As filed with the Securities and Exchange Commission on May 29, 2002
Registration No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Ventas, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 6519 61-1055020
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code
Number)
Ventas Realty, Limited Partnership Ventas Capital Corporation
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
Delaware 6519 61-1324573 Delaware 9999 35-2168770
(State or other (Primary (I.R.S. Employer (State or other (Primary (I.R.S. Employer
jurisdiction of Standard Identification jurisdiction of Standard Identification
incorporation or Industrial No.) incorporation or Industrial No.)
organization) Classification organization) Classification
Code Number) Code Number)
Ventas LP Realty, L.L.C.
(Exact name of registrant as specified in its charter)
Delaware 9999 52-2093507
(State or other (Primary (I.R.S. Employer
jurisdiction of Standard Identification
incorporation or Industrial No.)
organization) Classification
Code Number)
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4360 Brownsboro Road, Suite 115
Louisville, Kentucky 40207-1642
(502) 357-9000
(Address, including zip code, and telephone number, including area code,
of registrants' principal executive offices)
T. Richard Riney, General Counsel
Ventas, Inc.
4360 Brownsboro Road, Suite 115
Louisville, Kentucky 40207
(502) 357-9000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
Maurice M. Lefkort, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019
(212) 728-8000
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
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CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Maximum Aggregate Amount of
Amount to be Offering Price Offering Registration
Title of Each Class of Securities to be Registered Registered per Note(1) Price(1) Fee
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83/4% Senior Notes due 2009 of Ventas Realty,
Limited Partnership and Ventas Capital Corporation.... $175,000,000 100% $175,000,000 $16,100
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9% Senior Notes due 2012 of Ventas Realty,
Limited Partnership and Ventas Capital Corporation.... $225,000,000 100% $225,000,000 $20,700
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Guarantees of each of the Notes listed above by Ventas,
Inc. and Ventas LP Realty, L.L.C...................... (2) (2) (2) (2)
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Total.................................................. $400,000,000 100% $400,000,000 $36,800
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
(2) Pursuant to Rule 457(n) under the Securities Act of 1933, as amended, no
separate fee is payable for the guarantees.
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The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION,
DATED MAY 29, 2002
Prospectus
Ventas Realty, Limited Partnership
Ventas Capital Corporation
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Offer to Exchange
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Up to $175,000,000 8 3/4% Senior Notes due 2009
for
$175,000,000 Outstanding 8 3/4% Senior Notes due 2009
Unconditionally Guaranteed by
Ventas, Inc. and Ventas LP Realty, L.L.C.
and
Up to $225,000,000 9% Senior Notes due 2012
for
$225,000,000 Outstanding 9% Senior Notes due 2012
Unconditionally Guaranteed by
Ventas, Inc. and Ventas LP Realty, L.L.C.
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. The Exchange Offer expires at 5:00 p.m., New York City time, on ,
2002, unless extended.
. All Original Notes that are validly tendered and not validly withdrawn
prior to the expiration of the Exchange Offer will be exchanged.
. Tenders of Original Notes may be withdrawn at any time before 5:00 p.m.,
New York City time, on the expiration date of the Exchange Offer.
. We and the Issuers will not receive any proceeds from the issuance of New
Notes in the Exchange Offer.
. The terms of the New Notes to be issued are substantially identical to
the terms of the Original Notes, except that the New Notes will be
registered under the Securities Act and certain transfer restrictions,
registration rights and liquidated damages relating to the Original Notes
will not apply to the New Notes.
. The exchange of Original Notes for New Notes will not be a taxable
exchange for U.S. federal income tax purposes.
. There is no established trading market for the Notes, and we do not
intend to apply for listing of the Notes on any securities exchange or
for inclusion in any automated quotation system.
See "Risk Factors" beginning on page 14 for a discussion of matters you
should consider before you participate in the Exchange Offer.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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The date of this Prospectus is , 2002
This prospectus incorporates important business and financial information
about us that is not included or delivered with this prospectus. We will
provide this information to you at no charge upon written or oral request
directed to: General Counsel, Ventas, Inc., 4360 Brownsboro Road, Suite 115,
Louisville, KY 40207, (502) 357-9000. In order to ensure timely delivery of the
information, any request should be made by , 2002, which is five
business days before the Exchange Offer expires.
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Each broker-dealer that receives New Notes for its own account in the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of those New Notes. Each letter of transmittal that accompanies
this prospectus states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"). A
participating broker-dealer may use this prospectus, as it may be amended or
supplemented from time to time, in connection with resales of New Notes where
those Original Notes were acquired by the broker-dealer as a result of
market-making activities or other trading activities. The Issuers and the
Guarantors have agreed, if requested by such a participating broker-dealer, to
use their respective commercially reasonable efforts to keep the registration
statement of which this prospectus is a part continuously effective for a
period not to exceed 30 days after the date on which the registration statement
is declared effective, or such longer period if extended under certain
circumstances, for use in connection with any resale of this kind. In addition,
until , 2002 (90 days after the date of this prospectus), all dealers
effecting transactions in the Notes may be required to deliver a
prospectus. See "Plan of Distribution."
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Table of Contents
Cautionary Statements................................................................ 1
Summary.............................................................................. 3
Risk Factors......................................................................... 14
Use of Proceeds...................................................................... 24
Capitalization....................................................................... 25
The Exchange Offer................................................................... 26
Selected Consolidated Financial Data of the Company.................................. 36
Management's Discussion and Analysis of Financial Condition and Results of Operations 38
Business............................................................................. 53
Management........................................................................... 84
Certain Relationships and Related Transactions....................................... 87
Description of Other Indebtedness and Obligations.................................... 89
Description of Notes................................................................. 92
Material United States Federal Income Tax Considerations............................. 123
Plan of Distribution................................................................. 127
Legal Matters........................................................................ 127
Experts.............................................................................. 127
Where You Can Find More Information.................................................. 128
Incorporation by Reference........................................................... 128
Index to Consolidated Financial Statements and Condensed Consolidated Financial
Statements (Unaudited)............................................................... F-1
Index to Unaudited Pro Forma Financial Statements.................................... P-1
(i)
CAUTIONARY STATEMENTS
Forward-looking Statements
This prospectus includes forward-looking statements. All statements
regarding our and our subsidiaries' expected future financial position, results
of operations, cash flows, funds from operations, dividends and dividend plans,
financing plans, business strategy, budgets, projected costs, capital
expenditures, competitive positions, growth opportunities, expected lease
income, continued qualification as a real estate investment trust ("REIT"),
plans and objectives of management for future operations and statements that
include words such as "anticipate," "if," "believe," "plan," "estimate,"
"expect," "intend," "may," "could," "should," "will," and other similar
expressions are forward-looking statements. Such forward-looking statements are
inherently uncertain, and you should recognize that actual results may differ
from our expectations. We do not undertake any duty to update such
forward-looking statements.
Actual future results and trends for us may differ materially depending on a
variety of factors discussed in this prospectus and elsewhere in our filings
with the U.S. Securities and Exchange Commission (the "Commission"). Factors
that may affect our plans or results include, without limitation:
. the ability and willingness of Kindred Healthcare, Inc. and certain of
its affiliates (collectively, "Kindred") to continue to meet and honor
their obligations under certain contractual arrangements with us,
including the lease agreements and various agreements (the "Spin
Agreements") entered into by us and Kindred at the time of our spin-off
of Kindred on May 1, 1998 (the "1998 Spin Off"), as such agreements may
have been amended and restated in connection with Kindred's emergence
from bankruptcy on April 20, 2001;
. the ability and willingness of Kindred to continue to meet and/or honor
its obligation to indemnify and defend us for all litigation and other
claims relating to the healthcare operations and other assets and
liabilities transferred to Kindred in the 1998 Spin Off;
. the ability of Kindred and our other operators to maintain the financial
strength and liquidity necessary to satisfy their respective obligations
and duties under the leases and other agreements with us and their
existing credit agreements;
. our success in implementing our business strategy;
. the nature and extent of future competition;
. the extent of future healthcare reform and regulation, including cost
containment measures and changes in reimbursement policies and procedures;
. increases in our cost of borrowing;
. the ability of our operators to deliver high quality care and to attract
patients;
. the results of litigation affecting us;
. changes in general economic conditions or economic conditions in the
markets in which we may, from time to time, compete;
. our ability to pay down, refinance, restructure, and extend our
indebtedness as it becomes due;
. the movement of interest rates and the resulting impact on the value of
our interest rate swap agreements and our ability to satisfy our
obligation to post cash collateral if required to do so under one of
these interest rate swap agreements;
. the ability and willingness of Atria, Inc. ("Atria") to continue to meet
and honor its contractual arrangements with us and Ventas Realty, Limited
Partnership entered into in connection with our spin-off of our assisted
living facility and related assets and liabilities to Atria in August
1996;
1
. our ability and willingness to maintain our qualification as a REIT due
to economic, market, legal, tax or other considerations, including the
risk that we may fail to qualify as a REIT due to our ownership of
Kindred common stock;
. the outcome of the audit being conducted by the Internal Revenue Service
("IRS") for our tax years ended December 31, 1997 and 1998;
. the final determination of our taxable net income for the tax year ended
December 31, 2001;
. the ability and willingness of our tenants to renew their leases with us
as the leases expire and our ability to relet our facilities on the same
or better terms if the leases are not renewed by existing tenants; and
. the value of our common stock in Kindred and the limitations on our
ability to sell, transfer or otherwise dispose of our common stock in
Kindred arising out of the securities laws, the registration rights
agreement we entered into with Kindred and certain of the holders of
common stock in Kindred.
Many of these factors are beyond our control and the control of our management.
Kindred Information
Kindred is subject to the reporting requirements of the Commission and is
required to file with the Commission annual reports containing audited
financial information and quarterly reports containing unaudited financial
information. The information related to Kindred provided in this prospectus is
derived from filings made with the Commission or other publicly available
information, or has been provided by Kindred. We have not verified this
information either through an independent investigation or by reviewing
Kindred's public filings. We have 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. We are providing this data for informational purposes
only, and the reader of this prospectus is encouraged to obtain Kindred's
publicly available filings from the Commission.
Industry and Market Data
Industry and market data used throughout this prospectus were obtained
through company research, surveys and studies conducted by third parties and
industry and general publications. We have not independently verified market
and industry data from third-party sources. While we believe internal company
surveys are reliable and market definitions are appropriate, neither these
surveys nor these definitions have been verified by any independent sources.
2
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before participating in the Exchange Offer. You should read the entire
prospectus carefully, including the "Risk factors" section, the financial
statements and the notes to those financial statements, as well as the
documents incorporated in this prospectus by reference. As used in this
prospectus, unless otherwise specified or the context otherwise requires, the
terms "Ventas," "Company," "we," "our," and "us" refer to Ventas, Inc. and, in
some cases, our subsidiaries. In addition, Ventas Realty, Limited Partnership
is referred to as "Ventas Realty," Ventas Capital Corporation is referred to as
"Ventas Capital" and Ventas Realty and Ventas Capital are referred to together
as the "Issuers." Ventas and Ventas LP Realty, L.L.C. are referred to together
as the "Guarantors." This prospectus and the letters of transmittal that
accompany it collectively constitute the Exchange Offer.
The Company
We are a healthcare real estate investment trust. Our business consists of
owning and leasing healthcare facilities. As of March 31, 2002, our properties
included 215 skilled nursing facilities, 44 hospitals and 8 personal care
facilities in 36 states. For the year ended December 31, 2001, we generated
approximately $204.6 million in revenue and $174.3 million in EBITDA. For the
three months ended March 31, 2002 we generated approximately $46.7 million in
revenue and $43.9 million in EBITDA. Our primary tenant, Kindred, is one of the
largest providers of long-term healthcare services in the United States.
Kindred operates all of our hospitals and 210 of our skilled nursing facilities
pursuant to five multi-facility master lease agreements. All of the master
leases are structured as "triple-net" leases, under which Kindred is
responsible for insurance, taxes, utilities, maintenance and repairs related to
our properties.
We conduct substantially all of our business through two wholly-owned
subsidiaries. The first, Ventas Realty, is a co-issuer of the Notes. We and
Ventas Realty owned 175 skilled nursing facilities, 44 hospitals and 8 personal
care facilities as of March 31, 2002. We and Ventas Realty generated
approximately $175.2 million in pro forma revenue and $156.4 million in pro
forma EBITDA (as defined in our current credit facility and the indentures
governing the Notes) for the year ended December 31, 2001 and approximately
$38.8 million in pro forma revenue and $38.8 million in pro forma EBITDA (as
defined in our current credit facility and the indentures governing the Notes)
for the three months ended March 31, 2002. The second subsidiary, Ventas
Finance I, LLC, which was formed in connection with our commercial mortgage
backed securitization transaction, owned 40 skilled nursing facilities as of
March 31, 2002. Ventas Finance I, LLC is not a Guarantor of the Notes.
We commenced operations in 1985 as a company engaged in the business of
owning, operating and acquiring healthcare facilities. In May 1998, we effected
a spin-off, pursuant to which we were separated into two publicly held
corporations. We retained the ownership of substantially all of the real
property and leased such real property to Kindred. Kindred was formed to
operate the skilled nursing facilities, hospitals and other businesses.
3
Portfolio of Properties
We own a diversified portfolio of assets. The following information provides
an overview of our properties as of and for the three months ended March 31,
2002.
Percent of
Number of Number of Rental Rental
Portfolio by Owner and Type Properties Beds Income Income
--------------------------- ---------- --------- ------- ----------
(dollars in thousands)
Issuers and Guarantors of Notes:
Skilled Nursing Facilities... 175 22,159 $23,164 50.0%
Hospitals.................... 44 4,033 15,137 32.6
Personal Care Facilities..... 8 136 199 0.4
--- ------ ------- -----
Subtotal................. 227 26,328 38,500 83.0
Unrestricted Subsidiaries:
Skilled Nursing Facilities... 40 5,668 7,897 17.0
--- ------ ------- -----
Total.................... 267 31,996 $46,397 100.0%
=== ====== ======= =====
The following table illustrates rental income by state.
Year Ended Three Months Ended
December 31, 2001 March 31, 2002
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Rental Rental
State Income Percentage Income Percentage
----- -------- ---------- ------- ----------
(dollars in thousands)
1. California............ $ 18,486 10.1 % $ 5,311 11.4 %
2. Florida............... 17,610 9.5 4,370 9.4
3. Massachusetts......... 16,623 9.0 4,341 9.4
4. Indiana............... 13,324 7.1 3,398 7.3
5. North Carolina........ 10,454 5.6 2,344 5.1
6. Kentucky.............. 10,363 5.6 2,716 5.9
7. Illinois.............. 8,906 4.8 2,122 4.6
8. Wisconsin............. 8,530 4.6 1,770 3.8
9. Texas................. 7,989 4.3 1,809 3.9
10. Ohio.................. 6,993 3.8 1,874 4.0
Other (26 states)......... 65,874 35.6 16,342 35.2
-------- ------ ------- ------
$185,152 100.0 % $46,397 100.0 %
======== ====== ======= ======
Competitive Strengths
Geographically Diverse Property Portfolio
Our portfolio of properties is broadly diversified by geographic location.
Only one state comprises more than 10% of our rental income. In addition,
approximately 66% of our rental income is derived from facilities in states
that require state approval for development and expansion of healthcare
facilities. We believe that such state approvals may limit competition for our
operators and enhance the value of our properties.
Financially Secure Primary Tenant
Our primary tenant, Kindred, is one of the largest providers of long-term
healthcare services in the United States, with approximately $3.1 billion in
revenue for the year ended December 31, 2001. Kindred leases approximately 70%
of its facilities from us. Kindred restructured its balance sheet effective
April 20, 2001 and completed a public offering of its common stock in November
2001. As of March 31, 2002, Kindred had debt outstanding, net of cash, of
approximately $1.7 million.
4
Superior Multi-Facility Master Leases
Kindred leases 210 of our skilled nursing facilities and all of our
hospitals under five "triple-net" multi-facility master lease agreements. Under
the master leases, Kindred is responsible for insurance, taxes, utilities,
maintenance and repairs related to our properties. The individual facilities
are grouped into bundles ranging in size from 3 to 12 facilities per bundle,
and the bundles are then pooled into multi-facility leases. Each bundle in a
master lease has a renewal date ranging from 2008 to 2013. Kindred has three
5-year renewal options. For the period from May 1, 2001 through April 30, 2002,
total annual base rent under the five master leases is $180.7 million. Base
rent escalates at an annual rate of 3.5% if Kindred meets certain revenue
targets. In addition, we have a one-time option to increase rents to a then
fair market rental rate between July 2006 and July 2007. We also have a wide
range of remedies in the event of a default by Kindred under the master leases.
Strong Cash Flow Generation
We have been able to maintain consistent EBITDA since 1999, in large part
because Kindred is responsible for all operational, working capital and capital
expenditures relating to our facilities. This has helped us to reduce our total
debt from approximately $974 million at the beginning of 2000 to approximately
$831.5 million as of March 31, 2002. We have further improved our financial
position by lowering our cost of debt, primarily through our commercial
mortgage backed securitization, or CMBS transaction, which was completed in
December 2001 and which bears interest at a nominal weighted average rate of
one-month LIBOR plus 1.46%. In addition, the offering of the Original Notes and
our 2002 Credit Facility have further reduced our cost of debt.
Consistent Financial Performance
We have been able to maintain consistent financial performance since the
1998 spin-off in spite of difficult market conditions. As a result of the
Medicare reimbursement reductions introduced in the Balanced Budget Act of
1997, five of the seven largest skilled nursing facility operators in the U.S.,
including Kindred, sought bankruptcy protection in 1999 and 2000. In addition,
several operators, including Kindred, faced government billing disputes. During
this industry turmoil, we were able to maintain stable revenue and EBITDA, meet
all of our financial obligations and substantially reduce our total debt.
Strategy
Our business strategy is comprised of two primary objectives:
diversification of our portfolio of properties and further reduction of our
indebtedness. We intend to diversify our portfolio by operator, facility type
and reimbursement source in order to reduce our dependence on Kindred and
government reimbursement. We intend to acquire additional healthcare
properties, which could include hospitals, nursing centers, assisted or
independent living facilities and ancillary healthcare facilities, that are
operated by leading providers in their industries. We also intend to further
reduce our indebtedness. We reduced our indebtedness from approximately $974
million in total debt as of the beginning of 2000 to approximately $831.5
million as of March 31, 2002.
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Our principal executive offices are located at 4360 Brownsboro Road, Suite
115, Louisville, Kentucky 40207-1642, and our telephone number is (502)
357-9000.
5
The Exchange Offer
On April 17, 2002, the Issuers privately placed $175,000,000 aggregate
principal amount of 8 3/4% Senior Notes due 2009 and $225,000,000 aggregate
principal amount of 9% Senior Notes due 2012, which we refer to collectively as
the Original Notes, in a transaction exempt from registration under the
Securities Act. In connection with the private placement, the Issuers and the
Guarantors entered into a registration rights agreement, dated as of April 17,
2002, with the initial purchasers of the Original Notes. In the registration
rights agreement, the Issuers and the Guarantors of the Notes agreed to
register under the Securities Act an offer of the Issuers' new 8 3/4% Senior
Notes due 2009 and new 9% Senior Notes due 2012, which we refer to collectively
as the New Notes, in exchange for the Original 2009 Notes and the Original 2012
Notes, respectively. The Issuers and the Guarantors also agreed to deliver this
prospectus to the holders of the Original Notes. In this prospectus we refer to
the Original 2009 Notes and the New 2009 Notes as the 2009 Notes, the Original
2012 Notes and the New 2012 Notes as the 2012 Notes and the Original Notes and
the New Notes as the Notes. You should read the discussion under the heading
"Description of Notes" for information regarding the Notes.
The Exchange Offer.......... This is an offer to exchange $1,000 in principal
amount of New Notes for each $1,000 in principal
amount of Original Notes. The New Notes are
substantially identical to the Original Notes,
except that:
. the New Notes will be registered under the
Securities Act;
. the New Notes will be freely transferable,
other than as described in this prospectus and
will not contain any legend restricting their
transfer;
. holders of the New Notes will not be entitled
to certain rights of the holders of the
Original Notes under the registration rights
agreement, which rights will terminate on
completion of the Exchange Offer; and
. the New Notes will not contain any provisions
regarding the payment of liquidated damages.
We believe that you can transfer the New Notes
without complying with the registration and
prospectus delivery provisions of the Securities
Act if you:
. acquire the New Notes in the ordinary course
of your business;
. are not and do not intend to become engaged in
a distribution of the New Notes;
. are not an affiliate of ours;
. are not a broker-dealer that acquired the
Original Notes directly from us or affiliates
of ours; and
. are not a broker-dealer that acquired the
Original Notes as a result of market-making or
other trading activities.
If any of these conditions are not satisfied and
you transfer any New Note without delivering a
proper prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act.
6
Each broker-dealer that receives New Notes for
its own account in exchange for Original Notes
that it acquired as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of those New Notes.
See "Plan of Distribution."
Registration Rights Agreement Under the registration rights agreement, the
Issuers and the Guarantors have agreed to use
their best efforts to consummate the Exchange
Offer or cause the Original Notes to be
registered under the Securities Act to permit
resales. If the Issuers and the Guarantors are
not in compliance with their obligations under
the registration rights agreement, liquidated
damages will accrue on the Notes in addition to
the interest that is otherwise due on the Notes.
If the Exchange Offer is completed on the terms
and within the time period contemplated by this
prospectus, no liquidated damages will be payable
on the Notes. The New Notes will not contain any
provisions regarding the payment of liquidated
damages. See "The Exchange Offer--Liquidated
Damages."
Minimum Condition........... The Exchange Offer is not conditioned on any
minimum aggregate principal amount of Original
Notes being tendered for exchange.
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 2002, unless the
Issuers and the Guarantors extend it.
Exchange Date............... Properly tendered Original Notes will be accepted
for exchange at the time when all conditions of
the Exchange Offer are satisfied or waived. The
New Notes will be delivered promptly after the
Issuers and the Guarantors accept the Original
Notes.
Conditions to the Exchange
Offer..................... The obligation of the Issuers and the Guarantors
to complete the Exchange Offer is subject to
certain conditions. See "The Exchange
Offer--Conditions to the Exchange Offer." The
Issuers and the Guarantors reserve the right to
terminate or amend the Exchange Offer at any time
prior to the expiration date upon the occurrence
of certain specified events.
Withdrawal Rights........... You may withdraw the tender of your Original
Notes at any time before the expiration date. Any
Original Notes not accepted for any reason will
be returned to you without expense promptly after
the expiration or termination of the Exchange
Offer.
Procedures for Tendering
Original Notes............ See "The Exchange Offer--How to Tender."
United States Federal Income
Tax Consequences.......... The exchange of the Original Notes for New Notes
by U.S. Holders (as defined below) will not be a
taxable exchange for federal income tax purposes,
and U.S. Holders will not recognize any taxable
gain or loss as a result of such exchange.
7
Effect on Holders of
Original Notes............ If the Exchange Offer is completed on the terms
and within the period contemplated by this
prospectus, holders of Original Notes will have
no further registration or other rights under the
registration rights agreement, except under
limited circumstances. See "The Exchange
Offer--Liquidated Damages."
Holders of Original Notes who do not tender their
Original Notes will continue to hold those
Original Notes. All untendered, and tendered but
unaccepted, Original Notes will continue to be
subject to the restrictions on transfer provided
for in the Original Notes and the indentures
under which the Original Notes have been issued.
To the extent that Original Notes are tendered
and accepted in the Exchange Offer, the trading
market, if any, for the Original Notes could be
adversely affected. See "Risk Factors--Risks
Relating to the Exchange Offer--You may not be
able to sell your Original Notes if you do not
exchange them for registered New Notes in the
Exchange Offer" and "--Your ability to sell your
Original Notes may be significantly more limited
and the price at which you may be able to sell
your Original Notes may be significantly lower if
you do not exchange them for registered New Notes
in the Exchange Offer," and "The Exchange
Offer--Other."
Use of Proceeds............. We and the Issuers will not receive any proceeds
from the issuance of New Notes in the Exchange
Offer.
Exchange Agent.............. U.S. Bank National Association is serving as the
exchange agent in connection with the Exchange
Offer.
8
The Notes
The summary below describes the principal terms of the Notes. Certain of the
terms and conditions described below are subject to important limitations and
exceptions. The "Description of Notes" section of this prospectus contains a
more detailed description of the terms and conditions of the Notes.
The New Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of the indentures. See "Description of Notes."
Issuers..................... Ventas Realty, Limited Partnership and Ventas
Capital Corporation.
Company..................... Ventas, Inc.
Notes Offered............... Up to $175,000,000 aggregate principal amount of
8 3/4% Senior Notes due 2009 and up to
$225,000,000 aggregate principal amount of 9%
Senior Notes due 2012.
Maturity Dates.............. The 2009 Notes will mature on May 1, 2009, and
the 2012 Notes will mature on May 1, 2012.
Interest.................... The New Notes will accrue interest from the last
interest payment date on which interest was paid
on the Original Notes or, if no interest has been
paid on the Original Notes, the date of original
issuance of such Original Notes at the respective
rates per annum described above. Interest on the
Notes will be payable semi-annually in arrears on
each May 1 and November 1, commencing on November
1, 2002.
Sinking Fund................ None.
Optional Redemption......... The Issuers may redeem the Notes, in whole or in
part, at any time at a redemption price equal to
the principal amount, plus accrued and unpaid
interest to the date of redemption and a
make-whole premium as described in this
prospectus. See "Description of Notes--Optional
Redemption."
Guarantors.................. The Notes are unconditionally guaranteed on a
senior unsecured basis by Ventas and each of
Ventas' current Restricted Subsidiaries and
future Restricted Subsidiaries (other than
Excluded Joint Ventures). See "Description of
Notes--Guarantees."
Ranking..................... The Notes are part of our and Ventas Realty's
general unsecured obligations, ranking equal in
right of payment with all of our and Ventas
Realty's existing and future senior unsecured
obligations and will rank senior to all of our
and Ventas Realty's existing and future
subordinated indebtedness. See "Capitalization."
However, the Notes will be effectively
subordinated to all borrowings under the 2002
Credit Facility with respect to the assets
securing the 2002 Credit Facility. In addition,
the Notes are structurally subordinated to
approximately $225 million of indebtedness that
is secured by 40 of our nursing facilities.
9
Change of Control........... If we experience specific kinds of changes of
control, as described in this prospectus, the
Issuers must make an offer to repurchase the
Notes, in whole or in part, at a purchase price
in cash equal to 101% of the principal amount
thereof, plus any accrued and unpaid interest to
the date of purchase. See "Risk Factors--Risks
Relating to the Terms of and Market for the
Notes--If we experience a change of control, we
may be unable to purchase the Notes you hold as
required under the indentures."
Certain Covenants........... The indentures contain covenants that limit our
ability and the ability of our subsidiaries to,
among other things:
. incur debt;
. incur secured debt;
. make certain dividend payments, distributions
and investments;
. enter into certain transactions, including
transactions with affiliates;
. subject our subsidiaries to restrictions on
dividends or other payments to us;
. merge, consolidate or transfer all or
substantially all of our assets; and
. sell assets.
These covenants are subject to important
exceptions and qualifications, which are
described under the heading "Description of
Notes." We are also required to maintain total
unencumbered assets of at least 150% of our
unsecured debt. If we obtain an investment grade
rating, certain of these covenants will be
suspended.
Absence of a Public Market
for the Notes............. The Notes are new issues of securities and there
is currently no established market for them.
There can be no assurance as to the development
or liquidity of any market for the Notes. Certain
of the initial purchasers have advised us that
they currently intend to make a market for the
Notes, as permitted by applicable laws and
regulations. However, they are not obligated to
do so and may discontinue any such market making
activities at any time without notice. We do not
intend to apply for listing of any of the Notes
on any securities exchange or for inclusion in
any automated quotation system. See "Risk
Factors--Risks relating to the terms of and
market for the Notes--There is no public market
for the Notes, so you may be unable to sell the
Notes.
Risk Factors................ Investing in the Notes and participating in the
Exchange Offer involves risks. See "Risk Factors"
for a discussion of certain matters that you
should consider before participating in the
Exchange Offer.
10
Summary Financial Data
The summary consolidated financial data as of December 31, 2000 and 2001 and
for each of the three years in the period ended December 31, 2001 presented
below is derived from our financial statements and accompanying notes. Our
financial statements as of December 31, 2000 and 2001 and for each of the three
years in the period ended December 31, 2001 have been audited by Ernst & Young
LLP, independent auditors. The summary financial data presented below as of and
for the three months ended March 31, 2001 and 2002 have been derived from our
unaudited financial statements. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations as of such dates and for such periods. The
following table also indicates our unaudited pro forma financial data and
ratios related to the year ended December 31, 2001 and the three months ended
March 31, 2002, as adjusted for the issuance and sale of the Original Notes,
the 2002 Credit Facility and the CMBS Transaction, which was completed in
December 2001. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our Consolidated Financial Statements as of December 31, 2000 and
2001 and for the years ended December 31, 1999, 2000 and 2001 and accompanying
notes, the unaudited Condensed Consolidated Financial Statements for the three
months ended and as of March 31, 2002 and our unaudited pro forma financial
statements and accompanying notes included elsewhere in this prospectus.
Years Ended December 31,
----------------------------------------------------
Restricted
Group(2)
Pro forma(1) Pro forma
1999 2000 2001 2001 2001
-------- -------- -------- ------------ ----------
(dollars in thousands)
Operating Data:
Rental income................................ $228,600 $232,841 $185,152 $185,152 $155,787
Gain on sale of Kindred common stock......... -- -- 15,425 15,425 15,425
Total revenues............................... 232,991 242,322 204,581 204,581 175,216
General and administrative and other expenses 21,566 20,781 14,902 14,902 12,538
Interest expense............................. 88,753 95,319 87,032 79,367 61,515
United States Settlement..................... -- 96,493 -- -- --
Interest on United States Settlement......... -- -- 4,592 4,592 4,592
Net income (loss)............................ 42,535 (65,452) 50,566 59,258 52,816
Other Data:
FFO(3)....................................... 85,023 76,479 93,502 100,872 88,968
Normalized FFO(4)............................ 85,023 76,479 78,077 85,447 73,543
EBITDA(5).................................... 177,007 173,213 174,254 174,254 156,402
Debt to EBITDA............................... 5.5 x 5.1 x 4.9 x 5.0 x 4.1 x
EBITDA/Interest expense(6)................... 2.0 1.8 2.0 2.2 2.5
EBITDA/Fixed charges(7)...................... 2.0 1.8 1.8 1.9 2.1
Three Months Ended March 31,
----------------------------------------
Restricted
Group(2)
Pro forma(1) Pro forma
2001 2002 2002 2002
------- ------- ------------ ----------
(dollars in thousands)
Operating Data:
Rental income................................ $46,118 $46,397 $46,397 $38,500
Total revenues............................... 47,624 46,739 46,739 38,796
General and administrative and other expenses 4,348 2,876 2,876 2,387
Interest expense............................. 21,121 19,860 19,219 14,727
Interest on United States Settlement......... -- 1,471 1,471 1,471
Net income (loss)............................ 10,579 12,701 13,342 13,087
Other Data:
FFO(3)....................................... 21,054 22,068 22,709 21,092
EBITDA(5).................................... 43,276 43,863 43,863 38,809
Debt to EBITDA(8)............................ 4.9 x 4.7 x 4.9 x 4.0x
EBITDA/Interest expense(6)................... 2.0 2.2 2.3 2.6
EBITDA/Fixed charges(7)...................... 2.0 2.1 2.1 2.4
11
March 31,
--------------------------------
Restricted
Group(2)
December 31, Pro forma(1) Pro forma
2001 2002 2002 2002
------------ -------- ------------ ----------
Balance Sheet Data: (dollars in thousands)
Real estate investments, net............ $806,336 $795,420 $ 795,420 $ 683,453
Cash and cash equivalents............... 18,596 9,281 1,281 1,281
Kindred common stock.................... 55,118 43,751 43,751 43,751
Total assets............................ 941,859 891,632 891,714 766,170
Total debt.............................. 848,368 831,544 852,185 627,747
United States Settlement................ 54,747 54,747 54,747 54,747
Total stockholders' equity (deficit)(9). (91,074) (94,266) (101,184) (101,184)
- --------
(1) Consolidated pro forma information assumes that the CMBS Transaction, which
closed on December 12, 2001, the 2002 Credit Facility (as defined below)
and the issuance the Original Notes were completed as of and for the year
ending December 31, 2001 or as of and for the three months ended March 31,
2002, as the case may be.
(2) The restricted group includes the Issuers and Guarantors of the Notes under
the indentures, but the restricted group excludes our wholly-owned
subsidiaries that were formed in connection with the CMBS Transaction,
which are not obligors under the indentures, except to the extent of
distributions to the restricted group. The presentation gives effect to pro
forma dividends of $9.1 million from the unrestricted group for the year
ended December 31, 2001 and $2.4 million for the three months ended March
31, 2002. Such dividends reflect distributions of available cash flow from
the unrestricted group. See "Description of Notes."
(3) We consider funds from operation ("FFO") an appropriate measure of
performance of an equity REIT and we use the National Association of Real
Estate Investment Trusts ("NAREIT") definition of FFO. NAREIT defines FFO
as net income (computed in accordance with accounting principals generally
accepted in the United States ("GAAP")), excluding gains (or losses) from
sales of real estate 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 our financial performance or as an alternative to cash flow
from operating activities (determined in accordance with GAAP) as a measure
of our liquidity, nor is FFO indicative of sufficient cash flow to fund all
of our needs. FFO in 2000 excludes the effect of the United States
Settlement.
(4) Normalized FFO for the year ended December 31, 2001 excludes the gain on
sale of Kindred common stock:
FFO................................. $ 93,502
Gain on Sale of Kindred Common Stock (15,425)
--------
$ 78,077
========
(5) EBITDA is defined as earnings before depreciation and amortization,
interest expense, income taxes and non-recurring gains and losses.
Restricted group pro forma EBITDA (as defined in the 2002 Credit Facility
and the indentures governing the Notes) includes $9.1 million of pro forma
dividends from the unrestricted group for the year ended December 31, 2001
and $2.4 million for the three months ended March 31, 2002. We believe that
EBITDA is commonly used as an analytical indicator within the healthcare
industry, and also serves as a measure of leverage capacity and debt
service ability. EBITDA presented herein is not necessarily comparable to
EBITDA presented by other companies due to the fact that not all companies
use the same definition. EBITDA should not be considered as a measure of
financial performance under GAAP, and the items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered as an alternative to net
income (determined in accordance with GAAP), cash flows generated by
operating, investing or financing activities (determined in accordance with
GAAP) or other financial statement data presented in the consolidated
financial statements as indicators of financial performance or liquidity.
(6) Interest expense does not include the interest on the United States
Settlement.
(7) Fixed charges for purposes of this calculation include interest expense and
principal and interest payments on the United States Settlement.
12
(8) EBITDA is annualized for purposes of the Debt to EBITDA calculation.
(9) Total stockholders' equity at December 31, 2001 includes $17.5 million
cumulative increase from a change in accounting for derivatives.
Ratio of Earnings to Fixed Charges
Our ratio of earnings to fixed charges for each of the periods indicated was
as follows:
Period From Year Ended
May 1, 1998 to December 31, Three Months
December 31, -------------- Ended March 31,
1998 1999 2000 2001 2002
-------------- ---- ---- ---- ---------------
Ratio of earnings to fixed charges(a)... 1.94 1.48 0.35 1.59 1.55
- --------
(a) Earnings were insufficient to cover fixed charges by $62.2 million in 2000.
Earnings in 2000 were reduced by $96.5 million for the United States
Settlement.
For this ratio, earnings consist of earnings (loss) before income taxes,
minority interest and discontinued operations plus fixed charges excluding
capitalized interest. Fixed charges consist of interest expensed and
capitalized, plus the portion of rent expense under operating leases deemed by
us to be representative of the interest factor.
13
RISK FACTORS
Our business, operations and financial condition are subject to various
risks. Some of these risks are described below, and you should take these risks
into account in evaluating us or any investment decision involving us,
including participation in the Exchange Offer. This section does not describe
all risks applicable to us, our industry or our business, and it is intended
only as a summary of certain material factors. If any of the following risks
actually occur, we could be materially and adversely affected. In such case,
you may lose all or part of your investment.
We have grouped these risk factors into five general categories:
. Risks Arising from Our Business;
. Risks Arising from Our Capital Structure;
. Risks Arising from Our Status as a REIT;
. Risks Relating to the Exchange Offer; and
. Risks Relating to the Terms of and Market for the Notes.
Risks Arising from Our Business
We are dependent on Kindred; Kindred's inability or unwillingness to satisfy
its obligations under its agreements with us could significantly harm us and
our ability to service our indebtedness and other obligations and to make
distributions to our stockholders as required to continue to qualify as a
REIT.
We are dependent on Kindred in a number of ways:
. We lease substantially all of our properties to Kindred under five master
leases (the "Master Leases"), and therefore:
. Kindred is the primary source of our rental income, accounting for
approximately 98.8% of our rental income in 2001; and
. since the Master Leases are triple-net leases, we depend on Kindred to
pay for insurance, taxes, utilities and maintenance and repair
expenses required in connection with the leased properties.
. In connection with the 1998 Spin Off, Kindred assumed and agreed to
indemnify us for the following:
. all obligations under third-party leases and contracts;
. all losses, including costs and expenses, resulting from future claims
and all liabilities that may arise out of the ownership or operation
of the healthcare operations either before or after the date of the
1998 Spin Off;
. any claims that were pending at the time of the 1998 Spin Off and that
arose out of the ownership or operation of the healthcare operations
or were asserted after the 1998 Spin Off and that arise out of the
ownership and operation of the healthcare operations or any of the
assets or liabilities transferred to Kindred in connection with the
1998 Spin Off.
. We own 1,080,314 shares of Kindred common stock, which we intend to use
to satisfy certain of our obligations.
Although Kindred emerged from bankruptcy on April 20, 2001, there can be
no assurance that Kindred will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under its agreements with
us. In addition, any failure by Kindred to effectively conduct its
operations could have a material adverse effect on its business reputation
or on its ability to enlist and maintain patients in its facilities. Any
inability or unwillingness on the part of Kindred to satisfy its obligations
under its agreements with us, decrease in the price of Kindred common stock,
or failure of Kindred to keep the
14
shelf registration statement effective with respect to the shares of Kindred
stock held by us could significantly harm us and our ability to service our
indebtedness and other obligations and to make distributions to our
stockholders as required to continue to qualify as a REIT.
We may be unable to find another lessee or operator for our properties if we
have to replace Kindred.
We may have to find another lessee/operator for the properties covered by
one or more of the Master Leases upon the expiration of the terms of the Master
Leases or upon a default by Kindred. During any period that we are attempting
to locate one or more lessee/operators there could be a decrease or cessation
of rental payments by Kindred. There can be no assurance that we will be able
to locate another suitable lessee/operator or that if we are successful in
locating such an operator, that the rental payments from the new operator would
not be significantly less than the existing rental payments. Our ability to
locate another suitable lessee/operator may be significantly delayed or limited
by various state licensing, receivership, certificate-of-need or other laws, as
well as by Medicare and Medicaid change-of-ownership rules. See
"Business--Governmental Regulation."
We are subject to the risks associated with investment in a single industry:
the heavily regulated health care industry.
All of our investments are in properties used in the healthcare industry;
therefore we are exposed to risks associated with the healthcare industry in
particular. The healthcare industry is highly regulated and changes in
government regulation have in the past had material adverse consequences on the
industry in general, which may not even have been contemplated by lawmakers and
regulators. There can be no assurance that future changes in government
regulation of healthcare will not have a material adverse effect on the
healthcare industry, including our lessees. Moreover, our ability to invest in
non-healthcare related properties may be restricted by the terms of our 2002
Credit Facility.
Our tenants, including Kindred, may be adversely affected by increasing
healthcare regulation and enforcement.
We believe that the regulatory environment surrounding the long-term care
industry has intensified both in the amount and type of regulations and in the
efforts to enforce those regulations. This is particularly true for large
for-profit, multi-facility providers like Kindred.
The extensive federal, state and local regulations affecting the healthcare
industry include, but are not limited to, regulations relating to licensure,
conduct of operations, ownership of facilities, addition of facilities,
allowable costs, services and prices for services. See "Business--Governmental
Regulation." The federal government has intensified enforcement policies,
resulting in a significant increase in the number of inspections, citations of
regulatory deficiencies and other regulatory sanctions, including terminations
from the Medicare and Medicaid programs, bars on Medicare and Medicaid payments
for new admissions, civil monetary penalties and even criminal penalties. If
Kindred and our other tenants and operators fail to comply with the extensive
laws and regulations applicable to their businesses, they could become
ineligible to receive government program reimbursement, suffer civil or
criminal penalties or be required to make significant changes to their
operations. Kindred has informed us that the Medicare certification for one of
its hospitals located in Minnesota was terminated effective April 5, 2002,
which resulted in the concurrent termination of the Medicaid certification for
such hospital. In addition, on May 10, 2002 Kindred informed us that its
Medicare and Medicaid certification for one of its skilled nursing facilities
in Kentucky was terminated on May 5, 2002. See "Governmental
Regulation--General." Kindred and our other tenants also could be forced to
expend considerable resources responding to an investigation or other
enforcement action under these laws or regulations. In addition, as part of the
United States Settlement, Kindred entered into and agreed to comply with the
terms of a Corporate Integrity Agreement. Kindred's failure to comply with the
Corporate Integrity Agreement could have a material adverse effect on Kindred's
results of operations, financial condition and its ability to make rental
payments to us, which, in turn, could significantly harm us and our ability to
service our indebtedness and other obligations and to make
15
distributions to our stockholders as required to continue to qualify as a REIT.
See "Business--Dependence on Kindred--Settlement of United States Claims."
We are unable to predict the future course of federal, state and local
regulation or legislation, including the Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on Kindred and our other operators, which, in turn, could significantly
harm us and our ability to service our indebtedness and other obligations and
to make distributions to our stockholders as required to continue to qualify as
a REIT. See "Business--Governmental Regulation."
Changes in the reimbursement rates or methods of payment from third-party
payors, including Medicare and Medicaid programs, could have a material
adverse effect on our tenants.
Kindred and our other tenants and operators rely on reimbursement from
third-party payors, including the Medicare and Medicaid programs, for
substantially all of their revenues. Reductions in those reimbursements rates
could have a material adverse effect on Kindred and our other operators, which,
in turn, could significantly harm us and our ability to service our
indebtedness and other obligations and to make distributions to our
stockholders as required to continue to qualify as a REIT.
In an effort to reduce federal spending on healthcare, in 1997 the Federal
government enacted the Balanced Budget Act, which contained extensive changes
to the Medicare and Medicaid programs intended to reduce the projected amount
of increase in payments under such programs between 1998 and 2002, and eased
impediments on the states' ability to reduce their Medicaid reimbursement
levels. As a result, substantially all of the large nursing home chains in the
country were forced into bankruptcy protection. Although there has been some
relief from the effects of the Balanced Budget Act, certain of those provisions
are scheduled to expire, some as early as 2002. Long-Term Acute Care Hospitals,
or LTACs, are expected to be subjected to a payment system similar to nursing
homes by October 1, 2002. The Centers for Medicare and Medicaid Services
recently published a proposed rule relating to these proposed changes to the
LTAC payment system. There can be no assurance as to the content of the final
rule, nor can we predict its impact on our tenants and operators. See
"Business--Governmental Regulation."
There also continue to be state legislative proposals that would impose more
limitations on government and private payments to providers of healthcare
services such as Kindred. Many states have enacted or are considering enacting
measures that are designed to reduce their Medicaid expenditures and to make
certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional LTACs. There are a number of legislative proposals currently under
consideration, including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers.
There continues to be various legislative and regulatory proposals to
implement cost-containment measures that limit payments to healthcare
providers. In addition, private third-party payors have continued their efforts
to control healthcare costs. There can be no assurance that adequate
reimbursement levels will be available for services to be provided by Kindred
and other tenants which are currently being reimbursed by Medicare, Medicaid or
private payors. Significant limits by the governmental and third-party payors
on the scope of services reimbursed and on reimbursement rates and fees could
have a material adverse effect on the liquidity, financial condition and
results of operations of Kindred and our other operators and other tenants,
which, in turn, could significantly harm us and our ability to service our
indebtedness and other obligations and to make distributions to our
stockholders as required to continue to qualify as a REIT. See
"Business--Governmental Regulation."
16
Significant legal actions, particularly in the State of Florida, could
subject Kindred to increased operating costs and substantial uninsured
liabilities, which could materially and adversely affect Kindred's liquidity,
financial condition and results of operation.
Kindred has experienced substantial increases in both the number and size of
patient care liability claims in recent years. In addition to large
compensatory claims, plaintiffs' attorneys increasingly are seeking significant
punitive damages and attorneys' fees. In the State of Florida, where Kindred
operates 15 of our skilled nursing facilities and six of our hospitals, general
liability and professional liability costs for nursing centers have increased
substantially and become increasingly difficult to estimate.
Kindred insures its professional liability risks in part through a
wholly-owned, limited purpose insurance company. The limited purpose insurance
company insures initial losses up to specified coverage levels per occurrence
and in the aggregate. Coverage for losses in excess of those levels are
maintained through unaffiliated commercial insurance carriers; however, the
limited purpose insurance company insures all claims arising in Florida up to a
per occurrence limit without the benefit of any aggregate coverage limit
through unaffiliated commercial insurance carriers. Kindred maintains general
liability insurance and professional malpractice liability insurance in amounts
and with deductibles which Kindred management has indicated that it believes
are sufficient for its operations. However, its insurance coverage might not
cover all claims against Kindred or continue to be available to Kindred at a
reasonable cost. If Kindred is unable to maintain adequate insurance coverage
or is required to pay punitive damages, Kindred may be exposed to substantial
liabilities.
Kindred may also be sued under a federal whistleblower statute designed to
combat fraud and abuse in the healthcare industry. These lawsuits can involve
significant monetary and award bounties to private plaintiffs who successfully
bring these suits. These lawsuits brought against Kindred combined with
increased operating costs and substantial uninsured liabilities could have a
material adverse effect on the liquidity, financial condition and results of
operation of Kindred and its ability to make rental payments to us, which, in
turn, could significantly harm us and our ability to service our indebtedness
and other obligations and to make distributions to our stockholders as required
to continue to qualify as a REIT.
We may encounter certain risks when implementing our business strategy.
We intend to pursue acquisitions or development of additional healthcare or
other properties, subject to the contractual restrictions contained in the
indentures governing the Notes and 2002 Credit Facility, assuming that
Kindred's financial condition remains stabilized and we have the financial
flexibility at that time to do so. However, we may still encounter certain
risks. 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. We do not presently
contemplate any development projects, although if we 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.
We may compete for investment opportunities with entities that have
substantially greater financial resources than we have. Our ability to compete
successfully for such opportunities is affected by many factors, including our
cost of obtaining debt and equity capital at rates comparable to or better than
our competitors. Competition generally may reduce the number of suitable
investment opportunities available to us and increase the bargaining power of
property owners seeking to sell, thereby impeding our acquisitions or
development activities.
17
Even though Atria, Inc. has assumed and agreed to repay indebtedness
evidenced by bonds that we issued under the spin off of our assisted living
operations, we may still be liable for the indebtedness if Atria cannot or
does not honor its obligations.
We have issued bonds to residents of an assisted living facility that we own
and lease to and is operated by Atria. Proceeds from the bonds are paid to and
utilized by Atria. The obligation to repay the bonds is secured by a mortgage
and trust indenture that encumbers (among other properties) the assisted living
facility. Currently, based solely upon information obtained from Atria, the
bonds evidence an aggregate principal amount of indebtedness of approximately
$29.4 million. In connection with our spin off of our assisted living
operations and related assets and liabilities to Atria in 1996, Atria assumed
and agreed to repay the indebtedness and to indemnify and hold us harmless from
and against all amounts we may be obligated to pay under the mortgage and trust
indenture, including the obligation to repay the bonds. We may remain the
primary obligor under the bonds and the mortgage and trust indenture. If Atria
is unable to or does not satisfy these obligations, we may be liable for these
obligations. There can be no assurance that Atria will have sufficient means to
enable it to satisfy its obligations or will continue to honor those
obligations under the mortgage and trust indenture and the bonds. However, we
believe that Atria's failure to satisfy its obligations would, subject to any
applicable defenses available to Atria, allow us to terminate the lease between
us and Atria, repossesses the property, and exercise all other available
remedies under the lease between us and Atria. Our payment or performance of
these obligations could significantly harm us and our ability to service our
indebtedness and other obligations and to make distributions to our
stockholders as required to continue to qualify as a REIT. We are currently
engaged in efforts to have ourselves released from liability under the bonds
and the mortgage and trust indenture. There can be no assurance that we will be
successful in our attempts to be released from this potential liability. A
lawsuit is pending against us wherein Atria is seeking, among other things, a
declaration that Atria's indemnity obligation in favor of us relative to the
bonds is void and unenforceable. See "Business--Legal Proceedings--Other Legal
Proceedings."
If we or our properties become involved in environmental claims, we could
incur substantial liabilities and costs.
Under environmental laws and regulations, a current or former owner of real
property may be liable for the costs of removal or remediation of hazardous or
toxic substances at, under or disposed of in connection with such property, as
well as other costs relating to hazardous or toxic substances (including
government fines and damages for injuries to persons, natural resources and
adjacent property). Such laws and regulations often impose liability without
regard to whether the owner knew of, or was responsible for, the presence or
disposal of such substances and may be imposed on the owner in connection with
the activities of a current or former operator of the property. While we are
generally indemnified by the operators of our properties for any environmental
costs or liabilities, this indemnification may not be sufficient. See
"Business--Environmental Regulation."
Risks Arising from Our Capital Structure
After the offering of the Original Notes we continue to be highly leveraged.
Assuming that we had completed the sale of the Original Notes on March 31,
2002 and had entered into the 2002 Credit Facility and other related
transactions, including the partial breakage of one of our swap agreements, on
such date, we would have had on that date approximately $852.2 million of
indebtedness, and approximately an additional $60.4 million of obligations
under the settlement we entered into with the United States Department of
Justice, and our subsidiaries would have had approximately $122.3 million in
additional borrowings available under the 2002 Credit Facility. The indentures
relating to the Notes permit us to incur substantial additional debt, and we
may borrow additional funds, which may include secured borrowings. A high level
of indebtedness may have the following consequences:
. substantial amounts of our existing debt will, and our future debt may,
mature prior to the Notes--a high level of debt makes it more difficult
for us to repay you;
. a potential impairment of our ability to obtain additional financing for
our business strategy;
18
. the requirement that a substantial portion of our cash flow from
operations must be dedicated to the payment of debt service, thus
reducing the funds available for our business strategy; and
. potential limits on our ability to adjust rapidly to changing market
conditions and vulnerability in the event of a downturn in general
economic conditions or in the real estate and/or healthcare sectors.
We may be unable to raise additional capital necessary to implement our
business plan and to meet our debt payments and our obligations under the
settlement we entered into with the United States Department of Justice.
In order to implement our business plan and to meet our debt payments and
our obligations under the settlement we entered into with the United States
Department of Justice, we may need to raise additional capital. Our ability to
incur additional indebtedness is restricted by the terms of the indentures and
the 2002 Credit Facility. In addition, adverse economic conditions could cause
the terms on which we can obtain additional borrowings to become unfavorable.
In such circumstances, we may be required to raise equity in the capital
markets or liquidate one or more investments in properties at times that may
not permit realization of the maximum return on the investments and that could
result in adverse tax consequences to us. In addition, certain healthcare
regulations may constrain our ability to sell assets. There can be no assurance
that we will be able to meet our debt service obligations or our obligations
under the United States Settlement and the failure to do so could significantly
harm us and our ability to service our indebtedness and other obligations and
to make distributions to our stockholders as required to continue to qualify as
a REIT.
One of our interest rate swap agreements may obligate us to post collateral
which could negatively impact our liquidity and access to financing.
The terms of our interest rate swap agreement entered into at the time of
the 1998 Spin Off, or the 1998 Swap, require that we make a cash payment or
otherwise post collateral to the other party to the 1998 Swap if the fair value
loss to us exceeds specified threshold levels. Under the 1998 Swap, if
collateral must be posted, the amount of that collateral must equal the
difference between the fair value unrealized loss of the 1998 Swap at the time
of such determination and the threshold amount. The posting of collateral under
the 1998 Swap could negatively impact our liquidity and access to financing.
There can be no assurance that we will have sufficient assets, income and
access to financing to enable us to post collateral if required to do so under
the 1998 Swap. Failure to post collateral under the terms of the 1998 Swap
could significantly harm us and our ability to service our indebtedness and
other obligations and to make distributions to our stockholders as required to
continue to qualify as a REIT. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Assets/Liability
Management--Market Risk."
We hedge floating-rate debt with interest rate swaps and may record charges
associated with the termination or change in value of these interest swaps.
We have interest rate swaps that hedge interest payment obligations on
floating-rate debt. We periodically assess our interest rate swaps in relation
to our outstanding balances of floating-rate debt, and based on such
assessments may terminate portions of our swaps or enter into additional swaps.
Termination of swaps with accrued losses, or changes in the value of swaps as a
result of falling interest rates, would result in charges to our earnings,
which could be significant.
Risks Arising from Our Status as a REIT
The 90% distribution requirement will decrease our liquidity and may limit
our ability to engage in otherwise beneficial transactions.
To comply with the 90% distribution requirement applicable to REITs and to
avoid the nondeductible excise tax, we must make distributions to our
stockholders. The terms of the indentures governing the Notes permit us to make
annual distributions to our stockholders in an amount equal to the minimum
amount necessary to
19
maintain our REIT status so long as our ratio of Debt to Adjusted Total Assets
does not exceed 60% and to make additional distributions if we pass certain
other financial tests. As a result, substantial distributions will be made to
our stockholders prior to the scheduled maturity of the Notes.
Although we anticipate that we generally will have sufficient cash or liquid
assets to enable us to satisfy the distribution requirement, it is possible
that from time to time, we may not have sufficient cash or other liquid assets
to meet the 90% distribution requirement or to distribute such greater amount
as may be necessary to avoid income and excise taxation. This may be due to the
timing differences between the actual receipt of income and actual payment of
deductible expenses on the one hand and the inclusion of that income and
deduction of those expenses in arriving at our taxable income. In addition,
nondeductible expenses such as principal amortization or repayments or capital
expenditures in excess of noncash deductions may also cause us to fail to have
sufficient cash or liquid assets to enable us to satisfy the 90% distribution
requirement.
These distributions may impair our ability to make payment of principal and
interest on the Notes and may limit our ability to rely upon rental payments
from our properties or subsequently acquired properties to finance acquisitions
or new developments.
In the event that timing differences or other cash needs occur, we may find
it necessary to borrow funds, issue equity securities (although there can be no
assurance that we will be able to do so), pay taxable stock dividends if
possible, distribute other property or securities (including Kindred common
stock) or engage in a transaction intended to enable us to meet the REIT
distribution requirements. This may require us to raise additional capital to
meet our obligations; however, see "Risk Factors--Risks Arising from our
Capital Structure--We may be unable to raise additional capital necessary to
implement our business plan and to meet our debt payments and our obligations
under the settlement we entered into with the United States Department of
Justice." The terms of the indentures and our 2002 Credit Facility restrict our
ability to engage in some of these transactions.
We may still be subject to corporate level taxes.
Following our REIT election, we are considered to be a former C corporation
for income tax purposes. Therefore, potentially, we remain subject to corporate
level taxes for any asset dispositions occurring between January 1, 1999 and
December 31, 2008. The Internal Revenue Service is currently reviewing our
federal tax returns for tax years ended December 31, 1997 and 1998 and may also
review our federal tax returns for subsequent years. There can be no assurance
as to the ultimate outcome of these matters or whether that outcome will
significantly harm us and our ability to service our indebtedness and other
obligations and to make distributions to our stockholders as required to
continue to qualify as a REIT.
However, if there are any resulting tax liabilities for the tax years ended
December 31, 1997 and 1998, we intend to use the net operating loss, or NOL,
carryforwards, if any (including the NOL carryforwards that were utilized to
offset our federal income tax liability for 1999 and 2000), to satisfy those
tax liabilities. If the tax liabilities exceed the amount of NOL carryforwards,
then we will use the escrowed amounts under the tax refund escrow agreement we
entered into when Kindred emerged from bankruptcy to satisfy the remaining tax
liabilities. To the extent that NOL carryforwards and escrowed amounts are not
sufficient to satisfy the tax liabilities, Kindred has indemnified us for
specific tax liabilities and Kindred has assumed these obligations under the
tax refund escrow agreement described below under the heading
"Business--Dependence on Kindred--Summary of Kindred's Plan of
Reorganization--Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow
Agreement." There can be no assurance that the NOL carryforwards and the
escrowed amounts will be sufficient to satisfy these liabilities, that Kindred
has any obligation to indemnify us for particular tax liabilities, that Kindred
will have sufficient financial means to enable it to satisfy its indemnity
obligations under such tax refund escrow agreement or that Kindred will
continue to honor its indemnification obligations.
20
We may jeopardize our REIT status if we violate the 10% securities test or
the 5% asset test because of the value of the Kindred common stock.
We lease substantially all of our properties to Kindred and Kindred is the
primary source of our rental income. Under Kindred's plan of reorganization, we
received 1,498,500 shares of Kindred common stock on April 20, 2001 as future
rent. We sold 83,300 of those shares of Kindred common stock on November 14,
2001 through an underwritten offering, and distributed 334,886 shares of
Kindred common stock as part of the 2001 dividend. Consequently, we currently
own 1,080,314 shares of Kindred common stock. If we violated or violate the 10%
securities test described below under the heading "Business--Federal Income
Taxation of the Company," Kindred would be a related party tenant and
consequently, the rents from Kindred would not qualify as "rents from real
property" under the Code. As a result, we would lose our REIT status because we
likely would not be able to satisfy either the 75% or the 95% gross income test
also described below under the heading "Business--Federal Income Taxation of
the Company."
In addition, if our shares of Kindred common stock exceed 10% of the voting
power or value of Kindred's outstanding stock or if the value of our shares of
Kindred common stock exceeds 5% of the value of our total assets at the end of
the quarter in which we received the Kindred common stock or at the end of any
subsequent quarter (except where such excess in subsequent quarters is caused
by value fluctuations of our various investments and not by the acquisition or
disposition of assets) we would violate the 10% securities test or the 5% asset
test. Consequently, we would lose our REIT status unless we cured the violation
in a timely manner under the applicable provisions of the Code. There can be no
assurance that relief for such a violation would be available. See
"Business--Federal Income Taxation of the Company."
Risks Relating to the Exchange Offer
You may not be able to sell your Original Notes if you do not exchange them
for registered New Notes in the Exchange Offer.
If you do not exchange your Original Notes for New Notes in the Exchange
Offer, your Original Notes will continue to be subject to the restrictions on
transfer as stated in the legend on the Original Notes. In general, you may not
offer, sell or otherwise transfer the Original Notes in the U.S. unless they
are:
. registered under the Securities Act;
. offered or sold under an exemption from the Securities Act and
applicable state securities laws; or
. offered or sold in a transaction not subject to the Securities Act and
applicable state securities laws.
The Issuers and the Guarantors do not currently anticipate that they will
register the Original Notes under the Securities Act and, except for limited
instances involving the initial purchasers or holders of Original Notes who are
not eligible to participate in the Exchange Offer or who do not receive freely
transferable New Notes in the Exchange Offer, they will not be under any
obligation to do so under the registration rights agreement or otherwise. Also,
if the Exchange Offer is completed on the terms and within the time period
contemplated by this prospectus, no liquidated damages will be payable on your
Original Notes.
Your ability to sell your Original Notes may be significantly more limited
and the price at which you may be able to sell your Original Notes may be
significantly lower if you do not exchange them for registered New Notes in
the Exchange Offer.
To the extent that Original Notes are tendered and accepted for exchange in
the Exchange Offer, the trading market for the Original Notes that remain
outstanding may be significantly more limited. As a result, the liquidity of
the Original Notes not tendered and accepted for exchange could be adversely
affected. The extent of the market for Original Notes and the availability of
price quotations would depend upon a number of factors, including the number of
holders of Original Notes remaining outstanding and the interest of securities
firms in maintaining a market in the Original Notes. An issue of securities
with a similar outstanding market value
21
available for trading, which is called the "float," may command a lower price
than would be comparable to an issue of securities with a greater float. As a
result, the market price for Original Notes that are not exchanged in the
Exchange Offer may be affected adversely to the extent that Original Notes
exchanged in the Exchange Offer reduce the float. The reduced float also may
make the trading price of the Original Notes that are not exchanged more
volatile.
There are state securities law restrictions on the resale of the New Notes.
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or sold by any holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. The Issuers and the Guarantors do not currently
intend to register or qualify the resale of the New Notes in any such
jurisdictions. However, an exemption is generally available for sales to
registered broker-dealers and certain institutional buyers. Other exemptions
under applicable state securities laws may also be available.
The Issuers and the Guarantors will not accept your Original Notes for
exchange if you fail to follow the Exchange Offer procedures and, as a
result, your Original Notes will continue to be subject to existing transfer
restrictions and you may not be able to sell your Original Notes.
The Issuers and the Guarantors will issue New Notes as part of the Exchange
Offer only after a timely receipt of your Original Notes, a properly completed
and duly executed letter of transmittal and all other required documents.
Therefore, if you want to tender your Original Notes, please allow sufficient
time to ensure timely delivery. If the Issuers and the Guarantors do not
receive your Original Notes, letter of transmittal and other required documents
by the expiration date of the Exchange Offer, they will not accept your
Original Notes for exchange. The Issuers and the Guarantors are under no duty
to give notification of defects or irregularities with respect to the tenders
of Original Notes for exchange. If there are defects or irregularities with
respect to your tender of Original Notes, the Issuers and the Guarantors will
not accept your Original Notes for exchange. See "The Exchange Offer."
Risks Relating to the Terms of and Market for the Notes
The New Notes, like the Original Notes, entail the following risks:
Because the Notes will be structurally subordinated to the obligations of our
subsidiaries that are not Guarantors, you may not be fully repaid if we
become insolvent.
Only our "Restricted Subsidiaries" that are not Excluded Joint Ventures will
be directly obligated on the Notes. Holders of the Notes will have no claims
against the assets of our "Unrestricted Subsidiaries," which initially will
include the subsidiaries formed in connection with the CMBS transaction and any
future Excluded Joint Ventures. These Unrestricted Subsidiaries currently own
40 nursing homes. We may, subject to the limitations to be contained in the
indentures, form additional Unrestricted Subsidiaries and Excluded Joint
Ventures in the future. All obligations of the Unrestricted Subsidiaries and
any Excluded Joint Ventures, including indebtedness to trade creditors will
have to be paid, in full, before the holders of the Notes will have any claims
against the current and future Unrestricted Subsidiaries and Excluded Joint
Ventures.
Because the Notes that you hold are unsecured, you may not be fully repaid if
we become insolvent.
The New Notes, like the Original Notes, will not be secured by any of our
assets or our subsidiaries' assets. The indentures relating to the Notes permit
us to incur secured debt, including $350 million under the 2002 Credit Facility
which is secured by certain of our assets. In addition, our mortgage loan under
the CMBS Transaction (described below under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capital
Resources--CMBS Transaction") is secured by mortgages on certain of our
properties. If we became insolvent, the holders of any secured debt would
receive payments from the assets used as security before you would receive
payments on the Notes.
22
If we experience a change in control, we may be unable to purchase the Notes
you hold as required under the indentures.
Upon the occurrence of certain change of control events, we must make an
offer to purchase all outstanding Notes at a purchase price equal to 101% of
the principal amount of the Notes, plus accrued and unpaid interest, if any, to
the date of purchase. We may not have sufficient funds to pay the purchase
price for all Notes tendered by holders seeking to accept the offer to
purchase. In addition, the 2002 Credit Facility and our other debt agreements
may require us to repurchase the other debt upon a change in control or may
prohibit us from purchasing all validly tendered Notes, which would result in
an event of default under the indentures. See "Description of Notes--Certain
Covenants--Repurchase of Notes Upon a Change of Control."
Federal and state statutes allow courts, under specific circumstances, to
void the guarantees and require noteholders to return payments received from
the Issuers or the Guarantors.
The creditors of the Guarantors could challenge the guarantees as fraudulent
conveyances or on other grounds. The delivery of the guarantees could be found
to be a fraudulent transfer and declared void if a court determined that: the
Guarantor delivered the guarantee with the intent to hinder, delay or defraud
its existing or future creditors; the Guarantor did not receive fair
consideration for the delivery of the guarantee; or the Guarantor was insolvent
at the time it delivered the guarantee. There can be no assurance regarding the
standard a court would apply to determine whether a Guarantor was insolvent
upon the consummation of the sale of the Notes or that, regardless of the
method of evaluation, a court would not determine that the Guarantor was
insolvent upon consummation of the sale of the Notes. If a court declares the
guarantees to be void, or if the guarantees must be limited or voided in
accordance with their terms, any claim you may make against us for amounts
payable on the Notes would be unsecured and subordinated to the debt of the
Guarantors, including trade payables of such Guarantors.
The guarantees provided by us and our subsidiaries are subject to certain
defenses that may limit your right to receive payment on the Notes.
Although the guarantees provide the holders of the Notes with a direct claim
against the assets of the Guarantors, enforcement of the guarantees against any
Guarantor would be subject to certain "suretyship" defenses available to
Guarantors generally. Enforcement could also be subject to other defenses
available to the Guarantors in certain circumstances. To the extent that the
guarantees are not enforceable, you would not be able to successfully assert a
claim against such Guarantors.
There is no public market for the Notes, so you may be unable to sell the
Notes.
The Notes are new securities for which there is currently no market.
Consequently, the Notes may be relatively illiquid, and you may be unable to
sell your Notes, or if you are able to sell your Notes, there can be no
assurance as to the price at which you will able to sell them. Future trading
prices of the Notes will depend on many factors, including, among other things,
prevailing interest rates, economic conditions, our and Ventas Realty's
financial condition and the market for similar securities. We do not intend to
apply for listing of the Notes on any securities exchange or for the inclusion
of the Notes in any automated quotation system. Certain of the initial
purchasers have advised us that they presently intend to make a market in the
Notes. However, they are not obligated to do so, and they may discontinue any
market-making at any time in their sole discretion and without notice.
23
USE OF PROCEEDS
We and the Issuers will not receive any proceeds from the issuance of the
New Notes in the Exchange Offer. The New Notes will evidence the same debt as
the Original Notes surrendered in exchange for the New Notes. Accordingly, the
issuance of the New Notes will not result in any change in our and the Issuers'
indebtedness.
The net proceeds of the private placement of the Original Notes were
approximately $390.6 million after deducting expenses. Our net proceeds from
the offering were used, together with certain borrowings under the 2002 Credit
Facility and cash on hand, to repay all outstanding indebtedness under our
Amended and Restated Credit, Security and Guaranty Agreement dated January 31,
2000 (the "2000 Credit Agreement") and to pay breakage costs for the partial
termination of the associated interest rate swap agreement.
24
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 2002.
In the pro forma columns, we have made adjustments to give effect to our
receipt of the net proceeds from the sale of the Original Notes, the borrowings
under the 2002 Credit Facility, the repayment of all outstanding indebtedness
under our 2000 Credit Agreement and the payment of breakage costs for the
partial termination of the associated interest rate swap agreement as described
above in "Use of Proceeds."
You should read this table in conjunction with our consolidated financial
statements and their notes contained elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Use of Proceeds" for additional information.
As of March 31, 2002
-----------------------------------
Pro forma
-----------------------
Historical Restricted
Consolidated Consolidated Group (1)
------------ ------------ ----------
(dollars in thousands)
Cash and cash equivalents.............. $ 9,281 $ 1,281 $ 1,281
======== ========= =========
2000 Credit Agreement.................. 607,106 -- --
CMBS loan(2)........................... 224,438 224,438 --
Notes.................................. -- 400,000 $ 400,000
2002 Credit Facility................... -- 227,747 227,747
-------- --------- ---------
Total debt.......................... 831,544 852,185 627,747
Total stockholders' equity (deficit)(3) (94,266) (101,184) (101,184)
-------- --------- ---------
Total capitalization................... $737,278 $ 751,001 $ 526,563
======== ========= =========
(1) The restricted group includes the Issuers and the Guarantors under the
indentures, but the restricted group excludes our wholly-owned subsidiaries
that were formed in connection with the CMBS Transaction, which are not
obligors under the indentures, except to the extent of distributions to the
restricted group. The presentation gives effect to pro forma dividends of
$2.4 million from the unrestricted group. See "Description of Notes."
(2) The CMBS Transaction completed December 12, 2001, bears interest at a
nominal weighted average rate of one-month LIBOR plus 1.46% and is
non-recourse to us.
(3) Pro forma stockholders' equity is adjusted for the write-off of deferred
financing costs from the repayment of our 2000 Credit Agreement.
25
THE EXCHANGE OFFER
Purpose of the Exchange Offer
On April 17, 2002, the Issuers privately placed the Original Notes in a
transaction exempt from registration under the Securities Act. Accordingly, the
Original Notes may not be reoffered, resold or otherwise transferred in the
U.S. unless so registered or unless an exemption from the Securities Act
registration requirements is available. In the registration rights agreement,
the Issuers and the Guarantors have agreed with the initial purchasers of the
Original Notes to, at their own cost:
... file an Exchange Offer registration statement with the Commission within 45
days after April 17, 2002 (or, if such 45th day is not a business day, the
following business day);
... use their respective commercially reasonable efforts to cause the Exchange
Offer registration statement to be declared effective by the Commission
within 180 days after April 17, 2002 (or, if such 180th day is not a
business day, the following business day); and
... unless the Exchange Offer would not be permitted by applicable law or
Commission policy,
(1) commence the Exchange Offer; and
(2) use their respective best efforts to consummate the Exchange Offer
within 30 business days, or longer, if required by the federal
securities laws, after the date on which the Exchange Offer registration
statement was declared effective by the Commission.
In addition, the Issuers and the Guarantors have agreed to keep the Exchange
Offer open for at least 20 business days, or longer if required by applicable
law, after the date notice of the Exchange Offer is mailed to the holders of
the Original Notes. The New Notes are being offered under this prospectus to
satisfy these obligations under the registration rights agreement.
Terms of the Exchange
Upon the terms and subject to the conditions contained in this prospectus
and in the letters of transmittal that accompany this prospectus, the Issuers
and the Guarantors are offering to exchange $1,000 in principal amount of New
Notes for each $1,000 in principal amount of Original Notes. The terms of the
New Notes are substantially identical to the terms of the Original Notes for
which they may be exchanged in the Exchange Offer, except that:
... The New Notes will be registered under the Securities Act;
... the New Notes will be freely transferable, other than as described in this
prospectus and will not contain any legend restricting their transfer;
... holders of the New Notes will not be entitled to certain rights of the
holders of the Original Notes under the registration rights agreement, which
rights will terminate on completion of the Exchange Offer; and
... the New Notes will not contain any provisions regarding the payment of
liquidated damages.
The New Notes will evidence the same debt as the Original Notes and will be
entitled to the benefits of the indentures. See "Description of Notes."
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Original Notes being tendered for exchange.
Based on interpretations by the Commission's staff in no-action letters
issued to other parties, we believe that holders of New Notes issued in the
Exchange Offer may transfer the New Notes without complying with the
registration and prospectus delivery requirements of the Securities Act if the
holders:
... acquire the New Notes in the ordinary course of the holders' business;
26
... are not engaged in, and do not intend to engage in, and have no arrangement
or understanding with any person to participate in, a distribution of the
New Notes;
... are not affiliates of ours within the meaning of Rule 405 under the
Securities Act;
... are not broker-dealers that acquired Original Notes directly from us or
affiliates of ours; and
... are not broker-dealers that acquired Original Notes as a result of
market-making or other trading activities.
If any of these conditions are not satisfied and a holder of New Notes
transfers any New Note without delivering a proper prospectus or without
qualifying for a registration exemption, it may incur liability under the
Securities Act.
See "Plan of Distribution."
Each broker-dealer that receives New Notes for its own account in the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of those New Notes. Each letter of transmittal that accompanies
this prospectus states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act. A participating broker-dealer may use this
prospectus, as it may be amended or supplemented from time to time, in
connection with resales of New Notes received in exchange for Original Notes
where those Original Notes were acquired by the broker-dealer for its own
account as a result of market-making activities or other trading activities.
The Issuers and the Guarantors have agreed, if requested by such a
participating broker-dealer, to use their respective commercially reasonable
efforts to keep the registration statement of which this prospectus is a part
continuously effective for a period not to exceed 30 days after the date on
which the registration statement is declared effective, or such longer period
if extended under certain circumstances, for use in connection with any resale
of this kind.
Tendering holders of Original Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the applicable letter of
transmittal, transfer taxes relating to the exchange of Original Notes for New
Notes in the Exchange Offer.
Shelf Registration Statement
If:
... the Issuers and the Guarantors are not required to file the Exchange Offer
registration statement;
... the Issuers and the Guarantors are not permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy; or
... any holder of Original Notes notifies the Issuers prior to the 20th day
following the completion of the Exchange Offer that:
(1) it is prohibited by law or Commission policy from participating in the
Exchange Offer; or
(2) it may not resell the New Notes acquired by it in the Exchange Offer to
the public without delivering a prospectus and this prospectus is not
appropriate or available for such resales; or
(3) it is a broker-dealer and owns Original Notes acquired directly from the
Issuers or an affiliate of the Issuers,
the Issuers and the Guarantors will, at their cost:
... use their respective best efforts to file a shelf registration statement to
cover resales of the Notes by the holders of the Notes who satisfy certain
conditions relating to the provision of information in connection with the
shelf registration statement on or prior to 45 days after such filing
obligation arises (or, if such 45th day is not a business day, the following
business day);
... use their respective commercially reasonable efforts to cause the shelf
registration statement to be declared effective by the Commission on or
prior to 180 days after such obligation arises (or, if such 180th day is not
a business day, the following business day); and
27
... keep the shelf registration statement continuously effective under the
Securities Act until the earlier of April 17, 2004, subject to extension,
and such shorter period ending when all Notes covered by the shelf
registration statement have been sold in the manner set forth and as
contemplated in the shelf registration statement.
For purposes of determining whether the Issuers and the Guarantors are
obligated to file a shelf registration statement, the requirement that a
participating broker-dealer deliver this prospectus in connection with sales of
New Notes will not result in those New Notes being deemed not freely tradable.
If the Issuers and the Guarantors file a shelf registration statement, they
will, among other things:
... provide to each holder for whom the shelf registration statement was filed
copies of the prospectus that is a part of the shelf registration statement;
... notify each of those holders when the shelf registration statement has
become effective; and
... take other actions as are required to permit unrestricted resales of the
Original Notes or the New Notes, as the case may be.
A holder selling Original Notes or New Notes under the shelf registration
statement generally must be named as a selling security holder in the related
prospectus and must deliver a prospectus to purchasers. Consequently, the
holder will be subject to the civil liability provisions under the Securities
Act in connection with those sales and will be bound by any applicable
provisions of the registration agreement, including specified indemnification
obligations.
Liquidated Damages
Liquidated damages will accrue on the Notes, in addition to the stated
interest on the Notes, from and including the date on which a registration
default occurs to but excluding the earlier of the date on which all
registration defaults have been cured and the date on which all Notes otherwise
become freely transferable by holders of Notes other than affiliates of the
Issuers and the Guarantors without registration under the Securities Act.
The occurrence of any of the following is a registration default:
... the Issuers and the Guarantors fail to file either of the registration
statements required by the registration rights agreement on or before the
date specified for such filing; or
... any such registration statement is not declared effective by the Commission
on or prior to the date specified for such effectiveness; or
... the Issuers and the Guarantors fail to consummate the Exchange Offer within
30 business days of the date the registration statement of which this
prospectus is a part is declared effective; or
... either registration statement is declared effective but thereafter ceases to
be effective or usable in connection with resales of Notes covered by such
registration statement during the periods specified in the registration
rights agreement.
Liquidated damages will accrue on the Notes, with respect to the first
90-day period immediately following the occurrence of the registration default,
in an amount equal to $.05 per week per $1,000 principal amount of Notes. The
amount of the liquidated damages will increase by an additional $.05 per week
per $1,000 principal amount of Notes with respect to each subsequent 90-day
period until the earlier of the date all registration defaults have been cured
and the date on which all Notes otherwise become freely transferable by holders
of Notes other than affiliates of the Issuers and the Guarantors without
registration under the Securities Act, up to a maximum amount of liquidated
damages for all registration defaults of $.20 per week per $1,000 principal
amount of Notes. Following the cure of all registration defaults, the accrual
of liquidated damages will cease. If
28
the Exchange Offer is completed on the terms and within the period contemplated
by this prospectus, no liquidated damages will be payable on the Notes. The New
Notes will not contain any provisions regarding the payment of liquidated
damages.
The summary of the provisions of the registration rights agreement contained
in this prospectus does not purport to be complete. This summary is subject to
and is qualified in its entirety by reference to all the provisions of the
registration rights agreement, a copy of which is an exhibit to the
registration statement of which this prospectus is a part.
Expiration Date; Extensions; Termination; Amendments
The expiration date of the Exchange Offer is 5:00 p.m., New York City time,
on , 2002, unless the Issuers and the Guarantors in their sole
discretion extend the period during which the Exchange Offer is open. In that
case, the expiration date will be the latest time and date to which the
Exchange Offer is extended. The Issuers and the Guarantors reserve the right to
extend the Exchange Offer at any time and from time to time before the
expiration date by giving written notice to the exchange agent, U.S. Bank
National Association, and by timely public announcement. Unless otherwise
required by applicable law or regulation, the public announcement will be made
by a release to the Dow Jones News Service. During any extension of the
Exchange Offer, all Original Notes previously tendered in the Exchange Offer
will remain subject to the Exchange Offer.
The initial exchange date will be the first business day following the
expiration date. The Issuers and the Guarantors expressly reserve the right to:
... terminate the Exchange Offer and not accept for exchange any Original Notes
for any reason, including if any of the events described below under
"--Conditions to the Exchange Offer" shall have occurred and shall not have
been waived by the Issuers; and
... amend the terms of the Exchange Offer in any manner.
If any termination or amendment occurs, the Issuers and the Guarantors will
notify the exchange agent in writing and will either issue a press release or
give written notice to the holders of the Original Notes as promptly as
practicable. Unless the Issuers and the Guarantors terminate the Exchange Offer
prior to 5:00 p.m., New York City time, on the expiration date, the Issuers and
the Guarantors will exchange the New Notes for the Original Notes on the
exchange date.
If:
... The Issuers and/or the Guarantors waive any material condition to the
Exchange Offer or amend the Exchange Offer in any other material respect; and
... at the time that notice of this waiver or amendment is first published, sent
or given to holders of Original Notes in the manner specified above, the
Exchange Offer is scheduled to expire at any time earlier than the fifth
business day from, and including, the date that the notice is first so
published, sent or given,
then the Exchange Offer will be extended until that fifth business day.
This prospectus and the letters of transmittal and other relevant materials
will be mailed by the Issuers and the Guarantors to record holders of Original
Notes. In addition, these materials will be furnished to brokers, banks and
similar persons whose names, or the names of whose nominees, appear on the
lists of holders for subsequent transmittal to beneficial owners of Original
Notes.
How to Tender
The tender to the Issuers and the Guarantors of Original Notes according to
one of the procedures described below will constitute an agreement between that
holder of Original Notes and the Issuers and the Guarantors in accordance with
the terms and subject to the conditions set forth in this prospectus and in the
applicable letter of transmittal.
29
General Procedures. A holder of Original Notes may tender them by:
... properly completing and signing the applicable letter of transmittal or a
facsimile of the letter of transmittal and delivering them, together with
the certificate or certificates representing the Original Notes being
tendered and any required signature guarantees, or a timely confirmation of
a book-entry transfer according to the procedure described below, to the
exchange agent at its address set forth below under "--Exchange Agent" on
or before the expiration date; or
... complying with the guaranteed delivery procedures described below.
All references in this prospectus to a letter of transmittal include a
facsimile of the letter of transmittal.
If tendered Original Notes are registered in the name of the signer of the
applicable letter of transmittal and the New Notes to be issued in exchange for
accepted Original Notes are to be issued, and any untendered Original Notes are
to be reissued, in the name of the registered holder, the signature of the
signer need not be guaranteed. In any other case, the tendered Original Notes
must be endorsed or accompanied by written instruments of transfer in form
satisfactory to the Issuers and the Guarantors. They must also be duly executed
by the registered holder. In addition, the signature on the endorsement or
instrument of transfer must be guaranteed by an eligible guarantor institution
that is a member of a recognized signature guarantee medallion program within
the meaning of Rule 17Ad-15 under the Exchange Act. If the New Notes and/or
Original Notes not exchanged are to be delivered to an address other than that
of the registered holder appearing on the note register for the Original Notes,
an eligible guarantor institution must guarantee the signature on the
applicable letter of transmittal.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Original Notes should contact the holder promptly and instruct it to
tender on the beneficial owner's behalf. If the beneficial owner wishes to
tender the Original Notes itself, the beneficial owner must either make
appropriate arrangements to register ownership of the Original Notes in its
name or follow the procedures described in the immediately preceding paragraph.
The beneficial owner must make these arrangements or follow these procedures
before completing and executing the applicable letter of transmittal and
delivering the Original Notes. The transfer of record ownership may take
considerable time.
Book-Entry Transfer. The exchange agent will make a request to establish an
account for the Original Notes at the book-entry transfer facility, The
Depository Trust Company, or DTC, for purposes of the Exchange Offer within two
business days after receipt of this prospectus. Subject to the establishment of
the account, any financial institution that is a participant in the book-entry
transfer facility's systems may make book-entry delivery of Original Notes by
causing the book-entry transfer facility to transfer the Original Notes into
the exchange agent's account at the book-entry transfer facility in accordance
with the facility's procedures. However, although delivery of Original Notes
may be effected through book-entry transfer, the applicable letter of
transmittal, with any required signature guarantees and any other required
documents, must, in any case, be transmitted to and received by the exchange
agent at the address set forth below under "--Exchange Agent" on or before the
expiration date or the guaranteed delivery procedures described below must be
complied with.
The method of delivery of Original Notes and all other documents is at the
election and risk of the holder. If sent by mail, it is recommended that the
holder use registered mail, return receipt requested, obtain proper insurance,
and make the mailing sufficiently in advance of the expiration date to permit
delivery to the exchange agent on or before the expiration date.
Unless an exemption applies under the applicable law and regulations
concerning backup withholding of federal income tax, the exchange agent will be
required to withhold 30% of the gross proceeds otherwise payable to a holder in
the Exchange Offer if the holder does not provide the holder's taxpayer
identification number and certify that the number is correct. Each tendering
holder should complete and sign the main signature form and
30
the Substitute Form W-9 included as part of the letter of transmittal, so as to
provide the information and certification necessary to avoid backup
withholding. This will not be required, however, if an applicable exemption
exists and is proved in a manner satisfactory to the Issuers, the Guarantors
and the exchange agent.
Guaranteed Delivery Procedures. If a holder desires to accept the Exchange
Offer and time will not permit a letter of transmittal or Original Notes to
reach the exchange agent before the expiration date, a tender may be effected
if the exchange agent has received at its office listed under "--Exchange
Agent" below on or before the expiration date a letter, telegram or facsimile
transmission from an eligible guarantor institution that:
. sets forth the name and address of the tendering holder, the names in
which the Original Notes are registered and, if possible, the certificate
numbers of the Original Notes to be tendered; and
. states that the tender is being made thereby; and
. guarantees that within three New York Stock Exchange trading days after
the date of execution of the letter, telegram or facsimile transmission
by the eligible guarantor institution, the Original Notes, in proper form
for transfer, will be delivered by the eligible guarantor institution
together with a properly completed and duly executed letter of
transmittal and any other required documents.
Unless Original Notes being tendered by the above-described method or a
timely confirmation of a book-entry transfer are deposited with the exchange
agent within the time period described above, accompanied or preceded by a
properly completed letter of transmittal and any other required documents, the
Issuers and the Guarantors may reject the tender. Copies of a notice of
guaranteed delivery that may be used by eligible guarantor institutions for the
purposes described in this paragraph are being delivered with this prospectus
and the letters of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed letter of transmittal
accompanied by the Original Notes or a timely confirmation of a book-entry
transfer is received by the exchange agent. Issuances of New Notes in exchange
for Original Notes tendered by an eligible guarantor institution as described
above will be made only against deposit of the applicable letter of transmittal
and any other required documents and the tendered Original Notes or a timely
confirmation of a book-entry transfer.
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance for exchange of any tender of Original Notes will be
determined by the Issuers and the Guarantors. The Issuers' and Guarantors'
determination will be final and binding. The Issuers and the Guarantors reserve
the absolute right to reject any or all tenders not in proper form or the
acceptances for exchange of which may, in the opinion of counsel to the
Issuers, be unlawful. The Issuers and the Guarantors also reserve the absolute
right to waive any of the conditions of the Exchange Offer or any defect or
irregularities in tenders of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders. None of the
Issuers, the Guarantors, the exchange agent or any other person will incur any
liability for failure to give notification of any defects or irregularities in
tenders. The interpretation of the terms and conditions of the Exchange Offer
of the Issuers and the Guarantors, including the letters of transmittal and the
instructions to the letters of transmittal, will be final and binding.
Terms and Conditions of the Letters of Transmittal
Each letter of transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer.
The party tendering Original Notes for exchange, or the transferor,
exchanges, assigns and transfers the Original Notes to the Issuers and the
Guarantors and irrevocably constitutes and appoints the exchange agent as its
agent and attorney-in-fact to cause the Original Notes to be assigned,
transferred and exchanged. The transferor represents and warrants that:
... it has full power and authority to tender, exchange, assign and transfer
the Original Notes and to acquire New Notes issuable upon the exchange of
the tendered Original Notes; and
31
... when the same are accepted for exchange, the Issuers and the Guarantors
will acquire good and unencumbered title to the tendered Original Notes,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim.
The transferor also warrants that it will, upon request, execute and deliver
any additional documents the Issuers and the Guarantors deem necessary or
desirable to complete the exchange, assignment and transfer of tendered
Original Notes. The transferor further agrees that acceptance of any tendered
Original Notes by the Issuers and the Guarantors and the issuance of New Notes
in exchange shall constitute performance in full by the Issuers and the
Guarantors of their obligations under the registration rights agreement and
that the Issuers and the Guarantors shall have no further obligations or
liabilities under the registration rights agreement, except in certain limited
circumstances. All authority conferred by the transferor will survive the death
or incapacity of the transferor and every obligation of the transferor shall be
binding upon the heirs, legal representatives, successors, assigns, executors
and administrators of the transferor.
By tendering Original Notes, the transferor certifies that:
... it is not an affiliate of ours within the meaning of Rule 405 under the
Securities Act, that it is not a broker-dealer that owns Original Notes
acquired directly from us or an affiliate of ours, that it is acquiring the
New Notes offered hereby in the ordinary course of its business and that it
has no arrangement with any person to participate in the distribution of
the New Notes; or
... it is an affiliate, as so defined, of ours or of the initial purchasers,
and that it will comply with applicable registration and prospectus
delivery requirements of the Securities Act.
Each broker-dealer that receives New Notes for its own account in the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of those New Notes. Each letter of transmittal states that by
so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an underwriter within the meaning of the Securities
Act.
Withdrawal Rights
Original Notes tendered in the Exchange Offer may be withdrawn at any time
before the expiration date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be timely received by the exchange agent at its address set
forth below under "--Exchange Agent." Any notice of withdrawal must:
. specify the person named in the applicable letter of transmittal as
having tendered Original Notes to be withdrawn;
. specify the certificate numbers of Original Notes to be withdrawn;
. specify the principal amount of Original Notes to be withdrawn, which
must be an authorized denomination;
. state that the holder is withdrawing its election to have those Original
Notes exchanged;
. state the name of the registered holder of those Original Notes; and
. be signed by the holder in the same manner as the original signature on
the applicable letter of transmittal, including any required signature
guarantees, or be accompanied by evidence satisfactory to the Issuers and
the Guarantors that the person withdrawing the tender has succeeded to
the beneficial ownership of the Original Notes being withdrawn.
The exchange agent will return the properly withdrawn Original Notes
promptly following receipt of notice of withdrawal. All questions as to the
validity of notices of withdrawals, including time of receipt, will be
determined by the Issuers and the Guarantors, and this determination will be
final and binding on all parties.
32
Acceptance of Original Notes for Exchange; Delivery of New Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of Original Notes validly tendered and not withdrawn
and the issuance of the New Notes will be made on the exchange date. For the
purposes of the Exchange Offer, the Issuers and the Guarantors shall be deemed
to have accepted for exchange validly tendered Original Notes when, as and if
the Issuers and the Guarantors have given written notice of acceptance to the
exchange agent.
The exchange agent will act as agent for the tendering holders of Original
Notes for the purposes of receiving New Notes from the Issuers and the
Guarantors and causing the Original Notes to be assigned, transferred and
exchanged. Upon the terms and subject to the conditions of the Exchange Offer,
delivery of New Notes to be issued in exchange for accepted Original Notes will
be made by the exchange agent promptly after acceptance of the tendered
Original Notes. Original Notes not accepted for exchange will be returned
without expense to the tendering holders. Or, in the case of Original Notes
tendered by book-entry transfer, the non-exchanged Original Notes will be
credited to an account maintained with the book-entry transfer facility
promptly following the expiration date. If the Issuers and the Guarantors
terminate the Exchange Offer before the expiration date, these non-exchanged
Original Notes will be credited to the exchange agent's account promptly after
the Exchange Offer is terminated.
Conditions to the Exchange Offer
Despite any other provision of the Exchange Offer or any extension of the
Exchange Offer, the Issuers and the Guarantors will not be required to issue
New Notes for any properly tendered Original Notes not previously accepted. The
Issuers and the Guarantors may terminate the Exchange Offer by oral or written
notice to the exchange agent and by timely public announcement communicated,
unless otherwise required by applicable law or regulation, by making a release
to the Dow Jones News Service or, at its option, modify or otherwise amend the
Exchange Offer, if:
. the Exchange Offer violates applicable law or any applicable
interpretation of the staff of the Commission;
. an action or proceeding has been instituted or threatened in any court or
by any governmental agency that might materially impair the ability of
the Issuers and the Guarantors to proceed with the Exchange Offer;
. a material adverse development has occurred in any existing action or
proceeding with respect to the Issuers or the Guarantors; or
. all governmental approvals that the Issuers and the Guarantors deem
necessary for the consummation of the Exchange Offer have not been
obtained.
The conditions described above are for the sole benefit of the Issuers and
the Guarantors. The Issuers and the Guarantors may assert these conditions
regarding all or any portion of the Exchange Offer regardless of the
circumstances, including any action or inaction by the Issuers, giving rise to
the condition. The Issuers and the Guarantors may waive these conditions in
whole or in part at any time or from time to time in their sole discretion. The
failure by the Issuers or the Guarantors at any time to exercise any of the
rights described above will not be deemed a waiver of any of those rights, and
each right will be deemed an ongoing right which may be asserted at any time or
from time to time. In addition, the Issuers and the Guarantors have reserved
the right, despite the satisfaction of each of the conditions described above,
to terminate or amend the Exchange Offer.
Any determination by the Issuers and the Guarantors concerning the
fulfillment or non-fulfillment of any conditions will be final and binding upon
all parties.
In addition, the Issuers and the Guarantors will not accept for exchange any
Original Notes tendered and no New Notes will be issued in exchange for any
Original Notes, if at that time any stop order is threatened or in effect
relating to:
. the registration statement of which this prospectus constitutes a part; or
33
. the qualification of either of the indentures under the Trust Indenture
Act.
Exchange Agent
The U.S. Bank National Association has been appointed as the exchange agent
for the Exchange Offer. Letters of transmittal must be addressed to the
exchange agent at its address set forth below.
By Registered or By Overnight Courier or
Certified Mail: By Hand:
U.S. Bank National U.S. Bank National
Association Association
Corporate Trust Window Corporate Trust Window
100 Wall Street, Suite 100 Wall Street, Suite
1600 1600
New York, NY 10005 New York, NY 10005
Attention: Donna Haynes Attention: Donna Haynes
By Facsimile:
(212) 514-6808
Confirm by Telephone:
(212) 361-2511
Delivery to an address other than as set forth in this prospectus, or
transmissions of instructions via a facsimile or telex number other than the
ones set forth herein, will not constitute a valid delivery.
Solicitation of Tenders; Expenses
The Issuers and the Guarantors have not retained any dealer-manager or
similar agent in connection with the Exchange Offer and will not make any
payments to brokers, dealers or others for soliciting acceptances of the
Exchange Offer. However, the Issuers and the Guarantors will pay the exchange
agent reasonable and customary fees for its services and will reimburse it for
reasonable out-of-pocket expenses in connection with its services. The Issuers
and the Guarantors will also pay brokerage houses and other custodians,
nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them
in forwarding tenders for their customers.
Appraisal Rights
Holders of Original Notes will not have dissenters' rights or appraisal
rights in connection with the Exchange Offer.
United States Federal Income Tax Consequences
The exchange of Original Notes for New Notes by U.S. holders will not be a
taxable exchange for U.S. federal income tax purposes, and U.S. holders will
not recognize any taxable gain or loss or any interest income as a result of
the exchange.
Other
Participation in the Exchange Offer is voluntary, and holders should
carefully consider whether to accept the terms and conditions of this offer.
Holders of the Original Notes are urged to consult their financial and tax
advisors in making their own decisions on what action to take.
As a result of the making of this Exchange Offer, and upon acceptance for
exchange of all validly tendered Original Notes according to the terms of this
Exchange Offer, the Issuers and the Guarantors will have fulfilled a covenant
contained in the terms of the Original Notes and the registration rights
agreement. Holders of the Original Notes who do not tender their certificates
in the Exchange Offer will continue to hold those certificates and will be
entitled to all the rights, and limitations applicable to the Original Notes
under the indentures, except for any rights under the registration rights
agreement which by their terms terminate or cease to have further effect as a
result of the making of this Exchange Offer. See "Description of Notes."
All untendered, and tendered but unaccepted, Original Notes will continue to
be subject to the restrictions on transfer provided for in the Original Notes
and the indentures under which the Original Notes have been
34
issued. In general, the Original Notes may not be reoffered, resold or
otherwise transferred in the U.S. unless they are registered under the
Securities Act, offered or sold under an exemption from the Securities Act and
applicable state securities laws or offered or sold in a transaction not
subject to the Securities Act and applicable state securities laws. Except
under certain limited circumstances, we do not intend to register the Original
Notes under the Securities Act.
In addition, any holder of Original Notes who tenders in the Exchange Offer
for the purpose of participating in a distribution of the New Notes may be
deemed to have received restricted securities. If so, that holder will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction. To the extent
that Original Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Original Notes could be adversely affected.
The Issuers and the Guarantors may in the future seek to acquire untendered
Original Notes in open market or privately negotiated transactions, through
subsequent Exchange Offers or otherwise. The Issuers and the Guarantors have no
present plan to acquire any Original Notes that are not tendered in the
Exchange Offer.
35
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected consolidated financial data as of December 31, 1998, 1999, 2000
and 2001 and for the years then ended and for the period from May 1, 1998
through December 31, 1998 presented below is derived from our audited financial
statements and accompanying notes. The selected financial data presented below
as of and for the three months ended March 31, 2001 and 2002 has been derived
from our unaudited financial statements. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operation as of such dates and for such periods. The
data presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
Consolidated Financial Statements as of December 31, 2000 and 2001 and for the
years ended December 31, 1999, 2000 and 2001 and accompanying notes, the
unaudited Condensed Consolidated Financial Statements for the three months
ended and as of March 31, 2002 and our unaudited pro forma financial statements
and accompanying notes included elsewhere in this prospectus.
Three Months Ended
Years Ended December 31, March 31,
----------------------------- ------------------
Period from
May 1, 1998 to
December 31,
1998(1) 1999 2000 2001 2001 2002
-------------- -------- --------- --------- -------- --------
(dollars in thousands)
Operating Data:
Rental income.................. $149,933 $228,600 $ 232,841 $ 185,152 $ 46,118 $ 46,397
Gain on sale of Kindred common
stock........................ -- -- -- 15,425 -- --
Total revenues................. 150,134 232,991 242,322 204,581 47,624 46,739
General and administrative and
other expenses............... 5,697 21,566 20,781 14,902 4,348 2,876
United States Settlement....... -- -- 96,493 -- -- --
Interest expense............... 59,428 88,753 95,319 87,032 21,121 19,860
Interest on United States
Settlement................... -- -- -- 4,592 -- 1,471
Loss on uncollectible amounts
due from tenants............. -- 34,418 48,328 -- -- --
Net income (loss) before
extraordinary charge......... 34,809 42,535 (61,245) 51,888 10,579 12,701
Net income (loss).............. 26,758 42,535 (65,452) 50,566 10,579 12,701
Other Data:
Net cash provided by operating
activities................... $ 86,757 $103,580 $ 85,338 $ 79,893 $ 23,098 $ 24,178
Net cash provided by (used in)
investing activities......... (908) 371 5,359 2,760 (555) 601
Net cash provided by (used in)
financing activities......... (85,511) 35,305 (142,890) (151,458) (54,846) (34,094)
FFO(2)......................... 84,660 85,023 76,479 93,502 21,054 22,068
Normalized FFO, excluding gain
on Kindred common
stock(3)..................... 84,460 85,023 76,479 78,077 21,054 22,068
36
December 31,
------------------------------
Period from
May 1, 1998 to
December 31, March 31,
1998(1) 1999 2000 2001 2002
-------------- ---------- --------- -------- ---------
(dollars in thousands)
Balance Sheet Data:
Real estate investments, net..... $939,460 $ 894,791 $ 848,545 $806,336 $795,420
Cash and cash equivalents........ 338 139,594 87,401 18,596 9,281
Kindred common stock............. -- -- -- 55,118 43,751
Total assets..................... 959,706 1,071,199 981,145 941,859 891,632
Notes payable and other debt..... 931,127 974,247 886,385 848,368 831,544
United States Settlement......... -- -- 96,493 54,747 54,747
Stockholders' equity (deficit)(4) (9,009) 8,345 (117,514) (91,074) (94,266)
- --------
(1) As a result of the 1998 Spin Off, we are deemed to have commenced
operations on May 1, 1998.
(2) We consider FFO an appropriate measure of performance of an equity REIT and
we use the NAREIT definition of FFO. NAREIT defines FFO as net income
(computed in accordance with GAAP), excluding gains (or losses) from sales
of real estate 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 our
financial performance or as an alternative to cash flow from operating
activities (determined in accordance with GAAP) as a measure of our
liquidity, nor is FFO indicative of sufficient cash flow to fund all of the
Company's needs. FFO in 2000 excludes the effect of the United States
Settlement.
(3) Normalized FFO in 2001 excludes the gain on sale of Kindred common stock:
FFO................................. $ 93,502
Gain on Sale of Kindred Common Stock (15,425)
--------
$ 78,077
========
(4) Total stockholders' equity at December 31, 2001 includes $17.5 million
cumulative increase from a change in accounting for derivatives.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of our consolidated
results of operations and financial condition. This discussion should be read
in conjunction with our Consolidated Financial Statements and accompanying
notes and other financial information included elsewhere in this prospectus. In
addition, see "Cautionary Statements--Forward-looking Statements" and "Risk
Factors."
Introduction to Our Business
The Company owns a geographically diverse portfolio of healthcare related
facilities, including hospitals, nursing facilities and personal care
facilities, that it leases to third parties. Substantially all of the Company's
rental income is derived from five master leases with Kindred. As a result, the
Company's financial condition and results of operations are dependent on the
financial condition and results of operations of Kindred, which emerged from
bankruptcy in April of 2001.
The Company elected to be taxed as a REIT under the Code, beginning with the
tax year ended December 31, 1999. As a result, for so long as Ventas continues
to satisfy the requirements for qualification as a REIT, including the
distribution of 90% of taxable net income to its stockholders, it will not be
subject to federal income taxation on the income so distributed.
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 years ended December
31, 2000 and 2001. The Company intends to continue to qualify as a REIT for
federal income tax purposes for the year ending December 31, 2002 and
subsequent years. It is possible that economic, market, legal, tax or other
considerations may cause the Company to fail, or elect not, to continue to
qualify as a REIT. The Company's failure to continue to qualify as a REIT 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 other obligations 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").
Three Months Ended March 31, 2002 and 2001
Rental income for the three months ended March 31, 2002 was $46.4 million,
of which $45.9 million (98.9%) resulted from leases with Kindred. The rental
income from Kindred includes $0.6 million related to the amortization of
deferred revenue recorded as a result of the Company's receipt of Kindred
common stock under the Final Plan on April 20, 2001 (the "Kindred Common
Stock") and the $4.5 million of additional future rent under the Master Leases.
The rental income for the three months ended March 31, 2002 is approximately
equal to rental income for the three months ended March 31, 2001 of $46.1
million, of which $45.4 million (98.4%) resulted from leases with Kindred.
Interest and other income totaled approximately $0.3 million for the three
months ended March 31, 2002 as compared to approximately $1.5 million for the
three months ended March 31, 2001. The decrease in interest income was
primarily the result of lower cash balances and reduced interest rates.
Expenses totaled $35.1 million for the quarter ended March 31, 2002 and
included $10.5 million of depreciation expense and $19.9 million of interest on
debt refinancing and $1.5 million of interest on the United States Settlement.
For the quarter ended March 31, 2001, expenses totaled $36.4 million and
included $10.5 million of depreciation expense on real estate assets and $21.1
million of interest on the 2000 Credit Agreement.
38
The $1.3 million decrease in expenses was due primarily to decreased interest
expense and decreased professional fees, which were offset by interest on the
United States Settlement.
Interest expense excluding the interest on the United States Settlement
decreased $1.2 million to $19.9 million for the three months ended March 31,
2002 from $21.1 million for the three months ended March 31, 2001. The decrease
is primarily a result of reduced principal balances and reduced interest rates
resulting from the CMBS transaction. See "Note 4--Borrowing Arrangements" to
the Condensed Consolidated Financial Statements.
Professional fees totaled approximately $0.6 million for the three months
ended March 31, 2002, as compared to $1.8 million for the three months ended
March 31, 2001. The decrease relates primarily to the reduction in professional
fees incurred as a result of Kindred's emergence from bankruptcy.
A provision for income tax was not recorded in the first quarter ended March
31, 2002 due to the fact that the Company intends to distribute to its
stockholders more than 90% of its estimated 2002 taxable income. In the first
quarter ended March 31, 2001, the Company recorded a charge for taxes on the
10% of its estimated 2001 taxable income which the Company did not distribute
as a dividend.
On March 13, 2002, the Company sold a skilled nursing facility for $1.8
million and recognized a gain of $1.1 million.
Net income for the three months ended March 31, 2002 was $12.7 million, or
$0.18 per diluted share. Net income for the three months ended March 31, 2001,
was $10.6 million or $0.15 per diluted share.
Years Ended December 31, 2001 and December 31, 2000
Net of total write-offs, rental income was essentially unchanged in 2001
compared to 2000, increasing $0.6 million in 2001 from 2000. Rental income for
the year ended December 31, 2001 was $185.2 million, of which $182.9 million
(98.8%) resulted from leases with Kindred. The rental income from Kindred
includes $1.7 million related to the amortization of deferred revenue recorded
as a result of Ventas Realty's receipt of the Kindred common stock and the $4.5
million of additional future rent under the Amended Master Leases. Net rental
income for the year ended December 31, 2000 was $184.5 million, of which $181.7
million (98.5%) resulted from leases with Kindred. In 2000, the outcome of the
Kindred bankruptcy was uncertain, and the difference between the rent provided
for in the five master leases in effect at that time (the "Prior Master
Leases") and rent actually received from Kindred was written off to
uncollectible rent expense. Kindred's plan of reorganization terminated the
Company's right to the payment of the difference between rent required to be
paid under the terms of the Prior Master Leases and the rent received by the
Company after the date that Kindred filed for protection under chapter 11 of
title 11 of the Bankruptcy Code (the "Bankruptcy Code") and prior to the
beginning of the month immediately following the date Kindred emerged from
bankruptcy.
As a result, for the period from January 1, 2001 through April 30, 2001, the
Company recorded rental income equal to the amount actually paid by Kindred
under the Rent Stipulation. The Company included in its revenue computation for
the period May 1, 2001 through December 31, 2001 the amount of rent due and
payable under the Master Leases for that period.
Interest and other income totaled approximately $4.0 million and $9.5
million for the years ended December 31, 2001 and 2000, respectively. The
decrease in interest was primarily the result of lower cash balances during the
year as well as reduced market interest rates.
Expenses totaled $150.3 million for the year ended December 31, 2001 and
included $42.0 million of depreciation expense on real estate assets, $87.0
million of interest on our 2000 Credit Agreement (as defined below) and other
debt and $4.6 million interest on United States Settlement. For the year ended
December 31,
39
2000 expenses totaled $304.5 million and included $42.2 million of depreciation
expense on real estate assets and $95.3 million of interest on our 2000 Credit
Agreement and other debt. The $154.2 million decrease in expenses in 2001 was
due primarily to (a) a charge in 2000 of $96.5 million related to the United
States Settlement, (b) a charge to earnings in 2000 of $48.3 million for unpaid
rent from tenants, which primarily includes the difference between the minimum
monthly base rent that would have been due under the terms of the Prior Master
Leases and the base rent that was paid under the terms of the Rent Stipulation
entered into in connection with the Kindred bankruptcy, (c) decreased interest
expense and (d) decreased professional fees.
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 Company will pay $103.6 million to the federal government, of which $34.0
million was paid on the date Kindred emerged from bankruptcy. The balance of
$69.6 million bears interest at 6% per annum and is payable in equal quarterly
installments over a five-year term commencing on June 30, 2001. The charge for
the United States Settlement was discounted for accounting purposes based on an
imputed borrowing rate of 10.75%.
Professional fees totaled approximately $4.7 million for the year ended
December 31, 2001, as compared to $10.8 million for the year ended December 31,
2000. The decrease relates primarily to the reduction in professional fees
incurred as a result of
Kindred's emergence from bankruptcy. See "Note 4--Concentration of Credit
Risk" and "Note 9--Transactions with Kindred" to the Consolidated Financial
Statements.
Interest expense, excluding the interest on the United States Settlement,
decreased $8.3 million to $87.0 million for the year ended December 31, 2001
from $95.3 million for the year ended December 31, 2000. The decrease is
primarily a result of reduced principal, reduced amortization of deferred
financing fees and the favorable impact in the first quarter of 2001 of timing
differences in the rate setting under the Company's interest rate swap
agreement and the Company's 2000 Credit Agreement. See "Note 5--Borrowing
Arrangements" to the Consolidated Financial Statements. For the year ended
December 31, 2001, interest expense includes a $13.8 million payment on the
1998 Swap Agreement. For the year ended December 31, 2000, the Company received
payments totaling $4.3 million related to the 1998 Swap, which offset interest
expense.
The IRS is currently reviewing the federal income tax returns of the Company
for tax years ended 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 use of NOL carryforwards (including the NOL carryforwards that
were utilized to offset the Company's federal income tax liability for 1999 and
2000).
As a result of the uncertainties relating to the Company's ability to retain
its NOLs, the Company recorded a charge for taxes on the 10% of its estimated
2001 taxable income which the Company did not distribute as a dividend. The
$2.7 million tax provision reported for the year ended December 31, 2001
included a $0.7 million provision related to Ventas Realty's receipt of the
Kindred common stock, of which 100% was taxable income to the Company in the
second quarter of 2001. See "Note 8--Income Taxes" to the Consolidated
Financial Statements.
The Company disposed of 418,186 shares of Kindred common stock in the fourth
quarter of 2001 and recognized a gain of $15.4 million on the dispositions. In
connection with a registered offering of common stock by Kindred, Ventas Realty
exercised its piggyback registration rights, and sold 83,300 shares of Kindred
common stock, recognizing a gain of $2.6 million. The Company applied the net
proceeds of $3.6 million from the sale of the 83,300 shares of Kindred common
stock as a prepayment on the Company's indebtedness under the Company's 2000
Credit Agreement. The Company distributed 334,886 shares of Kindred common
stock as part of the 2001 dividend, resulting in a gain of $12.8 million. For
every share of common stock of the Company
40
that a stockholder owned at the close of business on December 14, 2001, the
stockholder received 0.005 of a share of Kindred common stock and $0.0049 in
cash (equating to one share of Kindred common stock and $0.98 in cash for every
two hundred shares of common stock in the Company). For purposes of the 2001
dividend, the Kindred common stock was valued in accordance with the Code and
applicable rulings and regulations on December 31, 2001 at $51.02 per share.
In connection with the refinancing of a portion of its indebtedness under
the Company's 2000 Credit Agreement, in the fourth quarter of 2001, the Company
incurred an extraordinary loss of approximately $1.3 million related to the
partial write-off of unamortized deferred financing fees associated with the
2000 Credit Agreement. During the first quarter of 2000, the Company incurred
an extraordinary loss of $4.2 million relating to the write-off of the
unamortized deferred financing costs associated with the Company's 1998 credit
facility. See "Note 5--Borrowing Arrangements" to the Consolidated Financial
Statements.
Net income for the year ended December 31, 2001 was $50.6 million or $0.73
per diluted share after an extraordinary loss of $1.3 million (or $0.02 per
share). After an extraordinary loss of $4.2 million or $0.06 per diluted share,
as discussed above, net loss for the year ended December 31, 2000, was $65.5
million or $0.96 per diluted share.
Years Ended December 31, 2000 and December 31, 1999
Gross rental income for the year ended December 31, 2000 was $232.8 million,
of which $229.6 million (98.6%) was from leases with Kindred, an increase of
$4.2 million (1.8%) from rental income for the year ended December 31, 1999 of
$228.6 million, of which $225.1 million (98.5%) resulted from leases with
Kindred. The increase in rental income was offset by a $13.9 million increase
in charges for unpaid rents from tenants discussed below. 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.
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 Company's 2000 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 Company's 1998 credit facility and other debt. The $113.8
million increase 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 have been due under
the terms of the Prior Master Leases and the base rent that was paid under the
terms of the Rent Stipulation, (c) increased interest expense and (d) increased
general and administrative expenses.
41
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 Kindred's plan of reorganization, the Company waived its right to the
payment of (a) $18.9 million for the August 1999 monthly base rent under the
Prior Master Leases, and (b) the difference between the rent required to be
paid under the terms of the Prior Master Leases and the rent received by the
Company under the Rent Stipulation after the date Kindred filed for bankruptcy
protection until the first day of the month immediately following the date
Kindred emerged from bankruptcy. As a result of delays in the extended Kindred
bankruptcy proceeding and the determination that such an amount was
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:
1999 2000
------- -------
(dollars in thousands)
The difference between the minimum monthly base rent under the Prior Master
Leases and rent stipulation.............................................. $15,000 $48,018
August 1999 monthly base rent under the Prior Master Leases................ 18,884 --
Charge for rent due under a lease with Kindred which was under dispute..... 226 (124)
Rent due from non-Kindred tenants.......................................... 308 434
------- -------
Total................................................................... $34,418 $48,328
======= =======
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 Company's 2000
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.
General and administrative expenses increased 24.4% 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 reorganization negotiations with Kindred. Fees incurred in the third
and fourth quarter of 1999 were significant in connection with Kindred's
bankruptcy filing and in connection with the Company's business strategy
alternatives. 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 Company's 1998
credit facility. See "Note 5--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 United States Settlement, as discussed above, net loss for the
year ended December 31, 2000 was $65.5 million or $0.96 per diluted share. Net
income for the year ended December 31, 1999 was $42.5 million or $0.63 per
diluted share.
42
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 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 Company's 1998 Spin Off and the consummation of our
1998 credit facility, the Company entered into an interest rate swap agreement
with a highly-rated counterparty (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 1998 Swap counterparty to shorten the maturity of the 1998
Swap 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 floating rate 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 1998 Swap, pursuant to which the parties agreed,
for purposes of certain calculations set forth in the 1998 Swap, to continue to
use certain defined terms set forth in the Company's 1998 credit agreement. The
Company paid $6.4 million in 1999 related to the 1998 Swap which is included in
interest expense. For the year ended December 31, 2000, the Company received
$4.3 million related to the 1998 Swap which is included in interest expense.
Funds from operations
Three Months Ended March 31, 2002 and 2001
FFO for the three months ended March 31, 2002 totaled $22.1 million. FFO for
the three months ended March 31, 2001 totaled $21.1 million. FFO for the three
months ended March 31, 2002 and 2001 is summarized in the following table:
Three Months Ended
March 31,
--------------------
2002 2001
------- -------
(dollars in thousands)
Net income............................. $12,701 $10,579
Depreciation on real estate investments 10,424 10,475
Realized gain on sale of assets........ (1,057) --
------- -------
FFO................................. $22,068 $21,054
======= =======
43
Years Ended December 31, 1999, 2000 and 2001
Funds from operations for the years ended December 31, 1999, 2000 and 2001
totaled $85.0 million, $76.5 million and $93.5 million, respectively. Net of
the gain on the disposition and sale of Kindred common stock, FFO for the year
ended December 31, 2001 was $78.1 million. FFO for the years ended December 31,
2001, 2000 and 1999 is summarized in the following table:
Year Ended December 31,
---------------------------
1999 2000 2001
------- -------- --------
(dollars in thousands)
Net income (loss)........................... $42,535 $(65,452) $ 50,566
Extraordinary loss on extinguishment of debt -- 4,207 1,322
------- -------- --------
Income (loss) before extraordinary loss..... 42,535 (61,245) 51,888
Depreciation on real estate assets.......... 42,742 42,188 41,904
United States Settlement.................... -- 96,493 --
Realized gain on sale of real estate assets. (254) (957) (290)
------- -------- --------
FFO......................................... 85,023 76,479 93,502
Gain on sale of Kindred equity.............. -- -- (15,425)
------- -------- --------
Normalized FFO.............................. $85,023 $ 76,479 $ 78,077
======= ======== ========
The Company considers FFO an appropriate measure of performance of an equity
REIT and the Company uses the National Association of Real Estate Investment
Trust ("NAREIT") definition of FFO. NAREIT defines FFO as net income (computed
in accordance with GAAP), excluding gains (or losses) from sales of real estate
property, plus depreciation for real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. FFO presented herein is not
necessarily comparable to FFO presented by other real estate companies due to
the fact that not all real estate companies use the same definition. FFO should
not be considered as an alternative to net income (determined in accordance
with GAAP) as an indicator of the Company's financial performance or as an
alternative to cash flow from operating activities (determined in accordance
with GAAP) as a measure of the Company's liquidity, nor is FFO necessarily
indicative of sufficient cash flow to fund all of the Company's needs. The
Company believes that in order to facilitate a clear understanding of its
consolidated historical operating results, FFO should be examined in
conjunction with net income as presented in the Consolidated Financial
Statements and data included elsewhere in this Annual Report. Normalized FFO is
FFO excluding the gain on sale of Kindred common stock.
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.
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.
44
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
5--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 create 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, in connection with the
1998 Spin Off and the consummation of the Company's 1998 credit facility, the
Company entered into the 1998 Swap to effectively convert most of its floating
rate debt obligations to fixed rate debt obligations. Interest rate swaps
generally involve the exchange of fixed and floating rate interest payments on
an underlying notional amount. As of March 31, 2002, the Company had an $800.0
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 1998 Swap 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
1998 Swap counterparty to shorten the maturity of the 1998 Swap 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 1998 Swap was reduced
on April 17, 2002 to $450 million in connection with the issuance of the
Original Notes, and is scheduled to decline as follows:
Notional Amount Date
--------------- ----
$425,000,000 December 31, 2002
-- June 30, 2007
The terms of the 1998 Swap require that the Company make a cash deposit or
otherwise post collateral to the counterparty if the fair value loss to the
Company exceeds certain levels (the "threshold 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 Company's 1998 credit
agreement. As of March 31, 2002, the Company believes that the threshold level
under the 1998 Swap was a fair value unrealized loss of $35.0 million. The 1998
Swap was in an unrealized loss position to the Company of $26.6 million on
March 31, 2002. Therefore, no cash collateral was required to be posted.
Generally, once the fair value loss exceeds the applicable threshold level,
collateral is either posted by the Company or returned to the Company if the
value of the 1998 Swap fluctuates by $2.0 million from the value on the last
date that a counterparty demands collateral be posted or refunded, as
applicable. Under the 1998 Swap, if collateral must be posted, the principal
amount of such collateral must equal the difference between the fair values
unrealized loss of the 1998 Swap at the time of such determination and the
threshold level. If the Company should be required to post additional
collateral under the 1998 Swap, the Company expects to post such collateral in
the form of cash from cash reserves, cash flows from operations, and/or draws
from revolving loans under the 2002 Credit Agreement up to the permitted
amounts set forth in the 2002 Credit Agreement. However, there can be no
assurance that the Company will have sufficient cash to post such additional
collateral, if required. On January 31, 2000, the Company entered into a letter
agreement with the counterparty to the 1998 Swap for the purpose of amending
the 1998 Swap. The letter agreement provides that, for purposes of certain
calculations set forth in the 1998 Swap, the parties agree to continue to use
certain defined terms set forth in the Company's 1998 credit agreement. See
"Note 5--Borrowing Arrangements--Derivatives and Hedging" to the Consolidated
Financial Statements and "Note 4--Borrowing Arrangements" to the unaudited
Condensed Consolidated Financial Statements included elsewhere in this
prospectus.
45
On September 28, 2001, the Company entered into a second interest rate swap
agreement (the "2003-2008 Swap") with a highly rated counterparty to hedge
floating rate debt for the period between July 1, 2003 and June 30, 2008, under
which the Company pays a fixed rate of 5.385% and receives LIBOR from the
counterparty to this agreement. The 2003-2008 Swap is treated as a cash flow
hedge for accounting purposes. There are no collateral requirements under the
2003-2008 Swap. The notional amount of the 2003-2008 Swap is scheduled to
decline from $450 million as of July 1, 2003 as follows:
Notional Amount Date
--------------- ----
$300,000,000 June 30, 2006
150,000,000 June 30, 2007
-- June 30, 2008
In accordance with the terms of the CMBS Loan Agreement (as defined below),
on December 11, 2001, Ventas Finance I, LLC, an indirect wholly owned
consolidated subsidiary of the Company ("Ventas Finance") purchased an interest
rate cap from a highly rated counterparty (the "Buy Cap"). See "--Capital
Resources--CMBS Transaction" and "Note 5--Borrowing Arrangements" to the
Consolidated Financial Statements. Because the Company already hedged its
consolidated interest rate risk through the 1998 Swap and the 2003-2008 Swap,
on December 11, 2001 the Company sold an interest rate cap (the "Sell Cap") for
the same notional value ($225 million) and on the same terms (5 year amortizing
8% LIBOR cap) as the Buy Cap. If LIBOR should exceed the 8% cap, the Sell Cap
would require the Company to pay the counterparty and the Buy Cap would require
the counterparty to pay Ventas Finance for the interest accruing in excess of
the 8% LIBOR cap. The Buy Cap and the Sell Cap are shown separately as an asset
and a liability on the Company's balance sheet, respectively. The Company
believes that the economic substance of the Buy Cap offsets the net cash flow
exposure of the Sell Cap.
At March 31, 2002, the 1998 Swap and 2003-2008 Swap were reported at their
fair value of $16.7 million in liabilities in the Condensed Consolidated
Balance Sheet. The offsetting adjustment is reported as a deferred loss in
Accumulated Other Comprehensive Income. The Buy and Sell Caps are reported at
their fair value of approximately $1.8 million in other assets and other
liabilities, respectively, in the Condensed Consolidated Balance Sheet. The
offsetting adjustments for each of these instruments are reported as the
Condensed Consolidated Statement of Operations and net to zero for the three
months ended March 31, 2002.
When interest rates rise the interest rate swaps increase in fair value to
the Company and when interest rates fall the interest rate swaps decline in
fair value to the Company. Generally, interest rate swap agreements with longer
terms evidence greater dollar values of variation when interest rates change.
To highlight the sensitivity of the interest rate swaps 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 April 30, 2002:
2003-2008
1998 Swap Swap Sell Cap Buy Cap
------------ ------------ ------------ ------------
Notional Amount..................... $450,000,000 $450,000,000 $225,000,000 $225,000,000
Fair Value to the Company........... (18,052,161) 1,980,801 (1,417,839) 1,417,839
Fair Value to the Company Reflecting
Change in Interest Rates
- 100 BPS........................ (23,129,752) (13,790,811) (500,134) 500,134
+ 100 BPS........................ (13,084,382) 16,770,582 (3,085,557) 3,085,557
Credit Risk
As a result of the 1998 Spin Off, the Company has a significant
concentration of credit risk with Kindred under its Master Leases. For the year
ended December 31, 2001 lease rental revenues from Kindred totaled $182.9
million or 98.8% of the Company's total rental income for the period. For the
years ended December 31, 2000 and 1999, lease rental revenues from Kindred
comprised $229.6 million or 98.6% ($181.6 million or
46
98.4%, net of write-offs) and $225.1 million, or approximately 98.5%,
respectively, of the Company's total lease rental revenues. Accordingly,
Kindred's financial condition and ability to meet its rent obligations will
determine the Company's rental revenues and its ability to make distributions
to its stockholders. In addition, any failure by Kindred to effectively conduct
its operations could have a material adverse effect on its business reputation
or on its ability to enlist and maintain patients in its facilities. Kindred,
as well as certain other tenants of the Company, have experienced financial
difficulty and/or filed for bankruptcy. Kindred emerged from bankruptcy on
April 20, 2001. Despite Kindred's emergence from bankruptcy, there can be no
assurance that Kindred will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the Master Leases.
Since the Company derives in excess of 98% of its rental revenues from Kindred
and since the Master Leases are triple net leases under which Kindred is
responsible for all insurance, taxes and maintenance and repair expenses
required in connection with the leased properties, the inability or
unwillingness of Kindred to satisfy its obligations under the Master Leases
would have a material adverse effect on the condition of the leased properties,
as well as a Material Adverse Effect on the Company. See "Risk Factors--Risks
Arising from our Business--We are dependent on Kindred; Kindred's inability or
unwillingness to satisfy its obligations under its agreements with us could
have a material adverse effect on us" and "Note 4--Concentration of Credit
Risk" to the Consolidated Financial Statements. There can be no assurance that
future healthcare legislation or changes in the administration or
implementation of governmental or other third-party healthcare reimbursement
programs will not have a material adverse effect on the liquidity, financial
condition or results of operations of the Company's operators and tenants which
could have a material adverse effect on their ability to make rental payments
to the Company which, in turn, could have a Material Adverse Effect on the
Company. The Company monitors its credit risk under its lease agreements with
its tenants by, among other things, reviewing and analyzing (a) information
regarding the healthcare industry generally, (b) publicly available information
regarding tenants, (c) information provided by the tenants under the Company's
lease agreements, and (d) discussion with tenants and their representatives.
Liquidity
The Company's principal sources of liquidity are cash flow from operations
and available borrowings under the 2002 Credit Facility.
Three Months Ended March 31, 2002 and 2001
Cash provided by operations totaled $24.2 million for the three months ended
March 31, 2002. For the three months ended March 31, 2001 cash provided by
operations totaled $23.1 million. Net cash used in financing activities for the
three months ended March 31, 2002 totaled $34.1 million and included a $16.8
million payment of principal on the 2000 Credit Agreement and $17.2 million of
cash dividend payments. Net cash used in financing activities for the three
months ended March 31, 2001 totaled $54.8 million after payment of $35.0
million on principal on the 2000 Credit Agreement and $19.8 million payment of
a cash dividend of $0.29 per common share to stockholders of record as of
December 30, 2000.
The Company had cash and cash equivalents of $9.3 million (excluding
restricted cash of $20.0 million) and outstanding debt of $831.5 million on
March 31, 2002.
Years Ended December 31, 1999, 2000 and 2001
Cash provided by operations totaled $103.6 million, $85.3 million and $79.9
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Cash flows from operations for the year ended December 31, 2001 reflects eight
months of reduced rent under the Master Leases and $4.5 million of interest
payments on the United States Settlement. Net cash provided by investing
activities for the year ended December 31, 2001 of $2.8 million included the
proceeds from the Company's sale of 83,300 shares of Kindred common stock. 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 nursing
facilities. Net cash provided by investing activities for the year ended
December 31, 1999 totaled $0.4 million.
47
Net cash used in financing activities totaled $151.5 million and included
payments of principal on the Company's 2000 Credit Agreement in the aggregate
amount of $263.0 million in 2001. $212.8 million of the payments were funded
from the CMBS Transaction (as defined below) which generated gross proceeds of
$225 million. The 2001 financing activities also included $6.9 million in
financing costs, $41.7 million payment on the United States Settlement, and
$65.3 million of cash dividend payments. For the year ended December 31, 2000,
net cash used in financing activities was $142.9 million 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. 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.
Capital Resources
The 2002 Credit Facility
On April 17, 2002 (the "Closing Date"), the Company, as Guarantor, and
Ventas Realty, as borrower, entered into a Second Amended and Restated Credit,
Security and Guaranty Agreement (the "2002 Credit Facility"). Under the 2002
Credit Facility, Ventas Realty obtained a $350.0 million credit facility (the
"Total Commitments") consisting of a $60.0 million term loan (the "Tranche B
Term Loan") and a $290.0 million revolving credit facility (the "Revolving
Credit Facility"). The 2002 Credit Facility also permits Ventas Realty to
obtain an additional term loan in an amount of not less than $50.0 million, but
not more than the remaining unused portion of the Total Commitments, subject to
the conditions set forth in the 2002 Credit Facility (the "Tranche C Term
Loan"). Ventas Realty has the option to increase the Total Commitments (in the
form of term and/or revolving loans) to an amount not to exceed $450.0 million,
subject to the satisfaction of certain conditions set forth in the 2002 Credit
Facility.
The outstanding aggregate principal balance of the Tranche B Term Loan, the
Tranche C Term Loan and the Revolving Credit Facility may not collectively
exceed either (a) the Borrowing Base (as described below) or (b) the Total
Commitments. As of the Closing Date, the outstanding principal balance of the
Tranche B Term Loan was $60.0 million and the outstanding principal balance
under the Revolving Credit Facility was $160.3 million. As of the Closing Date,
there was no Tranche C Term Loan.
Amounts under the Revolving Credit Facility may be borrowed and reborrowed
from time to time, subject to the conditions set forth in the 2002 Credit
Facility; provided, however, that the Revolving Credit Facility matures and
must be repaid in full on April 17, 2005. The principal amount of the Tranche B
Term Loan is payable in installments of $150,000 on the last day of each fiscal
quarter, beginning September 30, 2002, and matures and must be repaid in full
on April 17, 2005.
Borrowings outstanding under the 2002 Credit Facility bear interest at an
Applicable Percentage over either (i) a fluctuating rate per annum equal to the
higher of (a) the Federal Funds Rate (as defined in the 2002 Credit Facility)
in effect for the relevant period, plus one half of one percent (0.5%) and (b)
the Prime Rate (as defined in the 2002 Credit Facility) in effect for the
relevant period (the "Base Rate") or (ii) a fluctuating LIBOR-based rate per
annum (the "Eurodollar Rate"). With respect to Tranche B Term Loans, the
Applicable Percentage is (a) 2.50% for loans bearing interest at the Eurodollar
Rate, and (b) 1.00% for loans bearing interest at the Base Rate. With respect
to revolving loans under the Revolving Credit Facility:
(a) If the senior unsecured (non-credit enhanced) long term debt of Ventas
Realty or the Company is rated BBB- or better by Standard & Poor's
("S&P") and Baa3 or better by Moody's Investors Service, Inc.
("Moody's") (in the case of a split rating the lower rating will apply),
the Applicable Percentage is as follows: (i) 0.25% for revolving loans
bearing interest at the Base Rate and (ii) 2.25% for revolving loans
bearing interest at the Eurodollar Rate.
48
(b) Otherwise, the Applicable Percentage is based on the Consolidated
Leverage Ratio (as defined in the 2002 Credit Facility) as follows:
Consolidated Applicable Percentage for Applicable Percentage
Pricing Level Leverage Ratio Eurodollar Rate Loans for Base Rate Loans
------------- ------------------------- ------------------------- -------------------------
I (less or =) 4.25 2.50% 1.00%
II (greater than) 4.25 but
(less than) 4.75 2.75% 1.25%
III (greater or =) 4.75 3.00% 1.50%
The Consolidated Leverage Ratio is generally the ratio of debt for borrowed
money of the Company and its consolidated subsidiaries (excluding the United
States Settlement, unrestricted cash and cash equivalents) to trailing
twelve-month EBITDA of the Company and its consolidated subsidiaries, as more
particularly described in the 2002 Credit Facility. The Applicable Percentage
as of the Closing was based on pricing level II.
Loans outstanding under the 2002 Credit Facility are pre-payable without
premium or penalty, provided that loans bearing interest at the Eurodollar Rate
are subject to customary "breakage" costs if repaid prior to the end of an
interest period. Ventas Realty has agreed to pay various fees in connection
with the 2002 Credit Facility, including without limitation, issuance fees for
letters of credit and fees for the unused portion of the total committed amount
of the Revolving Credit Facility. Ventas Realty may permanently reduce or
terminate the total committed amount of the Revolving Credit Facility, subject
to the conditions set forth in the 2002 Credit Facility.
The Company (and any other owner of mortgaged property securing Ventas
Realty's obligations under the 2002 Credit Facility from time to time) has
guaranteed Ventas Realty's obligations under the 2002 Credit Facility. Such
obligations are secured by liens on certain of Ventas Realty's real property
assets and any related leases, rents and personal property, and, at Ventas
Realty's option, may be secured by certain cash collateral from time to time.
Currently, 59 real properties owned by Ventas Realty are mortgaged to secure
the 2002 Credit Facility (the "Borrowing Base Properties"). All 59 Borrowing
Base Properties are leased to Kindred pursuant to Amended Master Lease No. 1.
The Borrowing Base under the 2002 Credit Facility is, as determined at any
time, an amount equal to the sum of (i) sixty-five percent (65%) of the
aggregate property value of the Borrowing Base Properties, plus (ii) one
hundred percent (100%) of amounts on deposit in certain cash collateral or
pledged accounts. The aggregate principal amount of the obligations outstanding
under the 2002 Credit Facility (including the revolving loans under the
Revolving Credit Facility, the Tranche B Term Loan and the Tranche C Term Loan)
may not at any time exceed the Borrowing Base. Ventas Realty may at any time
include additional real estate assets (which must satisfy certain conditions
set forth in the 2002 Credit Facility) in the Borrowing Base. Subject to the
terms and conditions set forth in the 2002 Credit Facility, Ventas Realty may
also obtain a release of various Borrowing Base Properties from the liens and
security interests encumbering such properties.
The 2002 Credit Facility contains a number of restrictive covenants,
including, without limitation, covenants pertaining to (i) the incurrence of
additional indebtedness; (ii) limitations on liens; (iii) customary
restrictions on certain dividends, distributions and other payments (the sum of
all restricted payments made by the Company after the Closing Date cannot
exceed the sum of (a) 95% of the Company's aggregate cumulative FFO, and (b)
certain additional amounts more particularly described in the 2002 Credit
Facility); (iv) mergers, sales of assets and other transactions; (iv)
requirements regarding the maintenance of certain (a) consolidated leverage
ratios, (b) consolidated fixed charge coverage ratios and (c) consolidated
adjusted net worth; (v) transactions with affiliates; (vi) permitted business
and development activities and uses of loan proceeds; and (vii) changes to
material agreements. The 2002 Credit Facility contains various potential events
of default and is, among other things, cross-defaulted with certain other
indebtedness and obligations of Ventas Realty and the Company.
See "Description of Other Indebtedness and Obligations."
49
CMBS Transaction
On December 12, 2001 the Company raised $225.0 million in gross proceeds
from the completion of a LIBOR based floating rate commercial mortgage backed
securitization transaction (the "CMBS Transaction"). Under a Loan and Security
Agreement dated as of December 12, 2001 (the "CMBS Loan Agreement"), Ventas
Finance obtained a loan in the principal amount of $225.0 million (the "CMBS
Loan") from Merrill Lynch Mortgage Lending, Inc., as lender (the "CMBS
Lender"), and bearing interest at a nominal weighted average rate of LIBOR plus
1.4589%. The CMBS Loan is comprised of six components (i) a component in the
original principal amount of $125.23 million which bears interest at LIBOR plus
0.8665%; (ii) a component in the original principal amount of $17.97 million
which bears interest at LIBOR plus 1.1665%; (iii) a component in the original
principal amount of $8.86 million which bears interest at LIBOR plus 1.5165%;
(iv) a component in the original principal amount of $26.83 million which bears
interest at LIBOR plus 1.9665%; (v) a component in the original principal
amount of $26.83 million which bears interest at LIBOR plus 2.6665%; and (vi) a
component in the original principal amount of $19.28 million which bears
interest at LIBOR plus 3.1665%. Principal of and interest on the CMBS Loan is
payable monthly, commencing January 9, 2002. Principal payments on the CMBS
Loan were calculated based upon a 25-year amortization schedule and an assumed
interest rate of 9.46% per annum. The CMBS Loan matures on December 9, 2006 at
which time a principal balloon payment of approximately $211.0 million will be
due, assuming all scheduled amortization payments are made and no prepayments
are made on the CMBS Loan. The CMBS Loan may be prepaid in whole or in part at
any time and from time to time provided that any prepayment on or before
January 9, 2003 must be accompanied by a payment of 1% of the amount of the
principal amount prepaid.
The CMBS Loan is secured by liens on forty (40) skilled nursing facilities
transferred by Ventas Realty to Ventas Finance (the "CMBS Properties") and
leased to Kindred under a Master Lease (the "CMBS Master Lease") and any
related leases, rents and personal property. Except for certain customary
exceptions, the CMBS Loan is non-recourse to Ventas Finance and the Company.
Ventas Finance is required to maintain or cause to be maintained the
following reserve accounts under the CMBS Loan Agreement: (a) a debt service
reserve account in an amount of $5.0 million to cover shortfalls in cash
available for debt service on the CMBS Loan, (b) an imposition and insurance
reserve for the payment of real property taxes and insurance premiums with
respect to the CMBS Properties, and (c) a replacement reserve account in the
amount of $1.6 million for the payment of the cost of capital improvements
expected to be made to the CMBS Properties. The impositions and insurance
reserve and the replacement reserve under the CMBS Loan Agreement are being
funded and/or maintained by Kindred as required under and in accordance with
the terms of the CMBS Master Lease. If Kindred should be unwilling or unable to
fund these reserves under the CMBS Loan Agreement, Ventas Finance will be
required to fund and/or maintain such reserves. Restricted cash at December 31,
2001 included $5.0 million related to the debt service reserve account for the
CMBS Loan.
Monthly rental amounts under the CMBS Master Lease are deposited directly by
Kindred into a central account for the benefit of the CMBS Lender. Amounts in
the central account are applied to pay the monthly principal and interest
payments on the CMBS Loan and to fund the reserve accounts required under the
CMBS Loan Agreement. Amounts remaining in the central account after the payment
of the current month's principal and interest payment and the funding of the
reserve accounts are distributed to Ventas Finance, provided no event of
default has occurred and is continuing under the CMBS Loan Agreement and
provided a Cash Flow Sweep Event (as defined below) has not occurred. The
central account is swept on a daily basis. During the continuance of an event
of default or a Cash Flow Sweep Event, all amounts in the central account in
excess of the current month's principal and interest payment and the required
reserve payments will be deposited into an account and applied as a prepayment
of the CMBS Loan on the next monthly payment date. A "Cash Flow Sweep Event"
occurs as of any date of determination if (the "Coverage Test") (a) the ratio
of (i) the aggregate net cash flow from the CMBS Properties for the applicable
quarter to (ii) the debt service on the CMBS Loan for the same quarter, is less
than 1.50 to 1, or (b) the aggregate net cash flow from the CMBS Properties for
the applicable quarter does not equal or exceed the rent payable under the CMBS
Master Lease for the same quarter. No Cash Flow Sweep Event will occur at any
time while the Coverage Test is satisfied. See "Note 5--Borrowing Arrangements"
to the Consolidated Financial Statements.
50
Dividends
In order to continue to qualify as a REIT, the Company must make annual
distributions to its stockholders of at least 90% of its "REIT taxable income"
(excluding net capital gain). The Company paid dividends equal to 90% of its
estimated taxable income for 2001. The Company paid dividends equal to 95% of
its taxable income for 2000 and 1999. The Company intends to pay a dividend for
2002 equal to $0.95 per common share, but not less than 90% of the Company's
taxable income for 2002. The 2002 dividend may be paid by a combination of cash
and other property or securities, including shares of Kindred common stock.
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, for 2001 this was partially offset by
the value of the Kindred common stock received by the Company on the date
Kindred emerged from bankruptcy which is included in taxable income in 2001.
The Company anticipates that it generally will have sufficient cash or liquid
assets to enable it to satisfy the 90% distribution requirement. It is
possible, however, that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 90% distribution requirement or to
distribute such greater amount as may be necessary to avoid income and excise
taxation.
The Company declared the first quarterly dividend for 2002 of $0.2375 per
share on February 12, 2002 and paid such dividend on March 4, 2002 to
stockholders of record on February 22, 2002. In addition, on May 14, 2002, the
Company declared a quarterly dividend of $0.2375 per share, payable in cash on
June 4, 2002 to stockholders of record on May 24, 2002. Although the Company
currently intends to distribute 90% or more of its taxable income for 2002 in
quarterly installments, there can be no assurance that it will do so or as to
when the remaining distributions will be made. The Company intends to pay
subsequent 2002 dividends in cash, although it reserves the right to pay
dividends in whole or in part by distribution of shares of Kindred Common
Stock, or other securities or properties.
The Kindred Common Stock is considered marketable for accounting purposes at
March 31, 2002 and classified as available for sale in accordance with SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Accordingly, the Kindred Common Stock is measured at fair value as of March 31,
2002. The unrealized gains and losses are reported as a component of
Accumulated Other Comprehensive Income. As of March 31, 2002, the fair value of
the Kindred Common Stock was $43.8 million. A $30.6 million unrealized gain on
the Kindred Common Stock was reported in Accumulated Other Comprehensive Income
at March 31, 2002. See "Note 3--Concentration of Credit Risk and Recent
Developments--Recent Developments Regarding Dividends" to the Condensed
Consolidated Financial Statements.
The Company's estimation of its 2002 taxable income is based on a number of
assumptions, including, but not limited to, those set forth under "--Results of
Operations--Three Months ended March 31, 2002 and 2001."
It is important to note for purposes of the required REIT distributions that
the Company's taxable income may vary significantly from historical results and
from current income determined in accordance with GAAP depending on the
resolution of a variety of factors. Under certain circumstances, the Company
may be required to make distributions in excess of FFO (as defined by the
NAREIT) in order to meet such distribution requirements. In the event that
timing differences or cash needs occur, the Company may find it necessary to
borrow funds or to issue equity securities (there being no assurance that it
will be able to do so) or, if possible, to pay taxable stock dividends,
distribute other property or securities or engage in a transaction intended to
enable it to meet the REIT distribution requirements. The Company's ability to
engage in certain of these transactions may be restricted in certain
circumstances by the terms of the indentures governing the Notes and 2002
Credit Agreement (as defined below). If so restricted, such transaction would
likely require the consent of the "Required Lenders" under the 2002 Credit
Agreement and/or the holders of a majority in principal amount of outstanding
the Notes under each indenture governing the Notes, and there can be no
assurance that such consents would be obtained. In addition, the failure of
Kindred to make rental payments under the Master Leases would materially impair
the ability of the Company to make distributions. Consequently, there can be no
assurance that the Company will be able to make distributions at the required
distribution rate or any other rate.
Although the Company intends to continue to qualify as a REIT for the year
ending December 31, 2002 and subsequent years, it is possible that economic,
market, legal, tax or other considerations may cause the Company
51
to fail, or elect, not to continue to qualify as a REIT in any such year. If
the Company were to fail, or elect, not to continue to qualify as a REIT in any
such tax year, the Company would be subject to 35% federal income tax and to
the applicable state and local income taxes for the affected years. Such tax
obligations would have a Material Adverse Effect on the Company. Unless
eligible for limited relief, if the Company failed, or revoked its election to
qualify as a REIT the Company would not be eligible to elect again to be
treated as a REIT before the fifth taxable year after the year of such
termination or revocation.
Capital Expenditures and Property Acquisitions
Capital expenditures to maintain and improve the leased properties generally
will be incurred by the Company's 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 or unwilling to meet their obligations under the leases, the
Company anticipates that any expenditures relating to the maintenance of leased
properties for which it may become responsible will be funded by cash flows
from operations or through additional borrowings. 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 may be restricted by the terms of the 2002 Credit
Facility and the indentures governing the Notes. Any such capital expenditures
or borrowings may require the consent of the lenders under the 2002 Credit
Facility, and there can be no assurance that such consent would be obtained.
Other
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 Company is required to pay $103.6 million to the federal government, of
which $34.0 million was paid on the date Kindred emerged from bankruptcy. The
balance of $69.6 million bears interest at 6% per annum and is payable in equal
quarterly installments over a five-year term commencing on June 30, 2001. The
charge in the fourth quarter of 2000 was discounted for accounting purposes
based on an imputed borrowing rate of 10.75%. The Company will be required to
pay $16.2 million in principal and interest in 2002 under the United States
Settlement.
The Company has outstanding loans, with interest provisions, of
approximately $4.5 million, net of repayments as of March 31, 2002, 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 and the 1998 Spin Off. The loans are
payable over periods ranging from four to ten years beginning in each case on
the date such loan was made. See "Note 14--Related Party Transactions" to the
December 31, 2001 Consolidated Financial Statements.
On March 13, 2002, the Company sold a skilled nursing facility for $1.8
million and recognized a gain of $1.1 million.
52
BUSINESS
General
We are a healthcare real estate investment trust. Our business consists of
owning and leasing healthcare facilities. As of March 31, 2002, our properties
included 215 skilled nursing facilities, 44 hospitals and 8 personal care
facilities in 36 states. For the year ended December 31, 2001, we generated
approximately $204.6 million in revenue and $174.3 million in EBITDA. For the
three months ended March 31, 2002, we generated approximately $46.7 million in
revenue and $43.9 million in EBITDA. Our primary tenant, Kindred, is one of the
largest providers of long-term healthcare services in the United States.
Kindred operates all of our hospitals and 210 of our skilled nursing facilities
pursuant to five multi-facility master lease agreements. All of the master
leases are structured as "triple-net" leases, under which Kindred is
responsible for insurance, taxes, utilities, maintenance and repairs related to
our properties.
We conduct substantially all of our business through two wholly owned
subsidiaries. The first, Ventas Realty, is a co-issuer of the Notes. We and
Ventas Realty owned 175 skilled nursing facilities, 44 hospitals and 8 personal
care facilities as of March 31, 2002. We and Ventas Realty generated
approximately $175.2 million in pro forma revenue and $156.4 million in pro
forma EBITDA (as defined in the 2002 Credit Facility and the indentures
governing the Notes) for the year ended December 31, 2001 and approximately
$38.8 million in pro forma revenue and $38.8 million in pro forma EBITDA (as
defined in the 2002 Credit Facility and the indentures governing the Notes) for
the three months ended March 31, 2002. The second subsidiary, Ventas Finance I,
LLC, which was formed in connection with our commercial mortgage backed
securitization transaction, owned 40 skilled nursing facilities as of March 31,
2002. Ventas Finance I, LLC is not a Guarantor of the Notes.
On May 1, 1998, we effected the 1998 Spin Off pursuant to which we were
separated into two publicly held corporations. A new corporation, subsequently
named Vencor, Inc. (which has since been renamed Kindred Healthcare, Inc.), was
formed to operate the hospital, nursing facility and ancillary services
businesses. Pursuant to the terms of the 1998 Spin Off, we distributed the
common stock of Kindred to our stockholders of record as of April 27, 1998. We,
through our subsidiaries, continued to hold title to substantially all of the
real property and to lease such real property to Kindred. At such time, we also
changed our name to Ventas, Inc. and refinanced substantially all of our
long-term debt. For financial reporting periods after and including the 1998
Spin Off, our historical financial statements for financial reporting periods
prior to the 1998 Spin Off were assumed by Kindred, and we are deemed to have
commenced operations on May 1, 1998. In addition, for certain reporting
purposes, the Commission treats us as having commenced operations on May 1,
1998. On September 13, 1999, Kindred filed for protection under the Bankruptcy
Code. Kindred emerged from proceedings under the Bankruptcy Code on April 20,
2001 pursuant to the terms of Kindred's plan of reorganization. As a result of
the Kindred bankruptcy proceedings, we suspended the implementation of our
original business strategy in 1999.
We have re-implemented our original business strategy, subject to the
contractual restrictions contained in the indentures governing the Notes and
the 2002 Credit Facility, assuming that Kindred's financial condition remains
stabilized and we have the financial flexibility at that time to do so. See
"Risk Factors--Risks Arising from Our Business--We may encounter certain risks
when implementing our business strategy."
53
Portfolio of Properties
We own a diversified portfolio of assets. The following information provides
an overview of our properties as of and for the three months ended March 31,
2002.
Number Percent of
Portfolio by Owner of Number Rental Rental Percent of Investment
and Type Properties of Beds Income Income Investment Investment Per Bed States(a)
------------------ ---------- ------- ------- ---------- ---------- ---------- ---------- ---------
(dollars in thousands)
Issuers and Guarantors of
Notes:
Skilled Nursing
Facilities............. 175 22,159 $23,164 50.0% $ 654,805 55.8% $29.6 32
Hospitals................ 44 4,033 15,137 32.6 341,162 29.0 84.6 20
Personal Care Facilities. 8 136 199 0.4 7,137 0.6 52.5 1
--- ------ ------- ----- ---------- -----
Subtotal............. 227 26,328 38,500 83.0 1,003,104 85.4 38.1 36
Unrestricted Subsidiaries:
Skilled Nursing
Facilities............. 40 5,668 7,897 17.0 171,432 14.6 30.2 15
--- ------ ------- ----- ---------- -----
Total................ 267 31,996 $46,397 100.0% $1,174,536 100.0% 36.7 36
=== ====== ======= ===== ========== =====
- --------
(a) We have properties located in 36 states operated by four different
operators.
Hospital Facilities
Our 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
Our nursing facilities generally are skilled nursing facilities, or SNFs. In
addition to the customary services provided by skilled nursing facilities, the
operators of our nursing facilities typically provide rehabilitation services,
including physical, occupational and speech therapies.
Personal Care Facilities
Our 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.
54
For the period from January 1, 2001 through April 30, 2001, we reported
rental income equal to the amount of rent actually paid by Kindred under the
Rent Stipulation. We included in our rental income computation for the period
from May 1, 2001 through December 31, 2001 the amount due and payable under the
Master Leases for that period. The 2001 adjusted rental income shown in the
tables below (the "Adjusted Rental Income") reflects the rent due and payable
under the Master Leases for a full contract year, or May 1, 2001 through
April 30, 2002.
Adjusted
Rental
Income Percentage
-------- ----------
(dollars in thousands)
Issuers and Guarantors of the Notes:
Skilled Nursing Facilities....... $ 92,857 50%
Hospitals........................ 60,468 33
Personal Care Facilities......... 779 --
-------- ---
Subtotal..................... 154,104 83
Unrestricted Subsidiaries:
Skilled Nursing Facilities....... 31,587 17
-------- ---
Total........................ $185,691 100%
======== ===
Our portfolio of properties is broadly diversified by geographic location.
Only one state comprises more than 10% of our rental income.
Year Ended Three Months Ended
December 31, 2001 Adjusted March 31, 2002
------------------ ------------------ -----------------
Rental Rental Rental
State Income Percentage Income Percentage Income Percentage
----- -------- ---------- -------- ---------- ------- ----------
(dollars in thousands)
1. California..... $ 18,486 10.1% $ 21,245 11.4% $ 5,311 11.4%
2. Florida........ 17,610 9.5 17,481 9.4 4,370 9.4
3. Massachusetts.. 16,623 9.0 17,366 9.4 4,341 9.4
4. Indiana........ 13,324 7.1 13,594 7.3 3,398 7.3
5. North Carolina. 10,454 5.6 9,376 5.0 2,344 5.1
6. Kentucky....... 10,363 5.6 10,830 5.8 2,716 5.9
7. Illinois....... 8,906 4.8 8,487 4.6 2,122 4.6
8. Wisconsin...... 8,530 4.6 7,081 3.8 1,770 3.8
9. Texas.......... 7,989 4.3 7,216 3.9 1,809 3.9
10. Ohio........... 6,993 3.8 7,003 3.8 1,874 4.0
Other (26 states) 65,874 35.6 66,012 35.6 16,342 35.2
-------- ----- -------- ----- ------- -----
$185,152 100.0% $185,691 100.0% $46,397 100.0%
======== ===== ======== ===== ======= =====
In addition to the diversification of lease rental income from the
geographic diversification of the portfolio, the majority of our facilities are
located in states that have certificate of need ("CON") requirements. Certain
states require state approval for development and expansion of healthcare
facilities and services, including findings of need for additional or expanded
healthcare facilities or services. A CON, which is issued by governmental
agencies with jurisdiction over healthcare facilities, is at times required for
expansion of existing facilities, construction of new facilities, addition of
beds, acquisition of major items of equipment or introduction of new services.
The CON rules and regulations may restrict an operator's ability to expand our
properties in certain circumstances.
55
The following table illustrates the percentage of rental income derived from
states with and without CON requirements.
December 31, 2001 Adjusted Rental Income
-------------------------- --------------------------
Skilled Skilled
Nursing Nursing
Certificate of Need States Facilities Hospitals Total Facilities Hospitals Total
- -------------------------- ---------- --------- ----- ---------- --------- -----
States with CON Requirement... 72.5% 54.7% 66.0% 72.3% 52.4% 65.5%
States without CON Requirement 27.5 45.3 34.0 27.7 47.6 34.5
----- ----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
Competitive Strengths
Geographically Diverse Property Portfolio
Our portfolio of properties is broadly diversified by geographic location.
Only one state comprises more than 10% of our rental income. In addition,
approximately 66% of our rental income is derived from facilities in states
that require state approval for development and expansion of healthcare
facilities. We believe that such state approvals may limit competition for our
operators and enhance the value of our properties.
Financially Secure Primary Tenant
Our primary tenant, Kindred, is one of the largest providers of long-term
healthcare services in the United States, with approximately $3.1 billion in
revenue for the year ended December 31, 2001. Kindred leases approximately 70%
of its facilities from us. Kindred restructured its balance sheet effective
April 20, 2001 and completed a public offering of its common stock in November
2001. As of March 31, 2002, Kindred had debt outstanding, net of cash, of
approximately $1.7 million.
Superior Multi-Facility Master Leases
Kindred leases 210 of our skilled nursing facilities and all of our
hospitals pursuant to five "triple-net" multi-facility master lease agreements.
Under the master leases, Kindred is responsible for insurance, taxes,
utilities, maintenance and repairs related to our properties. The individual
facilities are grouped into bundles ranging in size from 3 to 12 facilities per
bundle, and the bundles are then pooled into multi-facility leases. Each bundle
in a master lease has a renewal date ranging from 2008 to 2013. Kindred has
three 5-year renewal options. For the period from May 1, 2001 through April 30,
2002, total annual base rent under the five master leases is $180.7 million.
Base rent escalates at an annual rate of 3.5% if Kindred meets certain revenue
targets. In addition, we have a one-time option to increase rents to a then
fair market rental rate between July 2006 and July 2007. We also have a wide
range of remedies in the event of a default by Kindred under the master leases.
Strong Cash Flow Generation
We have been able to maintain consistent EBITDA since 1999, in large part
because Kindred is responsible for all operational, working capital and capital
expenditures relating to our facilities. This has helped us to reduce our total
debt from approximately $974 million at the beginning of 2000 to approximately
$831.5 million as of March 31, 2002. We have further improved our financial
position by lowering our cost of debt, primarily through our commercial
mortgage backed securitization, or CMBS transaction, which was completed in
December 2001 and which bears interest at a nominal weighted average rate of
one-month LIBOR plus 1.46%. In addition, this initial offering of the Original
Notes and the 2002 Credit Facility further reduced our cost of debt.
Consistent Financial Performance
We have been able to maintain consistent financial performance since the
1998 spin-off in spite of difficult market conditions. As a result of the
Medicare reimbursement reductions introduced in the Balanced Budget Act
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of 1997 (the "Budget Act"), five of the seven largest skilled nursing facility
operators in the U.S., including Kindred, sought bankruptcy protection in 1999
and 2000. In addition, several operators, including Kindred, faced government
billing disputes. During this industry turmoil, we were able to maintain stable
revenue and EBITDA, meet all of our financial obligations and substantially
reduce our total debt.
Strategy
Our business strategy is comprised of two primary objectives:
diversification of our portfolio of properties and further reduction of our
indebtedness. We intend to diversify our portfolio by operator, facility type
and reimbursement source in order to reduce our dependence on Kindred and
government reimbursement. We intend to acquire additional healthcare
properties, which could include hospitals, nursing centers, assisted or
independent living facilities and ancillary healthcare facilities, that are
operated by leading providers in their industries. We also intend to further
reduce our indebtedness. We reduced our indebtedness from approximately $974
million in total debt as of the beginning of 2000 to approximately $831.5
million as of March 31, 2002.
Dependence on Kindred
We lease all of our hospitals and 210 of our nursing facilities to Kindred
under the Master Leases. For the years ended December 31, 2001, 2000 and 1999,
Kindred accounted for approximately 98.8%, 98.6% (98.4%, net of write-offs) and
98.5% of our rental income, respectively. For the three months ended March 31,
2002 Kindred accounted for approximately 98.9% of our rental income. See "Risk
Factors."
As demonstrated in the following table, Kindred is our primary tenant.
Year Ended Three Months Ended
December 31, 2001 March 31, 2002
------------------ -----------------
Rental Rental
Income Percentage Income Percentage
-------- ---------- ------- ----------
(dollars in thousands)
Portfolio by Operator/Tenant
Kindred................................. $182,854 98.8% $45,866 98.9
Other................................... 2,298 1.2 531 1.1
-------- ----- ------- -----
Total................................ $185,152 100.0% $46,397 100.0%
======== ===== ======= =====
Kindred is one of the largest providers of long-term healthcare services in
the United States. Kindred operates through two main divisions: health services
and hospitals. At March 31, 2002, the health services division consists of 294
nursing centers with 38,032 licensed beds in 32 states and a rehabilitation
therapy business. For the three months ended March 31, 2002, Kindred's health
services division accounted for approximately 57% of its total revenue. The
hospital division provides long-term acute care services through a network of
57 hospitals with 4,961 licensed beds in 23 states and an institutional
pharmacy business. Kindred leases approximately 70% of their facilities from
us. For the three months ended March 31, 2002, Kindred generated revenues of
approximately $811 million.
Recent Developments Regarding Kindred
In order to govern certain of the relationships between us and Kindred after
the 1998 Spin Off and to provide mechanisms for an orderly transition, we and
Kindred entered into the Spin Agreements at the time of the 1998 Spin Off.
Except as noted below, each written agreement by and among Kindred and us
and/or Ventas Realty was assumed by Kindred and certain of these agreements
were simultaneously amended in accordance with the terms of Kindred's plan of
reorganization.
We and Kindred also entered into certain agreements and stipulations and
orders both prior to and during the pendency of Kindred's bankruptcy
proceedings governing certain aspects of the business relationships between
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us and Kindred prior to the date Kindred emerged from bankruptcy. These
agreements and stipulations and orders were terminated on the date Kindred
emerged from bankruptcy in accordance with the terms of Kindred's plan of
reorganization.
Set forth below is a description of the material terms of (a) Kindred's plan
of reorganization, (b) certain of the Spin Agreements as assumed by Kindred
pursuant to its plan of reorganization, including the terms of amendments or
restatements of such Spin Agreements, where applicable, (c) those Spin
Agreements and other agreements terminated under Kindred's plan of
reorganization, and (d) new agreements entered into between us and Kindred in
accordance with Kindred's plan of reorganization.
Summary of Kindred's Plan of Reorganization
Under the terms of Kindred's plan of reorganization, we, among other things,
(a) retained all rent paid by Kindred through the date Kindred emerged from
bankruptcy, (b) amended and restated our leases with Kindred, (c) received
1,498,500 shares of the common stock of Kindred together with certain
registration rights, (d) entered into new agreements relating to the allocation
of certain tax refunds and liabilities, and (e) settled certain claims of the
United States pertaining to our former healthcare operations.
Master Leases
Under Kindred's plan of reorganization, Kindred assumed its five
pre-existing leases with us and Ventas Realty. These master leases were then
amended and restated into four agreements styled as amended and restated master
leases (the "Amended and Restated Master Leases").
In connection with the consummation on December 12, 2001 of a $225.0 million
LIBOR based floating rate commercial mortgage backed securitization transaction
(the "CMBS Transaction"), Ventas Realty removed 40 skilled nursing facilities
from Amended Master Lease No. 1 and placed the CMBS Properties (defined below)
in a new fifth master lease with Kindred dated December 12, 2001 (the "CMBS
Master Lease"). Simultaneously with the closing of the CMBS Transaction, Ventas
Realty transferred the CMBS Properties and the CMBS Master Lease to Ventas
Finance, the borrower under the CMBS Transaction. The Amended and Restated
Master Leases and the CMBS Master Lease are collectively referred to in this
prospectus as the "Master Leases."
Each Master Lease is a "triple-net lease" or an "absolute-net lease"
pursuant to which Kindred is required to pay all insurance, taxes, utilities,
maintenance and repairs related to the properties. There are several renewal
bundles of properties under each Master Lease, with each bundle containing a
varying number of properties. All properties within a bundle have primary terms
ranging from 10 to 15 years commencing May 1, 1998, plus renewal options
totaling fifteen years.
Under each Master Lease, the aggregate annual rent is referred to as Base
Rent (as defined in each Master Lease). Base Rent equals the sum of Current
Rent (as defined in each Master Lease) and Accrued Rent (as defined in each
Master Lease). Kindred is obligated to pay the portion of Base Rent that is
Current Rent, and unpaid Accrued Rents, as set forth below. From May 1, 2001
through April 30, 2004, Base Rent will equal Current Rent. Under the Master
Leases, the initial annual aggregate Base Rent is $180.7 million from May 1,
2001 to April 30, 2002. For the period from May 1, 2002 through April 30, 2004,
annual aggregate Base Rent, payable all in cash, escalates on May 1 of each
year at an annual rate of 3.5% over the Prior Period Base Rent (as defined in
the Master Leases) if certain Kindred revenue parameters are met. Assuming such
Kindred revenue parameters are met, Annual Base Rent under the Master Leases
would be $187.0 million from May 1, 2002 to April 30, 2003 and $193.6 million
from May 1, 2003 to April 30, 2004. See "Note 3--Revenues from Leased
Properties" and "Note 9--Transactions with Kindred" to the Consolidated
Financial Statements.
Each Master Lease provides that beginning May 1, 2004, if Kindred refinances
its senior secured indebtedness entered into in connection with its plan of
reorganization or takes other similar action (a "Kindred
58
Refinancing"), the 3.5% annual escalator will be paid in cash and the Base Rent
shall continue to equal Current Rent. If a Kindred Refinancing has not
occurred, then on May 1, 2004, the annual aggregate Base Rent will be comprised
of (a) Current Rent payable in cash which will escalate annually by an amount
equal to 2% of Prior Period Base Rent, and (b) an additional annual non-cash
accrued escalator amount of 1.5% of the Prior Period Base Rent which will
accrete from year to year including an interest accrual at LIBOR (as defined in
the Master Leases) plus 450 basis points (compounded annually) to be added to
the annual accreted amount (but such interest will not be added to the
aggregate Base Rent in subsequent years). The Unpaid Accrued Rent will become
payable, and all future Base Rent escalators will be payable in cash, upon the
occurrence of a Kindred Refinancing. Under certain circumstances, our right to
receive payment of the Unpaid Accrued Rent is subordinate to the receipt of
payment by the lenders of Kindred's senior secured indebtedness. Upon the
occurrence of a Kindred Refinancing, the annual aggregate Base Rent payable in
cash will thereafter escalate at the annual rate of 3.5% and there will be no
further accrual feature for rents arising after the occurrence of such events.
Under the terms of the Master Leases, we have a one time right to reset the
rents under the Master Leases, exercisable 5 years after the date Kindred
emerged from bankruptcy on a Master Lease by Master Lease basis, to a then fair
market rental rate, for a total fee of $5.0 million payable on a pro-rata basis
at the time of exercise under the applicable Master Lease. The right to reset
the rents under the CMBS Master Lease can only be exercised in conjunction with
the exercise of the right to reset the rents under Master Lease No. 1. We
cannot exercise our right to reset the rents under the CMBS Master Lease
without the prior written consent of the CMBS Lender if, as a result of such
reset, the aggregate rent for the CMBS Properties would decrease. See "Risk
Factors--Risks Arising from Our Business--We are dependent on Kindred;
Kindred's inability or unwillingness to satisfy its obligations under its
agreements with us could have a material adverse effect on us."
Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow Agreement
The tax allocation agreement we entered into at the time of the 1998 Spin
Off and described in more detail below, was assumed by Kindred under its plan
of reorganization and then amended and supplemented by the tax refund escrow
agreement described below. A tax stipulation we entered into with Kindred
during the pendency of the Kindred bankruptcy proceedings was superseded by the
tax refund escrow agreement described below.
The tax allocation agreement provides that Kindred will be liable for, and
will hold us harmless from and against, (i) any taxes of Kindred and its then
subsidiaries (the "Kindred Group") for periods after the 1998 Spin Off, (ii)
any taxes of ours and our then subsidiaries (the "Company Group") or the
Kindred Group for periods prior to the 1998 Spin Off (other than taxes
associated with the spin off) with respect to the portion of such taxes
attributable to assets owned by the Kindred Group immediately after completion
of the 1998 Spin Off and (iii) any taxes attributable to the 1998 Spin Off to
the extent that Kindred derives certain tax benefits as a result of the payment
of such taxes. Under this agreement, Kindred would be entitled to any refund or
credit in respect of taxes owed or paid by Kindred under (i), (ii) or (iii)
above. Kindred's liability for taxes for purposes of the tax allocation
agreement would be measured by our actual liability for taxes after applying
certain tax benefits otherwise available to us other than tax benefits that we
in good faith determine would actually offset our tax liabilities in other
taxable years or periods. Any right to a refund for purposes of the tax
allocation agreement would be measured by the actual refund or credit
attributable to the adjustment without regard to our offsetting tax attributes.
Under the tax allocation agreement, we would be liable for, and would hold
Kindred harmless against, any taxes imposed on the Company Group or the Kindred
Group other than taxes for which the Kindred Group is liable as described in
the above paragraph. We would be entitled to any refund or credit for taxes we
owed or paid as described in this paragraph. Our liability for taxes for
purposes of the tax allocation agreement would be measured by the Kindred
Group's actual liability for taxes after applying certain tax benefits
otherwise available to the Kindred Group other than tax benefits that the
Kindred Group in good faith determines would actually offset tax liabilities of
the Kindred Group in other taxable years or periods. Any right to a refund
would be
59
measured by the actual refund or credit attributable to the adjustment without
regard to offsetting tax attributes of the Kindred Group. See "Note 8--Income
Taxes" to the Consolidated Financial Statements.
Prior to and during the Kindred bankruptcy proceedings, we and Kindred were
engaged in disputes regarding the entitlement to federal, state and local tax
refunds for the tax periods prior to and including May 1, 1998 (the "Subject
Periods") which had been received or which would be received by either company.
Under the terms of a tax stipulation, the companies agreed that the 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, were to be held by the recipient of such refunds in segregated interest
bearing accounts.
On the date Kindred emerged from bankruptcy, we entered into a tax refund
escrow agreement with Kindred governing our relative entitlement to certain tax
refunds for the Subject Periods that each received or may receive in the
future. The tax refund escrow agreement amends and supplements the tax
allocation agreement and supersedes the tax stipulation. Under the terms of the
tax refund escrow agreement, refunds ("Subject Refunds") received on or after
September 13, 1999 by either Kindred or us with respect to federal, state or
local income, gross receipts, windfall profits, transfer, duty, value-added,
property, franchise, license, excise, sales and use, capital, employment,
withholding, payroll, occupational or similar business taxes (including
interest, penalties and additions to tax, but excluding certain refunds), for
taxable periods ending on or prior to May 1, 1998, or including May 1, 1998 and
received on or after September 13, 1999 ("Subject Taxes") must be deposited
into an escrow account with a third-party escrow agent.
The tax refund escrow agreement provides, inter alia, that each party must
notify the other of any asserted Subject Tax liability of which it becomes
aware, that either party may request that asserted liabilities for Subject
Taxes be contested, that neither party may settle such a contest without the
consent of the other, that each party has the right to participate in any such
contest, and that the parties generally must cooperate with regard to Subject
Taxes and Subject Refunds and will mutually and jointly control any audit or
review process related thereto.
The funds in the escrow account (the "Escrow Funds") may be released from
the escrow account to pay Subject Taxes and as otherwise provided therein.
The tax refund escrow agreement provides generally that Kindred and we waive
our respective rights under the tax allocation agreement to make claims against
each other with respect to Subject Taxes satisfied by the Escrow Funds,
notwithstanding the indemnification provisions of the tax allocation agreement.
To the extent that the Escrow Funds are insufficient to satisfy all liabilities
for Subject Taxes that are finally determined to be due (such excess amount,
"Excess Taxes"), the relative liability of Kindred and us to pay such Excess
Taxes shall be determined as provided in the tax refund escrow agreement.
Disputes under the tax refund escrow agreement, and the determination of the
relative liability of Kindred and us to pay Excess Taxes, if any, are governed
by the arbitration provision of the tax allocation agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities will be distributed equally to each of Kindred
and us on an annual basis and are accrued as interest income on the
Consolidated Statement of Operations. Any Escrow Funds after no further claims
may be made by governmental authorities with respect to Subject Taxes or
Subject Refunds (because of the expiration of statutes of limitation or
otherwise) will be distributed equally to Kindred and us.
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, we assigned our former third party
lease obligations (i.e., leases under which an unrelated third party is the
landlord) as a tenant or as a Guarantor of tenant obligations to Kindred (the
60
"Third Party Leases"). Under Kindred's plan of reorganization, Kindred assumed
and has agreed to fulfill its obligations under the Agreement of
Indemnity--Third Party Leases. There can be no assurance that Kindred will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations under the Agreement of Indemnity--Third Party Leases or that
Kindred will continue to honor its obligations under the Agreement of
Indemnity--Third Party Leases. If Kindred does not satisfy or otherwise honor
the obligations under the Agreement of Indemnity--Third Party Leases, then we
may be liable for the payment and performance of such obligations. Under
Kindred's plan of reorganization, Kindred has agreed not to renew or extend any
Third Party Lease unless it first obtains a release of us from liability under
such Third Party Lease. See "Risk Factors--Risks Arising from Our Business--We
are dependent on Kindred; Kindred's inability or unwillingness to satisfy its
obligations under its agreements with us could have a material adverse affect
on us." and "Note 9--Transactions with Kindred--Agreement of Indemnity--Third
Party Leases" to the Consolidated Financial Statements.
Agreement of Indemnity--Third Party Contracts
In connection with the 1998 Spin Off, we assigned our former third party
guaranty agreements to Kindred. Under Kindred's plan of reorganization, Kindred
assumed and has agreed to fulfill its obligations under the Agreement of
Indemnity--Third Party Contracts. There can be no assurance that Kindred will
have sufficient assets, income and access to financing to enable it to satisfy
its obligations incurred in connection with the Agreement of Indemnity--Third
Party Contracts or that Kindred will continue to honor its obligations under
the Agreement of Indemnity--Third Party Contracts. If Kindred does not satisfy
or otherwise honor the obligations under the Agreement of Indemnity--Third
Party Contracts, then we may be liable for the payment and performance of such
obligations. See "Risk Factors--Risks Arising from Our Business--We are
dependent on Kindred; Kindred's inability or unwillingness to satisfy its
obligations under its agreements with us could have a material adverse affect
on us." and "Note 9--Transactions with Kindred--Agreement of Indemnity--Third
Party Contracts" to the Consolidated Financial Statements.
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, Kindred agreed in various Spin
Agreements to assume and to indemnify us for any and all liabilities that may
arise out of the ownership or operation of the healthcare operations either
before or after the date of the 1998 Spin Off. Under Kindred's plan of
reorganization, Kindred assumed and agreed to perform its obligations under
these indemnifications. There can be no assurance that Kindred will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations incurred in connection with the 1998 Spin Off or that Kindred will
continue to honor its obligations incurred in connection with the 1998 Spin
Off. If Kindred does not satisfy or otherwise honor the obligations under these
arrangements, then we may be liable for the payment and performance of such
obligations and may have to assume the defense of such claims. See "Risk
factors--Risks arising from our business--We are dependent on Kindred;
Kindred's inability or unwillingness to satisfy its obligations under its
agreements with us could have a material adverse affect on us." and "Note
9--Transactions with Kindred--Assumption of Certain Operating Liabilities and
Litigation" to the Consolidated Financial Statements.
Kindred Common Stock and Registration Rights Agreement
On the date Kindred emerged from bankruptcy, Ventas Realty received
1,498,500 shares of the common stock in Kindred, representing not more than
9.99% of the issued and outstanding common stock in Kindred as of the date
Kindred emerged from bankruptcy. Based on applicable laws, regulations, advice
from experts, an appraisal, the trading performance of the Kindred common stock
at the applicable time and other appropriate facts and circumstances, including
the illiquidity and lack of registration of the Kindred common stock when
received and our lack of significant influence over Kindred, we determined that
the value of the Kindred common stock was $18.2 million on the date received by
Ventas Realty. The Kindred common stock received by Ventas Realty is subject to
dilution from stock issuances occurring after the date Kindred emerged from
bankruptcy. The Kindred common stock was issued to Ventas Realty as additional
future rent in consideration of the agreement to charge the base rent as
provided in the Master Leases.
61
On the date Kindred emerged from bankruptcy, Kindred executed and delivered
to Ventas Realty and other signatories, a registration rights agreement, which,
among other things, provides that Kindred must file a shelf registration
statement with respect to the Kindred common stock and to keep such
registration statement continuously effective for a period of two years with
respect to such securities (subject to customary exceptions). The shelf
registration statement was declared effective on November 7, 2001.
We disposed of 418,186 shares of Kindred common stock in the fourth quarter
of 2001 and recognized a gain of $15.4 million on the dispositions. In
connection with a registered offering of common stock by Kindred, Ventas Realty
exercised its piggyback registration rights, and sold 83,300 shares of Kindred
common stock, recognizing a gain of $2.6 million on the dispositions. We
applied the net proceeds of $3.6 million from the sale of 83,300 shares of
Kindred common stock as a prepayment on our indebtedness under our 2000 Credit
Agreement. We declared a distribution of 334,886 shares of Kindred common stock
as part of the 2001 dividend, resulting in a gain of $12.8 million. For every
share of our common stock that a stockholder owned at the close of business on
December 14, 2001, the stockholder received 0.005 of a share of Kindred common
stock and $0.0049 in cash (equating to one share of Kindred common stock and
$0.98 in cash for every two hundred shares of our common stock). For purposes
of the 2001 dividend, the Kindred common stock was valued in accordance with
the Code and applicable rulings and regulations on December 31, 2001 at $51.02
per share.
Terminated Agreements
A participation agreement and a development agreement, both executed in
connection with the 1998 Spin Off, were terminated on the date Kindred emerged
from bankruptcy. A second standstill agreement and a tolling agreement, both
entered into by us and Kindred in April 1999, and the tax stipulation and the
Rent Stipulation were all terminated on the date Kindred emerged from
bankruptcy and are of no further force or effect.
Settlement of United States Claims
Kindred and we were the subject of investigations by the United States
Department of Justice regarding our prior healthcare operations, including
matters arising from lawsuits filed under the qui tam, or whistleblower,
provision of the Federal Civil False Claims Act, which allows private citizens
to bring a suit in the name of the United States. See "Note 12--Litigation" to
the Consolidated Financial Statements. Kindred's plan of reorganization
contains a comprehensive settlement of all of these claims by the United States.
Under the United States Settlement, we will pay $103.6 million to the United
States, of which $34.0 million was paid on the date Kindred emerged from
bankruptcy. The balance of $69.6 million bears interest at 6% per annum and is
payable in equal quarterly installments over a five-year term commencing on
June 30, 2001 and ending in 2006. We made the first four quarterly installments
under the settlement through April 1, 2002.
We also paid approximately $0.4 million to legal counsel for the realtors in
the qui tam actions. In the fourth quarter of 2000, we recorded the full amount
of the obligation under the settlement for $96.5 million based on an imputed
interest rate of 10.75%.
Competition
We compete for real property investments with healthcare providers, other
healthcare related REITs, real estate partnerships, banks, insurance companies
and other investors. Many of our competitors are significantly larger and have
greater financial resources and lower cost of capital than us. Our ability to
compete successfully for real property investments will be determined by
numerous factors, including our ability to identify suitable acquisition
targets, our ability to negotiate acceptable terms for any such acquisition,
the availability and cost of capital to us, and the restrictions contained in
the 2002 Credit Facility and the indentures governing the Notes. See "Risk
Factors--Risks Arising from Our Business--We may encounter certain risks when
implementing our business strategy," "Note 5--Borrowing Arrangements" to the
December 31, 2001 Consolidated Financial Statements and "Note 4--Borrowing
Arrangements" to the Condensed Consolidated Financial Statements.
62
The operators of our properties compete on a local and regional basis with
other healthcare operators. The ability of our operators to compete
successfully for patients at our facilities depends upon several factors,
including the quality of care at the facility, the operational reputation of
the operator, physician referral patterns, physical appearance of the
facilities, other competitive systems of healthcare delivery within the
community, population and demographics, and the financial condition of the
operator. Private, federal and state reimbursement programs and the effect of
other laws and regulations also may have a significant effect on our 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 our properties, we 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 us address a
wide variety of topics, including, but not limited to, asbestos,
polychlorinated biphenyls ("PCBs"), fuel oil management, wastewater discharges,
air emissions, radioactive materials, medical wastes, and hazardous wastes.
Under the Master Leases, Kindred has agreed to indemnify us against any
environmental claims (including penalties and clean-up costs) resulting from
any condition arising in, on or under, or relating to, the leased properties at
any time on or after the commencement date of the lease term for the applicable
leased property. Kindred also has agreed to indemnify us 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 us or any of our
affiliates other than Kindred and its direct affiliates). There can be no
assurance that Kindred will have the financial capability or the willingness to
satisfy any such environmental claims. See "Risk Factors--Risks Arising from
Our Business--We are dependent on Kindred; Kindred's inability or unwillingness
to satisfy its obligations under its agreements with us could have a material
adverse affect on us." If Kindred is unable or unwilling to satisfy such
claims, we may be required to satisfy the claims. We have agreed to indemnify
Kindred against any environmental claims (including penalties and clean-up
costs) resulting from any condition arising on or under, or relating to, the
leased properties at any time before the commencement date of the lease term
for the applicable leased property.
We did not make any material capital expenditures in connection with such
environmental, health, and safety laws, ordinances, and regulations in 2001 and
do not expect that we will have to make any such material capital expenditures
during 2002.
63
Governmental Regulation
General
The operators of our properties derive a substantial portion of their
revenues from third party payors, including the Medicare and Medicaid programs.
Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, certain disabled persons and
persons with end-stage renal disease. Medicaid is a medical assistance program
jointly funded by federal and state governments and administered by each state
pursuant to which benefits are available to certain indigent patients. The
Medicare and Medicaid statutory framework is subject to administrative rulings,
interpretations and discretion that may affect the amount and timing of
reimbursements made under Medicare and Medicaid. The amounts of program
payments received by our operators and tenants can be changed by legislative or
regulatory actions and by determinations by agents for the programs.
The Balanced Budget Act of 1997 (the "Budget Act") was intended to reduce
the increase in Medicare payments by $115 billion and reduce the increase in
Medicaid payments by $13 billion between 1998 through 2002 and made extensive
changes to the Medicare and Medicaid programs. The impact of these changes and
reductions has been only partially ameliorated by subsequent legislation. See
"--Healthcare Reform" below. In addition, private payors, including managed
care payors, increasingly are demanding discounted fee structures and the
assumption by healthcare providers of all or a portion of the financial risk.
Efforts to impose greater discounts and more stringent cost controls upon
operators by private payors are expected to continue. Further, on March 25,
1999, legislation was passed that prevents nursing facility operators that
decide to withdraw from the Medicaid program from evicting or transferring
patients who are residents as of the effective date of withdrawal, and who rely
on Medicaid to cover their long-term care expenses. There can be no assurance
that adequate reimbursement levels will continue to be available for services
to be provided by the operators of our 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 us.
The operators of our properties are subject to extensive federal, state and
local laws and regulations including, but not limited to, laws and regulations
relating to licensure, conduct of operations, ownership of facilities, addition
of facilities, services, prices for services and billing for services. These
laws authorize periodic inspections and investigations, and identification of
deficiencies that, if not corrected, can result in sanctions that include loss
of licensure to operate and loss of rights to participate in the Medicare and
Medicaid programs. Regulatory agencies have substantial powers to affect the
actions of operators of our properties if the agencies believe that there is an
imminent threat to patient welfare, and in some states these powers can include
assumption of interim control over facilities through receiverships. Extensive
legislation and regulations also pertain to healthcare fraud and abuse,
including kickbacks, physician self-referrals and false claims.
Federal anti-kickback laws codified under Section 1128B(b) of the Social
Security Act (the "Anti-kickback Laws") prohibit certain business practices and
relationships that might affect the provision and cost of healthcare services
reimbursable under Medicare, Medicaid and other federal healthcare programs,
including the payment or receipt of remuneration for the referral of patients
whose care will be paid by Medicare or other governmental programs. Sanctions
for violating the Anti-kickback Laws include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs such
as the Medicare and Medicaid programs. In the ordinary course of their
businesses, the operators of our properties have been and are subject regularly
to inquiries, investigations and audits by federal and state agencies that
oversee these laws and regulations.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the United States 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.
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Business arrangements of healthcare service providers that fail to satisfy the
applicable Safe Harbor's criteria, however, risk increased scrutiny and
possible sanctions by enforcement authorities.
The operators of our properties also are subject to the Ethics in Patient
Referral Act of 1989, commonly referred to as the Stark Law. In the absence of
an applicable exception, the Stark Law prohibits referrals by physicians of
Medicare and other government-program patients to providers of a broad range of
designated health services with which the physicians (or their immediate family
members) have ownership interests or certain other financial arrangements.
Initially, the Stark Law applied only to clinical laboratory services and
regulations applicable to clinical laboratory services were issued in 1995.
Earlier that same year, the Stark Law's self-referral prohibition expanded to
additional goods and services, including inpatient and outpatient hospital
services. In January 2001 the Centers for Medicare and Medicaid Services
("CMS," formerly the Health Care Financing Administration) published a final
rule that it characterized as the first phase of what will be a two-phase final
rule, and most of the provisions of part one of this final rule became
effective on January 4, 2002. Although CMS has stated that it intends to
publish phase two shortly, it is unclear when this will occur.
Many states have adopted or are considering legislative proposals similar to
the federal referral prohibition, some of which extend beyond the Medicare and
Medicaid programs to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of whether the
service was reimbursed by Medicare or Medicaid. These laws and regulations are
extremely complex, and little judicial or regulatory interpretation exists. A
violation of such laws and regulations could have a material adverse effect on
these operators' liquidity, financial condition and results of operations,
which could affect adversely their ability to make rental payments to us.
Government investigations and enforcement of healthcare laws has increased
dramatically over the past several years and is expected to continue. The
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191)
("HIPAA"), which became effective January 1, 1997, greatly expanded the
definition of healthcare fraud and related offenses and broadened the scope to
include private healthcare plans in addition to government payors. HIPAA also
greatly increased funding for the Department of Justice, Federal Bureau of
Investigation and the Office of the Inspector General to audit, investigate and
prosecute suspected healthcare fraud. Private enforcement of healthcare fraud
also has increased due in large part to amendments to the civil False Claims
Act in 1986 that were designed to encourage private individuals to sue on
behalf of the government. These whistleblower suits by private individuals,
known as qui tam relators, may be filed by almost anyone, including present and
former patients and nurses and other employees. HIPAA also mandates the
adoption by HHS of regulations aimed at standardizing transaction formats and
billing codes for documenting medical services, dealing with claims submissions
and protecting the privacy and security of individually identifiable health
information. HIPAA regulations that standardize transactions and code sets
became final in the fourth quarter of 2000. Final privacy regulations became
effective in April 2001, with compliance for most covered entities required by
April 2003. On March 27, 2002 HHS published proposed revisions to the final
privacy rule which will not affect the compliance date. HIPAA's security
regulations have not yet been finalized. These actions could have a material
adverse effect on these operators' liquidity, financial condition and results
of operations, which could affect adversely their ability to make rental
payments to us.
The Budget Act also provides a number of additional anti-fraud and abuse
provisions. The Budget Act contains new civil monetary penalties for an
operator's violation of the Anti-kickback Laws and imposes an affirmative duty
on operators to ensure that they do not employ or contract with persons
excluded from the Medicare and other government programs. The Budget Act also
provides a minimum ten-year period for exclusion from participation in federal
healthcare programs for operators convicted of a prior healthcare offense.
Some states require state approval for development and expansion of
healthcare facilities and services, including findings of need for additional
or expanded healthcare facilities or services. A certificate of need (or
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CON), which is issued by governmental agencies with jurisdiction over
healthcare facilities, is at times required for expansion of existing
facilities, construction of new facilities, addition of beds, acquisition of
major items of equipment or introduction of new services. The CON rules and
regulations may restrict an operator's ability to expand our properties in
certain circumstances.
Kindred has informed us that the Medicare certification for one of its
hospitals located in Minnesota was terminated effective April 5, 2002, which
resulted in the concurrent termination of the Medicaid certification for such
hospital. If the termination remains effective, Kindred would be unable to
receive Medicare or Medicaid payments for patients admitted to this hospital on
or after April 5, 2002 and would be unable to receive payment for its Medicare
or Medicaid patients at this hospital beginning in May, 2002. Also, as a result
of the termination, private third-party payors may decide to exclude the
hospital from their networks of approved providers, and the state of Minnesota
may decide to terminate the hospital's license. Kindred has since filed an
appeal of the termination with the United States Department of Health and Human
Services. In a settlement reached in early May 2002, management of the subject
hospital has been assumed by a not-for-profit corporation under a contract with
Kindred. The license to operate the facility currently remains with Kindred and
Kindred remains liable for the performance of all obligations relating to the
hospital under the applicable Master Lease. Under the settlement, Kindred
dismissed its appeal and the hospital's certification will be reinstated under
the Medicare and Medicaid systems subject to satisfactory reviews of the
hospital by the Minnesota Health Department before the end of July 2002.
Kindred was also notified that its Medicare and Medicaid certification for one
of its skilled nursing facilities in Kentucky was terminated on May 5, 2002.
Kindred has filed an appeal of the termination with the United States
Department of Health and Human Services. Kindred recently informed the Company
that Kindred and the Commonwealth of Kentucky agreed to an order containing a
settlement resolving the termination at the Kentucky nursing facility. Under
the settlement, Kindred is required to immediately relocate all the patients at
the facility. Kindred will be allowed to readmit patients at the facility as
early as June 17, 2002. Subject to the satisfaction of certain conditions,
Kindred will be permitted to retain its license and operate the Kentucky
nursing facility and the facility will be reinstated under the Medicare and
Medicaid systems subject to certain restrictions.
In the event that any operator of our properties fails to make rental
payments to us or to comply with the applicable healthcare regulations, and, in
either case, such operators or their lenders fail to cure the default prior to
the expiration of the applicable cure period, our ability to evict that
operator and substitute another operator or operators may be materially delayed
or limited by various state licensing, receivership, CON or other laws, as well
as by Medicare and Medicaid change-of-ownership rules. Such delays and
limitations could have a material adverse effect on our ability to collect
rent, to obtain possession of leased properties, or otherwise to exercise
remedies for tenant default. In addition, we 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 our hospitals are operated as long-term acute care
hospitals ("LTACs"). In order to receive Medicare and Medicaid reimbursement,
each hospital must meet the applicable conditions of participation set forth by
HHS relating to the type of hospital, its equipment, personnel and standard of
medical care, as well as comply with state and local laws and regulations.
Hospitals undergo periodic on-site certification surveys, which generally are
limited if the hospital is accredited by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") or other recognized accreditation
organization. A loss of certification could adversely affect a hospital's
ability to receive payments from Medicare and Medicaid programs, which could in
turn adversely impact the operator's ability to make rental payments under its
leases with us.
An LTAC has an average length of stay greater than 25 days. Hospitals that
are certified by Medicare as LTACs are currently excluded from the prospective
payment system ("PPS") that applies to acute care hospitals. However, a PPS
system for LTACs is scheduled to be in place by October 1, 2002 and applicable
to cost report periods commencing on or after October 1, 2002. See "--Recent
Developments Regarding Government Regulation" below. Inpatient operating costs
for LTACs are reimbursed under a cost-based reimbursement
66
system, subject to a computed target rate per discharge for inpatient operating
costs established by the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"), as amended by the Budget Act and the Medicare, Medicaid and SCHIP
Benefits Improvement and Protection Act of 2000 ("BIPA"). Medicare and Medicaid
reimbursements generally are determined from annual cost reports filed by
hospital operators that are subject to audit by the respective agency (or their
fiscal agents) administering the program. Under such programs of cost-based
reimbursement, costs which will be accepted for reimbursement are defined and
limited by statutes, regulations and program policies relating to numerous
factors, including necessity, reasonableness, related-party principles and
relatedness to patient care.
Nursing Facilities
The operators of our 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 SNFs
for cost reporting periods beginning on or after July 1, 1998. The payments
received under the SNF prospective payment system cover all services for
Medicare patients, including ancillary services. The rates for such services
were first published in the Federal Register on May 12, 1998, after the
consummation of the 1998 Spin Off. Although there has been some payment relief
under the Balanced Budget Refinement Act of 1999 ("Refinement Act") and BIPA,
there can be no assurance that the reimbursement levels under the SNF PPS will
be sufficient to permit our operators to satisfy their obligations, including
payment of rent under their leases with us. See "--Healthcare Reform" below.
Healthcare Reform
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. In an
effort to reduce federal spending on healthcare, in 1997 the Federal government
enacted the Budget Act, which contained extensive changes to the Medicare and
Medicaid programs intended to reduce the projected amount of increase in
payments under those programs by $115 billion and $13 billion, respectively,
between 1998 and 2002. Under the Budget Act, annual growth rates for Medicare
were to be reduced from over 10% to approximately 7.5% for the period between
1998 and 2002 based on specific program baseline projections from 1993 to 1997.
Virtually all spending reductions have and will come from healthcare operators
and changes in program components. For certain healthcare providers, including
hospitals, home health agencies, SNFs and hospices, implementation of the
Budget Act resulted in more drastic reimbursement reductions than had been
anticipated. In addition to its impact on Medicare, the Budget Act also
afforded states more flexibility in administering their Medicaid plans,
including the ability to shift most Medicaid enrollees into managed care plans
without first obtaining a federal waiver. Accordingly, the Medicare and
Medicaid programs, including payment levels and methods, are in a state of
change and are less predictable than before enactment of the Budget Act.
Further Medicare reform legislation is currently under consideration by
Congress. See "--Recent Developments Regarding Government Regulation" below.
The Budget Act established a prospective payment system for skilled nursing
facilities ("SNF PPS") to be transitioned over a three-year period for cost
reporting periods beginning on or after July 1, 1998. Under the SNF PPS payment
methodology, payment amounts are based upon classifications determined through
assessments of individual Medicare patients in the skilled nursing facility,
rather than on the facility's reasonable costs. The SNF PPS features a case-mix
adjustment that utilizes data derived from a standardized clinical assessment
tool that assesses a patient's needs known as the Minimum Data Set, or MDS. For
SNF PPS purposes, the MDS data are used to classify SNF patients into one of 44
Resource Utilization Groups, Version III ("RUG-III") based on the medical
services and functional support the patient is expected to need. Each RUG-III
group is assigned an index
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score that factors the amount of staff time, supplies, and services used, on
average, for patients classified in that group. The payments received under the
SNF PPS are intended generally to cover all inpatient services for Medicare
patients, including routine nursing care, most capital-related costs associated
with the inpatient stay, and ancillary services, such as respiratory therapy,
occupational therapy, speech therapy and certain covered drugs.
Under the SNF PPS, per diem payments are made to nursing home facilities for
each resident. Upon the expiration of the three-year transition period, these
per diem payments would be fully transitioned into the federal SNF PPS rates.
During the transition period, payments are based on a blended rate that uses
both a facility-specific rate and the federal rate. As a result of SNF PPS,
Medicare payments to SNFs dropped by 12.5% in 1999. Additionally, the SNF PPS
forced SNFs to make expensive administrative adjustments to implement the
payment system. Although there has been some payment relief (as described
below), there can be no assurance that the reimbursement levels under the SNF
PPS will be sufficient to permit our operators to satisfy their obligations,
including payment of rent under their leases with us.
With respect to Medicaid, the Budget Act repealed the "Boren Amendment"
federal payment standard for Medicaid payments to hospitals and nursing
facilities effective October 1, 1997, giving states greater latitude in setting
payment rates for these providers.
The Budget Act also affected the payments made to LTACs by reducing the
amount of reimbursement for incentive payments established pursuant to the
TEFRA, for capital expenditures and bad debts, and for services to certain
patients transferred from an acute care hospital. In addition, the Budget Act
for the first time imposed a national ceiling limitation or "national cap" on
payments that may be made in each category of hospitals exempt from a
prospective payment system. LTACs constitute one such category. The Budget Act
also mandated the creation of a prospective payment system ("LTAC PPS") for
LTACs.
In response to widespread healthcare industry concern about the effects of
the Budget Act, the Federal government enacted the Refinement Act on November
29, 1999. The Refinement Act did not enact any fundamental changes in the
Medicare system, but rather reversed or delayed some of the reductions in
Medicare payment increases mandated by the Budget Act. It was estimated that in
the four to five fiscal years after its enactment, the Refinement Act would
return to healthcare providers approximately $16 billion of the $115 billion
the Budget Act was expected to cut from increases to the Medicare program.
Specific providers who received relief under the Refinement Act included SNFs,
which received temporary (effective April 1, 2000 to October 1, 2000) per diem
payment increases for certain high cost patients, and outpatient rehabilitation
therapy providers, which received a 2-year moratorium on a $1,500 annual cap on
the amount of physical, occupational and speech therapy provided to a patient.
Pursuant to BIPA, CMS extended the moratorium on the $1,500 annual cap to
December 31, 2002.
In its July 31, 2000 final rule ("Final Refinement Act Rule") refining the
SNF PPS, CMS announced increases in payment rates for fiscal year 2001. In its
earlier proposed rule, issued on April 10, 2000, CMS had detailed proposed
refinements to be made to the SNF PPS case-mix classification system that would
more adequately account for high cost cases. Specifically, the agency developed
new categories of service classifications for payment purposes and proposed to
increase reimbursement rates for higher cost cases using a new index system
based on patient clinical variables. The Final Refinement Act Rule postponed
any such refinements to the SNF PPS case-mix classification system, while
retaining two temporary remedies set forth in the Refinement Act: (a) a 4%
increase in the per diem reimbursement rates for all RUG-III groups in both
fiscal years 2001 and 2002; and (2) an additional 20% increase in the per diem
reimbursement for fifteen RUG-III groups falling under the Extensive Services,
Special Care, Clinically Complex, High Rehabilitation and Medium Rehabilitation
categories, applicable to services furnished on or after April 1, 2000, until
such time as case-mix refinements are implemented.
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Passed in December 2000, BIPA provided a certain degree of relief from the
projected impact of the Budget Act. Specifically, BIPA modified the impact of
the Refinement Act on SNF PPS payment rates, as implemented by the Final
Refinement Act Rule, in several important ways. First, BIPA revised the annual
market basket update factor upward from "market basket--1%" to (a) "market
basket" in fiscal year 2001, and (b) "market basket--0.5%" in fiscal years 2002
and 2003. Second, BIPA temporarily increased the nursing component of the
federal SNF PPS rate by 16.6%, from April 1, 2001 through September 30, 2002.
Finally, BIPA increased the per diem reimbursement rates for fourteen
rehabilitation-related RUG-III groups by 6.7%, from April 1, 2001 until such
time as case-mix refinements are implemented pursuant to the Refinement Act. To
date, CMS has not promulgated the SNF PPS case-mix refinements required by the
Refinement Act. As a result, the temporary per diem payment increases for
specified RUG-III groups have been retained for an unspecified period of time,
with certain budget-neutral changes to the size and allocation of such
increases among different RUG-III groups.
There can be no assurance that the Budget Act, the Refinement Act, BIPA and
future healthcare legislation, or other changes in the administration or
interpretation of governmental healthcare programs, will not have a material
adverse effect on the liquidity, financial condition or results of operations
of our operators which could have a material adverse effect on their ability to
make rental payments to us.
Recent Developments Regarding Government Regulation
Recent federal legislation and regulations set forth revised payment
mechanisms for SNF and LTAC services. The full economic impact of new laws and
other recent developments discussed below is under review by the long-term care
industry and by the Company and its tenants.
In its annual update for Medicare SNF payment rates ("2002 Final Rule"), the
Centers for Medicare and Medicaid Services announced payment increases
effective October 1, 2001 for payments made to our tenants who operate SNFs
participating in the Medicare program. The 2002 Final Rule reflects an update
for prices of the goods and services needed to provide SNF care, and implements
certain adjustments under both the Refinement Act and BIPA. These adjustments
under the Refinement Act and BIPA are intended to temporarily ameliorate the
economic effects of the Budget Act, which established the SNF PPS. The 2002
Final Rule implements BIPA's temporary increase of 16.6% in the nursing
component of the federal SNF PPS rate, as well as the Refinement Act's 4%
increase in the per diem reimbursement rates for all RUG-III groups. Both the
16.6% temporary increase in the nursing component of the federal SNF PPS rate
and the 4% add-on for all RUG-III groups are due to expire on September 30,
2002. There can be no assurance that these provisions will continue after that
date.
Under the Medicare provisions of the Refinement Act and BIPA, SNFs also
receive a 20% increase in the per diem reimbursement rates for 15 RUG-III
groups relating to medically complex patients and a 6.7% increase to the per
diem reimbursement rates for 14 rehabilitation-related RUG-III groups. Under
applicable law, however, the 6.7% add-on for rehabilitation patients and the
20% add-on for medically complex patients will expire when CMS implements
certain refinements to the SNF PPS's RUG-III system. On April 23, 2002, HHS
indicated that CMS will not implement the RUG-III refinements this year. As a
result, at this time the 6.7% increase and the 20% add-on will be retained, and
CMS has indicated that it will publish a notice before July 31, 2002 that will
include Medicare's payment rates for fiscal year 2003.
Under the Medicare provisions of the Refinement Act and BIPA, LTACs, which
are currently excluded from a prospective payment system, are scheduled to
transition to a prospective payment system ("LTAC PPS") by October 1, 2002. The
new LTAC PPS would apply to cost report periods beginning on or after October
1, 2002. If HHS cannot implement a prospective payment system specific to LTACs
by October 1, 2002, BIPA requires HHS to implement a default LTAC PPS based on
existing acute care hospital diagnosis-related groups ("DRGs") that have been
modified where feasible to account for the specific resource use of LTAC
patients. On March 22, 2002, CMS published a proposed rule for the LTAC PPS.
The proposed LTAC PPS is based on the
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DRG system currently in use for general acute care hospitals. CMS has indicated
that reimbursement under the proposed LTAC PPS would be similar to total
payments under the current system. The public has 60 days from March 22, 2002
to review the proposed LTAC PPS rule and submit comments to CMS. In response to
comments submitted by the public and its own ongoing review of the proposed
rule, CMS may modify the proposed rule before it is adopted in final form. The
Company is currently analyzing the effects of the proposed rule. There can be
no assurance as to the content of the final rule for LTAC PPS, nor can we
predict its impact on our tenants and operators. We believe that the proposed
LTAC PPS, if adopted and implemented within the prescribed time frames, would
impact Kindred no sooner than September 1, 2003.
CMS also has promulgated a final regulation ("Final Regulation") to restrict
the "upper-payment limit loophole" in Medicaid. The Final Regulation revises a
provision of a prior regulation published on January 12, 2001 that allowed
states to make overall payments to public non-state government owned or
operated hospitals of up to 150% of the estimated amount that would be paid
under Medicare for the same services. Under the Final Regulation, these
payments are limited to 100% of estimated Medicare payments, which is the limit
for all other hospitals. The resulting effect of the Final Regulation is that
states may implement rate or service cuts to providers (including SNFs) to
compensate for reduced federal funding. On May 14, 2002, CMS indicated that the
Final Regulation would become effective on May 15, 2002.
Approximately two-thirds of all nursing home residents are dependent on
Medicaid. Medicaid reimbursement rates, however, typically are less than the
amounts charged by the operators of our properties. Moreover, rising Medicaid
costs and decreasing state revenues caused by current economic conditions have
prompted an increasing number of states to cut Medicaid funding as a means of
balancing their respective state budgets. Existing and future initiatives
affecting Medicaid reimbursement may reduce utilization of (and reimbursement
for) services offered by the operators of the our properties.
Recently, HHS announced the Nursing Home Quality Initiative pilot program
for the states of Colorado, Florida, Maryland, Ohio, Rhode Island and
Washington. This program, which is designed to provide consumers with
comparative information about nursing home quality measures, will rate every
nursing home operating in these states on nine quality of care indicators. The
quality of care indicators include such measures as percentages of patients
with infections, bedsores, and unplanned weight loss. On April 24, 2002, HHS
released initial quality data from nursing homes in the pilot program's six
states. In addition, CMS recently published advertisements in thirty newspapers
in the six states that include some of the quality data. The quality data,
along with other information about individual nursing homes, have been made
available to the public through Medicare's consumer web site and telephone help
line. Following this pilot program, CMS intends to refine and expand the
initiative to all other states.
We currently own nursing home properties in certain of the pilot program
states. If the operators of our properties located in pilot program states are
unable to achieve quality of care ratings in these states that are comparable
or superior to those of their competitors, patients may choose alternate
facilities, which could cause operating revenues to decline. In the event the
financial condition or operating revenues of these operators adversely
affected, the operators' ability to make rental payments to us could be
adversely affected, which, in turn, could have a Material Adverse Effect on us.
Federal Income Taxation of the Company
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.
70
We elected to qualify as a REIT for federal income tax purposes for the year
ended December 31, 1999. We believe that we have satisfied the requirements to
qualify as a REIT for the years ended December 31, 2000 and 2001. We intend to
continue to qualify as a REIT for federal income tax purposes for the year
ended December 31, 2002 and subsequent years subject to our ability to meet the
minimum distribution requirements as discussed below. Our continued
qualification and taxation as a REIT will depend upon our 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 our operations for any particular taxable year will satisfy such
requirements. Although we believe we have satisfied the requirements to
continue to qualify as a REIT for years ended December 31, 2000 and 2001 and
although we currently intend to continue to qualify as a REIT for the year
ended December 31, 2002 and subsequent years, it is possible that economic,
market, legal, tax or other considerations may cause us to fail, or elect not,
to continue to qualify as a REIT. For a discussion of the tax consequences of
failing to continue to qualify as a REIT, see "--Failure to Continue to
Qualify" below.
If we continue to qualify for taxation as a REIT, we generally will not be
subject to federal corporate income tax on net income that we currently
distribute 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 our
qualification as a REIT, we will be subject to federal income tax in the
following circumstances. First, we will be taxed at regular corporate rates on
any undistributed taxable income, including undistributed net capital gains.
Second, under certain circumstances, we may be subject to the "alternative
minimum tax" on our undistributed items of tax preference. Third, if we have
(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 we repossess 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 we have 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 we
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and have nonetheless maintained our qualification as a
REIT because certain other requirements have been met, we will be subject to a
100% tax on the product of (a) the gross income attributable to the greater of
the amount by which we fail the 75% or 95% gross income test, and (b) a
fraction intended to reflect our profitability. Sixth, if we should fail to
distribute during each calendar year at least the sum of (i) 85% of our REIT
ordinary income for such year, (ii) 95% of our REIT capital gain net income for
such year (other than retained long-term capital gain we elect to treat as
having been distributed to stockholders), and (iii) any undistributed taxable
income from prior years, we would be subject to a non-deductible 4% excise tax
on the excess of such required distribution over the amounts actually
distributed. Seventh, if we should receive rents from a tenant deemed not to be
fair market value rents, or if we value our assets incorrectly, we may be
liable for valuation penalties. Finally, if we acquire 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 our hands is determined by
reference to the basis of the asset (or any other asset) in the hands of the C
corporation, and we recognize gain on the disposition of such asset during the
10-year period (the "Recognition Period") beginning on the date on which we
acquired such asset, 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 us over the adjusted basis of such asset at such time), such gain will be
subject to tax at the highest regular corporate rate (the "Built-in Gain
Rules")).
We own appreciated assets that we held on January 1, 1999, the effective
date of our REIT election. These assets are subject to the Built-in Gain Rules
discussed above because we were a taxable C corporation prior to January 1,
1999. If we recognize taxable gain upon the disposition of any of these assets
within the ten-year Recognition Period, we generally will be subject to regular
corporate income tax on the gain equal to the lower of (a) the recognized gain
at the time of the disposition and (b) the Built-in Gain in that asset as of
January 1, 1999. The total amount of gain on which we can be taxed under the
Built-in Gain Rules is limited to our net built-in
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gain at the time we became a REIT, i.e., the excess of the aggregate fair
market value of our assets at the time we became a REIT over the adjusted tax
bases of those assets at that time. Some but not all of such capital gains
realized would be offset by the amount of any available capital loss
carryforwards. In connection with the sale of any assets, all or a portion of
such gain could be treated as ordinary income instead of capital gain and be
subject to taxation and/or the minimum REIT distribution requirements. See
"--Requirements for Qualification--Annual Distribution Requirements" below.
Requirements for Qualification
To continue to qualify as a REIT, we must continue to meet the requirements
discussed below, relating to the organization, sources of income, nature of
assets and distributions of income to stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons during at
least 335 days of a taxable year of 12 months, or during a proportionate part
of a shorter taxable year (the "100 Shareholder Rule"); (vi) not more than 50%
in value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include certain entities)
during the last half of each taxable year (the "5/50 Rule"); (vii) that makes
an election to be a REIT (or has made such election for a previous taxable
year) and satisfies all relevant filing and other administrative requirements
established by the Internal Revenue Service that must be met in order to elect
and to maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes; and (ix) that meets certain other tests, described below,
regarding the nature of its income and assets.
For purposes of the 5/50 Rule, an unemployment compensation benefits plan, a
private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
trust that is a qualified trust under Section 401(a) of the Code, however,
generally is not considered an individual and the beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. Certain entities,
including entities that file Schedules 13 D, F or G with the Commission, are
not treated as a single owner under the 5/50 Rule. For purposes of the 5/50
Rule, the beneficial owners of such entities are deemed to be the owners of our
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 "--Requirements for Qualification--Annual Record Keeping
Requirements" below.
In order to prevent a concentration of ownership of our stock that would
cause us to fail the 5/50 Rule or the 100 Shareholder Rule, we amended our
Certificate of Incorporation on April 30, 1998 to provide that, except with the
consent of our 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 us. Certain persons (an "Existing
Holder") who owned our stock 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 our 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 our
stock if such ownership would cause more than 50% in value of our outstanding
stock to be owned by five or fewer individuals or would result in our stock
being beneficially owned by fewer than 100 persons (determined without
reference to any rule of attribution).
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Since the date of the 1998 Spin Off, Tenet Healthcare Corporation ("Tenet")
has owned approximately 12% of our issued and outstanding Common Stock and,
therefore, is treated as an Existing Holder under our Certificate of
Incorporation. Except as explained below, as an Existing Holder, Tenet is
generally permitted to own in excess of the ownership limits in our Certificate
of Incorporation.
As permitted by our certificate of incorporation, we previously granted
waivers of the ownership limitations to certain of our stockholders. These
waivers initially permitted such stockholders to own over 10% of our Common
Stock 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 our issued and outstanding Common Stock. We believe that no stockholder,
other than Tenet, owns 10% or more of our issued and outstanding Common Stock,
as measured by the Code.
To qualify as a REIT, a corporation may not have (as of the end of the
taxable year) any earnings and profits that were accumulated in periods before
it elected REIT status. We believe that at December 31, 1999 we did not have
any accumulated earnings and profits that are attributable to periods during
which we were not a REIT, although the IRS would be entitled to challenge that
determination. For taxable years beginning after 2000 (and we believe 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 REIT subsidiary" is defined as any wholly owned corporate subsidiary
of a REIT. We currently have two qualified REIT subsidiaries, Ventas Specialty
I, Inc. and Ventas Finance I, Inc.
Pursuant to Treasury Regulations relating to entity classification (the
"Check-the-Box Regulations"), an unincorporated entity that has a single owner
is disregarded as an entity separate from its owner for federal income tax
purposes. We directly own a 99% general partnership interest in Ventas Realty
and indirectly own 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 Ventas for federal income tax
purposes. Similarly, Ventas Specialty I, LLC and Ventas Finance I, LLC, formed
in connection with the CMBS Transaction, are also wholly owned, single member
limited liability companies that are disregarded for federal income tax
purposes.
In the case of a REIT that is a partner in a partnership, Treasury
regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of the income and asset
tests described below. If and when Ventas Realty were to admit a partner other
than Ventas, a subsidiary of Ventas, or an entity that is disregarded under the
Check-the-Box Regulations as an entity separate from Ventas, Ventas's
proportionate share of the assets and gross income of Ventas Realty would be
treated as the assets and gross income of Ventas for purposes of applying the
requirements described herein.
Income Tests
To continue to qualify as a REIT, we must satisfy certain annual gross
income requirements. First, at least 75% of our 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,
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interest on certain types of temporary investment income. Second, at least 95%
of our gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived from such real property or temporary
investments, dividends, interest and gain from the sale or disposition of stock
or securities, or from any combination of the foregoing.
Substantially all of our gross income is derived from leasing our properties
to Kindred under the Master Leases. Rents we received or deemed received under
our leases (including the Master Leases) will qualify as "rents from real
property" in satisfying the gross income requirements described above only if
our 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 our 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, we believe that our 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 our
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 we receive from our tenants would not be considered rent or would not
otherwise satisfy the various requirements for qualification as "rents from
real property." In that case, we likely would not be able to satisfy either the
75% or the 95% gross income tests, and, as a result, would lose our REIT status.
Assuming that our leases are "true" leases for tax purposes, rents we
receive 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 we, 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," we
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 we derive no income. The
"independent contractor"
requirement, however, does not apply to the extent that the services we
provided 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 we provided,
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 our 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 our stock or an entity not more than 35% owned (directly or
indirectly) by persons who own more than 35% of our stock. If any
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class of our stock 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 we form a taxable REIT Subsidiary. See
"--Asset Tests--Taxable REIT Subsidiary."
We do not believe that we have, and do not anticipate that we 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 us to
fail to satisfy the 95% and 75% gross income tests.
Related Party Tenant
We lease substantially all of our properties to Kindred and Kindred is the
primary source of our rental revenues. Under Kindred's plan of reorganization,
Ventas Realty received 1,498,500 shares of Kindred common stock on the date
Kindred emerged from bankruptcy. Under the Code, if we own 10% or more of any
class of Kindred's issued and outstanding voting securities or 10% or more of
the value of any class of Kindred's issued and outstanding securities (the "10%
securities test"), Kindred would be a Related Party Tenant. As a Related Party
Tenant, our rental revenue from Kindred would not qualify as "rents from real
property" and we would lose our REIT status because we likely would not be able
to satisfy either the 75% or the 95% gross income test. Our loss of REIT status
would have a Material Adverse Effect on us.
Since the date Kindred emerged from bankruptcy, Kindred has issued
additional common stock and Ventas Realty has disposed of 418,186 shares of its
Kindred common stock. As of March 31, 2002, we owned 1,080,314 shares of
Kindred common stock or not more than 6.1% of the issued and outstanding shares
of Kindred. Based upon applicable tax authorities and decisions and advice from
the IRS, we believe that for purposes of the 10% securities test, our ownership
percentage in Kindred has been and will continue to be less than 9.99%.
A number of safeguards are in place to reduce the risk of our violation of
the 10% securities test as a result of our ownership of Kindred common stock
including: (a) a provision in Kindred's corporate charter requiring Kindred, at
our sole option, to purchase a portion of our Kindred common stock in the event
Kindred proposes to enter into a transaction which would cause us to violate
the 10% securities test, and (b) our ability to sell the Kindred common stock
to a third party or distribute the Kindred common stock to our stockholders,
subject to compliance with the registration requirements of the Securities Act.
See "Note 9--Transactions with Kindred--Kindred Common Stock and Registration
Rights Agreement" to the Consolidated Financial Statements.
We believe that the only greater than 10% stockholder of our Common Stock,
as measured by the Code, is Tenet. Since the date of the 1998 Spin Off, Tenet
has owned approximately 12% of our issued and outstanding Common Stock. Certain
provisions under the Code provide that any ownership interest in Kindred that
Tenet may purchase may be attributed to us. Any such attribution could cause to
us to violate the 10% securities test and lose our REIT status unless under
applicable laws, rules and regulations or interpretations, we are otherwise
deemed not to have violated the 10% securities test. To reduce the likelihood
of such an occurrence, we implemented certain protective measures. As part of
Kindred's plan of reorganization, we negotiated for the inclusion of Article
Tenth of the Kindred Corporate Charter. Article Tenth of the Kindred Corporate
Charter, which became effective on the date Kindred emerged from bankruptcy, is
designed to prohibit Tenet from gaining beneficial ownership of any Kindred
common stock if such ownership when combined with our ownership would exceed
9.9% of any class of stock or all stock in the aggregate. If Tenet should
nevertheless violate this provision, either directly or as a result of the
attribution rules under the Code, any shares of the Kindred common stock so
purchased by or attributed to Tenet will automatically, without any action by
any
75
party, become "Excess Stock" in Kindred and will be deemed to be owned by a
trust for the benefit of a third party and Tenet will have no legal title to
such "Excess Stock" in Kindred. Tenet would have the limited right to receive
certain distributions on and a certain portion of the proceeds of a sale of
such "Excess Stock" in Kindred.
In addition, under our Certificate of Incorporation, under a formal
interpretation by the Board of Directors, if Tenet should purchase any Kindred
common stock while Tenet owns in excess of 10% of our Common Stock, then all of
Tenet's holdings of our Common Stock in excess of 9.9% will automatically
become "Excess Shares" in the Company and will be deemed to be owned by a trust
for the benefit of a third party and Tenet would have no legal title to such
"Excess Shares" in the Company. Tenet would have the limited right to receive
certain distributions on and a certain portion of the proceeds of a sale of
such Excess Shares in the Company.
While we believe that these and other safeguards which we have instituted
will enable us to satisfy the 10% securities test, there can be no assurances
that such safeguards will be adequate to prevent us from violating the 10%
securities test. If we should ever violate the 10% securities test, we would
lose our status as a REIT which would have a Material Adverse Effect on us.
If we fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, we may nevertheless continues to qualify as a REIT for such
year if we are entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if our failure to meet such tests
was due to reasonable cause and not due to willful neglect, we attach a
schedule of the sources of our income to our return and any incorrect
information on the schedule was not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances we 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 us (by our 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, we may operate the foreclosed
property without an "independent contractor" or qualifying lessee. The 90-day
grace period will begin on the date we acquire possession of the property.
To maintain foreclosure property treatment after the 90 day grace period, we
must cause the property to be managed by an "independent contractor" (from whom
we derive or receive 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 us 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.
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Healthcare Properties
We are permitted to terminate leases of "qualified healthcare properties"
other than by reason of default or imminent default. In addition, we may treat
"qualified healthcare properties" as foreclosure property at the time a lease
comes to an end. Except as noted below, healthcare foreclosure properties are
subject to the foreclosure property tax and other rules under the general
foreclosure property rules.
The differences between this special healthcare rule and the general
foreclosure rule are that (i) the initial foreclosure property period is for
two rather than three years, although it may be extended for the same aggregate
six years, (ii) the lease may be terminated without requirement of default, and
(iii) income from the independent contractor is disregarded to the extent such
income is attributable to any lease of property in effect on the date of
acquisition or any lease of property entered into after such date if on such
date a lease of the new property from the REIT was in effect, and under the
terms of the new lease, the REIT receives no more than substantially the same
benefit in comparison to the lease previously in effect.
A "qualified healthcare property" includes any real property and any
personal property incident to such real property which is a "healthcare
facility" or is necessary or incidental to the use of a healthcare facility.
The qualified healthcare facility may be operated by an independent contractor
from whom the REIT does not derive or receive any income other than certain
qualifying lease income from an independent contractor.
Asset Tests
At the close of each quarter of our taxable year, we must satisfy two tests
relating to the nature of our assets. First, at least 75% of the value of our
total assets must be represented by cash or cash items (including certain
receivables), government securities, "real estate assets" or, in cases where we
raise new capital through stock or long-term (maturity of at least five years)
debt offerings, temporary investments in stock or debt instruments during the
one-year period following our 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 us (other than our 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 our total assets
(the "5% asset test"), and we 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 our 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 or stock of a taxable REIT subsidiary) (previously defined as
the "10% securities test"). In addition, no more than 20% of the value of our
assets can be represented by securities of Taxable REIT Subsidiaries (as
defined below).
If we should fail to satisfy the asset tests at the end of a calendar
quarter except for our first calendar quarter, such a failure would not cause
us to fail to qualify as a REIT or to lose our REIT status if (i) we satisfied
all of the asset tests at the close of the preceding calendar quarter and (ii)
the discrepancy between the value of our assets and the asset test requirements
arose from changes in the market values of our 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 was not satisfied, we still
could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose. We intend to
maintain adequate records of the value of our assets to ensure compliance with
the asset tests and to take such other actions as may be required to comply
with those tests.
77
We believe we have been and will continue to be in compliance with the 10%
securities test and the 5% asset test. However, there can be differing opinions
as to the methods of calculating compliance with these tests and as to the
value of our assets (including the valuation of the Kindred common stock) for
purposes of these tests. Therefore, there can be no assurance we are or will
continue to be in compliance with either of these tests. If we failed to
satisfy either of these tests, we would lose our REIT status. If we lost our
status as a REIT, it would have a Material Adverse Effect on us.
Taxable REIT Subsidiaries
We are permitted to own up to 100% of a "Taxable REIT Subsidiary." To
qualify as a taxable REIT subsidiary, both we 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 our 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 us for such activities to fail to be treated
as rents from real property. However, rents paid to us generally are not
qualified rents if we own 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 healthcare facility, subject to special rules for
certain lodging facilities.
Also, the taxable REIT subsidiary generally cannot provide to any person
rights to any brand name under which hotels or healthcare facilities are
operated, unless the rights are provided to an independent contractor to
operate or manage a lodging facility, if the rights are held by the taxable
REIT subsidiary as licensee or franchisee and the lodging facility is owned by
the taxable REIT subsidiary or leased to it by us.
The taxable REIT subsidiary cannot deduct interest paid or accrued (directly
or indirectly) to the REIT 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 us 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 us 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.
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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 whether the Taxable REIT subsidiary and the REIT are
related persons as defined in Section 267(b) or 707(b)(i) of the Code.
Annual Distribution Requirements
In order to be taxed as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (i) the sum of (A) 90% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (B) 90% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before we timely file our tax return for such year and if paid on or before the
first regular dividend payment after such declaration. To the extent that we do
not distribute all of our net capital gain or distribute at least 90%, but less
than 100%, of our "REIT taxable income," as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains and ordinary corporate tax
rates except to the extent of net operating loss or capital loss carryforwards.
If any taxes are paid in connection with the Built-In Gain Rules, these taxes
will be deductible in computing REIT taxable income. Furthermore, if we should
fail to distribute during each calendar year at least the sum of (i) 85% of our
REIT ordinary income for such year, (ii) 95% of our REIT capital gain net
income for such year (other than long-term capital gain we elect to retain and
treat as having been distributed to stockholders), and (iii) any undistributed
taxable income from prior periods, we will be subject to a 4% nondeductible
excise tax on the excess of such required distribution over the amounts
actually distributed.
It is expected that our REIT taxable income will be less than our cash flow
due to the allowance of depreciation and other non-cash deductions in computing
REIT taxable income. We anticipate that we generally will have sufficient cash
or liquid assets to enable us to satisfy the 90% distribution requirement. It
is possible, however, that we, from time to time, may not have sufficient cash
or other liquid assets to meet the 90% distribution requirement or to
distribute such greater amount as may be necessary to avoid income and excise
taxation, as a result of timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of such
income and deduction of such expenses in arriving at our 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, we may find it
necessary to borrow funds or to issue equity securities (there being no
assurance that we will be able to do so) or, if possible, to pay taxable stock
dividends, distribute other property or securities (including the Kindred
common stock) or engage in a transaction intended to enable us to meet the REIT
distribution requirements. Our ability to engage in certain of these
transactions may be restricted by the terms of the indentures and the 2002
Credit Facility. If so restricted, any such transaction may require the consent
of the lenders under the 2002 Credit Facility and/or the holders of a majority
in principal amount of the outstanding Notes, and there can be no assurance
that such consent would be obtained. Our ability to engage in certain of these
transactions is also restricted by the registration requirements under the
Securities Act, the rules and regulations of the New York Stock Exchange and
the Commission and by other applicable laws, rules and regulations. In
addition, the failure of Kindred to make rental payments under the Master
Leases would impair materially our ability to make required distributions.
Consequently, there can be no assurance that we will be able to make
distributions at the required distribution rate or any other rate.
Under certain circumstances, we 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 our deduction for
dividends paid for the earlier year. Although we may be able to avoid being
taxed on amounts distributed as deficiency dividends, we 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.
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We elected to qualify as a REIT for federal income tax purposes for the year
ended December 31, 1999. We believe that we have satisfied the requirements to
qualify as a REIT for the years ended December 31, 2000 and 2001. Although we
intend to continue to qualify as a REIT for federal income tax purposes for the
year ended December 31, 2002 and subsequent years, it is possible that
economic, market, legal, tax or other considerations may cause us to fail, or
elect not, to continue to qualify as a REIT.
Annual Record Keeping Requirements
In our first taxable year in which we qualify as a REIT and thereafter, we
are required to maintain certain records and request on an annual basis certain
information from our stockholders designed to disclose the actual ownership of
our outstanding shares. We believe that we have complied with these
requirements for the 1999, 2000 and 2001 tax years. We will be subject to a
penalty of $25,000 ($50,000 for intentional violations) for any year in which
we do not comply with the rules.
Failure to Continue to Qualify
If our election to be taxed as a REIT is revoked or terminated (e.g., due to
a failure to meet the REIT qualification tests), we will be subject to tax
(including any applicable alternative minimum tax) on our 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 us,
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,
we would be prohibited from re-electing REIT status for the four taxable years
following the year during which we ceased to qualify as a REIT, unless certain
relief provisions of the Code apply. It is impossible to predict whether we
would be entitled to such statutory relief.
Employees
As of March 31, 2002, we had 14 full-time employees and four part-time
employees. We consider our relationship with our employees to be good.
Insurance
We maintain or require in our leases that our tenants maintain appropriate
liability and casualty insurance on our assets and operations. Under the Master
Leases, Kindred is required to maintain, at its expense, certain insurance
coverage related to the properties under the Master Leases and Kindred's
operations at the related facilities. See "--Dependence on Kindred--Summary of
Kindred's Plan of Reorganization--Master Leases." There can be no assurance
that Kindred and our other tenants will maintain such insurance and any failure
by Kindred or our other tenants to do so could have a Material Adverse Effect
on us. We believe that Kindred and our other tenants are in substantial
compliance with the insurance requirements contained in their respective leases
with us.
We believe that the amount and coverage of our insurance protection is
customary for similarly situated companies in our industry. There can be no
assurance that in the future such insurance will be available at a reasonable
price or that we will be able to maintain adequate levels of insurance coverage.
Legal Proceedings
Legal Proceedings Defended and Indemnified by Kindred Under the Spin
Agreements
The following litigation and other matters arose from our operations prior
to the 1998 Spin Off or relate to assets or liabilities transferred to Kindred
in connection with the 1998 Spin Off. Under the Spin Agreements, Kindred agreed
to assume the defense, on our behalf, of any claims that (a) were pending at
the time of the 1998
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Spin Off and which arose out of the ownership or operation of the healthcare
operations or any of the assets or liabilities transferred to Kindred in
connection with the 1998 Spin Off, or (b) were asserted after the 1998 Spin Off
and which arose out of the ownership and operation of the healthcare operations
or any of the assets or liabilities transferred to Kindred in connection with
the 1998 Spin Off, and to indemnify us for any fees, costs, expenses and
liabilities arising out of such operations (the "Indemnification"). Kindred is
presently defending us in the matters described below. Under Kindred's plan of
reorganization, Kindred assumed and agreed to abide by the Indemnification and
to defend us in these and other matters as required under the Spin Agreements.
See "Note 9--Transactions with Kindred--Assumption of Certain Operating
Liabilities and Litigation" to the Consolidated Financial Statements included
elsewhere in this prospectus. However, there can be no assurance that Kindred
will continue to defend us in such matters or that Kindred 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 Kindred's public filings and information provided to us by Kindred. There
can be no assurance that Kindred has provided us with complete and accurate
information in all instances.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc. et al. was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The putative class action
claims were brought by an alleged one of our stockholders against us and
certain of our executive officers and directors. The complaint alleges that we
and certain of our current and former executive officers during a specified
time frame violated Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), by, among other things, issuing to the
investing public a series of false and misleading statements concerning our
current operations and the inherent value of our common stock. The complaint
further alleges that as a result of these purported false and misleading
statements concerning our revenues and successful acquisitions, the price of
our common stock was artificially inflated. The suit seeks damages in an amount
to be proven at trial, pre-judgment and post-judgment interest, reasonable
attorneys' fees, expert witness fees and other costs, and any extraordinary
equitable and/or injunctive relief permitted by law or equity to assure that
the plaintiff has an effective remedy. On December 27, 2001, the parties filed
a motion for the District Court to approve a settlement among the parties
requiring the payment of $3.0 million to the certified class. The proposed
settlement does not require any payments by us. On May 13, 2002, the District
Court conducted a fairness hearing and approved the settlement.
A stockholder derivative suit entitled Thomas G. White on behalf of Kindred,
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 Kindred and us against certain of
our and Kindred's current and former executive officers and directors. The
complaint alleges, among other things, that the defendants damaged Kindred and
us by engaging in violations of the securities laws, including engaging in
insider trading, fraud and securities fraud and damaging the reputation of
Kindred and us. 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 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. We believe that the
allegations in the complaint are without merit. Kindred has informed us that it
also believes the allegations in the complaint are without merit, and intends
to defend this action vigorously for and on our behalf.
A class action lawsuit entitled Sally Pratt, et al. v. Ventas, Inc. et al.
was filed on May 25, 2001 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-01CV-317-H). The putative class action
complaint alleges that we and certain of our current and former officers and
employees engaged in a fraudulent scheme to conceal the true nature and
substance of the 1998 Spin Off resulting in (a) a violation of the Racketeer
Influenced and Corrupt Organizations Act, (b) bankruptcy fraud, (c) common law
fraud, and (d) a deprivation of plaintiffs' civil rights. The plaintiffs allege
that the defendants failed to act affirmatively to explain and disclose the
fact that we were the entity that had been known as Vencor, Inc. prior to the
1998 Spin Off and that a new separate and distinct legal entity assumed the
name of Vencor, Inc. after the
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1998 Spin Off. The plaintiffs contend that the defendants filed misleading
documents in the plaintiffs' state court lawsuits that were pending at the time
of the 1998 Spin Off and that the defendants deceptively used the bankruptcy
proceedings of Vencor, Inc. (now known as Kindred Healthcare, Inc.) to stay
lawsuits against us. As a result of these actions, the plaintiffs maintain that
they and similarly situated individuals suffered and will continue to suffer
severe financial harm. The suit seeks compensatory damages (trebled with
interest), actual and punitive damages, reasonable attorneys' fees, costs and
expenses, declaratory and injunctive and any and all other relief to which the
plaintiffs may be entitled. This action was dismissed in its entirety on
February 4, 2002. The plaintiffs filed a motion requesting that the dismissal
be altered to allow the plaintiffs to resume this action if they are unable to
obtain relief in the Kindred proceedings in the Bankruptcy Court, and the
District Court granted the plaintiffs' motion on April 5, 2002. On May 6, 2002,
plaintiffs filed an appeal of the District Court's dismissal of this action.
The plaintiffs have also filed a motion with the Kindred Bankruptcy Court
requesting, among other things, that the Kindred Bankruptcy Court set aside
portions of the releases of us contained in Kindred's plan of reorganization,
as such releases apply to the plaintiffs. Kindred, on our behalf, is vigorously
contesting these motions and the appeal.
Kindred and we were informed by the Department of Justice that they were the
subject of ongoing investigations into various aspects of our former healthcare
operations. In the United States Settlement, documented in Kindred's plan of
reorganization, the United States, we and Kindred resolved all claims arising
out of the investigations by the Department of Justice and the Office of
Inspector General including the pending qui tam, or whistleblower, actions.
Under the United States Settlement, the United States was required to move to
dismiss with prejudice to the United States and the realtors (except for
certain claims which will be dismissed without prejudice to the United States
in certain of the cases) the pending qui tam actions as against us, Kindred and
any current or former officers, directors and employees of either us or
Kindred. All pending qui tam actions against us have been resolved and
dismissed by the United States Settlement.
Kindred is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. We are a party to certain legal
actions and regulatory investigations that arise from the normal course of our
prior healthcare operations which legal actions and regulatory investigations
are being defended by Kindred under the Indemnification Agreement. Neither we
nor Kindred are able to predict the ultimate outcome of pending litigation and
regulatory investigations. In addition, there can be no assurance that the
Center for Medicare and Medicaid Services (formerly known as United States
Healthcare Financing Administration) ("CMS") or other regulatory agencies will
not initiate additional investigations related to Kindred's business or our
prior healthcare business in the future, nor can there be any assurance that
the resolution of any litigation or investigations, either individually or in
the aggregate, would not have a material adverse effect on Kindred's liquidity,
financial position or results of operations, which in turn could have a
Material Adverse Effect on us.
Unasserted Claims--Potential Liabilities Due to Fraudulent Transfer
Considerations, Legal Dividend Requirements and Other Claims
The 1998 Spin Off, including the simultaneous distribution of the Kindred
common stock to the Ventas stockholders (the "Distribution"), is subject to
review under fraudulent conveyance laws. 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.
We believe that the Distribution was proper and that 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
we were 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.
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Other Legal Proceedings
We and Atria, Inc. ("Atria") have been engaged in ongoing discussions
regarding the parties' respective rights and obligations relative to the
issuance of mortgage resident bonds (the "Bonds") to the new residents of New
Pond Village, a senior housing facility in Walpole, Massachusetts, owned by us
and leased to and operated by Atria. See "Note 10--Commitment and
contingencies," to the Consolidated Financial Statements. On August 6, 2001,
Atria filed a lawsuit styled Atria, Inc. v. Ventas Realty, Limited Partnership
in the Superior Court Department of the Trial Court in Norfolk County,
Massachusetts (Civil Action Number 01 01233). The complaint alleges that we
have a duty to sign and issue Bonds to new residents of New Pond Village and
that, as a result of an alleged failure of us to issue Bonds, we have, among
other things, breached contractual obligations under the Bond Indenture. The
complaint seeks a declaration that Atria's indemnity obligation in our favor
relating to the Bonds is void and unenforceable and injunctive and declaratory
relief requiring us to sign and issue Bonds to new residents of New Pond
Village. The complaint also seeks damages, interest, attorneys' fees and other
costs. We believe that the allegations in the complaint are without merit. Our
motion to dismiss was denied by the trial court. The trial court's decision was
affirmed by an appellate court on January 24, 2002. We have asserted
counterclaims against Atria and we intend to defend this action and pursue our
counterclaims vigorously.
We are 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 us under theories of
breach of contract, tortious interference with contract and abuse of process.
These counterclaims allege, among other things, that we wrongfully, and in
violation of the terms of our 1998 credit facility, (a) failed to recognize an
assignment to Black Diamond of certain notes issued under our 1998 credit
facility, (b) failed to issue to Black Diamond new notes under our 1998 credit
facility, and (c) executed the Waiver and Extension Agreement between us and
our lenders in October 1999. The counterclaims further claim that we acted
tortiously in commencing the action against the defendants. The counterclaims
seek damages of $11,796,875 (the principal amount of our Bridge Loan under our
199 credit facility 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. We dispute the material
allegations contained in Black Diamond's counterclaims and we intend to pursue
our claims and defend the counterclaims vigorously.
We are party to various lawsuits arising in the normal course of our
business. It is the opinion of management that, except as set forth under the
heading entitled "--Legal Proceedings," the disposition of these lawsuits will
not, individually or in the aggregate, have a Material Adverse Effect on us. If
management's assessment of our liability with respect to these actions is
incorrect, such lawsuits could have a Material Adverse Effect on us.
Except for the United States Settlement, no provision for liability, if any,
resulting from the aforementioned litigation has been made in the consolidated
financial statements as of December 31, 2001 or the unaudited condensed
consolidated financial statements as of March 31, 2002.
83
MANAGEMENT
Ventas Realty and Ventas Capital
Ventas Realty is managed by Ventas, its general partner. Ventas Capital is a
wholly owned subsidiary of Ventas Realty. Set forth below are the names, ages
(as of May 28, 2002) and positions of the persons who are the current executive
officers and directors of Ventas Capital.
Name Age Position
- ---- --- --------
Debra A. Cafaro............... 44 Chief Executive Officer, President and Director
T. Richard Riney.............. 44 Executive Vice President, General Counsel,
Corporate Secretary and Director
John C. Thompson.............. 35 Executive Vice President, Chief Investment
Officer and Director
Ventas
Set forth below are the names, ages (as of May 28, 2002) and present and
past positions of the persons who are our current executive officers and
directors.
Name Age Position
- ---- --- --------
W. Bruce Lunsford............. 54 Chairman of the Board
Debra A. Cafaro............... 44 Chief Executive Officer, President and Director
T. Richard Riney.............. 44 Executive Vice President, General Counsel and
Corporate Secretary
John C. Thompson.............. 35 Executive Vice President and Chief Investment
Officer
Douglas Crocker, II........... 62 Director
Ronald G. Geary............... 55 Director
Jay M. Gellert................ 48 Director
Gary W. Loveman............... 42 Director
Sheli Z. Rosenberg............ 60 Director
W. Bruce Lunsford, one of our founders, certified public accountant and
attorney, has served as our Chairman of the Board since we commenced operations
on May 1, 1998. From May 1, 1998 through December 1998, he also served as our
President and Chief Executive Officer. Mr. Lunsford was a founder of Vencor,
Inc. and served as Chairman of the Board, Chief Executive Officer and President
of Vencor, Inc. from the time it commenced operations in 1985 until May 1,
1998, the date of the 1998 Spin Off. Mr. Lunsford served as Chairman of the
Board and Chief Executive Officer of the new corporation, Vencor, Inc. (now
known as Kindred) (NASDAQ: KIND), from May 1, 1998 until January 21, 1999 and
as President of Kindred from May 1, 1998 until November 1998. Mr. Lunsford is
also a director of National City Bank, Kentucky, Inc. and Res-Care, Inc.
(NASDAQ: RSCR) ("Res-Care").
Debra A. Cafaro joined us as Chief Executive Officer and President on March
5, 1999. From April 1997 to May 1998, she served as President and Director of
Ambassador Apartments, Inc. (NYSE: AAH), a real estate investment trust. Ms.
Cafaro was a founding member of the Chicago law firm Barack Ferrazzano
Kirschbaum Perlman & Nagelberg, becoming a partner in 1987, where her areas of
concentration were real estate, finance and corporate transactions. From 1988
to 1992 Ms. Cafaro served as an Adjunct Professor of Law at Northwestern
University Law School. Ms. Cafaro is admitted to the Bar in Illinois and
Pennsylvania. She is a member of the Board of Governors of NAREIT, the Visiting
Committee of the University of Chicago Law School and a Chapter Director of the
National Association of Corporate Directors.
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T. Richard Riney has served as our Executive Vice President, General Counsel
and Secretary from May 1998 to the present. He served as Transactions Counsel
of Vencor, Inc. from April 1996 to April 1998. From May 1992 to March 1996, Mr.
Riney was a partner of Hirn, Reed & Harper, a law firm based in Louisville,
Kentucky, where his areas of concentration were real estate and corporate
finance. Mr. Riney is a member of NAREIT.
John C. Thompson has served as our Executive Vice President and Chief
Investment Officer since January 1, 2002. Mr. Thompson served as our Vice
President, Corporate Development from January 1999 to December 31, 2001. He
served as Director of Acquisitions from May 1998 to January 1999. Mr. Thompson
served as Director of Development of Vencor, Inc. from April 1996 to May 1998
and as Development Manager from 1993 to April 1996. Mr. Thompson is a member of
NAREIT.
Douglas Crocker, II has been one of our directors since September 1998. Mr.
Crocker has been a Trustee, Chief Executive Officer and President of Equity
Residential Properties Trust (NYSE: EQR) ("EQR"), the nation's largest
apartment real estate investment trust, since March 1993. Mr. Crocker has been
President and Chief Executive Officer of First Capital Corporation, previously
a sponsor of public limited real estate partnerships, since December 1992 and a
director of First Capital Corporation since January 1993. Mr. Crocker also
served as Executive Vice President of Equity Financial and Management Company,
a subsidiary of Equity Group Investments, Inc. ("EGI") which provides strategic
direction and services for EGI's real estate and corporate activities, from
November 1992 until March 1997. Mr. Crocker is also a director of Wellsford
Real Properties, Inc., a real estate merchant banking firm.
Ronald G. Geary, an attorney and certified public accountant, has served as
one of our directors since May 1, 1998. Mr. Geary has served as a director and
President of Res-Care, Inc., a provider of residential training and support
services for persons with developmental disabilities and certain vocational
training services, since February 1990 and as Chief Executive Officer of
Res-Care since 1993. Since June 1998, Mr. Geary also has served as Chairman of
the Board of Res-Care. Prior to becoming Chief Executive Officer, Mr. Geary was
Chief Operating Officer of Res-Care from 1990 to 1993. Mr. Geary is also a
director of Alterra Healthcare Corporation (AMEX: ALI), a national assisted
living company operating assisted living residences and providing assisted
living services.
Jay M. Gellert joined us as a director on September 10, 2001. Since 1998,
Mr. Gellert has been President and Chief Executive Officer of Health Net, Inc.
(formerly known as Foundation Health Systems, Inc.) (NYSE: HNT) ("Health Net"),
an integrated managed care organization which administers the delivery of
managed healthcare services. Previously, Mr. Gellert was President and Chief
Operating Officer of Health Net from May 1997 until August 1998 and from April
1997 to May 1997, Mr. Gellert served as Executive Vice President and Chief
Operating Officer of Health Net. From June 1996 to March 1997, Mr. Gellert
served as President and Chief Operating Officer of Health Net, then operating
as Health Systems International, Inc. ("HSI"), a health maintenance
organization. He served on the Board of Directors of HSI from June 1996 to
April 1997. Prior to joining HSI, Mr. Gellert directed strategic advisory
engagements for Shattuck Hammond Partners. Mr. Gellert serves on the boards of
the American Association of Health Plans, MedUnite, Inc. and Miavita, Inc.
Gary W. Loveman has been one of our directors since September 10, 2001. Mr.
Loveman has been President of Harrah's Entertainment Inc. (NYSE: HET)
("Harrah's"), a casino entertainment company, since April 23, 2001, a director
since February 2000 and Chief Operating Officer of Harrah's since May 1998. Mr.
Loveman was a Professor of Business Administration at Harvard Graduate School
of Business Administration from May 1989 to 1998, where his responsibilities
included teaching and research in the field of service management and advising
large service companies. Mr. Loveman is also a director of Coach, Inc. (NYSE:
COH), a marketer of modern classic American accessories.
Sheli Z. Rosenberg has been one of our directors since January 26, 2001. Ms.
Rosenberg has been Vice Chairman of Equity Group Investments, LLC ("EGI LLC"),
an investment company, since January 1, 2000 and Chief Executive Officer and
President of EGI LLC from January 1, 1999 to January 1, 2000. From November
85
1994 until 1999, Ms. Rosenberg served as Chief Executive Officer, president and
a director of EGI LLC. Ms. Rosenberg was a principal in the law firm of
Rosenberg & Liebentritt, P.C., from 1980 to 1997. Ms. Rosenberg is a trustee of
EQR and Equity Office Properties Trust (NYSE: EOP), an office building REIT.
Ms. Rosenberg is also director of Capital Trust, Inc. a specialized finance
company, Manufactured Home Communities, Inc. (NYSE: MHC), a manufactured home
community real estate investment trust, CVS Corporation (NYSE: CVS), a drug
store chain, Dynegy Inc. (NYSE: DYN), a supplier of electricity and natural
gas, Cendant Corporation (NYSE: CD), a provider of travel related, real estate
related and direct marketing consumer and business services, and iDine Rewards
Network, Inc. (formerly known as Transmedia Network, Inc.), a marketer of card
based savings plans.
86
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1998, we adopted a policy which provides that any transaction between
us and any of our officers, directors or their affiliates must be approved by
the disinterested members of the Board of Directors and must be on terms no
less favorable to us than those available from unaffiliated parties.
Tax Loan
In connection with the 1998 Spin Off, we agreed to loan Mr. Lunsford (former
Chief Executive Officer and present Chairman of the Board of Directors) an
amount sufficient to cover his estimated income taxes payable as a result of
the distribution of Vencor common stock. Mr. Lunsford's tax loan is evidenced
by a promissory note which has a term of ten years and bears interest at 5.77%.
Principal on the tax loan is scheduled to be repaid in ten equal annual
installments beginning on June 15, 1999. Interest is payable quarterly;
however, any interest payment on the tax loan is forgiven if Mr. Lunsford
remains employed in his position with us on the date on which such interest
payment is due. Moreover, in the event of a change in control of the Company,
the entire balance of Mr. Lunsford's tax loan will be forgiven. The tax loan
was based on estimated tax payments required to be made by Mr. Lunsford as a
result of the distribution of Kindred common stock. The principal amount of the
tax loan to Mr. Lunsford was $3,750,000. In connection with the amendment of
his employment agreement at the time of his resignation as President and Chief
Executive Officer in December 1998, the terms of the tax loan were amended. The
tax loan will be restructured if he is subject to an Involuntary Termination,
such that any payment of the principal will be made in equal annual
installments with a final maturity date ten years from the date of the tax
loan. In addition, if Mr. Lunsford resigns as Chairman at the request of the
Board for any reason other than "cause", all amounts owed under Mr. Lunsford's
tax loan will be forgiven. As of March 31, 2002 the outstanding principal
balance of the tax loan was $2,625,000.
Transactions with Res-Care
In October 1998, we acquired eight personal care facilities and related
facilities for approximately $7.1 million from Tangram. Tangram is a wholly
owned subsidiary of Res-Care of which Mr. Geary is Chairman, President and
Chief Executive Officer and Mr. Lunsford is a director. Also in 1998, Res-Care
acquired Tangram in a cash merger. The purchase price for the Tangram
facilities was determined by an appraisal conducted by Graham & Associates,
Inc., San Marcos, Texas, a certified General Real Estate Appraiser for the
State of Texas. We lease the Tangram facilities to Tangram pursuant to a master
lease agreement which is guaranteed by Res-Care. During 2001, Tangram paid us
$779,239 in rent. During the three months ended March 31, 2002 Tangram paid us
$199,012 in rent. We believe that the terms of the master lease agreement
represent market rates.
Office Lease
Effective March 15, 1999, we relocated our principal executive offices and
entered into a lease agreement with Summit II Partners, Limited (the
"Landlord"). On November 29, 2001, the Landlord and we amended the lease
agreement to add additional office space (as amended, the "Office Lease"). The
Office Lease requires us to pay annual rent of $110,161 to the Landlord. Mr.
Lunsford owns an indirect equity interest in the Landlord of approximately 22%.
We believe that the terms of the Office Lease represent market rates.
Hospital Sublease
On March 6, 2000, we consented to the sublease by Kindred to Xodiax, LLC
("Xodiax") of approximately 8,352 square feet in a data center building located
on the hospital campus known as Kindred Hospital Louisville. The Kindred
Hospital Louisville campus is owned by us and is leased to Kindred pursuant to
the terms of a Master Lease between us and Kindred. The sublease is subject and
subordinate to the terms of the Master Lease. Total annual rent under the
sublease is $330,279. Upon the occurrence of certain events, at our option,
Xodiax will pay rent under the sublease directly to us and/or attorn to us
under the sublease. Mr. Lunsford is the Chairman of Xodiax and owns an equity
interest in Xodiax of approximately 13.5%.
87
Cafaro Loans
Under the terms of Ms. Cafaro's employment agreement, we made loans in the
aggregate principal amount of $67,250 to Ms. Cafaro in 1999, and $184,551 to
Ms. Cafaro in 2000, $593,893 to Ms. Cafaro in 2001 and $692,651 during the
three months ended March 31, 2002 to pay all federal, state, local and other
taxes payable upon the vesting of restricted stock awards previously granted to
her. The principal amount of all of Ms. Cafaro's tax loans is payable on March
5, 2009. The tax loans bear interest at the lowest applicable federal rate.
Interest on the tax loans is payable annually out of and only to the extent of
dividends from the vested restricted stock. Ms. Cafaro has paid interest on her
tax loans through December 31, 2001. Each of Ms. Cafaro's tax loans is secured
by a pledge of all of the restricted shares to which such tax loan relates, and
the tax loans are otherwise nonrecourse to Ms. Cafaro. Ms. Cafaro's tax loans
are to be forgiven if there is a change of control of the Company, Ms. Cafaro's
employment with us is terminated by us for any reason other than "cause" or by
Ms. Cafaro for "good reason" or due to the death or disability of Ms. Cafaro.
In the event either a loan or its forgiveness results in taxable income to Ms.
Cafaro, we are required to pay to Ms. Cafaro an amount sufficient for the
payment of all taxes relative to the loan or its forgiveness.
Separation Agreements
On February 29, 2000, we entered into a separation and release agreement
with our former Executive Vice President and Chief Financial Officer. The
separation agreement was entered into in connection with his resignation as our
Executive Vice President and Chief Financial Officer, effective February 9,
2000. The separation agreement provided for a lump sum severance payment of
approximately $510,000 and certain other consideration from us, and an
extension of certain employee benefits for a one-year period following the date
the separation agreement became effective.
We entered into a separation agreement and release of claims with Thomas T.
Ladt pursuant to which Mr. Ladt resigned as our President, Chief Executive
Officer and Chief Operating Officer and from our Board of Directors as of March
5, 1999. Mr. Ladt's separation agreement provides for a lump sum payment of
approximately $1.3 million and certain other consideration from us, and an
extension of certain employee benefits for a two-year period following the date
of his resignation. We further agreed to amend a tax loan that we 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.
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DESCRIPTION OF OTHER INDEBTEDNESS AND OBLIGATIONS
On a consolidated basis at April 30, 2002, we had approximately $220.3
million outstanding under the 2002 Credit Facility and $224.4 million
outstanding under the CMBS Loan.
On April 17, 2002, we used (i) the proceeds from the offering of the
Original Notes, (ii) certain borrowings under the 2002 Credit Facility and
(iii) cash on hand to repay all outstanding indebtedness under the 2000 Credit
Agreement and to pay breakage costs for the partial termination of the
associated interest rate swap agreement. The 2000 Credit Agreement is no longer
in effect.
The 2002 Credit Facility
On the Closing Date, we, as Guarantor, and Ventas Realty, as borrower,
entered into the 2002 Credit Facility. Under the 2002 Credit Facility, Ventas
Realty obtained a $350.0 million credit facility consisting of the $60.0
million Tranche B Term Loan and the $290.0 million Revolving Credit Facility.
The 2002 Credit Facility also permits Ventas Realty to obtain an additional
Tranche C Term Loan in an amount of not less than $50.0 million, but not more
than the remaining unused portion of the Total Commitments, subject to the
conditions set forth in the 2002 Credit Facility. Ventas Realty has the option
to increase the Total Commitments (in the form of term and/or revolving loans)
to an amount not to exceed $450.0 million, subject to the satisfaction of
certain conditions set forth in the 2002 Credit Facility.
The outstanding aggregate principal balance of the Tranche B Term Loan, the
Tranche C Term Loan and the Revolving Credit Facility may not collectively
exceed either (a) the Borrowing Base or (b) the Total Commitments. As of the
Closing Date, the outstanding principal balance of the Tranche B Term Loan was
$60.0 million and the outstanding principal balance under the Revolving Credit
Facility was $160.3 million. As of the Closing Date, there was no Tranche C
Term Loan.
Amounts under the Revolving Credit Facility may be borrowed and reborrowed
from time to time, subject to the conditions set forth in the 2002 Credit
Facility; provided, however, that the Revolving Credit Facility matures and
must be repaid in full on April 17, 2005. The principal amount of the Tranche B
Term Loan is payable in installments of $150,000 on the last day of each fiscal
quarter, beginning September 30, 2002, and matures and must be repaid in full
on April 17, 2005.
Borrowings outstanding under the 2002 Credit Facility bear interest at an
Applicable Percentage (as defined below) over either (i) a fluctuating rate per
annum equal to the higher of (a) the Federal Funds Rate (as defined in the 2002
Credit Facility) in effect for the relevant period, plus one half of one
percent (0.5%) and (b) the Prime Rate (as defined in the 2002 Credit Facility)
in effect for the relevant period (the "Base Rate") or (ii) a fluctuating
LIBOR-based rate per annum (the "Eurodollar Rate"). With respect to Tranche B
Term Loans, the Applicable Percentage is (a) 2.50% for loans bearing interest
at the Eurodollar Rate, and (b) 1.00% for loans bearing interest at the Base
Rate. With respect to revolving loans under the Revolving Credit Facility:
(a) If the senior unsecured (non-credit enhanced) long term debt of Ventas
Realty or the Company is rated BBB- or better by S&P and Baa3 or better
by Moody's (in the case of a split rating the lower rating will apply),
the Applicable Percentage is as follows: (i) 0.25% for revolving loans
bearing interest at the Base Rate and (ii) 2.25% for revolving loans
bearing interest at the Eurodollar Rate.
(b) Otherwise, the Applicable Percentage is based on the Consolidated
Leverage Ratio (as defined in the 2002 Credit Facility) as follows:
Pricing Consolidated Applicable Percentage for Applicable Percentage
Level Leverage Ratio Eurodollar Rate Loans for Base Rate Loans
----- -------------------------------------- ------------------------- ---------------------
I (less or =)4.25 2.50% 1.00%
II (greater than)4.25 but (less than)4.75 2.75% 1.25%
III (greater or =)4.75 3.00% 1.50%
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The Consolidated Leverage Ratio is generally the ratio of our and our
consolidated subsidiaries' debt for borrowed money (excluding the United States
Settlement, unrestricted cash and cash equivalents) to our and our consolidated
subsidiaries' trailing twelve-month EBITDA, as more particularly described in
the 2002 Credit Facility. The Applicable Percentage as of the Closing was based
on pricing level II.
Loans outstanding under the 2002 Credit Facility are pre-payable without
premium or penalty, provided that loans bearing interest at the Eurodollar Rate
are subject to customary "breakage" costs if repaid prior to the end of an
interest period. Ventas Realty has agreed to pay various fees in connection
with the 2002 Credit Facility, including without limitation, issuance fees for
letters of credit and fees for the unused portion of the total committed amount
of the Revolving Credit Facility. Ventas Realty may permanently reduce or
terminate the total committed amount of the Revolving Credit Facility, subject
to the conditions set forth in the 2002 Credit Facility.
We (and any other owner of mortgaged property securing Ventas Realty's
obligations under the 2002 Credit Facility from time to time) have guaranteed
Ventas Realty's obligations under the 2002 Credit Facility. Such obligations
are secured by liens on certain of Ventas Realty's real property assets and any
related leases, rents and personal property, and, at Ventas Realty's option,
may be secured by certain cash collateral from time to time. Currently, 59 real
properties owned by Ventas Realty are mortgaged to secure the 2002 Credit
Facility. All 59 Borrowing Base Properties are leased to Kindred pursuant to
Amended Master Lease No. 1.
The Borrowing Base under the 2002 Credit Facility is, as determined at any
time, an amount equal to the sum of (i) sixty-five percent (65%) of the
aggregate property value of the Borrowing Base Properties, plus (ii) one
hundred percent (100%) of amounts on deposit in certain cash collateral or
pledged accounts. The aggregate principal amount of the obligations outstanding
under the 2002 Credit Facility (including the revolving loans under the
Revolving Credit Facility, the Tranche B Term Loan and the Tranche C Term Loan)
may not at any time exceed the Borrowing Base. Ventas Realty may at any time
include additional real estate assets (which must satisfy certain conditions
set forth in the 2002 Credit Facility) in the Borrowing Base. Subject to the
terms and conditions set forth in the 2002 Credit Facility, Ventas Realty may
also obtain a release of various Borrowing Base Properties from the liens and
security interests encumbering such properties.
The 2002 Credit Facility contains a number of restrictive covenants,
including, without limitation, covenants pertaining to (i) the incurrence of
additional indebtedness; (ii) limitations on liens; (iii) customary
restrictions on certain dividends, distributions and other payments (the sum of
all restricted payments made by us after the Closing Date can not exceed the
sum of (a) 95% of the Company's aggregate cumulative FFO measured from the
beginning of the second quarter 2002, and (b) certain additional amounts more
particularly described in the 2002 Credit Facility); (iv) mergers, sales of
assets and other transactions; (iv) requirements regarding the maintenance of
certain (a) consolidated leverage ratios, (b) consolidated fixed charge
coverage ratios and (c) consolidated adjusted net worth; (v) transactions with
affiliates; (vi) permitted business and development activities and uses of loan
proceeds; and (vii) changes to material agreements. The 2002 Credit Facility
contains various potential events of default and is, among other things,
cross-defaulted with certain other indebtedness and obligations of Ventas
Realty and the Company.
CMBS Transaction
On December 12, 2001 we raised $225.0 million in gross proceeds from the
completion of the CMBS Transaction. Under the CMBS Loan Agreement, Ventas
Finance obtained a loan in the principal amount of $225.0 million from Merrill
Lynch Mortgage Lending, Inc., as lender, and bearing interest at a nominal
weighted average rate of one-month LIBOR plus 1.4589%. The CMBS Loan is
comprised of six components:
. a component in the original principal amount of $125.23 million which
bears interest at LIBOR plus 0.8665%;
. a component in the original principal amount of $17.97 million which
bears interest at LIBOR plus 1.1665%;
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. a component in the original principal amount of $8.86 million which bears
interest at LIBOR plus 1.5165%;
. a component in the original principal amount of $26.83 million which
bears interest at LIBOR plus 1.9665%;
. a component in the original principal amount of $26.83 million which
bears interest at LIBOR plus 2.6665%; and
. a component in the original principal amount of $19.28 million which
bears interest at LIBOR plus 3.1665%.
Principal of and interest on the CMBS Loan is payable monthly, commencing
January 9, 2002. Principal payments on the CMBS Loan were calculated based upon
a 25-year amortization schedule and an assumed interest rate of 9.46% per
annum. The CMBS Loan matures on December 9, 2006 at which time a principal
balloon payment of approximately $211.0 million will be due, assuming all
scheduled amortization payments are made and no prepayments are made on the
CMBS Loan. The CMBS Loan may be prepaid in whole or in part at any time and
from time to time provided that any prepayment on or before January 9, 2003
must be accompanied by a payment of 1% of the amount of the principal amount
prepaid.
The CMBS Loan is secured by liens on forty skilled nursing facilities
transferred by Ventas Realty to Ventas Finance and leased to Kindred under the
CMBS Master Lease and any related leases, rents and personal property. Except
for certain customary exceptions, the CMBS Loan is non-recourse to Ventas
Finance and Ventas.
Monthly rental amounts under the CMBS Master Lease are deposited directly by
Kindred into a central account for the benefit of the CMBS Lender. Amounts in
the central accounts are applied to pay the monthly principal and interest
payments on the CMBS Loan and to fund certain reserve accounts required under
the CMBS Loan Agreement. Amounts remaining in the central account after the
payment of the current month's principal and interest payment and the funding
of the reserve accounts are distributed to Ventas Finance, provided no event of
default has occurred and is continuing under the CMBS Loan Agreement and
provided a Cash Flow Sweep Event has not occurred. The central account is swept
on a daily basis.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Capital Resources--CMBS Transaction."
United States Settlement
Under the United States Settlement, we will pay $103.6 million to the United
States, of which $34.0 million was paid on the date Kindred emerged from
bankruptcy. The balance of $60.4 million bears interest at 6% per annum and is
payable in equal quarterly installments over a five-year term commencing on
June 30, 2001 and ending in 2006. We made the first three quarterly
installments under the settlement through March 31, 2002.
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DESCRIPTION OF NOTES
You can find the definitions of certain terms used in this description under
the subheading "--Certain Definitions." In this description, the word
"Partnership" refers only to Ventas Realty, Limited Partnership and not to any
of its subsidiaries. The term "Issuers" refers to the Partnership and Ventas
Capital Corporation, collectively. The terms "we," "us" and "our" refer to
Ventas, Inc. and not to any of its subsidiaries.
The Original 2009 Notes and the New 2009 Notes are referred to collectively
herein as the "2009 Notes." The Original 2012 Notes and the New 2012 Notes are
referred to collectively herein as the "2012 Notes." The Original 2009 Notes
and the Original 2012 Notes are referred to collectively, herein, as the
"Original Notes." The New 2009 Notes and the New 2012 Notes are referred to
collectively, herein, as the "New Notes." The 2009 Notes and the 2012 Notes are
referred to collectively, herein, as the "Notes."
The New 2009 Notes, like the Original 2009 Notes, will be issued under an
indenture (the "2009 Note Indenture") among the Issuers, the Guarantors and
U.S. Bank National Association, as trustee (the "2009 Note Trustee"). The New
2012 Notes, like the Original 2012 Notes, will be issued under a separate
indenture (the "2012 Note Indenture" and, together with the 2009 Note
Indenture, the "Indentures") among the Issuers, the Guarantors and U.S. Bank
National Association, as trustee (the "2012 Note Trustee" and, together with
the 2009 Note Trustee, the "Trustees"). The Original Notes and the New Notes
issued under each Indenture will be considered collectively to be a single
class for all purposes under that Indenture, including waivers, amendments,
redemptions and offers to purchase. The terms of the Notes include those stated
in the Indentures and those made part of the Indentures by reference to the
Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
Indentures and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the Indentures and the
registration rights agreement because they, and not this description, define
your rights as holders of the Notes. Copies of the Indentures and the
registration rights agreement are available as set forth below under
"--Additional Information." Certain defined terms used in this description but
not defined below under "--Certain Definitions" have the meanings assigned to
them in the Indentures.
We will be obligated to pay liquidated damages on the Original Notes in the
circumstances described under "The Exchange Offer--Liquidated Damages." If the
Exchange Offer is completed on the terms and within the period contemplated by
this prospectus, no liquidated damages will be payable. The New Notes will not
contain any provisions regarding the payment of liquidated damages.
The registered holder of a Note will be treated as the owner of it for all
purposes. Only registered holders will have rights under the Indentures.
Brief description of the Notes and the Guarantees
The Notes
The Notes:
. are general unsecured obligations of the Issuers;
. are pari passu in right of payment with each other and with all other
existing and future unsecured senior Debt of the Issuers;
. are senior in right of payment to any future subordinated Debt of the
Issuers; and
. are unconditionally guaranteed by the Guarantors.
However, the Notes will be effectively subordinated to all borrowings under
the 2002 Credit Agreement, with respect to the assets pledged to secure those
borrowings. The Credit Agreement is required to be secured by
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properties with a value equal to at least 1.54x the outstanding borrowings
under the Credit Agreement. The Notes will also be structurally subordinated to
the indebtedness and other obligations of our Unrestricted Subsidiaries and any
future Excluded Joint Ventures with respect to the assets of such entities. The
subsidiaries formed in connection with the CMBS transaction will initially be
Unrestricted Subsidiaries; therefore the Notes will be structurally
subordinated to approximately $225.0 million of indebtedness secured by the 40
nursing facilities owned by such Unrestricted Subsidiaries. See "Risk
Factors--Risks Relating to the Terms of and Market for the Notes--Because the
Notes will be structurally subordinated to the obligations of our subsidiaries
who are not Guarantors, you may not be fully repaid if we become insolvent" and
"Risk Factors--Risks Relating to the Terms of and Market for the Notes--Because
the Notes that you hold are unsecured, you may not be fully repaid if we become
insolvent."
The Guarantees
The Notes are guaranteed by the Partnership's parent, Ventas, Inc., and each
of Ventas, Inc.'s current Restricted Subsidiaries.
Each guarantee of the Notes:
. is a general unsecured obligation of the Guarantor; and
. is pari passu in right of payment with any future senior Debt of that
Guarantor.
See "Risk Factors--Risks Relating to the Terms of and Market for the
Notes--The guarantees provided by us and our subsidiaries are subject to
certain defenses that may limit your right to receive payment on the Notes."
Ventas Capital Corporation
Ventas Capital Corporation is a wholly owned subsidiary of the Partnership
that was incorporated in Delaware for the purpose of serving as a co-Issuer of
the Notes in order to facilitate the offering. The Partnership believes that
certain prospective purchasers of the Notes may be restricted in their ability
to purchase debt securities of partnerships, such as the Partnership, unless
such debt securities are jointly issued by a corporation. Ventas Capital
Corporation will not have any substantial operations or assets and will not
have any revenues. As a result, prospective purchasers of the Notes should not
expect Ventas Capital Corporation to participate in servicing the interest and
principal obligations on the Notes. See "--Certain Covenants."
Unrestricted Subsidiaries
Certain of our subsidiaries are Unrestricted Subsidiaries under the
Indentures.
Principal, Interest and Maturity
The 2009 Note Indenture provides that the Issuers will initially issue 2009
Notes in the principal amount of $175.0 million. The Issuers may, without the
consent of the holders, increase such principal amount in the future on the
same terms and conditions and with the same CUSIP number(s) as the 2009 Notes
initially offered. The 2012 Note Indenture also provides that the Issuers will
initially issue 2012 Notes in the principal amount of $225.0 million. The
Issuers may, without the consent of the holders, increase such principal amount
in the future on the same terms and conditions and with the same CUSIP
number(s) as the 2012 Notes initially offered. Any offering of additional Notes
is subject to the covenants of the Indentures described below, including the
covenant described under the caption "--Certain Covenants--Limitations on
Incurrence of Debt." The Notes and any additional Notes subsequently issued
under the same Indenture may be treated as a single class for all purposes
under the applicable Indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. The Issuers will issue Notes in
denominations of $1,000 and integral multiples of $1,000.
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The 2009 Notes
The 2009 Notes will mature on May 1, 2009. The 2009 Notes will bear interest
at the rate per annum set forth on the cover page of this prospectus from the
date of original issuance, or from the immediately preceding interest payment
date to which interest has been paid. Interest is payable semi-annually in
arrears on May 1 and November 1 of each year, commencing November 1, 2002, to
the persons in whose names the 2009 Notes are registered at the close of
business on April 15 and October 15, as the case may be, immediately before the
interest payment dates. Accrued interest is also payable on the date of
maturity or any earlier redemption of the 2009 Notes. Interest on the 2009
Notes will be computed on the basis of a 360-day year of twelve 30-day months.
The 2012 Notes
The 2012 Notes will mature on May 1, 2012. The 2012 Notes will bear interest
at the rate per annum set forth on the cover page of this prospectus from the
date of original issuance, or from the immediately preceding interest payment
date to which interest has been paid. Interest is payable semi-annually in
arrears on May 1 and November 1 of each year, commencing November 1, 2002, to
the persons in whose names the 2012 Notes are registered at the close of
business on April 15 and October 15, as the case may be, immediately before the
interest payment dates. Accrued interest is also payable on the date of
maturity or any earlier redemption of the 2012 Notes. Interest on the 2012
Notes will be computed on the basis of a 360-day year of twelve 30-day months.
Guarantees
The Notes will be guaranteed by the Partnership's parent, Ventas, Inc., and
each of Ventas, Inc.'s current Restricted Subsidiaries. All future Restricted
Subsidiaries (other than Excluded Joint Ventures) will also guarantee the
Notes. These Guarantees will be joint and several obligations of the
Guarantors. The obligations of each Guarantor under its Guarantee will be
limited as necessary to prevent that Guarantee from constituting a fraudulent
conveyance under applicable law. See "Risk Factors--Risks Relating to the Terms
of and Market for the Notes--Federal and state statutes allow courts, under
specific circumstances, to void the guarantees and require noteholders to
return payments received from the Issuers or the Guarantors."
A Guarantor may not sell or otherwise dispose of all or substantially all of
its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than the Issuer or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or Event
of Default exists; and
(2) subject to the provisions of the following paragraph, the Person
acquiring the property in any such sale or disposition or the Person
formed by or surviving any such consolidation or merger assumes all the
obligations of that Guarantor under the Indentures, its Guarantee and
the registration rights agreement pursuant to supplemental Indentures
satisfactory to the applicable Trustee.
The Guarantee of a Guarantor will be released, and any Person acquiring
assets (including by way of merger or consolidation) or Capital Stock of a
Guarantor in accordance with the provisions of (1) or (2) below shall not be
required to assume the obligations of any such Guarantor:
(1) in connection with any sale or other disposition of all or substantially
all of the assets of that Guarantor (including by way of merger or
consolidation) to a Person that is not (either before or after giving
effect to such transaction) a Restricted Subsidiary (other than a
Permitted Joint Venture) of Ventas, Inc., if the sale or other
disposition complies with the "Asset Sale" provisions of the applicable
Indenture;
(2) in connection with any sale of all of the Capital Stock of a Guarantor
to a Person that is not (either before or after giving effect to such
transaction) a Restricted Subsidiary (other than a Permitted Joint
Venture) of Ventas, Inc., if the sale complies with the "Asset Sale"
provisions of the applicable Indenture;
94
(3) if the Issuers or Ventas, Inc. designates any Restricted Subsidiary that
is a Guarantor to be an Excluded Joint Venture or an Unrestricted
Subsidiary in accordance with the applicable provisions of the
Indentures; or
(4) in the event that the Issuers exercise their discharge or full
defeasance options as described under "--Discharge, Defeasance and
Covenant Defeasance."
Optional Redemption
The Notes may be redeemed at any time at our option, in whole or from time
to time in part, at a redemption price equal to the sum of (i) the principal
amount of the Notes being redeemed, (ii) accrued interest thereon to the
redemption date and (iii) the Make-Whole Amount, if any, with respect to the
Notes, upon terms and conditions described in the Indentures.
After notice of optional redemption has been given as provided in the
Indentures, if funds for the redemption of any Notes called for redemption have
been made available on the redemption date, Notes called for redemption will
cease to bear interest on the date fixed for the redemption specified in the
redemption notice and the only right of the holders of the Notes will be to
receive payment of the redemption price.
Notice of any optional redemption of any Notes will be given to holders at
their addresses, as shown in the Notes register, not more than 60 nor less than
30 days prior to the date fixed for redemption. The notice of redemption will
specify, among other items, the redemption price and the principal amount of
the Notes held by the holder to be redeemed.
We will notify the applicable Trustee at least 45 days prior to the
redemption date (or such shorter period as is satisfactory to the applicable
Trustee) of the aggregate principal amount of Notes to be redeemed and the
redemption date. If less than all the Notes are to be redeemed, the applicable
Trustee shall select, pro rata or by lot or by any other method that such
Trustee considers fair and appropriate under the circumstances, Notes to be
redeemed. Notes may be redeemed in part in the minimum authorized denomination
for Notes or in any integral multiple thereof.
Certain Covenants
Changes in Covenants when Notes Rated Investment Grade
If on any date following the date of the Indentures:
(1) the Notes are rated Baa3 or better by Moody's and BBB- or better by S&P
(or, if either such entity ceases to rate the Notes for reasons outside
of the control of Ventas, Inc., the equivalent investment grade credit
rating from any other "nationally recognized statistical rating
organization" within the meaning of Rule 15c3-1(c)(2)(vi)(F) under the
Exchange Act selected by Ventas, Inc. as a replacement agency); and
(2) no Default or Event of Default shall have occurred and be continuing,
then, beginning on that day and subject to the provisions of the following
paragraph, the covenants specifically listed under the following captions in
this prospectus will no longer be applicable to the Notes:
(1) "--Repurchase of Notes upon a Change of Control;"
(2) "--Limitations on Restricted Payments;"
(3) "--Dividend and Other Payment Restrictions Affecting Subsidiaries;"
(4) "--Transactions with Affiliates;" and
(5) "--Repurchase of Notes upon an Asset Sale."
95
Notwithstanding the foregoing, if the rating assigned by both such rating
agencies should subsequently decline to below Baa3 or BBB-, respectively, the
foregoing covenants shall be reinstituted as of and from the date of such
rating decline. The "--Limitations on Restricted Payments" covenant will be
interpreted as if it had been in effect since the date of the Indentures except
that no Default will be deemed to have occurred solely by reason of a
Restricted Payment made while that covenant was suspended. There can be no
assurance that the Notes will ever achieve an investment grade rating or that
any such rating will be maintained.
Notwithstanding the foregoing, neither (a) the continued existence following
the reinstatement of the foregoing covenants of facts and circumstances or
obligations that were incurred or otherwise came into existence while the
foregoing covenants were suspended nor (b) the performance of any such
obligations, including the consummation of any transaction pursuant to, and on
materially the same terms as, a contractual agreement in existence prior to the
reinstatement of the foregoing covenants, shall constitute a breach of any such
covenants or cause a Default or Event of Default thereunder, provided, however
that (1) Ventas, Inc. and its Restricted Subsidiaries did not incur or
otherwise cause such facts and circumstances or obligations to exist in
anticipation of the reinstatement of the foregoing covenants and (2) Ventas,
Inc. and its Restricted Subsidiaries did not reasonably believe that such
incurrence or actions would result in such reinstatement. For purposes of
clause (b) above, any increase in the consideration to be paid prior to such
amendment or modification to the terms of an existing obligation following the
reinstatement of the foregoing covenants that does not exceed 10% of the
consideration that was to be paid prior to such amendment or modification shall
not be deemed a "material" amendment or modification. For purposes of clause
(1) and (2) above, anticipation and reasonable belief may be determined by
Ventas, Inc. and shall be conclusively evidenced by a board resolution to such
effect adopted by the Board of Directors of Ventas, Inc. The Board of Directors
of Ventas, Inc. in making its determination may, but need not, consult with
Moody's and S&P.
Limitations on Incurrence of Debt
Ventas, Inc. will not, and will not permit any Restricted Subsidiary to,
incur any additional Debt (other than Permitted Debt) if, immediately after
giving effect to the incurrence of such additional Debt and the application of
the proceeds thereof, the aggregate principal amount of all of Ventas, Inc.'s
and its Restricted Subsidiaries' outstanding Debt on a consolidated basis
determined in accordance with GAAP would be greater than 60% of the sum of
(without duplication):
(1) the Total Assets of Ventas, Inc. and its Restricted Subsidiaries as of the
end of the calendar quarter covered by Ventas, Inc.'s Annual Report on Form
10-K or Quarterly Report on Form 10-Q, as the case may be, most recently
filed with the Commission (or, if such filing is not permitted under the
Exchange Act, as of the end of the calendar quarter covered by Ventas,
Inc.'s most recent report filed with the Trustees) prior to the incurrence
of such additional Debt (the "Measurement Date"); and
(2) the purchase price of any Real Estate Assets or mortgages receivable
acquired, and the amount of any securities offering proceeds received (to
the extent that such proceeds were not used to acquire Real Estate Assets
or mortgages receivable or used to reduce Debt), by Ventas, Inc. or any of
its Restricted Subsidiaries on a consolidated basis since the Measurement
Date (such sum of clauses (1) and (2) being collectively referred to as
"Adjusted Total Assets").
In addition to the above limitations on the incurrence of Debt, Ventas, Inc.
will not, and will not permit any Restricted Subsidiary to, incur any Secured
Debt (other than Permitted Debt) if, immediately after giving effect to the
incurrence of such additional Secured Debt and the application of the proceeds
thereof, the aggregate principal amount of all of Ventas, Inc.'s and its
Restricted Subsidiaries' outstanding Secured Debt on a consolidated basis in
accordance with GAAP is greater than 40% of Adjusted Total Assets.
In addition to the above limitations on the incurrence of Debt, Ventas, Inc.
will not, and will not permit any Restricted Subsidiary to, incur any Debt
(other than Permitted Debt) if the ratio of Consolidated Income
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Available for Debt Service to the Annual Debt Service for the four consecutive
fiscal quarters ended on the Measurement Date shall have been less than 2.0x,
on a pro forma basis after giving effect thereto and to the application of the
proceeds therefrom, and calculated on the assumption that:
(1) such Debt and any other Debt incurred by Ventas, Inc. and any of its
Restricted Subsidiaries on a consolidated basis since the first day of such
four-quarter period and the application of the proceeds therefrom,
including to refinance other Debt, had occurred at the beginning of such
period;
(2) the repayment or retirement of any other Debt by Ventas, Inc. and any of
its Restricted Subsidiaries on a consolidated basis since the first day of
such four-quarter period had been repaid or retired at the beginning of
such period (except that, in making such computation, the amount of Debt
under any revolving credit facility shall be computed based upon the
average daily balance of such Debt during such period);
(3) in the case of Acquired Debt or Debt incurred in connection with any
acquisition since the first day of such four-quarter period, the related
acquisition had occurred as of the first day of such period with
appropriate pro forma adjustments to, among other things Consolidated
Income Available for Debt Service, with respect to such acquisition being
included in such pro forma calculation; and
(4) in the case of any acquisition or disposition by Ventas, Inc. or any of its
Restricted Subsidiaries on a consolidated basis of any asset or group of
assets since the first day of such four-quarter period, whether by merger,
stock purchase or sale, or asset purchase or sale, such acquisition or
disposition or any related repayment of Debt had occurred as of the first
day of such period with the appropriate pro forma adjustments with respect
to such acquisition or disposition being included in such pro forma
calculation.
If the Debt giving rise to the need to make the foregoing calculation or any
other Debt incurred after the first day of the relevant four-quarter period
bears interest at a floating rate then, for purposes of calculating the Annual
Debt Service, the interest rate on such Debt will be computed on a pro forma
basis as if the average interest rate in effect during the entire such
four-quarter period had been the applicable rate for the entire such period;
provided, however that for purposes of calculating Annual Debt Service for Debt
for which there is a corresponding Hedging Obligation, Annual Debt Service
shall be calculated after giving effect to the Hedging Obligation.
Maintenance of Total Unencumbered Assets
Ventas, Inc. and its Restricted Subsidiaries will maintain Total
Unencumbered Assets as of the end of each fiscal quarter of not less than 150%
of the aggregate outstanding principal amount of Ventas, Inc.'s and its
Restricted Subsidiaries' Unsecured Debt as of the end of each fiscal quarter,
all calculated on a consolidated basis in accordance with GAAP.
Limitations on Restricted Payments
Ventas, Inc. will not, and will not permit any Restricted Subsidiary to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of Ventas, Inc.'s or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving Ventas, Inc. or any of its Restricted
Subsidiaries) or to the direct or indirect holders of Ventas, Inc.'s or any
of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable (a) in Equity Interests
(other than Disqualified Stock) of Ventas, Inc. or (b) to Ventas, Inc. or
any of its Restricted Subsidiaries);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving the Partnership) any Equity Interests of (a) the Partnership or
any direct or indirect parent of the Partnership or (b) any Restricted
Subsidiary, including a Permitted Joint Venture (in either case other than
Equity Interests owned by Ventas, Inc. or any of its Restricted
Subsidiaries);
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(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any Subordinated Debt, except a
payment of interest or principal at the stated maturity thereof; or
(4) make any Restricted Investment (all such payments and other actions set
forth in these clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default shall have occurred and be continuing;
(2) Ventas, Inc. and its Restricted Subsidiaries could incur at least $1.00 of
Debt (other than Permitted Debt) under the terms of the Indentures; and
(3) the aggregate sum of all Restricted Payments made after the date of the
Indentures, excluding Restricted Payments made pursuant to the following
paragraph, shall not exceed the sum of:
(a) 95% of our aggregate cumulative Funds from Operations accrued on a
cumulative basis from the date of the beginning of the fiscal quarter
which includes the date of the Indentures;
(b) the aggregate proceeds or values received after the date of the
Indentures from the issuance or sale of Ventas, Inc.'s or the
Partnership's Equity Interests (other than Disqualified Stock and Equity
Interests sold to a Subsidiary of Ventas, Inc.), net of underwriting
discounts, commissions, legal fees and similar offering expenses;
(c) any dividends or other distributions received by Ventas, Inc. or any of
its Restricted Subsidiaries after the date of the Indentures from an
Unrestricted Subsidiary of Ventas, Inc., to the extent that such
dividends were not otherwise included in Earnings From Operations of
Ventas, Inc. for such period, plus
(d) to the extent that any Unrestricted Subsidiary of Ventas, Inc. is
redesignated as a Restricted Subsidiary after the date of the
Indentures, the lesser of (i) the Fair Market Value of Ventas, Inc.'s
Investment in such Subsidiary as of the date of such redesignation or
(ii) such Fair Market Value as of the date on which such Subsidiary was
originally designated as an Unrestricted Subsidiary.
Notwithstanding the foregoing, the limitations on Restricted Payments
described above shall not apply to the following:
(1) any distribution or other action which is necessary to maintain Ventas
Inc.'s status as a REIT under the Code, if the aggregate principal amount
of outstanding Debt of Ventas, Inc. and its Restricted Subsidiaries on a
consolidated basis determined in accordance with GAAP is less than 60% of
Adjusted Total Assets;
(2) any distribution payable in Ventas, Inc.'s Equity Interests (other than
Disqualified Stock);
(3) so long as the Partnership is a partnership and no Default or Event of
Default has occurred and is continuing under the Indentures, distributions
to partners of the Partnership in an amount, with respect to any period
after April 1, 2002, not to exceed the Tax Amount for such period;
(4) the redemption, repurchase or other acquisition or retirement of any Equity
Interests in exchange for, or out of the net cash proceeds of a
substantially concurrent issue and sale of, Capital Stock to any person
(other than to a Subsidiary of Ventas, Inc.); provided, however, that such
net cash proceeds are excluded from clause 3(b) of the first paragraph of
this covenant;
(5) any redemption, repurchase or other acquisition or retirement of
Subordinated Debt in exchange for, or out of the net cash proceeds of (a) a
substantially concurrent issue and sale of, Capital Stock to any person
(other than to a Restricted Subsidiary of Ventas, Inc.); provided, however,
that any such net cash proceeds are excluded from clause 3(b) of the first
paragraph of this covenant and not used under clause (4) of this paragraph
or (b) Permitted Refinancing Debt;
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(6) repurchases of Capital Stock deemed to occur upon the exercise of stock
options if such Capital Stock represents a portion of the exercise price
thereof and repurchases of Capital Stock deemed to occur upon the
withholding of a portion of the Capital Stock granted or awarded to an
employee to pay for the taxes payable by such employee upon such grant or
award;
(7) pro rata dividends and other distributions on the Capital Stock of any
Restricted Subsidiary by such Restricted Subsidiary to a Person other than
Ventas, Inc. or any of its Restricted Subsidiaries;
(8) the redemption, repurchase or other acquisition or retirement of any
Capital Stock of Ventas, Inc. or any Restricted Subsidiary from any
director, officer or employee of Ventas, Inc. or any Restricted Subsidiary,
or from such person's estate, (a) pursuant to any agreement with such
director, officer or employee or (b) upon the death or termination of
directorship or employment of such person, in an aggregate amount under
this clause (8) not to exceed $1.5 million in any twelve-month period;
(9) the forgiveness of loans to current or former officers or directors of
Ventas, Inc. in an aggregate principal amount since the date of the
Indentures of up to $10.0 million; and
(10) other Restricted Payments in an aggregate amount not to exceed $35.0
million since the date of the Indentures.
Also, Ventas, Inc. and its Restricted Subsidiaries will not be prohibited
from making the payment of any distribution within 60 days of the declaration
thereof if at the date of declaration such payment would have complied with the
provisions of the immediately preceding paragraph.
Transactions with Affiliates
Ventas, Inc. will not, and will not permit its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of
their properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate or 10% Stockholder (each, an "Affiliate Transaction"), unless the
Affiliate Transaction is on terms that are no less favorable to Ventas, Inc. or
the relevant Restricted Subsidiary than those that would have been obtained in
a comparable transaction by Ventas, Inc. or such Restricted Subsidiary with an
unrelated Person; provided, however, that for an Affiliate Transaction with an
aggregate value of $10.0 million or more, at Ventas, Inc.'s option, either:
(1) a majority of the members of the Board of Directors of Ventas, Inc. who
have no conflicting financial interest in the Affiliate Transaction shall
determine in good faith that such Affiliate Transaction is on terms that
are not materially less favorable than those that might reasonably have
been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of Ventas, Inc.; or
(2) the Board of Directors of Ventas, Inc. shall obtain an opinion from a
nationally recognized investment banking, appraisal or accounting firm that
such Affiliate Transaction is fair to Ventas, Inc. or the applicable
Restricted Subsidiary from a financial point of view.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) directors' fees, indemnification and similar arrangements, consulting fees,
employee salaries, bonuses or employment agreements, compensation or
employee benefit arrangements and incentive arrangements with, and loans
and advances to, any officer, director or employee in the ordinary course
of business;
(2) performance of all agreements in existence on the date of the Indentures
and any modification thereto or any transaction contemplated thereby in any
replacement agreement therefor so long as such modification or replacement
is not materially more disadvantageous to Ventas, Inc. or any of its
Restricted Subsidiaries than the original agreement in effect on the date
of the Indentures;
(3) customary transactions in connection with a Qualified CMBS Transaction;
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(4) transactions between or among Ventas, Inc. and/or its Restricted
Subsidiaries (other than any Permitted Joint Venture);
(5) transactions with a Person (other than a Permitted Joint Venture and its
Subsidiaries) that is an Affiliate of Ventas, Inc. or any of its Restricted
Subsidiaries solely because Ventas, Inc. or a Restricted Subsidiary owns an
Equity Interest in, or controls, such Person;
(6) sales of Equity Interests (other than Disqualified Stock) to Affiliates of
Ventas, Inc. or any of its Restricted Subsidiaries; and
(7) Restricted Payments that are permitted by the provisions of the Indentures
described above under the caption "--Limitations on Restricted Payments."
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Ventas, Inc. will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary (other than the Partnership or any Excluded Joint
Venture) to:
(1) pay dividends or make any other distributions on their Capital Stock to
Ventas, Inc. or any of its Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, their profits, or pay
any indebtedness owed to Ventas, Inc. or any of its Restricted Subsidiaries;
(2) make loans or advances to Ventas, Inc. or any of its Restricted
Subsidiaries; or
(3) transfer any of their properties or assets to Ventas, Inc. or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Debt and Credit Facilities as in effect on
the date of the Indentures and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
of those agreements, provided, however that the amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive, taken as a whole, with respect to
such dividend and other payment restrictions than those contained in those
agreements on the date of the Indentures;
(2) the Indentures, the Notes and the Guarantees;
(3) applicable law;
(4) any instrument governing Debt or Capital Stock of a Person acquired by
Ventas, Inc. or any of its Restricted Subsidiaries as in effect at the time
of such acquisition (except to the extent such Debt or Capital Stock was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person; so acquired, provided, however, that, in the case
of Debt, such Debt was permitted by the terms of the Indentures to be
incurred;
(5) customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary course of
business that impose restrictions on that property of the nature described
in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of the stock or assets of a
Subsidiary that restricts distributions by that Subsidiary pending its sale
or other disposition;
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(8) Liens securing Debt otherwise permitted to be incurred by the Indentures or
negative covenants with respect to Debt permitted to be secured by Liens
that limit the right of the debtor to dispose of the assets subject to such
Liens or permitted to be subject to such Liens;
(9) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course
of business; and
(10) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
Restrictions on Activities of Ventas Capital Corporation
In addition to the other restrictions set forth in the Indentures, the
Indentures will provide that Ventas Capital Corporation may not hold any
material assets, become liable for any material obligations or engage in any
significant business activities; provided, however that Ventas Capital
Corporation may be a co-obligor with respect to Debt if the Partnership is a
primary obligor of such Debt and the net proceeds of such Debt are received by
the Partnership or one or more of its Restricted Subsidiaries other than Ventas
Capital Corporation.
Additional Guarantees
If Ventas, Inc. acquires or creates another Subsidiary after the date of the
Indentures, other than an Excluded Joint Venture or a Subsidiary that has
properly been designated as an Unrestricted Subsidiary in accordance with the
Indentures for so long as it continues to constitute an Excluded Joint Venture
or an Unrestricted Subsidiary, then that newly acquired or created Subsidiary
will become a Guarantor and execute supplemental indentures and deliver a
customary opinion of counsel satisfactory to the applicable Trustee within 10
Business Days of the date on which it was acquired or created.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors of Ventas, Inc. may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if that designation would not cause
a Default. If a Restricted Subsidiary is designated as an Unrestricted
Subsidiary, the aggregate Fair Market Value of all outstanding Investments
owned by Ventas, Inc. and its Restricted Subsidiaries in the Subsidiary
properly designated will be deemed to be an Investment made as of the time of
the designation and will reduce the amount available for Restricted Payments
under the covenant described above under the caption "--Limitations on
Restricted Payments" or Permitted Investments, as determined by Ventas, Inc.
That designation will only be permitted if the Investment would be permitted at
that time and if the Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary. The Board of Directors of Ventas, Inc. may redesignate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however
that such designation will be deemed to be an incurrence of Debt by a
Restricted Subsidiary of Ventas, Inc. of any outstanding Debt of such
Unrestricted Subsidiary and such designation will only be permitted if (1) such
Debt is permitted under the covenant described under the caption "--Certain
Covenants--Limitations on Incurrence of Debt," calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation.
Existence
Except as permitted as described below under "Merger, Consolidation or
Sale," Ventas, Inc. and its Restricted Subsidiaries will agree to do all things
necessary to preserve and keep their existence, rights and franchises;
provided, however that the existence of a Restricted Subsidiary may be
terminated if the Board of Directors of Ventas, Inc. determines that it is in
the best interests of Ventas, Inc. to do so.
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Provision of Financial Information
Whether or not required by the Commission, so long as any Notes are
outstanding, Ventas, Inc. will furnish to the holders of Notes, within the time
periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if Ventas,
Inc. were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by Ventas, Inc.'s certified independent accountants; and
(2) all current reports that would be required to be filed with the Commission
on Form 8-K if Ventas, Inc. were required to file such reports.
In addition, whether or not required by the Commission, Ventas, Inc. will
file a copy of all of the information and reports referred to in clauses (1)
and (2) above with the Commission for public availability within the time
periods specified in the Commission's rules and regulations (unless the
Commission will not accept such a filing) and make such information available
to securities analysts and prospective investors upon request. In addition,
Ventas, Inc. has agreed that, for so long as any Notes remain outstanding, it
will furnish to the holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act.
If Ventas, Inc. has designated any of its Subsidiaries as Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of Ventas,
Inc., as applicable, and its Restricted Subsidiaries separate from the
financial condition and results of operations of the Unrestricted Subsidiaries
of Ventas, Inc.
Merger, Consolidation or Sale
Ventas, Inc. may not, directly or indirectly: (1) consolidate or merge with
or into another Person (whether or not Ventas, Inc. is the surviving
corporation); or (2) sell, assign, transfer, convey, lease (other than to an
unaffiliated operator in the ordinary course of business) or otherwise dispose
of all or substantially all of the properties or assets of Ventas, Inc. and its
Restricted Subsidiaries taken as a whole, in one or more related transactions,
to another Person; unless:
(1) either: (a) Ventas, Inc. is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than
Ventas, Inc.) or to which such sale, assignment, transfer, conveyance or
other disposition has been made is a corporation organized or existing
under the laws of the United States, any state of the United States or the
District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger (if
other than Ventas, Inc.) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all the
obligations of Ventas, Inc. under the Notes, the Indentures and the
registration rights agreement pursuant to agreements reasonably
satisfactory to the applicable Trustee;
(3) immediately after such transaction, on a pro forma basis giving effect to
such transaction or series of transactions (and treating any obligation of
Ventas, Inc. or any Restricted Subsidiary incurred in connection with or as
a result of such transaction or series of transactions as having been
incurred at the time of such transaction), no Default or Event of Default
exists; and
(4) Ventas, Inc. or the Person formed by or surviving any such consolidation or
merger (if other than Ventas, Inc.), or to which such sale, assignment,
transfer, conveyance or other disposition has been made will, on the date
of such transaction after giving pro forma effect thereto and any related
financing transactions as if the same had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Debt (other than Permitted Debt) pursuant to the covenant
described above under the caption "--Limitations on Incurrence of Debt."
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In addition, in the case of any lease of all or substantially all of its
properties or assets (other than to an unaffiliated operator in the ordinary
course of business), in one or more related transactions, to any other Person
the terms of the lease must be reasonably acceptable to the applicable Trustees
or to a majority of the holders of each series of Notes. This "Merger,
Consolidation or Sale" covenant will not apply to a sale, assignment, transfer,
conveyance or other disposition of assets between or among Ventas, Inc. and its
Restricted Subsidiaries.
Upon any consolidation or merger, or any sale, assignment, transfer,
conveyance, transfer or other disposition of all or substantially all of the
properties or assets of Ventas, Inc. in accordance with the foregoing
provisions, the successor Person formed by such consolidation or into which
Ventas, Inc. is merged or to which such sale, assignment, transfer, conveyance
or other disposition is made, shall succeed to, and be substituted for, and may
exercise every right and power of, Ventas, Inc. under the Indentures with the
same effect as if such successor initially had been named as Ventas, Inc.
therein. When a successor assumes all the obligations of its predecessor under
the Indentures and the Notes following a consolidation or merger, or any sale,
assignment, transfer, conveyance, transfer or other disposition of 90% or more
of the assets of the predecessor in accordance with the foregoing provisions,
the predecessor shall be released from those obligations.
Repurchase of Notes Upon a Change of Control
If a Change of Control occurs, each holder of Notes will have the right to
require the Issuers to purchase some or all (in principal amounts of $1,000 or
an integral multiple of $1,000) of such holder's Notes pursuant to the offer
described below (the "Change of Control Offer"), unless, after giving pro forma
effect to the Change of Control, (i) Moody's and S&P's shall have confirmed
their ratings of the Notes at Ba3 or higher and BB- or higher, respectively,
(ii) the ratio of Consolidated Income Available for Debt Service to Annual Debt
Service for the four consecutive fiscal quarters ended on the most recent
Measurement Date prior to the date of such Change of Control after such Change
of Control is at least equal to the ratio of Consolidated Income Available for
Debt Service to Annual Debt Service prior to such Change of Control and (iii)
the Person formed by or surviving any consolidation or merger (if other than
the Partnership) or to which any sale, assignment, transfer, conveyance or
other disposition has been made forming the basis of the Change of Control is
principally engaged in a Permitted Business.
Any Change of Control Offer will include a cash offer price of 101% of the
principal amount of any Notes purchased plus accrued and unpaid interest, if
any, to the date of purchase (the "Change of Control Payment"). If a Change of
Control Offer is required, within 10 Business Days following a Change of
Control, the Issuers will mail a notice to each holder describing the Change of
Control and offering to repurchase Notes on a specified date (the "Change of
Control Payment Date"). The Change of Control Payment Date will be no earlier
than 30 days and no later than 60 days from the date the notice is mailed.
On the Change of Control Payment Date, the Issuers will, to the extent
lawful:
(1) accept for payment all Notes properly tendered and not withdrawn pursuant
to the Change of Control Offer;
(2) deposit the Change of Control Payment with the paying agent in respect of
all Notes so accepted; and
(3) deliver to the Trustees the Notes accepted and an officers' certificate
stating the aggregate principal amount of all Notes purchased by us.
The paying agent will promptly mail to each holder of Notes properly
tendered the Change of Control Payment for such Notes, and the Trustees will
promptly authenticate and mail, or cause to be transferred by book entry, to
each holder a new Note in principal amount equal to any unpurchased portion of
the Notes surrendered.
The Issuers will comply with the requirements of Section 14(e) of the
Exchange Act and any other securities laws or regulations to the extent those
laws and regulations are applicable to any Change of Control Offer. If the
provisions of any of the applicable securities laws or securities regulations
conflict with the provisions of the
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covenant described above, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached their
obligations under the covenant described above by virtue of that compliance.
A third party, instead of the Issuers, may make the Change of Control Offer
in compliance with the requirements set forth in the Indentures and purchase
all Notes properly tendered and not withdrawn.
In addition, the Issuers will not be obligated to make or consummate a
Change of Control Offer if they have irrevocably elected to redeem all of the
Notes under provisions described under "--Optional Redemption" and have not
defaulted in their redemption obligations. The provisions under the Indentures
relating to our obligation to make an offer to repurchase the Notes as a result
of a Change of Control may be waived or modified with the written consent of
the holders of a majority in principal amount of the 2009 Notes and the 2012
Notes, as the case may be, then outstanding.
Some change of control events may constitute a default under the Credit
Agreement. Future indebtedness of the Partnership or the Guarantors may contain
prohibitions on the events that constitute a Change of Control or may require
the indebtedness to be purchased or repaid if a Change of Control occurs.
Moreover, the exercise by the holders of their right to require the Issuers to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not. Finally, the Issuers' ability to pay cash to
the holders of Notes, if required to do so, may be limited by their existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. See "Risk
Factors--Risks Relating to the Terms of and Market for the Notes--If we
experience a change in control, we may be unable to purchase the Notes you hold
as required under the Indentures."
Repurchase of Notes Upon an Asset Sale
Ventas, Inc. will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) Ventas, Inc. (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the Fair
Market Value of the assets or Equity Interests issued or sold or otherwise
disposed of;
(2) the Fair Market Value is set forth in an officers' certificate delivered to
the applicable Trustee, provided, however that this clause (2) will not
apply to sales of assets pursuant to contracts in effect on the date of the
Indentures; and
(3) at least 75% of the consideration received in the Asset Sale by Ventas,
Inc. or such Restricted Subsidiary is in the form of cash, Cash Equivalents
and/or Replacement Assets. For purposes of this provision, each of the
following will be deemed to be cash:
(a) any liabilities, as shown on Ventas, Inc.'s or such Restricted
Subsidiaries' most recent balance sheet, of Ventas, Inc. or any such
Restricted Subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the Notes or any Guarantee) that
are assumed by the transferee of any such assets but, except in the case
of an Asset Sale to a Restricted Subsidiary of Ventas, Inc., only to the
extent of the reduction in the amount of such liabilities on Ventas,
Inc.'s consolidated balance sheet;
(b) any securities, Notes or other obligations received by Ventas, Inc. or
any such Restricted Subsidiary from such transferee that are
contemporaneously, subject to ordinary settlement periods, converted by
Ventas, Inc. or such Restricted Subsidiary into cash, to the extent of
the cash received in that conversion;
(c) the cash amount drawable by Ventas, Inc. under any irrevocable letter of
credit provided to Ventas, Inc. as consideration for such Asset Sale
(provided that such amount is drawn before the expiration of such
irrevocable letter of credit); and
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(d) any other consideration received in Asset Sales since the date of the
Indentures that is designated by Ventas, Inc. as "Designated Cash
Consideration;" provided, however that the aggregate Fair Market Value
of all Designated Cash Consideration does not exceed 10% of Consolidated
Net Tangible Assets.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale or
Qualified CMBS Transaction, Ventas, Inc. may apply those Net Proceeds:
(1) to repay Debt and other Obligations under a Credit Facility;
(2) to acquire all or substantially all of the assets of, or a majority of the
Voting Stock of, another Permitted Business;
(3) to make a capital expenditure;
(4) to acquire or enter into a legally binding obligation to acquire
Replacement Assets; or
(5) to acquire other long-term assets that are used or useful in a Permitted
Business.
Pending the final application of any Net Proceeds, Ventas, Inc. may
temporarily reduce revolving credit borrowings or otherwise invest the Net
Proceeds in any manner that is not prohibited by the Indentures.
Any Net Proceeds from Asset Sales or Qualified CMBS Transactions that are
not applied or invested as provided in the preceding paragraph will constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $20.0
million, the Issuers will make an Asset Sale Offer or Qualified CMBS
Transaction Offer, as applicable, to all holders of Notes and all holders of
other Debt that is pari passu with the Notes containing provisions similar to
those set forth in the Indentures with respect to offers to purchase or redeem
with the proceeds of sales of assets or in connection with securitizations to
purchase the maximum principal amount of Notes and such other pari passu Debt
that may be purchased out of the Excess Proceeds. The offer price in any Asset
Sale Offer or Qualified CMBS Transaction Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer or a Qualified CMBS
Transaction Offer, the Issuers may use those Excess Proceeds for any purpose
not otherwise prohibited by the Indentures. If the aggregate principal amount
of Notes and other pari passu Debt tendered into such Asset Sale Offer or
Qualified CMBS Transaction Offer, as applicable, exceeds the amount of Excess
Proceeds, the Trustees will select the Notes and such other pari passu Debt to
be purchased on a pro rata basis. Upon completion of each Asset Sale Offer and
Qualified CMBS Transaction Offer, the amount of Excess Proceeds will be reset
at zero.
The Issuers will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with each
repurchase of Notes pursuant to an Asset Sale Offer or Qualified CMBS
Transaction Offer. To the extent that the provisions of any securities laws or
regulations conflict with the Asset Sale or Qualified CMBS Transaction
provisions of the Indentures, the Issuers will comply with the applicable
securities laws and regulations and will not be deemed to have breached their
obligations under the Asset Sale or Qualified CMBS Transaction provisions of
the Indentures by virtue of such conflict.
Some Asset Sales and Qualified CMBS Transactions may constitute a default
under the Credit Agreement. Future indebtedness of the Partnership or the
Guarantors may contain prohibitions on Asset Sales or Qualified CMBS
Transactions or may require the indebtedness to be purchased or repaid if an
Asset Sale or Qualified CMBS Transaction occurs. Moreover, the exercise by the
holders of their right to require the Issuers to repurchase the Notes could
cause a default under such indebtedness, even if the Assets Sale or Qualified
CMBS Transaction themselves do not. Finally, the Issuers' ability to pay cash
to the holders of Notes, if required to do so, may be limited by their then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required repurchases.
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Events of Default, Notice and Waiver
The Indentures provides that the term "Event of Default" means any of the
following:
(1) We do not pay the principal or any premium on the Notes when due and
payable;
(2) We do not pay interest on the Notes within 30 days after the applicable due
date;
(3) We fail to make or consummate a Change of Control Offer following a Change
of Control when required as described under "Repurchase of Notes upon a
Change of Control;"
(4) Ventas, Inc. or its Restricted Subsidiaries remain in breach of any other
term of the Indentures for 60 days after they receive a notice of Default
stating they are in breach. Either the Trustees or the holders of more than
25% in principal amount of the 2009 Notes or the 2012 Notes, as the case
may be, may send the notice;
(5) Final judgments aggregating in excess of $15.0 million (exclusive of
amounts covered by insurance) are entered against Ventas, Inc. and its
Restricted Subsidiaries and are not paid, discharged or stayed for a period
of 60 days;
(6) Ventas, Inc. or its Restricted Subsidiaries default under any of their
indebtedness in an aggregate principal amount exceeding $15.0 million after
the expiration of any applicable grace period, which default results in the
acceleration of the maturity of such indebtedness. Such default is not an
Event of Default if the other indebtedness is discharged, or the
acceleration is rescinded or annulled, within a period of 10 days after
Ventas, Inc. or its Restricted Subsidiaries receives notice specifying the
default and requiring that they discharge the other indebtedness or cause
the acceleration to be rescinded or annulled. Either the Trustees or the
holders of more than 25% in principal amount of the 2009 Notes or 2012
Notes, as the case may be, may send the notice; or
(7) Ventas, Inc. or one of their "Significant Subsidiaries," if any, files for
bankruptcy or certain other events in bankruptcy, insolvency or
reorganization occur.
The term "Significant Subsidiary" means each Restricted Subsidiary that is a
significant subsidiary, if any, of Ventas, Inc. as defined in Regulation S-X
under the Securities Act of 1933, as amended.
Remedies if an Event of Default Occurs
If an Event of Default has occurred and has not been cured, either of the
Trustees or the holders of at least 25% in principal amount of the 2009 Notes
or 2012 Notes, as the case may be, may declare the entire principal amount of
all the applicable series of Notes to be due and immediately payable by written
notice to the Partnership, Ventas, Inc. and the Trustee. If an Event of Default
occurs because of certain events in bankruptcy, insolvency or reorganization,
the principal amount of all the Notes will be automatically accelerated,
without any action by the Trustees or any holder. At any time after the
Trustees or the holders have accelerated either series of the Notes, but before
a judgment or decree for payment of the money due has been obtained, the
holders of at least a majority in principal amount of the applicable series of
Notes may, under certain circumstances, rescind and annul such acceleration.
The Trustees will be required to give notice to the holders of Notes within
90 days after a Default under the Indentures unless the Default has been cured
or waived. The Trustees may withhold notice to the holders of the Notes of any
Default, except a Default in the payment of the principal of or interest on the
Notes, if specified responsible officers of the Trustees in good faith
determine that withholding the notice is in the interest of the holders.
Except in cases of Default, where the Trustees has some special duties, the
Trustees are not required to take any action under the Indentures at the
request of any holders unless the holders offer the Trustees reasonable
protection from expenses and liability. We refer to this as an "indemnity." If
reasonable indemnity is provided,
106
the holders of a majority in principal amount of the outstanding 2009 Notes or
2012 Notes, as the case may be, may direct the time, method and place of
conducting any lawsuit or other formal legal action seeking any remedy
available to the Trustees. These majority holders may also direct the Trustees
in performing any other action under the Indentures, subject to certain
limitations.
Before you bypass the Trustees and bring your own lawsuit or other formal
legal action or take other steps to enforce your rights or protect your
interests relating to the Notes, the following must occur:
(1) You must give the applicable Trustee written notice that an Event of
Default has occurred and remains uncured;
(2) The holders of at least a majority in principal amount of all outstanding
2009 Notes or 2012 Notes, as the case may be, must make a written request
that the applicable Trustee take action because of the Default, and must
offer reasonable indemnity to the applicable Trustee against the cost and
other liabilities of taking that action;
(3) The applicable Trustee must have not taken action for 60 days after receipt
of the notice and offer of indemnity; and
(4) The holders of at least a majority in principal amount of all outstanding
2009 Notes or 2012 Notes, as the case may be, have not given the applicable
Trustee a direction inconsistent with such request within such 60-day
period.
However, you are entitled at any time to bring a lawsuit for the payment of
money due on any Note after its due date.
Within 120 days after the end of each fiscal year, Ventas, Inc. will furnish
to the 2009 Trustee and 2012 Trustee, respectively, a written statement by
certain of Ventas, Inc.'s officers certifying that to their knowledge Ventas,
Inc. and its Restricted Subsidiaries are in compliance with the 2009 Indenture
and 2012 Indenture, as applicable, and the Notes, or else specifying any
Default.
No Liability for Certain Persons
No director, officer, employee or stockholder of Ventas, Inc. or any of its
Subsidiaries, as such, will have any liability for any obligations of Ventas,
Inc. or any of its Subsidiaries under the Notes or the Indentures based on, in
respect of, or by reason of such obligations or their creation. Each holder by
accepting a Note waives and releases all such liability. The foregoing waiver
and release are an integral part of the consideration or the issuance of the
Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws.
Modification of the Indentures
Except as provided in the next two succeeding paragraphs, the Indentures or
the Notes may be amended or supplemented with the written consent of the
holders of at least a majority in principal amount of the 2009 Notes or 2012
Notes, as the case may be, then outstanding (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, 2009 Notes or 2012 Notes, as the case may be), and any existing
Default, Event of Default or compliance with any provision of the Indentures or
the Notes may be waived with the consent of the holders of a majority in
principal amount of the then outstanding 2009 Notes or the 2012 Notes, as the
case may be (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder):
(1) reduce the principal amount of Notes whose holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Note or alter
the provisions with respect to the redemption of the Notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase of Notes Upon a Change of Control" and "--Repurchase of Notes
Upon an Asset Sale");
107
(3) reduce the rate of or change the time for payment of interest on any Note;
(4) waive a Default or Event of Default in the payment of principal of, or
interest or premium, or Liquidated Damages, if any, on the Notes (except a
rescission of acceleration of the Notes by the holders of at least a
majority in aggregate principal amount of the 2009 Notes or the 2012 Notes,
as the case may be, and a waiver of the payment Default that resulted from
such acceleration);
(5) make any Note payable in money other than that stated in the Notes;
(6) make any change in the provisions of the Indentures relating to waivers of
past Defaults or the rights of holders of Notes to receive payments of
principal of, or interest or premium or Liquidated Damages, if any, on the
Notes;
(7) waive a redemption payment with respect to any Note (other than provisions
relating to the covenants described above under the caption "--Repurchase
of Notes Upon a Change of Control" and "--Repurchase of Notes Upon an Asset
Sale");
(8) release any Guarantor from any of its obligations under its Guarantee or
the Indentures, except in accordance with the terms of the Indentures; or
(9) make any change in the amendment and waiver provisions set forth in clauses
(1) through (8).
Notwithstanding the preceding, without the consent of any holder of Notes,
the Issuers, the Guarantors and the applicable Trustee may amend or supplement
the applicable Indenture or the applicable Note:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(3) to provide for the assumption of the Issuers' obligations to holders of
Notes in the case of a merger or consolidation or sale of all or
substantially all of the Issuers' assets;
(4) add additional Guarantees with respect to the Notes;
(5) secure the Notes;
(6) to make any other change that would provide any additional rights or
benefits to the holders of Notes or that does not adversely affect the
legal rights under the Indentures of any such holder; or
(7) to comply with requirements of the Commission in order to effect or
maintain the qualification of the applicable Indenture under the Trust
Indenture Act.
Any such consent need only approve the substance, rather than the particular
form, of the proposed amendment.
Notes are not considered outstanding, and therefore the holders thereof are
not eligible to vote, if we have deposited or set aside in trust for you money
for their payment or redemption or if we or one of our affiliates own them. The
holders of Notes are also not eligible to vote if they have been fully defeased
as described below under "--Discharge, Defeasance and Covenant Defeasance--Full
Defeasance."
Sinking Fund
The Notes are not entitled to any sinking fund payments.
The Registrar and Paying Agent
The Issuers have initially designated the Trustees as the registrar and
paying agent for the Notes. Payments of interest and principal will be made,
and the Notes will be transferable, at the office of the paying agent, or at
such other place or places as may be designated pursuant to the Indentures. For
Notes that we issue in book-entry form represented by a global security,
payments will be made to a nominee of the depository.
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Discharge, Defeasance and Covenant Defeasance
Discharge
The Issuers may discharge all of their obligations to the holders of Notes
(other than the right to register transfers and exchanges) that either have
become due and payable or will become due and payable within one year, or
scheduled for redemption within one year, by irrevocably depositing with the
applicable Trustee, in trust, funds in the applicable currency in an amount
sufficient to pay the 2009 Notes or the 2012 Notes, as the case may be,
including any premium and interest payable thereon.
Full Defeasance
The Issuers can, under particular circumstances, effect a full defeasance of
the Notes. This means the Issuers can legally release themselves from any
payment or other obligations on the Notes if, among other things, the Issuers
put in place the arrangements described below to repay the holders of the Notes
and deliver certain certificates and legal opinions to the applicable Trustee:
(1) The Issuer must deposit in trust for the benefit of all direct holders of
the Notes money or U.S. government or U.S. government agency notes or bonds
(or, in some circumstances, depositary receipts representing these notes or
bonds), or any combination thereof, that will generate enough cash to make
interest, principal and any other payments on the Notes on their due dates;
(2) The current federal tax law must be changed or an IRS ruling must be issued
permitting the above deposit without causing holders of the Notes to be
taxed on the Notes any differently than if the Issuers did not make the
deposit and just repaid the Notes themselves. Under current federal income
tax law, the deposit and the Issuers' legal release from the Notes would be
treated as though the Issuers took back the Notes and gave each holder of
the Notes such holder's share of the cash and notes or bonds deposited in
trust. In that event, the holders of the Notes could recognize gain or loss
on the Notes such holder gives back to the Issuers; and
(3) The Issuers must deliver to the applicable Trustee a legal opinion
confirming the tax law change or IRS ruling described above.
If the Issuers did accomplish full defeasance, the holders of the Notes
would have to rely solely on the trust deposit for repayment on the Notes. The
holders of the Notes could not look to the Issuers or the Guarantors for
repayment in the unlikely event of any shortfall. Conversely, the trust deposit
would most likely be protected from claims of the Issuers lenders and other
creditors if the Issuers ever became bankrupt or insolvent.
Covenant Defeasance
Under current federal income tax law, the Issuers can make the same type of
deposit described above and be released from some of the restrictive covenants
in the Indentures and the Notes. This is called "covenant defeasance." In that
event, the holders of the Notes would lose the protection of those restrictive
covenants but would gain the protection of having money and securities set
aside in trust to repay the Notes.
If the Issuers accomplish covenant defeasance, the following provisions of
the Indentures and the Notes would no longer apply:
(1) any covenants applicable to the Notes and described in this prospectus; and
(2) certain Events of Default relating to breach of covenants and acceleration
of the maturity of other debt set forth in this prospectus.
If the Issuers accomplish covenant defeasance, the holders of the Notes can
still look to the Issuers for repayment of the Notes if a shortfall in the
trust deposit occurred. If one of the remaining Events of Default occurs, for
example, the Issuers' bankruptcy, and the Notes become immediately due and
payable, there may be a shortfall. Depending on the event causing the Default,
the holders of the Notes may not be able to obtain payment of the shortfall.
109
The Issuers may exercise their full defeasance option notwithstanding any
prior exercise of their covenant defeasance option.
Book-Entry System and Form of Notes
The Notes will be issued in the form of a single fully registered global
note without coupons that will be deposited with The Depository Trust Company,
New York, New York, or DTC, and registered in the name of its nominee, Cede &
Co. This means that we will not issue certificates to each owner of Notes. One
global note will be issued to DTC, which will keep a computerized record of its
participants (for example, your broker) whose clients have purchased the Notes.
The participant will then keep a record of its clients who purchased the Notes.
Unless it is exchanged in whole or in part for a certificated note, the global
note may not be transferred, except that DTC, its nominees, and their
successors may transfer the global note as a whole to one another.
DTC has provided us with the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a banking organization
within the meaning of the New York Banking Law, a member of the United States
Federal Reserve System, a clearing corporation within the meaning of the New
York Uniform Commercial Code and a clearing agency registered under the
provisions of Section 17A of the Exchange Act. DTC holds securities that its
participants (Direct Participants) deposit with DTC. DTC also records the
settlement among Direct Participants of securities transactions, such as
transfers and pledges, in deposited securities through computerized records for
Direct Participants' accounts. This eliminates the need to exchange
certificates. Direct Participants include securities brokers and dealers
(including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its Direct Participants are
on file with the Commission.
DTC is owned by a number of its Direct Participants and by the NYSE, the
American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc.
We expect that, pursuant to procedures established by DTC, ownership of
beneficial interests in the Notes evidenced by the global note will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominee (with respect to beneficial interests of
Direct Participants) and records of Direct Participants (with respect to
beneficial interests of persons who hold through Direct Participants). Neither
we nor the Trustees will have any responsibility or liability for any aspect of
the records of DTC or for maintaining, supervising or reviewing any records of
DTC or any of its Direct Participants relating to beneficial ownership
interests in the Notes. The laws of some states require that certain purchasers
of securities take physical delivery of such securities in definitive form.
Such limits and laws may impair your ability to own, pledge or transfer
beneficial interests in the global note.
So long as DTC or its nominee is the registered owner of the global note,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Notes represented by the global note for all purposes under the
Indentures. Except as described below, as an owner of a beneficial interest in
Notes evidenced by the
global note you will not be entitled to have any of the individual Notes
represented by such global note registered in your name, you will not receive
or be entitled to receive physical delivery of any such Notes in definitive
form and you will not be considered the owner or holder thereof under the
Indentures for any purpose, including with respect to the giving of any
direction, instructions or approvals to the Trustees thereunder. Accordingly,
you must rely on the procedures of DTC and, if you are not a Direct
Participant, on the procedures of the Direct Participant through which you own
your interest, to exercise any rights of a holder under the Indentures. We
understand that, under existing industry practice, if we request any action of
holders or if an owner of a beneficial interest in a global note desires to
give or take any action which a holder is entitled to give or take under the
Indentures, DTC would authorize the Direct Participants holding the relevant
beneficial interest to give or take such action, and such Direct Participants
would authorize beneficial owners through such Direct Participants to give or
take such actions or would otherwise act upon the instructions of beneficial
owners holding through them.
110
Payments of principal of, any premium, if any, and any interest or
additional amount on, individual Notes represented by a global note registered
in the name of the holder of the global note or its nominee will be made by the
Trustees to or at the direction of the holder of the global note or its
nominee, as the case may be, as the registered owner of the global note under
the Indentures. Under the terms of the Indentures, we and the applicable
Trustee may treat the persons in whose name Notes, including a global note, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither we nor the Trustees has or will have any responsibility
or liability for the payment of such amounts to beneficial owners of Notes
(including principal, premium, if any, and interest or additional amount
payable thereon).
We believe, however, that it is currently the policy of DTC to immediately
credit the accounts of relevant Direct Participants with such payments in
amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of DTC. Payments by Direct
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of DTC's
Direct Participants. Redemption notices with respect to any Notes will be sent
to the holder of the global note (i.e., DTC, its nominee or any subsequent
holder). If less than all of the Notes of any series are to be redeemed, we
expect the holder of the global note to determine the amount of interest of
each Direct Participant in the Notes to be redeemed by lot. Neither we, the
Trustees, any paying agent nor the security registrar for such Notes will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global note
for such Notes.
Neither we nor the Trustees will be liable for any delay by the holder of a
global note or DTC in identifying the beneficial owners of Notes and we and the
Trustees may conclusively rely on, and will be protected in relying on,
instructions from the holder of a global note or DTC for all purposes.
The Notes, which are represented by the global note, will be exchangeable
for certificate Notes with the same terms in authorized denominations only if:
. DTC notifies us that it is unwilling or unable to continue as depository
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depository is not appointed by us within 90 days; or
. we determine not to require all of the Notes to be represented by a
global note and notify the applicable Trustee of our decision, in which
case we will issue individual Notes in denominations of $1,000 and
integral multiples thereof.
Same Day Settlement and Payment
We will make all payments of principal and interest in respect of the Notes
in immediately available funds. The Notes will trade in DTC's Same-Day Funds
Settlement System until maturity or until the Notes are issued in certificated
form, and secondary market trading activity in the Notes will therefore be
required by DTC to settle in immediately available funds. We expect that
secondary trading in the certificated securities, if any, will also be settled
in immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on trading activity in the
Notes.
Governing Law
The Indentures and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
Certain Definitions
"Acquired Debt" means Debt of a person or entity (1) existing at the time
such person becomes a Subsidiary or (2) assumed in connection with the
acquisition of assets from such person or entity, in each case, other than Debt
incurred in connection with, or in contemplation of, such person or entity
becoming a Subsidiary or such acquisition. Acquired Debt is deemed to be
incurred on the date of the related acquisition of assets from any person or
entity or the date the acquired entity becomes a Subsidiary.
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"Adjusted Book Value" means, as of any date (i) with respect to any Real
Estate Asset that was owned as of the date of the Indentures and continues to
be owned by Ventas, Inc. or any of its Restricted Subsidiaries as of such date,
the Real Estate Revenues specified for such Real Estate Asset on a schedule
attached to the Indentures, divided by 0.10, (ii) with respect to any Real
Estate Assets acquired after the date of the Indentures that are owned by
Ventas, Inc. or any of its Restricted Subsidiaries as of such date, the cost
(original cost plus capital improvements, before depreciation and amortization)
of such Real Estate Asset and (iii) with respect to all other assets as of any
date, the book value of such asset as of such date, in each case on a
consolidated basis determined in accordance with GAAP.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise. For purposes of this definition, the terms
"controlling," "controlled by" and "under common control with" have correlative
meanings. No Person (other than Ventas, Inc. or any of its Restricted
Subsidiaries) in whom a Special Purpose Entity makes an Investment in
connection with a Qualified CMBS Transaction will be deemed to be an Affiliate
of Ventas, Inc. or any of its Restricted Subsidiaries solely by reason of such
Investment.
"Annual Debt Service" as of any date means the amount which was expensed in
the four consecutive fiscal quarters ending on the most recent Measurement Date
for interest on Debt of Ventas, Inc. and its Restricted Subsidiaries excluding
(1) amortization of debt discount and deferred financing cost; (2) all gains
and losses associated with interest rate swap agreements that are recognized in
connection with the issuance of the Notes and the transaction contemplated by
the Offering Memorandum relating to the issue and sale of the Original Notes
and (3) the impact of that certain interest rate cap agreement between the
Partnership and Bank of America, N.A., dated December 11, 2001.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition by Ventas, Inc. or any of
its Restricted Subsidiaries of any assets, other than leases of Real
Estates Assets and sales of products and services, in each case, in the
ordinary course of business consistent with past practices; provided,
however that the sale, conveyance or other disposition of all or
substantially all of the assets of Ventas, Inc. or any of its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indentures described above under the caption "--Repurchase of Notes Upon a
Change of Control" and/or the provisions described above under the caption
"--Certain Covenants--Merger, Consolidation or Sale" and not by the
provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Ventas, Inc.'s Restricted
Subsidiaries or the sale of Equity Interests in any of Ventas, Inc.'s
Restricted Subsidiaries;
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that involves
assets having a Fair Market Value of less than $2.0 million;
(2) a transfer of assets between or among Ventas, Inc. or any of its Restricted
Subsidiaries (other than any Permitted Joint Ventures);
(3) an issuance of Equity Interests by a Restricted Subsidiary to Ventas, Inc.
or to another Restricted Subsidiary;
(4) the sale, lease or other disposition of equipment, inventory, accounts
receivable or other assets in the ordinary course of business;
(5) the sale or other disposition of cash or Cash Equivalents;
112
(6) a Restricted Payment that is permitted by the covenant described above
under the caption "--Certain Covenants--Limitations on Restricted Payments"
or any Permitted Investment;
(7) any Asset Swap;
(8) any issuance of Equity Interests (other than Disqualified Stock) by the
Partnership in order to acquire assets used or useful in a Permitted
Business; and
(9) any sale, transfer, conveyance or other disposition of assets of the type
specified in the definition of "Qualified CMBS Transaction" to an
Unrestricted Subsidiary for the Fair Market Value thereof, including cash
received at the time of such sale, transfer, conveyance or disposition in
an amount at least equal to 75% of the Adjusted Book Value thereof as
determined in accordance with GAAP.
"Asset Swap" means an exchange by Ventas, Inc. or any of its Restricted
Subsidiaries of property or assets for property or assets of another Person;
provided, however that (i) Ventas, Inc. or the applicable Restricted
Subsidiary, as the case may be, receives consideration at the time of such
exchange at least equal to the Fair Market Value of the assets or other
property sold, issued or otherwise disposed of (as evidenced by a resolution of
Ventas, Inc.'s or such Restricted Subsidiaries' Board of Directors set forth in
an officers' certificate delivered to the applicable Trustee), and (ii) at
least 75% of the consideration for such exchange constitutes assets or other
property of a kind usable by Ventas, Inc. or any of its Restricted Subsidiaries
in a Permitted Business; provided, however that any consideration not
constituting assets or property of a kind usable by Ventas, Inc. or any of its
Restricted Subsidiaries in a Permitted Business received by Ventas, Inc. or any
of its Restricted Subsidiaries in connection with any exchange permitted to be
consummated under "--Repurchase of Notes Upon an Asset Sale" shall constitute
Net Proceeds subject to the provisions under "--Repurchase of Notes Upon an
Asset Sale."
"Board of Directors" means:
(1) with respect to a corporation, the Board of Directors of the corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other Person, the board or committee of such Person
serving a similar function.
"Business Day" means any day other than a Saturday or Sunday or a day on
which banking institutions in The City of New York are required or authorized
to close.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means, with respect to any entity, any capital stock
(including preferred stock), shares, interests, participation or other
ownership interests (however designated) of such entity and any rights (other
than debt securities convertible into or exchangeable for capital stock),
warrants or options to purchase any thereof; provided, however, that leases of
real property that provide for contingent rent based on the financial
performance of the tenant shall not be deemed to be Capital Stock.
"Cash Equivalents" means demand deposits, certificates of deposit or
repurchase agreements with banks or financial institutions, marketable
obligations of the United States of America or any of its agencies or
instrumentalities, or any commercial paper or other obligation rated, at time
of purchase, "P-2" or better by Moody's or "A-2" or better by S&P's and
repurchase obligations with a term of not more than 10 days for underlying
securities supported by the full faith and credit of the United States of
America, and money market funds substantially all of whose investments
constitute Cash Equivalents.
"Change of Control" means (i) such time as any "person" or "group" (as such
terms are defined in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total
voting
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power of the Voting Stock of Ventas, Inc. on a fully diluted basis; provided,
however that a person shall not be deemed to be the beneficial owner of
securities subject to a merger, stock purchase, subscription or other
agreement, if the acquisition of such securities is subject to conditions
outside of such person's control, until such acquisition actually occurs; (ii)
the first day on which the Partnership ceases to be a Restricted Subsidiary of
Ventas, Inc. or (iii) the first day on which the Partnership fails to own 100%
of the issued and outstanding Equity Interests of Ventas Capital Corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations of Ventas, Inc. and its Restricted Subsidiaries plus
amounts which have been deducted, and minus amounts which have been added, for
the following (without duplication): (1) total interest expense of Ventas, Inc.
and its Restricted Subsidiaries for such period, including interest or
distributions on Debt of Ventas, Inc. and its Restricted Subsidiaries, (2)
provision for taxes based on income or profits or the Tax Amount of Ventas,
Inc. and its Restricted Subsidiaries for such period, to the extent that such
provision for taxes or Tax Amount was included in computing such Consolidated
Income Available for Debt Service, (3) amortization of debt discount and
deferred financing costs, (4) provisions for gains and losses on properties,
(5) depreciation and amortization (excluding amortization of prepaid cash
expenses that were paid in a prior period), (6) the effect of any non-cash
charge resulting from a change in accounting principles in determining Earnings
from Operations for such period, (7) amortization of deferred charges, and (8)
the aggregate amount of all non-cash expenses (excluding any such non-cash
expenses to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period), determined on a consolidated basis, to the extent
such items increased or decreased Earnings from Operations for such period.
"Consolidated Net Tangible Assets" means, as of any date, all tangible
assets of Ventas, Inc. and its Restricted Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles
and classified as such on the consolidated balance sheet of Ventas, Inc. and
its Restricted Subsidiaries.
"Consolidated Real Estate Revenues" means, with respect to any Person for
any period, the aggregate of the Real Estate Revenues of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis determined in
accordance with GAAP.
"Credit Agreement" means that certain Credit Agreement, to be dated as of
April 17, 2002, by and among the Partnership, Banc of America Securities LLC
and the lenders party thereto providing for up to $350.0 million of revolving
credit borrowings, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, modified, renewed, refunded, replaced or refinanced from
time to time (whether or not with the original agents or lenders and whether or
not contemplated under the original agreement relating thereto).
"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through the sale of receivables to
such lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time (whether or not with the original agents or lenders and
whether or not contemplated under the original agreement relating thereto).
"Debt" of Ventas, Inc. or any of its Restricted Subsidiaries means, without
duplication, any indebtedness of Ventas, Inc. or any Restricted Subsidiary,
whether or not contingent, in respect of:
(1) borrowed money or evidenced by bonds, notes, debentures or similar
instruments,
(2) indebtedness for borrowed money secured by any encumbrance existing on
property owned by Ventas, Inc. or its Restricted Subsidiaries, to the
extent of the lesser of (x) the amount of indebtedness so secured or (y)
the Fair Market Value of the property subject to such encumbrance,
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(3) the reimbursement obligations in connection with any letters of credit
actually drawn or amounts representing the balance deferred and unpaid of
the purchase price of any property or services, except any such balance
that constitutes an accrued expense, trade payable, conditional sale
obligations or obligations under any title retention agreement,
(4) the principal amount of all obligations of Ventas, Inc. and its Restricted
Subsidiaries with respect to redemption, repayment or other repurchase of
any Disqualified Stock,
(5) any lease of property by Ventas, Inc. or any of its Restricted Subsidiaries
as lessee which is reflected on Ventas, Inc.'s or such Restricted
Subsidiaries' consolidated balance sheet as a Capitalized Lease Obligation,
to the extent, in the case of items of indebtedness under clauses (1)
through (5) above, that any such items would appear as a liability on
Ventas, Inc.'s or such Restricted Subsidiaries' consolidated balance sheet
in accordance with GAAP; or
(6) the liquidation preference of any Disqualified Stock of Ventas, Inc. or of
any shares of preferred stock of any of its Restricted Subsidiaries.
Debt also includes, to the extent not otherwise included, any obligation by
Ventas, Inc. and its Restricted Subsidiaries to be liable for, or to pay, as
obligor, Guarantor or otherwise (other than for purposes of collection in the
ordinary course of business), Debt of another Person (other than Ventas, Inc.
or any of its Restricted Subsidiaries); it being understood that Debt shall be
deemed to be incurred by Ventas, Inc. or any of its Restricted Subsidiaries
whenever Ventas, Inc. or such Restricted Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof; provided, however that
a Person shall not be deemed to have incurred Debt (or be liable with respect
to such Debt) by virtue of Standard Securitization Undertakings.
Debt shall not include (a) Debt arising from agreements of Ventas, Inc. or
any Restricted Subsidiary providing for indemnification, adjustment or holdback
of purchase price or similar obligations, in each case, incurred or assumed in
connection with the acquisition or disposition of any business, assets or a
Subsidiary, other than guarantees of Debt incurred by any person acquiring all
or any portion of such business, assets or Subsidiary for the purpose of
financing such acquisition, (b) contingent obligations under performance bonds,
performance guarantees, surety bonds, appeal bonds or similar obligations
incurred in the ordinary course of business and consistent with past practices,
or (c) bonds issued by Ventas Realty to residents of an assisted living
facility owned by Ventas Realty and leased to and operated by Atria, Inc. and
the related mortgage securing such bonds pursuant to contractual commitments in
existence on the date of the Indentures. In the case of Debt as of any date
issued with original issue discount, the amount of such Debt shall be the
accreted value thereof as of such date.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Default Payment Date" means, with respect to the notes, each Interest
Payment Date.
"Disqualified Stock" means, with respect to any entity, any Capital Stock of
such entity which by the terms of such Capital Stock (or by the terms of any
security into which it is convertible or for which it is exchangeable or
exercisable), upon the happening of any event or otherwise (other than pursuant
to a change of control provision not materially more favorable to the holder
thereof than as described under "Description of Notes-- Repurchase of Notes
Upon a Change of Control"), (1) matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise (other than Capital Stock which is
redeemable solely in exchange for Capital Stock which is not Disqualified Stock
or for Subordinated Debt), (2) is convertible into or exchangeable or
exercisable for Debt, other than Subordinated Debt or Disqualified Stock, or
(3) is redeemable at the option of the holder thereof, in whole or in part
(other than Capital Stock which is redeemable solely in exchange for Capital
Stock which is not Disqualified Stock or for Subordinated Debt); in each case
on or prior to the stated maturity of the Notes.
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"Earnings from Operations" for any period means the consolidated net income
of Ventas, Inc. and its Restricted Subsidiaries without reduction for any
minority interests, excluding gains and losses on sales of investments,
extraordinary items, distributions on equity securities, property valuation
losses, and the net income of any Person, other than a Restricted Subsidiary of
Ventas, Inc. (except to the extent of cash dividends or distributions paid to
Ventas, Inc. or any Restricted Subsidiary) as reflected in the financial
statements of Ventas, Inc. and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP, and excluding the
cumulative effect of changes in accounting principles.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Joint Venture" means any Permitted Joint Venture created after the
date of the Indentures; provided, however that the only Investments made by
Ventas, Inc. and its Restricted Subsidiaries in such Permitted Joint Venture
are made pursuant to clauses (10) or (11) of the definition of Permitted
Investments or are Restricted Payments permitted by the covenant described
above under the caption "Certain Covenants--Limitation on Restricted Payments."
"Existing Debt" means Debt of Ventas, Inc. and its Restricted Subsidiaries
(other than Debt under the Credit Agreement) in existence on the date of the
Indentures, until such amounts are repaid.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) which could be
negotiated in an arm's length free market transaction between a willing seller
and a willing buyer, neither of which is under pressure or compulsion to
complete the transaction. Fair Market Value shall be determined by the Board of
Directors of Ventas, Inc. in good faith.
"Funds from Operations" for any period means Earnings from Operations for
such period plus amounts that have been deducted, and minus amounts that have
been added, for the following (without duplication): (1) provision for taxes of
Ventas, Inc. and its Restricted Subsidiaries based on income, (2) amortization
of debt discount and deferred financing costs, (3) provisions for gains and
losses on properties and property depreciation and amortization, (4) the effect
of any noncash charge resulting from a change in accounting principles in
determining Earnings from Operations for such period, (5) amortization of
deferred charges and (6) gains (and losses) associated with the partial
termination of the interest rate swap agreement in connection with the
issuances of the Notes and the repayment of existing floating rate Debt.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the date of determination.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Debt.
"Guarantors" means each of:
(1) Ventas, Inc.; and
(2) any other Restricted Subsidiary of Ventas, Inc. that executes a Guarantee
of the Notes in accordance with the provisions of the Indentures;
and their respective successors and assigns; provided, however that any Person
constituting a Guarantor as described above shall cease to constitute a
Guarantor when its Guarantee of the Notes is released in accordance with the
terms of the Indentures.
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"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person against
fluctuations in interest rates or foreign exchange rates.
"Incur" means issue, create, assume, guarantee, incur or otherwise become
liable for; provided, however that any Debt or Capital Stock of a person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be incurred
by such Subsidiary at the time it becomes a Restricted Subsidiary. Neither the
accrual of interest nor the accretion of original issue discount shall be
deemed to be an incurrence of Debt. The term "incurrence" when used as a noun
shall have a correlative meaning.
"Interest Payment Date" has the meaning set forth in the Indenture and the
Notes.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to directors,
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Debt, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If Ventas,
Inc. or any Restricted Subsidiary sells or otherwise disposes of any Equity
Interests of any direct or indirect Restricted Subsidiary of Ventas, Inc. or
such Restricted Subsidiary such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of Ventas, Inc.,
Ventas, Inc. or such Restricted Subsidiary will be deemed to have made an
Investment on the date of any such sale or disposition equal to the Fair Market
Value of the Equity Interests of such Subsidiary not sold or disposed. The
acquisition by Ventas, Inc. or any of its Restricted Subsidiaries of a Person
that holds an Investment in a third Person will be deemed to be an Investment
by Ventas, Inc. or such Restricted Subsidiary in such third Person in an amount
equal to the Fair Market Value of the Investment held by the acquired Person in
such third Person. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and, except in connection with any Qualified CMBS Transaction, any
filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction.
"Make-Whole Amount" means, in connection with any optional redemption of the
Notes, the excess, if any, of:
(1) the aggregate present value as of the date of such redemption of each
dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated
payment) that would have been payable in respect of each such dollar if
such redemption or accelerated payment had not been made, determined by
discounting, on a semi-annual basis, such principal and interest at the
Reinvestment Rate (determined on the third Business Day preceding the date
a notice of redemption is given or declaration of acceleration is made)
from the respective dates on which such principal and interest would have
been payable if such redemption or payment had not been made, over
(2) the aggregate principal amount of the Notes being redeemed or paid.
"Moody's" means Moody's Investors Service, Inc. or any successor to the
rating agency business thereof.
"Net Proceeds" means the aggregate cash proceeds and Cash Equivalents
received by Ventas, Inc. or any of its Restricted Subsidiaries in respect of
any Asset Sale or Qualified CMBS Transaction (including, without limitation,
any cash received upon the sale or other disposition of any non-cash
consideration received in any
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Asset Sale or Qualified CMBS Transaction), net of the (i) amount required to be
distributed to the stockholders by Ventas, Inc. as a result of such Asset Sale
or Qualified CMBS transaction in order to maintain its status as REIT under the
Code and (ii) direct costs relating to such Asset Sale or Qualified CMBS
Transaction, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result of the Asset Sale or Qualified CMBS Transaction, taxes paid or payable
as a result of the Asset Sale or Qualified CMBS Transaction and, without
duplication, all distributions to equity holders in respect of taxes, in each
case, after taking into account any available tax credits or deductions and any
tax sharing arrangements, amounts required to be applied to the repayment of
Debt, other than Debt under a Credit Facility, and appropriate amounts to be
provided by Ventas, Inc. or any Restricted Subsidiary, as the case may be, as a
reserve required in accordance with GAAP against any liabilities associated
with such Asset Sale or Qualified CMBS Transaction and retained by Ventas, Inc.
or any Restricted Subsidiary, as the case may be, after such Asset Sale or
Qualified CMBS Transaction, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale or Qualified CMBS Transaction; provided, however, that any
amounts remaining after adjustments, revaluations or liquidations of such
reserves shall constitute Net Proceeds.
"Non-Recourse Debt" means Debt:
(1) as to which neither Ventas, Inc. nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking, agreement
or instrument that would constitute Debt), other than pursuant to Standard
Securitization Undertakings, (b) is directly or indirectly liable as a
Guarantor or otherwise, other than pursuant to Standard Securitization
Undertakings, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the holders of
the Debt may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Debt (other than the Notes) of Ventas, Inc. or any of its
Restricted Subsidiaries to declare a default on such other Debt or cause
the payment of the Debt to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of Ventas, Inc. or any of its
Restricted Subsidiaries, other than pursuant to Standard Securitization
Undertakings.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Debt.
"Permitted Business" means the definition assigned to such term in the
Credit Agreement as in effect on the date of the Indentures plus any other
business that Ventas, Inc. and its Restricted Subsidiaries are engaged in on
the date of the Indentures and such business activities as are complementary,
incidental, ancillary or related to, or are reasonable extensions of, the
foregoing.
"Permitted Debt" means:
(1) Permitted Refinancing Debt, and
(2) Debt under Credit Facilities in an aggregate principal amount (including
all Permitted Refinancing Debt incurred with respect thereto) not to exceed
at any one time outstanding an amount equal to $350.0 million less the
aggregate amount of Net Proceeds of Asset Sales that have been applied
since the date of the Indentures to repay Debt under Credit Facilities or
Permitted Refinancing Debt incurred with respect thereto pursuant to clause
(1) of the second paragraph of the covenant described above under the
caption "--Repurchase of Notes Upon an Asset Sale." Debt outstanding under
Credit Facilities on the date of the Indentures will be deemed to have been
incurred pursuant to clause (2) of this definition.
"Permitted Investments" means:
(1) any Investment in Ventas, Inc. or any of its Restricted Subsidiaries;
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(2) any Investment in Permitted Mortgage Investments in the ordinary course of
business or in Cash Equivalents;
(3) any Investment by Ventas, Inc. or any of its Restricted Subsidiaries in a
Person, if as a result of such Investment:
(a) such Person becomes a Subsidiary of Ventas, Inc. or such Restricted
Subsidiary and a Guarantor; or
(b) such Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, Ventas, Inc. or any of its Restricted Subsidiaries that
is a Guarantor;
(4) any Investment made as a result of the receipt of non-cash consideration
from an Asset Sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase of Notes Upon an
Asset Sale";
(5) any acquisition of assets to the extent made in exchange for the issuance
of Equity Interests (other than Disqualified Stock) of Ventas, Inc. or the
Partnership;
(6) any Investments received in compromise of obligations of such persons
incurred in the ordinary course of trade creditors or customers that were
incurred in the ordinary course of business, including pursuant to any plan
of reorganization or similar arrangement upon the bankruptcy or insolvency
of any trade creditor or customer;
(7) Hedging Obligations;
(8) intercompany Debt and Guarantees, in either case, to the extent permitted
under the "Limitations on Incurrence of Debt" covenant;
(9) any Investment by Ventas, Inc. or any of its Restricted Subsidiaries
acquired as a result of a transfer of assets to an Unrestricted Subsidiary
in connection with a Qualified CMBS Transaction permitted by clause (9) of
the definition of "Asset Sale";
(10) any Investment in Permitted Joint Ventures when taken together with all
other Investments made pursuant to this clause (10) since the date of the
Indentures does not to exceed the greater of (i) $50.0 million or (ii) 5%
of Ventas, Inc.'s Consolidated Net Tangible Assets; and
(11) other Investments in any Person having an aggregate Fair Market Value
(measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (11) since the date of the
Indentures does not to exceed $50.0 million.
"Permitted Joint Venture" means any entity owned 50% or more by Ventas, Inc.
and/or any of its Restricted Subsidiaries, if such entity (a) is engaged in a
Permitted Business, (b) is designated as a Restricted Subsidiary(if more than
50% owned) and (c) Ventas has the right to appoint at least half of the Board
of Directors or similar governing body of such entity.
"Permitted Mortgage Investment" means any investment in a secured note,
mortgage, deed of trust, collateralized mortgage obligations, commercial
mortgage-backed securities, other secured debt securities, secured debt
derivative or other debt instruments, so long as such investment relates
directly or indirectly to real property that constitutes or is used as a
skilled nursing home center, hospital, personal healthcare facility, assisted
living facility, independent living facility, continuum of care facility, life
care facility, sheltered care facility, senior housing, senior living facility
or other property customarily constituting an asset of a real estate investment
trust specializing in healthcare or senior housing property.
"Permitted Refinancing Debt" means any Debt of Ventas, Inc. or any of its
Restricted Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund other Debt of
Ventas, Inc. or any of its Restricted Subsidiaries (other than intercompany
Debt); provided, however that:
(1) the principal amount (or accreted value, if applicable) of such Permitted
Refinancing Debt does not exceed the principal amount (or accreted value,
if applicable) of the Debt extended, refinanced, renewed, replaced,
119
defeased or refunded (plus all accrued interest on the Debt and the amount
of all expenses and premiums incurred in connection therewith);
(2) such Permitted Refinancing Debt has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal
to or greater than the Weighted Average Life to Maturity of, the Debt being
extended, refinanced, renewed, replaced, defeased or refunded;
(3) if the Debt being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Debt has a final maturity date later than the final maturity
date of, and is subordinated in right of payment to, the Notes on terms at
least as favorable to the holders of Notes as those contained in the
documentation governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded; and
(4) such Debt is incurred either by Ventas, Inc. or by the Restricted
Subsidiary who is the obligor on the Debt being extended, refinanced,
renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Prospectus" means the prospectus included in a Registration Statement, as
amended or supplemented by any prospectus supplement and by all other
amendments thereto, including post-effective amendments, and all material
incorporated by reference into such Prospectus.
"Qualified CMBS Transaction" means any transaction or series of transactions
entered into by Ventas, Inc. or any of its Restricted Subsidiaries pursuant to
which Ventas, Inc. or any of its Restricted Subsidiaries sells, conveys or
otherwise transfers to an Unrestricted Subsidiary, or grants a security
interest in, any Real Estate Assets or mortgage receivables (whether now
existing or arising in the future) of Ventas, Inc. or any of its Restricted
Subsidiaries, and any assets related thereto including, without limitation, all
collateral securing such Real Estate Assets or mortgage receivables, all
contracts and all guarantees or other obligations in respect of such Real
Estate Assets or mortgage receivables, proceeds of such Real Estate Assets or
mortgage receivables and other assets which are customarily transferred or in
respect of which security interests are customarily granted in connection with
asset securitization transactions involving Real Estate Assets or mortgage
receivables.
"Real Estate Assets" means, as of any date, the real estate assets of such
Person and its Restricted Subsidiaries on such date, on a consolidated basis
determined in accordance with GAAP.
"Real Estate Revenues" means, with respect to any Real Estate Asset of
Ventas, Inc. and its Restricted Subsidiaries owned as of the date of the
Indentures, the rental revenues generated by such Real Estate Asset for Ventas,
Inc. during the four-quarter period ending March 31, 2002, all as set forth on
a schedule attached to the Indentures.
"Reinvestment Rate" means 0.50% plus the arithmetic mean of the yields under
the respective heading Week Ending published in the most recent Statistical
Release under the caption Treasury Constant Maturities for the maturity
(rounded to the nearest month) corresponding to the remaining life to maturity,
as of the date of the principal being redeemed or paid. If no maturity exactly
corresponds to such maturity, yields for the two published maturities most
closely corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be interpolated
or extrapolated from such yields on a straight-line basis, rounding in each of
such relevant periods to the nearest month. For the purpose of calculating the
Reinvestment Rate, the most recent Statistical Release published prior to the
date of determination of the Make-Whole Amount shall be used.
"Replacement Assets" mean properties or assets (other than current assets)
that are used or useful in a Permitted Business.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"S&P's" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. or any successor to the rating agency business
thereof.
"Secured Debt" means, for any Person, Debt secured by a mortgage, lien,
charge, pledge or security interest or other encumbrance on the property of
such Person or any of its Restricted Subsidiaries.
"Securities Act" means the Securities Act of 1933, as amended.
"Shelf Registration Statement" has the meaning set forth in Section 4 of the
registration rights agreement.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by Ventas, Inc. or any Restricted
Subsidiary which are reasonably customary in a Qualified CMBS Transactions by
the parent or sponsoring entity.
"Statistical Release" means that statistical release designated H.15(519) or
any successor publication that is published weekly by the Federal Reserve
System and that establishes annual yields on actively traded United States
government securities adjusted to constant maturities, or, if such statistical
release is not published at the time of any determination under the Indenture,
then such other reasonably comparable index we designate.
"Subordinated Debt" means Debt which by the terms of such Debt is
subordinated in right of payment to the principal of and interest and premium,
if any, on the Notes or any Guarantee thereof.
"Subsidiary" means, for any Person, any corporation or other entity of which
a majority of the Voting Stock is owned, directly or indirectly, by such Person
or one or more other Subsidiaries of such Person.
"Tax Amount" means, with respect to any Person for any period, the combined
federal, state and local income taxes that would be paid by such Person if it
were a Delaware corporation filing separate tax returns with respect to its
Taxable Income for such Period; provided, however, that in determining the Tax
Amount, the effect thereon of any net operating loss carryforwards or other
carryforwards or tax attributes, such as alternative minimum tax carryforwards,
that would have arisen if such Person were a Delaware corporation shall be
taken into account. Notwithstanding anything to the contrary, Tax Amount shall
not include taxes resulting from such Person's reorganization as or change in
the status to a corporation.
"Taxable Income" means, with respect to any Person for any period, the
taxable income or loss of such Person for such period for federal income tax
purposes; provided, however that (i) all items of income, gain, loss or
deduction required to be stated separately pursuant to Section 703(a)(1) of the
Code shall be included in taxable income or loss, (ii) any basis adjustment
made in connection with an election under Section 754 of the Code shall be
disregarded and (iii) such taxable income shall be increased or such taxable
loss shall be decreased by the amount of any interest expense incurred by such
Person that is not treated as deductible for federal income tax purposes by a
partner or member of such Person.
"10% Stockholder" means any Person who beneficial owns 10% or more of the
total voting power of the Voting Stock of Ventas, Inc.
"Total Assets" means, for any Person as of any date, the sum of (i) in the
case of any Real Estate Assets that were owned as of the date of the Indentures
and that are owned as of such date, the Real Estate Revenues specified for such
Real Estate Assets on a schedule attached to the Indentures, divided by .10,
plus (ii) the cost (original cost plus capital improvements before depreciation
and amortization) of all Real Estate Assets acquired after the date of the
Indentures that are then owned by Ventas, Inc. or any Restricted Subsidiaries
and (iii) the book value of all assets (excluding Real Estate Assets and
intangibles) of such Person and its Restricted Subsidiaries on a consolidated
basis determined in accordance with GAAP.
121
"Total Unencumbered Assets" means, for any Person as of any date, the Total
Assets of such Person and its Restricted Subsidiaries as of such date, that do
not secure any portion of Secured Debt, on a consolidated basis determined in
accordance with GAAP.
"Unrestricted Subsidiary" means (i) Ventas Specialty I, Inc., Ventas Finance
I, Inc., Ventas Specialty I, LLC and Ventas Finance I, LLC, and (ii) any
Subsidiary of Ventas, Inc. or any successor to any of them, other than the
Partnership and Ventas Capital Corporation, that is designated by the Board of
Directors as an Unrestricted Subsidiary pursuant to a board resolution, but
only to the extent that such Subsidiary:
(1) has no Debt other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding with
Ventas, Inc. or any of its Restricted Subsidiaries unless the terms of any
such agreement, contract, arrangement or understanding are no less
favorable to Ventas, Inc. or such Restricted Subsidiary than those that
might be obtained at the time from Persons who are not Affiliates of
Ventas, Inc.;
(3) is a Person with respect to which neither Ventas, Inc. nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any Debt of Ventas, Inc. or any of its Restricted Subsidiaries,
other than pursuant to Standard Securitization Undertakings; and
(5) has at least one director on its Board of Directors that is not a director
or executive officer of Ventas, Inc. or any of its Restricted Subsidiaries
and has at least one executive officer that is not a director or executive
officer of Ventas, Inc. or any of its Restricted Subsidiaries.
Any designation of a Subsidiary of Ventas, Inc. as an Unrestricted
Subsidiary will be evidenced to the Trustees by filing with the applicable
Trustee a certified copy of the board resolution giving effect to such
designation and an officers' certificate certifying that such designation
complied with the preceding conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Limitations on
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the preceding requirements as an Unrestricted Subsidiary, it will
thereafter cease to be an Unrestricted Subsidiary for purposes of the
Indentures and any Debt of such Subsidiary will be deemed to be incurred by a
Restricted Subsidiary of Ventas, Inc. as of such date and, if such Debt is not
permitted to be incurred as of such date under the covenant described under the
caption "--Certain Covenants--Limitations on Incurrence of Debt," Ventas, Inc.
will be in default of such covenant.
"Unsecured Debt" means, for any Person, any Debt of such Person or its
Restricted Subsidiaries which is not Secured Debt.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Debt at any
date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect of
the Debt, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such
payment; by
(2) the then outstanding principal amount of such Debt.
122
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax considerations relevant to participants in the Exchange Offer and
holders of the Notes. This discussion is based upon the Code, Treasury
Regulations, Internal Revenue Service ("IRS") rulings, and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations.
This discussion does not deal with all aspects of United States federal
income taxation that may be important to participants in the Exchange Offer and
holders of the Notes, and does not deal with tax consequences arising under the
laws of any foreign, state or local jurisdiction. This discussion is for
general information only, and does not purport to address all tax consequences
that may be important to particular participants or purchasers in light of
their personal circumstances, or to certain types of participants or purchasers
(such as certain financial institutions, insurance companies, tax-exempt
entities, dealers in securities or persons who hold the Notes in connection
with a straddle, hedge, conversion transaction or any similar or hybrid
financial instrument) that may be subject to special rules. This discussion
assumes that each holder holds the Notes as a capital asset within the meaning
of section 1221 of the Code.
For the purpose of this discussion, a "Non-U.S. Holder" refers to any holder
who is not a United States person. The term "United States person" means a
citizen or resident of the United States, a corporation or partnership
(including any entity taxed as a partnership for United States federal income
tax purposes) organized in the United States or any state thereof, an estate,
the income of which is includible in income for United States federal income
tax purposes regardless of its source, or a trust if (i) a court within the
United States is able to exercise primary supervision over the administration
of the trust and (ii) one or more United States persons have the authority to
control all substantial decisions of the trust. In addition, the term "Non-U.S.
Holder" does not include a trust that has elected under applicable Treasury
Regulations to retain its pre-August 20, 1996 classification as a United States
person.
PROSPECTIVE PARTICIPANTS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR
PARTICIPATION IN THE EXCHANGE OFFER AND THEIR OWNERSHIP AND DISPOSITION OF THE
NOTES AND THE EFFECT THAT THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON SUCH TAX
CONSEQUENCES.
Tax Considerations Applicable to United States Persons
Interest on the Notes. Interest paid on the Notes will be taxable to a
holder as ordinary interest income at the time that such interest is accrued or
(actually or constructively) received in accordance with the holder's method of
tax accounting and in the amount of each payment. We expect that the Notes will
not be issued with original issue discount within the meaning of the Code.
Liquidated Damages on the Notes. We intend to treat our obligation to pay
liquidated damages (see "Description of notes--Registration rights") as an
"incidental contingency" for United States federal income tax purposes and, in
accordance with such treatment, any payment of liquidated damages should be
subject to tax when such interest is accrued or (actually or constructively)
received in accordance with the holder's method of tax accounting. Regardless
of our position, however, the IRS may take the contrary position that our
obligation to pay liquidated damages is not an incidental contingency, which,
if upheld, could affect the timing of both the United States person's
recognition of income from the Notes and our deduction with respect to the
payments of liquidated damages.
If we fail to register the New Notes for sale to the public, holders should
consult their tax advisers concerning the appropriate tax treatment of the
payment of liquidated damages on the Notes.
123
Sale or Exchange of the Notes. In general, a holder of the Notes will
recognize gain or loss upon the sale, redemption, retirement or other
disposition of the Notes measured by the difference between the amount of cash
and the fair market value of any property received (except to the extent
attributable to the payment of accrued interest, which will be taxable as such)
and the holder's adjusted tax basis in the Notes. A holder's adjusted tax basis
in the Notes generally will equal the cost of the Notes to the holder increased
by the amount of market discount, if any, previously taken into income by the
holder or decreased by any bond premium theretofore amortized by the holder
with respect to the Notes. Subject to the market discount rules discussed
below, the gain or loss on the disposition of the Notes will be capital gain or
loss and will be long-term gain or loss if the Notes have been held for more
than one year at the time of such disposition.
Market Discount. The resale of the Notes may be affected by the "market
discount" provisions of the Code. For this purpose, but subject to a de minimis
exception, the market discount on a Note will generally be equal to the amount,
if any, by which the stated redemption price at maturity of the Note
immediately after its acquisition exceeds the holder's tax basis in the Note.
Unless the election described below is made to include accrued market discount
in income currently, these provisions generally require a holder of a Note
acquired at a market discount to treat as ordinary income any gain recognized
on the disposition of the Note to the extent of the "accrued market discount"
on the Note at the time of disposition. In general, market discount on a Note
will be treated as accruing on a straight-line basis over the term of the Note,
or, at the election of the holder, under a constant yield method. Holders may
elect to include accrued market discount in income currently with respect to
all market discount bonds acquired on or after the first day of the first
taxable year for which the election is effective and for any such bond on
either a straight-line or constant yield basis. In the absence of such
election, a holder of the Notes acquired at a market discount may be required
to defer the deduction of a portion of the interest on any indebtedness
incurred or maintained to purchase or carry the Notes until the Notes are
disposed of in a taxable transaction.
Tax Considerations Applicable to Non-U.S. holders
Interest on the Notes. Generally, and assuming certain certification
requirements are satisfied (which include identification of the beneficial
owner of Notes), interest paid on the Notes to a Non-U.S. Holder will not be
subject to United States federal income tax if (i) such interest is not
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Holder and (ii) the Non-U.S. Holder does not actually
or constructively own 10% or more of the total voting power of all classes of
our stock entitled to vote, is not a bank receiving interest pursuant to a loan
agreement entered into in the ordinary course of its trade or business and is
not a controlled foreign corporation with respect to which we are a "related
person" within the meaning of the Code.
The certification requirements mentioned above generally require that either
(i) the beneficial owner of a Note certify to us (or our paying agent) that
such beneficial owner is a Non-U.S. Holder and provide such owner's name,
address and taxpayer identification number, if any, or (ii) a securities
clearing organization, bank or other financial institution that holds customer
securities in the ordinary course of its trade or business and holds the Note
on behalf of the beneficial owner certify that such certificate has been
received from the beneficial owner and a copy of such certificate is furnished
to us (or our paying agent). Applicable Treasury Regulations also provide
alternative methods for satisfying the certification requirements. These
regulations also require, in the case of Notes held by a foreign partnership,
that (i) the certification be provided by the partners rather than by the
foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number. A look-through rule applies in
the case of tiered partnerships.
A holder that is not exempt from tax under these rules will be subject to
United States federal income tax withholding at a rate of 30% or a lower
applicable treaty rate unless the interest is effectively connected with the
conduct of a United States trade or business, in which case the interest will
be subject to the United States federal income tax on net income that applies
to United States persons generally. Corporate Non-U.S. Holders that receive
interest income that is effectively connected with the conduct of a trade or
business within the United States may also be subject to an additional "branch
profits" tax on such income. Non-U.S. Holders should consult applicable income
tax treaties, which may provide different rules.
124
Sales or Exchange of the Notes. A Non-U.S. Holder generally will not be
subject to United States federal income tax on gain recognized upon the sale or
other disposition of the Notes unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the
Non-U.S. Holder; (ii) in the case of a Non-U.S. Holder who is a nonresident
alien individual and holds the Notes as a capital asset, such holder is present
in the United States for 183 or more days in the taxable year and certain other
circumstances are present; or (iii) the Non-U.S. Holder is subject to tax
pursuant to the provisions of United States federal income tax law applicable
to certain United States expatriates. Corporate Non-U.S. Holders recognizing
effectively connected gain may also be subject to an additional "branch
profits" tax on such gain. Non-U.S. Holders should consult applicable income
tax treaties which may provide different rules.
Federal Estate Taxes. A Note beneficially owned by an individual who is not
domiciled in the United States for United States federal estate tax purposes at
the time of his or her death generally will not be subject to United States
federal estate tax as a result of such individual's death, provided that (i)
such individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote within
the meaning of section 871(h)(3) of the Code and (ii) interest payments with
respect to such Note would not have been, if received at the time of such
individual's death, effectively connected with the conduct of a United States
trade or business by such individual.
Information Reporting and Backup Withholding
United States Persons. Information reporting and backup withholding may
apply to payments of interest on or the proceeds of the sale or other
disposition of the Notes with respect to certain non-corporate United States
person. Such United States person generally will be subject to backup
withholding unless the recipient of the payment supplies a taxpayer
identification number, certified under penalties of perjury, as well as certain
other information, or otherwise establishes, in the manner prescribed by law,
an exemption from backup withholding. Any amount withheld under backup
withholding is allowable as a credit against the United States person's federal
income tax, upon furnishing the required information to the IRS.
Non-U.S. Holders. Generally, information reporting and backup withholding
of United States federal income tax may apply to payments of principal,
interest and premium (if any) to Non-U.S. Holders if the payee fails to certify
that the holder is not a United States person or if we or our paying agent has
actual knowledge that the payee is a United States person. The backup
withholding tax generally will not apply to interest paid to Non-U.S. Holders
outside the United States that are subject to withholding as discussed above
(see "--Tax Considerations Applicable to Non-U.S. Holders--Interest on the
Notes") or that perfect their eligibility for the benefits of a tax treaty that
reduces or eliminates such withholding.
The payment of the proceeds on the disposition of the Notes to or through
the United States office of a United States or foreign broker will be subject
to information reporting and backup withholding unless the owner provides the
certification described above or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a Non-U.S. Holder of the Notes to
or through a foreign office of a broker will not be subject to backup
withholding. However, if such broker is a United States person, a controlled
foreign corporation for United States tax purposes, a foreign person 50% or
more of whose gross income from all sources for certain periods is from
activities that are effectively connected with a United States trade or
business or a foreign partnership in which United States persons hold more than
50% of the income or capital interests or which is engaged in a United States
trade or business at any time during its tax year, information reporting will
apply unless the broker has documentary evidence of the owner's status as a
Non-U.S. Holder and has no actual knowledge to the contrary or unless the owner
otherwise establishes an exemption. Both backup withholding and information
reporting will apply to the proceeds from the dispositions if the broker has
actual knowledge that the payee is a United States person.
125
Consequences of the Exchange Offer to Exchanging and Nonexchanging Holders
The exchange of an Original Note for a New Note pursuant to the Exchange
Offer will not constitute a taxable exchange for United States federal income
tax purposes because the New Note will not be considered to differ materially
in kind or extent from the Original Note exchanged therefor. Accordingly, a New
Note will be treated for United States federal income tax purposes as a
continuation of a Note in your hands, with the result that (1) you will not
recognize any gain or loss on the exchange; (2) the holding period for a New
Note will include the holding period for the Original Note for which it was
exchanged; and (3) the adjusted tax basis of a New Note immediately after the
exchange will be the same as the adjusted tax basis of the Original Note for
which it was exchanged.
The Exchange Offer will not have any United States federal income tax
consequences to a nonexchanging holder of Original Notes.
126
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of those New Notes. Each letter of transmittal that accompanies
this prospectus states that by so acknowledging and by delivering a prospectus,
a broker-dealer will not be deemed to admit that it is an underwriter within
the meaning of the Securities Act. A participating broker-dealer may use this
prospectus, as it may be amended or supplemented from time to time, in
connection with resales of New Notes received in exchange for Original Notes
where those Original Notes were acquired by the broker-dealer as a result of
market-making activities or other trading activities. The Issuers and the
Guarantors have agreed, if requested by such a participating broker-dealer, to
use their respective commercially reasonable efforts to keep the registration
statement of which this prospectus is a part continuously effective for a
period not to exceed 30 days after the date on which the registration statement
is declared effective, or such longer period if extended under certain
circumstances, for use in connection with any resale of this kind. In addition,
until , 2002 (90 days after the date of this prospectus) all
dealers effecting transactions in the Notes may be required to deliver a
prospectus.
We and the Issuers will not receive any proceeds from any sale of New Notes
by broker-dealers. New Notes received by broker-dealers for their own account
in the Exchange Offer may be sold from time to time in one or more
transactions. These sales may be made in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of these methods of resale, and may be at market prices prevailing
at the time of resale, at prices related to the prevailing market prices or
negotiated prices. Any resale of this kind may be made directly to purchasers
or to or through brokers or dealers who may receive compensation in the form of
commissions or concessions from any of these broker-dealers and/or the
purchasers of any of these New Notes. Any broker-dealer that resells New Notes
that were received by it for its own account in the Exchange Offer and any
broker or dealer that participates in a distribution of these New Notes may be
deemed to be an underwriter within the meaning of the Securities Act. If this
is the case, any profit of any of these resales of New Notes and any
commissions or concessions received by any of these persons may be deemed to be
underwriting compensation under the Securities Act. Each letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
underwriter within the meaning of the Securities Act.
The Issuers and Guarantors have agreed to pay all expenses incident to the
exchange offer, other than the expenses of counsel for the holder of the
Original Notes and commissions or concessions of any brokers or dealers. The
Issuers and Guarantors have also agreed to indemnify the holders of the
Original Notes, including any broker-dealers, against various liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Willkie Farr & Gallagher, New York, New York, will pass upon the validity of
the New Notes and related guarantees offered in this prospectus for the Issuers
and the Guarantors.
EXPERTS
The consolidated financial statements (including the schedules incorporated
by reference in such consolidated financial statements) of Ventas, Inc. at
December 31, 2001 and 2000, and for each of the three years in the period ended
December 31, 2001, appearing in this prospectus and the registration statement
of which this prospectus is a part have been audited by Ernst &Young LLP,
independent auditors, as set forth in their reports thereon appearing and
incorporated by reference herein. The financial statements referred to above
are included in this prospectus and such registration statement in reliance
upon such reports given on the authority of such firm as experts in accounting
and auditing.
127
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Commission. We have also filed with the Commission a
registration statement on Form S-4 to register the New Notes being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the registration
statement. For further information about the Issuers and the Guarantors and the
New Notes offered in this prospectus, you should refer to the registration
statement and its exhibits.
Our Commission filings are available on the Commission's Web site at
www.sec.gov. You also may read and copy any documents we file at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for further
information about their public reference rooms, including copy charges. You can
also obtain information about us from the New York Stock Exchange at 20 Broad
Street, New York, New York 10005.
INCORPORATION BY REFERENCE
We are incorporating by reference in the prospectus the information we file
with the Commission. This means that we can disclose important information to
you by referring you to those documents. The information incorporated by
reference is an important part of this prospectus, and information that we file
later with the commission will automatically update and supersede this
information. We are incorporating by reference our documents listed below and
any future filings we make with the Commission under Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934 after the date of the initial
registration statement of which this prospectus is a part and prior to the
termination of this offering or after the date of such initial registration
statement and before the effective date of the registration statement.
. Annual Report on Form 10-K for the fiscal year ended December 31, 2001;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2002; and
. Current reports on Forms 8-K filed January 2, 2002, January 3, 2002,
January 31, 2002, April 3, 2002, April 15, 2002, April 18, 2002, April
24, 2002, May 16, 2002 and May 25, 2002 (other than with respect to the
information reported under Item 9 of that report).
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
General Counsel
Ventas, Inc.
4360 Brownsboro Road
Suite 115
Louisville, Kentucky 40207
(502) 357-9000
You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information. We are not making an offer of these securities in
any state where the offer is not permitted. You should not assume that the
information in this prospectus is accurate as of any date other than the date
on the front of those documents.
128
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Report of Independent Auditors.................................................................. F-2
Consolidated Balance Sheets--As of December 31, 2001 and 2000................................... F-3
Consolidated Statements of Operations--Years ended December 31, 2001, 2000 and 1999............. F-4
Consolidated Statements of Stockholder's Equity (Deficit)--Years ended December 31, 2001, 2000
and 1999...................................................................................... F-5
Consolidated Statements of Cash Flows--Years ended December 31, 2001, 2000 and 1999............. F-6
Notes to Consolidated Financial Statements...................................................... F-7
Condensed Consolidated Balance Sheets--As of March 31, 2002 and December 31, 2001 (unaudited)... F-41
Condensed Consolidated Statements of Income--Three months ended March 31, 2002 and
March 31, 2001 (unaudited).................................................................... F-42
Condensed Consolidated Statements of Comprehensive Income--Three months ended March 31, 2002
and March 31, 2001 (unaudited)................................................................ F-43
Condensed Consolidated Statements of Cash Flows--Three months ended March 31, 2002 and March 31,
2001 (unaudited).............................................................................. F-44
Notes to Condensed Consolidated Financial Statements (unaudited)................................ F-45
F-1
REPORT OF INDEPENDENT AUDITORS
Ventas, Inc. Stockholders and Board of Directors
We have audited the accompanying consolidated balance sheets of Ventas, Inc.
as of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Ventas, Inc.
at December 31, 2001 and 2000, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 2 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative instruments.
/S/ ERNST & YOUNG LLP
Louisville, Kentucky
February 8, 2002
F-2
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2001 2000
---------- ----------
(dollars in thousands)
Assets
Real estate investments:
Land........................................................................... $ 119,771 $ 120,151
Building and improvements...................................................... 1,056,067 1,055,992
---------- ----------
1,175,838 1,176,143
Accumulated depreciation....................................................... (369,502) (327,598)
---------- ----------
Total net real estate investments.......................................... 806,336 848,545
Cash and cash equivalents......................................................... 18,596 87,401
Restricted cash................................................................... 20,773 26,893
Recoverable federal income taxes, restricted in 2000.............................. -- 3,211
Investment in Kindred Healthcare, Inc. common stock............................... 55,118 --
Kindred Healthcare, Inc. common stock reserved for distribution................... 17,086 --
Deferred financing costs, net..................................................... 14,153 10,875
Notes receivable from employees................................................... 3,635 3,422
Other............................................................................. 6,162 798
---------- ----------
Total assets............................................................... $ 941,859 $ 981,145
========== ==========
Liabilities and stockholders' equity (deficit)
Liabilities:
Notes payable and other debt................................................... $ 848,368 $ 886,385
United States Settlement....................................................... 54,747 96,493
Deferred gain on partial termination of interest rate swap agreement........... -- 21,605
Deferred revenue............................................................... 21,027 --
Interest rate swap agreements.................................................. 27,430 --
Accrued dividend............................................................... 17,910 19,846
Accounts payable and other accrued liabilities................................. 18,154 13,720
Other liabilities--disputed tax refunds and accumulated interest............... 14,903 30,104
Deferred income taxes.......................................................... 30,394 30,506
---------- ----------
Total liabilities.......................................................... 1,032,933 1,098,659
---------- ----------
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 2001 and 2000............................................................. 18,402 18,402
Capital in excess of par value................................................. 122,468 132,228
Unearned compensation on restricted stock...................................... (1,000) (1,338)
Accumulated other comprehensive income......................................... 36,174 --
Retained earnings (deficit).................................................... (134,088) (121,323)
---------- ----------
41,956 27,969
Treasury stock--4,723 shares in 2001 and 5,172 shares in 2000.................. (133,030) (145,483)
---------- ----------
Total stockholders' equity (deficit)....................................... (91,074) (117,514)
---------- ----------
Total liabilities and stockholders' equity (deficit)....................... $ 941,859 $ 981,145
========== ==========
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
----------------------------------------
2001 2000 1999
-------- -------- --------
(in thousands, except per share amounts)
Revenues:
Rental income.......................................................... $185,152 $232,841 $228,600
Gain on sale of Kindred common stock................................... 15,425 -- --
Interest and other income.............................................. 4,004 9,481 4,391
-------- -------- --------
Total revenues..................................................... 204,581 242,322 232,991
-------- -------- --------
Expenses:
General and administrative............................................. 10,244 9,613 7,767
Professional fees...................................................... 4,658 10,813 12,527
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................................ 1,734 1,339 1,304
Depreciation........................................................... 42,038 42,264 42,742
Interest............................................................... 87,032 95,319 88,753
Interest on United States Settlement................................... 4,592 -- --
-------- -------- --------
Total expenses..................................................... 150,298 304,524 190,710
-------- -------- --------
Income (loss) before gain on disposal of real estate assets, provision for
income taxes and extraordinary loss..................................... 54,283 (62,202) 42,281
Provision for income taxes................................................ 2,685 -- --
-------- -------- --------
Income (loss) before gain on disposal of real estate assets and
extraordinary loss...................................................... 51,598 (62,202) 42,281
Net gain on real estate disposals......................................... 290 957 254
-------- -------- --------
Income (loss) before extraordinary loss................................... 51,888 (61,245) 42,535
Extraordinary loss on extinguishment of debt.............................. (1,322) (4,207) --
-------- -------- --------
Net income (loss)......................................................... $ 50,566 $(65,452) $ 42,535
======== ======== ========
Earnings (loss) per common share:
Basic:
Income (loss) before extraordinary loss............................ $ 0.76 $ (0.90) $ 0.63
Extraordinary loss on extinguishment of debt....................... (0.02) (0.06) --
-------- -------- --------
Net income (loss).................................................. $ 0.74 $ (0.96) $ 0.63
======== ======== ========
Diluted:
Income (loss) before extraordinary loss............................ $ 0.75 $ (0.90) $ 0.63
Extraordinary loss on extinguishment of debt....................... (0.02) (0.06) --
-------- -------- --------
Net income (loss).................................................. $ 0.73 $ (0.96) $ 0.63
======== ======== ========
Weighted average number of shares outstanding, basic...................... 68,409 68,010 67,754
Weighted average number of shares outstanding, diluted.................... 69,363 68,131 67,989
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
For the Years ended December 31, 2001, 2000 and 1999
Unearned Accumulated
Capital in Compensation Other Retained
Common Excess of on Restricted Comprehensive Earnings Treasury
Stock Par Value Stock Income (Deficit) Stock Total
------- ---------- ------------- ------------- --------- --------- ---------
(dollars in thousands)
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)
Comprehensive Income
Net income.......................... -- -- -- -- 50,566 -- 50,566
Cumulative effect from change in
accounting for derivatives......... -- -- -- 17,476 -- -- 17,476
Unrealized loss on interest rate
swap............................... -- -- -- (23,301) -- -- (23,301)
Unrealized gain on Kindred common
stock.............................. -- -- -- 41,999 -- -- 41,999
---------
Comprehensive Income.................. 86,740
Dividends to common stockholders--
$0.92 per share...................... -- -- -- -- (63,331) -- (63,331)
Proceeds from issuance of shares for
Stock Plans, net..................... -- (3,383) -- -- -- 3,936 553
Grant of restricted stock............. -- (6,377) (1,396) -- 8,517 744
Amortization of restricted stock
grants............................... -- -- 1,734 -- -- -- 1,734
------- -------- ------- -------- --------- --------- ---------
Balance at December 31, 2001.......... $18,402 $122,468 $(1,000) $ 36,174 $(134,088) $(133,030) $ (91,074)
======= ======== ======= ======== ========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
(dollars in thousands)
Cash flows from operating activities:
Net income (loss).............................................................. $ 50,566 $ (65,452) $ 42,535
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation.................................................................. 42,038 42,264 42,803
Amortization of deferred financing costs...................................... 2,332 3,236 6,049
Amortization of restricted stock grants....................................... 1,734 1,339 1,304
Normalized rents.............................................................. 2 (117) (140)
Loss on impairment of assets.................................................. -- -- 1,927
Gain on sale of assets........................................................ (15,715) (957) (254)
Extraordinary loss on extinguishment of debt.................................. 1,322 4,207 --
United States Settlement...................................................... -- 96,493 --
Amortization of deferred revenue.............................................. (1,673) -- --
Other......................................................................... 49 -- --
Changes in operating assets and liabilities:
Decrease in amount due from Kindred, Inc...................................... -- -- 6,967
Decrease (increase) in restricted cash........................................ 6,120 (26,893) --
Decrease (increase) in accounts receivable and other assets................... (1,400) 23,378 (27,025)
Increase (decrease) in accounts payable and accrued and other liabilities..... (5,482) 7,840 29,414
--------- --------- ---------
Net cash provided by operating activities................................... 79,893 85,338 103,580
Cash flows from investing activities:
Purchase of furniture and equipment............................................ (1,117) -- (299)
Sale of real estate properties................................................. 670 5,170 254
Proceeds from sale of Kindred Healthcare, Inc. common stock.................... 3,420 -- --
Repayment (issuance) of notes receivable from employees........................ (213) 189 416
--------- --------- ---------
Net cash provided by investing activities................................... 2,760 5,359 371
Cash flows from financing activities:
Net change in borrowings under revolving line of credit........................ -- -- 173,143
Proceeds from long-term debt................................................... 225,000 -- --
Repayment of long-term debt.................................................... (263,017) (87,862) (130,023)
Proceeds from partial termination of interest rate swap agreement.............. -- -- 21,605
Payment of deferred financing costs............................................ (6,932) (12,616) (2,935)
Payment on the United States Settlement........................................ (41,746) -- --
Issuance of common stock....................................................... 503 22 4
Cash distribution to stockholders.............................................. (65,266) (42,434) (26,489)
--------- --------- ---------
Net cash provided by (used in) financing activities......................... (151,458) (142,890) 35,305
--------- --------- ---------
Increase (decrease) in cash and cash equivalents................................... (68,805) (52,193) 139,256
Cash and cash equivalents at beginning of year..................................... 87,401 139,594 338
--------- --------- ---------
Cash and cash equivalents at end of year........................................... $ 18,596 $ 87,401 $ 139,594
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid including swap payments and receipts............................. $ 84,700 $ 91,080 $ 86,125
========= ========= =========
Supplemental schedule of non cash activities:
Receipt of Kindred Healthcare, Inc. common stock............................... $ 18,200 -- --
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Description of Business
Ventas, Inc. ("Ventas" or the "Company") is a Delaware corporation that
elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), for the year ended
December 31, 1999. The Company believes that it has satisfied the requirements
to qualify as a REIT for the years ended December 31, 2000 and 2001. The
Company intends to continue to qualify as a REIT for the year ending December
31, 2002 and subsequent years. It is possible that economic, market, legal, tax
or other considerations may cause the Company to fail, or elect not, to qualify
as a REIT. The Company owns a geographically diverse portfolio of healthcare
related facilities which consisted of 44 hospitals, 216 nursing facilities and
eight personal care facilities in 36 states as of December 31, 2001. The
Company and its subsidiaries lease these facilities to healthcare operating
companies under "triple-net" or "absolute net" leases. Kindred Healthcare, Inc.
and its subsidiaries (collectively, "Kindred") lease 210 of the Company's
nursing facilities and all of the Company's hospitals as of December 31, 2001.
The Company conducts substantially all of its business through a wholly owned
operating partnership, Ventas Realty, Limited Partnership ("Ventas Realty") and
an indirect, wholly owned limited liability company, Ventas Finance I, LLC
("Ventas Finance"). The Company operates in one segment which consists of
owning and leasing healthcare facilities and leasing or subleasing such
facilities to third parties.
As a result of the Kindred bankruptcy proceedings, the Company suspended the
implementation of its original business strategy in 1999 and continued such
suspension through 2001. The Company's current business strategy is preserving
and maximizing stockholders' capital by means that include (a) the reduction of
the amount of the Company's indebtedness and a reduction of the average all-in
cost of the Company's indebtedness and (b) the implementation of a measured and
disciplined diversification and growth program to reduce the Company's
dependence on Kindred. The ability of the Company to pursue certain of these
objectives may be restricted by the terms of the Company's Amended and Restated
Credit, Security, Guaranty and Pledge Agreement dated January 31, 2000 (the
"Credit Agreement").
Note 2--Summary of Significant Accounting Policies
Change in Accounting Principle
In June of 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which amends
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, as amended, requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. As discussed in
"Note 5--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 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 5--Borrowing
Arrangements") was reclassified to other comprehensive income, resulting in a
cumulative adjustment to other comprehensive income of $17.5 million. The FASB
continues to issue interpretive guidance that could require changes in the
Company's application of the standard. 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
F-7
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
other variables affecting the fair values of derivative instruments and hedged
items, but will have no effect on cash flows. The Company reported its
derivative instruments at fair value on the Consolidated Balance Sheet. Changes
in the fair value of derivatives deemed to be eligible for hedge accounting are
reported in Accumulated Other Comprehensive Income. Changes in fair value of
derivative instruments that are not hedges are reported in the Statement of
Operations. See "Note 5--Borrowing Arrangements." The fair value of the
Company's derivative instruments are estimated by a third party consultant.
Basis of Presentation
The consolidated financial statements include the accounts of the Company,
Ventas Realty, Ventas Finance and all direct and indirect wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 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. 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 chapter 11 of title 11 of the United States Code (the
"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.
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.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes guidelines for
the reporting and display of comprehensive income and its components in
financial statements. Comprehensive income includes net income and all other
non-owner changes in stockholders' equity during a period including unrealized
gains and losses on equity securities classified as available-for-sale and
unrealized fair value adjustments on certain derivative instruments.
Marketable Equity Securities
Marketable equity securities are classified as available-for-sale and
reported on the Company's Consolidated Balance Sheet at 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 $4.6
million and $2.2 million at December 31, 2001 and 2000, 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
9--Transactions with Kindred." Certain leases with tenants other than Kindred
contain provisions relating to increases in rental payments over the terms of
the leases. Rental income under those 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 the 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 in accordance with accounting
principles generally accepted in the United States 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 healthcare
facilities and leasing or subleasing such facilities to third parties,
primarily Kindred. See "Note 4--Concentration of credit risk." All of the
Company's leases are triple-net leases, which require the tenants to pay all
property related expenses. The Company does not operate these facilities nor
does it allocate capital to maintain the properties. Substantially all
depreciation and interest expenses, except for interest expense relating to the
United States Settlement, reflected in the consolidated statement of operations
relate to the ownership of the Company's investment in real estate.
Note 3--Revenues from Leased Properties
Under Kindred's plan of reorganization (the "Kindred Reorganization Plan"),
which became effective on April 20, 2001 (the "Kindred Effective Date"),
Kindred assumed its five pre-existing leases with the Company (the "Prior
Master Leases"). The Prior Master Leases were then amended and restated into
four agreements styled as amended and restated master leases (collectively, the
"Amended Master Leases").
F-9
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the consummation on December 12, 2001 of a $225 million
commercial mortgage backed securitization transaction (the "CMBS Transaction"),
Ventas Realty removed forty (40) skilled nursing facilities (the "CMBS
Properties") from Amended Master Lease No. 1 and placed the CMBS Properties in
a new fifth master lease with Kindred dated December 12, 2001 (the "CMBS Master
Lease"). Simultaneously with the closing of the CMBS Transaction, Ventas Realty
transferred the CMBS Properties and the CMBS Master Lease to Ventas Finance,
the borrower under the CMBS Transaction. The Amended Master Leases and the CMBS
Master Lease are collectively referred to as the "Master Leases."
Each Master Lease is a "triple-net lease" or an "absolute-net lease"
pursuant to which Kindred is required to pay all insurance, taxes, utilities,
maintenance and repairs related to the properties. There are several renewal
bundles of properties under each Master Lease, with each bundle containing a
varying number of properties. All properties within a bundle have primary terms
ranging from 10 to 15 years commencing May 1, 1998, plus renewal options
totaling fifteen years.
Under each Master Lease, the aggregate annual rent is referred to as Base
Rent (as defined in each Master Lease). Base Rent equals the sum of Current
Rent (as defined in each Master Lease) and Accrued Rent (as defined in each
Master Lease). Kindred is obligated to pay the portion of Base Rent that is
Current Rent, and unpaid Accrued Rents, as set forth below. From May 1, 2001
through April 30, 2004, Base Rent will equal Current Rent. Under the Master
Leases, the initial annual aggregate Base Rent is $180.7 million from May 1,
2001 to April 30, 2002. For the period from May 1, 2002 through April 30, 2004,
annual aggregate Base Rent, payable all in cash, escalates on May 1 of each
year at an annual rate of 3.5% over the Prior Period Base Rent (as defined in
the Master Leases) if certain Kindred revenue parameters are met. Assuming such
Kindred revenue parameters are met, Annual Base Rent under the Master Leases
would be $187.0 million from May 1, 2002 to April 30, 2003 and $193.6 million
from May 1, 2003 to April 30, 2004.
Each Master Lease provides that beginning May 1, 2004, if Kindred refinances
its senior secured indebtedness entered into in connection with the Kindred
Reorganization Plan or takes other similar action (a "Kindred Refinancing"),
the 3.5% annual escalator will be paid in cash and the Base Rent shall continue
to equal Current Rent. If a Kindred Refinancing has not occurred, then on May
1, 2004, the annual aggregate Base Rent will be comprised of (a) Current Rent
payable in cash which will escalate annually by an amount equal to 2% of Prior
Period Base Rent, and (b) an additional annual non-cash accrued escalator
amount of 1.5% of the Prior Period Base Rent which will accrete from year to
year including an interest accrual at LIBOR (as defined in the Master Leases)
plus 450 basis points (compounded annually) to be added to the annual accreted
amount (but such interest will not be added to the aggregate Base Rent in
subsequent years). The Unpaid Accrued Rent will become payable, and all future
Base Rent escalators will be payable in cash, upon the occurrence of a Kindred
Refinancing. Under certain circumstances, the Company's right to receive
payment of the Unpaid Accrued Rent is subordinate to the receipt of payment by
the lenders of Kindred's senior secured indebtedness. Upon the occurrence of a
Kindred Refinancing, the annual aggregate Base Rent payable in cash will
thereafter escalate at the annual rate of 3.5% and there will be no further
accrual feature for rents arising after the occurrence of such events.
For the period from January 1, 2001 through April 30, 2001, the Company
recorded revenue equal to the amount of rent actually paid by Kindred under a
stipulation entered into in connection with Kindred's bankruptcy proceedings
(the "Rent Stipulation"). The Company included in its revenue computation for
the period from May 1, 2001 through December 31, 2001 the amount due and
payable under the Master Leases for that period.
The future contracted minimum rentals, excluding rent escalations and the
amortization of the value of the Kindred common stock and the $4.5 million in
cash received on the Kindred Effective Date, but with normalized
F-10
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rents where applicable, for the remainder of the initial terms of the Master
Leases and the Company's leases with tenants other than Kindred are as follows
(see "Note 9--Transactions with Kindred"):
Kindred Other(1) Total
---------- -------- ----------
(in thousands)
2002...... $ 180,714 $ 2,119 $ 182,833
2003...... 180,714 1,872 182,586
2004...... 180,714 1,850 182,564
2005...... 180,714 1,850 182,564
2006...... 180,714 1,850 182,564
Thereafter 610,481 12,795 623,276
---------- ------- ----------
Total.. $1,514,051 $22,336 $1,536,387
========== ======= ==========
- --------
(1) Excludes tenants that have defaulted under the terms of their respective
leases or that have filed for protection under the Bankruptcy Code.
Note 4--Concentration of Credit Risk
As of December 31, 2001, 70.4% 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 facilities are
located in 36 states with rental revenues from operations in only one state
accounting 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 Kindred and approximately 98.8% of rental revenue
in 2001 was derived from the Master Leases or the Prior Master Leases.
Because the Company leases substantially all of its properties to Kindred
and Kindred is the primary source of the Company's rental revenues, Kindred's
financial condition and ability and willingness 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 obligations under the United States Settlement (as defined in "Note
9--Transactions with Kindred--Settlement of United States Claims") and to make
distributions to its stockholders. On September 13, 1999, Kindred filed for
protection under the Bankruptcy Code with the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Kindred
Reorganization Plan became effective and Kindred emerged from bankruptcy on
April 20, 2001. Despite Kindred's emergence from bankruptcy, there can be no
assurance that Kindred will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the Master Leases or
that Kindred will perform its obligations under the Master Leases. The
inability or unwillingness of Kindred to satisfy its obligations under the
Master Leases would have a material adverse effect on the business, financial
condition, results of operation and liquidity of the Company, on the Company's
ability to service its indebtedness and its obligations under the United States
Settlement and on the Company's ability to make distributions to its
stockholders as required to maintain its status as a REIT (a "Material Adverse
Effect"). The failure of Kindred to make three consecutive rent payments will
trigger an event of default under the Company's Credit Agreement (as defined
below).
The Company generally invests excess cash in short term maturities of time
deposits and other similar cash equivalents as required by the Credit Agreement
(as defined below). See "Note 5--Borrowing Arrangements."
F-11
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Borrowing Arrangements
The following is a summary of the Company's long-term debt and certain
interest rate and maturity information as of December 31, 2001 and 2000 (in
thousands):
2001 2000
-------- --------
Credit Agreement--$25.0 million revolving credit line, bearing interest at either LIBOR
plus 2.75% or the Base Rate plus 1.75% ($17.8 million and $25.0 million available as
of December 31, 2001 and 2000, respectively)......................................... $ -- $ --
Credit Agreement--Tranche A Loan, bearing interest at a rate of LIBOR plus 2.75%
(9.48% at December 31, 2000)......................................................... -- 113,017
Credit Agreement--Tranche B Loan, bearing interest at a rate of LIBOR plus 3.25%
(5.16% at December 31, 2001), and LIBOR plus 3.75% (10.48% at December 31,
2000), due December 31, 2005 with amortization payments of $30.0 million due on
December 30, 2003 and $50.0 million due on December 30, 2004, both such payments
having been prepaid.................................................................. 150,000 300,000
Credit Agreement--Tranche C Loan, bearing interest at a rate of LIBOR plus 4.25%
(6.16% at December 31, 2001 and 10.98% at December 31, 2000), due December 31,
2007................................................................................. 473,368 473,368
CMBS Loan, bearing interest at a nominal weighted average rate of LIBOR plus
1.4589% (3.40% at December 31, 2001), due December 9, 2006........................... 225,000 --
-------- --------
$848,368 $886,385
======== ========
The Credit Agreement
On January 31, 2000, the Company entered into the Credit Agreement. The
loans under the Credit Agreement are pre-payable without premium or penalty.
Borrowings under the Credit Agreement bear interest at a margin over LIBOR
described above or at a margin (that is 100 basis points less than the LIBOR
margin) over a Base Rate. The Base Rate is deemed to be the greater of (i) the
prime rate and (ii) the federal funds rate plus 50 basis points.
The Credit Agreement is secured by liens on substantially all of the
Company's real property (other than the 40 skilled nursing facilities securing
the CMBS Loan) and any related leases, rents and personal property. In
addition, the Credit Agreement contains certain restrictive covenants,
including, but not limited to, the following: (a) the Company can only pay
dividends for any year in amounts not to exceed the greater of (i) 80% of FFO,
as defined in the Credit Agreement, or (ii) the minimum amount necessary to
maintain its REIT status; (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 those requiring the Company to have (i)
Consolidated EBITDA (as defined in the Credit Agreement) on the last day of
each fiscal quarter at least equal to 80% of the Company's Projected
Consolidated EBITDA (as defined in the Credit Agreement) on the Kindred
Effective Date; and (ii) a ratio of Consolidated EBITDA to Consolidated
Interest Expense (as defined in the Credit Agreement) on a trailing four
quarter basis (or such shorter period from May 1, 2001 through the end of the
reported quarter), of at least 1.20 to 1.00. Certain of these covenants may be
waived by holders of 51% or more of the principal indebtedness under the Credit
Agreement.
The Credit Agreement amended and restated the Company's 1998 credit
agreement (the "1998 Credit Agreement") that it had entered into at the time of
the Company's spin-off of Kindred on May 1, 1998 (the "1998 Spin Off").
F-12
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 29, 1999, in conjunction with the execution of a waiver of the
1998 Credit Agreement, the Company paid a $2.4 million loan waiver fee which
was amortized over the extension period ending January 31, 2000. In connection
with the consummation of the 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. The Company
also incurred an extraordinary loss of approximately $4.2 million relating to
the write-off of the unamortized deferred financing costs associated with the
1988 Credit Agreement.
The Company and substantially all of its lenders entered into an Amendment
and Waiver dated as of December 20, 2000 (the "Amendment and Waiver No. 1") to
the Credit Agreement, that extended the deadline for the Kindred Effective Date
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 No. 1 and agreed to amend the amortization schedules on certain of
the loans under the Credit Agreement. The Company exercised its extension
option under the Amendment and Waiver No. 1 to extend the Kindred Effective
Date deadline from March 31, 2001 to April 30, 2001 for a fee of approximately
$0.1 million.
On May 21, 2001, the Company made a one-time mandatory prepayment of $0.4
million on the Tranche B Loan, based on its excess cash as described in the
Credit Agreement.
The Company and substantially all of its lenders under the Credit Agreement
entered into an Amendment and Waiver No. 2 dated as of September 26, 2001
consenting to the terms of the CMBS Transaction.
On December 12, 2001, the Company used $212.8 million of the proceeds from
the CMBS Loan (as defined below) to pay down a portion of the outstanding
principal under the Credit Agreement. As a result of the prepayment, the
Company's obligation to make monthly mandatory prepayments from excess cash
flow and the restriction limiting dividends to 90% of taxable net income both
terminated. The Company recognized a $1.3 million extraordinary loss in the
fourth quarter of 2001 relating to the partial write-off of unamortized
deferred financing costs as a result of such prepayment.
CMBS Transaction
On December 12, 2001 the Company raised $225 million in gross proceeds from
the completion of the CMBS Transaction. Under a Loan and Security Agreement
dated as of December 12, 2001, Ventas Finance I, LLC, an indirect, wholly owned
consolidated subsidiary of the Company ("Ventas Finance") obtained a loan in
the principal amount of $225 million (the "CMBS Loan") from Merrill Lynch
Mortgage Lending, Inc., as lender (the "CMBS Lender"). The CMBS Loan is
comprised of six components (i) a component in the original principal amount of
$125.23 million which bears interest at LIBOR plus 0.8665%; (ii) a component in
the original principal amount of $17.97 million which bears interest at LIBOR
plus 1.1665%; (iii) a component in the original principal amount of $8.86
million which bears interest at LIBOR plus 1.5165%; (iv) a component in the
original principal amount of $26.83 million which bears interest at LIBOR plus
1.9665%; (v) a component in the original principal amount of $26.83 million
which bears interest at LIBOR plus 2.6665%; and (vi) a component in the
original principal amount of $19.28 million which bears interest at LIBOR plus
3.1665%. Principal of and interest on the CMBS Loan is payable monthly,
commencing January 9, 2002. Principal payments on the CMBS Loan were calculated
based upon a 25-year amortization schedule and an assumed interest rate of
9.46% per annum. The CMBS Loan matures on December 9, 2006 at which time a
principal balloon payment of approximately $211.0 million will be due, assuming
all scheduled amortization payments are made and no prepayments are made on the
CMBS Loan. The CMBS Loan may be prepaid in whole or in part at any time and
from time to time provided that any prepayment on or before January 9, 2003
must be accompanied by a payment of 1% of the amount of the principal amount
prepaid.
F-13
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The CMBS Loan is secured by liens on the CMBS Properties transferred by
Ventas Realty to Ventas Finance and leased to Kindred under the CMBS Master
Lease. Except for certain customary exceptions, the CMBS Loan is non-recourse
to Ventas Finance and the Company.
Ventas Finance is required to maintain or cause to be maintained the
following reserve accounts under the CMBS Loan Agreement: (a) a debt service
reserve account in an amount of $5.0 million to cover shortfalls in cash
available for debt service on the CMBS Loan, (b) an imposition and insurance
reserve for the payment of real property taxes and insurance premiums with
respect to the CMBS Properties, and (c) a replacement reserve account in the
amount of $1.6 million for the payment of the cost of capital improvements
expected to be made to the CMBS Properties. The impositions and insurance
reserve and the replacement reserve under the CMBS Loan Agreement are being
funded and/or maintained by Kindred as required under and in accordance with
the terms of the CMBS Master Lease. If Kindred should be unwilling or unable to
fund these reserves under the CMBS Loan Agreement, Ventas Finance will be
required to fund and/or maintain such reserves. Restricted cash at December 31,
2001 included $5.0 million related to the debt service reserve account for the
CMBS Loan.
Monthly rental amounts under the CMBS Master Lease are deposited directly by
Kindred into a central account for the benefit of the CMBS Lender. Amounts in
the central account are applied to pay the monthly principal and interest
payments on the CMBS Loan and to fund the reserve accounts required under the
CMBS Loan Agreement. Amounts remaining in the central account after the payment
of the current month's principal and interest payment and the funding of the
reserve accounts are distributed to Ventas Finance, provided no event of
default has occurred and is continuing under the CMBS Loan Agreement and
provided a Cash Flow Sweep Event (as defined below) has not occurred. The
central account is swept on a daily basis.
During the continuance of an event of default or a Cash Flow Sweep Event,
all amounts in the central account in excess of the current month's principal
and interest payment and the required reserve payments will be deposited into
an account and applied as a prepayment of the CMBS Loan on the next monthly
payment date. A "Cash Flow Sweep Event" occurs as of any date of determination
if (the "Coverage Test") (a) the ratio of (i) the aggregate net cash flow from
the CMBS Properties for the applicable quarter to (ii) the debt service on the
CMBS Loan for the same quarter, is less than 1.50 to 1, or (b) the aggregate
net cash flow from the CMBS Properties for the applicable quarter does not
equal or exceed the rent payable under the CMBS Master Lease for the same
quarter. No Cash Flow Sweep Event will occur at any time while the Coverage
Test is satisfied.
The principal maturities of the CMBS Loan for each of the five years
following December 31, 2001, including the $211.0 million balloon payment on
December 9, 2006, are set forth below in thousands:
Year Amount
---- --------
2002............................................................. $ 2,329
2003............................................................. 2,559
2004............................................................. 2,812
2005............................................................. 3,090
2006............................................................. 214,210
--------
$225,000
========
Derivatives and Hedging
In connection with the 1998 Spin Off and the consummation of the 1998 Credit
Agreement, the Company entered into an interest rate swap agreement (on a
notional amount of $800.0 million outstanding at December 31, 2001) to reduce
the impact of changes in interest rates on the Company's floating rate debt
obligations (the "1998
F-14
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Swap"). The original agreement expired in varying amounts through December
2007; however, as discussed below, the 1998 Swap was amended to expire in
varying amounts through June 2003. The 1998 Swap provides for the Company to
pay a fixed rate of 5.985% and receive LIBOR (floating rate) from the
counterparty.
The terms of the 1998 Swap require that the Company make a cash deposit or
otherwise post collateral to the counterparty if the fair value loss to the
Company exceeds certain levels (the "threshold 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 1998 Credit Agreement. As
of December 31, 2001, the Company believes that the threshold level under the
1998 Swap was a fair value unrealized loss of $35.0 million and the 1998 Swap
was in an unrealized loss position to the Company of $36.4 million.
As of December 31, 2001, the Company was required to have collateral posted
under the 1998 Swap of $1.4 million. The $7.7 million letter of credit posted
as collateral under the 1998 Swap on December 31, 2001 was reduced to $1.4
million on January 2, 2002. Generally, once the fair value loss exceeds the
applicable threshold level, collateral is either posted by the Company or
returned to the Company if the value of the 1998 Swap fluctuates by $2.0
million from the value on the last date that a counterparty demands collateral
be posted or refunded, as applicable. Under the 1998 Swap, if collateral must
be posted, the principal amount of such collateral must equal the difference
between the fair value unrealized loss of the 1998 Swap at the time of such
determination and the threshold level. If the 1998 Swap continues to decline in
value, the Company will have to post additional collateral in the form of cash,
letter of credit or other permitted credit support. The Company is permitted to
issue up to $15.0 million in principal amount of letters of credit under the
$25.0 million revolving credit facility under the Credit Agreement. If the
Company should be required to post collateral under the 1998 Swap, the Company
expects to post such additional collateral in the form of cash from cash
reserves, cash flows from operations, and/or draws on the Company's revolving
credit facility under the Credit Agreement up to the principal amount of $15.0
million, net of outstanding letters of credit. However, there can be no
assurance that the Company will have sufficient cash to post such additional
collateral, if required. On January 31, 2000, the Company entered into a letter
agreement with the counterparty to the 1998 Swap for the purpose of amending
the 1998 Swap. The letter agreement provides that, for purposes of certain
calculations set forth in the 1998 Swap, the parties agree to continue to use
certain defined terms set forth in the 1998 Credit Agreement.
On August 4, 1999, the Company entered into an agreement with the 1998 Swap
counterparty to shorten the maturity of the 1998 Swap 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. The Company expects to amortize the $21.6 million
payment for financial accounting purposes in future periods beginning in July
2003 and ending December 2007. See "Note 2--Summary of significant accounting
policies--Change in Accounting Principle."
On January 31, 2000, the Company entered into a letter agreement with the
counterparty to the 1998 Swap for the purpose of amending the 1998 Swap. The
letter agreement provides that, for purposes of certain calculations set forth
in the 1998 Swap, the parties agree to continue to use certain defined terms
set forth in the 1998 Credit Agreement.
The notional amount of the 1998 Swap is scheduled to decline from $800.0
million as of December 31, 2001 as follows (in thousands):
Notional Amount Date
--------------- -----------------
$775,000.................................................... December 31, 2002
--..................................................... June 30, 2003
The 1998 Swap is treated as a cash flow hedge. Cash flow hedges address the
risk associated with future cash flows of debt transactions. Over time, the
unrealized gains and losses held in Accumulated Other
F-15
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income will be reclassified into earnings in the same periods in
which the hedged interest payments affect earnings. Assuming no changes in
interest rates, the Company estimates that approximately $24.3 million of the
current balance held in Accumulated Other Comprehensive Income will be recorded
as interest expense within the next twelve months consistent with historical
reporting. The amount reclassified into interest expense for the year ended
December 31, 2001 was $13.7 million. See "Note 2--Summary of Significant
Accounting Policies--Change in Accounting Principle."
On September 28, 2001, the Company entered into a second interest rate swap
agreement (the "2003-2008 Swap") with a highly rated counterparty to hedge
floating-rate debt for the period between July 1, 2003 and June 30, 2008, under
which the Company pays a fixed rate of 5.385% and receives LIBOR from the
counterparty to this agreement. The 2003-2008 Swap is treated as a cash flow
hedge for accounting purposes. There are no collateral requirements under the
2003-2008 Swap. The notional amount of the 2003-2008 Swap is scheduled to
decline from $450.0 million as of December 31, 2001 as follows (in thousands):
Notional Amount Date
--------------- -------------
$300,000.................................................... June 30, 2006
150,000.................................................... June 30, 2007
--..................................................... June 30, 2008
The Company is exposed to credit loss in the event of nonperformance by the
counterparty to an interest rate swap agreement. However, the Company does not
anticipate nonperformance by the counterparties to the 1998 Swap or the
2003-2008 Swap. The net interest rate difference incurred on these swap
contracts for the years ended December 31, 2001, 2000 and 1999 was $13.8
million payment, $4.3 million receipt and $6.4 million payment, respectively,
included in interest expense in the Consolidated Financial Statements.
In accordance with the terms of the CMBS Loan Agreement, on December 11,
2001, Ventas Finance purchased an interest rate cap from a highly rated
counterparty (the "Buy Cap"). Because the Company already hedged its
consolidated interest rate risk through the 1998 Swap and 2003-2008 Swap, on
December 11, 2001 the Company sold an interest rate cap (the "Sell Cap") for
the same notional value ($225 million) and on the same terms (5 year amortizing
8% LIBOR cap) as the Buy Cap. If LIBOR should exceed the 8% cap, the Sell Cap
would require the Company to pay the counterparty and the Buy Cap would require
the counterparty to pay Ventas Finance for the interest accruing in excess of
the 8% LIBOR cap. The Buy Cap and the Sell Cap are shown separately as an asset
and a liability on the Company's balance sheet, respectively. The Company
believes that the economic substance of the Buy Cap offsets the net cash flow
exposure of the Sell Cap.
At December 31, 2001, the 1998 Swap and 2003-2008 Swap were reported at
their fair value of $27.4 million in liabilities in the Consolidated Balance
Sheet. The offsetting adjustment is reported as a deferred loss in Accumulated
Other Comprehensive Income. The Buy and Sell Caps are reported at their fair
value of approximately $3.1 million in other assets and other liabilities,
respectively, in the Consolidated Balance Sheet. The offsetting adjustments for
each of these instruments are reported in the Consolidated Statement of
Operations and net to zero for the year.
Note 6--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)
. Investment in Kindred common stock: The fair value is based on the quoted
market value on December 31, 2001.
. 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 and cap agreements: The fair values of the Company's
interest rate swap and interest rate cap agreements 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, 2001 and 2000 the carrying amounts and fair values of the
Company's financial instruments are as follows (in thousands):
2001 2000
------------------- ------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Cash and cash equivalents........................ $ 18,596 $ 18,596 $ 87,401 $ 87,401
Investment in Kindred............................ 55,118 55,118 -- --
Purchase interest rate cap (Buy Cap)............. 3,051 3,051 -- --
Notes receivable from employees.................. 3,635 3,324 3,422 2,921
Interest rate swap agreements.................... 27,430 27,430 -- (4,129)
Notes payable.................................... 623,368 623,368 886,385 886,385
United States Settlement......................... 54,747 54,747 96,493 96,493
Commercial Mortgage Backed Securities (CMBS Loan) 225,000 225,000 -- --
Written interest rate cap (Sell Cap)............. 3,051 3,051 -- --
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.
Note 7--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 and
one plan under which certain directors may receive Common Stock of the Company
in lieu of directors' fees (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;
(5) The TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan; and (6)
The Common Stock Purchase Plan for Directors (the "Directors Stock Purchase
Plan"). On May 23, 2000, the Company's stockholders 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
F-17
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Directors increased the number of shares reserved for issuance under the 2000
Incentive Plan 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 (other than the Directors Stock Purchase Plan), 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 December 31, 2001,
options for 4,282,858 shares had been granted to eligible participants and
remained outstanding (including options granted prior to the 1998 Spin Off and
held by Kindred employees) under the provisions of the Plans. As of December
31, 2001, options for 551,361 shares had been granted outside of the Plans to
certain employees and non-employee directors and remained outstanding. The
Company granted 308,250, 466,705 and 188,500 shares of restricted stock for the
years ended December 31, 2001, 2000 and 1999, respectively. 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
$1.7 million in 2001 and $1.3 million for both 2000 and 1999, respectively.
The Company utilizes only the 2000 Incentive Compensation Plan (Employee
Plan), the 2000 Stock Option Plan for Directors and the Directors Stock
Purchase Plan for option and stock grants and stock issuances. Under the terms
of the Ventas, Inc. 2000 Incentive Compensation Plan (Employee Plan), 5,620,000
shares are reserved for grants to employees. Under the terms of the Ventas,
Inc. 2000 Stock Option Plan for Directors, 200,000 shares are reserved for
grants or issuance to the chairman of the board and non-employee directors.
Under the terms of the Directors Stock Purchase Plan, 200,000 shares are
reserved for issuance to the chairman of the board and non-employee directors
in lieu of the payment of all or a portion of their retainer and meeting fees,
at their option. As of December 31, 2001, the number of shares available for
future grants or issuance under the Ventas, Inc. 2000 Incentive Compensation
Plan (Employee Plan), the Ventas, Inc. 2000 Stock Option Plan for Directors,
and the Directors Stock Purchase Plan are 2,406,688, 110,250 and 195,168,
respectively. No additional grants are permitted under the 1987 Incentive
Compensation Program, the 1987 Stock Option Plan for Non-Employee Directors and
the TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan. As a result
the number of shares reserved under these three Plans equals the number of
options outstanding under such Plans. As of December 31, 2001, the Company has
reserved 2,498,386 shares for issuance under these three Plans.
The following is a summary of stock option activity for the Company in 2001,
2000 and 1999:
A. 2001 Activity
Weighted
Average
Exercise
Activity Shares Range of Exercise Prices Price
-------- --------- ------------------------ --------
Outstanding at beginning of year 4,745,636 $0.1231 - $26.0476 $12.7134
Options Granted.............. 603,705 5.875 - 12.0600 7.3180
Options Exercised............ (134,408) 3.3125 - 10.3421 5.5095
Options Canceled............. (380,714) 3.3125 - 24.1623 15.6160
---------
Outstanding at end of year...... 4,834,219 $0.1231 - $26.0476 $12.0116
=========
Exercisable at end of year...... 4,053,519 $0.1231 - $26.0476 $12.6054
=========
F-18
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
B. 2000 Activity
Weighted
Average
Exercise
Activity Shares Range of Exercise Prices Price
-------- --------- ------------------------ --------
Outstanding at beginning of year 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 year...... 4,745,636 $0.1231 - $26.0476 $12.7134
=========
Exercisable at end of year...... 3,631,587 $0.1231 - $26.0476 $13.2590
=========
C. 1999 Activity
Weighted
Average
Exercise
Activity Shares Range of Exercise Prices Price
-------- ---------- ------------------------ --------
Outstanding at beginning of year 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 year...... 5,066,530 $0.1231 - $27.0095 $13.4926
==========
Exercisable at end of year...... 3,046,064 $0.1231 - $27.0095 $13.8731
==========
A summary of stock options outstanding at December 31, 2001 follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Outstanding as of Contractual Exercise Exercisable as of Exercise
Range of Exercise Prices December 31, 2001 Life Price December 31, 2001 Price
- ------------------------ ----------------- ----------- -------- ----------------- --------
$0.1231 to $8.0000.... 1,671,425 8.0 $ 5.2419 1,190,794 4.9793
$8.0001 to $13.2500... 373,030 5.6 11.4389 298,947 11.4166
$13.2501 to $26.0476.. 2,789,764 5.0 16.1441 2,563,778 16.2861
--------- -------- ---------
4,834,219 6.1 $12.0116 4,053,519 12.6054
========= ======== =========
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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, 2001, 2000 and
1999 was approximately $633,300, $135,800 and $1,232,000, respectively.
Pro forma information follows (in thousands, except per share amounts):
2001 2000 1999
------- -------- -------
Pro forma income (loss) available to common stockholders $47,338 $(69,138) $36,203
Pro forma earnings (loss) per common share:
Diluted.............................................. $ 0.68 $ (1.02) $ 0.53
F-19
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
2001 2000 1999
------- ------- -------
Risk-free interest rate................................................. 5.2% 6.7% 6.0%
Dividend yield.......................................................... 8.0% 14.0% 12.0%
Volatility factors of the expected market price for the Company's common
stock................................................................. 0.437% 0.567% 0.543%
Weighted average expected life of options............................... 9 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.
Note 8--Income Taxes
The Company elected to be taxed as a REIT under the Internal Revenue Code of
1986 as amended (the "Code"), commencing with the 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 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 belief that it qualified as a REIT, the distribution of 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. As a result of the uncertainties relating to the
Company's ability to retain its operating loss carryforwards, the Company has
recorded a provision for taxes on the 10% of its estimated 2001 taxable income
which the Company did not distribute as a dividend. The 5.0% effective tax rate
for 2001 was determined based on the 35% federal statutory rate plus an
incremental state rate less the dividends paid deduction.
The 2001 provision for income taxes consists of the following
Current tax expense:
--------------------
Federal............................................................... $2,310
State................................................................. 375
------
$2,685
======
Although the Company believes that it satisfied the requirements to qualify
as a REIT for the years ended December 31, 1999, 2000 and 2001 and although the
Company intends to continue to qualify as a REIT for the year ended December
31, 2002 and subsequent years, it is possible that economic, market, legal, tax
or other considerations may cause the Company to fail, or elect not, to
continue to qualify as a REIT in any such tax year.
F-20
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company believes it has met the annual distribution requirement by
payment of 90% of its estimated 2001 taxable income as a result of its three
$0.22 per share dividends paid on May 14, 2001, July 23, 2001, and October 1,
2001 and its $0.26 per share dividend paid on January 7, 2002. The Company
believes that it met the annual distribution requirement for 2000 as a result
of its $0.29 per share dividend on January 15, 2001 and 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. The Company's dividends for the tax years ended December 31,
1999, 2000 and 2001 constitute ordinary income to the Company's stockholders
for tax purposes.
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, prepaid rent, impairment losses on real estate, the United States
Settlement liability, and the deferred gain on the partial termination of the
interest rate swap agreement. The net difference between tax bases of the
Company's asset and liabilities for federal income tax purposes was $51.4 and
$48.3 million more than the book bases of those assets and liabilities for
financial reporting for the years ended December 31, 2001 and 2000,
respectively.
The Company made no income tax payments for the years ended December 31,
2000 and 1999. 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.
The Company received refunds for state and local, franchise and other
miscellaneous taxes of $1.9 and $1.1 million for the years ended December 31,
2001 and 2000, respectively. The Company has recorded a tax contingency
liability of $7.1 million at December 31, 2001 and $3.7 million at December 31,
2000 for contingencies arising from and prior to the Spin Off. Included in
general administrative expenses on the Company's statement of operations is a
tax contingency expense of $1.5 million and $2.6 million for 2001 and 2000,
respectively, for federal, state, local, franchise and other miscellaneous
taxes, net of the Company's receipt 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
for the period January 1, 1999 through December 31, 2008 ("built-in gains
tax"). The amount of income potentially subject to this special corporate level
tax is generally equal to (a) the excess of the fair value of the asset as of
December 31, 1998 over its adjusted tax basis as of December 31, 1998, or (b)
the actual amount of gain, whichever of (a) and (b) is lower. Some but not all
gains recognized during this period of time could be offset by available net
operating losses and capital loss carryforwards. The deferred income tax
liability of $30.4 million and $30.5 million at December 31, 2001 and 2000,
respectively, 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. During 2001, the Company utilized $0.1 million of the deferred income
tax liability in connection with a sales transaction.
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 carrybacks of losses
reported in the Company's 1998 federal income tax return. The Company, Ventas
Realty and Kindred 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"). On the Kindred Effective Date, Kindred and the Company
entered into the Tax Refund Escrow Agreement and First Amendment of the Tax
Allocation Agreement (the "Tax Refund Escrow
F-21
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Agreement") governing their relative entitlement to certain tax refunds for the
tax periods prior to and including May 1, 1998 (the "Subject Periods") that
each received or may receive in the future. The Tax Refund Escrow Agreement
amends and supplements the Tax Allocation Agreement and supersedes the Tax
Stipulation. See "Note 9--Transactions with Kindred--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. During 2001, the Company received a $3.2 million refund as a result
of the audit adjustments to the Company's 1995 and 1996 federal income tax
returns. These proceeds were deposited into the tax escrow account.
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 use 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 the escrowed amounts under the Tax Refund
Escrow Agreement. To the extent such NOL carryforwards and escrowed amounts are
not sufficient to satisfy such liabilities, Kindred 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
escrowed amounts will be sufficient to satisfy these liabilities or that
Kindred has any obligation to indemnify the Company for particular liabilities
or that Kindred will have sufficient assets, income and access to financing to
enable it to satisfy its indemnity obligations under the Tax Allocation
Agreement or that Kindred will continue to honor such indemnification
obligations.
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 $13.0 million at December 31, 2001 assuming no utilization in
2001. These amounts 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, 2001 and 2000. 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.
Note 9--Transactions with Kindred
On September 13, 1999 (the "Petition Date"), Kindred filed for protection
under the Bankruptcy Code. Kindred emerged from proceedings under the
Bankruptcy Code on the Kindred Effective Date pursuant to the terms of the
Kindred Reorganization Plan.
F-22
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In order to govern certain of the relationships between the Company and
Kindred after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Kindred entered into certain agreements at the time
of the 1998 Spin Off (the "Spin Agreements"). Except as noted below, each
written agreement by and among Kindred and the Company and/or Ventas Realty was
assumed by Kindred and certain of these agreements were simultaneously amended
in accordance with the terms of the Kindred Reorganization Plan.
The Company and Kindred also entered into certain agreements and
stipulations and orders both prior to and during the pendency of Kindred's
bankruptcy proceedings governing certain aspects of the business relationships
between the Company and Kindred prior to the Kindred Effective Date. These
agreements and stipulations and orders were terminated on the Kindred Effective
Date in accordance with the terms of the Kindred Reorganization Plan.
Set forth below is a description of the material terms of (a) the Kindred
Reorganization Plan, (b) certain of the Spin Agreements as assumed by Kindred
pursuant to the Kindred Reorganization Plan, including the terms of amendments
or restatements of such Spin Agreements, where applicable, (c) those Spin
Agreements and other agreements terminated under the Kindred Reorganization
Plan, and (d) new agreements entered into between the Company and Kindred in
accordance with the Kindred Reorganization Plan.
Summary of the Kindred Reorganization Plan
Under the terms of the Kindred Reorganization Plan, the Company, among other
things, (a) retained all rent paid by Kindred through the Kindred Effective
Date, (b) amended and restated its leases with Kindred, (c) received 1,498,500
shares of the common stock of Kindred together with certain registration
rights, (d) entered into new agreements relating to the allocation of certain
tax refunds and liabilities, and (e) settled certain claims of the United
States pertaining to the Company's former healthcare operations.
Master Leases
Under the Kindred Reorganization Plan, Kindred assumed the Prior Master
Leases. Those leases were then amended and restated into four agreements styled
as amended and restated master leases. In connection with the CMBS Transaction,
Ventas Realty removed the CMBS Properties from Master Lease No. 1 and entered
into the CMBS Master Lease to cover the CMBS Properties. The CMBS Master Lease
contains the same terms as Master Lease No. 1.
On the Kindred Effective Date, the Company also received a $4.5 million cash
payment as additional future rent under the Master Leases. The value of the
Company's Kindred common stock and the $4.5 million additional future rent will
be amortized as future rent over the weighted average remaining term of the
Master Leases for financial reporting purposes.
Under the Kindred Reorganization Plan, the Company waived the right to the
payment of (a) $18.9 million for the August 1999 unpaid monthly base rent under
the Prior Master Leases and (b) approximately $79.5 million representing the
difference between the rent required to be paid under the terms of the Prior
Master Leases and the rent paid to the Company after the Petition Date and
prior to the first calendar month following the Kindred Effective Date pursuant
to the terms of a rent stipulation.
Each Master Lease includes 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 Master Leases. There
are several renewal bundles of properties under each Master Lease, with each
bundle containing a varying number of properties. All properties within a
bundle have primary terms ranging from 10 to 15 years from May 1, 1998, subject
to certain exceptions, and are subject to three five-year renewal terms.
F-23
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For a discussion of the rent payable under the Master Leases see "Note
3--Revenues from Leased Properties."
Under the terms of the Master Leases, the Company has a one-time right to
reset the rents under the Master Leases (the "Reset Right"), exercisable 5
years after the Kindred Effective Date on a Master Lease by Master Lease basis,
to a then fair market rental rate, for a total fee of $5.0 million payable on a
pro-rata basis at the time of exercise under the applicable Master Lease. The
Reset Right under the CMBS Master Lease can only be exercised in conjunction
with the exercise of the Reset Right under Master Lease No. 1. The Company
cannot exercise the Reset Right under the CMBS Master Lease without the prior
written consent of the CMBS Lender if, as a result of such reset, the aggregate
rent payable for the CMBS Properties would decrease.
As a result of delays in the extended Kindred bankruptcy proceeding, the
ultimate outcome of the Kindred Reorganization Plan 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 Prior Master Lease and
the rent stipulation............................................................... $48,018 $15,000
August 1999 monthly base rent under the Prior Master Leases.......................... -- 18,884
Charge for rent due under a lease with Kindred under dispute......................... (124) 226
Rent due from non-Kindred tenants.................................................... 434 308
------- -------
$48,328 $34,418
======= =======
Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow Agreement
The Tax Allocation Agreement, entered into at the time of the 1998 Spin Off
and described in more detail below, was assumed by Kindred under the Kindred
Reorganization Plan and then amended and supplemented by the Tax Refund Escrow
Agreement, also described below. The Tax Stipulation, entered into by Kindred
and the Company during the pendency of the Kindred bankruptcy proceedings, was
superseded by the Tax Refund Escrow Agreement.
The Tax Allocation Agreement provides that Kindred will be liable for, and
will hold the Company harmless from and against, (i) any taxes of Kindred and
its then subsidiaries (the "Kindred Group") for periods after the 1998 Spin
Off, (ii) any taxes of the Company and its then subsidiaries (the "Company
Group") or the Kindred Group for periods prior to the 1998 Spin Off (other than
taxes associated with the Spin Off) with respect to the portion of such taxes
attributable to assets owned by the Kindred Group immediately after completion
of the 1998 Spin Off and (iii) any taxes attributable to the 1998 Spin Off to
the extent that Kindred derives certain tax benefits as a result of the payment
of such taxes. Under the Tax Allocation Agreement, Kindred would be entitled to
any refund or credit in respect of taxes owed or paid by Kindred under (i),
(ii) or (iii) above. Kindred's liability for taxes for purposes of the Tax
Allocation Agreement would be measured by the Company's actual liability for
taxes after applying certain tax benefits otherwise available to the Company
other than tax benefits that the Company in good faith determines would
actually offset tax liabilities of the Company in other taxable years or
periods. Any right to a refund for purposes of the Tax Allocation Agreement
would be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Company.
Under the Tax Allocation Agreement, the Company would be liable for, and
would hold Kindred harmless against, any taxes imposed on the Company Group or
the Kindred Group other than taxes for which the Kindred Group is liable as
described in the above paragraph. The Company would be entitled to any refund
or credit for
F-24
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
taxes owed or paid by the Company as described in this paragraph. The Company's
liability for taxes for purposes of the Tax Allocation Agreement would be
measured by the Kindred Group's actual liability for taxes after applying
certain tax benefits otherwise available to the Kindred Group other than tax
benefits that the Kindred Group in good faith determines would actually offset
tax liabilities of the Kindred Group in other taxable years or periods. Any
right to a refund would be measured by the actual refund or credit attributable
to the adjustment without regard to offsetting tax attributes of the Kindred
Group. See "Note 8--Income Taxes."
Prior to and during the Kindred bankruptcy, the Company and Kindred were
engaged in disputes regarding the entitlement to federal, state and local tax
refunds for the Subject Periods which had been received or which would be
received by either company. Under the terms of the Tax Stipulation, the
companies agreed that the proceeds of certain federal, state and local tax
refunds for 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 to be held by the
recipient of such refunds in segregated interest bearing accounts.
On the Kindred Effective Date, Kindred and the Company entered into the Tax
Refund Escrow Agreement governing their relative entitlement to certain tax
refunds for the Subject Periods that each received or may receive in the
future. The Tax Refund Escrow Agreement amends and supplements the Tax
Allocation Agreement and supersedes the Tax Stipulation. Under the terms of the
Tax Refund Escrow Agreement, refunds ("Subject Refunds") received on or after
September 13, 1999 by either Kindred or the Company with respect to federal,
state or local income, gross receipts, windfall profits, transfer, duty,
value-added, property, franchise, license, excise, sales and use, capital,
employment, withholding, payroll, occupational or similar business taxes
(including interest, penalties and additions to tax, but excluding certain
refunds), for taxable periods ending on or prior to May 1, 1998, or including
May 1, 1998 and received on or after September 13, 1999 ("Subject Taxes") must
be deposited into an escrow account with a third-party escrow agent on the
Kindred Effective Date.
The Tax Refund Escrow Agreement provides, inter alia, that each party must
notify the other of any asserted Subject Tax liability of which it becomes
aware, that either party may request that asserted liabilities for Subject
Taxes be contested, that neither party may settle such a contest without the
consent of the other, that each party has the right to participate in any such
contest, and that the parties generally must cooperate with regard to Subject
Taxes and Subject Refunds and will mutually and jointly control any audit or
review process related thereto.
The funds in the escrow account (the "Escrow Funds") may be released from
the escrow account to pay Subject Taxes and as otherwise provided therein.
The Tax Refund Escrow Agreement provides generally that Kindred and the
Company waive their rights under the Tax Allocation Agreement to make claims
against each other with respect to Subject Taxes satisfied by the Escrow Funds,
notwithstanding the indemnification provisions of the Tax Allocation Agreement.
To the extent that the Escrow Funds are insufficient to satisfy all liabilities
for Subject Taxes that are finally determined to be due (such excess amount,
"Excess Taxes"), the relative liability of Kindred and the Company to pay such
Excess Taxes shall be determined as provided in the Tax Refund Escrow
Agreement. Disputes under the Tax Refund Escrow Agreement, and the
determination of the relative liability of Kindred and the Company to pay
Excess Taxes, if any, are governed by the arbitration provision of the Tax
Allocation Agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities will be distributed equally to each of Kindred
and the Company on an annual basis and are accrued as interest income on the
Consolidated Statement of Operations. Any Escrow Funds remaining in the escrow
account after no further claims may be made by governmental authorities with
respect to Subject Taxes or Subject Refunds
F-25
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(because of the expiration of statutes of limitation or otherwise) will be
distributed equally to Kindred and the Company. At December 31, 2001,
approximately $14.9 million of disputed Subject Refunds and accrued interest,
representing 50% of the Escrow Funds, is recognized in restricted cash on the
Company's Consolidated Balance Sheet.
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a Guarantor of tenant obligations to Kindred
(the "Third Party Leases"). The lessors of these properties may claim that the
Company remains liable on the Third Party Leases assigned to Kindred. Under the
terms of the Agreement of Indemnity--Third Party Leases, Kindred 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 Kindred. 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 third parties unrelated to Kindred (the "Subleased Third Party
Leases"). If Kindred or such third party subtenants are unable to or do not
satisfy the obligations under any Third Party Lease assigned by the Company to
Kindred, 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
Third Party Leases relating to nursing facilities, hospitals, offices and
warehouses have remaining terms (excluding renewal periods) of 1 to 10 years.
The Third Party Leases relating to ground leases have remaining terms from 1 to
80 years. Under the Kindred Reorganization Plan, Kindred assumed and has agreed
to fulfill its obligations under the Agreement of Indemnity--Third Party
Leases. There can be no assurance that Kindred will have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Agreement of Indemnity--Third Party Leases or that Kindred will continue to
honor its obligations under the Agreement of Indemnity--Third Party Leases. If
Kindred does not satisfy or otherwise honor the obligations under the Agreement
of Indemnity--Third Party Leases, then the Company may be liable for the
payment and performance of such obligations. Under the Kindred Reorganization
Plan, Kindred has agreed not to renew or extend any Third Party Lease unless it
first obtains a release of the Company from liability under such Third Party
Lease.
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
---------- --------- ------- ------ ------- ------ -------
2002.................. $1,407 $ 2,225 $ 526 $50 $ 1,375 $ 292 $ 5,875
2003.................. 1,054 2,225 497 -- 1,224 265 5,265
2004.................. 942 2,225 473 -- 1,117 265 5,022
2005.................. 716 1,925 473 -- 1,117 265 4,496
2006.................. 235 1,025 552 -- 1,117 88 3,017
Thereafter..... -- 2,050 11,754 -- 4,839 -- 18,643
------ ------- ------- --- ------- ------ -------
$4,354 $11,675 $14,275 $50 $10,789 $1,175 $42,318
====== ======= ======= === ======= ====== =======
F-26
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 Kindred (the "Third Party Guarantees"). The
Company may remain liable on the Third Party Guarantees assigned to Kindred.
Under the terms of the Agreement of Indemnity--Third Party Contracts, Kindred
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 Kindred. If Kindred is unable to or does
not satisfy the obligations under any Third Party Guarantee assigned by the
Company to Kindred, 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 Company believes that the
aggregate exposure under these guarantees is approximately $38.0 million. Under
the Kindred Reorganization Plan, Kindred assumed and has agreed to fulfill its
obligations under the Agreement of Indemnity--Third Party Contracts. There can
be no assurance that Kindred will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the Agreement of Indemnity--Third Party Contracts or that Kindred will continue
to honor its obligations under the Agreement of Indemnity--Third Party
Contracts. If Kindred does not satisfy or otherwise honor the obligations under
the Agreement of Indemnity--Third Party Contracts, then the Company may be
liable for the payment and performance of such obligations.
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, Kindred agreed in various Spin
Agreements to assume and to indemnify the Company for any and all liabilities
that may arise out of the ownership or operation of the healthcare operations
either before or after the date of the 1998 Spin Off. The indemnification
provided by Kindred also covers losses, including costs and expenses, which may
arise from any future claims asserted against the Company based on these
healthcare operations. In addition, at the time of the 1998 Spin Off, Kindred
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 healthcare operations. Kindred 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 healthcare operations. Under the
Kindred Reorganization Plan, Kindred assumed and agreed to perform its
obligations under these indemnifications. There can be no assurance that
Kindred will have sufficient assets, income and access to financing to enable
it to satisfy its obligations incurred in connection with the 1998 Spin Off or
that Kindred will continue to honor its obligations incurred in connection with
the 1998 Spin Off. If Kindred does not satisfy or otherwise honor the
obligations under these arrangements, then the Company may be liable for the
payment and performance of such obligations and may have to assume the defense
of such claims.
Kindred Common Stock and Registration Rights Agreement
On the Kindred Effective Date, Ventas Realty received 1,498,500 shares of
the common stock in Kindred, representing not more than 9.99% of the issued and
outstanding common stock in Kindred as of the Kindred Effective Date. Based on
applicable laws, regulations, advice from experts, an appraisal, the trading
performance of the Kindred common stock at the applicable time and other
appropriate facts and circumstances, including the illiquidity and lack of
registration of the Kindred common stock when received and the Company's lack
of significant influence over Kindred, the Company determined that the value of
the Kindred common stock was $18.2 million on the date received by Ventas
Realty. The Kindred common stock received by Ventas Realty is subject to
dilution from stock issuances occurring after the Kindred Effective Date. The
Kindred common stock was issued to the Company as additional future rent in
consideration of the Company's agreement to charge the base rent as provided in
the Master Leases.
F-27
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On the Kindred Effective Date, Kindred executed and delivered to Ventas
Realty and other signatories, a Registration Rights Agreement, which, among
other things, provides that Kindred must file a shelf registration statement
with respect to the Kindred common stock and keep such registration statement
continuously effective for a period of two years with respect to such
securities (subject to customary exceptions). The shelf registration statement
was declared effective on November 7, 2001.
The Company disposed of 418,186 shares of Kindred common stock in the fourth
quarter of 2001 and recognized a gain of $15.4 million on the dispositions. In
connection with a registered offering of common stock by Kindred, Ventas Realty
exercised its piggyback registration rights, and sold 83,300 shares of Kindred
common stock, recognizing a gain of $2.6 million. The Company applied the net
proceeds of $3.6 million from the sale of the 83,300 shares of Kindred common
stock as a prepayment on the Company's indebtedness under the Credit Agreement.
The Company declared a distribution of 334,886 shares of Kindred common stock
as part of the 2001 dividend, resulting in a gain of $12.8 million. For every
share of Common Stock of the Company that a stockholder owned at the close of
business on December 14, 2001, the stockholder received 0.005 of a share of
Kindred common stock and $0.0049 in cash (equating to one share of Kindred
common stock and $0.98 in cash for every two hundred shares of Common Stock in
the Company). For purposes of the 2001 dividend, the Kindred common stock was
valued in accordance with the Code and applicable rulings and regulations on
December 31, 2001 at $51.02 per share. Kindred common stock reserved for this
dividend is segregated on the Consolidated Balance Sheet at December 31, 2001.
Terminated Agreements
The Participation Agreement and the Development Agreement, both executed in
connection with the 1998 Spin Off, were terminated on the Kindred Effective
Date. The Second Standstill Agreement and the Tolling Agreement, both entered
into by the Company and Kindred in April 1999, and the Tax Stipulation and the
Rent Stipulation were all terminated on the Kindred Effective Date and are of
no further force or effect.
Settlement of United States Claims
Kindred and the Company were the subject of investigations by the United
States Department of Justice regarding the Company's prior healthcare
operations, including matters arising from lawsuits filed under the qui tam, or
whistleblower, provision of the Federal Civil False Claims Act, which allows
private citizens to bring a suit in the name of the United States. See "Note
12--Litigation." The Kindred Reorganization Plan contains a comprehensive
settlement of all of these claims by the United States (the "United States
Settlement").
Under the United States Settlement, the Company will pay $103.6 million to
the United States, of which $34.0 million was paid on the Kindred Effective
Date. The balance of $69.6 million bears interest at 6% per annum and is
payable in equal quarterly installments over a five-year term commencing on
June 30, 2001 and ending in 2006. The Company made the first three quarterly
installments under the United States Settlement through December 31, 2001.
The Company also paid approximately $0.4 million to legal counsel for the
realtors 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%.
Note 10--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
F-28
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
repay the bonds is secured by a certain Mortgage and Trust Indenture (the
"Atria Mortgage") that encumbers (among other property) the assisted living
facility. Based solely upon the most current information obtained by the
Company from Atria, the Company believes that the aggregate principal amount of
the indebtedness evidenced by the bonds is currently approximately $29.4
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 or unwilling 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.
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 itself released from liability under the bonds and the Atria
Mortgage. A lawsuit is pending between Atria and the Company wherein Atria is
seeking, among other things, a declaration that Atria's indemnity obligation in
favor of the Company relative to the bonds is void and unenforceable. There can
be no assurance, however, that the Company will be successful in its attempts
to be released from this liability. See "Note 12--Litigation--Other Legal
Proceedings."
The Company may be subject to certain liabilities assumed by Kindred in
connection with the 1998 Spin Off. See "Note 9--Transactions with Kindred."
F-29
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Earnings per share
The following table shows the amounts used in computing basic and diluted
earnings per share (In thousands, except per share amounts)
Year Year Year
Ended Ended Ended
December December December
31, 2001 31, 2000 31, 1999
-------- -------- --------
Numerator for Basic and Diluted Earnings Per Share:
Income (loss) before Extraordinary Item........................... $51,888 $(61,245) $42,535
Extraordinary Loss................................................ (1,322) (4,207) --
------- -------- -------
Net Income (loss)................................................. $50,566 $(65,452) $42,535
======= ======== =======
Denominator:
Denominator for Basic Earnings Per Share--Weighted Average Shares. 68,409 68,010 67,754
Effect of Dilutive Securities:
Stock Options................................................. 810 67 15
Time Vesting Restricted Stock Awards.......................... 144 54 220
------- -------- -------
Dilutive Potential Common Stock............................... 954 121 235
======= ======== =======
Denominator for Diluted Earnings Per Share--Adjusted Weighted
Average......................................................... 69,363 68,131 67,989
======= ======== =======
Basic Earnings (loss) Per Share:
Income (loss) before Extraordinary Item........................... $ 0.76 $ (0.90) $ 0.63
Extraordinary Loss................................................ (0.02) (0.06) --
------- -------- -------
Net Income (loss)................................................. $ 0.74 $ (0.96) $ 0.63
======= ======== =======
Diluted Earnings (loss) Per Share:
Income (loss) before Extraordinary Item........................... $ 0.75 (0.90) $ 0.63
Extraordinary Loss................................................ (0.02) (0.06) --
------- -------- -------
Net Income (loss)................................................. $ 0.73 $ (0.96) $ 0.63
======= ======== =======
Options to purchase 3.1 million shares of Common Stock ranging from $10.8125
to $26.0476 were outstanding at December 31, 2001, 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, 2001 and, therefore, the effect would be anti-dilutive.
Options to purchase 3.4 million shares of Common Stock ranging from $5.885 to
$26.0476 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.
Note 12--Litigation
Legal Proceedings Defended and Indemnified by Kindred 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 Kindred in connection with the 1998 Spin Off. Under the Spin
F-30
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Agreements, Kindred agreed to assume the defense, on behalf of the Company, of
any claims that (a) were pending at the time of the 1998 Spin Off and which
arose out of the ownership or operation of the healthcare operations or any of
the assets or liabilities transferred to Kindred in connection with the 1998
Spin Off, or (b) were asserted after the 1998 Spin Off and which arose out of
the ownership and operation of the healthcare operations or any of the assets
or liabilities transferred to Kindred in connection with the 1998 Spin Off, and
to indemnify the Company for any fees, costs, expenses and liabilities arising
out of such operations (the "Indemnification"). Kindred is presently defending
the Company in the matters described below. Under the Kindred Reorganization
Plan, Kindred assumed and agreed to abide by the Indemnification and to defend
the Company in these and other matters as required under the Spin Agreements.
See "Note 9--Transactions with Kindred--Assumption of Certain Operating
Liabilities and Litigation." However, there can be no assurance that Kindred
will continue to defend the Company in such matters or that Kindred 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 Kindred's public filings and information provided to
the Company by Kindred. There can be no assurance that Kindred has provided the
Company with complete and accurate information in all instances.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc. et al. was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The putative class action
claims were brought by an alleged stockholder of the Company against the
Company and certain executive officers and directors of the Company. The
complaint alleges that the Company and certain current and former executive
officers of the Company during a specified time frame violated Sections 10(b)
and 20(a) of the Exchange Act, by, among other things, issuing to the investing
public a series of false and misleading statements concerning the Company's
current operations and the inherent value of the Company's Common Stock. The
complaint further alleges that as a result of these purported false and
misleading statements concerning the Company's revenues and successful
acquisitions, the price of the Company's Common Stock was artificially
inflated. The suit seeks damages in an amount to be proven at trial,
pre-judgment and post-judgment interest, reasonable attorneys' fees, expert
witness fees and other costs, and any extraordinary equitable and/or injunctive
relief permitted by law or equity to assure that the plaintiff has an effective
remedy. On December 27, 2001, the parties filed a motion for the District Court
to approve a settlement among the parties requiring the payment of $3.0 million
to the certified class. The proposed settlement does not require any payments
by the Company. A hearing to consider the settlement has been scheduled for May
13, 2002. There can be no assurance the settlement will be approved by the
District Court. If the settlement is not approved by the District Court,
Kindred, on behalf of the Company, intends to continue to defend this action
vigorously.
A stockholder derivative suit entitled Thomas G. White on behalf of Kindred,
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 Kindred and the Company against
certain current and former executive officers and directors of Kindred and the
Company. The complaint alleges, among other things, that the defendants damaged
Kindred 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 Kindred 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 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.
Kindred has informed the Company that it also believes the allegations in the
complaint are without merit, and intends to defend this action vigorously for
and on behalf of the Company.
A class action lawsuit entitled Sally Pratt, et al. v. Ventas, Inc. et al.
was filed on May 25, 2001 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-01CV-317-H). The
F-31
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
putative class action complaint alleges that the Company and certain current
and former officers and employees of the Company engaged in a fraudulent scheme
to conceal the true nature and substance of the 1998 Spin Off resulting in (a)
a violation of the Racketeer Influenced and Corrupt Organizations Act, (b)
bankruptcy fraud, (c) common law fraud, and (d) a deprivation of plaintiffs'
civil rights. The plaintiffs allege that the defendants failed to act
affirmatively to explain and disclose the fact that the Company was the entity
that had been known as Vencor, Inc. prior to the 1998 Spin Off and that a new
separate and distinct legal entity assumed the name of Vencor, Inc. after the
1998 Spin Off. The plaintiffs contend that the defendants filed misleading
documents in the plaintiffs' state court lawsuits that were pending at the time
of the 1998 Spin Off and that the defendants deceptively used the bankruptcy
proceedings of Vencor, Inc. (now known as Kindred Healthcare, Inc.) to stay
lawsuits against the Company. As a result of these actions, the plaintiffs
maintain that they and similarly situated individuals suffered and will
continue to suffer severe financial harm. The suit seeks compensatory damages
(trebled with interest), actual and punitive damages, reasonable attorneys'
fees, costs and expenses, declaratory and injunctive and any and all other
relief to which the plaintiffs may be entitled. This action was dismissed in
its entirety on February 4, 2002. The plaintiffs filed a motion requesting that
the dismissal be altered to allow the plaintiffs to resume this action if they
are unable to obtain relief in the Kindred proceedings in the Bankruptcy Court.
The plaintiffs have filed a motion with the Kindred Bankruptcy Court
requesting, among other things, that the Kindred Bankruptcy Court set aside
portions of the releases of the Company contained in the Kindred Reorganization
Plan, as such releases apply to the plaintiffs. Kindred, on behalf of the
Company, is vigorously contesting these motions.
Kindred and the Company were informed by the Department of Justice that they
were the subject of ongoing investigations into various aspects of the
Company's former healthcare operations. In the United States Settlement,
documented in the Kindred Reorganization Plan, the United States, the Company
and Kindred resolved all claims arising out of the investigations by the
Department of Justice and the Office of Inspector General including the pending
qui tam, or whistleblower, actions. Under the United States Settlement, the
United States was required to move to dismiss with prejudice to the United
States and the realtors (except for certain claims which will be dismissed
without prejudice to the United States in certain of the cases) the pending qui
tam actions as against the Company, Kindred and any current or former officers,
directors and employees of either entity. All pending qui tam actions against
the Company have been resolved and dismissed by the United States Settlement.
Kindred is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is a party to certain
legal actions and regulatory investigations that arise from the normal course
of its prior healthcare operations which legal actions and regulatory
investigations are being defended by Kindred under the Indemnification. Neither
the Company nor Kindred is able to predict the ultimate outcome of pending
litigation and regulatory investigations. In addition, there can be no
assurance that the Center for Medicare and Medicaid Services (formerly known as
United States Healthcare Financing Administration) ("CMS") or other regulatory
agencies will not initiate additional investigations related to Kindred's
business or the Company's prior healthcare business in the future, nor can
there be any assurance that the resolution of any litigation or investigations,
either individually or in the aggregate, would not have a material adverse
effect on Kindred's liquidity, financial position or results of operations,
which in turn could have a Material Adverse Effect on the Company.
Unasserted Claims--Potential Liabilities Due to Fraudulent Transfer
Considerations, Legal Dividend Requirements and Other Claims
The Company
The 1998 Spin Off, including the simultaneous distribution of the Kindred
common stock to the Ventas stockholders (the "Distribution"), is subject to
review under fraudulent conveyance laws. In addition, the 1998 Spin Off is
subject to review under state corporate distribution and dividend statutes.
Under Delaware law, a
F-32
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the Distribution was proper and
that 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.
Other Legal Proceedings
The Company and Atria, Inc. ("Atria") have been engaged in ongoing
discussions regarding the parties' respective rights and obligations relative
to the issuance of mortgage resident bonds (the "Bonds") to the new residents
of New Pond Village, a senior housing facility in Walpole, Massachusetts, owned
by the Company and leased to and operated by Atria. See "Note 10--Commitment
and Contingencies." On August 6, 2001, Atria filed a lawsuit styled Atria, Inc.
v. Ventas Realty, Limited Partnership in the Superior Court Department of the
Trial Court in Norfolk County, Massachusetts (Civil Action Number 01 01233).
The complaint alleges that the Company has a duty to sign and issue Bonds to
new residents of New Pond Village and that, as a result of an alleged failure
of the Company to issue Bonds, the Company has, among other things, breached
contractual obligations under the Bond Indenture. The complaint seeks a
declaration that Atria's indemnity obligation in favor of the Company relating
to the Bonds is void and unenforceable and injunctive and declaratory relief
requiring the Company to sign and issue Bonds to new residents of New Pond
Village. The complaint also seeks damages, interest, attorneys' fees and other
costs. The Company believes that the allegations in the complaint are without
merit. The Company's motion to dismiss was denied by trial court. The trial
court's decision was affirmed by an appellate court on January 24, 2002. The
Company has asserted counterclaims against Atria and the Company intends to
defend this action and pursue its counterclaims vigorously.
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 1998 Credit Agreement,
(a) failed to recognize an assignment to Black Diamond of certain notes issued
under the 1998 Credit Agreement, (b) failed to issue to Black Diamond new notes
under the 1998 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 seek damages of $11,796,875
(the principal amount of the Company's Bridge Loan under the 1998 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.
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 12, 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.
F-33
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Except for the United States Settlement, no provision for liability, if any,
resulting from the aforementioned litigation has been made in the consolidated
financial statements as of December 31, 2001.
Note 13--Capital Stock
The authorized capital stock of the Company at December 31, 2001 and 2000
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 Healthcare Corporation ("Tenet"). Since the date of the 1998 Spin Off,
Tenet has owned 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 Kindred may be attributed to the Company. If as a result
of any such attribution, the Company is deemed to own 10% or more of the issued
and outstanding Kindred 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 Kindred 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 will be deemed to
be owned by a trust for the benefit of a third party and Tenet will have no
legal title to such "Excess 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
issued by Kindred and performance shares issued by Kindred will be deemed
outstanding for purposes of calculating the Company's ownership percentage
under the 10% securities test. In addition, since the Kindred Effective Date,
Kindred issued additional shares of Kindred common stock and the Company
disposed of 418,186 shares of Kindred common stock, so that as of January 27,
2002 Ventas Realty owned not more than 6.2% of the issued and outstanding stock
of Kindred. Accordingly, the Company believes that for purposes of the 10%
securities test, its ownership percentage in Kindred has been and will continue
to be materially less than 9.99%.
F-34
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's Board of Directors is empowered to grant waivers from the
"Excess Share" provisions of the Company's Certificate of Incorporation. One
such waiver is currently in effect permitting a stockholder to own over 9% of
the Common Stock but in no event more than 9.9% of the Common Stock as measured
by the Code. The Company believes that no stockholder, other than Tenet,
currently owns 10% or more of the Common Stock as measured by the Code.
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. A total of 300,000 shares of Series A Preferred Stock are
subject to the Rights.
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 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.
F-35
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's Distribution Reinvestment and Stock Purchase Plan (the "Plan"
or "DRIP") was declared effective by the Securities and Exchange Commission on
December 31, 2001. Under the Plan's terms, existing stockholders may purchase
shares of Common Stock in the Company by reinvesting all or a portion of the
cash distribution on their shares of the Company's Common Stock. In addition,
existing stockholders of the Company, as well as new investors may purchase
shares of Common Stock in the Company by making optional cash payments.
Note 14--Related Party Transactions
At December 31, 2001 and 2000, the Company had receivables of approximately
$3.6 million and $3.4 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 $2.6
million at December 31, 2001, is forgiven on a periodic basis, provided that
the officer remains an employee of the Company (the "1998 Spin Off Note").
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. The Restricted Share Note is secured by a pledge of all of
the restricted shares to which the Restricted Share Note relates and the
Restricted Share Note is otherwise non-recourse. The 1998 Spin Off Note is not
secured.
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, 2001, 2000 and 1999, Tangram has paid the Company
approximately $779,000, $754,000 and $733,800, 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. 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.
F-36
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Note 15--Quarterly Financial Information (unaudited)
Summarized unaudited consolidated quarterly information for the years ended
December 31, 2001 and 2000 is provided below (amounts in thousands, except per
share amounts).
First Second Third Fourth
For the Quarters Ended 2001 Quarter Quarter Quarter Quarter
- --------------------------- ------- ------- ------- --------
Revenues........................................... $47,624 $47,356 $47,296 $ 62,305
Income before Extraordinary Item................... 10,579 8,105 9,157 24,047
Extraordinary Item................................. -- -- -- (1,322)
Net Income......................................... 10,579 8,105 9,157 22,725(1)
Earnings per share
Basic
Income before Extraordinary Item............ $ 0.16 $ 0.12 $ 0.13 $ 0.35(1)
Extraordinary Loss.......................... -- -- -- (0.02)
Net Income.................................. $ 0.16 $ 0.12 $ 0.13 $ 0.33(1)
Diluted
Income before Extraordinary Item............ $ 0.15 $ 0.12 $ 0.13 $ 0.35(1)
Extraordinary Loss.......................... -- -- -- (0.02)
Net Income.................................. $ 0.15 $ 0.12 $ 0.13 $ 0.33(1)
Dividends declared................................. -- $ 0.22 $ 0.44 0.26
First Second Third Fourth
For the Quarters Ended 2000 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)(2)
Extraordinary Loss................................. (4,207) -- -- --
Net Income (Loss).................................. 2,733 7,512 8,581 (84,278)(2)
Earnings per share
Basic
Income (Loss) before Extraordinary Item..... $ 0.10 $ 0.11 $ 0.13 $ (1.24)(2)
Extraordinary Loss.......................... (0.06) -- -- --
Net Income (Loss)........................... $ 0.04 $ 0.11 $ 0.13 $ (1.24)(2)
Diluted
Income (Loss) before Extraordinary Item..... $ 0.10 $ 0.11 $ 0.13 $ (1.24)(2)
Dividends declared................................. -- -- $ 0.62 $ 0.29
- --------
(1) Reflects the gain from the sale and distribution of Kindred common stock.
(2) Reflects the charge for the United States Settlement and the waiver fee on
the Credit Agreement.
F-37
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16--Condensed Consolidating Information
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2001
The following summarizes the condensed consolidating information for the
Company as of and for the year ended December 31, 2001:
Ventas,
Inc. and Ventas
Ventas LP Realty,
Realty, Limited Unrestricted Consolidated
L.L.C. Partnership Group (a) Elimination Consolidated
--------- ----------- ------------ ------------ ------------
(in thousands)
Assets
Total net real estate investments.............. $ 14,888 $678,119 $113,329 $ 806,336
Cash and cash equivalents...................... 1,651 16,945 -- 18,596
Restricted cash................................ 15,731 -- 5,042 20,773
Investment in Kindred Healthcare, Inc. common
stock........................................ -- 55,118 -- 55,118
Kindred Healthcare, Inc. common stock
reserved for distribution.................... -- 17,086 -- 17,086
Deferred financing costs, net.................. -- 7,398 6,755 14,153
Notes receivable from employees................ 845 2,790 -- 3,635
Equity in affiliates........................... 3,358 -- -- $(3,358) --
Other.......................................... 1,084 2,027 3,051 6,162
-------- -------- -------- ------- ----------
Total assets............................ $ 37,557 $779,483 $128,177 $(3,358) $ 941,859
======== ======== ======== ======= ==========
Liabilities and Stockholders' Equity (Deficit)
Liabilities:
Notes payable and other debt................... $ -- $623,368 $225,000 $ 848,368
United States Settlement....................... 54,747 -- -- 54,747
Deferred revenue............................... 184 17,167 3,676 21,027
Interest rate swap agreements.................. -- 27,430 -- 27,430
Accrued dividend............................... 17,910 -- -- 17,910
Accounts payable intercompany and other
accrued liabilities.......................... 9,473 9,474 (793) 18,154
Other liabilities--disputed tax refunds and
accumulated interest......................... 14,903 -- -- 14,903
Deferred income taxes.......................... 30,394 -- -- 30,394
-------- -------- -------- ------- ----------
Total liabilities.............................. 127,611 677,439 227,883 1,032,933
Total stockholders' equity (deficit)........... (90,054) 102,044 (99,706) (3,358) (91,074)
-------- -------- -------- ------- ----------
Total liabilities and stockholders'
equity (deficit)...................... $ 37,557 $779,483 $128,177 $(3,358) $ 941,859
======== ======== ======== ======= ==========
- --------
(a) Includes Ventas Specialty I, Inc., Ventas Finance I, Inc., Ventas Specialty
I, LLC and Ventas Finance I, LLC.
F-38
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Year ended December 31, 2001
Ventas,
Inc. and
Ventas Ventas
LP Realty,
Realty, Limited Unrestricted Consolidated
L.L.C. Partnership Group (a) Elimination Consolidated
-------- ----------- ------------ ------------ ------------
(in thousands)
Revenues:
Rental income............................... $ 2,233 $181,603 $ 1,316 $185,152
Gain on sale of Kindred common stock........ -- 15,425 -- 15,425
Equity earnings in affiliate(s)............. 55,577 -- -- $(55,577) --
Interest and other income................... 1,442 2,562 -- 4,004
------- -------- ------- -------- --------
Total revenues.......................... 59,252 199,590 1,316 (55,577) 204,581
------- -------- ------- -------- --------
Expenses:
General and administrative.................. 123 10,053 68 10,244
Professional fees........................... 56 4,571 31 4,658
Amortization of restricted stock grants..... 21 1,701 12 1,734
Depreciation................................ 694 41,115 229 42,038
Interest.................................... -- 89,658 (2,626) 87,032
Interest on United States Settlement........ 4,592 -- -- 4,592
------- -------- ------- -------- --------
Total expenses.......................... 5,486 147,098 (2,286) 150,298
------- -------- ------- -------- --------
Income (loss) before gain on disposal of real
estate assets, provision for income taxes and
extraordinary loss........................... 53,766 52,492 3,602 (55,577) 54,283
Provision for income taxes..................... 2,685 -- -- 2,685
------- -------- ------- -------- --------
Income (loss) before gain on disposal of real
estate assets and extraordinary loss......... 51,081 52,492 3,602 (55,577) 51,598
Net gain on real estate disposals.............. -- 290 -- 290
------- -------- ------- -------- --------
Income (loss) before extraordinary loss........ 51,081 52,782 3,602 (55,577) 51,888
Extraordinary loss on extinguishment of debt... -- (1,322) -- (1,322)
------- -------- ------- -------- --------
Net income (loss).............................. $51,081 $ 51,460 $ 3,602 $(55,577) $ 50,566
======= ======== ======= ======== ========
- --------
(a) Includes Ventas Specialty I, Inc., Ventas Finance I, Inc., Ventas Specialty
I, LLC and Ventas Finance I, LLC.
F-39
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Year ended December 31, 2001
Ventas,
Inc. and Ventas
Ventas LP Realty,
Realty, Limited Unrestricted Consolidated
L.L.C. Partnership Group (a) Elimination Consolidated
--------- ----------- ------------ ------------ ------------
(in thousands)
Net cash provided by (used in) operating
activities............................... $ 50,951 $ 89,524 $ (5,005) $(55,577) $ 79,893
Net cash provided by (used in) investing
activities............................... (1,697) 4,457 -- 2,760
Cash flows from financing activities:
Proceeds from long-term debt............ -- -- 225,000 225,000
Repayment of long-term debt............. -- (263,017) -- (263,017)
Payment of deferred financing costs..... -- (121) (6,811) (6,932)
Payment on the United States Settlement. (41,746) -- -- (41,746)
Cash distribution to Stockholders....... (65,266) -- -- (65,266)
Cash distributions from affiliates...... 57,285 100,322 (213,184) 55,577 --
Issuance of common stock................ 503 -- -- 503
-------- --------- --------- -------- ---------
Net cash provided by (used in) financing
activities............................... (49,224) (162,816) 5,005 55,577 (151,458)
-------- --------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents.............................. 30 (68,835) -- (68,805)
Cash and cash equivalents at beginning of
year..................................... 1,621 85,780 -- 87,401
-------- --------- --------- -------- ---------
Cash and cash equivalents at end of year... $ 1,651 $ 16,945 $ -- $ 18,596
======== ========= ========= ======== =========
- --------
(a) Includes Ventas Specialty I, Inc., Ventas Finance I, Inc., Ventas Specialty
I, LLC and Ventas Finance I, LLC.
F-40
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2002
(in thousands)
March 31, December 31,
2002 2001
(Unaudited) (Audited)
----------- ------------
Assets
Real estate investments:
Land............................................................. $ 119,650 $ 119,771
Building and improvements........................................ 1,054,886 1,056,067
---------- ----------
1,174,536 1,175,838
Accumulated depreciation......................................... (379,116) (369,502)
---------- ----------
Total real estate investments................................ 795,420 806,336
Cash and cash equivalents........................................... 9,281 18,596
Restricted cash..................................................... 19,994 20,773
Deferred financing costs, net....................................... 13,453 14,153
Investment in Kindred Healthcare, Inc. common stock................. 43,751 55,118
Kindred Healthcare, Inc. common stock reserved for distribution..... -- 17,086
Notes receivable from employees..................................... 4,508 3,635
Other............................................................... 5,225 6,162
---------- ----------
Total assets................................................. $ 891,632 $ 941,859
========== ==========
Liabilities and stockholders' equity
Liabilities:
Notes payable and other debt..................................... $ 831,544 $ 848,368
United States Settlement......................................... 54,747 54,747
Deferred revenue................................................. 20,400 21,027
Interest rate swap agreements.................................... 16,715 27,430
Accrued dividend................................................. -- 17,910
Accounts payable and other accrued liabilities................... 17,218 18,154
Other liabilities--disputed federal, state and local tax refunds. 14,880 14,903
Deferred income taxes............................................ 30,394 30,394
---------- ----------
Total liabilities............................................ 985,898 1,032,933
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, unissued........................................ -- --
Common stock..................................................... 18,402 18,402
Capital in excess of par value................................... 119,263 122,468
Unearned compensation on restricted stock........................ (2,070) (1,000)
Accumulated other comprehensive income........................... 35,522 36,174
Retained earnings (deficit)...................................... (137,793) (134,088)
---------- ----------
33,324 41,956
Treasury stock................................................... (127,590) (133,030)
---------- ----------
Total stockholders' equity (deficit)......................... (94,266) (91,074)
---------- ----------
Total liabilities and stockholders' equity................... $ 891,632 $ 941,859
========== ==========
See notes to condensed consolidated financial statements.
F-41
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share amounts)
Three months ended
March 31,
------------------
2002 2001
------- -------
Revenues:
Rental income.......................................... $46,397 $46,118
Interest and other income.............................. 342 1,506
------- -------
46,739 47,624
Expenses:
General and administrative............................. 2,311 2,549
Professional fees...................................... 565 1,799
Amortization of restricted stock grants................ 422 403
Depreciation........................................... 10,466 10,498
Interest............................................... 19,860 21,121
Interest on United States Settlement................... 1,471 --
------- -------
Total expenses..................................... 35,095 36,370
------- -------
Income before gain on sale of real estate and income taxes 11,644 11,254
Net gain on sale of real estate........................... 1,057 --
------- -------
Income before income taxes................................ 12,701 11,254
Provision for income taxes................................ -- 675
------- -------
Net income................................................ $12,701 $10,579
======= =======
Earnings per common share:
Basic.................................................. $ 0.18 $ 0.16
Diluted................................................ $ 0.18 $ 0.15
Shares used in computing earnings per common share:
Basic.................................................. 68,698 68,222
Diluted................................................ 69,844 68,872
Dividend declared and paid per common share............... $0.2375 $ --
See notes to condensed consolidated financial statements.
F-42
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
For the three For the three
Months Ended Months Ended
March 31, 2002 March 31, 2001
-------------- --------------
Net income....................................................... $ 12,701 $ 10,579
Other comprehensive income (loss):
Cumulative effect from change in accounting for derivatives... -- 17,476
Unrealized gain (loss) on interest rate swaps................. 10,715 (17,504)
Unrealized loss on Kindred, Inc. common stock................. (11,367) --
-------- --------
(652) (28)
-------- --------
Net comprehensive income......................................... $ 12,049 $ 10,551
======== ========
See notes to condensed consolidated financial statements.
F-43
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended
March 31,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income.............................................. $ 12,701 $ 10,579
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation..................................... 10,466 10,498
Amortization of deferred financing
costs....................................... 700 611
Amortization of restricted stock
grants...................................... 422 403
Normalized rents.............................. (48) 7
Gain on sale of real estate...................... (1,057) --
Amortization of deferred revenue.............. (627) --
Other............................................ 38 --
Changes in operating assets and
liabilities:
(Increase) decrease in restricted cash........ 779 (160)
Increase in accounts receivable and
other assets................................ (254) (247)
Increase in accounts payable and
accrued and other liabilities............... 1,058 1,407
-------- --------
Net cash provided by operating activities............ 24,178 23,098
Cash flows from investing activities:
Proceeds from sale of real estate.................. 1,550 --
Purchase of furniture and equipment................ (76) (95)
Increase in notes receivable from employees........ (873) (460)
-------- --------
Net cash provided by (used in) investing
activities......................................... 601 (555)
Cash flows from financing activities:
Repayment of long-term debt........................ (16,824) (35,000)
Cost of issuance of stock.......................... (40) --
Cash dividends to stockholders..................... (17,230) (19,846)
-------- --------
Cash used in financing activities.................... (34,094) (54,846)
-------- --------
Decrease in cash and cash equivalents................... (9,315) (32,303)
Cash and cash equivalents--beginning of period.......... 18,596 87,401
-------- --------
Cash and cash equivalents--end of period................ $ 9,281 $ 55,098
======== ========
Supplemental schedule of noncash activities:
Dividend distribution of Kindred common stock........ $ 17,086 $ --
======== ========
See notes to condensed consolidated financial statements.
F-44
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1--Reporting Entity
Ventas, Inc. ("Ventas" or the "Company") is a Delaware corporation that
elected to be taxed as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"), for the year ended
December 31, 1999. The Company believes that it has satisfied the requirements
to qualify as a REIT for the years ended December 31, 2000 and 2001. The
Company intends to continue to qualify as a REIT for the year ending December
31, 2002 and subsequent years. It is possible that economic, market, legal, tax
or other considerations may cause the Company to fail, or elect not, to qualify
as a REIT. The Company owns a geographically diverse portfolio of healthcare
related facilities that consisted of 44 hospitals, 215 nursing facilities and
eight personal care facilities in 36 states as of March 31, 2002. The Company
and its subsidiaries lease these facilities to healthcare operating companies
under "triple-net" or "absolute net" leases. Kindred Healthcare, Inc. and its
subsidiaries (collectively, "Kindred") lease 210 of the Company's nursing
facilities and all of the Company's hospitals as of March 31, 2002. The Company
conducts substantially all of its business through a wholly owned operating
partnership, Ventas Realty, Limited Partnership ("Ventas Realty") and an
indirect, wholly owned limited liability company, Ventas Finance I, LLC
("Ventas Finance"). The Company's business consists of owning and leasing
healthcare facilities and leasing or subleasing such facilities to third
parties.
Note 2--Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair statement of results for the interim
period have been included. Operating results for the three-month period ended
March 31, 2002 are not necessarily an indication of the results that may be
expected for the year ending December 31, 2002. The Condensed Consolidated
Balance Sheet as of December 31, 2001 has been derived from the Company's
audited consolidated financial statements for the year ended December 31, 2001.
These financial statements and related notes should be read in conjunction with
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
The Company has one primary reportable segment, which consists of investment
in real estate. The Company's primary business is owning and leasing healthcare
facilities and leasing or subleasing such facilities to third parties,
primarily Kindred. See "Note 3--Concentration of Credit Risk and Recent
Developments." All of the Company's leases are triple-net leases, which require
the tenants to pay all property-related expenses. The Company does not operate
these facilities nor does it allocate capital to maintain the properties.
Substantially all depreciation and interest expenses reflected in the Condensed
Consolidated Statements of Income relate to the Company's investment in real
estate.
Note 3--Concentration of Credit Risk and Recent Developments
Concentration of Credit Risk
As of March 31, 2002, approximately 70.3% of the Company's real estate
investments, based on the original cost of such investments, related to skilled
nursing facilities. The remaining real estate investments consist of hospitals
and personal care facilities. The Company's facilities are located in 36 states
with rental revenues from operations in only one state accounting for more than
ten percent (10%) of the Company's total revenues.
F-45
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Approximately 98.1% of the Company's real estate investments, based on the
original cost of such investments, are operated by Kindred. Approximately 98.9%
of the Company's rental revenue for the three months ended March 31, 2002 was
derived from the four amended and restated master lease agreements dated as of
April 20, 2001 between Ventas Realty and Kindred (the "Amended Master Leases")
and the master lease agreement dated as of December 12, 2001 between Ventas
Finance and Kindred (the "CMBS Master Lease," and, collectively with the
Amended Master Leases, the "Master Leases").
Because the Company leases substantially all of its properties to Kindred
and Kindred is the primary source of the Company's revenues, Kindred's
financial condition and its ability and willingness to satisfy its rent
obligations under the Master Leases and certain other agreements will
significantly impact the Company's revenues and its ability to service its
indebtedness, its obligations with respect to the settlement contained in
Kindred's bankruptcy plan of reorganization (the "Final Plan") of the civil and
administrative claims asserted by the United States against the Company and
Kindred (the "United States Settlement") and other obligations, and to make
distributions to its stockholders. There can be no assurance that Kindred will
have sufficient assets, income and access to financing to enable it to satisfy
its obligations under the Master Leases or that Kindred will perform its
obligations under the Master Leases. The failure of Kindred to make three
consecutive rental payments under any of the Master Leases will trigger an
event of default under the Company's 2002 Credit Agreement (as defined below).
The inability or unwillingness of Kindred to satisfy its obligations under the
Master Leases would 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, its obligations under the United States
Settlement and other obligations, and on the Company's ability to make
distributions to its stockholders as required to maintain its status as a REIT
(a "Material Adverse Effect").
Recent Developments Regarding Dividends
The Company elected to be taxed as a REIT under the Code for the year ended
December 31, 1999. The Company believes that it has satisfied the requirements
to qualify as a REIT for the years ended December 31, 2000 and 2001. The
Company intends to continue to qualify as a REIT for the year ending December
31, 2002 and subsequent years. Such qualification requires the Company to
declare a distribution to its stockholders of 90% of its taxable income for any
given year not later than September 15 of the year following the end of the
year in respect of which the dividend is to be paid (i.e., not later than
September 15, 2003 for the year 2002) and pay such dividend not later than
December 31 of that same year (i.e., not later than December 31, 2003 for the
year 2002), or, if earlier, prior to the payment of the first regular dividend
for the then current year. While such distributions are not required to be made
quarterly, if they are not made by January 31 of the year following the end of
the year in respect of which the dividend is to be paid (i.e., by January 31,
2003 for the year 2002), the Company is required to pay a 4% non-deductible
excise tax on the difference between 85% of its taxable net income for the year
in respect of which the dividend is to be paid and the aggregate amount of
dividends paid for that year on or prior to January 31 of the year following
the year in respect of which the dividend is to be paid.
Consistent with its stated intention to pay total dividends to its
stockholders of $0.95 per share for 2002, the Company declared the first
quarterly dividend for 2002 of $0.2375 per share on February 12, 2002. The
dividend was paid in cash on March 4, 2002 to stockholders of record as of
February 22, 2002. Although the Company currently intends to distribute 90% or
more of its taxable income for 2002 in quarterly installments, there can be no
assurance that it will do so or as to when the remaining distributions will be
made. The Company currently intends to pay subsequent 2002 dividends in cash,
although it may pay dividends in whole or in part by distribution of shares of
common stock of Kindred (the "Kindred Common Stock"), or other securities or
property.
F-46
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's estimation of its 2002 taxable income and the related
quarterly dividends is based on a number of assumptions, including, but not
limited to, the following: Kindred performs its obligations under the Master
Leases and the various agreements (the "Spin Agreements") entered into by the
Company and Kindred at the time of the Company's spin-off of Kindred in May 1,
1998 (the "1998 Spin Off"), as such agreements may have been amended and
restated in connection with Kindred's emergence from bankruptcy on April 20,
2001 (the "Kindred Effective Date"); the Company's other tenants perform their
obligations under their leases with the Company; no additional dispositions of
Kindred Common Stock occur; no capital transactions, acquisitions or divestures
occur; the Company does not incur any impact from new accounting rule FASB 133
relating to derivatives; the Company's tax and accounting positions do not
change; and the Company's issued and outstanding and diluted shares are
unchanged.
It is important to note for purposes of the required REIT distributions that
the Company's taxable income may vary significantly from historical results and
from current income determined in accordance with accounting principles
generally accepted in the United States depending on the resolution of a
variety of factors. Under certain circumstances, the Company may be required to
make distributions in excess of funds from operations ("FFO") (as defined by
the National Association of Real Estate Investment Trusts) in order to meet
such distribution requirements. In the event that timing differences or cash
needs occur, the Company may find it necessary to borrow funds or to issue
equity securities (there being no assurance that it will be able to do so) or,
if possible, to pay taxable stock dividends, distribute other property or
securities or engage in a transaction intended to enable it to meet the REIT
distribution requirements. The Company's ability to engage in certain of these
transactions may be restricted in certain circumstances by the terms of the
Indentures (as defined below) and the 2002 Credit Agreement. If so restricted,
such transaction would likely require the consent of the "Required Lenders"
under the 2002 Credit Agreement and/or the holders of a majority in principal
amount of the outstanding Notes under each Indenture and there can be no
assurance that such consents would be obtained. See "Note 4--Borrowing
Arrangements." In addition, the failure or inability of Kindred to make rental
payments under the Master Leases would materially impair the ability of the
Company to make distributions. Consequently, there can be no assurance that the
Company will be able to make distributions at the required distribution rate or
any other rate.
Although the Company intends to continue to qualify as a REIT for the year
ended December 31, 2002 and subsequent years, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail, or
elect not, to continue to qualify as a REIT in any such year. If the Company
were to fail, or elect not, to continue to qualify as a REIT in any such year,
the Company would be subject to 35% federal income tax and to the applicable
state and local income taxes for the affected years. Such tax obligations would
have a Material Adverse Effect on the Company. Unless eligible for limited
relief, if the Company failed, or revoked its election, to qualify as a REIT,
the Company would not be eligible to elect again to be treated as a REIT before
the fifth year after the year of such termination or revocation.
Recent Developments Regarding Liquidity
On April 17, 2002, Ventas Realty and Ventas Capital Corporation, a wholly
owned subsidiary of Ventas Realty, completed an offering (the "Offering") of
8-3/4% Senior Notes due 2009 in the aggregate principal amount of $175 million
and 9% Senior Notes due 2012 in the aggregate principal amount of $225 million.
Also on April 17, 2002, Ventas Realty obtained a new $350 million secured
credit facility. The Company used the proceeds of the Offering and certain
borrowings under the new credit facility, in addition to cash on hand, to repay
all outstanding indebtedness under the Company's Amended and Restated Credit,
Security, Guaranty and Pledge Agreement dated January 31, 2000 (the "2000
Credit Agreement") and to pay certain fees, costs and expenses relating to the
Offering and new credit facility transactions, including breakage costs for the
partial termination of one of its interest rate swap agreements. See "Note
4--Borrowing Arrangements."
F-47
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Developments Regarding Income Taxes
The Internal Revenue Service is currently reviewing the federal income tax
returns of the Company for years ending December 31, 1997 and 1998. There can
be no assurance as to the ultimate outcome of these matters or whether such
outcome will have a Material Adverse Effect on the Company.
NOTE 4--Borrowing Arrangements
The following is a summary of the Company's long-term debt and certain
interest rate and maturity information as of March 31, 2002 and December 31,
2001 (in thousands):
March 31, December 31,
2002 2001
--------- ------------
2000 Credit Agreement-$25.0 million revolving credit line, bearing interest at either
LIBOR plus 2.75% or the Base Rate plus 1.75% ($25.0 million and $17.8 million
available as of March 31, 2002 and December 31, 2001, respectively)................ $ -- $ --
2000 Credit Agreement--Tranche B Loan, bearing interest at a rate of LIBOR plus
3.25% (5.16% at March 31, 2002 and December 31, 2001).............................. 133,738 150,000
2000 Credit Agreement--Tranche C Loan, bearing interest at a rate of LIBOR plus
4.25% (6.16% at March 31, 2002 and December 31, 2001), due December 31,
2007............................................................................... 473,368 473,368
CMBS Loan, bearing interest at a nominal weighted average rate of LIBOR plus
1.4589% (3.34% at March 31, 2002 and 3.40% at December 31, 2001), due
December 9, 2006................................................................... 224,438 225,000
-------- --------
$831,544 $848,368
======== ========
The 2000 Credit Agreement
On January 31, 2000, the Company entered into the 2000 Credit Agreement. The
loans under the 2000 Credit Agreement are pre-payable without premium or
penalty. Borrowings under the 2000 Credit Agreement bear interest at a margin
over LIBOR described above or at a margin (that is 100 basis points less than
the LIBOR margin) over a Base Rate. The Base Rate is deemed to be the greater
of (i) the prime rate or (ii) the federal funds rate plus 50 basis points.
The 2000 Credit Agreement is secured by liens on substantially all of the
Company's real property and any related leases, rents and personal property
(other than the 40 skilled nursing facilities securing the CMBS Loan (as
defined below)). In addition, the 2000 Credit Agreement contains certain
restrictive covenants. As of March 31, 2002, the Company was in compliance with
all applicable covenants under the 2000 Credit Agreement.
On December 12, 2001, the Company used $212.8 million of the proceeds from
the CMBS Loan to pay down a portion of the outstanding principal under the 2000
Credit Agreement. The Company recognized a $1.3 million extraordinary loss in
the fourth quarter of 2001 relating to the partial write-off of unamortized
deferred financing costs as a result of the aforementioned prepayments under
the 2000 Credit Agreement. As a result of the prepayment, the Company's
obligation to make monthly mandatory prepayments from excess cash flow and the
restriction limiting dividends to 90% of taxable net income were terminated.
On April 17, 2002, the Company used the proceeds of the Offering and certain
borrowing under the 2002 Credit Agreement (as defined below), in addition to
cash on hand, to repay all outstanding indebtedness under the 2000 Credit
Agreement. See "--Use of Proceeds; Repayment of 2000 Credit Agreement."
F-48
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The CMBS Transaction
On December 12, 2001 the Company raised $225 million in gross proceeds from
the completion of a commercial mortgage backed securitization transaction (the
"CMBS Transaction"). Under a Loan and Security Agreement dated as of December
12, 2001 (the "CMBS Loan Agreement"), Ventas Finance obtained a loan in the
principal amount of $225 million (the "CMBS Loan") from Merrill Lynch Mortgage
Lending, Inc., as lender (the "CMBS Lender"). The CMBS Loan is comprised of six
components (i) a component in the original principal amount of $125,230,000
which bears interest at LIBOR plus 0.8665%; (ii) a component in the original
principal amount of $17,970,000 which bears interest at LIBOR plus 1.1665%;
(iii) a component in the original principal amount of $8,860,000 which bears
interest at LIBOR plus 1.5165%; (iv) a component in the original principal
amount of $26,830,000 which bears interest at LIBOR plus 1.9665%; (v) a
component in the original principal amount of $26,830,000 which bears interest
at LIBOR plus 2.6665%; and (vi) a component in the original principal amount of
$19,280,000 which bears interest at LIBOR plus 3.1665%. Principal of and
interest on the CMBS Loan is payable monthly, commencing January 9, 2002.
Principal payments on the CMBS Loan were calculated based upon a 25-year
amortization schedule using an assumed interest rate of 9.46% per annum. The
CMBS Loan matures on December 9, 2006, at which time a principal balloon
payment of approximately $211.0 million will be due, assuming all scheduled
amortization payments are made and no prepayments are made on the CMBS Loan.
The CMBS Loan may be prepaid in whole or in part at any time and from time to
time provided that any prepayment on or before January 9, 2003 must be
accompanied by a payment of 1% of the amount of the principal amount prepaid.
The CMBS Loan is secured by liens on the 40 skilled nursing facilities (the
"CMBS Properties") transferred by Ventas Realty to Ventas Finance and leased to
Kindred under the CMBS Master Lease. Except for certain customary exceptions,
the CMBS Loan is non-recourse to Ventas Finance and the Company.
Ventas Finance is required to maintain or cause to be maintained the
following reserve accounts under the CMBS Loan Agreement: (a) a debt service
reserve account in an amount of $5.0 million to cover shortfalls in cash
available for debt service on the CMBS Loan, (b) an imposition and insurance
reserve for the payment of real property taxes and insurance premiums with
respect to the CMBS Properties, and (c) a replacement reserve account in the
amount of $1.58 million for the payment of the cost of capital improvements
expected to be made to the CMBS Properties. The impositions and insurance
reserve and the replacement reserve under the CMBS Loan Agreement are being
funded and/or maintained by Kindred as required under and in accordance with
the terms of the CMBS Master Lease. If Kindred should be unwilling or unable to
fund these reserves under the CMBS Loan Agreement, Ventas Finance will be
required to fund and/or maintain such reserves. Restricted cash at December 31,
2001 included $5.0 million related to the debt service reserve account for the
CMBS Loan.
Monthly rental amounts under the CMBS Master Lease are deposited directly by
Kindred into a central account for the benefit of the CMBS Lender. Amounts in
the central account are applied to pay the monthly principal and interest
payments on the CMBS Loan and to fund the reserve accounts required under the
CMBS Loan Agreement. Amounts remaining in the central account after the payment
of the current month's principal and interest payment and the funding of the
reserve accounts are distributed to Ventas Finance, provided no event of
default has occurred and is continuing under the CMBS Loan Agreement and
provided a Cash Flow Sweep Event (as defined below) has not occurred. The
central account is swept on a daily basis.
During the continuance of an event of default or a Cash Flow Sweep Event,
all amounts in the central account in excess of the current month's principal
and interest payment and the required reserve payments will be deposited into
an account and applied as a prepayment of the CMBS Loan on the next monthly
payment date. A "Cash Flow Sweep Event" occurs as of any date of determination
if (the "Coverage Test") (a) the ratio of (i) the aggregate net cash flow from
the CMBS Properties for the applicable quarter to (ii) the debt service on the
F-49
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CMBS Loan for the same quarter, is less than 1.50 to 1, or (b) the aggregate
net cash flow from the CMBS Properties for the applicable quarter does not
equal or exceed the rent payable under the CMBS Master Lease for the same
quarter. No Cash Flow Sweep Event will occur at any time while the Coverage
Test is satisfied.
The 2002 Credit Agreement
On April 17, 2002 (the "Closing Date"), the Company, as guarantor, and
Ventas Realty, as borrower, entered into a Second Amended and Restated Credit,
Security and Guaranty Agreement (the "2002 Credit Agreement"). Under the 2002
Credit Agreement, Ventas Realty obtained a $350 million credit facility (the
"Total Commitments") consisting of a $60 million term loan (the "Tranche B Term
Loan") and a $290 million revolving credit facility (the "Revolving Credit
Facility"). The 2002 Credit Agreement also permits Ventas Realty to obtain an
additional term loan in an amount of not less than $50 million, but not more
than the remaining unused portion of the Total Commitments, subject to the
conditions set forth in the 2002 Credit Agreement (the "Tranche C Term Loan").
Ventas Realty has the option to increase the Total Commitments (in the form of
term and/or revolving loans) to an amount not to exceed $450 million, subject
to the satisfaction of certain conditions set forth in the 2002 Credit
Agreement.
The outstanding aggregate principal balance of the Tranche B Term Loan, the
Tranche C Term Loan and the Revolving Credit Facility may not collectively
exceed either (a) the Borrowing Base (as described below) or (b) the Total
Commitments. As of the Closing Date, the outstanding principal balance of the
Tranche B Term Loan was $60.0 million and the outstanding principal balance
under the Revolving Credit Facility was $160.3 million. As of the Closing Date,
there was no Tranche C Term Loan.
Amounts under the Revolving Credit Facility may be borrowed and reborrowed
from time to time, subject to the conditions set forth in the 2002 Credit
Agreement; provided, however, that the Revolving Credit Facility matures and
must be repaid in full on April 17, 2005. The principal amount of the Tranche B
Term Loan is payable in installments of $150,000 on the last day of each fiscal
quarter, beginning September 30, 2002, and matures and must be repaid in full
on April 17, 2005.
Borrowings outstanding under the 2002 Credit Agreement bear interest at an
Applicable Percentage over either (i) a fluctuating rate per annum equal to the
higher of (a) the Federal Funds Rate (as defined in the 2002 Credit Agreement)
in effect for the relevant period, plus one half of one percent (0.5%) and (b)
the Prime Rate (as defined in the 2002 Credit Agreement) in effect for the
relevant period (the "Base Rate") or (ii) a fluctuating LIBOR-based rate per
annum (the "Eurodollar Rate"). With respect to Tranche B Term Loans, the
Applicable Percentage is (a) 2.50% for loans bearing interest at the Eurodollar
Rate, and (b) 1.00% for loans bearing interest at the Base Rate. With respect
to revolving loans under the Revolving Credit Facility:
(a) If the senior unsecured (non-credit enhanced) long term debt of Ventas
Realty or the Company is rated BBB- or better by Standard & Poor's
("S&P") and Baa3 or better by Moody's Investors Service, Inc.
("Moody's") (in the case of a split rating the lower rating will apply),
the Applicable Percentage is as follows: (i) 0.25% for revolving loans
bearing interest at the Base Rate and (ii) 2.25% for revolving loans
bearing interest at the Eurodollar Rate.
(b) Otherwise, the Applicable Percentage is based on the Consolidated
Leverage Ratio (as defined in the 2002 Credit Agreement) as follows:
Pricing Consolidated Applicable Percentage for Applicable Percentage for
Level Leverage Ratio Eurodollar Rate Loans Base Rate Loans
- ------- --------------------------------------- ------------------------- -------------------------
I (less or =)4.25 2.50% 1.00%
II (greater than)4.25 but (less than) 4.75 2.75% 1.25%
III (greater or =)4.75 3.00% 1.50%
F-50
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Consolidated Leverage Ratio is generally the ratio of debt of the
Company and its consolidated subsidiaries (excluding the United States
Settlement, and net of unrestricted cash and cash equivalents), to trailing
twelve-month EBITDA of the Company and its consolidated subsidiaries, as more
particularly described in the 2002 Credit Agreement. The Applicable Percentage
as of the Closing Date was based on pricing level II.
Loans outstanding under the 2002 Credit Agreement are pre-payable without
premium or penalty, provided that loans bearing interest at the Eurodollar Rate
are subject to customary "breakage" costs if repaid prior to the end of an
interest period. Ventas Realty has agreed to pay various fees in connection
with the 2002 Credit Agreement, including without limitation, issuance fees for
letters of credit and fees for the unused portion of the total committed amount
of the Revolving Credit Facility. Ventas Realty may permanently reduce or
terminate the total committed amount of the Revolving Credit Facility, subject
to the conditions set forth in the 2002 Credit Agreement.
The Company (and any other owner of mortgaged property securing Ventas
Realty's obligations under the 2002 Credit Agreement from time to time) has
guaranteed Ventas Realty's obligations under the 2002 Credit Agreement. Such
obligations are secured by liens on certain of Ventas Realty's real property
assets and any related leases, rents and personal property, and, at Ventas
Realty's option, may be secured by certain cash collateral from time to time.
Currently, 59 real properties owned by Ventas Realty are mortgaged to secure
the 2002 Credit Agreement (the "Borrowing Base Properties"). All 59 Borrowing
Base Properties are leased to Kindred pursuant to Amended Master Lease No. 1.
The Borrowing Base under the 2002 Credit Agreement is, as determined at any
time, an amount equal to the sum of (i) sixty-five percent (65%) of the
aggregate property value of the Borrowing Base Properties, plus (ii) one
hundred percent (100%) of amounts on deposit in certain cash collateral or
pledged accounts. The aggregate principal amount of the obligations outstanding
under the 2002 Credit Agreement (including the revolving loans under the
Revolving Credit Facility, the Tranche B Term Loan and the Tranche C Term Loan)
may not at any time exceed the Borrowing Base. Ventas Realty may at any time
include additional real estate assets (which must satisfy certain conditions
set forth in the 2002 Credit Agreement) in the Borrowing Base. Subject to the
terms and conditions set forth in the 2002 Credit Agreement, Ventas Realty may
also obtain a release of various Borrowing Base Properties from the liens and
security interests encumbering such properties.
The 2002 Credit Agreement contains a number of restrictive covenants,
including, without limitation, covenants pertaining to (i) the incurrence of
additional indebtedness; (ii) limitations on liens; (iii) customary
restrictions on certain dividends, distributions and other payments (the sum of
all restricted payments made by the Company after the Closing Date cannot
exceed the sum of (a) 95% of the Company's aggregate cumulative FFO and (b)
certain additional amounts further described in the 2002 Credit Agreement);
(iv) mergers, sales of assets and other transactions; (v) requirements
regarding the maintenance of certain (a) consolidated leverage ratios, (b)
consolidated fixed charge coverage ratios and (c) consolidated adjusted net
worth; (vi) transactions with affiliates; (vii) permitted business and
development activities and uses of loan proceeds; and (viii) changes to
material agreements. The 2002 Credit Agreement contains various potential
events of default and is, among other things, cross-defaulted with certain
other indebtedness and obligations of Ventas Realty and the Company.
Senior Notes Offering
On the Closing Date, Ventas Realty and Ventas Capital Corporation, a wholly
owned subsidiary of Ventas Realty (collectively, the "Issuers"), completed the
Offering of 8 3/4% Senior Notes due 2009 in the aggregate principal amount of
$175 million (the "2009 Notes") and 9% Senior Notes due 2012 in the aggregate
principal
F-51
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
amount of $225 million (the "2012 Notes" and, together with the 2009 Notes, the
"Notes"). The 2009 Notes and the 2012 Notes were issued under separate
Indentures, each dated as of April 17, 2002 (collectively, the "Indentures")
and mature on May 1, 2009 and May 1, 2012, respectively.
The Notes are unconditionally guaranteed on a senior unsecured basis by the
Company and by certain of the Company's current and future subsidiaries as
described in the Indentures (collectively, the "Guarantors"). The Notes are
part of the general unsecured obligations of the Company and Ventas Realty,
rank equal in right of payment with all existing and future senior obligations
of the Company and Ventas Realty, and rank senior to all existing and future
subordinated indebtedness of the Company and Ventas Realty. However, the Notes
are effectively subordinated to all borrowings under the 2002 Credit Agreement
with respect to Borrowing Base Properties and any future assets securing
indebtedness under the 2002 Credit Agreement. In addition, the Notes are
structurally subordinated to approximately $225 million of indebtedness
relating to the CMBS Transaction that is secured by the CMBS Properties. The
Issuers may redeem the Notes, in whole or in part, at any time at a redemption
price equal to the principal amount, plus accrued and unpaid interest to the
date of redemption and a make-whole premium as described in the Indentures.
If the Company experiences certain kinds of changes of control, as described
in the Indentures, the Issuers must make an offer to repurchase the Notes, in
whole or in part, at a purchase price in cash equal to 101% of the principal
amount thereof, plus any accrued and unpaid interest to the date of purchase;
provided, however, that in the event Moody's and S&P have confirmed their
ratings of the Notes and certain other conditions are met as set forth in the
Indentures, this repurchase obligation will not apply.
The Indentures contain covenants that limit the ability of the Company and
certain of the Company's subsidiaries (collectively, the "Restricted Group")
to, among other things (i) incur debt, (ii) incur secured debt, (iii) make
certain dividend payments, distributions and investments (the sum of all
restricted payments made by the Company after the Closing Date cannot exceed
the sum of (a) 95% of the Company's aggregate cumulative FFO and (b) certain
additional amounts further described in the Indentures), (iv) enter into
certain transactions, including transactions with affiliates, (v) subject the
Company's subsidiaries to restrictions on dividends or other payments to the
Company, (vi) merge, consolidate or transfer all or substantially all of the
Restricted Group's assets and (vii) sell assets. These covenants are subject to
certain exceptions and qualifications as described in the Indentures. The
Restricted Group is also required to maintain total unencumbered assets of at
least 150% of the Restricted Group's unsecured debt. If the Company obtains an
investment grade rating, certain of these covenants will be suspended while
such rating remains in effect.
The Issuers and the Guarantors are obligated to file a registration
statement with respect to an offer to exchange the Notes for two new series of
notes registered under the Securities Act and otherwise identical to the Notes
within 45 days after the date the Offering was consummated. The Issuers and the
Guarantors also are obligated to use commercially reasonable efforts to cause
the registration statement to be declared effective within 180 days after the
date the Offering was consummated. The Issuers and the Guarantors may be
required to file and have declared effective a shelf registration statement to
cover resales of the Notes under certain circumstances. If the Issuers and the
Guarantors fail to satisfy these obligations, they may be required to pay
liquidated damages to the holders of the Notes.
Use of Proceeds; Repayment of 2000 Credit Agreement
On April 17, 2002, the Company used (i) the $400.0 million gross proceeds
from the Offering, (ii) $220.3 million of borrowings under the 2002 Credit
Agreement (consisting of $60.0 million of borrowings under the Tranche B Term
Loan and $160.3 million of borrowings under the Revolving Credit Facility) and
(iii) approximately $14.3 million cash on hand to: (a) repay all outstanding
indebtedness under the 2000 Credit
F-52
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Agreement, (b) pay certain closing costs, fees and expenses, and (c) pay a
one-time $13.6 million breakage cost relating to the termination of $350
million notional amount of the 1998 Swap (defined below). The Company will
record a $7.0 million extraordinary loss in the second quarter ending June 30,
2002 to write-off deferred financing costs relating to the 2000 Credit
Agreement.
Derivatives and Hedging
In the normal course of business, the Company is exposed to the effect of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures including the use of derivatives. For
interest rate exposures, derivatives are used primarily to fix the rate on debt
based on floating-rate indices and to manage the cost of borrowing obligations.
The Company currently has two interest rate swaps to manage interest rate risk.
The Company prohibits the use of derivative instruments for trading or
speculative purposes. Further, the Company has a policy of only entering into
contracts with major financial institutions based upon their credit ratings and
other factors. When viewed in conjunction with the underlying and offsetting
exposure that the derivative is designed to hedge, the Company has not
sustained a material loss from those instruments nor does it anticipate any
material adverse effect on its net income or financial position in the future
from the use of derivatives.
One of the Company's interest rate swap agreements has a notional principal
amount as of March 31, 2002 of $800 million (the "1998 Swap"). Under the 1998
Swap the Company pays a fixed rate at 5.985% and receives LIBOR (floating rate)
maturing June 30, 2003.
The terms of the 1998 Swap require that the Company make a cash deposit 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 its prior bank credit agreement. As of March 31,
2002, no collateral was posted under the 1998 Swap.
On August 4, 1999, the Company entered into an agreement with the 1998 Swap
counterparty to shorten the maturity of the 1998 Swap 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. The Company expects to amortize that portion of the
$21.6 million payment remaining after the $7.4 million adjustment described
below for financial accounting purposes in future periods beginning in July
2003 and ending December 2007.
On the Closing Date, as a result of the consummation of the Offering and the
establishment of the new credit facility under the 2002 Credit Agreement, all
of the outstanding indebtedness under the 2000 Credit Agreement was repaid in
full. Consequently, the Company no longer expects variable rate debt held by
the Company to exceed $450 million in the foreseeable future. Accordingly, on
April 17, 2002, the Company entered into an agreement with the 1998 Swap
counterparty to break $350 million of the $800 million 1998 Swap notional
amount in exchange for a payment to the counterparty of approximately $13.6
million. Additionally, a portion of the previously deferred gain recorded in
connection with the 1999 transaction to shorten the maturity of the 1998 Swap
also was impacted by the change in expectation. Based on the Company's previous
designation of the 1998 Swap to hedge the Company's exposure to variable rate
debt, the $13.6 million partial swap breakage cost and $7.4 million of the
approximately $21.6 million deferred gain, both of which were previously
recorded on the Condensed Consolidated Balance Sheet in Accumulated Other
Comprehensive Income, will be recognized as an expense in the Statement of
Operations in the second quarter ending June 30, 2002.
F-53
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The notional amount of the 1998 Swap, which as of April 17, 2002 was $450
million, is scheduled to decline as follows:
Notional Amount Date
--------------- -------------------------
$425,000,000 December 31, 2002
-- June 30, 2003
The 1998 Swap is treated as a cash flow hedge. Cash flow hedges address the
risk associated with future cash flows of debt transactions. Over time, the
unrealized gains and losses recorded on the Condensed Consolidated Balance
Sheet in Accumulated Other Comprehensive Income will be reclassified into
earnings in the same periods in which the hedged interest payments affect
earnings. Assuming no changes in interest rates, the Company estimates that, in
addition to the $13.6 million partial swap breakage cost, approximately $10.0
million of the current balance recorded on the Condensed Consolidated Balance
Sheet in Accumulated Other Comprehensive Income will be recorded as interest
expense within the next twelve months consistent with historical reporting. The
amount reclassified into interest expense for the three months ended March 31,
2002 was $7.9 million.
On September 28, 2001, the Company entered into a second interest rate swap
agreement (the "2003-2008 Swap") to hedge floating-rate debt for the period
between July 1, 2003 and June 30, 2008, under which the Company pays a fixed
rate at 5.385% and receives LIBOR from the counterparty to the agreement. The
2003-2008 Swap is treated as a cash flow hedge. There are no collateral
requirements under this agreement. The notional amount of the 2003-2008 Swap is
$450 million and is scheduled to decline as follows:
Notional Amount Date
--------------- -------------------------
$300,000,000 June 30, 2006
150,000,000 June 30, 2007
In accordance with the terms of the CMBS Loan Agreement, on December 11,
2001, Ventas Finance purchased an interest rate cap from a highly rated
counterparty (the "Buy Cap"). Because the Company already hedged its
consolidated interest rate risk through the 1998 Swap and 2003-2008 Swap, on
December 11, 2001 the Company sold an interest rate cap (the "Sell Cap") for
the same notional value ($225 million) and on the same terms (5 year amortizing
8% LIBOR cap) as the Buy Cap. If LIBOR should exceed the 8% cap, the Sell Cap
would require the Company to pay the counterparty and the Buy Cap would require
the counterparty to pay Ventas Finance for the interest accruing in excess of
the 8% LIBOR cap. The Buy Cap and the Sell Cap are shown separately as an asset
and a liability on the Company's balance sheet, respectively. The Company
believes that the economic substance of the Buy Cap offsets the net cash flow
exposure of the Sell Cap.
At March 31, 2002, the 1998 Swap and 2003-2008 Swap were reported at their
fair value of $16.7 million in liabilities in the Condensed Consolidated
Balance Sheet. The offsetting adjustment is reported as a deferred loss in
Accumulated Other Comprehensive Income. The Buy and Sell Caps are reported at
their fair value of approximately $1.8 million in other assets and other
liabilities, respectively, in the Condensed Consolidated Balance Sheet. The
offsetting adjustments for each of these instruments are reported as the
Condensed Consolidated Statement of Operations and net to zero for the three
months ended March 31, 2002.
Note 5--Litigation
Legal Proceedings Presently Defended and Indemnified by Kindred Under the
Spin Agreements
The following litigation and other matters arose from the Company's
operations prior to the time of the 1998 Spin Off or relate to assets or
liabilities transferred to Kindred in connection with the 1998 Spin Off. Under
F-54
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Spin Agreements, Kindred agreed to assume the defense, on behalf of the
Company, of any claims that (a) were pending at the time of the 1998 Spin Off
and which arose out of the ownership or operation of the healthcare operations
or any of the assets or liabilities transferred to Kindred in connection with
the 1998 Spin Off, or (b) were asserted after the 1998 Spin Off and which arose
out of the ownership and operation of the healthcare operations or any of the
assets or liabilities transferred to Kindred in connection with the 1998 Spin
Off, and to indemnify the Company for any fees, costs, expenses and liabilities
arising out of such operations (the "Indemnification"). Kindred is presently
defending the Company in the matters described below, among others. Under the
Final Plan, Kindred assumed and agreed to abide by the Indemnification and to
defend the Company in these and other matters as required under the Spin
Agreements. However, there can be no assurance that Kindred will continue to
defend the Company in such matters or that Kindred 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
Kindred's public filings and information provided to the Company by Kindred.
There can be no assurance that Kindred has included in its public filings and
provided the Company complete and accurate information in all instances.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc. et al. was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). A proposed settlement of
the Helwig case is scheduled to be considered by the court on May 13, 2002. In
addition, a stockholder derivative suit entitled Thomas G. White on behalf of
Kindred, 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. There were no material developments in these lawsuits during the first
quarter ended March 31, 2002. Kindred, on behalf of the Company, intends to
continue to defend these actions vigorously.
A class action lawsuit entitled Sally Pratt, et al. v. Ventas, Inc. et al.
was filed on May 25, 2001 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-01CV-317-H). The putative class action
complaint alleges that the Company and certain current and former officers and
employees of the Company engaged in a fraudulent scheme to conceal the true
nature and substance of the 1998 Spin Off resulting in (a) a violation of the
Racketeer Influenced and Corrupt Organizations Act, (b) bankruptcy fraud, (c)
common law fraud, and (d) a deprivation of plaintiffs' civil rights. The
plaintiffs allege that the defendants failed to act affirmatively to explain
and disclose the fact that the Company was the entity that had been known as
Vencor, Inc. prior to the 1998 Spin Off and that a new separate and distinct
legal entity assumed the name of Vencor, Inc. after the 1998 Spin Off. The
plaintiffs contend that the defendants filed misleading documents in the
plaintiffs' state court lawsuits that were pending at the time of the 1998 Spin
Off and that the defendants deceptively used the bankruptcy proceedings of
Vencor, Inc. (now known as Kindred Healthcare, Inc.) to stay lawsuits against
the Company. As a result of these actions, the plaintiffs maintain that they
and similarly situated individuals suffered and will continue to suffer severe
financial harm. The suit seeks compensatory damages (trebled with interest),
actual and punitive damages, reasonable attorneys' fees, costs and expenses,
declaratory and injunctive and any and all other relief to which the plaintiffs
may be entitled. This action was dismissed in its entirety on February 4, 2002.
The plaintiffs filed a motion requesting that the dismissal be altered to allow
the plaintiffs to resume this action if they are unable to obtain relief in the
Kindred proceedings in the Bankruptcy Court, and the District Court granted the
plaintiffs' motion on April 5, 2002. On May 6, 2002, the plaintiffs filed an
appeal of the District Court's dismissal of this action. The plaintiffs have
also filed a motion with the Kindred Bankruptcy Court requesting, among other
things, that the Kindred Bankruptcy Court set aside portions of the releases of
the Company contained in the Final Plan, as such releases apply to the
plaintiffs. Kindred, on behalf of the Company, is vigorously contesting these
motions and the appeal.
Kindred is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. The Company is a party to certain
legal actions and regulatory investigations that arise from the normal
F-55
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
course of its prior healthcare operations, which legal actions and regulatory
investigations are being defended by Kindred under the Indemnification. Neither
the Company nor Kindred is able to predict the ultimate outcome of pending
litigation and regulatory investigations. In addition, there can be no
assurance that the Centers for Medicare and Medicaid Services ("CMS") or other
regulatory agencies will not initiate additional investigations related to
Kindred's business or the Company's prior healthcare business in the future,
nor can there be any assurance that the resolution of any litigation or
investigations, either individually or in the aggregate, would not have a
material adverse effect on Kindred's liquidity, financial position or results
of operations, which in turn could have a Material Adverse Effect on the
Company.
Other Litigation
The Company and Atria, Inc. ("Atria") have been engaged in ongoing
discussions regarding the parties' respective rights and obligations relative
to the issuance of mortgage resident bonds (the "Bonds") to the new residents
of New Pond Village, a senior housing facility in Walpole, Massachusetts, owned
by the Company and leased to and operated by Atria. On August 6, 2001, Atria
filed a lawsuit styled Atria, Inc. v. Ventas Realty, Limited Partnership in the
Superior Court Department of the Trial Court in Norfolk County, Massachusetts
(Civil Action Number 01 01233). The complaint alleges that the Company has a
duty to sign and issue Bonds to new residents of New Pond Village and that, as
a result of an alleged failure of the Company to issue Bonds, the Company has,
among other things, breached contractual obligations under the Bond Indenture.
The complaint seeks a declaration that Atria's indemnity obligation in favor of
the Company relating to the Bonds is void and unenforceable and injunctive and
declaratory relief requiring the Company to sign and issue Bonds to new
residents of New Pond Village. The complaint also seeks damages, interest,
attorneys' fees and other costs. The Company believes that the allegations in
the complaint are without merit. The Company's motion to dismiss was denied by
trial court. The trial court's decision was affirmed by an appellate court on
January 24, 2002. The Company has asserted counterclaims against Atria and the
Company intends to defend this action and pursue its counterclaims vigorously.
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. There were no material developments in this action during the
first quarter ended March 31, 2002. The Company disputes the material
allegations contained in Black Diamond's counterclaims and the Company intends
to continue 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 5, 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.
F-56
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--Earnings Per Share
The following table shows the amounts used in computing basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended
March 31,
------------------
2002 2001
------- -------
Numerator for Basic and Diluted Earnings Per Share:
Net Income...................................... $12,701 $10,579
======= =======
Denominator:.......................................
Denominator for Basic Earnings Per Share
--Weighted Average Shares................... 68,698 68,222
Effect of Dilutive Securities:
Stock Options............................... 1,005 557
Time Vesting Restricted Stock Awards........ 141 93
------- -------
Dilutive Potential Common Stock............. 1,146 650
------- -------
Denominator for Diluted Earnings Per Share
--Adjusted Weighted Average................. 69,844 68,872
======= =======
Basic Earnings Per Share........................... $ 0.18 $ 0.16
======= =======
Diluted Earnings Per Share......................... $ 0.18 $ 0.15
======= =======
F-57
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Condensed Consolidating Information
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
March 31, 2002
The following summarizes the condensed consolidating information for the
Company as of and for the three months ended March 31, 2002:
Ventas, Inc. Ventas
and Ventas Realty,
LP Realty, Limited Unrestricted Consolidated
L.L.C. Partnership Group (a) Elimination Consolidated
------------ ----------- ------------ ------------ ------------
(in thousands)
Assets
Total net real estate investments............. $ 14,680 $668,773 $111,967 $795,420
Cash and cash equivalents..................... 1,659 2,208 5,414 9,281
Restricted cash............................... 14,946 -- 5,048 19,994
Investment in Kindred Healthcare, Inc.
common stock................................ -- 43,751 -- 43,751
Deferred financing costs, net................. -- 7,038 6,415 13,453
Notes receivable from employees............... 1,716 2,792 -- 4,508
Other......................................... 1,117 1,994 2,114 5,225
-------- -------- -------- --------- --------
Total assets............................... $ 34,118 $726,556 $130,958 $891,632
======== ======== ======== ========= ========
Liabilities and Stockholders' Equity (Deficit)
Liabilities:..................................
Notes payable and other debt.................. $ -- $607,106 $224,438 $831,544
United States Settlement...................... 54,747 -- -- 54,747
Deferred revenue.............................. 178 16,654 3,568 20,400
Interest rate swap agreements................. -- 16,715 -- 16,715
Accounts payable, intercompany and other
accrued liabilities......................... 9,221 8,217 (220) 17,218
Equity in affiliates.......................... 18,185 -- -- ($ 18,185) --
Other liabilities-disputed tax refunds and
accumulated interest........................ 14,880 -- -- 14,880
Deferred income taxes......................... 30,394 -- -- 30,394
-------- -------- -------- --------- --------
Total liabilities............................. 127,605 648,692 227,786 (18,185) 985,898
Total stockholders' equity (deficit)....... (93,487) 77,864 (96,828) 18,185 (94,266)
-------- -------- -------- --------- --------
Total liabilities and stockholders' equity
(deficit)................................ $ 34,118 $726,556 $130,958 $ -- $891,632
======== ======== ======== ========= ========
- --------
(a) Includes Ventas Specialty I, Inc., Ventas Finance I, Inc., Ventas Specialty
I, LLC and Ventas Finance I, LLC, which are not restricted under the Notes.
See "Note 4--Borrowing Arrangements--Senior Notes."
F-58
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 2002
Ventas, Inc. Ventas
and Ventas Realty,
LP Realty, Limited Unrestricted Consolidated
L.L.C. Partnership Group (a) Elimination Consolidated
------------ ----------- ------------ ------------ ------------
(in thousands)
Revenues:
Rental income........................... $ 630 $37,870 $7,897 $46,397
Equity earnings in affiliate(s)......... 13,834 -- -- $(13,834) --
Interest and other income............... 73 223 46 342
------- ------- ------ -------- -------
Total revenues...................... 14,537 38,093 7,943 (13,834) 46,739
------- ------- ------ -------- -------
Expenses:
General and administrative.............. 31 1,887 393 2,311
Professional fees....................... 8 461 96 565
Amortization of restricted stock grants. 6 344 72 422
Depreciation............................ 208 8,896 1,362 10,466
Interest................................ -- 16,382 3,478 19,860
Interest on United States Settlement.... 1,471 -- -- 1,471
------- ------- ------ -------- -------
Total expenses...................... 1,724 27,970 5,401 35,095
------- ------- ------ -------- -------
Income (loss) before gain on sale of real
estate................................... 12,813 10,123 2,542 (13,834) 11,644
------- ------- ------ -------- -------
Net gain on sale of real estate............ -- 1,057 -- 1,057
------- ------- ------ -------- -------
Net income (loss).......................... $12,813 $11,180 $2,542 $(13,834) $12,701
======= ======= ====== ======== =======
- --------
(a) Includes Ventas Specialty I, Inc., Ventas Finance I, Inc., Ventas Specialty
I, LLC and Ventas Finance I, LLC, which are not restricted under the Notes.
See "Note 4--Borrowing Arrangements--Senior Notes."
F-59
VENTAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 2002
Ventas, Inc. Ventas
and Ventas Realty,
LP Realty, Limited Unrestricted Consolidated
L.L.C. Partnership Group (a) Elimination Consolidated
------------ ----------- ------------ ------------ ------------
(in thousands)
Net cash provided by (used in) operating
activities.............................. $ 13,018 $ 19,018 $5,976 $(13,834) $ 24,178
Net cash provided by (used in) investing
activities.............................. (949) 1,550 -- 601
Cash flows from financing activities:.....
Repayment of long-term debt............ -- (16,262) (562) (16,824)
Cash distribution to stockholders...... (17,230) -- -- (17,230)
Cash distributions from affiliates..... 5,209 (19,043) -- 13,834 --
Issuance of common stock............... (40) -- -- (40)
-------- -------- ------ -------- --------
Net cash provided by (used in) financing
activities.............................. (12,061) (35,305) (562) 13,834 (34,094)
-------- -------- ------ -------- --------
Increase (decrease) in cash and cash
equivalents............................. 8 (14,737) 5,414 -- (9,315)
Cash and cash equivalents at beginning of
period.................................. 1,651 16,945 -- 18,596
-------- -------- ------ -------- --------
Cash and cash equivalents at end of period $ 1,659 $ 2,208 $5,414 $ 9,281
======== ======== ====== ======== ========
- --------
(a) Includes Ventas Specialty I, Inc., Ventas Finance I, Inc., Ventas Specialty
I, LLC and Ventas Finance I, LLC, which are not restricted under the Notes.
See "Note 4--Borrowing Arrangements--Senior Notes."
F-60
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Financial Statements...................................... P-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet--As of March 31, 2002................ P-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations--For the Year Ended
December 31, 2001........................................................................... P-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations--For the Three Months Ended
March 31, 2002.............................................................................. P-5
Notes to Unaudited Pro Forma Financial Statements............................................. P-6
P-1
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated balance sheet as of
March 31, 2002 is presented, as if the Company had completed (1) the secured
2002 Credit Facility of $350 million; (2) the issuance and sale of the Original
Notes in an aggregate principal amount of $400 million and (3) the repayment of
all outstanding indebtedness under the 2000 Credit Agreement and partial
termination of the associated interest rate swap agreement. The unaudited
condensed consolidated statements of operations for the year ended December 31,
2001 and for the three months ended March 31, 2002 discloses the impact of the
following transactions as if they had been completed prior to January 1, 2001:
(1) the $225 million commercial mortgage backed securitization transaction (the
"CMBS Loan"), which was consummated on December 12, 2001; (2) the secured 2002
Credit Facility of $350 million; (3) the issuance and sale of the Original
Notes in an aggregate principal amount of $400 million; and (4) the repayment
of all outstanding indebtedness under the 2000 Credit Agreement and partial
termination of the associated interest rate swap agreement.
The unaudited pro forma financial statements are derived from our historical
financial statements, which are included in this prospectus. The unaudited pro
forma financial statements should be read in conjunction with these financial
statements and accompanying notes and other financial information included
elsewhere in this prospectus. In management's opinion, all adjustments
necessary to reflect the effects of the offering and other transactions
mentioned above have been made.
The unaudited pro forma condensed consolidated balance sheet and statements
of operations of the Company are further adjusted to subtract the assets,
liabilities, revenues and expenses of the unrestricted subsidiaries of the
Company which are not obligated under the senior notes.
The following unaudited pro forma financial information is not necessarily
indicative of what our actual financial position or results of operations would
have been as of the date or for the period indicated, nor does it purport to
represent our financial position or results of operations for future periods.
P-2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2002
Total Less
Consolidated Pro Forma Consolidated Unrestricted Restricted
Historical Adjustments Pro Forma Group (F) Group
------------ ----------- ------------ ------------ ----------
(in thousands)
Assets
Real estate investments:
Land................................ $ 119,650 $ 119,650 $ (14,624) $ 105,026
Building and improvements........... 1,054,886 1,054,886 (156,808) 898,078
---------- --------- ---------- ----------- ----------
1,174,536 1,174,536 (1,171,432) 1,003,104
Accumulated depreciation............... (379,116) (379,116) 59,465 (319,651)
---------- --------- ---------- ----------- ----------
Total net real estate
investments................... 795,420 795,420 (111,967) 683,453
Cash and cash equivalents.............. 9,281 $ (8,000) A 1,281 1,281
Restricted cash........................ 19,994 19,994 (5,048) G 14,946
Investment in Kindred Healthcare, Inc.
common stock......................... 43,751 43,751 43,751
Deferred financing costs, net.......... 13,453 8,082 B 21,535 (6,415) F 15,120
Notes receivable from employees........ 4,508 4,508 4,508
Interest rate cap...................... 1,778 1,778 (1,778) H --
Other.................................. 3,447 3,447 (336) F 3,111
---------- --------- ---------- ----------- ----------
Total assets........................ $ 891,632 $ 82 $ 891,714 $ (125,544) $ 766,170
========== ========= ========== =========== ==========
Liabilities and stockholders'
equity (deficit)
Liabilities:
Notes payable and other debt........ $ 607,106 $(607,106) C $ -- $ --
CMBS Debt........................... 224,438 224,438 $ (224,438) F --
Notes............................... -- 400,000 C 400,000 -- 400,000
Credit facility..................... -- 227,747 C 227,747 227,747
United States Settlement............ 54,747 54,747 54,747
Deferred revenue.................... 20,400 20,400 (3,568) F 16,832
Interest rate cap................... 1,778 1,778 1,778
Interest rate swap agreements....... 16,715 (13,641) A 3,074 3,074
Investment in Unrestricted
Subsidiaries...................... 102,242 I 102,242
Accounts payable and other
accrued liabilities............... 15,440 15,440 220 F 15,660
Other liabilities--disputed tax
refunds and accumulated
interest.......................... 14,880 14,880 14,880
Deferred income taxes............... 30,394 30,394 30,394
---------- --------- ---------- ----------- ----------
Total liabilities................... 985,898 7,000 992,898 (125,544) 867,354
---------- --------- ---------- ----------- ----------
Commitments and contingencies.......... --
Stockholders' equity (deficit)......... (94,266) (6,918) D (101,184) (101,184)
---------- --------- ---------- ----------- ----------
Total liabilities and stockholders'
equity (deficit).................. $ 891,632 $ 82 $ 891,714 $ (125,544) $ 766,170
========== ========= ========== =========== ==========
P-3
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2001
Total Less
Consolidated Pro forma Consolidated Unrestricted Restricted
Historical Adjustments Pro Forma Group (F) Group
------------ ----------- ------------ ------------ ----------
(in thousands, except per share amounts)
Revenues:
Rental income...................... $185,152 $ -- $185,152 $(29,365) F $155,787
Gain on sale of Kindred common
stock............................ 15,425 -- 15,425 -- 15,425
Interest and other income.......... 4,004 -- 4,004 -- 4,004
-------- ------- -------- -------- --------
Total revenues................. 204,581 -- 204,581 (29,365) 175,216
-------- ------- -------- -------- --------
Expenses:
General and administrative......... 10,244 -- 10,244 (1,625) J 8,619
Professional fees.................. 4,658 -- 4,658 (739) J 3,919
Amortization of restricted stock
grants........................... 1,734 -- 1,734 (275) J 1,459
Depreciation....................... 42,038 -- 42,038 (5,483) F 36,555
Interest........................... 87,032 (7,665) C 79,367 (17,852) K 61,515
Interest rate cap.................. -- -- -- 3,051 H 3,051
Interest on United States
Settlement....................... 4,592 -- 4,592 -- 4,592
-------- ------- -------- -------- --------
Total expenses................. 150,298 (7,665) 142,633 (22,923) 119,710
-------- ------- -------- -------- --------
Income (loss) before gain on disposal
of real estate assets, provision
for income taxes and extraordinary
loss................................ 54,283 7,665 61,948 (6,442) 55,506
Provision for income taxes............ 2,685 295 E 2,980 -- 2,980
-------- ------- -------- -------- --------
Income (loss) before gain on disposal
of real estate assets and
extraordinary loss.................. 51,598 7,370 58,968 (6,442) 52,526
Net gain on real estate disposals..... 290 -- 290 -- 290
-------- ------- -------- -------- --------
Income (loss) before extraordinary
loss................................ 51,888 7,370 59,258 (6,442) 52,816
Extraordinary loss on extinguishment
of debt............................. (1,322) 1,322 -- -- --
-------- ------- -------- -------- --------
Net income (loss)..................... $ 50,566 $ 8,692 $ 59,258 $ (6,442) $ 52,816
======== ======= ======== ======== ========
Earnings per common share:
Basic:
Net income..................... $ 0.76 $ 0.87
-------- --------
Diluted:
Net income..................... $ 0.75 $ 0.85
-------- --------
Weighted average number of shares
outstanding, basic.................. 68,409 68,409
Weighted average number of shares
outstanding, diluted................ 69,363 69,363
P-4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2002
Total Less
Consolidated Pro forma Consolidated Unrestricted Restricted
Historical Adjustments Pro Forma Group (F) Group
------------ ----------- ------------ ------------ ----------
(in thousands, except per share amounts)
Revenues:
Rental income............................. $46,397 -- $46,397 $(7,897) F $38,500
Interest and other income................. 342 -- 342 (46) J 296
------- ----- ------- ------- -------
Total revenues........................ 46,739 -- 46,739 (7,943) 38,796
------- ----- ------- ------- -------
Expenses:
General and administrative................ 2,311 -- 2,311 (393) J 1,918
Professional fees......................... 565 -- 565 (96) J 469
Amortization of restricted stock grants... 422 -- 422 (72) J 350
Depreciation.............................. 10,466 -- 10,466 (1,362) F 9,104
Interest.................................. 19,860 (641) C 19,219 (4,492) K 14,727
Interest rate cap......................... -- -- -- (1,273) H (1,273)
Interest on United States Settlement...... 1,471 -- 1,471 -- 1,471
------- ----- ------- ------- -------
Total expenses........................ 35,095 (641) 34,454 (7,688) 26,766
------- ----- ------- ------- -------
Income (loss) before gain on disposal of real
estate assets.............................. 11,644 641 12,285 (255) 12,030
Net gain on real estate disposals............ 1,057 -- 1,057 -- 1,057
------- ----- ------- ------- -------
Net income (loss)............................ $12,701 $ 641 $13,342 $ (255) $13,087
======= ===== ======= ======= =======
Earnings per common share:
Basic:
Net income............................ $ 0.18 $ 0.19
Diluted:
Net income............................ $ 0.18 $ 0.19
Weighted average number of shares
outstanding, basic......................... 68,698 68,698
Weighted average number of shares
outstanding, diluted....................... 69,844 69,844
P-5
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
A. Represents the estimated fair value ($13,641) of the $350 million swap
notional amount that the Company intends to terminate and settle (the "swap
breakage") in connection with the offering of the Notes. For purposes of this
pro forma at March 31, 2002 the Company has assumed payment of the swap
breakage utilizing cash ($8,000) and additional borrowings under the 2002
Credit Facility.
B. The following table shows the deferred financing costs related to the
Refinancing Transactions (collectively defined as the CMBS Loan, the 2002
Credit Facility and Notes); and the charge off of the financing costs related
to the repayment of the 2000 Credit Agreement:
Amortization
Amortization Expense for
Deferred Expense for the Year
Financing the Three Ended
Costs as of Months Ended December 31,
March 31, 2002 March 31, 2002 2001
-------------- -------------- ------------
Eliminate 2000 Credit Agreement $(6,918) $(359) $(2,332)
CMBS Loan...................... -- 1,362
2002 Credit Facility........... 5,600 467 1,867
Notes.......................... 9,400 279 1,116
------- ----- -------
$ 8,082 $ 387 $ 2,013
======= ===== =======
C. Represents the Refinancing Transactions and the related adjustments to
interest expense. Historical LIBOR rates are assumed in calculating interest
expense during the three months ended March 31, 2002 and the year ended
December 31, 2001.
Interest Interest
Expense for Expense for
Three Months the Year
Debt as of Ended Ended
March 31, March 31, December 31,
2002 2002 2001
---------- ------------ ------------
2000 Credit Agreement.................................................. $(607,106) $(9,161) $(70,398)
=========
CMBS Loan, LIBOR plus 1.4589% (3.4% at December 31, 2001).............. -- -- 12,419
2002 Credit Facility--$290 million revolving credit line, LIBOR plus
2.75% (4.66% at December 31, 2001 and March 31, 2002)................ $ 67,747 2,139 14,341
2002 Credit Facility--$60 million Term Loan B, LIBOR plus 2.5%
(4.41% at March 31, 2002)............................................ 60,000 662 4,068
Notes--due 2009, fixed at 8.75%........................................ 175,000 3,828 15,313
Notes--due 2012, fixed at 9%........................................... 225,000 5,062 20,250
--------- ------- --------
$ 627,747 2,530 (4,007)
=========
Elimination of pro rata payments under the interest rate swap resulting
from swap breakage described in Note A............................... (3,558) (5,671)
------- --------
$(1,028) $ (9,678)
======= ========
Under the 2002 Credit Facility, the margin over LIBOR would equal 2.75% if
the ratio of total indebtedness to EBITDA, as defined, is greater than 4.25x
and less than 4.75x. At December 31, 2001 and March 31, 2002, the ratio equaled
4.4x.
The pro forma adjustment to interest expense of $7,665 in the unaudited pro
forma condensed consolidated statement of operations for the year ended
December 31, 2001 includes the net interest expense reduction of $9,678 and
additional amortization expense of $2,013. The pro forma adjustment of $641 in
the unaudited pro forma condensed consolidated statement of operations for the
three months ended March 31, 2002 includes the net interest savings of $1,028
and additional amortization expense of $387.
D. Represents the charge-off of deferred financing fees of $6,918 described
in Note B to this pro forma presentation.
P-6
E. Represents the tax provision relating to the reduction in interest
expense of $7,665 described in Note C to this pro forma presentation which was
computed based upon a statutory federal and state income tax rate of 38.5%
applied to the 10% of earnings which were not distributed by the Company during
the year ended December 31, 2001. The Company expects to distribute 100% of its
taxable income in 2002 and anticipates that it will not be subject to federal
income tax.
F. The unrestricted group includes Ventas Specialty I, Inc., Ventas Finance
I, Inc., Ventas Specialty I, LLC and Ventas Finance I, LLC. The unrestricted
group is made up primarily of the $225 million CMBS Loan and the 40 properties
transferred by Ventas Realty to Ventas Finance I, LLC to secure the CMBS Loan.
Depreciation expense on the 40 properties for the three months ended March 31,
2002 and the year ended December 31, 2001, equals $1,362 and $5,483,
respectively. Additionally, net deferred financing costs of $6,415 relating to
the CMBS Loan and deferred revenue of $3,568 associated with Master Lease No. 5
has been reflected in this pro forma presentation. The rental income of $7,897
and $29,365 reported on the unaudited pro forma statement of operations
represents the rental income earned on the 40 properties under Master Lease No.
5 with Kindred Healthcare, Inc. for the three months ended March 31, 2002 and
the year ended December 31, 2001.
G. Restricted cash represents a debt service reserve account required to be
maintained under the CMBS Loan to cover shortfalls in cash available for debt
service on the CMBS Loan.
H. Represents an interest rate cap agreement purchased by Ventas Finance I,
LLC in connection with the CMBS Loan. For accounting purposes the financial
statements reflect the interest rate cap at its estimated fair value of $1,778
as of March 31, 2002 with changes in fair value reflected as a component of the
pro forma statement of operations.
I. Represents the distribution of the proceeds of the CMBS Loan in excess of
the assets transferred resulting in a negative investment in a subsidiary. The
net deficit of the unrestricted group is shown on the investment in
unrestricted group line and highlights the absence of intercompany elimination
entries in the presentation.
J. The following expenses were allocated to the unrestricted group based on
the proportionate share of total rental income.
Three
Months
Ended Year Ended
March 31, December 31,
2002 2001
--------- ------------
(in thousands)
General and administrative............... $393 $1,625
Professional fees........................ 96 739
Amortization of restricted stock grants.. 72 275
The $46,000 in interest and other income consists of interest earned on
unrestricted cash in the three months ended March 31, 2002.
K. Represents interest on the CMBS Loan and related amortization of deferred
financing costs and the allocation of interest rate swap payments. Certain
covenant calculations to the 2002 Credit Facility and Notes permit the impact
of the interest under the Company's interest rate swap to be allocated to the
Unrestricted Group based on the Unrestricted Group's proportionate share of the
Company's consolidated variable rate debt balances.
Three
Months For the Year
Ended Ended
March 31, December 31,
2002 2001
--------- ------------
(in thousands)
CMBS loan................................ $1,864 $12,844
Amortization of deferred financing....... 341 1,362
Interest rate swap payments.............. 2,287 3,646
------ -------
$4,492 $17,852
====== =======
P-7
================================================================================
We have not authorized any person to give you any information or to make any
representations about the exchange offer other than those contained in this
prospectus. If you are given any information or representations that are not
discussed in this prospectus, you must not rely on that information or those
representations. This prospectus is not an offer to sell or a solicitation of
an offer to buy any securities other than the securities to which it relates.
In addition, this prospectus is not an offer to sell or the solicitation of an
offer to buy those securities in any jurisdiction in which the offer or
solicitation is not authorized, or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation. The delivery of this prospectus and any
exchange made under this prospectus do not, under any circumstances, mean that
there has not been any change in our affairs since the date of this prospectus
or that information contained in this prospectus is correct as of any time
subsequent to its date.
Ventas Realty, Limited Partnership
Ventas Capital Corporation
83/4% Senior Notes due 2009
9% Senior Notes due 2012
Unconditionally Guaranteed by
Ventas, Inc. and Ventas LP Realty, L.L.C.
-----------------
Prospectus
-----------------
, 2002
================================================================================
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors and officers pursuant to the following
provisions or otherwise, we have been advised that, although the validity and
scope of the governing statute have not been tested in court, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
addition, indemnification may be limited by state securities laws.
Ventas, Inc.
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers us
to, and Article IX of our Certificate of Incorporation provides that we will,
indemnify any person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("Proceeding") because he or she is
or was one of our directors or officers, or is or was serving at our request as
a director, officer, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against all expenses,
liabilities and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) actually and
reasonably incurred or suffered by him or her in connection with such
Proceeding. We may provide by action of our Board of Directors through
agreement, resolution or by a provision in our By-Laws, indemnification of our
employees and agents with substantially the same scope and effect as the
indemnification provided in Article IX of our Certificate of Incorporation.
Expenses incurred by such a person in his or her capacity as one of our
directors or officers (and not in any other capacity in which service was or is
rendered by such person while a director or officer) in defending a Proceeding
may be paid by us in advance of the final disposition of such Proceeding as
authorized by the Board of Directors in a specific case upon receipt of an
undertaking by or on behalf of that person to repay such amounts unless it is
ultimately determined that that person is entitled to be indemnified by us as
authorized by the General Corporation Law of the State of Delaware. Expenses
incurred by a person in any capacity other than one of our officers or
directors may be paid in advance of the final disposition of a Proceeding on
such terms and conditions, if any, as the Board of Directors deems appropriate.
Pursuant to Section 102(b)(7) of the DGCL, our Certificate of Incorporation,
as amended, eliminates certain liability of our directors for breach of their
fiduciary duty of care. Article VIII of the Certificate of Incorporation
provides that neither we nor our stockholders may recover monetary damages from
our directors for breach of the duty of care in the performance of their duties
as our directors. Article VIII does not, however, eliminate the liability of
our directors (i) for a breach of the director's duty of loyalty, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful distributions), or (iv) for any improper personal benefit.
The indemnification provided for by Article IX of our Certificate of
Incorporation is a contract right and continues as to persons who cease to be
directors, officers, employees or agents and inures to the benefit of the
heirs, executors and administrators of such persons. No amendment to our
Certificate of Incorporation or repeal of any article thereof increases the
liability of any of our directors or officers for acts or omissions of such
persons occurring prior to such amendment or repeal.
The right to indemnification conferred by Article IX of our Certificate of
Incorporation is not exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to actions taken
in his or her official capacity and in any other capacity while holding such
office.
II-1
We may purchase and maintain insurance on behalf of any person who is or was
one of our directors, officers, employees or agents, or is or was serving at
our request as a director, trustee, officer, partner, employee, or agent of
another domestic or foreign corporation, partnership, joint venture, trust or
other enterprise, against any liability asserted against him or her and
incurred by him or her in such capacity or arising out of his or her status as
such, whether or not we would have the power or be obligated to indemnify him
or her against such liability under the provisions of Article IX of our
Certificate of Incorporation or the General Corporation Law of the State of
Delaware.
We currently have in effect officers and directors liability insurance
policies. These policies cover any negligent act, error or omission of a
director or officer, subject to certain exclusions. The limit of liability
under the policies is $60,000,000 in the aggregate annually for coverages in
excess of deductibles.
Ventas Realty, Limited Partnership
Section 17-108 of the Delaware Revised Uniform Limited Partnership Act
provides that, subject to such standards and restrictions in its partnership
agreement, if any, a limited partnership may, and shall have the power to,
indemnify and hold harmless any partner or other person from and against any
and all claims and demands whatsover.
Section 9.5 of Ventas Realty's Limited Partnership Agreement provides that
Ventas Realty will indemnify and hold the officers, employees, agents and
representatives of the partnership, its general partner, and each of the
trustees, officers, employees, agents, and representatives of its general
partner harmless from any loss or damage, including without limitation
reasonable legal fees and court costs, incurred by it or any of them by reason
of anything it or any of them may do or refrain from doing for and on behalf of
Ventas Realty or in connection with its business or affairs; provided, however,
that Ventas Realty will not be required to indemnify any of its officers,
employees, agents and representatives, its general partner or any of the
trustees, officers, employees, agents, and representatives of its general
partner for any loss or damage which it might incur as a result of fraud,
willful misconduct or gross negligence committed by any such person in the
performance of their duties under the Limited Partnership Agreement. Ventas
Realty's indemnification obligations under the Limited Partnership Agreement
continue and are unaffected in respect of any other person which or who shall
not have committed such fraud, willful misconduct or gross negligence. The
indemnification provision under the Limited Partnership Agreement does not
relieve the general partner of its proportionate share of the obligations of
Ventas Realty in its capacity as a partner thereof.
Section 9.5 of Ventas Realty's Limited Partnership Agreement also provides
that its general partner will be entitled to reimbursement from Ventas Realty
for any amounts the general partner pays in satisfaction of indemnification
obligations owed by Ventas Realty's general partner to present or former
trustees, officers, employees, agents or representatives of such general
partner or its predecessors, or other persons indemnified by such general
partner, as provided for in or pursuant to the Declaration of Trust and By-Laws
of Ventas Realty's general partner or otherwise.
The right to indemnification set forth in Section 9.5 of Ventas Realty's
Limited Partnership Agreement is in addition to any rights to which the person
or entity seeking indemnification may otherwise be entitled and inures to the
benefit of the successors and assigns of any such person or entity.
None of Ventas Realty's partners are personally liable with respect to any
claim for indemnification pursuant to Section 9.5 of the Limited Partnership
Agreement and such claims will be satisfied solely out of assets of Ventas
Realty.
Section 94 of Ventas Realty's Limited Partnership Agreement provides that
its general partner will not be liable or accountable, in damages or otherwise,
to Ventas Realty or to any of its partners for any error of judgment or for any
mistakes of fact or law or for anything which it may do or refrain from doing
hereafter in connection with the business and affairs of Ventas Realty except
(i) in the case of fraud, willful misconduct (such as an intentional breach of
fiduciary duty or an intentional breach of the Limited Partnership Agreement)
or gross negligence, and (ii) for other breaches of the Limited Partnership
Agreement.
Officers and directors of Ventas Realty are covered under the same liability
insurance policies described under "--Ventas, Inc." above.
II-2
Ventas Capital Corporation
Section 145 of the DGCL empowers Ventas Capital to, and Paragraph 10 of its
Certificate of Incorporation provides that Ventas Capital will indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of Ventas Capital) by reason of the fact that the person is or was a
director, officer, employee or agent of Ventas Capital, or is or was serving at
the request of Ventas Capital as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of Ventas Capital, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe the person's conduct was
unlawful. Under Paragraph 10 of Ventas Capital's Certificate of Incorporation,
the termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
does not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to the best interests of Ventas Capital, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
Also pursuant to Paragraph 10 of its Certificate of Incorporation, Ventas
Capital will indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in
the right of Ventas Capital to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent of Ventas
Capital, or is or was serving at the request of Ventas Capital as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees) actually
and reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of Ventas Capital; provided, however, that no indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to Ventas Capital unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall (in the case of any action, suit or proceeding against a
director of Ventas Capital) or may (in the case of any action, suit or
proceeding against an officer, trustee, employee or agent) be paid by Ventas
Capital in advance of the final disposition of such action, suit or proceeding
as authorized by Ventas Capital's board or directors upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
Ventas Capital as authorized Paragraph 10 of its Certificate of Incorporation.
Pursuant to Section 102(b)(7) of the DGCL, Paragraph 10 of Ventas Capital's
Certificate of Incorporation provides that no director will be personally
liable to Ventas Capital or any stockholder for monetary damages for breach of
fiduciary duty as a director. Paragraph 10 of Ventas Capital's Certificate of
Incorporation does not eliminate or limit the liability of a director (i) for
any breach of the director's duty of loyalty to Ventas Capital or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL (relating to unlawful distributions), or (iv) for any transaction
from which the director derived an improper personal benefit.
Paragraph 10 provides that if the DGCL is amended to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director of the Ventas Capital shall be eliminated or
limited to the fullest extent permitted by the DGCL, as so amended.
II-3
Neither the amendment nor repeal of Paragraph 10 of Ventas Capital's
Certificate of Incorporation, nor the adoption of any provision of its
Certificate of Incorporation inconsistent with Paragraph 10, will eliminate or
reduce the effect of Paragraph 10 of Ventas Capital's Certificate of
Incorporation in respect of any matter occurring prior to such amendment,
repeal or adoption of an inconsistent provision or in respect of any cause of
action, suit or claim relating to any such matter which would have given rise
to a right of indemnification or right to receive expenses pursuant to
Paragraph 10 of Ventas Capital's Certificate of Incorporation if such provision
had not been so amended or repealed or if a provision inconsistent therewith
had not been so adopted.
The indemnification and other rights set forth in Paragraph 10 of Ventas
Capital's Certificate of Incorporation is not be exclusive of any provisions
with respect thereto in Ventas Capital's By-laws or any other contract or
agreement between Ventas Capital and any officer, director, employee or agent
of Ventas Capital.
Pursuant to Section 8 of Ventas Capital's By-Laws, Ventas Capital will
indemnify any and all of its directors or officers, including former directors
or officers, and any employee, who shall serve as an officer or director of any
corporation at the request of Ventas Capital, to the fullest extent permitted
under and in accordance with the laws of the State of Delaware
Officers and directors of Ventas Capital are covered under the same
liability insurance policies described under "--Ventas, Inc." above.
Ventas LP Realty, L.L.C.
Section 18-107 of the Delaware Limited Liability Company Act provides that,
subject to such standards and restrictions in its limited liability company
agreement, if any, a limited liability company may, and shall have the power
to, indemnify and hold harmless any member or manager or other person from and
against any and all claims and demands whatsover. Ventas LP Realty's limited
liability company agreement does not contain standards or restrictions
regarding Ventas LP Realty's power to indemnify and hold harmless any member or
manager or other person from and against claims and demands.
Officers and directors of Ventas LP Realty are covered under the same
liability insurance policies described under "--Ventas, Inc." above.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ -----------------------------------------------------------------------------------------------
3.1 Certificate of Limited Partnership of Ventas Realty, Limited Partnership.
3.2 Certificate of Amendment to the Certificate of Limited Partnership of Ventas Realty, Limited
Partnership.
3.3 Certificate of Incorporation of Ventas Capital Corporation.
3.4 Certificate of Formation of Ventas LP Realty, L.L.C.
3.5 First Amended and Restated Agreement of Limited Partnership of Ventas Realty, Limited
Partnership, dated as of January 31, 2000.
3.6 By-laws of Ventas Capital Corporation.
3.7 Limited Liability Company Agreement of Ventas LP Realty, L.L.C., dated March 30, 1998.
3.8 Amendment to Limited Liability Company Agreement of Ventas LP Realty, L.L.C., dated February
24, 2000.
4.1 Indenture, dated as of April 17, 2002, among Ventas Realty, Limited Partnership, Ventas Capital
Corporation, the Guarantors named therein and U.S. Bank National Association, as trustee,
relating to the 8 3/4% Senior Notes due 2009.*
II-4
Exhibit
Number Description of Exhibit
- ------ ----------------------------------------------------------------------------------------------------
4.2 Indenture, dated as of April 17, 2002, among Ventas Realty, Limited Partnership, Ventas Capital
Corporation, the Guarantors named therein and U.S. Bank National Association, as trustee,
relating to the 9% Senior Notes due 2012. **
4.3 Registration Rights Agreement, dated as of April 17, 2002, by and among Ventas Realty, Limited
Partnership, Ventas Capital Corporation, the Guarantors named therein and the Initial Purchasers
of the Original Notes named therein.
5.1 Opinion of Willkie Farr & Gallagher.***
8.1 Opinion of Willkie Farr & Gallagher with respect to certain tax matters.***
12.1 Statement regarding Computation of Ratio Earnings to Fixed Charges.
23.1 Consent of Willkie Farr & Gallagher (included their opinions filed as Exhibits 5.1 and Exhibit
8.1).***
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included on the signature pages hereto).
25.1 Statement on Form T-1 of Eligibility of Trustee relating to the 8 3/4% Senior Notes due 2009 and
related guarantees.
25.2 Statement on Form T-1 of Eligibility of Trustee relating to the 9% Senior Notes due 2012 and related
guarantees.
99.1 Form of Letter of Transmittal relating to the 8 3/4% Senior Notes due 2009.
99.2 Form of Notice of Guaranteed Delivery relating to the 8 3/4% Senior Notes due 2009.
99.3 Form of Letter to Clients relating to the 8 3/4% Senior Notes due 2009.
99.4 Form of Letter to Nominees relating to the 8 3/4% Senior Notes due 2009.
99.5 Guidelines for Certification of Taxpayer Identification Number relating to the 8 3/4% Senior Notes
due 2009.
99.6 Form of Letter of Transmittal relating to the 9% Senior Notes due 2012.
99.7 Form of Notice of Guaranteed Delivery relating to the 9% Senior Notes due 2012.
99.8 Form of Letter to Clients relating to the 9% Senior Notes due 2012.
99.9 Form of Letter to Nominees relating to the 9% Senior Notes due 2012.
99.10 Guidelines for Certification of Taxpayer Identification Number relating to the 9% Senior Notes due
2012.
- --------
* Incorporated herein by reference to Exhibit 99.1 to our Form 8-K filed
April 24, 2002.
** Incorporated herein by reference to Exhibit 99.2 to our Form 8-K filed
April 24, 2002.
*** To be filed by amendment.
(b) Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation****
- --------
**** Incorporated herein by reference to our Annual Report on Form 10-K for the
year ended December 31, 2001.
II-5
Item 22. Undertakings.
The undersigned registrants hereby undertake that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of a
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants, pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by any such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether or not such indemnification is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication to such issue.
The undersigned registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrants pursuant to Rule 424(b)(1) or
497(h) under the Securities Act shall be deemed to part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Louisville
and the Commonwealth of Kentucky, on the 29th day of May, 2002.
VENTAS, INC.
By: /S/ DEBRA A. CAFARO
----------------------------------
Name: Debra A. Cafaro
Title: Chief Executive Officer and President
POWER OF ATTORNEY
The undersigned officers and directors of Ventas, Inc., hereby severally
constitute and appoint Debra A. Cafaro, T. Richard Riney and John C. Thompson,
and each of them, attorneys-in-fact for the undersigned, in any and all
capacities, with the power of substitution, to sign any amendments to this
Registration Statement (including post-effective amendments) and any subsequent
registration statement for the same offering which may be filed under Rule
462(b) under the Securities Act of 1933, as amended, and to file the same with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
and to all interests and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ DOUGLAS CROCKER, II Director May 29, 2002
- -----------------------------
Douglas Crocker, II
/S/ JAY M. GELLERT Director May 29, 2002
- -----------------------------
Jay M. Gellert
/S/ RONALD G. GEARY Director May 29, 2002
- -----------------------------
Ronald G. Geary
/s/ GARY W. LOVEMAN Director May 29, 2002
- -----------------------------
Gary W. Loveman
/S/ SHELI Z. ROSENBERG Director May 29, 2002
- -----------------------------
Sheli Z. Rosenberg
/S/ W. BRUCE LUNSFORD Chairman of the Board and May 29, 2002
- ----------------------------- Director
W. Bruce Lunsford
/S/ DEBRA A. CAFARO Chief Executive Officer, May 29, 2002
- ----------------------------- President and Director
Debra A. Cafaro (Principal Executive
Officer/Principal Financial
Officer)
/S/ MARY L. SMITH Principal Accounting Officer May 29, 2002
- -----------------------------
Mary L. Smith
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Louisville
and the Commonwealth of Kentucky, on the 29th day of May, 2002.
VENTAS REALTY, LIMITED PARTNERSHIP
By: VENTAS, INC., its General Partner
By: /S/ DEBRA A. CAFARO
-------------------------------
Name: Debra A. Cafaro
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
The undersigned officers and directors of Ventas, Inc., the General Partner
of Ventas Realty, Limited Partnership, hereby severally constitute and appoint
Debra A. Cafaro, T. Richard Riney and John C. Thompson, and each of them,
attorneys-in-fact for the undersigned, in any and all capacities, with the
power of substitution, to sign any amendments to this Registration Statement
(including post-effective amendments) and any subsequent registration statement
for the same offering which may be filed under Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all interests
and purposes as he might or could do in person, hereby ratifying and confirming
all that each said attorney-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ DOUGLAS CROCKER, II Director of Ventas, Inc., May 29, 2002
- ----------------------------- corporate general partner
Douglas Crocker, II of Ventas Realty, Limited
Partnership
/S/ JAY M. GELLERT Director of Ventas, Inc., May 29, 2002
- ----------------------------- corporate general partner
Jay M. Gellert of Ventas Realty, Limited
Partnership
/S/ RONALD G. GEARY Director of Ventas, Inc., May 29, 2002
- ----------------------------- corporate general partner
Ronald G. Geary of Ventas Realty, Limited
Partnership
/S/ GARY W. LOVEMAN Director of Ventas, Inc., May 29, 2002
- ----------------------------- corporate general partner
Gary W. Loveman of Ventas Realty, Limited
Partnership
II-8
Signature Title Date
--------- ----- ----
/S/ SHELI Z. ROSENBERG Director of Ventas, Inc., May 29, 2002
- ----------------------------- corporate general partner
Sheli Z. Rosenberg of Ventas Realty, Limited
Partnership
/S/ W. BRUCE LUNSFORD Chairman of the Board and May 29, 2002
- ----------------------------- Director of Ventas, Inc.,
W. Bruce Lunsford corporate general partner
of Ventas Realty, Limited
Partnership
/S/ DEBRA A. CAFARO Chief Executive Officer, May 29, 2002
- ----------------------------- President and Director
Debra A. Cafaro (Principal Executive
Officer/Principal Financial
Officer) of Ventas, Inc.,
corporate general partner
of Ventas Realty, Limited
Partnership
/S/ MARY L. SMITH Principal Accounting Officer May 29, 2002
- ----------------------------- of Ventas, Inc., corporate
Mary L. Smith general partner of Ventas
Realty, Limited Partnership
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Louisville
and the Commonwealth of Kentucky, on the 29th day of May, 2002.
VENTAS CAPITAL CORPORATION
By: /S/ DEBRA A. CAFARO
-----------------------------
Name: Debra A. Cafaro
Title: President and Chief
Executive Officer
POWER OF ATTORNEY
The undersigned officers and directors of Ventas Capital Corporation, hereby
severally constitute and appoint Debra A. Cafaro, T. Richard Riney and John C.
Thompson, and each of them, attorneys-in-fact for the undersigned, in any and
all capacities, with the power of substitution, to sign any amendments to this
Registration Statement (including post-effective amendments) and any subsequent
registration statement for the same offering which may be filed under Rule
462(b) under the Securities Act of 1933, as amended, and to file the same with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
and to all interests and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorney-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ DEBRA A. CAFARO President, Chief Executive May 29, 2002
- ----------------------------- Officer and Director
Debra A. Cafaro (Principal Executive
Officer/Principal Financial
Officer)
/S/ T. RICHARD RINEY Director May 29, 2002
- -----------------------------
T. Richard Riney
/S/ JOHN C. THOMPSON Director May 29, 2002
- -----------------------------
John C. Thompson
/S/ MARY L. SMITH Principal Accounting Officer May 29, 2002
- -----------------------------
Mary L. Smith
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Louisville
and the Commonwealth of Kentucky, on the 29th day of May, 2002.
VENTAS LP REALTY, L.L.C.
By: VENTAS, INC., its Sole Member
By: /S/ DEBRA A. CAFARO
-------------------------------
Name: Debra A. Cafaro
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
The undersigned officers and directors of Ventas, Inc., the Sole Member of
Ventas L. P. Realty, L.L.C., hereby severally constitute and appoint Debra A.
Cafaro, T. Richard Riney and John C. Thompson, and each of them,
attorneys-in-fact for the undersigned, in any and all capacities, with the
power of substitution, to sign any amendments to this Registration Statement
(including post-effective amendments) and any subsequent registration statement
for the same offering which may be filed under Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all interests
and purposes as he might or could do in person, hereby ratifying and confirming
all that each said attorney-in-fact, or his substitute or substitutes, may do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ DOUGLAS CROCKER, II Director of Ventas, Inc., the May 29, 2002
- ----------------------------- Sole Member of Ventas LP
Douglas Crocker, II Realty, L.L.C.
/S/ JAY M. GELLERT Director of Ventas, Inc., the May 29, 2002
- ----------------------------- Sole Member of Ventas LP
Jay M. Gellert Realty, L.L.C.
/S/ RONALD G. GEARY Director of Ventas, Inc., the May 29, 2002
- ----------------------------- Sole Member of Ventas LP
Ronald G. Geary Realty, L.L.C.
/S/ GARY W. LOVEMAN Director of Ventas, Inc., the May 29, 2002
- ----------------------------- Sole Member of Ventas LP
Gary W. Loveman Realty, L.L.C.
/S/ SHELI Z. ROSENBERG Director of Ventas, Inc., the May 29, 2002
- ----------------------------- Sole Member of Ventas LP
Sheli Z. Rosenberg Realty, L.L.C.
/S/ W. BRUCE LUNSFORD Chairman of the Board and May 29, 2002
- ----------------------------- Director of Ventas, Inc.,
W. Bruce Lunsford the Sole Member of Ventas
LP Realty, L.L.C.
II-11
Signature Title Date
--------- ----- ----
/S/ DEBRA A. CAFARO Chief Executive Officer, May 29, 2002
- ----------------------------- President and Director
Debra A. Cafaro (Principal Executive
Officer/Principal Financial
Officer) of Ventas, Inc.,
the Sole Member of Ventas
LP Realty, L.L.C.
/S/ MARY L. SMITH Principal Accounting Officer May 29, 2002
- ----------------------------- of Ventas, Inc., the Sole
Mary L. Smith Member of Ventas LP Realty,
L.L.C.
II-12
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------------------------------------------------------------------------------------
3.1 Certificate of Limited Partnership of Ventas Realty, Limited Partnership.
3.2 Certificate of Amendment to the Certificate of Limited Partnership of Ventas Realty, Limited
Partnership.
3.3 Certificate of Incorporation of Ventas Capital Corporation.
3.4 Certificate of Formation of Ventas LP Realty, L.L.C.
3.5 First Amended and Restated Agreement of Limited Partnership of Ventas Realty, Limited
Partnership, dated as of January 31, 2000.
3.6 By-laws of Ventas Capital Corporation.
3.7 Limited Liability Company Agreement of Ventas LP Realty, L.L.C., dated March 30, 1998.
3.8 Amendment to Limited Liability Company Agreement of Ventas LP Realty, L.L.C., dated
February 24, 2000.
4.1 Indenture, dated as of April 17, 2002, among Ventas Realty, Limited Partnership, Ventas Capital
Corporation, the Guarantors named therein and U.S. Bank National Association, as trustee,
relating to the 8 3/4% Senior Notes due 2009.*
4.2 Indenture, dated as of April 17, 2002, among Ventas Realty, Limited Partnership, Ventas Capital
Corporation, the Guarantors named therein and U.S. Bank National Association, as trustee,
relating to the 9% Senior Notes due 2012. **
4.3 Registration Rights Agreement, dated as of April 17, 2002, by and among Ventas Realty, Limited
Partnership, Ventas Capital Corporation, the Guarantors named therein and the Initial Purchasers
of the Original Notes named therein.
5.1 Opinion of Willkie Farr & Gallagher.***
8.1 Opinion of Willkie Farr & Gallagher with respect to certain tax matters.***
12.1 Statement Regarding Computation of Ratio Earnings to Fixed Charges.
23.1 Consent of Willkie Farr & Gallagher (included their opinions filed as Exhibits 5.1 and
Exhibit 8.1).***
23.2 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included on the signature pages hereto).
25.1 Statement on Form T-1 of Eligibility of Trustee relating to the 8 3/4% Senior Notes due 2009 and
related guarantees.
25.2 Statement on Form T-1 of Eligibility of Trustee relating to the 9% Senior Notes due 2012 and related
guarantees.
99.1 Form of Letter of Transmittal relating to the 8 3/4% Senior Notes due 2009.
99.2 Form of Notice of Guaranteed Delivery relating to the 8 3/4% Senior Notes due 2009.
99.3 Form of Letter to Clients relating to the 8 3/4% Senior Notes due 2009.
99.4 Form of Letter to Nominees relating to the 8 3/4% Senior Notes due 2009.
99.5 Guidelines for Certification of Taxpayer Identification Number relating to the 8 3/4% Senior Notes
due 2009.
Exhibit
Number Description of Exhibit
- ------ --------------------------------------------------------------------------------------------------
99.6 Form of Letter of Transmittal relating to the 9% Senior Notes due 2012.
99.7 Form of Notice of Guaranteed Delivery relating to the 9% Senior Notes due 2012.
99.8 Form of Letter to Clients relating to the 9% Senior Notes due 2012.
99.9 Form of Letter to Nominees relating to the 9% Senior Notes due 2012.
99.10 Guidelines for Certification of Taxpayer Identification Number relating to the 9% Senior Notes due
2012.
- --------
* Incorporated herein by reference to Exhibit 99.1 to our Form 8-K filed
April 24, 2002.
** Incorporated herein by reference to Exhibit 99.2 to our Form 8-K filed
April 24, 2002.
*** To be filed by amendment.