SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:
[ ]CONFIDENTIAL, FOR USE OF THE
[X]Preliminary Proxy Statement COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))

[_]Definitive Proxy Statement

[_]Definitive Additional Materials

[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12

VENCOR, INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)

-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
[_]No fee required.

[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
stock, par value $.25 per share, of Operating Company
(2) Aggregate number of securities to which transaction applies: 67,311,276
shares of Operating Company Common Stock to be distributed by the
Company to its stockholders.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): $12.84 The
underlying value of the transaction used solely for the purpose of
computing the filing fee pursuant to Exchange Act Rule 0-11 is the pro
forma book value of Operating Company at December 31, 1997.
(4) Proposed maximum aggregate value of transaction: $64,276,783.80
(5) Total fee paid: $172,855.36

[X]Fee paid previously with preliminary materials: $172,855.36

[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[VENCOR, INC. LETTERHEAD]

, 1998

Dear Stockholder:

You are cordially invited to attend an Annual Meeting of Stockholders of
Vencor, Inc. (the "Company") to be held at : .m. (local time) on ,
, 1998 at (the "Annual Meeting"). I hope that you will be present or
represented by proxy at this important meeting.

At the Annual Meeting you will be asked to approve several proposals
relating to the Company's plan to become a self-administered, self-managed
real estate company ("Realty Company") that will focus on the ownership and
acquisition of healthcare properties. Realty Company expects that it will be
taxed as a real estate investment trust ("REIT") for Federal income tax
purposes commencing on January 1, 1999. The Company will retain substantially
all of the Company-owned land, buildings and other improvements and real
estate related assets, including 49 of the 60 long-term acute care hospitals
and 205 of the 309 nursing centers operated by the Company as of December 31,
1997 (the "Real Estate Business"). The Company intends to change its name to
"VenTrust, Inc." in connection with these transactions.

In connection with the Reorganization Transactions (as defined herein), the
Company intends to distribute to its common stockholders through a dividend of
the common stock of a newly formed subsidiary ("Operating Company") all of the
non-Real Estate Business of the Company, including real property under
development or to be developed by the Company (the "Development Properties").
Operating Company will lease the Company's hospitals and nursing centers and
will continue to be one of the nation's largest providers of healthcare
services. Following the distribution, Operating Company will assume the name
"Vencor, Inc."

The distribution of the Operating Company shares is a taxable transaction to
both the Company and Company stockholders. However, the Company expects that
it will incur little or no tax as a result of the transaction. The tax payable
by both the Company and Company stockholders will be based upon the trading
price of Operating Company common stock immediately following the
distribution, the earnings and profits of the Company through 1998 and, in the
case of Company stockholders, the stockholder's basis in Company common stock.
These tax consequences are highly complex, and you are urged to review
carefully the description of tax consequences in the accompanying Proxy
Statement.

The purposes of the Annual Meeting are to (a) approve an Agreement and Plan
of Distribution which contemplates certain reorganization transactions (the
"Reorganization Transactions"), including but not limited to, (i) certain
internal mergers and stock and asset transfers that will allocate the assets
and liabilities relating to the Real Estate Business to Realty Company and the
assets and liabilities relating to the non-Real Estate Business of the Company
to Operating Company, (ii) the issuance and sale of $10 million of non-voting
preferred stock of Operating Company, (iii) the distribution by the Company to
its common stockholders on a pro rata basis of the outstanding common stock of
Operating Company, (iv) Realty Company leasing to Operating Company pursuant
to a master lease agreement 49 long-term acute care hospitals and 205 nursing
centers, (v) the completion by Operating Company of the development of the
Development Properties pursuant to a development agreement and thereafter the
sale to, and lease back from, Realty Company of the Development Properties,
and (vi) the repayment by the Company of the funded portion of its existing
bank credit facility, the repurchase of up to all of its $750 million 8 5/8%
Senior Subordinated Notes due 2007 (the "Company Notes"), obtaining consents
to amend the terms of the Company Notes, the exchange of Company Notes for
other securities or a combination of the foregoing, and payment of certain
transaction costs to be incurred in connection with the Reorganization
Transactions, all on terms satisfactory to the Company, which amounts will be
obtained through borrowings and securities issuances by Realty Company of
approximately $1.0 billion and through borrowings and securities issuances by
Operating Company of approximately $1.11 billion (collectively, the
"Distribution Proposal"), (b) approve the amendment of the Company's
Certificate of Incorporation to (i) add certain transfer restrictions and

related provisions with respect to the Company's capital stock desirable for
the Company to protect its future status as a REIT for Federal income tax
purposes, (ii) change the name of the Company to "VenTrust, Inc.," and (iii)
increase the number of authorized shares of preferred stock of the Company
from 1,000,000 shares to 10,000,000 shares (proposal (b) being collectively
referred to as, the "Charter Amendment Proposals"), (c) elect the directors
named in the accompanying Proxy Statement to the Board of Directors of the
Company (the "Election Proposal"), and (d) transact such other business as may
properly come before the Annual Meeting.

The Reorganization Transactions and other important information, including a
description of the business and management of Realty Company and Operating
Company following the Reorganization Transactions, are more fully described in
the accompanying Proxy Statement. Completion of the Reorganization
Transactions is conditioned upon several approvals or events. These include
stockholder approval of the Distribution Proposal and the Charter Amendment
Proposals, completion of the repurchase of the Company Notes, the refinancing
on terms satisfactory to the Company of the Company Notes and the Company's
other indebtedness and certain state healthcare regulatory approvals.

The Board of Directors of the Company believes that the Distribution
Proposal, the Charter Amendment Proposals and the Election Proposal are in the
best interests of stockholders and unanimously recommends that you vote FOR
such proposals. We hope you will give serious consideration to these matters.

In order to ensure that your vote is represented at the meeting, please
complete, sign, date and return the enclosed proxy card promptly in the
enclosed pre-addressed, postage prepaid envelope. If you attend the Annual
Meeting, you may revoke the proxy at that time by voting in person.

Sincerely,

W. Bruce Lunsford
Chairman of the Board, President and
Chief Executive Officer

VENCOR, INC.
3300 AEGON CENTER
400 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202

----------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON , 1998

NOTICE HEREBY IS GIVEN that an Annual Meeting of Stockholders (the "Annual
Meeting") of Vencor, Inc., a Delaware corporation (the "Company"), has been
called by the Board of Directors of the Company and will be held at at
: .m. (local time) on , , 1998 to consider and vote upon the
following matters described in the accompanying Proxy Statement:

1. To consider and vote upon a proposal to approve an Agreement and Plan
of Distribution, dated as of , 1998, between the Company and a newly
formed, wholly-owned subsidiary of the Company ("Operating Company"), which
contemplates certain reorganization transactions (the "Reorganization
Transactions"), including but not limited to, (a) certain internal mergers
and stock and asset transfers that will allocate the assets and liabilities
relating to substantially all of the Company-owned land, buildings and
other improvements and real estate related assets, including 49 of the 60
long-term acute care hospitals and 205 of the 309 nursing centers operated
by the Company as of December 31, 1997, to the Company ("Realty Company"),
and the other assets and liabilities relating to the historical operations
of the Company, including real property under development and to be
developed by the Company (the "Development Properties"), to Operating
Company, (b) the issuance and sale of $10 million of non-voting preferred
stock of Operating Company, (c) the distribution by the Company to its
common stockholders on a pro rata basis of the outstanding common stock of
Operating Company, (d) Realty Company leasing to Operating Company pursuant
to a master lease agreement 49 long-term acute care hospitals and 205
nursing centers, (e) the completion by Operating Company of the development
of the Development Properties pursuant to a development agreement and
thereafter the sale to, and lease back from, Realty Company of the
Development Properties, and (f) the repayment by the Company of the funded
portion of its existing bank credit facility, the repurchase of up to all
of its $750 million 8 5/8% Senior Subordinated Notes due 2007 (the "Company
Notes"), obtaining consents to amend the terms of the Company Notes, the
exchange of Company Notes for other securities or a combination of the
foregoing, and payment of certain transaction costs to be incurred in
connection with the Reorganization Transactions, all on terms satisfactory
to the Company, which amounts will be obtained through borrowings and
securities issuances by Realty Company of approximately $1.0 billion and
through borrowings and securities issuances by Operating Company of
approximately $1.11 billion (collectively, the "Distribution Proposal");

2. To consider and vote upon a proposal to amend the Company's
Certificate of Incorporation to (a) add certain transfer restrictions and
related provisions with respect to the Company's capital stock desirable
for the Company to protect its status as a real estate investment trust for
Federal income tax purposes, (b) change the name of the Company to
"VenTrust, Inc.," and (c) increase the number of authorized shares of
preferred stock of the Company from 1,000,000 shares to 10,000,000 shares;

3. To elect the directors named in the accompanying Proxy Statement to
the Board of Directors of the Company; and

4. To transact such other business as may properly come before the Annual
Meeting or any adjournments or postponements thereof.

The Company reserves the right to cancel or defer the Reorganization
Transactions even if stockholders of the Company approve the Distribution
Proposal and the other conditions to the Reorganization Transactions are
satisfied.

Only holders of Company common stock, par value $.25 per share, of record at
the close of business on , 1998, are entitled to notice of and to vote
at the Annual Meeting or any adjournments or postponements thereof. No
business other than the proposals described in this notice are expected to be
considered at the Annual Meeting or any adjournment.

The Board of Directors unanimously recommends that stockholders vote FOR the
proposals listed above, which are described in detail in the accompanying
Proxy Statement.

WHETHER OR NOT YOU EXPECT TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND PROMPTLY MAIL IT IN THE ENCLOSED
PRE-ADDRESSED, POSTAGE-PAID ENVELOPE. You may revoke your proxy, either in
writing or by voting in person at the Annual Meeting, at any time prior to its
exercise.

By Order of the Board of Directors

W. Bruce Lunsford
Chairman of the Board, President and
Chief Executive Officer

Louisville, Kentucky
, 1998

VENCOR, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
VENCOR, INC.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202

The undersigned hereby (1) acknowledges receipt of the Notice of the Annual
Meeting of Stockholders (the "Annual Meeting") of Vencor, Inc., a Delaware
corporation (the "Company"), to be held at [ ] on [ , 19 at .m.]
local time, and the Proxy Statement in connection therewith, and (2) appoints
W. Bruce Lunsford and W. Earl Reed, III, and each of them, with full power of
substitution to vote as proxy for the undersigned, as herein stated at the
Annual Meeting of Stockholders of the Company according to the number of votes
the undersigned would be entitled to vote if personally present on the
proposals set forth below and according to their discretion on any other
matters that may properly come before the meeting or any adjournments thereof.

The undersigned directs that this proxy be voted as follows:

(1) To approve an Agreement and Plan of Distribution between the Company and
Operating Company, a newly formed wholly-owned subsidiary of the Company,
which contemplates certain reorganization transactions (the "Reorganization
Transactions"), including but not limited to, (a) certain internal mergers and
stock and asset transfers that will allocate the assets and liabilities
relating to substantially all of the Company-owned land, buildings and other
improvements and real estate related assets to the Company, which will become
a self-administered, self-managed realty company ("Realty Company") and the
assets and liabilities relating to the historical operations of the Company to
a newly-formed, wholly-owned subsidiary of the Company ("Operating Company"),
(b) the issuance and sale of $10 million of non-voting preferred stock of
Operating Company, (c) the distribution by the Company to its common
stockholders on a pro rata basis the outstanding common stock of Operating
Company, (d) Realty Company leasing to Operating Company pursuant to a master
lease agreement 49 long-term acute care hospitals and 205 nursing centers, (e)
the completion by Operating Company of the development of certain development
properties pursuant to a development agreement and thereafter the sale to, and
lease back from, Realty Company of such development properties, and (f) the
repayment by the Company of the funded portion of its existing bank credit
facility, the repurchase of up to all of its $750 million 8 5/8% Senior
Subordinated Notes due 2007 (the "Company Notes"), obtaining consents to amend
the terms of the Company Notes, the exchange of Company Notes for other
securities or a combination of the foregoing, and payment of certain
transaction costs to be incurred in connection with the Reorganization
Transactions, all on terms satisfactory to the Company, which amounts will be
obtained through borrowings and securities issuances by Realty Company of
approximately $1.0 billion and through borrowings and securities issuances by
Operating Company of approximately $1.11 billion.

[_] FOR [_] AGAINST [_] ABSTAIN

(2) To approve the amendment of the Company's Certificate of Incorporation
to (a) add certain transfer restrictions and related provisions with respect
to the Company's capital stock desirable for the Company to protect its status
as a real estate investment trust for Federal income tax purposes, (b) change
the name of the Company to "VenTrust, Inc." and (c) increase the number of
authorized shares of preferred stock of the Company from 1,000,000 shares to
10,000,000 shares.

[_] FOR [_] AGAINST [_] ABSTAIN

(3) To elect the following nominees to the Board of Directors of the
Company: Michael R. Barr, Walter F. Beran, Ulysses L. Bridgeman, Jr., Elaine
L. Chao, Donna R. Ecton, Greg D. Hudson, William H. Lomicka, W. Bruce
Lunsford, W. Earl Reed, III, and R. Gene Smith. TO WITHHOLD AUTHORITY TO VOTE
FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME.

[_] FOR all Nominees [_] AGAINST all Nominees

(4) To transact such other business as may properly come before the Annual
Meeting.

The shares covered by this proxy will be voted as specified. If no
specification is made, this proxy will be voted FOR each of the proposals. The
proxies cannot vote your shares unless you sign and return this card.

Stockholders of the Company will not be entitled to appraisal rights under
the Delaware General Corporation Law, in connection with any of the proposals.

The undersigned hereby revokes any proxy heretofore given to vote or act
with respect to shares of the Company and hereby ratifies and conforms all
that the proxies, their substitutes, or any of them may lawfully do by virtue
hereof.

Please mark, sign, and return this proxy in the enclosed envelope. No
postage is required.

Date: _________________, 1998

-------------------------------------
Signature of the Stockholder

-------------------------------------
Signature of the Stockholder (if
jointly held)

Please date this proxy and sign your
name exactly as it appears hereon.
Where there is more than one owner,
each should sign. When signing as an
attorney, administrator, executor,
guardian or trustee, please add your
title as such. If executed by a
corporation, the proxy should be
signed by a duly authorized officer
and state the full name of the
corporation.

VENCOR, INC.
3300 AEGON CENTER
400 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202

----------------

PROXY STATEMENT

----------------

This Proxy Statement (the "Proxy Statement") is being furnished to the
stockholders of Vencor, Inc., a Delaware corporation (the "Company"), in
connection with the solicitation of proxies by the Company's Board of
Directors (the "Company Board") from the holders of the outstanding shares of
common stock, par value $.25 per share, of the Company ("Company Common
Stock"), for use at the Annual Meeting of Stockholders of the Company to be
held on , , 1998, at : .m. (local time), at and at any
adjournments or postponements thereof (the "Annual Meeting"). The Company is
proposing to become a real estate investment trust ("REIT") for Federal income
tax purposes beginning with the tax year commencing January 1, 1999 (the
"Conversion Date"). The Company will retain substantially all of the Company-
owned land, buildings and other improvements and real estate related assets,
including 49 of the 60 long-term acute care hospitals and 205 of the 309
nursing centers operated by the Company as of December 31, 1997 (the
"Properties"). In addition, the Company is proposing to change its name in
connection with the Reorganization Transactions (as defined herein) to
"VenTrust, Inc." ("Realty Company").

At the Annual Meeting, holders of Company Common Stock will be asked to
consider and vote upon the following proposals (collectively, the
"Proposals"):

1. To approve an Agreement and Plan of Distribution (the "Distribution
Agreement"), dated as of , 1998, between the Company and a newly
formed, wholly-owned subsidiary of the Company ("Operating Company"), which
contemplates certain reorganization transactions (the "Reorganization
Transactions"), including, but not limited to, (a) certain internal mergers
and stock and asset transfers that will allocate the assets and liabilities
relating to the Properties to Realty Company and the other assets and
liabilities relating to the historical operations of the Company, including
real property under development or to be developed by the Company (the
"Development Properties"), to Operating Company, (b) the issuance and sale
of $10 million of non-voting preferred stock of Operating Company, (c) the
distribution (the "Distribution") by the Company to the holders of Company
Common Stock of all the outstanding shares of common stock, par value $.25
per share, of Operating Company (the "Operating Company Common Stock") on
the basis of one share of Operating Company Common Stock for [each][every]
share[s] of Company Common Stock, (d) Realty Company leasing to
Operating Company pursuant to the Master Lease Agreement (as defined
herein), 49 long-term acute care hospitals and 205 nursing centers
(collectively, the "Leased Properties"), (e) the completion by Operating
Company of the development of the Development Properties pursuant to the
Development Agreement (as defined herein) and thereafter the sale to, and
lease back from, Realty Company of the Development Properties, and (f) the
repayment by the Company of the funded portion of its existing bank credit
facility (the "Company Bank Facility"), the repurchase of up to all of its
$750 million 8 5/8% Senior Subordinated Notes due 2007 (the "Company
Notes") obtaining consents to amend the terms of the Company Notes, the
exchange of Company Notes for other securities or a combination of the
foregoing, and payment of certain transaction costs to be incurred in
connection with the Reorganization Transactions, all on terms satisfactory
to the Company, which amounts will be obtained through borrowings and
securities issuances by Realty Company of approximately $1.0 billion and
through borrowings and securities issuances by Operating Company of
approximately $1.11 billion (collectively, the "Distribution Proposal");

2. To approve the amendment of the Company's Certificate of Incorporation
(the "Company Charter") to (a) add certain transfer restrictions preventing
transfers that would result in the transferee (other than certain
stockholders) constructively holding in excess of 9.9% of the capital stock
of Realty Company and other related provisions with respect to the
Company's capital stock desirable for the Company to

protect its status as a REIT for Federal income tax purposes, (b) change
the name of the Company to "VenTrust, Inc." ((a) and (b) being collectively
referred to as the "REIT Charter Amendments"), and (c) increase the number
of authorized shares of preferred stock, par value $1.00 per share, of the
Company ("Company Preferred Stock") from 1,000,000 shares to 10,000,000
shares (the "Preferred Stock Charter Amendment" and, together with the REIT
Charter Amendments, the "Charter Amendment Proposals"); and

3. To elect the directors named in this Proxy Statement to the Company
Board (the "Election Proposal").

The Company Board unanimously recommends that each stockholder vote FOR the
Proposals listed above, which are described in detail in this Proxy Statement.

The Company intends to first distribute this Proxy Statement and the
materials accompanying it on or about , 1998. Any requests for
assistance may be directed to the Proxy Solicitor at the telephone number set
forth below. Requests for additional proxy cards or copies of this Proxy
Statement may be directed to the Proxy Solicitor and such additional materials
will be provided promptly at the Company's expense. Stockholders may also
contact their local broker, dealer, commercial bank or trust company for
assistance concerning the matters set forth herein.

The Proxy Solicitor is:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 549-6864 (Toll Free)

----------------

For questions addressed to the Company, please contact:
Vencor, Inc.
3300 Aegon Center
400 West Market Street
Louisville, Kentucky 40202
(502) 596-7300
Attention: Secretary

TABLE OF CONTENTS

SUMMARY.................................................................... 1
The Annual Meeting........................................................ 1
The Proposals............................................................. 1
Votes Required............................................................ 2
What Company Stockholders Will Receive in the Distribution................ 2
Recommendation of the Company Board....................................... 3
Appraisal Rights.......................................................... 3
Background and Reasons for the Reorganization Transactions................ 3
The Reorganization Transactions........................................... 4
Business of Realty Company and Operating Company After the Reorganization
Transactions............................................................. 7
Relationship Between Realty Company and Operating Company After the
Reorganization Transactions.............................................. 8
Management of Realty Company and Operating Company After the
Reorganization Transactions.............................................. 9
Business Strategy......................................................... 9
Certain Federal Income Tax Consequences of the Distribution............... 11
Distribution and Dividend Policy.......................................... 11
REALTY COMPANY SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA AND
COMPARATIVE PER SHARE DATA................................................ 13
THE COMPANY AND OPERATING COMPANY SUMMARY SELECTED HISTORICAL FINANCIAL
DATA...................................................................... 14
OPERATING COMPANY SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
AND COMPARATIVE PER SHARE DATA............................................ 15
THE ANNUAL MEETING......................................................... 16
Purpose of the Annual Meeting............................................. 16
Record Date............................................................... 17
Votes Required............................................................ 17
Voting and Revocation of Proxies.......................................... 17
Solicitation of Proxies................................................... 18
Appraisal Rights.......................................................... 18
RISK FACTORS............................................................... 19
New Business Strategy; No Operating History............................... 19
Dependence of Realty Company on Operating Company......................... 19
Lack of Control by Realty Company Over Hospital and Nursing Center
Properties............................................................... 20
Conflicts of Interest..................................................... 20
Substantial Leverage...................................................... 21
Ability to Maintain Distributions......................................... 22
Healthcare Industry Risks................................................. 23
Competition for Investment Opportunities.................................. 26
Uninsured and Underinsured Losses......................................... 26
Acquisition and Development Risks......................................... 26
Risks Associated with REIT Status......................................... 27
Effect of Market Interest Rates on Price of Common Stock and Cost of
Funds.................................................................... 29
Limited Relevance of Financial Information................................ 29
Potential Liabilities Due to Fraudulent Transfer Considerations and Legal
Dividend Requirements.................................................... 30
Uncertainty of Trading Markets............................................ 31
Payment of Dividends...................................................... 31
Certain Anti-Takeover Effects............................................. 31
THE DISTRIBUTION PROPOSAL.................................................. 32
Background and Reasons for the Reorganization Transactions................ 32
Required Vote............................................................. 33
Recommendation of the Company Board....................................... 33

The Reorganization Transactions........................................... 33
Material Federal Income Tax Consequences of the Distribution.............. 35
Listing and Trading of Company Common Stock and Operating Company Common
Stock.................................................................... 36
Regulatory Approvals...................................................... 36
Accounting Treatment...................................................... 36
Conditions; Termination................................................... 37
RELATIONSHIP BETWEEN REALTY COMPANY AND OPERATING COMPANY AFTER THE
REORGANIZATION TRANSACTIONS............................................... 38
Distribution Agreement.................................................... 38
Master Lease Agreement.................................................... 39
Development Agreement..................................................... 41
Participation Agreement................................................... 42
Employee Benefits Agreement............................................... 42
Intellectual Property Agreement........................................... 43
Tax Allocation Agreement.................................................. 43
Transition Services Agreements............................................ 44
Conflicts of Interest Policies............................................ 44
Legal Proceedings......................................................... 44
THE CHARTER AMENDMENT PROPOSALS............................................ 46
REIT Charter Amendments................................................... 46
Preferred Stock Charter Amendment......................................... 47
Required Vote............................................................. 48
Recommendation of the Company Board....................................... 48
ELECTION OF DIRECTORS...................................................... 49
Required Vote............................................................. 51
Recommendation of the Company Board....................................... 51
Company Board Meetings and Committees..................................... 51
Compensation of Directors................................................. 51
DISTRIBUTION AND DIVIDEND POLICY........................................... 53
Realty Company............................................................ 53
Operating Company......................................................... 54
REALTY COMPANY PRO FORMA CAPITALIZATION.................................... 55
OPERATING COMPANY PRO FORMA CAPITALIZATION................................. 56
SOURCES AND USES........................................................... 57
REALTY COMPANY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS....... 58
REALTY COMPANY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE
YEAR ENDED DECEMBER 31, 1997.............................................. 59
REALTY COMPANY UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31,
1997...................................................................... 60
REALTY COMPANY NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS................................................................ 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF REALTY COMPANY.............................................. 62
General................................................................... 62
Pro Forma Results of Operations........................................... 62
Liquidity................................................................. 62
Capital Resources......................................................... 63
THE COMPANY AND OPERATING COMPANY SELECTED HISTORICAL FINANCIAL DATA....... 64

THE COMPANY AND OPERATING COMPANY SELECTED HISTORICAL FINANCIAL DATA....... 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY................................................. 66
General................................................................... 66
Results of Operations..................................................... 67
Liquidity................................................................. 70
Capital Resources......................................................... 70
Healthcare Reform Legislation............................................. 71
Other Information......................................................... 73
OPERATING COMPANY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS.... 74
OPERATING COMPANY UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR
THE YEAR ENDED DECEMBER 31, 1997.......................................... 75
OPERATING COMPANY UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER
31, 1997.................................................................. 76
OPERATING COMPANY NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS................................................................ 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF OPERATING COMPANY........................................... 79
General .................................................................. 79
Pro Forma Results of Operations........................................... 79
Liquidity................................................................. 79
Capital Resources......................................................... 80
Healthcare Reform Legislation............................................. 80
Other Information......................................................... 81
BUSINESS OF REALTY COMPANY AFTER THE REORGANIZATION TRANSACTIONS........... 83
General................................................................... 83
Structure................................................................. 83
Sources of Capital for Expansion.......................................... 84
The Properties............................................................ 84
Properties Under Development By Operating Company......................... 92
Competition............................................................... 93
Governmental Regulation................................................... 93
BUSINESS OF OPERATING COMPANY AFTER THE REORGANIZATION TRANSACTIONS........ 94
General................................................................... 94
Hospital Operations....................................................... 94
Nursing Center Operations................................................. 99
Vencare Health Services Operations........................................ 103
Management Information System............................................. 105
Employees................................................................. 106
Liability Insurance....................................................... 106
MANAGEMENT OF THE COMPANY AND MANAGEMENT OF REALTY COMPANY AND OPERATING
COMPANY AFTER THE REORGANIZATION TRANSACTIONS............................. 107
The Company............................................................... 107
Realty Company............................................................ 115
Operating Company......................................................... 116
BUSINESS STRATEGY.......................................................... 126
Realty Company............................................................ 126
Operating Company......................................................... 127

iii

GOVERNMENTAL REGULATION................................................... 130
Hospitals................................................................ 130
Nursing Centers.......................................................... 133
Pharmacies............................................................... 134
Healthcare Reform Legislation............................................ 134
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK... 136
The Company.............................................................. 136
Realty Company........................................................... 138
Operating Company........................................................ 139
MARKET INFORMATION CONCERNING COMPANY COMMON STOCK........................ 141
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 142
The Distribution......................................................... 142
Taxation of Realty Company............................................... 143
Taxation of U.S. Stockholders of Realty Company.......................... 149
Taxation of Foreign Stockholders of Realty Company....................... 150
Information Reporting Requirements and Backup Withholding Tax............ 152
Other Tax Consequences................................................... 152
Ownership and Disposition of Distributed Shares.......................... 152
DESCRIPTION OF CAPITAL STOCK.............................................. 154
Realty Company........................................................... 154
Operating Company........................................................ 159
CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN CHARTER AND BY-LAWS PROVISIONS AND
THE COMPANY RIGHTS....................................................... 160
General.................................................................. 160
Classified Boards of Directors........................................... 161
Number of Directors; Removal; Filling Vacancies.......................... 161
Limitations on Stockholder Action by Written Consent; Annual Meetings.... 162
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals............................................................... 162
Preferred Stock.......................................................... 163
Common Stock............................................................. 164
Ownership Limitation Provision........................................... 164
Amendment of Certain Charter Provisions and the By-laws.................. 165
Preferred Share Purchase Rights.......................................... 166
Antitakeover Legislation................................................. 166
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF OPERATING
COMPANY.................................................................. 168
Limitation of Liability of Operating Company Directors................... 168
Indemnification of Directors and Officers................................ 168
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................... 170
SUBMISSION OF STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING............... 170
ADDITIONAL INFORMATION.................................................... 170
VENCOR, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES...................................................... F-1
Appendix AForm of Distribution Agreement to be entered into between the
Company and Operating Company*
Appendix BForm of Certificate of Amendment of Certificate of Incorporation
of Vencor, Inc.*

- --------
* To be filed by amendment.

SUMMARY

The following is a summary of certain information contained elsewhere in this
Proxy Statement and does not purport to be complete and is qualified in its
entirety by reference to the full text of this Proxy Statement, including the
Appendices attached hereto. Stockholders are urged to read this Proxy Statement
and the attached Appendices, and in particular the section entitled "Risk
Factors," carefully and in their entirety. Unless the context otherwise
requires, references in this Proxy Statement to the "Company" shall be deemed
to refer to Vencor, Inc. prior to consummation of the Reorganization
Transactions, and references to "Realty Company" shall be deemed to refer to
Vencor, Inc. immediately after the Reorganization Transactions, assuming
stockholders approve the Distribution Proposal at the Annual Meeting (at which
time, assuming stockholders approve the Charter Amendment Proposals at the
Annual Meeting, Vencor, Inc. will change its name to "VenTrust, Inc."). Unless
the context otherwise requires, references in this Proxy Statement to
"Operating Company" shall be deemed to refer to Operating Company immediately
after the Reorganization Transactions, assuming stockholders approve the
Distribution Proposal at the Annual Meeting (at which time, assuming
stockholders approve the Charter Amendment Proposals at the Annual Meeting,
Operating Company will change its name to "Vencor, Inc.").

THE ANNUAL MEETING

THE PROPOSALS

At the Annual Meeting, holders of Company Common Stock will be asked to
consider and vote upon the Proposals:

1. To approve the Distribution Agreement, which contemplates the
Reorganization Transactions, including, but not limited to, (a) certain
internal mergers and stock and asset transfers that will allocate the
assets and liabilities relating to the Properties to Realty Company and the
other assets and liabilities relating to the historical operations of the
Company, including the Development Properties, to Operating Company, (b)
the issuance and sale of $10 million of non-voting preferred stock of
Operating Company, (c) the distribution by the Company to the holders of
Company Common Stock of all the outstanding shares of Operating Company
Common Stock on the basis of one share of Operating Company Common Stock
for [each][every] share[s] of Company Common Stock, (d) Realty Company
leasing to Operating Company pursuant to the Master Lease Agreement all of
the Leased Properties, (e) the completion by Operating Company of the
development of the Development Properties pursuant to the Development
Agreement and thereafter the sale to, and lease back from, Realty Company
of the Development Properties, and (f) the repayment by the Company of the
funded portion of the Company Bank Facility, the repurchase of up to all
the Company Notes, obtaining consents to amend the terms of the Company
Notes, the exchange of Company Notes for other securities or a combination
of the foregoing, and payment of certain transaction costs to be incurred
in connection with the Reorganization Transactions, all on terms
satisfactory to the Company, which amounts will be obtained through
borrowings and securities issuances by Realty Company of approximately $1.0
billion and through borrowings and securities issuances by Operating
Company of approximately $1.11 billion.

2. To approve the amendment of the Company Charter to (a) add certain
transfer restrictions preventing transfers that would result in the
transferee (other than certain stockholders) constructively

holding in excess of 9.9% of the capital stock of Realty Company and other
related provisions desirable for the Company to protect its status as a
REIT for Federal income tax purposes, (b) change the name of the Company to
"VenTrust, Inc.," and (c) increase the number of authorized shares of
Company Preferred Stock from 1,000,000 shares to 10,000,000 shares; and

3. To elect the directors named in this Proxy Statement to the Company
Board.

Completion of the Reorganization Transactions is conditioned upon, among
other things, stockholder approval of the Distribution Proposal and the Charter
Amendment Proposals. If the stockholders approve the Distribution Proposal but
do not approve the Charter Amendment Proposals, the Company Board will
reevaluate its intention to complete the Reorganization Transactions. After
such review, the Company Board could decide not to complete the Reorganization
Transactions or waive this condition and complete the Reorganization
Transactions despite such lack of approval. The Company Board has further
retained discretion, even if stockholders approve the Distribution Proposal and
the other conditions to the Reorganization Transactions are satisfied, to
cancel or defer the Reorganization Transactions, including the Distribution.
See "The Distribution Proposal--Conditions; Termination."

VOTES REQUIRED

As of , 1998, there were shares of Company Common Stock outstanding
and entitled to vote at the Annual Meeting. Each share of Company Common Stock
outstanding on the Record Date will be entitled to one vote on each of the
Proposals to be voted on at the Annual Meeting. The presence, either in person
or by properly executed proxy, of the holders of a majority of the shares of
Company Common Stock outstanding on the Record Date is necessary to constitute
a quorum at the Annual Meeting.

Approval of the Distribution Proposal and the Charter Amendment Proposals
requires the affirmative vote of a majority of the outstanding shares of
Company Common Stock entitled to vote thereon. The election of the directors
named in this Proxy Statement will be determined by the vote of a plurality of
the shares present in person or represented by proxy at the Annual Meeting.

As of January 1, 1998, directors and executive officers of the Company and
their affiliates beneficially owned an aggregate of 5,020,782 shares of Company
Common Stock (including shares which may be acquired within 60 days upon
exercise of employee stock options) or approximately 7.5% of the shares of
Company Common Stock outstanding on such date. The directors and executive
officers of the Company have indicated their intention to vote their shares of
Company Common Stock in favor of approval and adoption of the Distribution
Proposal and the Charter Amendment Proposals and for election to the Company
Board of the directors named in this Proxy Statement.

WHAT COMPANY STOCKHOLDERS WILL RECEIVE IN THE DISTRIBUTION

It is expected that the Distribution will be made on or before April 30, 1998
(the "Distribution Date") on a pro rata basis to holders of record of issued
and outstanding Company Common Stock on the date selected by the Company Board
(the "Distribution Record Date"). Holders of record of Company Common Stock as
of the Distribution Record Date will receive shares of Operating Company Common
Stock on the basis of the distribution ratio of one share of Operating Company
Common Stock for [every] [each] share[s] of Company Common Stock held on
the Distribution Record Date (including shares held in the Vencor Retirement
Savings Plan) (the "Distribution Ratio"). All shares of Operating Company
Common Stock issued will be fully paid and nonassessable and the holders
thereof will not be entitled to preemptive rights. See "Description of Capital
Stock--Operating Company." No holder of Company Common Stock will be required
to pay any cash or other consideration for shares of Operating Company Common
Stock received in the Distribution or to surrender or exchange shares of
Company Common Stock in order to receive shares of Operating Company Common
Stock. See "The Distribution Proposal."

RECOMMENDATION OF THE COMPANY BOARD

The Company Board believes that each of the Proposals is in the best
interests of the Company and its stockholders and unanimously recommends that
stockholders vote FOR the Distribution Proposal, FOR the Charter Amendment
Proposals and FOR the Election Proposal.

APPRAISAL RIGHTS

Stockholders of the Company will not be entitled to appraisal rights under
the Delaware General Corporation Law (the "Delaware Law") in connection with
any of the Proposals.

BACKGROUND AND REASONS FOR THE REORGANIZATION TRANSACTIONS

The Company Board has decided to separate the Company into two publicly owned
companies as of the Distribution Date: (1) Realty Company, which will operate
as a self-administered, self-managed realty company (and as a REIT upon
election of REIT status on January 1, 1999), and will initially hold
substantially all of the Company-owned land, buildings and other improvements,
and certain other real estate related assets, including 49 of the 60 long-term
acute care hospitals and 205 of the 309 nursing centers operated by the Company
as of December 31, 1997; and (2) Operating Company, a newly formed holding
company, which will, after certain internal mergers and stock and asset
transfers are effected, directly or indirectly, hold all of the other assets
and liabilities relating to operation of the Company's historical business,
including the Development Properties, and will manage, operate and lease the
Leased Properties (and upon completion of development, the Development
Properties) from Realty Company.

The Company Board believes that the separation of Operating Company from the
Company and the Company's conversion to a REIT will benefit the Company's
stockholders by giving them a continuing interest in a leading long-term
healthcare company and a tax-advantaged REIT security that is expected to
provide both the opportunity for consistent cash dividends and capital
appreciation as Realty Company acquires additional properties. If Realty
Company qualifies for taxation as a REIT, it generally will not be subject to
Federal corporate income taxes on that portion of its ordinary income or
capital gain that is distributed to stockholders. Such treatment substantially
eliminates the Federal "double taxation" on earnings (at the corporate and the
stockholder levels) that generally results from investment in a corporation.
See "Certain Federal Income Tax Considerations--Taxation of Realty Company."

Upon conversion to REIT status, Realty Company will be able to benefit from
the tax advantages that apply to REITs, and stockholders will receive quarterly
distributions that are at least sufficient to satisfy the annual distribution
requirements for REITs. See "Certain Federal Income Tax Considerations" and
"Distribution and Dividend Policy--Realty Company." The Company Board believes
this will highlight the value of the Company's real estate assets and permit
stockholders to realize a regular cash return on that value. In addition,
although historically the Company has been primarily recognized as a long-term
healthcare company, successful acquisition of healthcare related real estate,
particularly hospitals and nursing centers, has always been an important
component of the Company's success. The management of Realty Company expects
that its acquisition strategy will focus primarily on transactions in the
healthcare industry, but over time it may effect transactions in other
industries that management determines have the opportunity to generate
attractive returns. In particular, the Company Board believes that Realty
Company will be able to pursue real estate opportunities that may yield
attractive investment returns but which are not necessarily consistent with the
Company's current operating

strategies. In addition, Realty Company is expected to have a lower ratio of
indebtedness to assets and cash flow than the Company has today, which will
give Realty Company greater flexibility for future real estate acquisitions and
investments.

Company stockholders will also retain, through the Distribution, their
proportionate interest in one of the largest providers of long-term healthcare
services in the United States. The Company's full-service integrated network of
hospitals, nursing centers and ancillary service providers will enable
Operating Company to continue to meet the range of needs of patients requiring
long-term care while further expanding its long-term care operations. The
Company Board believes that Operating Company will benefit from a strategic
relationship with Realty Company because Operating Company's management will be
able to focus its time and resources on its healthcare operations and at the
same time, through the Participation Agreement (as defined herein), have a
right of first offer to lease and operate certain healthcare properties
acquired by Realty Company for a period of three years following the
Distribution Date. The Company Board believes that the more highly leveraged
capital structure of Operating Company is appropriate for a company with the
expected growth and cash flow characteristics of Operating Company. The Company
Board also recognizes that this additional leverage carries with it certain
increased risks. See "Risk Factors."

THE REORGANIZATION TRANSACTIONS

The Company currently expects that, subject to approval of the Distribution
Proposal, the Charter Amendment Proposals and the satisfaction of the other
conditions set forth under "The Distribution Proposal--Conditions;
Termination," the Distribution and the following other Reorganization
Transactions would be effected.

1. Internal Mergers and Transfers. On or prior to the Distribution Date,
the Company will effectuate certain internal mergers and stock and asset
transfers intended to allocate the assets and liabilities relating to the
Properties to the Company and the other assets and liabilities relating to
the operation of the Company's historical business, including the
Development Properties, to Operating Company. The principal internal
mergers and stock and asset transfers are as follows: (a) the Company will
form a new limited partnership (the "Realty Company Partnership") of which
the Company will own a 99% general partnership interest, and a newly
formed, wholly-owned limited liability company of the Company will own a
one percent limited partnership interest; (b) all of the Company's first-
tier subsidiaries other than TheraTx, Incorporated ("TheraTx") and
Transitional Hospitals Corporation ("Transitional") will merge with and
into the Realty Company Partnership; (c) the Company will form Operating
Company; (d) the Company will transfer all of the outstanding stock of
TheraTx and Transitional (which owns, all of the Company's ownership
interest in Behavioral Healthcare Corporation ("BHC"), an operator of
psychiatric and behavioral clinics (the "BHC Stock")), the common stock of
Atria Communities, Inc., a publicly held company and former division of the
Company ("Atria"), held by the Company (the "Atria Common Stock"), and
certain operating assets held by the Company (collectively, the
"Transferred Assets") to Operating Company (or a subsidiary of Operating
Company) and, as consideration for such stock, Operating Company will issue
Operating Company Common Stock and the Operating Company Series A Preferred
Stock (as defined herein) to the Company; (e) the Realty Company
Partnership will transfer all of its assets to Operating Company (or
subsidiaries of Operating Company) other than its real property and real
property related assets included within the Properties and, as
consideration for such assets, Operating Company will issue Operating
Company Common Stock and transfer all of the owned real estate and real
estate related assets held by TheraTx and Transitional (and their
respective subsidiaries) to the Realty Company Partnership; and (f) the
Realty Company Partnership will distribute to the Company all of the
Operating Company Common Stock it received from Operating Company.

The following is a diagram of the organizational structure of the Company
prior to the Reorganization Transactions:

[DIAGRAM]

A diagram of the current ownership structure of the Company showing the
stockholders holding 100% of the Company and indicating that the Company owns
and operates the properties.

The following is a diagram of the organizational structure of the Company
following the Reorganization Transactions:

[DIAGRAM]

A diagram of the ownership structure of Realty Company and its subsidiaries and
Operating Company and its subsidiaries showing the Company's stockholders
holding 100% of Realty Company and Operating Company and unrelated third parties
holding a $10 million interest in Operating Company Preferred Stock.

2. Operating Company Series A Preferred Stock. As part of the
consideration to be paid by Operating Company to the Company for the
Transferred Assets, Operating Company will issue $10 million of non-voting
Series A Cumulative Mandatory Redeemable Preferred Stock (the "Operating
Company Series A Preferred Stock"). The Company currently expects to sell
all of the Operating Company Series A Preferred Stock in a private
placement to one or more unaffiliated third parties immediately following
the Distribution Date.

3. Master Lease Agreement. On or prior to the Distribution Date, Realty
Company and Operating Company will enter into the Master Lease Agreement
pursuant to which Realty Company will lease all of the Leased Properties to
Operating Company. See "Relationship Between Realty Company and Operating
Company After the Reorganization Transactions--Master Lease Agreement."

4. Development Agreement. On or prior to the Distribution Date, Realty
Company and Operating Company will enter into the Development Agreement
pursuant to which Operating Company will complete development of the
Development Properties and thereafter sell to, and lease back from, Realty
Company, the Development Properties. The terms of the leases for the
Development Properties will be substantially similar to the Master Lease
Agreement. See "Relationship Between Realty Company and Operating Company
After the Reorganization Transactions--Development Agreement."

5. Financing. In connection with the Reorganization Transactions, the
Company expects that all or substantially all of the Company's existing
$2.0 billion of indebtedness, consisting primarily of amounts drawn under
the Company Bank Facility and up to all $750 million of the Company Notes
will be repaid or repurchased (the "Company Financing Transactions") and
refinanced with bank borrowings and securities issuances by each of Realty
Company and Operating Company. In lieu of repurchasing the Company Notes,
the Company may obtain consents to amend the terms of the Company Notes,
exchange Company Notes for other securities or some combination of the
foregoing.

Realty Company is expected to have approximately $985 million in total
indebtedness as of the Distribution Date and approximately $215 million in
credit available under a revolving credit facility. It is expected that
such capital will be available from the following sources: (i) a revolving
credit facility in the amount of $250 million (the "Realty Company Credit
Facility"), (ii) a term loan (the "Realty Company Term A Loan") in the
amount of $250 million, (iii) a term loan (the "Realty Company Term B
Loan") in the amount of $250 million, and (iv) Commercial Mortgage Backed
Securities (the "Realty Company CMBS Debt") in the amount of $450 million
(collectively, the "Realty Company Financing Transactions"). The Company
has received proposals from financial institutions for all of Realty
Company's financing requirements, is negotiating the terms of such
financing and expects such financing to be achieved on terms acceptable to
the Company.

Operating Company is expected to have approximately $1.0 billion in
indebtedness as of the Distribution Date and approximately $300 million in
credit available under a revolving credit facility. It is expected that
such capital will be available from the following sources: (i) a revolving
credit facility (the "Operating Company Credit Facility") in the amount of
$300 million, (ii) a term loan (the "Operating Company Term A Loan") in the
amount of $400 million, (iii) a term loan (the "Operating Company Term B
Loan") in the amount of $400 million, (iv) a bridge loan (the "Operating
Company Bridge Loan") in the amount of $200 million, to be repaid from the
proceeds of the sale of certain non-strategic assets, including the sale of
Atria Common Stock to be owned by Operating Company following the
Reorganization Transactions, (v) $10 million of Operating Company Series A
Preferred Stock, and (vi) a public offering of approximately $100 million
of Operating Company Common Stock (the "Operating Company Offering") to be
consummated simultaneously with the Reorganization Transactions
(collectively, the "Operating Company Financing Transactions" and together
with the Realty Company Financing Transactions and Company Financing
Transactions, the "Financing Transactions"). If Operating Company is unable
to sell the Atria Common Stock or other assets, Operating Company expects
that it

would be required to refinance the Operating Company Bridge Loan with the
Operating Company Credit Facility or a public debt or equity offering, or a
combination thereof. The Company has received proposals from financial
institutions for all of Operating Company's financing requirements, is
negotiating the terms of such financing and expects such financing to be
achieved on terms acceptable to the Company.

The following is a diagram of the Operating Company Financing
Transactions and the Realty Company Financing Transactions:

[GRAPHIC]

A chart showing the ownership structure of both Operating Company and Realty
Company and listing each Company's debt facilities.

See "The Distribution Proposal--The Reorganization Transactions" and
"Description of Capital Stock--Operating Company--Preferred Stock."

BUSINESS OF REALTY COMPANY AND OPERATING COMPANY AFTER THE REORGANIZATION
TRANSACTIONS

REALTY COMPANY

After the Reorganization Transactions, Realty Company will be a self-
administered, self-managed realty company (and a REIT upon election of REIT
status on January 1, 1999) that will continue to expand and enhance the
portfolio of healthcare related properties owned by the Company. Realty
Company's Properties will include 49 long-term acute care hospitals and 205
nursing centers in 35 states. Realty Company believes it will be a leading real
estate company focused on the ownership and acquisition of healthcare related
properties, including, but not limited to, hospitals, nursing centers, assisted
living facilities and healthcare related office buildings. Realty Company also
may pursue opportunities in non-healthcare real estate. At or prior to the
Distribution Date, Realty Company will enter into a series of agreements with
Operating Company, including the Master Lease Agreement, the Development
Agreement and the Participation Agreement, pursuant to which Operating Company
will lease and operate all of the Leased Properties, and Operating Company will
complete development of the Development Properties and thereafter sell to, and
lease back from, Realty Company, the Development Properties. In addition,
Realty Company will have a right of first offer with respect to certain
healthcare properties to be sold or mortgaged by Operating Company for a period
of three years following the Distribution Date. See "Relationship Between
Realty Company and Operating Company After the Reorganization Transactions."
The Company and its predecessor companies have been engaged in the development,
construction and acquisition of healthcare properties since 1987.

Following the Reorganization Transactions, Realty Company's primary source of
revenues will be from payments by Operating Company under the Leases (as
defined herein). The annual base rent for the Leased Properties under the
Leases, for the twelve-month period commencing on the Distribution Date (the
"Annual

Base Rent"), will be approximately $225 million. Realty Company's principal
expenditures will include costs incurred in the purchase of the Development
Properties from Operating Company, the acquisition of additional properties,
and depreciation and financing costs, including interest expense. Realty
Company expects to diversify its credit exposure by entering into leases with
tenants other than Operating Company.

Realty Company will conduct substantially all of its business activities,
including future acquisitions of properties, through the Realty Company
Partnership. This structure will enable Realty Company to have properties that
are acquired in the future contributed to the Realty Company Partnership by the
owner of such property in exchange for units in the Realty Company Partnership
and/or cash. If the owner of such property receives units in the Realty Company
Partnership in exchange for any such properties, the owner will be able to
defer all or part of the tax consequences of the contribution. The units issued
in exchange for properties will represent limited partnership interests in the
Realty Company Partnership. This structure, which is commonly known as an
UPREIT, should make Realty Company an attractive buyer when a seller wishes to
be able to defer payment of taxes upon disposition of property.

OPERATING COMPANY

After the Reorganization Transactions, Operating Company will be one of the
largest providers of long-term healthcare services in the United States. At
December 31, 1997, Operating Company's operations would have included 60 long-
term acute care hospitals containing 5,273 licensed beds, 309 nursing centers
containing 40,383 licensed beds, and the Vencare contract services business
which provides respiratory and rehabilitation therapies and medical and
pharmacy management services to approximately 2,900 healthcare facilities. Also
at such date Operating Company would have operated in 46 states. Healthcare
services provided through this network include long-term hospital care, nursing
care, contract respiratory therapy services, acute cardiopulmonary care,
subacute and post-operative care, inpatient and outpatient rehabilitation
therapy, specialized care for Alzheimer's disease, hospice care, home
healthcare and pharmacy services. Operating Company will continue to develop
VenTouch(TM), a comprehensive paperless clinical information system designed to
increase the operating efficiencies of Operating Company's facilities.

In addition, pursuant to the Participation Agreement, Operating Company will
have a right of first offer to lease and operate certain healthcare properties
acquired by Realty Company for a period of three years following the
Distribution Date.

RELATIONSHIP BETWEEN REALTY COMPANY AND OPERATING COMPANY AFTER THE
REORGANIZATION TRANSACTIONS

For purposes of governing certain ongoing relationships between Realty
Company and Operating Company after the Reorganization Transactions and
providing mechanisms for an orderly transition, Realty Company and Operating
Company will enter into certain agreements and adopt certain policies prior to
or on the Distribution Date. Such agreements include: (i) the Distribution
Agreement, providing for, among other things, the Reorganization Transactions
and cross-indemnification provisions, (ii) the Master Lease Agreement, setting
forth, among other things, the material terms for the lease of the Leased
Properties by Realty Company to Operating Company, (iii) the Development
Agreement, providing for, among other things, the completion of development by
Operating Company of the Development Properties and thereafter the sale to, and
lease back from, Realty Company, of the Development Properties, (iv) the
Participation Agreement, providing for, among other things, the right of first
offer of each of Realty Company and Operating Company to participate in certain
transactions, (v) the Employee Benefits Agreement (as defined herein), (vi) the
Intellectual Property Agreement (as defined herein), (vii) the Tax Sharing
Agreement (as defined herein), and (viii) the Transition Services Agreement (as
defined herein). Each of Realty Company and Operating Company will create a
committee of independent directors to review and approve transactions and
agreements between the companies. See "Relationship Between Realty Company and
Operating Company After the Reorganization Transactions."

MANAGEMENT OF REALTY COMPANY AND OPERATING COMPANY AFTER THE REORGANIZATION
TRANSACTIONS

REALTY COMPANY

Subject to approval of the Election Proposal, the following ten individuals
will serve as members of the Company Board: Michael R. Barr, Walter F. Beran,
Ulysses L. Bridgeman, Jr., Elaine L. Chao, Donna R. Ecton, Greg D. Hudson,
William H. Lomicka, W. Bruce Lunsford (Chairman of the Board), W. Earl Reed,
III, and R. Gene Smith. It is expected that as of or prior to the Distribution
Date, Mr. Barr, Mr. Bridgeman, Ms. Chao, Ms. Ecton, Mr. Lomicka and Mr. Reed
will resign their positions as directors of the Company and become directors of
Operating Company. It is also expected that the Company Board will appoint
Ronald G. Geary and Thomas T. Ladt to fill the vacancies created by such
resignations. Accordingly, as of the Distribution Date, the Company expects
that the following six individuals will be members of the Board of Directors of
Realty Company (the "Realty Company Board"): Mr. Beran, Mr. Geary, Mr. Hudson,
Mr. Ladt, Mr. Lunsford and Mr. Smith. See "Election of Directors."

As of the close of business on the Distribution Date, the following
individuals are expected to serve in the following capacities as the executive
officers of Realty Company: W. Bruce Lunsford, Chairman of the Board and Chief
Executive Officer; Thomas T. Ladt, President and Chief Operating Officer; and
T. Richard Riney, Vice President, General Counsel and Secretary. Realty Company
expects that prior to the Distribution Date, it will have selected individuals
to serve as chief financial officer and vice president of planning and
development of Realty Company.

See "Management of the Company and Management of Realty Company and Operating
Company After the Reorganization Transactions--Realty Company."

OPERATING COMPANY

Prior to completing the Reorganization Transactions, the Company, as sole
stockholder of Operating Company, expects to elect the following eight
individuals to the Board of Directors of Operating Company (the "Operating
Company Board") as of the close of business on the Distribution Date: Michael
R. Barr, Ulysses L. Bridgeman, Jr., Elaine L. Chao, Donna R. Ecton, William H.
Lomicka, W. Bruce Lunsford (Chairman of the Board), W. Earl Reed, III, and R.
Gene Smith (Vice Chairman of the Board). Each such person is currently a
director of the Company and, other than Mr. Lunsford and Mr. Smith who will
each be directors of both Realty Company and Operating Company, will resign
their positions as directors of the Company as of or prior to the Distribution
Date.

As of the close of business on the Distribution Date, the following
individuals are expected to serve in the following capacities as the executive
officers of Operating Company: W. Bruce Lunsford, Chairman of the Board,
President and Chief Executive Officer; Michael R. Barr, Executive Vice
President and Chief Operating Officer; W. Earl Reed, III, Executive Vice
President and Chief Financial Officer; Jill L. Force, Senior Vice President,
General Counsel and Assistant Secretary; Richard E. Chapman, Senior Vice
President and Chief Information Officer; James H. Gillenwater, Jr., Senior Vice
President, Planning and Development; and Richard A. Lechleiter, Vice President,
Finance and Corporate Controller. Each such person is currently serving in such
capacity for the Company.

See "Management of the Company and Management of Realty Company and Operating
Company After the Reorganization Transactions--Operating Company."

BUSINESS STRATEGY

REALTY COMPANY

Realty Company's principal business objectives are to maximize growth in
Funds From Operations (as defined herein) and to enhance the value of its
portfolio of properties in order to maximize total return to

stockholders. Realty Company intends to focus on the acquisition of equity
interests in healthcare related properties, including hospitals, nursing
centers, assisted living facilities, and healthcare related office buildings.
Although Realty Company intends to focus its efforts in the healthcare
industry, it may consider investments in properties outside of the healthcare
industry. In addition, Realty Company expects to diversify its credit exposure
by entering into leases with tenants other than Operating Company. Realty
Company may expand its focus to include the development of healthcare
facilities.

Realty Company intends to achieve its objectives through the implementation
of the following strategies:

Growth Strategy

. Acquire additional healthcare properties and lease such properties to
other qualified operators or invest in mortgages secured by such
properties;

. Purchase from, and lease back to, Operating Company, the Development
Properties pursuant to the Development Agreement;

. Purchase or mortgage selected properties from Operating Company
pursuant to the Participation Agreement, which provides Realty Company with
a right of first offer on certain properties;

. Utilize the substantial healthcare industry experience and numerous
business relationships of management to identify and evaluate potential
investments;

. Through its structure as an UPREIT, offer Realty Company Partnership
units to sellers who would otherwise recognize a taxable gain upon a sale
of assets; and

. Begin development and construction of healthcare related facilities if
market conditions are favorable.

Operating Strategy

. Structure leases on a triple-net or similar basis under which the
tenants bear the principal portion of the financial and operational
responsibility for the properties;

. Incorporate step-ups and/or other rent escalation features into leases
and mortgages;

. Develop and maintain long-term working relationships with other
healthcare operators; and

. Diversify Realty Company's asset base by tenant, property type and
geographical location.

Capitalization Strategy

. Employ moderate leverage to fund additional acquisitions or
development;

. Maintain a debt to total market capitalization ratio (i.e., total debt
of Realty Company as a percentage of equity market value plus total debt)
of less than 50%; and

. Pay regular distributions beginning January 1, 1999 and periodically
raise distributions as Funds From Operations per share of common stock of
Realty Company ("Realty Company Common Stock") increases.

See "Business Strategy--Realty Company."

OPERATING COMPANY

Operating Company believes that the demand for long-term care is increasing.
Improved medical care and advances in medical technology continue to increase
the survival rates for victims of disease and trauma. Many of these patients
never fully recover and require long-term care. The incidence of chronic
problems increases with age, particularly in connection with certain
degenerative conditions. As the average age of the United States population
increases, Operating Company believes that the demand for long-term healthcare
at all levels of the continuum of care will increase.

At the same time, the healthcare system of the United States is experiencing
a period of significant change. Factors affecting the healthcare system include
cost containment, the expansion of managed care, improved medical technology,
an increased focus on measurable clinical outcomes and a growing public
awareness of healthcare spending by governmental agencies at Federal and state
levels. Payors are increasingly requiring providers to move patients from high-
acuity care environments to lower-acuity care settings as quickly as is
medically appropriate.

Operating Company will continue the Company's prior strategy of developing
its full-service integrated network to meet the range of needs of patients
requiring long-term care. Operating Company will continue to integrate and
expand the operations of its long-term acute care hospitals and nursing centers
and to develop related healthcare services. Operating Company expects to have
development opportunities independent of those arising as a result of its
relationship with Realty Company. Operating Company will provide a full range
of clinical expertise, as well as advanced technologies for cost-efficiencies,
to accommodate patients at all levels of long-term care. Key elements of
Operating Company's strategy for providing a full-service integrated network
for long-term care are as follows: (a) focus on the long-term care continuum,
(b) increase penetration of specialty care and comprehensive delivery and
management of ancillary services, and (c) further implement its patient
information system.

See "Business Strategy--Operating Company."

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

A U.S. Stockholder (as defined herein) will include the fair market value of
the shares of Operating Company Common Stock (the "Distributed Shares")
received pursuant to the Distribution in gross income as ordinary dividend
income to the extent of the U.S. Stockholder's share of the current or
accumulated tax earnings and profits of the Company through the end of 1998.
The exact amount of the Company's earnings and profits depends upon a variety
of factors and cannot be determined until the end of 1998. Based on the
Company's analysis of its earnings and profits and assuming that the value of
the Operating Company Common Stock at the time of the Distribution is not
greater than $ per share, the Company expects that a U.S. Stockholder will
not have more than $ of dividend income per share of Company Common Stock.
To the extent the value of Operating Company Common Stock on the Distribution
Date exceeds the per share earnings and profits of the Company, a U.S.
Stockholder will be required to reduce its basis in its shares of Company
Common Stock by such excess. A U.S. Stockholder whose basis in its shares of
Company Common Stock is thereby reduced to zero will recognize capital gain in
the amount of any remaining value of Distributed Shares received. A U.S.
Stockholder's holding period in the Distributed Shares will begin on the day
after the Distribution Date. See "Certain Federal Income Tax Considerations--
Ownership and Disposition of Distributed Shares." The Company will report to
U.S. Stockholders the portion of the Distribution that should be treated as a
dividend in February 1999.

A U.S. Stockholder that is a corporation will, subject to generally
applicable limitations, be entitled to a dividends received deduction in an
amount equal to 70% of the amount of the Distribution received by it that is a
dividend. If a dividend is deemed to be "extraordinary" under Section 1059 of
the Internal Revenue Code of 1986, as amended (the "Code"), a corporate
stockholder may be required to reduce its basis in the stock by the nontaxed
portion of the dividend.

DISTRIBUTION AND DIVIDEND POLICY

REALTY COMPANY

Realty Company is expected to make distributions to its stockholders on a
quarterly basis beginning the first quarter of 1999 following its election of
REIT status on January 1, 1999. Realty Company's first distribution is expected
to be equal to a payout ratio of approximately 80% of Funds From Operations
(the "Distribution Policy"). There can be no assurances that Realty Company
will meet or maintain the Distribution Policy. See "Risk Factors--Ability to
Maintain Distributions."

The Company established the Distribution Policy after reviewing Realty
Company's pro forma Funds From Operations for the twelve month period ended
December 31, 1997, as further adjusted as described in footnote (1) below.
"Funds From Operations" as defined by the National Association of Real Estate
Investment Trusts is net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains (or losses) from debt
restructuring or sales of property, plus depreciation and amortization on real
estate assets and after adjustments, if any, for unconsolidated partnerships
and joint ventures. Realty Company's "Cash Available for Distribution," which
is Funds From Operations adjusted for certain non-cash items, less reserves for
capital expenditures, is not expected to be materially different from its Funds
From Operations, principally because under the Master Lease Agreement,
Operating Company is responsible for substantially all maintenance and capital
expenditures. The Company believes that such pro forma financial information,
with the enumerated adjustments, provides a reasonable basis for setting the
Distribution Policy.

The following table sets forth certain unaudited, supplemental adjusted pro
forma financial information for the twelve month period ended December 31,
1997.

SUPPLEMENTAL ADJUSTED
PRO FORMA FINANCIAL
INFORMATION FOR THE TWELVE
MONTHS ENDED
DECEMBER 31, 1997(1)
--------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)

Rental income....................................... $225,000
Expenses(2)......................................... 89,480
Depreciation........................................ 45,969
Funds from operations(3)............................ 135,520
Initial funds from operations per common
share(3)(4)........................................ $ 2.01

- --------
(1) Represents the pro forma results of operations for the period presented,
determined on the basis set forth in the "Realty Company Unaudited Pro
Forma Consolidated Financial Statements" and as adjusted to reflect
annualized lease revenues, and associated expenses, as if each of the
Leased Properties had been in operation from January 1, 1997.
(2) Consists of interest expense, general and administrative expenses, and the
cost of administrative services provided by Operating Company in connection
with the Transition Services Agreement.
(3) Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered an alternative to net income as an
indicator of Realty Company's operating performance or to cash flow as a
measure of liquidity.
(4) Based on approximately 67.3 million shares of Company Common Stock
outstanding as of December 31, 1997. Excludes shares of Company Common
Stock issuable upon conversion of Company Options (as defined herein). See
"Realty Company Pro Forma Capitalization" and "Description of Capital
Stock--Realty Company."

See "Risk Factors--Payment of Dividends" and "Distribution and Dividend
Policy."

OPERATING COMPANY

Operating Company does not intend to pay cash dividends on Operating Company
Common Stock for the foreseeable future so that it may reinvest its earnings in
the development of its business and reduce indebtedness. The payment of
dividends on Operating Company Common Stock in the future will be at the
discretion of the Operating Company Board. Restrictions imposed by the
Operating Company Credit Facility, Operating Company Term A Loan, Operating
Company Term B Loan and Operating Company Bridge Loan (collectively, the
"Operating Company Debt Facilities") or other debt obligations are expected to
limit the payment of dividends by Operating Company on Operating Company Common
Stock. See "Risk Factors--Payment of Dividends."

REALTY COMPANY
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA AND COMPARATIVE PER SHARE DATA

The following table sets forth certain selected unaudited pro forma
consolidated data of Realty Company as of and for the year ended December 31,
1997, which assumes that the Reorganization Transactions were consummated on
January 1, 1997. The pro forma information contained herein may not necessarily
reflect the financial position or results of operations of Realty Company which
would have been obtained had Realty Company been a separate, publicly held
company on such date or at the beginning of the period indicated. In addition,
the pro forma financial statements do not purport to be indicative of future
operating results of Realty Company.

Realty Company will not have been operated as a REIT prior to the
Distribution Date. Accordingly, for accounting purposes, the financial
statements of Realty Company will consist solely of its operations after the
Distribution Date. See "The Distribution Proposal--Accounting Treatment."

The information below should be read in conjunction with the "Realty Company
Unaudited Pro Forma Consolidated Financial Statements" included elsewhere
herein.

YEAR ENDED
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE
DATA)

STATEMENT OF INCOME DATA:
Rental income................................... $225,000
Net income...................................... 89,551
Earnings per common share:
Basic.......................................... 1.30
Diluted........................................ 1.27

DECEMBER 31, 1997
----------------------

BALANCE SHEET DATA:
Total assets.................................... 931,830
Long-term debt, including amounts due within one
year........................................... 984,592
Common stockholders' equity (deficit)........... (56,862)
Book value (deficit) per common share........... (0.84)(1)

HISTORICAL PRO FORMA
---------- ---------

COMPARATIVE PER SHARE DATA:
EARNINGS PER COMMON SHARE FROM OPERATIONS:
Year ended December 31, 1997:
Basic........................................... $ - $1.30
Diluted......................................... - 1.27
BOOK VALUE (DEFICIT) PER COMMON SHARE:
At December 31, 1997(1).......................... - (0.84)(1)

- --------
(1)The computation is based upon the pro forma issued and outstanding shares of
Realty Company as of December 31, 1997.

THE COMPANY AND OPERATING COMPANY
SUMMARY SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth summary selected historical financial data of
the Company for each of the five years in the period ended December 31, 1997.
For accounting purposes, the consolidated historical financial statements of
the Company will become the historical financial statements of Operating
Company after the Distribution Date. The summary historical financial data
presented herein have been derived from the audited consolidated financial
statements of the Company.

The following summary selected financial data relate to the business of
Operating Company as it was operated as part of the Company and may not reflect
the financial position, results of operations or cash flows that would have
been obtained had Operating Company been a separate, publicly held company
during such periods. In particular, the effect of lease payments that would
have been incurred by Operating Company pursuant to the Leases are not
reflected herein. Operating Company will also incur interest expense related to
the Operating Company Debt Facilities at higher rates than those incurred by
the Company. In addition, the historical financial statements contained herein
include certain expenses that, upon completion of the Reorganization
Transactions, will not be included in the future financial statements of
Operating Company. Such expenses include (i) expenses for depreciation on real
estate assets which Operating Company will lease from Realty Company and (ii)
interest expense related to long-term debt which will be incurred by Realty
Company. The following table should be read in conjunction with: "Operating
Company Selected Unaudited Pro Forma Consolidated Financial Data and
Comparative Per Share Data," "Operating Company Unaudited Pro Forma
Consolidated Financial Statements," "The Company and Operating Company Selected
Historical Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Operating
Company" and the historical consolidated financial statements of the Company
presented elsewhere in this Proxy Statement. The summary selected historical
financial data set forth below reflects the three-for-two stock split of
Company Common Stock distributed on October 25, 1994.

YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 3,116,004 $ 2,577,783 $ 2,323,956 $ 2,032,827 $ 1,727,436
Income before income
taxes.................. 224,466 83,180 32,364 132,920 79,065
Income from operations.. 135,128 48,005 8,363 86,139 68,976
Net income (loss)....... 130,933 48,005 (14,889) 85,898 65,656
Earnings (loss) per
common share:
Basic:
Income from
operations........... $ 1.96 $ 0.69 $ 0.22 $ 1.41 $ 1.28
Extraordinary loss on
extinguishment of
debt................. (0.06) - (0.38) - (0.04)
Cumulative effect on
prior years of a
change in accounting
for income taxes..... - - - - (0.02)
----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 1.90 $ 0.69 $ (0.16) $ 1.41 $ 1.22
=========== =========== =========== =========== ===========
Diluted:
Income from
operations........... $ 1.92 $ 0.68 $ 0.29 $ 1.28 $ 1.22
Extraordinary loss on
extinguishment of
debt................. (0.06) - (0.32) - (0.04)
Cumulative effect on
prior years of a
change in accounting
for income taxes..... - - - - (0.02)
----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 1.86 $ 0.68 $ (0.03) $ 1.28 $ 1.16
=========== =========== =========== =========== ===========
Shares used in
computing earnings
(loss) per common
share:
Basic................. 68,938 69,704 61,196 55,522 51,985
Diluted............... 70,359 70,702 71,967 69,014 60,640
FINANCIAL POSITION:
Working capital......... $ 445,086 $ 320,123 $ 239,666 $ 129,079 $ 114,339
Assets.................. 3,334,739 1,968,856 1,912,454 1,656,205 1,563,350
Long-term debt.......... 1,919,624 710,507 778,100 746,212 784,801
Stockholders' equity.... 905,350 797,091 772,064 596,454 485,550
OPERATING DATA:
Number of hospitals..... 60 38 36 33 26
Number of hospital li-
censed beds............ 5,273 3,325 3,263 2,511 2,198
Number of hospital pa-
tient days............. 767,810 586,144 489,612 403,623 293,367
Number of nursing cen-
ters................... 309 313 311 310 325
Number of nursing center
licensed beds.......... 40,383 39,619 39,480 39,423 40,759
Number of nursing center
patient days........... 12,622,238 12,566,763 12,569,600 12,654,016 12,770,435
Number of Vencare con-
tracts................. 3,877 4,346 4,072 2,648 1,628

OPERATING COMPANY
SELECTED UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA AND COMPARATIVE PER SHARE DATA

The following table sets forth certain selected unaudited pro forma
consolidated data of Operating Company as of and for the year ended December
31, 1997, which assumes that the Reorganization Transactions were consummated
on January 1, 1997. The pro forma information contained herein may not
necessarily reflect the financial position or results of operations of
Operating Company which would have been obtained had Operating Company been a
separate, publicly held company on such date or at the beginning of the period
indicated. In addition, the pro forma financial statements do not purport to be
indicative of future operating results of Operating Company.

The information below should be read in conjunction with the "Operating
Company Unaudited Pro Forma Consolidated Financial Statements" included
elsewhere herein.

YEAR ENDED
DECEMBER 31, 1997
-----------------
(DOLLARS IN
THOUSANDS, EXCEPT
PER SHARE DATA)

STATEMENT OF INCOME DATA:
Revenues................. $3,364,274
Income from operations... 46,902
Earnings per common share
from operations:
Basic................... 0.57
Diluted................. 0.56

DECEMBER 31, 1997
-----------------

BALANCE SHEET DATA:
Total assets............. $2,446,172
Long-term debt, including
amounts due within one
year.................... 1,000,000
Mandatory redeemable pre-
ferred stock............ 10,000
Common stockholders' eq-
uity.................... 965,712
Book value per common
share................... 12.25(1)

HISTORICAL PRO FORMA
---------- ---------

COMPARATIVE PER SHARE DATA:
EARNINGS PER COMMON SHARE FROM OPERATIONS:
Year ended December 31, 1997:
Basic............................................ $ 1.96 $ 0.57
Diluted.......................................... 1.92 0.56
BOOK VALUE PER COMMON SHARE:
At December 31, 1997.............................. 13.45 12.25(1)

- --------
(1) The computation is based upon the pro forma issued and outstanding shares
of Operating Company as of December 31, 1997.

THE ANNUAL MEETING

This Proxy Statement is being furnished to stockholders of the Company in
connection with the solicitation of proxies by the Company Board for use at
the Annual Meeting of Stockholders of the Company to be held on , ,
1998, at : .m. (local time), at , and at any adjournment or
postponement thereof. The Company's principal executive offices are located at
3300 Aegon Center, 400 West Market Street, Louisville, Kentucky 40202 and its
telephone number is (502) 596-7300. The principal executive offices of
Operating Company will be located at . Its telephone number will be
(502) . Ernst & Young LLP, the independent auditors of the Company, are
expected to be present at the Annual Meeting and will be afforded the
opportunity to make a statement if they desire to do so and available to
respond to appropriate questions.

PURPOSE OF THE ANNUAL MEETING

At the Annual Meeting, holders of Company Common Stock will be asked to
consider and vote upon the following proposals:

1. To approve the Distribution Agreement, which contemplates the
Reorganization Transactions, including, but not limited to, (a) certain
internal mergers and stock and asset transfers that will allocate the
assets and liabilities relating to the Properties to Realty Company and the
other assets and liabilities relating to the historical operations of the
Company, including the Development Properties, to Operating Company, (b)
issuance and sale of $10 million of non-voting preferred stock of Operating
Company, (c) distribution by the Company to the holders of Company Common
Stock of all the outstanding shares of Operating Company Common Stock on
the basis of one share of Operating Company Common Stock for [each][every]
share[s] of Company Common Stock, (d) Realty Company leasing to
Operating Company pursuant to the Master Lease Agreement all of the Leased
Properties, (e) completion by Operating Company of the development of the
Development Properties pursuant to the Development Agreement and thereafter
the sale to, and lease back from, Realty Company of the Development
Properties, and (f) the repayment by the Company of the funded portion of
the Company Bank Facility, the repurchase of up to all the Company Notes,
obtaining consents to amend the terms of the Company Notes, the exchange of
Company Notes for other securities or a combination of the foregoing, and
payment of certain transaction costs to be incurred in connection with the
Reorganization Transactions, all on terms satisfactory to the Company,
which amounts will be obtained through borrowings and securities issuances
by Realty Company of approximately $1.0 billion and through borrowings and
securities issuances by Operating Company of approximately $1.11 billion.

2. To approve the amendment of the Company Charter to (a) add certain
transfer restrictions preventing transfers that would result in the
transferee (other than certain stockholders) constructively holding in
excess of 9.9% of the capital stock of Realty Company and other related
provisions desirable for the Company to protect its status as a REIT for
Federal income tax purposes, (b) change the name of the Company to
"VenTrust, Inc.," and (c) increase the number of authorized shares of
Company Preferred Stock from 1,000,000 shares to 10,000,000 shares; and

3. To elect the directors named in this Proxy Statement to the Company
Board.

Completion of the Reorganization Transactions is conditioned upon, among
other things, stockholder approval of the Distribution Proposal and the
Charter Amendment Proposals. If the stockholders approve the Distribution
Proposal but do not approve the Charter Amendment Proposals, the Company Board
will reevaluate its intention to complete the Reorganization Transactions.
After such review, the Company Board could decide not to complete the
Reorganization Transactions or waive this condition and complete the
Reorganization Transactions despite such lack of approval. The Company Board
has further retained discretion, even if the stockholders approve the
Distribution Proposal and the other conditions to the Reorganization
Transactions are satisfied, to cancel or defer the Reorganization
Transactions, including the Distribution. See "The Distribution Proposal--
Conditions; Termination."

THE COMPANY BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR ALL OF
THE PROPOSALS.

For a description of the reasons for the Reorganization Transactions, see
"The Distribution Proposal--Background and Reasons for the Reorganization
Transactions." For a description of the reasons for the Charter Amendment
Proposals, see "The Charter Amendment Proposals." For a description of the
Election Proposal, see "Election of Directors."

RECORD DATE

Only holders of record of shares of Company Common Stock as of the close of
business on , 1998, the Record Date, will be entitled to receive notice
of and to vote at the Annual Meeting.

VOTES REQUIRED

Abstentions and executed proxies returned by a broker holding shares of
Company Common Stock in street name which indicate that the broker does not
have discretionary authority as to certain shares to vote on one or more
matters ("broker non-votes") will be considered present at the Annual Meeting
for purposes of establishing a quorum. Abstentions will not be voted. Broker
non-votes will not be counted as votes cast on any matter to which they
relate. Approval of the Distribution Proposal and the Charter Amendment
Proposals require the affirmative vote of a majority of the outstanding shares
of Company Common Stock entitled to vote thereon. Therefore, abstentions and
broker non-votes will have the effect of votes cast against these proposals.
The election of the directors named in this Proxy Statement will be determined
by the vote of a plurality of the shares present in person or represented by
proxy at the Annual Meeting and abstentions and broker non-notes will have no
effect on the outcome of the vote on such election.

As of January 1, 1998, directors and executive officers of the Company and
their affiliates beneficially owned an aggregate of 5,020,782 shares of
Company Common Stock (including shares which may be acquired within 60 days
upon exercise of employee stock options) or approximately 7.5% of the shares
of Company Common Stock outstanding on such date. The directors and executive
officers of the Company have indicated their intention to vote their shares of
Company Common Stock in favor of approval and adoption of each of the
Proposals.

VOTING AND REVOCATION OF PROXIES

All shares of Company Common Stock that are represented at the Annual
Meeting by properly executed proxies received prior to or at the Annual
Meeting and not revoked will be voted at the Annual Meeting in accordance with
the instructions indicated in such proxies. IF A PROXY IS SIGNED AND RETURNED
WITHOUT INDICATING ANY VOTING INSTRUCTIONS, SUCH PROXY WILL BE VOTED FOR
APPROVAL AND ADOPTION OF THE DISTRIBUTION PROPOSAL AND THE CHARTER AMENDMENT
PROPOSALS AND FOR THE ELECTION PROPOSAL. Any proxy given pursuant to this
solicitation may be revoked by the person giving it at any time before the
proxy is voted by filing a duly executed revocation or a duly executed proxy
bearing a later date with the Secretary of the Company prior to or at the
Annual Meeting or by voting in person at the Annual Meeting. All written
notices of revocation and other communications with respect to revocation of
proxies should be addressed as follows: Vencor, Inc., 3300 Aegon Center, 400
West Market Street, Louisville, Kentucky 40202, Attention: Secretary.
Attendance at the Annual Meeting will not in and of itself constitute
revocation of a proxy.

In the event that a quorum is not present at the time the Annual Meeting is
convened, or if for any other reason the Company believes that additional time
should be allowed for the solicitation of proxies, the Company may adjourn the
Annual Meeting with or without a vote of the stockholders. If the Company
proposes to adjourn the Annual Meeting by a vote of the stockholders, the
persons named in the enclosed form of proxy will vote all shares of Company
Common Stock for which they have voting authority in favor of such
adjournment. The Company Board is not currently aware of any business to be
acted upon at the Annual Meeting other than as described herein. If, however,
other matters are properly brought before the Annual Meeting, the persons
appointed as proxies will have discretion to vote or act thereon according to
their best judgment.

SOLICITATION OF PROXIES

In addition to solicitation by mail, directors, officers and employees of
the Company, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of the Company, personally or by
telephone, telecopy or telegram or other forms of communication. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to
forward soliciting materials to beneficial owners and will be reimbursed for
their reasonable expenses incurred in sending proxy materials to beneficial
owners. The Company will bear the cost of the solicitation of proxies.

In addition, the Company has retained D.F. King & Co., Inc. ("D.F. King") to
assist in the solicitation of proxies. The fee to be paid to D.F. King for
such services by the Company is not expected to exceed $ , plus reasonable
out-of-pocket costs and expenses.

APPRAISAL RIGHTS

Stockholders of the Company will not be entitled to appraisal rights under
Delaware Law in connection with any of the Proposals.

RISK FACTORS

Stockholders should consider the following factors, as well as the other
information set forth in this Proxy Statement, before voting on the Proposals.

In addition, this Proxy Statement includes forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements regarding the Company's, Realty
Company's or Operating Company's expected future financial position, results
of operations, cash flows, funds from operations, dividends, financing plans,
business strategy, budgets, projected costs and capital expenditures,
competitive positions, growth opportunities, expected lease income, ability to
qualify as a REIT, plans and objectives of management for future operations
and words such as "anticipate," "believe," "plan," "estimate," "expect,"
"intend," and other similar expressions are forward-looking statements. Such
forward-looking statements are inherently uncertain, and stockholders must
recognize that actual results may differ from the Company's expectations.
Stockholders of the Company will continue to be subject to the same
considerations and risks inherent in the business as currently conducted.

Actual future results and trends for Realty Company and Operating Company
may differ materially depending on a variety of factors discussed in this
"Risk Factors" section and elsewhere in this Proxy Statement. Factors that may
affect the plans or results of Realty Company and/or Operating Company
include, without limitation, (i) success in implementing their respective
business strategies, (ii) the nature and extent of future competition, (iii)
the extent of future healthcare reform and regulation, including cost
containment measures and changes in reimbursement policies and procedures,
(iv) Operating Company's ability to manage and operate the Leased Properties
(and upon completion of development, the Development Properties), (v)
increases in the cost of borrowing for each of Realty Company and Operating
Company, (vi) the ability of Operating Company to continue to deliver high
quality care and to attract private pay patients, (vii) Realty Company's
ability to implement its plan to acquire and eventually develop additional
properties, and (viii) changes in the general economic conditions and/or in
the markets in which Realty Company and Operating Company may, from time to
time, compete. Many of such factors are beyond the control of Realty Company
and Operating Company and their respective management.

NEW BUSINESS STRATEGY; NO OPERATING HISTORY

If the Reorganization Transactions occur, the Company will cease to be one
of the largest providers of long-term healthcare services and instead will
limit its activities generally to owning and acquiring real estate and real
estate related assets. Management of the Company has no experience operating a
REIT, and Realty Company, initially and for the foreseeable future, will need
to rely on Operating Company to generate sufficient cash flow from its
healthcare operations to enable Operating Company to meet the rent obligations
under the Leases.

DEPENDENCE OF REALTY COMPANY ON OPERATING COMPANY

Operating Company will be the lessee of all the Leased Properties and,
therefore, the primary source of Realty Company's revenues. Operating
Company's financial condition and ability to meet its rent obligations will
determine Realty Company's ability to make distributions to its stockholders.
As of December 31, 1997, after giving effect to the Reorganization
Transactions, Operating Company would have had approximately $1.0 billion of
indebtedness, excluding guarantees of obligations of its subsidiaries under
the Leases, and Operating Company may incur additional indebtedness in the
future. There can be no assurance that Operating Company will have sufficient
assets, income and access to financing to enable it to satisfy its obligations
under the Leases. In addition, the credit rating of Realty Company will be
affected by the general creditworthiness of Operating Company. See "Operating
Company Unaudited Pro Forma Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Operating Company--Liquidity."

Due to Realty Company's dependence on Operating Company's rental payments as
the primary source of Realty Company's revenues, Realty Company may be limited
in its ability to enforce its rights under the Master Lease Agreement or to
terminate a Lease. Failure by Operating Company to comply with the terms of a
Lease or to comply with Healthcare Regulations (as defined herein) could
require Realty Company to find another lessee for such Lease and there could
be a decrease or cessation of rental payments by Operating Company. In such
event, Realty Company may be unable to locate a suitable lessee at similar
rental rates, which would have the effect of reducing Realty Company's rental
revenues. See "Relationship Between Realty Company and Operating Company After
the Reorganization Transactions--Master Lease Agreement," "--Healthcare
Industry Risks--Extensive Regulation" and "--Conflicts of Interest."

The Company currently leases eight long-term acute care hospitals and 78
nursing centers from third parties (the "Third Party Leases"). In connection
with the Reorganization Transactions, the Company will seek to assign these
leases to Operating Company and obtain releases for the Company from the
lessors. If such assignments and releases cannot be obtained, the Company will
sublease these properties to Operating Company. There can be no assurance that
the Company will receive all consents to assignment of and release from the
Third Party Leases. In order for the Company to obtain consents to assignment,
Realty Company may have to remain primarily liable for the obligations of
Operating Company under the Third Party Leases. There can be no assurance that
Operating Company will have sufficient assets, income and access to financing
to enable it to satisfy its obligations under the Third Party Leases. As a
result, if Operating Company were unable to satisfy such obligations, Realty
Company would be obligated to satisfy the Third Party Lease obligations which
could affect Realty Company's ability to make distributions to its
stockholders.

LACK OF CONTROL BY REALTY COMPANY OVER HOSPITAL AND NURSING CENTER PROPERTIES

Realty Company will be dependent on the ability of Operating Company, as
triple-net lessee under the Master Lease Agreement, to manage and maintain the
Leased Properties and will grant Operating Company certain rights of first
offer to lease and operate hospital and nursing center properties subsequently
acquired or developed by Realty Company. Realty Company may be unable to take
action if it believes Operating Company is operating one of the Leased
Properties inefficiently or in a manner adverse to Realty Company's interests,
unless a specific material default exists under a Lease. In the case of such a
default, Realty Company's redress will be limited to terminating the
applicable Lease and seeking to recover damages from Operating Company. See
"Relationship Between Realty Company and Operating Company After the
Reorganization Transactions--Master Lease Agreement." If a Lease is
terminated, Realty Company will be required to find another suitable lessee.
See "--Dependence of Realty Company on Operating Company."

CONFLICTS OF INTEREST

GENERAL

Because of the pre-existing and continuing ownership interests and
interrelationships between Realty Company and Operating Company, there are
inherent conflicts of interest and loyalties with respect to the
Reorganization Transactions and the ongoing operations of Realty Company and
Operating Company. See "The Distribution Proposal--The Reorganization
Transactions." W. Bruce Lunsford will be Chairman of the Board, President and
Chief Executive Officer of Operating Company and Chairman of the Board and
Chief Executive Officer of Realty Company, and one other director of Realty
Company and Operating Company will be the same. Consequently, the terms of
certain transactions and agreements, including the Master Lease Agreement and
other agreements entered into between Realty Company and Operating Company
after the Reorganization Transactions, will not reflect arm's length
negotiations between independent parties. Management believes the Master Lease
Agreement reflects terms that would have been obtained in arm's length
negotiations.

CONFLICTING DEMANDS FOR MANAGEMENT TIME

Mr. Lunsford will be Chairman of the Board, President and Chief Executive
Officer of Operating Company and Chairman of the Board and Chief Executive
Officer of Realty Company. Therefore, Mr. Lunsford will be subject to
competing demands on his time.

CONFLICTING CORPORATE OBJECTIVES AND INHERENT CONFLICTS OF INTEREST

Operating Company and Realty Company will be permitted to pursue business
opportunities independently from one another subject to certain rights of
first offer, and their interests may conflict. Subsequent to the
Reorganization Transactions, the interests of Realty Company and Operating
Company may potentially conflict because, among other reasons, (i) under the
Distribution Agreement the liabilities of the Company are to be divided
between Realty Company and Operating Company; (ii) Operating Company will
lease the Leased Properties from Realty Company pursuant to the Master Lease
Agreement; (iii) Operating Company will develop the Development Properties and
thereafter Operating Company will sell to, and lease back from, Realty
Company, the Development Properties pursuant to the Development Agreement;
(iv) Realty Company and Operating Company will each have certain rights of
first offer under the Participation Agreement; and (v) certain corporate and
administrative services will be provided by Operating Company to Realty
Company, and certain assets and liabilities will be allocated to Operating
Company and Realty Company under the terms of the Employee Benefits Agreement,
the Intellectual Property Agreement, the Tax Sharing Agreement and the
Transition Services Agreement. Each of Operating Company and Realty Company
will implement conflicts of interests policies, including the creation of a
committee of independent directors that will review transactions presenting a
conflict. There can be no assurance that conflicts of interest policies
adopted by Realty Company and Operating Company will successfully eliminate
the influence of such conflicts, and as a result most decisions relating to
the contractual and other business relationships between Realty Company and
Operating Company will be subject to conflicts of interests and loyalties. See
"Relationship Between Realty Company and Operating Company After the
Reorganization Transactions."

SUBSTANTIAL LEVERAGE

In connection with the Reorganization Transactions, the Company expects that
all or substantially all of the Company's existing $2.0 billion of
indebtedness, consisting primarily of amounts drawn under the Company Bank
Facility and $750 million of Company Notes, will be repaid or repurchased and
refinanced with bank borrowings and securities issuances by each of Realty
Company and Operating Company. In lieu of repurchasing the Company Notes, the
Company may obtain consents to amend the terms of the Company Notes, exchange
Company Notes for other securities or some combination of the foregoing.

REALTY COMPANY

Realty Company is expected to have approximately $985 million in total
indebtedness as of the Distribution Date (the "Realty Company Funded Debt")
and approximately $215 million in credit available under the Realty Company
Credit Facility, excluding potential liability under the Third Party Leases.
It is expected that necessary capital will be available from the following
sources: (i) the Realty Company Credit Facility in the amount of $250 million,
(ii) the Realty Company Term A Loan in the amount of $250 million, (iii) the
Realty Company Term B Loan in the amount of $250 million, and (iv) the Realty
Company CMBS Debt in the amount of $450 million (the Realty Company Credit
Facility, Realty Company Term A Loan, Realty Company Term B Loan and Realty
Company CMBS Debt being collectively referred to as, the "Realty Company Debt
Facilities").

Realty Company initially will be substantially dependent upon lease payments
from Operating Company to meet its interest expense and principal repayment
obligations under the Realty Company Debt Facilities, and all such obligations
will need to be met before distributions for any period are made to holders of
Realty Company Common Stock. In addition, the credit rating of Realty Company
will be affected by the general creditworthiness of Operating Company.

A portion of Realty Company's available borrowings may be used to purchase
the Development Properties and acquire additional properties. In addition,
Realty Company may have to remain primarily liable for the obligations of
Operating Company with respect to the Third Party Leases which will be
assigned to Operating Company in the Reorganization Transactions.

Subject to limitations in the Realty Company Debt Facilities, Realty Company
may borrow additional amounts from the same or other lenders in the future, or
may issue corporate debt securities in public or private offerings. Certain of
such additional borrowings may be secured by properties and leasehold
interests held by Realty Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Realty Company--Liquidity and
Capital Resources" and "The Distribution Proposal--The Reorganization
Transactions--Financing."

Adverse economic conditions could cause the terms on which borrowings become
available to be unfavorable. In such circumstances, if Realty Company is in
need of capital to repay indebtedness in accordance with its terms or
otherwise it could be required to liquidate one or more investments in
properties at times that may not permit realization of the maximum return on
such investments, and which could result in adverse tax consequences to Realty
Company. Moreover, Realty Company's level of indebtedness and costs of
obtaining additional financing could impede Realty Company's ability to
implement its growth strategy. See "--Risks Associated with REIT Status--
Possible Taxation on Capital Gains."

There can be no assurances that Realty Company will be able to meet its debt
service obligations and, to the extent that it cannot, Realty Company risks
the loss of some or all of its assets, including the Properties, to
foreclosure.

OPERATING COMPANY

Operating Company is expected to have approximately $1.0 billion in
indebtedness as of the Distribution Date (the "Operating Company Funded Debt")
and approximately $300 million available under the Operating Company Credit
Facility, excluding guarantees of obligations of its subsidiaries under the
Leases and the Third Party Leases.

It is expected that necessary capital will be available from the following
sources: (i) the Operating Company Credit Facility in the amount of $300
million, (ii) the Operating Company Term A Loan in the amount of $400 million,
(iii) the Operating Company Term B Loan in the amount of $400 million, (iv)
the Operating Company Bridge Loan in the amount of $200 million, (v) $10
million of Operating Company Series A Preferred Stock and (vi) the $100
million Operating Company Offering. It is anticipated that the Operating
Company Bridge Loan will be repaid from the proceeds of the sale of certain
non-strategic assets, including Atria Common Stock. However, if Operating
Company is unable to sell the Atria Common Stock or other assets, Operating
Company expects that it would be required to refinance the Operating Company
Bridge Loan with the Operating Company Credit Facility or a public debt or
equity offering or a combination thereof.

Subject to limitations in the Operating Company Debt Facilities, Operating
Company may borrow additional amounts from the same or other lenders in the
future, or may issue corporate debt securities in public or private offerings.
Certain of such additional borrowings may be secured by properties and
leasehold interests held by Operating Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Operating
Company--Liquidity and Capital Resources," and "The Distribution Proposal--The
Reorganization Transactions--Financing."

Operating Company's future results of operations may not produce sufficient
cash flows to permit it to service its debt and other financing obligations,
including the Leases and the Third Party Leases. In addition, adverse economic
conditions could cause the terms on which borrowings become available to be
unfavorable. Moreover, Operating Company's level of indebtedness could hinder
Operating Company's growth strategy unless it can obtain substantial
additional financing to fund its growth strategy. Accordingly, there can be no
assurances that Operating Company will be able to meet its debt service
obligations and, to the extent that it cannot, Operating Company risks the
loss of some or all of its assets to foreclosure.

ABILITY TO MAINTAIN DISTRIBUTIONS

Beginning January 1, 1999, Realty Company's distributions to its
stockholders on a quarterly basis are expected to be equal to a payout ratio
of approximately 80% of Funds From Operations. See "Distribution and

Dividend Policy--Realty Company." Decreases in Funds From Operations due to
unfinanced expenditures for acquisitions of properties or increases in the
number of shares of Realty Company Common Stock outstanding without
commensurate increases in Funds From Operations each would adversely affect
the ability of Realty Company to maintain distributions to its common
stockholders. In addition, Realty Company's indebtedness may restrict
dividends. See "The Distribution Proposal--The Reorganization Transactions--
Financing." Moreover, the failure of Operating Company to make rental payments
under the Leases would materially impair the ability of Realty Company to make
distributions. Consequently, there can be no assurance that Realty Company
will be able to make distributions at the anticipated distribution rate or any
other rate. To qualify as a REIT for Federal income tax purposes, Realty
Company will be required to pay out at least 95% of its net income as
distributions each year to its stockholders. See "Certain Federal Income Tax
Considerations." Consequently, Realty Company's ability to pay distributions
to qualify as a REIT for Federal income tax purposes is expected to depend in
part on its ability to generate Funds From Operations or otherwise obtain
sufficient capital to make such distributions. See "Distribution and Dividend
Policy--Realty Company."

HEALTHCARE INDUSTRY RISKS

Through Realty Company's dependence on lease payments from Operating Company
as its primary source of revenue, Realty Company as well as Operating Company
will be directly impacted by the risks associated with the healthcare
industry. The ability of Operating Company and other lessees to generate
profits and pay rent under their leases may be adversely impacted by such
risks. See "Governmental Regulation."

LIMITS ON REIMBURSEMENT

Operating Company will derive a substantial portion of its net operating
revenues from third-party payors, including the Medicare and Medicaid
programs. In 1997 and 1996, Operating Company would have derived approximately
60% and 62% of its total revenues from the Medicare and Medicaid programs,
respectively. Such programs are highly regulated and subject to frequent and
substantial changes. The recently enacted Balanced Budget Act of 1997 (the
"Budget Act") is intended to reduce the increase in Medicare payments by $115
billion over the next five years and makes extensive changes in the Medicare
and Medicaid programs. 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 by
private payors are expected to continue. There can be no assurances that
adequate reimbursement levels will continue to be available for services to be
provided by Operating Company which are currently being reimbursed by
Medicare, Medicaid or private payors. Significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on Operating Company's liquidity, financial condition and
results of operations.

EXTENSIVE REGULATION

The healthcare industry is subject to extensive Federal, state and local
regulation including, but not limited to, regulations relating to licensure,
conduct of operations, ownership of facilities, addition of facilities,
services and prices for services (collectively, the "Healthcare Regulations").
In particular, Medicare and Medicaid antikickback, antifraud and abuse
amendments codified under Section 1128(B)(b) of the Social Security Act (the
"Antikickback Amendments") prohibit certain business practices and
relationships that might affect the provisions and cost of healthcare services
reimbursable under Medicare and Medicaid, including the payment or receipt of
remuneration for the referral of patients whose care will be paid by Medicare
or other governmental programs. Sanctions for violating the Antikickback
Amendments include criminal penalties and civil sanctions, including fines and
possible exclusion from government programs such as the Medicare and Medicaid
programs. In the ordinary course of its business, the Company is subject
regularly to inquiries, investigations and audits by the Federal and state
agencies that oversee these laws and regulations.

Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the Department of Health and Human Services ("HHS") has issued
regulations that describe some of the conduct and business relationships
permissible under the Antikickback Amendments ("Safe Harbors"). The fact that
a given business

arrangement does not fall within a Safe Harbor does not render the arrangement
per se illegal. Business arrangements of healthcare service providers that
fail to satisfy the applicable Safe Harbors criteria, however, risk increased
scrutiny and possible sanctions by enforcement authorities.

The Health Insurance Portability and Accountability Act of 1997, which
became effective January 1, 1997, amends, among other things, Title XI (42
U.S.C. 1301 et seq.) to broaden the scope of current fraud and abuse laws to
include all health plans, whether or not they are reimbursed under Federal
programs.

In addition, Section 1877 of the Social Security Act, which restricts
referrals by physicians of Medicare and other government-program patients to
providers of a broad range of designated health services with which they have
ownership or certain other financial arrangements, was amended effective
January 1, 1995, to significantly broaden the scope of prohibited physician
referrals under the Medicare and Medicaid programs to providers with which
they have ownership or certain other financial arrangements (the "Self-
Referral Prohibitions"). Many states have adopted or are considering similar
legislative proposals, some of which extend beyond the Medicaid program to
prohibit the payment or receipt of remuneration for the referral of patients
and physician self- referrals regardless of the source of the payment for the
care. These laws and regulations are extremely complex and little judicial or
regulatory interpretation exists. The Company does not believe its
arrangements are, or that Operating Company's arrangements will be, in
violation of the Self-Referral Prohibitions. There can be no assurance,
however, that governmental officials charged with responsibility for enforcing
the provisions of the Self-Referral Prohibitions will not assert that one or
more of Operating Company's arrangements is in violation of such provisions.

The Budget Act also provides a number of new antifraud and abuse provisions.
The Budget Act contains new civil monetary penalties for violations of the
Antikickback Amendments and imposes an affirmative duty on providers to insure
that they do not employ or contract with persons excluded from the Medicare
program. The Budget Act also provides a minimum ten year period for exclusion
from participation in Federal healthcare programs for persons 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. Certificates of Need ("CON"),
which are issued by governmental agencies with jurisdiction over healthcare
facilities, are 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. Realty Company will own and
Operating Company will operate hospitals in 11 states that require state
approval for the expansion of its facilities and services under CON programs.
There can be no assurance that the Company or Operating Company will be able
to obtain a CON for any or all future projects. If Realty Company or Operating
Company are unable to obtain the requisite CON, their growth and business
could be adversely affected.

The Company is unable to predict the future course of Federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on Realty Company's or Operating Company's financial condition and
results of operations.

HEALTHCARE REFORM LEGISLATION

Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The
Budget Act, enacted in August 1997, contains 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,
over the next five years. Under the Budget Act, annual growth rates for
Medicare will be reduced from over 10% to approximately 7.5% for the next five
years based on specific program baseline projections from the last five years.
Virtually all spending reductions will come from providers and changes in
program components. The Budget Act will affect reimbursement systems for each
of Operating Company's operating units and thereby affect its ability to make
the rental payments under the Leases.

The Budget Act will reduce payments to many of Operating Company's
facilities, including, but not limited to, payments made to Operating
Company's hospitals, by reducing incentive payments pursuant to the Tax Equity
and Fiscal Responsibility Act of 1982 ("TEFRA"), reducing allowable costs for
capital expenditures and bad debts and reducing payments for services to
patients transferred from a prospective payment system hospital. The Budget
Act also requires the establishment of a prospective payment system ("PPS")
for nursing centers for cost reporting periods beginning on or after July 1,
1998. During the first three years, the per diem rates for nursing centers
will be based on a blend of facility-specific costs and Federal costs.
Thereafter, the per diem rates will be based solely on Federal costs. The
rates for such services have not been established or published. The payment
received under PPS will cover all services for Medicare patients including all
ancillary services, such as respiratory therapy, physical therapy,
occupational therapy, speech therapy and certain covered drugs. The Budget Act
also requires an adjustment to the payment system for home health services for
cost reporting periods beginning on or after October 1, 1997. The new system
will adjust per visit limits and establish per beneficiary annual spending
limits. A prospective payment system for home health services will be
established by October 1, 1999.

The Company management believes that the Budget Act will adversely impact
Operating Company's hospital business by reducing payments previously
described. Based on information currently available, management believes that
the new PPS will benefit its nursing center operations because (i) the Company
expects that its casemix index will be higher than the national average
casemix index and based upon expected payment rates this will result in
increases in payments per patient day and (ii) because the Company expects to
benefit from its ability to reduce the cost of providing ancillary services to
residents in its facilities. The national average casemix index, Operating
Company's casemix index and the average national rate will be established by
the Health Care Financing Administration ("HCFA"), and as of the date hereof
the Company does not know what these amounts will be. The Company believes
that Operating Company's anticipated growth in nursing center profitability
would be reduced if Congress acts to delay the effective date of PPS. As the
nursing center industry adapts to the cost containment measures inherent in
the new prospective payment system, the Company believes that the volume of
ancillary services provided per patient day to nursing center residents could
decline. In addition, as a result of these changes, many nursing facilities
are likely to elect to provide ancillary services to its residents through
internal staff and will no longer contract with outside parties for ancillary
services. For these reasons and others, since the enactment of the Budget Act,
sales of new contracts have declined and may continue to decline subject to
the Company's success in implementing its Vencare comprehensive, full-service
contracts sales strategy. The Company is developing, and Operating Company
will be actively implementing, strategies and operational modifications to
address these changes in the Federal reimbursement system.

In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services that will be provided by Operating Company
(including the rehabilitation contract therapy business acquired as part of
the acquisition of TheraTx). Under the new rules, HCFA established salary
equivalency guidelines for speech and occupational therapy services and
revised guidelines for physical and respiratory therapy services. The
guidelines are based on a blend of data from wage rates for hospitals and
nursing facilities, and include salary, fringe benefit and expense factors.
Rates are defined by specific geographic market areas, based upon a modified
version of the hospital wage index. Based upon its initial review of the final
rules, the Company believes these rules are slightly more favorable to the
Company than the proposed rules published in March 1997. Under the new
prospective payment system for nursing centers, the reimbursement for these
services provided to nursing centers will be a component of the total
reimbursement allowed per nursing center patient and the salary equivalency
guidelines will no longer be applicable.

There also continues to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as Operating Company. 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 long-term care hospitals and changes in the
Medicaid reimbursement system applicable to Operating Company's hospitals.
There are also a number of legislative proposals including

cost caps and the establishment of Medicaid prospective payment systems for
nursing centers. Moreover, by repealing the Boren Amendment, the Budget Act
eases existing impediments on the states' ability to reduce their Medicaid
reimbursement levels.

There can be no assurance that the Budget Act, new salary equivalency rates,
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on Realty Company's and Operating Company's financial
condition, results of operations and liquidity.

HIGHLY COMPETITIVE INDUSTRY

The healthcare services industry is highly competitive. Operating Company
faces competition from general acute care hospitals and long-term care
hospitals which provide services comparable to those that will be offered by
Operating Company's hospitals. Many general acute care hospitals are larger
and more established than Operating Company's hospitals. Certain hospitals
that will compete with Operating Company's hospitals are operated by not-for-
profit, nontaxpaying or governmental agencies, which can finance capital
expenditures on a tax-exempt basis, and which receive funds and charitable
contributions unavailable to Operating Company's hospitals. Operating Company
may experience increased competition from existing hospitals as well as
hospitals converted, in whole or in part, to specialized care facilities.
Operating Company's nursing centers will compete on a local and regional basis
with other nursing centers, and competition will also exist for the Vencare
health services program. It is also expected that Realty Company and Operating
Company will continue to compete with other healthcare companies for
hospitals, nursing facilities and other healthcare assets and businesses.

COMPETITION FOR INVESTMENT OPPORTUNITIES

Each of Realty Company and Operating Company may compete for investment
opportunities with entities that have substantially greater financial
resources than Realty Company or Operating Company. Realty Company's ability
to compete successfully for such opportunities is affected by many factors,
including the cost to Realty Company of obtaining debt and equity capital as
compared to its competitors. The lower the cost of capital of Realty Company
the lower the return on investments that will be required to operate
profitably. Competition may generally reduce the number of suitable investment
opportunities available to Realty Company or Operating Company and increase
the bargaining power of property owners seeking to sell.

UNINSURED AND UNDERINSURED LOSSES

The Master Lease Agreement requires that comprehensive insurance and hazard
insurance be maintained by Operating Company substantially at the levels
currently maintained with respect to each of the Leased Properties including
liability, fire and extended coverage. Leases for subsequently acquired
healthcare properties will contain similar provisions. There are certain types
of losses, generally of a catastrophic nature, such as earthquake and floods,
however, that may be uninsurable or not economically insurable. Insurance
coverage may not be sufficient to pay the full current market value or current
replacement cost of a loss. Inflation, changes in building codes and
ordinances, environmental considerations, and other factors also might make it
infeasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds received might not be adequate to restore the economic
position with respect to such property.

ACQUISITION AND DEVELOPMENT RISKS

Realty Company is expected to pursue acquisitions of additional healthcare
properties. Acquisitions entail risks that investments will fail to perform in
accordance with expectations and that estimates of the cost of improvements
necessary to market acquired properties will prove inaccurate, as well as
general investment risks associated with any new real estate investment. If
market conditions are favorable, Realty Company may pursue opportunities in
non-healthcare real estate. New project development is subject to numerous
risks, including risks of construction delays or cost overruns that may
increase project costs, new project commencement risks such as receipt of
zoning, occupancy and other required governmental approvals and permits and
the incurrence of

development costs in connection with projects that are not pursued to
completion. The fact that Realty Company must distribute 95% of its net
taxable income in order to maintain its qualification as a REIT may limit
Realty Company's ability to rely upon rental payments from the Properties or
subsequently acquired properties to finance acquisitions or new developments.
As a result, if debt or equity financing is not available on acceptable terms,
further acquisitions or development activities might be curtailed or Cash
Available for Distribution might be adversely affected.

RISKS ASSOCIATED WITH REIT STATUS

FAILURE TO QUALIFY AS A REIT

Realty Company is expected to operate and to cause its subsidiaries to
operate so as to qualify as a REIT for Federal income tax purposes as of the
Conversion Date. The Company has not operated as a REIT historically. The
continued qualification of Realty Company as a REIT will depend on its
continuing ability to meet various requirements concerning, among other
things, the ownership of its outstanding stock, the nature of its assets, the
sources of its income, and the amount of its distributions to its
stockholders. If Realty Company were to fail to qualify as a REIT in any
taxable year, it would not be allowed a deduction for distributions to
stockholders in computing its taxable income and would be subject to Federal
income tax (including any applicable minimum tax) on its taxable income at
regular corporate rates. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretation. The complexity of these provisions
is greater in the case of Realty Company because of the Reorganization
Transactions that Realty Company has undertaken in order to qualify as a REIT,
including the Distribution and the elimination of any earnings and profits
accumulated before the qualification of Realty Company as a REIT.
Qualification as a REIT also involves the determination of various factual
matters and circumstances not entirely in Realty Company's control. Unless
entitled to relief under certain Code provisions, Realty Company also would be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. As a result, Realty Company's Cash
Available for Distribution would be reduced for each of the years involved.
Although Realty Company currently is expected to operate in a manner designed
to qualify as a REIT, it is possible that future economic, market, legal, tax
or other considerations may cause the Realty Company Board to revoke the REIT
election. See "Certain Federal Income Tax Considerations."

TAX RISKS FROM RELATED PARTY RENTALS

If Realty Company and Operating Company are treated by the Internal Revenue
Service (the "Service") as being under common control, the Service will be
authorized to reallocate income and deductions between them to reflect arm's-
length terms. Were the Service successfully to establish that rents were
excessive, (i) Operating Company would be denied a deduction for the excessive
portion, (ii) Operating Company would be subject to a penalty on the portion
deemed excessive and (iii) Operating Company stockholders would be deemed to
have received a distribution that was then contributed to the capital of
Realty Company. To the extent that rents were insufficient, Realty Company (i)
would be subject to a penalty on the portion deemed insufficient and (ii)
would be deemed to have made a distribution to its shareholders equal to the
insufficiency. The Company believes the Master Lease Agreement reflects terms
that would have been obtained in arm's length negotiations.

Tenet Healthcare Corporation ("Tenet") will beneficially own, in the
aggregate, 12.3% of Company Common Stock and Operating Company Common Stock as
a result of the Distribution (based on the information contained in the
Schedule 13G dated January 10, 1996 filed by Tenet). Under applicable
provisions of the Code, Realty Company will not be treated as a REIT unless it
satisfies, among other things, requirements relating to the sources of its
gross income. See "Certain Federal Income Tax Considerations." Rents received
or accrued by Realty Company from Operating Company will not be treated as
qualifying rent for purposes of these requirements if Realty Company is
treated, either directly or under the applicable attribution rules, as owning
10% or more of Operating Company Common Stock. Realty Company will be treated
as owning, under the applicable attribution rules, 10% or more of Operating
Company Common Stock at any time that Tenet owns,

directly or under the applicable attribution rules, (a) 10% or more of Realty
Company Common Stock and (b) 10% or more of Operating Company Common Stock.
Thus, in order for the rents received or accrued by Realty Company from
Operating Company to be treated as qualifying rent for purposes of the REIT
gross income requirements, the Company intends to reduce Tenet's ownership in
Realty Company or Operating Company (or both) to under 10% prior to the
Conversion Date. If, prior to the Conversion Date, Tenet does not directly or
under the applicable attribution rules own less than 10% of the Common Stock
of either Realty Company or Operating Company, Realty Company may fail to
qualify as a REIT for the 1999 tax year (and for all subsequent years in which
Tenet's interest is not so reduced) and would be subject to tax on its taxable
income at regular corporate rates. In addition, distributions to stockholders
during such tax years would not be deductible by Realty Company and would not
be required to be made.

ADVERSE EFFECTS OF REIT MINIMUM DISTRIBUTION REQUIREMENTS

In order to qualify as a REIT, Realty Company generally will be required
each year to distribute to its stockholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, Realty Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it during (or required to be paid during) any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year (other than
capital gain income which Realty Company elects to retain and pay tax on) and
(iii) 100% of its undistributed income from prior years. Pursuant to recently
enacted legislation, Realty Company may elect to retain rather than distribute
its net long-term capital gains. The effect of such an election is that (i)
Realty Company is required to pay the tax on such gains, (ii) U.S.
Stockholders, while required to include their proportionate share of the
undistributed long-term capital gains in income, will receive a credit or
refund for their share of the tax paid by Realty Company, and (iii) the basis
of a U.S. Stockholder's stock would be increased by the amount of the
undistributed long-term capital gains (minus the amount of capital gains tax
paid by Realty Company) included in the U.S. Stockholder's long-term capital
gains.

Following the Conversion Date, Realty Company will be required to make
distributions to its stockholders to comply with the 95% distribution
requirement and to avoid the nondeductible excise tax. Realty Company's Funds
From Operations will be generated primarily by its share of the income from
the Master Lease Agreement. Differences in timing between taxable income and
Funds From Operations could require Realty Company to borrow funds on a short-
term basis to meet the 95% distribution requirement and to avoid the
nondeductible excise tax. Restrictions in Realty Company's indebtedness,
including the Realty Company Debt Facilities, could preclude it from meeting
the 95% distribution requirement.

Distributions by Realty Company will be determined by the Realty Company
Board and will be dependent on a number of factors, including the amount of
Realty Company's Funds From Operations, Realty Company's financial condition,
any decision by the Realty Company Board to reinvest funds rather than to
distribute such funds, Realty Company's capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Realty Company Board deems relevant. For Federal income tax
purposes, distributions paid to stockholders may consist of ordinary income,
capital gains, nontaxable return of capital, or a combination thereof. Realty
Company will provide its stockholders with an annual statement as to its
designation of the taxability of distributions. See "Certain Federal Income
Tax Considerations--Taxation of Realty Company."

LIMITATIONS ON ACQUISITIONS AND CHANGES IN CONTROL

In order for Realty Company to maintain its qualification as a REIT
following the Conversion Date, no more than 50% of the value of its
outstanding stock may be owned, directly or constructively, by five or fewer
individuals or entities (as set forth in the Code and as referred to herein as
an "Individual"). Upon consummation of the Reorganization Transactions, the
Company Charter will, subject to adoption of the Charter Amendment Proposals,
prohibit, subject to certain exceptions, direct, indirect and constructive
ownership of more than 9.9% of the outstanding shares of capital stock of
Realty Company by any Individual (except for certain existing stockholders)
(the "Ownership Limit"). See "Certain Federal Income Tax Considerations--
Taxation

of Realty Company." The constructive ownership rules are complex and may cause
shares of capital stock owned directly or constructively by a group of related
individuals or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of the outstanding
shares of Realty Company's capital stock (or the acquisition of an interest in
an entity which owns shares of Realty Company's capital stock) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.9% of the
outstanding shares of Realty Company's capital stock and thus subject such
shares of Realty Company's capital stock to the Ownership Limit. As a result,
the acquisition (directly or indirectly) of less than 9.9% of the outstanding
capital stock of Realty Company by an individual or entity could cause
constructive ownership of more than 9.9% of the outstanding capital stock of
Realty Company. A transfer of shares to a person who, as a result of the
transfer violates the Ownership Limit, may be void under some circumstances or
may be transferred to a trust, for the benefit of one or more qualified
charitable organizations designated by Realty Company, with the intended
transferee having only a right to share (to the extent of the transferee's
original purchase price for such shares) in proceeds from the trust's sale of
such shares. See "Certain Federal Income Tax Considerations--Taxation of
Realty Company" and "The Charter Amendment Proposals" for additional
information regarding the Ownership Limit.

POSSIBLE TAXATION ON CAPITAL GAINS

Pursuant to an election to be made by Realty Company and to be made by its
subsidiaries under Internal Revenue Service Notice 88-19, if during the ten-
year period beginning on the first day (the "Qualification Date") of the first
taxable year for which Realty Company qualified as a REIT, Realty Company or
any such subsidiary recognizes gain on the disposition of any property
(including, any partnership interest) held by Realty Company or any such
subsidiary, then, to the extent of the excess of (i) the fair market value of
such property as of the Qualification Date over (ii) the adjusted income tax
basis of Realty Company or any such subsidiary in such property ("built-in
gain") as of the Qualification Date, Realty Company and such subsidiary as the
case may be, will be required to pay a corporate level Federal income tax on
such gain at the highest regular corporate rate. The amount of gain upon which
Realty Company will be required to pay tax will not exceed Realty Company's
aggregate net built-in gain as of the Qualification Date, i.e., the amount by
which the fair market value of all its assets exceeded then adjusted income
tax basis on that date. Realty Company and its subsidiaries are not currently
expected to dispose of any such property in a manner that would trigger such
tax consequences but there can be no assurance that such dispositions will not
occur in the future.

Distributions to stockholders are taxable as dividends to the extent of
Realty Company's current and accumulated earnings and profits until the
Conversion Date. Realty Company's earnings and profits would be increased by a
gain on the sale of property. That gain will include built-in gain as of the
Qualification Date.

EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK AND COST OF FUNDS

One of the factors that may influence the price of Realty Company Common
Stock in public trading markets will be the annual yield from distributions by
Realty Company on the Realty Company Common Stock as compared to yields on
other financial instruments. Thus, an increase in market interest rates will
result in higher yields on other financial instruments, which could adversely
affect the market price of the shares of Realty Company Common Stock. In
addition, increases in market interest rates could increase the cost of funds
borrowed to make future investments.

LIMITED RELEVANCE OF FINANCIAL INFORMATION

The historical consolidated and pro forma financial information included in
this Proxy Statement may not necessarily reflect the results of operations,
financial position and cash flows of Operating Company or Realty Company in
the future or the results of operations, financial position and cash flows had
Operating Company operated as a separate stand-alone entity, had the Company
operated as a REIT and had the entities operated under the relationships they
will have in the future during the periods presented. The financial
information included herein does not reflect a number of significant changes
that may occur in the funding and operations of

Operating Company or Realty Company as a result of or in connection with the
Reorganization Transactions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Realty Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Operating Company," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company," "Realty Company
Unaudited Pro Forma Consolidated Financial Statements" and "Operating Company
Unaudited Pro Forma Consolidated Financial Statements."

POTENTIAL LIABILITIES DUE TO FRAUDULENT TRANSFER CONSIDERATIONS AND LEGAL
DIVIDEND REQUIREMENTS

The Reorganization Transactions are subject to review under Federal and
state fraudulent conveyance laws. Under these laws, if a court in a lawsuit by
an unpaid creditor or a representative of creditors (such as a trustee or
debtor-in-possession in bankruptcy of the Company or any of its respective
subsidiaries) were to determine that the Company did not receive fair
consideration or reasonably equivalent value for distributing the stock
distributed in the Distribution and, at the time of the Distribution, the
Company or any of its subsidiaries (i) were insolvent or would be rendered
insolvent, (ii) were to have had unreasonably small capital with which to
carry on its business and all businesses in which it intended to engage, or
(iii) were to have intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature, then such court could
order the holders of the stock distributed in the Distribution to return the
value of the stock and any dividends paid thereon, bar future dividend and
redemption payments on the stock, and invalidate, in whole or in part, the
Distribution as a fraudulent conveyance.

The measure of insolvency for purposes of the fraudulent conveyance laws
will vary depending on which jurisdiction's law is applied. Generally,
however, an entity would be considered insolvent if the present fair saleable
value of its assets is less than (i) the amount of its liabilities (including
contingent liabilities) or (ii) the amount that will be required to pay its
probable liabilities on its existing debts as they become absolute and mature.
No assurance can be given as to what standard a court would apply in
determining insolvency or that a court would not determine that the Company or
any of its subsidiaries was "insolvent" at the time of or after giving effect
to the Distribution.

In addition, the Distribution 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
preferred stock.

The Company Board believes that (i) the Company and each of its subsidiaries
will be solvent (in accordance with the foregoing definitions) at the time of
Distribution, will be able to repay its debts as they mature following the
Reorganization Transactions and will have sufficient capital to carry on their
respective businesses and (ii) the Reorganization Transactions will be made
entirely in compliance with Section 173 of 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 Reorganization Transactions or whether lawful funds were
available for the Reorganization Transactions.

The Distribution Agreement and certain of the ancillary agreements to the
Distribution Agreement provide for the allocation, immediately prior to the
Distributions, of certain debt of the Company. Further, pursuant to the
Distribution Agreement, from and after the date of the Reorganization
Transactions, each of Realty Company and Operating Company will be responsible
for the debts, liabilities and other obligations related to the businesses
which it owns and operates following the consummation of the Reorganization
Transactions. It is possible that a court would disregard the allocation
agreed to among the parties, and require Operating Company or Realty Company
to assume responsibility for obligations allocated to the other, particularly
if the other were to refuse or to be unable to pay or perform the subject
allocated obligations. See "Relationship Between Realty Company and Operating
Company After the Reorganization Transactions."

UNCERTAINTY OF TRADING MARKETS

OPERATING COMPANY COMMON STOCK

There has not been any established public trading for the Operating Company
Common Stock. It is currently anticipated that the Operating Company Common
Stock will be approved for listing on the New York Stock Exchange (the "NYSE")
prior to the Reorganization Transactions.

There can be no assurance as to the price at which Operating Company Common
Stock will trade. Until the Operating Company Common Stock is fully
distributed and an orderly market develops, the prices at which the shares
trade may fluctuate significantly and may be lower or higher than the price
that would be expected for a fully distributed issue. Prices for shares of
Operating Company Common Stock will be determined by the marketplace and may
be influenced by many factors, including the depth and liquidity of the market
for the shares, investor perception of Operating Company, changes in economic
conditions in the healthcare industry and general economic and market
conditions.

REALTY COMPANY COMMON STOCK

It is expected that the Company Common Stock will continue to be listed and
traded on the NYSE after the Reorganization Transactions under the name
"VenTrust, Inc." Following the Reorganization Transactions, the trading price
of Company Common Stock is expected to be lower than the trading prices of
Company Common Stock immediately prior to the Reorganization Transactions.

There can be no assurance as to the price at which Realty Company Common
Stock will trade. Prices for shares of Realty Company Common Stock will be
determined by the marketplace and may be influenced by many factors including
the depth and liquidity of the market for the shares, investor perception of
Realty Company, interest rate fluctuations, Realty Company's distribution
policy and general economic and market conditions. Realty Company does not
anticipate paying a dividend until the first quarter of 1999 which may also
affect the trading price.

The combined trading prices of Realty Company Common Stock and Operating
Company Common Stock held by stockholders after the Reorganization
Transactions may be less than, equal to or greater than the trading price of
Company Common Stock prior to the Reorganization Transactions. See "The
Distribution Proposal--Listing and Trading of Company Common Stock and
Operating Company Common Stock."

PAYMENT OF DIVIDENDS

Operating Company does not intend to pay cash dividends on Operating Company
Common Stock in the foreseeable future so that it may reinvest its earnings in
the development of its business and reduce indebtedness. The payment of
dividends on Operating Company Common Stock in the future will be at the
discretion of the Operating Company Board. Restrictions imposed by the
Operating Company Debt Facilities and other securities or agreements of
Operating Company are expected to limit the payment of dividends by Operating
Company. No assurance can be given that Operating Company will pay any
dividends.

CERTAIN ANTI-TAKEOVER EFFECTS

The Charter Amendment Proposals may make an acquisition of control of Realty
Company without approval of the Realty Company Board more difficult.

Upon consummation of the Reorganization Transactions, certain provisions of
Operating Company's Certificate of Incorporation (the "Operating Company
Charter") and Operating Company's By-laws (the "Operating Company By-laws")
and Delaware Law could discourage potential acquisition proposals and could
delay or prevent a change in control of Operating Company. Such provisions
could also inhibit fluctuations in the market price of Operating Company
Common Stock that could result from takeover attempts. In addition, certain
provisions of the Master Lease Agreement may have similar effects.

See "Certain Antitakeover Effects of Certain Charter and By-Laws Provisions
and the Company Rights."

THE DISTRIBUTION PROPOSAL

BACKGROUND AND REASONS FOR THE REORGANIZATION TRANSACTIONS

The Company has operated as one of the largest providers of long-term
healthcare services in the United States. At December 31, 1997, the Company's
operations included 60 long-term acute care hospitals containing 5,273
licensed beds, 309 nursing centers containing 40,383 licensed beds, and
Vencare, which provides respiratory and rehabilitation therapies and medical
and pharmacy management services to approximately 2,900 healthcare facilities.
The Company Board has decided to separate the Company into two publicly owned
companies as of the Distribution Date: (1) Realty Company, which will operate
as a self-administered, self-managed realty company (and as a REIT upon
election of REIT status on January 1, 1999), and will initially hold
substantially all of the Company-owned land, buildings and other improvements,
and certain other real estate related assets, including 49 of the 60 long-term
acute care hospitals and 205 of the 309 nursing centers operated by the
Company as of December 31, 1997; and (2) Operating Company, a newly formed
holding company, which will, after certain internal mergers and stock and
asset transfers are effected, directly or indirectly, hold all of the other
assets and liabilities relating to operation of the Company's historical
business, including the Development Properties, and will manage, operate and
lease the Leased Properties (and upon completion of development, the
Development Properties) from Realty Company.

The Company Board believes that the separation of Operating Company from the
Company and the Company's conversion to a REIT as of January 1, 1999 will
benefit the Company's stockholders by giving them a continuing interest in a
leading long-term healthcare company and a tax-advantaged REIT security that
is expected to provide both the opportunity for consistent cash dividends and
capital appreciation as Realty Company acquires additional properties. If
Realty Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income taxes on that portion of its ordinary
income or capital gain that is distributed to stockholders. Such treatment
substantially eliminates the Federal "double taxation" on earnings (at the
corporate and the stockholder levels) that generally results from investment
in a corporation. See "Certain Federal Income Tax Considerations--Taxation of
Realty Company."

Upon conversion to REIT status, Realty Company will be able to benefit from
the tax advantages that apply to REITs and stockholders will receive quarterly
distributions that are at least sufficient to satisfy the annual distribution
requirements for REITs. See "Certain Federal Income Tax Considerations" and
"Distribution and Dividend Policy--Realty Company." The Company Board believes
this will highlight the value of the Company's real estate assets and permit
stockholders to realize a regular cash return on that value. In addition,
although historically the Company has been primarily recognized as a long-term
healthcare company, successful acquisition of healthcare related real estate,
particularly hospitals and nursing centers, has always been an important
component of the Company's success. The management of Realty Company expects
that its acquisition strategy will focus primarily on transactions in the
healthcare industry, but over time it may effect transactions in other
industries that management determines have the opportunity to generate
attractive returns. In particular, the Company Board believes that Realty
Company will be able to pursue real estate opportunities that may yield
attractive investment returns but which are not necessarily consistent with
the Company's current operating strategies.

Company stockholders will also retain, through the Distribution, their
proportionate interest in one of the largest providers of long-term healthcare
services in the United States. The Company's full-service integrated network
of hospitals, nursing centers and ancillary service providers will enable
Operating Company to continue to meet the range of needs of patients requiring
long-term care while further expanding its long-term care operations. The
Company Board believes that Operating Company will benefit from a strategic
relationship with Realty Company because Operating Company's management will
be able to focus its time and resources on its healthcare operations and at
the same time, through the Participation Agreement, have a right of first
offer to lease and operate certain healthcare properties acquired by Realty
Company for a period of three years following the Distribution Date. The
Company Board believes that the more highly leveraged capital structure of
Operating Company is appropriate for a company with the expected growth and
cash flow characteristics of Operating Company. The Company Board also
recognizes that this additional leverage carries with it certain increased
risks. See "Risk Factors."

REQUIRED VOTE

Under Delaware Law, approval of the Distribution Proposal requires the
affirmative vote of a majority of the shares of Company Common Stock
outstanding and eligible to vote at the Annual Meeting.

RECOMMENDATION OF THE COMPANY BOARD

THE COMPANY BOARD HAS UNANIMOUSLY APPROVED THE DISTRIBUTION PROPOSAL AND
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE DISTRIBUTION PROPOSAL.

The Company currently expects that, subject to approval of the Distribution
Proposal, the Charter Amendment Proposals and the satisfaction of the other
conditions set forth under "--Conditions; Termination," the Reorganization
Transactions would be effected.

THE REORGANIZATION TRANSACTIONS

INTERNAL MERGERS AND TRANSFERS

On or prior to the Distribution Date, the Company will effect certain
internal mergers and stock and asset transfers intended to allocate the assets
and liabilities relating to the Properties to the Company and the other assets
and liabilities relating to the operation of the Company's historical
business, including the Development Properties, to Operating Company. The
principle internal mergers and stock and asset transfers are as follows: (a)
the Company will form the Realty Company Partnership of which the Company will
own a 99% general partnership interest and a newly formed, wholly-owned
limited liability company of the Company will own a one percent limited
partnership interest; (b) all of the Company's first-tier subsidiaries other
than TheraTx and Transitional will merge with and into the Realty Company
Partnership; (c) the Company will form Operating Company; (d) the Company will
transfer all of the Transferred Assets to Operating Company (or subsidiaries
of Operating Company) and, as consideration for such stock, Operating Company
will issue Operating Company Common Stock and the Operating Company Series A
Preferred Stock to the Company; (e) the Realty Company Partnership will
transfer all of its assets to Operating Company (or subsidiaries of Operating
Company) other than its real property and real property related assets
included within the Properties and, as consideration for such assets,
Operating Company will issue Operating Company Common Stock and transfer all
of the owned real estate and real estate related assets held by TheraTx and
Transitional (and their respective subsidiaries) to the Realty Company
Partnership; and (f) the Realty Company Partnership will distribute to the
Company all of the Operating Company Common Stock it received from Operating
Company.

Following completion of the foregoing internal mergers and transfers, the
Company will distribute the Operating Company Common Stock to the holders of
Company Common Stock on the Distribution Record Date.

The Distribution

In the event that the Company's stockholders approve the Distribution
Proposal and the Charter Amendment Proposals, the Company Board has approved
(subject to the satisfaction of the other conditions to the Reorganization
Transactions discussed under "--Conditions; Termination" and the actual
declaration of the dividend in respect of the Distribution) a plan to
distribute the outstanding shares of Operating Company Common Stock to all
holders of outstanding Company Common Stock. It is expected that the
Distribution will be made on or before April 30, 1998, the Distribution Date,
on a pro rata basis to holders of record of issued and outstanding Company
Common Stock on the Distribution Record Date. The Company currently intends to
use a direct registration system to implement the distribution of shares of
Operating Company Common Stock. On the Distribution Date, a certificate
representing all issued and outstanding shares of Operating Company Common
Stock will be delivered by the Company to National City Bank of Cleveland,
Ohio, as the distribution agent (the "Distribution Agent"). As soon as
practicable thereafter, an account statement will be mailed to each
stockholder of record as of the Distribution Record Date, stating the number
of shares of Operating Company

Common Stock, including fractional shares, received by such stockholder in the
Distribution. Following the Distribution, stockholders may request physical
certificates for their shares of Operating Company Common Stock. In that case,
fractional shares will not be issued but, instead, cash will be paid with
respect to such fractional shares. Holders of record of Company Common Stock
as of the Distribution Record Date will receive shares of Operating Company
Common Stock on the basis of the Distribution Ratio of one share of Operating
Company Common Stock for [every] [each] share[s] of Company Common Stock
held on the Distribution Record Date (including shares held in the Vencor
Retirement Savings Plan). No certificates or scrip representing fractional
interests in a share of Operating Company Common Stock will be issued if a
stockholder requests physical certificates. Instead, with respect to shares
for which physical certificates are requested, the Distribution Agent will, as
soon as practicable after the Distribution Date, aggregate and sell such
fractional interests at then prevailing prices and distribute the net cash
proceeds to stockholders entitled thereto pro rata based on their fractional
interests in a share of Operating Company Common Stock. See "--Material
Federal Income Tax Consequences of the Distribution." All shares of Operating
Company Common Stock issued will be fully paid and nonassessable and the
holders thereof will not be entitled to preemptive rights. See "Description of
Capital Stock--Operating Company."

No holder of Company Common Stock will be required to pay any cash or other
consideration to the Company for shares of Operating Company Common Stock
received in the Distribution or to surrender or exchange shares of Company
Common Stock in order to receive shares of Operating Company Common Stock.

Certificates representing outstanding shares of Company Common Stock will
continue to represent rights (the "Company Rights") to purchase shares of the
Company's Series A Participating Preferred Stock pursuant to the Company
Rights Agreement (as defined herein). See "Description of Capital Stock--
Realty Company."

OPERATING COMPANY SERIES A PREFERRED STOCK

As part of the consideration to be paid by Operating Company to the Company
for the Transferred Assets, Operating Company will issue $10 million of the
Operating Company Series A Preferred Stock. The Operating Company Series A
Preferred Stock is expected to be mandatorily redeemable on the tenth
anniversary of issuance and will not be callable prior to the fifth
anniversary of issuance. The dividend rate is expected to be 9% per annum,
payable quarterly in arrears. The Operating Company Series A Preferred Stock
is expected to be non-voting unless dividends are in arrears for more than six
quarters, in which event holders will be entitled to elect two directors of
Operating Company. See "Description of Capital Stock--Operating Company--
Preferred Stock." The Company currently expects to sell all of the Operating
Company Series A Preferred Stock in a private placement to one or more
unaffiliated third parties immediately following the Distribution Date.

MASTER LEASE AGREEMENT

On or prior to the Distribution Date, Realty Company and Operating Company
will enter into the Master Lease Agreement pursuant to which Realty Company
will lease all of the Leased Properties (and upon completion of development,
the Development Properties) to Operating Company. See "Relationship Between
Realty Company and Operating Company After the Reorganization Transactions--
Master Lease Agreement."

DEVELOPMENT AGREEMENT

On or prior to the Distribution Date, Realty Company and Operating Company
will enter into the Development Agreement pursuant to which Operating Company
will complete the development of the Development Properties and thereafter
sell to, and lease back from, Realty Company, the Development Properties. The
terms of the leases for the Development Properties will be substantially
similar to the Master Lease Agreement. See "Relationship between Realty
Company and Operating Company After the Reorganization Transactions--
Development Agreement."

FINANCING

In connection with the Reorganization Transactions, the Company expects that
all or substantially all of the Company's existing $2.0 billion of
indebtedness, consisting primarily of amounts drawn under the Company Bank
Facility and up to all $750 million of the Company Notes will be repaid or
repurchased and refinanced with bank borrowings and securities issuances by
each of Realty Company and Operating Company. In lieu of repurchasing the
Company Notes, the Company may obtain consents to amend the terms of the
Company Notes, exchange Company Notes for other securities or some combination
of the foregoing.

Realty Company is expected to have approximately $985 million in total
indebtedness as of the Distribution Date and approximately $215 million in
credit available under the Realty Company Credit Facility. It is expected that
capital necessary to fund Realty Company's capital requirements will be
available from the following sources: (i) the Realty Company Credit Facility
in the amount of $250 million, (ii) the Realty Company Term A Loan in the
amount of $250 million, (iii) the Realty Company Term B Loan in the amount of
$250 million, and (iv) the Realty Company CMBS Debt in the amount of $450
million.

Operating Company is expected to have approximately $1.0 billion in
indebtedness as of the Distribution Date and approximately $300 million in
credit available under the Operating Company Credit Facility. It is expected
that capital necessary to fund Operating Company's capital requirements will
be available from the following sources: (i) the Operating Company Credit
Facility in the amount of $300 million, (ii) the Operating Company Term A Loan
in the amount of $400 million, (iii) the Operating Company Term B Loan in the
amount of $400 million, (iv) the Operating Company Bridge Loan in the amount
of $200 million, to be repaid from the proceeds of the sale of certain non-
strategic assets, including the sale of Atria Common Stock to be owned by
Operating Company following the Reorganization Transactions, (v) $10 million
of Operating Company Series A Preferred Stock, and (vi) the $100 million
Operating Company Offering to be consummated simultaneously with the
Reorganization Transactions. If Operating Company is unable to sell the Atria
Common Stock or other assets, Operating Company expects that it would be
required to refinance the Operating Company Bridge Loan with the Operating
Company Credit Facility or a public debt or equity offering, or a combination
thereof.

The Company has received proposals from financial institutions for all of
the financing requirements of Realty Company and Operating Company. The
Company is negotiating the terms of such financing and expects such financing
to be achieved on terms acceptable to the Company.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

A U.S. Stockholder will include the fair market value of the Operating
Company Common Stock received pursuant to the Distribution in gross income as
ordinary dividend income to the extent of the U.S. Stockholder's share of the
current or accumulated tax earnings and profits of the Company through the end
of 1998. Based on the Company's analysis of its earnings and profits and
assuming that the value of Operating Company Common Stock at the time of
Distribution is not greater than $ per share, the Company expects that a
U.S. Stockholder will not have more than $ of dividend income per share of
Company Common Stock. To the extent the value of Operating Company Common
Stock on the Distribution Date exceeds the per share earnings and profits of
the Company, a U.S. Stockholder will be required to reduce its basis in its
shares of Company Common Stock by such excess. A U.S. Stockholder whose basis
in its shares of Company Common Stock is thereby reduced to zero will
recognize capital gain in the amount of any remaining value of Operating
Company Common Stock received. A U.S. Stockholder's holding period in the
Distributed Shares will begin on the day after the Distribution Date. See
"Certain Federal Income Tax Considerations--Ownership and Disposition of
Distributed Shares." The Company will report to U.S. Stockholders the portion
of the Distribution that should be treated as a dividend in February 1999.

A U.S. Stockholder that is a corporation will, subject to generally
applicable limitations, be entitled to a dividends received deduction in
amount equal to 70% of the amount of the Distribution received by it that is a
dividend. If a dividend is deemed to be "extraordinary" under Section 1059 of
the Code, a corporate stockholder may be required to reduce its basis in the
stock by the nontaxed portion of the dividend.

LISTING AND TRADING OF COMPANY COMMON STOCK AND OPERATING COMPANY COMMON STOCK

It is expected that Company Common Stock will continue to be listed and
traded on the NYSE after the Reorganization Transactions. There is not
currently a public market for Operating Company Common Stock. Prices at which
Operating Company Common Stock may trade prior to the Reorganization
Transactions on a "when-issued" basis or after the Reorganization Transactions
cannot be predicted. Until Operating Company Common Stock is fully distributed
and an orderly market develops, the prices at which trading in Operating
Company Common Stock occurs may fluctuate significantly. The prices at which
Operating Company Common Stock trades will be determined by the marketplace
and may be influenced by many factors, including, among others, the depth and
liquidity of the market for Operating Company Common Stock, investor
perception of Operating Company and the healthcare industry, Operating
Company's dividend policy and general economic and market conditions. See
"Risk Factors--Uncertainty of Trading Markets." In addition, the combined
trading prices of Realty Company Common Stock and Operating Company Common
Stock held by stockholders after the Reorganization Transactions may be less
than, equal to or greater than the trading price of Company Common Stock prior
to the Reorganization Transactions. See "Risk Factors--Uncertainty of Trading
Markets."

Operating Company will file an application to list the Operating Company
Common Stock and Operating Company Rights on the NYSE. Operating Company
initially will have approximately stockholders of record based upon the
number of stockholders of record of the Company as of , 1998. For certain
information regarding options to purchase Operating Company Common Stock that
will be outstanding after the Reorganization Transactions, see "Relationship
Between Realty Company and Operating Company After the Reorganization
Transactions--Employee Benefits Agreement."

Shares of Operating Company Common Stock distributed to the Company's
stockholders in the Reorganization Transactions will be freely transferable,
except for securities received by persons who may be deemed to be "affiliates"
of Operating Company pursuant to the Securities Act. Persons who may be deemed
to be "affiliates" of Operating Company after the Reorganization Transactions
generally include individuals or entities that control, are controlled by, or
are under common control with, Operating Company and may include certain
officers and directors of Operating Company as well as principal stockholders
of Operating Company, if any. Persons who are affiliates of Operating Company
will be permitted to sell their shares of Operating Company Common Stock only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act.

REGULATORY APPROVALS

The Company's hospitals, nursing centers, institutional pharmacies and home
care and hospice operations are licensed to operate by various state and
federal agencies. As a result of the Reorganization Transactions, the changes
in the corporate entities conducting these operations will be treated as a
change of ownership by these state and Federal agencies. In most instances,
notification of an impending change in ownership is required 60 to 90 days
prior to the desired effective date of such change. Depending on the
circumstances of each transaction and the licensing agency involved, the
actual approval process could exceed well beyond the 60 to 90 day period.
During this 60 to 90 day period, the new licensee will be required to provide
information supporting the change of ownership. Upon approval by each agency,
a new license will be issued in the name of the new corporate entity operating
the facility.

The Company does not believe that any other material Federal or state
regulatory approvals will be required in connection with the Reorganization
Transactions.

ACCOUNTING TREATMENT

The historical consolidated financial statements of the Company will become
the historical consolidated financial statements of Operating Company after
the Distribution Date. Realty Company will not have been

operated as a Realty Company prior to the Distribution Date. Accordingly, the
financial statements of Realty Company will consist solely of its operations
after the Distribution Date. The assets and liabilities of both Operating
Company and Realty Company will be recorded at their respective historical
carrying values at the Distribution Date.

CONDITIONS; TERMINATION

The Reorganization Transactions are conditioned upon the satisfaction of the
following conditions: (1) approval of the Distribution Proposal and the
Charter Amendment Proposals by the Company's stockholders at the Annual
Meeting; (2) certain transactions (including the internal mergers and stock
and asset transfers described in "--Internal Mergers and Transfers") having
been consummated; (3) Operating Company Common Stock having been approved for
listing on the NYSE, subject to official notice of issuance; (4) the
Registration Statement on Form 10 (the "Registration Statement") to be filed
with the Securities and Exchange Commission (the "Commission") to register the
Operating Company Common Stock under the Exchange Act having become effective
and no stop order being in effect; (5) all material authorizations, consents,
approvals and clearances of U.S. Federal, state and local, and foreign
governmental agencies having been obtained; (6) no preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a government, regulatory or administrative agency or
commission, and no statute, rule, regulation or executive order promulgated or
enacted by any governmental authority, being in effect preventing the
consummation of the Reorganization Transactions; and (7) the Financing
Transactions being in place and all conditions to borrowing or financing
thereunder having been satisfied, and all material consents, waivers or
amendments to any bank credit agreement, debt security or other financing
facility having been obtained, or each such agreement, security or facility
having been refinanced, in each case, on terms satisfactory to the Company.

The Company Board does not intend to waive any of the conditions, except
that if the stockholders approve the Distribution Proposal but do not approve
the Charter Amendment Proposals, the Company Board will reevaluate its
intention to complete the Reorganization Transactions. After such review, the
Company Board could decide to cancel the Reorganization Transactions or waive
the condition that the Charter Amendment Proposals be approved and to complete
the Reorganization Transactions despite such lack of approval. Even if all the
above conditions are satisfied, the Company Board has reserved the right to
cancel or defer the Reorganization Transactions, including the Distribution,
described in this Proxy Statement at any time prior to the Distribution Date.
See "Relationship Between Realty Company and Operating Company After the
Reorganization Transactions--Distribution Agreement."

RELATIONSHIP BETWEEN REALTY COMPANY AND OPERATING COMPANY
AFTER THE REORGANIZATION TRANSACTIONS

For the purpose of governing certain of the ongoing relationships between
Realty Company and Operating Company after the Reorganization Transactions and
to provide mechanisms for an orderly transition, Realty Company and Operating
Company or their respective subsidiaries, as applicable, will enter into the
various agreements, and will adopt policies, as described in this section
prior to or on the Distribution Date. The Company believes that the agreements
will contain terms which generally are comparable to those which would have
been reached in arms-length negotiations with unaffiliated parties. Certain of
the agreements summarized in this section will be included as exhibits to the
Registration Statement, and the following summaries are qualified in their
entirety by reference to the agreements as filed.

DISTRIBUTION AGREEMENT

Assuming the Reorganization Transactions occur, Realty Company and Operating
Company expect to enter into the Distribution Agreement which will provide
for, among other things, the conditions to the Reorganization Transactions
(see "The Distribution Proposal--Conditions; Termination"), the various
actions to be taken in connection with the Reorganization Transactions and the
relationship among the parties subsequent to the Reorganization Transactions
(see "The Distribution Proposal--The Reorganization Transactions").

The Distribution Agreement will provide that, from and after the
Distribution Date, (i) Realty Company shall assume, pay, perform and discharge
all Realty Company Liabilities (as defined in the Distribution Agreement) in
accordance with their terms, and (ii) Operating Company shall assume, pay,
perform and discharge all Operating Company Liabilities (as defined in the
Distribution Agreement), including potential liabilities incurred in
connection with certain legal proceedings, in accordance with their terms. See
"--Legal Proceedings."

In addition, the Distribution Agreement will provide for cross-indemnities
that require (i) Realty Company to indemnify Operating Company (and its
subsidiaries, directors, officers, employees and agents and certain other
related parties) against all losses arising out of or in connection with the
Realty Company Liabilities or the breach of the Distribution Agreement or any
ancillary agreement by Realty Company and (ii) Operating Company to indemnify
Realty Company (and its respective subsidiaries, directors, officers,
employees and agents and certain other related parties) against all losses
arising out of or in connection with the Operating Company Liabilities or the
breach of the Distribution Agreement or any ancillary agreement by Operating
Company, and for contribution in certain circumstances.

Pursuant to the Distribution Agreement, each of the parties will agree to
use all reasonable efforts to take or cause to be taken all action, and do or
cause to be done all things, reasonably necessary, proper or advisable to
consummate the transactions contemplated by and carry out the purposes of the
Distribution Agreement and the ancillary agreements. As such, the Distribution
Agreement will provide that if any contemplated internal mergers and stock and
asset transfers have not been effected on or prior to the Distribution Date,
the parties will cooperate to effect such transfers as quickly thereafter as
practicable. The entity retaining any asset or liability that should have been
transferred prior to the Distribution Date will continue to hold that asset
for the benefit of the party entitled thereto or that liability for the
account of the party required to assume it, and must take such other action as
may be reasonably requested by the party to whom such asset was to be
transferred or by whom such liability was to be assumed in order to place such
party, insofar as reasonably possible, in the same position as would have
existed had such asset or liability been transferred or assumed as
contemplated by the Distribution Agreement.

The Distribution Agreement will also provide for the execution and delivery
of certain other agreements governing the relationship between Realty Company
and Operating Company following the Reorganization Transactions. See "--Master
Lease Agreement," "--Development Agreement," "--Participation Agreement," "--
Employee Benefits Agreement," "--Intellectual Property Agreement," "--Tax
Sharing Agreement," and "--Transition Services Agreement."

MASTER LEASE AGREEMENT

Assuming the Reorganization Transactions occur, Realty Company and Operating
Company expect to enter into a master lease agreement (the "Master Lease
Agreement") that will set forth the material terms governing the lease of each
Leased Property (and upon completion of development, the Development
Properties). The Leased Properties will be divided into groups of
approximately five properties and an operating lease agreement will be entered
into with respect to each such group of properties (each a "Lease"). The
following description of the Master Lease Agreement does not purport to be
complete but contains a summary of the material provisions of the Master Lease
Agreement.

Concurrently with the Reorganization Transactions, Realty Company will lease
the Leased Properties to either Operating Company or certain subsidiaries of
Operating Company (in which case the obligation will be guaranteed by
Operating Company) pursuant to the Leases. Each Lease will include land,
buildings, structures and other improvements on the land, easements and
similar appurtenances to the land and improvements, and permanently affixed
equipment, machinery and other fixtures relating to the operation of the
Properties.

The Leases will have primary terms ranging from 15 to 19 years (the "Base
Term"). At the option of Operating Company, the Leases may be extended for two
five year renewal terms beyond the Base Term (the "Renewal Term") at the then
fair market value rental rate. The Base Term and Renewal Term of each Lease
will be subject to termination upon default and certain other contingencies
described in the Master Lease Agreement.

USE OF THE LEASED PROPERTY

The Master Lease Agreement will require that Operating Company utilize the
Leased Properties solely for the provision of healthcare services and related
uses and as Realty Company may otherwise consent (which consent may be granted
or withheld in its discretion). Operating Company will be responsible for
maintaining all licenses, certificates and permits necessary for it to comply
with the Healthcare Regulations. Operating Company will be obligated to
continuously operate each Leased Property as a provider of healthcare
services.

RENTAL AMOUNTS

The Master Lease Agreement will be what is commonly known as a triple-net
lease or an absolute-net lease. The Annual Base Rent for the twelve-month
period commencing on the Distribution Date for the Leased Properties is
approximately $225 million, with a 2% per annum escalator over the previous
twelve-month period. In addition, Operating Company will be required to pay
for (i) all insurance required in connection with the Leased Properties and
the business conducted on the Leased Properties, (ii) all taxes levied on or
with respect to the Leased Properties (other than taxes on the net income of
Realty Company) and (iii) all utilities and other services necessary or
appropriate for the Leased Properties and the business conducted on the Leased
Properties.

MAINTENANCE, MODIFICATION AND CAPITAL ADDITIONS

Operating Company will be required to maintain the Leased Properties in good
repair and condition, making all repairs, modifications and additions required
by law, including any Capital Addition (as defined herein). Operating Company
will be required to pay for all Maintenance Capital Expenditures. Maintenance
Capital Expenditures are all capital expenditures and other expenses for the
maintenance, repair, restoration or refurbishment of a Leased Property (and
any Capital Addition). Operating Company will also be required under the
Master Lease Agreement to maintain all personal property at each of the Leased
Properties in good order, condition and repair, as shall be necessary to
operate the Leased Property in compliance with all applicable licensure and
certification requirements, in compliance with all applicable legal
requirements and insurance requirements and otherwise in accordance with
customary practice in the industry.

Operating Company may undertake any capital addition that materially adds to
or improves a Leased Property (a "Capital Addition") without the prior
approval of Realty Company, provided that Realty Company shall approve the
plans and specifications, and Operating Company complies with customary
construction requirements. Realty Company may at its option, elect to pay for,
or finance, all or part of the cost of such Capital

Addition in which event the base rent for the Leased Properties will be
adjusted. To the extent Realty Company has not elected to pay for, or finance,
any part of such cost, Operating Company will not be permitted to commence any
such Capital Addition unless it has demonstrated to the reasonable
satisfaction of Realty Company that it has the funds or the financing
reasonably estimated to be necessary to complete such Capital Addition. If
Operating Company pays for, or finances, the Capital Addition, the base rent
will not be adjusted. Any Capital Addition will become the property of Realty
Company and subject to the Master Lease Agreement as part of the Leased
Properties.

INSURANCE

Operating Company will be required to maintain liability, all risk property
and workers' compensation insurance for the Leased Properties at a level at
least comparable to that currently in place with respect to the Leased
Properties.

The Master Lease Agreement will provide that in the event a Leased Property
is totally destroyed, or is substantially destroyed such that the damage
renders the Leased Property unsuitable for its intended use, as a result of a
casualty covered by insurance, Operating Company will have the option to
either restore the Leased Property at Operating Company's cost to its pre-
destruction condition or offer to purchase the Leased Property (in either
event all insurance proceeds, net of administrative and related costs, will be
made available to Operating Company). If Realty Company rejects the offer to
purchase, Operating Company will have the option to either restore the Leased
Property or terminate the Lease with respect to the Leased Property. If the
damage is such that the Leased Property is not rendered unsuitable for its
intended use, or if it is not covered by insurance, the Master Lease Agreement
will require Operating Company to restore the Leased Property to its original
condition.

ENVIRONMENTAL MATTERS

The Master Lease Agreement will provide that Operating Company will
indemnify Realty Company (and its officers, directors and stockholders)
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 on or after the first day of the Base Term. Operating
Company will also indemnify Realty Company (and its officers, directors and
stockholders) against any environmental claim (including penalties and clean
up costs) resulting from any condition permitted to deteriorate, on or after
such first day (including as a result of migration from adjacent properties
not owned or operated by Realty Company or any of its affiliates other than
Operating Company and its direct affiliates). Realty Company will indemnify
Operating Company (and its officers, directors and stockholders) 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 first day of the Base Term.

ASSIGNMENT AND SUBLETTING

The Master Lease Agreement will provide that Operating Company may not
assign, sublease or otherwise transfer any Lease or any portion of a Leased
Property as a whole (or in substantial part), including upon a Change of
Control (as defined herein), without the consent of Realty Company, which may
not be unreasonably withheld if the proposed assignee is sufficiently
creditworthy, has the expertise to operate the Leased Property, has a
favorable business reputation and character and agrees to comply with the use
restrictions in the Master Lease Agreement. Operating Company may sublease up
to 20% of each Leased Property for restaurants, gift shops and other stores or
services customarily found in hospitals or nursing centers without the consent
of Realty Company, subject, however, to there being no material alteration in
the character of the Leased Property or in the nature of the business
conducted on such Leased Property and to requirements of the Code with which
Realty Company must comply to retain REIT status. A "Change of Control" under
the Master Lease Agreement includes any of (a) a change in the composition of
the board of directors of either Operating Company or the ultimate corporate
parent of Operating Company (the "Parent") such that at the end of any period
of 12 consecutive months the persons constituting a majority of such board of
directors are not the same as the persons

constituting a majority at the start of such period (or persons appointed by
such majority), (b) the sale or other disposition by the Parent of any part of
its interest in the lessee or substantially all of the assets of the lessee
(other than a bona fide pledge in connection with a commercial financing) or
(c) a merger or consolidation involving the Parent as a result of which the
stockholders of the Parent immediately prior to such event do not own at least
50% of the capital stock of the surviving entity, in either case the effect of
which is that immediately after giving effect to such transaction the new
entity would have a consolidated net worth equal to less than 100% (or 75% if
the board of directors of the lessee approved the sale or merger prior to such
sale or merger) of the Parent's consolidated net worth immediately prior to
such event taking place. A Change of Control will constitute an assignment for
purposes of the Master Lease Agreement. See "Risk Factors--Certain
Antitakeover Effects."

EVENTS OF DEFAULT

An "Event of Default" will be deemed to have occurred under any Lease if,
among other things, Operating Company fails to pay rent or other amounts
within three days after notice; fails to comply with covenants continuing for
30 days or, so long as diligent efforts to cure such failure are being made,
such longer period (not over 120 days) as is necessary to cure such failure;
ceases to operate any Leased Property as a provider of healthcare services;
loses any healthcare licenses; defaults under certain other Leases to
Operating Company or an affiliate of Operating Company from Realty Company or
an affiliate of Realty Company; fails to maintain insurance; or certain
bankruptcy or insolvency events occur. In addition to its other remedies with
respect to an Event of Default, Realty Company will be able to enforce
guarantees made by Operating Company with respect to each Lease. See "Risk
Factors--Dependence of Realty Company on Operating Company."

OPERATING COMPANY'S RIGHT OF FIRST REFUSAL TO PURCHASE

The Master Lease Agreement will provide that if Realty Company receives a
bona fide offer from a third party to purchase any Leased Property and Realty
Company wishes to accept the offer, prior to entering into a contract of sale
with the third party, Realty Company must first offer Operating Company the
right to purchase the Leased Property on substantially the same terms and
conditions as are contained in the third party offer. See "Risk Factors--
Certain Antitakeover Effects."

MISCELLANEOUS

The Leases will be governed with respect to any particular property by the
law of the jurisdiction in which the Leased Property is located.

DEVELOPMENT AGREEMENT

Assuming the Reorganization Transactions occur, Realty Company and Operating
Company intend to enter into a development agreement (the "Development
Agreement") pursuant to which Operating Company will develop the Development
Properties, which includes (a) 4 long-term acute care hospitals, 3 combination
nursing homes and hospitals and 10 nursing centers currently under
construction and (b) 12 nursing centers which are owned or under contract and
scheduled for construction.

Operating Company will complete the construction of each Development
Property in accordance with the existing plans and specifications for each
such Development Property. Operating Company will proceed diligently to
complete the development of each Development Property in accordance with the
existing construction schedule. Upon completion of each such Development
Property, Realty Company will purchase the Development Property from Operating
Company at a purchase price equal to the amount of Operating Company's actual
costs in acquiring, developing and improving such Development Property prior
to the purchase date.

Operating Company will lease each Development Property from Realty Company
upon completion of the development and construction of such property, and
following the purchase by Realty Company of such Development Property from
Operating Company. The amount of rent to be paid by Operating Company under

such leases will be based on several factors including, the purchase price of
such Development Properties, number of beds in the facility, and real estate
and market conditions existing at the time of such lease. The terms of the
leases for the Development Properties will be substantially similar to the
Master Lease Agreement. See "--Master Lease Agreement."

PARTICIPATION AGREEMENT

Assuming the Reorganization Transactions occur, Realty Company and Operating
Company intend to enter into a participation agreement (the "Participation
Agreement") to provide each other with rights to participate in certain
transactions for a period of three years following the Reorganization
Transactions. The Participation Agreement is expected to provide, subject to
certain terms, that Realty Company will provide Operating Company with a right
of first offer to become the lessee of any real property acquired or developed
by Realty Company and to be operated as a hospital or nursing center or other
healthcare facility, provided that Operating Company and Realty Company
negotiate a mutually satisfactory lease arrangement and Realty Company
determines, in its sole discretion, that Operating Company is qualified to be
the lessee. As to opportunities for Operating Company to become the lessee of
any assets under such a lease arrangement, the Participation Agreement is
expected to provide that Realty Company must provide Operating Company with
written notice of the lessee opportunity. During the 30 days following such
notice, Operating Company will have a right of first offer to become a lessee
and the right to negotiate with Realty Company on an exclusive basis regarding
the terms and conditions of the lease. If a mutually satisfactory agreement
cannot be reached within the 30-day period (or such longer period to which
Operating Company and Realty Company may agree), Realty Company may offer the
opportunity to others for a period of 180 days thereafter before it must again
offer the opportunity to Operating Company in accordance with the procedures
specified above. Realty Company will not be required to provide Operating
Company with a right of first offer when the real property is being operated
by a third party on the date of acquisition or completion of development.

The Participation Agreement is also expected to provide, subject to certain
terms, that Operating Company will provide Realty Company with a right of
first offer to purchase or finance any healthcare related real property that
Operating Company determines to sell or mortgage to a third party, provided
that Operating Company and Realty Company negotiate mutually satisfactory
terms for such purchase or mortgage. Operating Company must provide Realty
Company with written notice of the purchase or mortgage opportunity. During
the 30 days following such notice, Realty Company will have a right of first
offer to become the owner of such property and the right to negotiate with
Operating Company on an exclusive basis regarding the terms and conditions of
such purchase or mortgage. If a mutually satisfactory agreement cannot be
reached within the 30-day period (or such longer period to which Operating
Company and Realty Company may agree), Operating Company may offer the
opportunity to others for a period of 180 days thereafter before it must again
offer the opportunity to Realty Company in accordance with the procedures
specified above. Operating Company will not be required to provide Realty
Company with a right of first offer when Operating Company elects to retain
ownership of a property or if Operating Company decides to sell the operations
of the facility related to the real property.

Each of Realty Company and Operating Company are expected to have the right
to terminate the Participation Agreement in the event of a Change of Control
(as defined in the Master Lease Agreement) of the other party.

EMPLOYEE BENEFITS AGREEMENT

Assuming the Reorganizations occur, Realty Company and Operating Company
expect to enter into an agreement with regard to their respective liabilities
for employee benefit-related matters for employees of Realty Company and
Operating Company in respect of periods before and after the Distribution Date
and to provide for certain other employee benefit matters (the "Employee
Benefits Agreement").

The Employee Benefits Agreement will provide that Operating Company will
establish and assume employee pension and welfare benefit plans which are
generally comparable to those provided by the Company as of the Distribution
Date. These plans will include comprehensive health and life insurance,
disability, retirement and 401(k) plans.

The Employee Benefits Agreement would also provide for the establishment of
certain incentive and pension benefit plans, effective as of or prior to the
Distribution Date, providing certain equity-based and deferred compensation
benefits to certain Operating Company employees which are generally comparable
to those provided by the Company at such time. In connection with the
establishment of such plans, Operating Company would assume and become liable
for certain obligations payable to Operating Company employees under these
plans. See "Management of the Company and Management of Realty Company and
Operating Company After the Reorganization Transactions--Operating Company--
Operating Company Incentive and Benefit Plans."

The Employee Benefits Agreement will also provide for the treatment of
performance shares awarded under the Company's 1987 Incentive Compensation
Program but not earned as of the Distribution Date. Pursuant to the terms of
such Program, such outstanding awards will be converted into awards of shares
of Operating Company Common Stock, with adjustments to reflect the relative
value of Operating Company Common Stock and Realty Company Common Stock as of
the Distribution Date. Awards of such shares of Operating Company Common Stock
will be based upon new performance goals applicable solely to the performance
of Operating Company following the Distribution Date.

The Employee Benefits Agreement will also provide for the treatment of
outstanding options to purchase Company Common Stock ("Company Options"). At
the time of the Distribution, Company Options will be split into options to
purchase both Operating Company Common Stock and Realty Company Common Stock
("Operating Company Options" and "Realty Company Options," respectively). The
number of shares of Realty Company Common Stock subject to options would equal
the number of shares of Operating Company Common Stock subject to options. The
exercise price of the Company Option would be modified, and the exercise price
of the Operating Company Option would be set, so that the combined exercise
price of the options to purchase Operating Company Common Stock and Realty
Company Common Stock equals that of the existing Company Options, allocated
between the Operating Company Options and the Realty Company Options in
proportion to the fair market value of Operating Company Common Stock and
Realty Company Common Stock after the Distribution. The holder would be
permitted to exercise each option separately. Thus, if a holder exercises an
Operating Company Option and the corresponding Realty Company Option after the
Distribution, such holder would pay the same aggregate option price and would
receive the same number of shares of Operating Company Common Stock and Realty
Company Common Stock that such holder would have received in the Distribution
if such holder had exercised a Company Option prior to the Distribution. It is
expected that all other terms of Company Options will remain the same
following the Distribution. Realty Company will be responsible for the
delivery of shares of Realty Company Common Stock upon exercise of a Realty
Company Option, and Operating Company will be responsible for the delivery of
shares of Operating Company Common Stock upon exercise of an Operating Company
Option.

INTELLECTUAL PROPERTY AGREEMENT

Assuming the Reorganization Transactions occur, Operating Company and Realty
Company expect to enter into an intellectual property agreement (the
"Intellectual Property Agreement") providing that all of the intellectual
property owned or licensed by the Company as of the Distribution Date will be
transferred to Operating Company, and Operating Company will grant to Realty
Company a royalty-free perpetual license to use certain intellectual property,
including the name "VenTrust, Inc."

TAX ALLOCATION AGREEMENT

Assuming the Reorganization Transactions occur, Realty Company and Operating
Company expect to enter into a tax allocation agreement on or prior to the
Distribution Date (the "Tax Allocation Agreement") which will allocate
responsibility for U.S. Federal income and various other taxes ("Taxes") among
the companies.

In general, pursuant to the Tax Allocation Agreement, Operating Company is
expected to be liable for the U.S. Federal income taxes payable with respect
to the returns of the Company's consolidated group (which prior to the
Distribution Date includes Realty Company and its subsidiaries) as well as
certain other Taxes payable

with respect to returns attributable to Realty Company's operations for
periods ending on or prior to the Distribution Date. If, in connection with a
Tax audit, or the filing of an amended return, a taxing authority adjusts
Realty Company's consolidated Federal income tax return or any other return
described above with respect to which Realty Company was liable for payment of
Taxes, Operating Company would be liable for the resulting Tax assessments or
would be entitled to the resulting Tax refunds. Realty Company and its
subsidiaries would be liable for Taxes payable with respect to returns filed
after the Distribution Date that are attributable to Realty Company's
operations after the Distribution Date.

TRANSITION SERVICES AGREEMENTS

On or prior to the Distribution Date, the Company and Operating Company
expect to enter into a transition services agreement (the "Transition Services
Agreement"), pursuant to which Operating Company will provide Realty Company
with transitional administrative and support services, including finance and
accounting, human resources, risk management, legal support, and information
systems support (the "Transition Services") through December 31, 1998. The
Transition Services Agreement will provide that, in consideration for the
performance of a Transition Service, Realty Company will pay Operating Company
$200,000 per month for such services.

The Transition Services Agreement will provide that Operating Company has
the right to terminate the provision of certain Transition Services under
certain circumstances including the occurrence of certain changes in the
ownership or beneficial control of Realty Company, and also will contain
provisions whereby Realty Company will generally agree to indemnify Operating
Company for all claims, losses, damages, liabilities and other costs incurred
by Operating Company to a third party which arise in connection with the
provision of a Transition Service, other than those costs resulting from
Operating Company's own willful misconduct or fraud. In general, Realty
Company can terminate a Transition Service after an agreed notice period.

CONFLICTS OF INTEREST POLICIES

Operating Company and Realty Company will be permitted to pursue business
opportunities independently from one another, subject to certain rights of
first offer. See "--Participation Agreement." As a result, the corporate
objectives of Operating Company and Realty Company may not align and decisions
of management at each may be subject to conflicts of interest. In addition,
certain business relations between the two companies, such as the Master Lease
Agreement and Development Agreement, will be subject to inherent conflicts of
interest. See "Risk Factors--Conflicts of Interest."

Each of Realty Company and Operating Company will adopt certain policies to
minimize potential conflicts of interest with respect to their respective
Boards of Directors and officers, including forming a committee of independent
directors to review transactions which present such a conflict. In addition,
each of Realty Company's and Operating Company's Boards are subject to certain
provisions of Delaware Law that are designed to eliminate or minimize certain
potential conflicts of interest. There can be no assurance, however, that
these policies and provisions always will be successful in eliminating the
influence of such conflicts, and as a result, most decisions relating to the
contractual and other business relationships between Realty Company and
Operating Company will be subject to conflicts of interest and loyalties.

LEGAL PROCEEDINGS

The following is a description of the material legal proceedings of the
Company as of December 31, 1997. It is expected that pursuant to the
Distribution Agreement, any liability arising from such legal proceedings
would be assumed by Operating Company and that Operating Company would
indemnify Realty Company against any losses it may incur arising out of or in
connection with such legal proceedings.

T. Ladt, Jill L. Force and James H. Gillenwater, Jr. The complaint alleges
that the Company and certain 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 Company 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 Company Common
Stock was artificially inflated. In particular, the complaint alleges that the
Company issued false and misleading financial statements during the first,
second and third calendar quarters of 1997 which misrepresented and
understated the impact that changes in Medicare reimbursement policies would
have on the Company's core services and profitability. The complaint further
alleges that the Company issued a series of materially false statements
concerning the purportedly successful integration of its recent acquisitions
and prospective earnings per share for 1997 and 1998 which the Company knew
lacked any reasonable basis and were not being achieved. The Company believes
that the allegations in the complaint are without merit and intends to
vigorously defend this action.

On June 19, 1997, a class action lawsuit was filed in the United State
District Court for the District of Nevada on behalf of a class consisting of
all persons who sold shares of Transitional common stock during the period
from February 26, 1997 through May 4, 1997, inclusive. The complaint alleges
that Transitional purchased shares of its common stock from members of the
investing public after it had received a written offer to acquire all of
Transitional's common stock and without disclosing that such an offer had been
made. The complaint further alleges that defendants disclosed that there were
"expressions of interest" in acquiring Transitional when, in fact, at that
time, the negotiations had reached an advanced stage with actual firm offers
at substantial premiums to the trading price of Transitional's stock having
been made which were actively being considered by Transitional's Board of
Directors. The complaint asserts claims pursuant to Sections 10(b) and 20(a)
of the Exchange Act and common law principles of negligent misrepresentation
and names as defendants Transitional as well as certain senior executives and
directors of Transitional. The Company is vigorously defending this action.

The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in
a qui tam lawsuit which was filed in the United States District Court for the
Eastern District of Arkansas and served on the Company on July 7, 1997. The
United States Department of Justice intervened in the suit which was brought
under the Federal Civil False Claims Act. AXR provided portable X-ray services
to nursing facilities (including those operated by the Company) and other
healthcare providers. The Company acquired an interest in AXR when Hillhaven
was merged into the Company in September 1995 and purchased the remaining
interest in AXR in February 1996. The suit alleges that AXR submitted false
claims to the Medicare and Medicaid programs. In conjunction with the qui tam
action, the United States Attorney's Office for the Eastern District of
Arkansas also is conducting a criminal investigation into the allegations
contained in the qui tam complaint. The Company is cooperating fully in the
investigation.

On June 6, 1997, Transitional announced that it had been advised that it is
a target of a Federal grand jury investigation being conducted by the United
States Attorney's Office for the District of Massachusetts (the "USAO")
arising from activities of Transitional's formerly owned dialysis business.
The investigation involves an alleged illegal arrangement in the form of a
partnership which existed from June 1987 to June 1992 between Damon
Corporation and Transitional. Transitional spun off its dialysis business, now
called Vivra Incorporated, on September 1, 1989. In January 1998, the Company
was informed that no criminal charges would be filed against the Company. The
Company has been informed that the USAO intends to file a civil action against
Transitional relating to the partnership's former business. If such a suit is
filed, the Company will vigorously defend the action.

As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of business.
The Company believes that all such claims and actions currently pending
against it either are adequately covered by insurance or would not have a
material adverse effect on the Company if decided in a manner unfavorable to
the Company. In addition, the Company is subject regularly to inquiries,
investigations and audits by Federal and state agencies that oversee various
healthcare regulations and laws.

THE CHARTER AMENDMENT PROPOSALS

The Company Board believes that it is advisable to adopt the Charter
Amendment Proposals described below, and, accordingly has adopted a resolution
proposing that the Charter Amendment Proposals be presented to the
stockholders at the Annual Meeting.

REIT CHARTER AMENDMENTS

OWNERSHIP LIMITATION PROVISION

If approved by the stockholders, an Article XII would be added to the
Company Charter (i.e., the Realty Company Charter following the Reorganization
Transactions) to provide for certain restrictions on the acquisition of shares
of Realty Company's capital stock (the "Ownership Limitation Provision").

The Ownership Limitation Provision provides that, subject to certain
exceptions specified in the Company Charter, no person (other than certain
stockholders) may own, or be deemed to own by virtue of the applicable
attribution provision of the Code, more than 9.9% of any class of Realty
Company's outstanding capital stock (the "Ownership Limit"). The Realty
Company Board may, but in no event will be required to, waive the Ownership
Limit if it determines that such ownership will not jeopardize Realty
Company's status as a REIT. As a condition of such waiver, the Realty Company
Board may require opinions of counsel satisfactory to it and undertakings or
representations from the applicant with respect to preserving the REIT status
of Realty Company. The Ownership Limitation Provision will not apply if the
Realty Company Board and the holders of at least 66 2/3% of the outstanding
shares of capital stock entitled to vote on such matter determine that it is
no longer in the best interest of Realty Company to attempt to qualify, or to
continue to qualify, as a REIT.

Any purported transfer of capital stock of Realty Company and/or any other
event that would otherwise result in any person or entity violating the
Ownership Limit will be void and of no force or effect as to that number of
shares in excess of the Ownership Limit and the purported transferee (the
"Prohibited Transferee") shall acquire no right or interest (or, in the case
of any event other than a purported transfer, the person or entity holding
record title to any such shares in excess of the Ownership Limit (the
"Prohibited Owner") shall cease to own any right or interest) in such excess
shares. In addition, if any transfer of capital stock of Realty Company or any
other event would cause Realty Company to become "closely held" under the Code
or otherwise to fail to qualify as a REIT under the Code, then such purported
transfer will be void and of no force or effect as to that number of shares in
excess of the number that could have been transferred without such result and
the Prohibited Transferee shall acquire no right or interest (or, in the case
of any event other than a transfer, the Prohibited Owner shall cease to own
any right or interest) in such excess shares. Also, if any purported transfer
of capital stock of Realty Company or any other event would otherwise cause
Realty Company to own, or be deemed to own by virtue of the applicable
attribution provisions of the Code, 10% or more of the ownership interests in
Operating Company or in any subleases, then any such purported transfer will
be void and of no force or effect as to that number of shares in excess of the
number that could have been transferred without such result, and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than a transfer, the Prohibited Owner shall cease to own any
right or interest) in such excess shares.

the sales proceeds received by the trust for such excess shares. Prior to a
sale of any such excess shares by the trust, the trustee will be entitled to
receive, in trust for the benefit of the Beneficiary, all dividends and other
distributions paid by Realty Company with respect to such excess shares, and
also will be entitled to exercise all voting rights with respect to such
excess shares.

Any purported transfer of capital stock of Realty Company that would
otherwise cause Realty Company to be beneficially owned by fewer than 100
persons will be null and void in its entirety, and the intended transferee
will acquire no rights in such stock.

The text of the Ownership Limitation Provision is set forth in Appendix B to
this Proxy Statement. In the event that the Ownership Limitation Provision is
approved, the Company Board will adopt conforming amendments to the Company
By-Laws which will become effective upon effectiveness of the Ownership
Limitation Provision.

NAME CHANGE PROVISION

If approved by the stockholders, Article I of the Company Charter would be
amended and restated in its entirety to provide for the name of the Company to
be changed to "VenTrust, Inc."

REASONS FOR THE REIT CHARTER AMENDMENTS

For Realty Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding stock. Specifically,
not more than 50% in value of Realty Company's outstanding stock may be owned,
actually or constructively under the applicable attribution provisions of the
Code, by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year (other than the first year)
or during a proportionate part of a shorter taxable year, and Realty Company
must be beneficially owned by 100 or more persons during at least 335 days of
a shorter taxable year. See "Certain Federal Income Tax Considerations--
Taxation of Realty Company." The Ownership Limitation Provision, however, may
have the effect of precluding an acquisition of control of Realty Company
without approval of the Realty Company Board. See "Certain Antitakeover
Effects of Certain Charter and By-laws Provisions and the Company Rights--
Ownership Limitation Provision."

If the REIT Charter Amendments are approved by the stockholders, the REIT
Charter Amendments will become effective upon the filing of a Certificate of
Amendment in accordance with Delaware Law. A form of such Certificate of
Amendment is included as Appendix B to this Proxy Statement.

PREFERRED STOCK CHARTER AMENDMENT

If the Charter Amendment Proposals are approved at the Annual Meeting, the
first paragraph of Article IV of the Company Charter (i.e., the Realty Company
Charter following the Reorganization Transactions) would be amended to
increase the number of authorized shares of Company Preferred Stock from
1,000,000 shares to 10,000,000 shares.

The text of the Preferred Stock Charter Amendment is set forth in Appendix B
to this Proxy Statement.

REASONS FOR THE PREFERRED STOCK CHARTER AMENDMENT

The primary purpose of the Preferred Stock Charter Amendment is to make
available for Realty Company additional authorized and unissued shares of
Company Preferred Stock (i.e., Realty Company Preferred Stock following the
Reorganization Transactions) that it can use for structuring possible future
financings and acquisitions, and for meeting other corporate needs that might
arise. After Realty Company qualifies as a REIT, Realty Company Preferred
Stock may be more attractive than debt for financing purposes because of
Realty Company's inability to utilize tax deductions for interest payments and
the potential for issuing preferred stock with a lower dividend rate than the
interest rate payable on Realty Company borrowings. Having such authorized
shares available for issuance will allow Realty Company to issue shares of
Realty Company Preferred Stock without the expense and delay of a special
stockholder's meeting. The authorized shares of Realty Company Preferred
Stock, as well as shares of Realty Company Common Stock, will be available for
issuance without further action by stockholders, unless such action is
required by applicable law or the rules of any stock exchange on which Realty
Company securities may be listed.

The Realty Company Board could, however, issue a series of Realty Company
Preferred Stock that could, subject to certain limitations imposed by the
securities laws and stock exchange rules, depending on the terms of such
series, impede the completion of a merger, tender offer or other takeover
attempt. For instance, such series of Realty Company Preferred Stock might
impede a business combination by including class voting rights that would
enable the holder to block such a transaction. The Realty Company Board will
make any determination to issue such shares based on their judgment as to the
best interests of Realty Company and its then existing stockholders. The
Realty Company Board, in so acting, could issue Realty Company Preferred Stock
having terms which could discourage an acquisition attempt or other
transaction that some, or a majority, of the stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over the then current market price of such stock. The authorized
and unissued Realty Company Preferred Stock, as well as the authorized and
unissued Realty Company Common Stock, would be available, and the Realty
Company Charter explicitly authorizes use of its capital stock, for the above
purposes.

The Company Board believes that the Preferred Stock Charter Amendment will
enhance Realty Company's ability to obtain financing and carry out its long-
range plans and goals for the benefit of its stockholders.

If the Charter Amendment Proposals are approved by the stockholders, the
Preferred Stock Charter Amendment will become effective upon filing of a
Certificate of Amendment in accordance with Delaware Law. A form of such
Certificate of Amendment is included as Appendix B to this Proxy Statement.

REQUIRED VOTE

The affirmative vote of a majority of the shares outstanding and eligible to
vote at the Annual Meeting is required for the approval of the Charter
Amendment Proposals. Approval of the Charter Amendment Proposals is a
condition to consummation of the Reorganization Transactions.

RECOMMENDATION OF THE COMPANY BOARD

THE COMPANY BOARD HAS UNANIMOUSLY APPROVED THE CHARTER AMENDMENT PROPOSALS
AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE CHARTER AMENDMENT PROPOSALS.

ELECTION OF DIRECTORS

It is proposed at the Annual Meeting to elect, the following ten nominees
for election to the Company Board. Each nominee is currently a member of the
Company Board. All such nominees will be elected to serve for a term expiring
at the Annual Meeting of Stockholders in 1999 (or until their respective
successors are elected and qualified). Unless you indicated otherwise on your
proxy, your proxy will be voted to elect such nominees. If any nominee fails
to receive the vote necessary to be elected, the vacancy so arising will be
filled by the Company Board. In the event of death, disqualification,
resignation or inability to serve of any of the directors listed below, the
vacancy so arising will be filled by the Company Board.

NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ --------------------------------------------

Michael R. Barr, 48 A founder of the Company, physical therapist and certified
respiratory therapist, Mr. Barr has served as Chief Operating
Officer and Executive Vice President of the Company since
February 1996. From November 1995 to February 1996, he was
Executive Vice President of the Company and Chief Executive
Officer of the Company's Hospital Division. Mr. Barr served as
Vice President, Operations from 1985 to November 1995. He has
been a director of the Company since 1985. Mr. Barr is a
director of Colorado MEDtech, Inc., a medical products and
equipment company.
Walter F. Beran, 71 Mr. Beran has served as a director of the Company since
September 1995. Since September 1986, Mr. Beran has served as
Chairman of the Pacific Alliance Group, a merger and acquisition
services firm. Previously, Mr. Beran served as Vice Chairman and
Western Regional Managing Partner of the accounting firm of
Ernst & Whinney (now Ernst & Young LLP) from 1971 until his
retirement in September 1986. Mr. Beran also serves as a
director of Arco Chemical Company, Pacific Scientific Company
and Fleetwood Enterprise, Inc. and as Trustee of Eureka Mutual
Funds.
Ulysses L. Bridgeman, Mr. Bridgeman has served as a director of the Company since May
Jr., 44 1997. Since 1988, Mr. Bridgeman has been President of Bridgeman
Foods, Inc., a franchisee of 51 Wendy's Old Fashioned Hamburger
Restaurants.
Elaine L. Chao, 44 Ms. Chao has served as a director of the Company since May 1997.
Ms. Chao is a Distinguished Fellow of The Heritage Foundation in
Washington, D.C. From 1992 to 1996, Ms. Chao was President and
Chief Executive Officer of the United Way of America. From 1991
to 1992, she served as the Director of the Peace Corps. Ms. Chao
is a director of Dole Food Company, Inc., NASD, Inc. and
Protective Life Corporation.
Donna R. Ecton, 50 Ms. Ecton has served as director of the Company since 1992.
Since December 1996, Ms. Ecton has been Chief Operating Officer
of PETsMART, Inc., a pet supplies retailer. From 1995 to 1996,
she was Chairman, President and Chief Executive Officer of
Business Mail Express, Inc., an expedited print and mail
services company. From 1991 to 1994, she was President and Chief
Executive Officer of Van Houten North America, Inc. and Andes
Candies Inc., confectionery products businesses. Ms. Ecton is a
director of Barnes Group, Inc., a diversified manufacturing,
aerospace and distribution company, PETsMART, Inc. and H&R
Block, Inc.
Greg D. Hudson, 49 Mr. Hudson has served as a director of the Company since 1991.
He has been President of Hudson Chevrolet-Oldsmobile, Inc. since
1988.

NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ --------------------------------------------

William H. Lomicka, 60 Mr. Lomicka has served as a director of the Company since 1987.
Since 1989, he has served as President of Mayfair Capital, Inc.,
a private investment firm. Mr. Lomicka serves as a director of
Regal Cinemas, Inc., a regional motion picture exhibitor, and
Sabratek Corporation, a company which designs, produces and
markets medical products for the alternative site healthcare
marketplace.
W. Bruce Lunsford, 50 A founder of the Company, certified public accountant and
attorney, Mr. Lunsford has served as Chairman of the Board,
President and Chief Executive Officer of the Company since the
Company commenced operations in 1985. Mr. Lunsford is the
Chairman of the Board of Atria Communities, Inc. and a director
of National City Corporation, a bank holding company, Churchill
Downs Incorporated, and Res-Care, Inc., a provider of
residential training and support services for persons with
developmental disabilities and certain vocational training
services.
W. Earl Reed, III, 46 A certified public accountant, Mr. Reed has served as a director
of the Company since 1987. He has been Chief Financial Officer
and Executive Vice President of the Company since 1995. From
1987 to November 1995, Mr. Reed served as Vice President,
Finance and Development of the Company.
R. Gene Smith, 63 A founder of the Company, Mr. Smith has served as a director of
the Company since 1985 and Vice Chairman of the Board since
1987. From 1987 to 1995, Mr. Smith was President of New Jersey
Blockbuster, Ltd., which held the Blockbuster Video franchise
for northern New Jersey. Since 1988, Mr. Smith has been Chairman
of the Board of Taco Tico, Inc., an operator of Mexican fast-
food restaurants. Since 1993, Mr. Smith has been Managing
General Partner of Direct Programming Services, which was a
marketer of direct broadcast satellite television services
through 1996. Mr. Smith is also a director of Atria Communities,
Inc.

The information given in this Proxy Statement concerning the above nominees
is based upon statements made or confirmed to the Company by or on behalf of
such nominees, except to the extent certain information appears in its
records. Ages are given as of January 1, 1998.

It is expected that Michael R. Barr, Ulysses L. Bridgeman, Jr., Elaine L.
Chao, Donna R. Ecton, William H. Lomicka and W. Earl Reed, III, will resign as
directors of the Company prior to or as of the Distribution Date and will
become directors of Operating Company at that time. In addition, Mr. Lunsford
and Mr. Smith will be directors of both the Company and Operating Company at
and after the Distribution Date. It is also expected that the Company Board
will appoint Ronald G. Geary and Thomas T. Ladt to fill the vacancies created
by such resignations. Accordingly, as of the Distribution Date, the Company
expects the following six individuals will be members of the Realty Company
Board: Mr. Beran, Mr. Geary, Mr. Hudson, Mr. Ladt, Mr. Lunsford and Mr. Smith.
Information with respect to Mr. Geary and Mr. Ladt is set forth below.

NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ --------------------------------------------

Ronald G. Geary, 50 An attorney and certified public accountant, Mr. Geary has
served as a director and President of Res-Care, Inc. since
February 1990 and Chief Executive Officer of Res-Care, Inc.
since 1993. Prior to being named Chief Executive Officer, Mr.
Geary was Chief Operating Officer of Res-Care, Inc. from 1990 to
1993.
Thomas T. Ladt, 47 Mr. Ladt has served as Executive Vice President, Operations of
the Company since February 1996. From November 1995 to February
1996, he served as President of the Company's Hospital Division.
From 1993 to November 1995, Mr. Ladt was Vice President of the
Company's Hospital Division. From 1989 to December 1993, Mr.
Ladt was a Regional Director of Operations for the Company. Mr.
Ladt is a director of Atria Communities, Inc.

REQUIRED VOTE

Directors will be elected if they receive the vote of a plurality of the
shares of Company Common Stock present in person or represented by proxy at
the Annual Meeting.

RECOMMENDATION OF THE COMPANY BOARD

THE COMPANY BOARD HAS UNANIMOUSLY APPROVED THE ELECTION OF EACH OF THE
NOMINEES NAMED HEREIN AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" ELECTION OF
EACH OF THESE NOMINEES.

COMPANY BOARD MEETINGS AND COMMITTEES

The Company Board met seven times during 1997. To assist the Company Board
in carrying out its duties, the Company Board has established an Executive
Committee, an Audit and Compliance Committee and an Executive Compensation
Committee with responsibilities in specific areas of Company Board activity.
All nominees who are current directors attended 75% or more of the aggregate
meetings of the Company Board and the Company Board committees on which they
served during the period they held office in 1997. A description of each
Company Board committee and its current membership follows.

Audit and Compliance Committee. The Audit and Compliance Committee met four
times during 1997. The Audit and Compliance Committee reviews the adequacy of
the Company's system of internal controls and accounting practices. In
addition, the Audit and Compliance Committee reviews the scope of the annual
audit of the Company's auditors, Ernst & Young, prior to its commencement, and
reviews the types of services for which the Company retains Ernst & Young. The
Audit and Compliance Committee also oversees the Company's adoption and
implementation of policies and procedures designed to ensure that the Company
and its employees comply with all applicable laws, regulations and policies.
The members of the Audit and Compliance Committee are Mr. Bridgeman, Ms. Chao,
Ms. Ecton and Mr. Lomicka, Chairman.

Executive Committee. The Executive Committee has the powers of the Company
Board in directing the management of the business and affairs of the Company
in the intervals between meetings of the Company Board (except for certain
matters reserved for the Company Board). The members of the Executive
Committee are Mr. Lomicka, Mr. Lunsford, Chairman, and Mr. Smith.

Executive Compensation Committee. The Executive Compensation Committee met
two times in 1997. The functions of the Executive Compensation Committee are
to establish annual salary levels, approve fringe benefits and administer any
special compensation plans or programs for executive officers of the Company.
The members of the Executive Compensation Committee are Mr. Beran, Mr. Hudson
and Mr. Smith, Chairman.

Independent Committee. Following the completion of the Reorganization
Transactions, the Company will form the Independent Committee whose function
will be to review and approve the following actions of the Company Board: (a)
the entering into of any agreements with Operating Company and its affiliates,
(b) the consummation of any transactions between Realty Company and Operating
Company or its affiliates, including, but not limited to, the negotiation,
enforcement and renegotiation of the terms of any Lease and (c) overseeing and
monitoring the existing agreements between Realty Company and Operating
Company. The members of the Independent Committee are expected to be Mr.
Beran, Mr. Geary and Mr. Hudson.

COMPENSATION OF DIRECTORS

During 1997, directors not employed by the Company received $2,000 for each
board meeting they attended. Non-employee directors also received $1,000 for
each committee meeting they attended. In addition, non-employee directors
received a $2,500 retainer for each calendar quarter that they served as a
director.

Pursuant to the Company's Non-Employee Directors Deferred Compensation Plan,
a non-employee director may defer in stock or cash the receipt of fees which
would otherwise be paid to the director for services on the board and its
committees. Directors who choose to defer fees may elect to have the deferred
amounts invested 100% in shares of the Company's Common Stock (a "Share
Election") or to accumulate and earn interest (a "Cash Election"). If a Share
Election is made, the director's deferral account is credited with 110% of the
compensation otherwise payable to the director. As of the end of each calendar
quarter, such deferred amounts are converted into share equivalents of the
Company's Common Stock based on the fair market value of Company Common Stock
on that date. If a Cash Election is made, the deferred amounts earn interest
at a floating rate of interest, compounded annually.

During 1997, directors not employed by the Company received options pursuant
to the Company's Stock Option Plan for Non-Employee Directors (the "Directors
Plan"). Under the Directors Plan, the Company issued, on January 1, to each of
the Company's non-employee directors an option to purchase 3,000 shares of
Company Common Stock with an exercise price equal to the fair market value of
Company Common Stock on the date the option was granted. Accordingly, in 1997,
the Company issued options with respect to an aggregate of 21,000 shares to
the seven persons who were non-employee directors on January 1, 1997. All
options become exercisable in four equal annual installments, beginning on the
first anniversary of the date of grant. In addition, the Company issued to Mr.
Bridgeman and Ms. Chao options to purchase 3,000 shares of Company Common
Stock with an exercise price equal to the fair market value of the Company
Common Stock on the date the option was granted. These options become
exercisable in four equal annual installments, beginning on the first
anniversary of the date of grant. The Company also granted Mr. Bridgeman and
Ms. Chao 1,000 shares of restricted Company Common Stock, which vests in 50%
increments over a two-year period. These options and shares of restricted
stock were issued upon Mr. Bridgeman's and Ms. Chao's election to the Company
Board in 1997.

In connection with the Distribution, each non-employee member of the Realty
Company Board will be granted a one-time grant of 2,000 restricted shares of
Realty Company Common Stock and an option to purchase 5,000 shares of Realty
Company Common Stock. The restrictions on all shares of restricted Realty
Company Common Stock lapse in four annual installments, beginning on the first
anniversary of their grant date. Each Realty Company Option will have an
exercise price equal to the fair market value of the Realty Company Common
Stock on the Distribution Date. These options will become exercisable in four
annual installments beginning on the first anniversary of their grant date.

DISTRIBUTION AND DIVIDEND POLICY

REALTY COMPANY

Realty Company is expected to make distributions to its stockholders on a
quarterly basis beginning the first quarter of 1999 following its election of
REIT status on January 1, 1999. Realty Company's first distribution, is
expected to be equal to a payout ratio of approximately 80% of Funds From
Operations. There can be no assurances that Realty Company will meet or
maintain the Distribution Policy. See "Risk Factors--Ability to Maintain
Distributions."

The Company established the Distribution Policy after reviewing Realty
Company's pro forma Funds From Operations for the twelve month period ended
December 31, 1997, as further adjusted as described in footnote (1) below.
"Funds From Operations" as defined by the National Association of Real Estate
Investment Trusts is net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains (or losses) from debt
restructuring or sales of property, plus depreciation and amortization on real
estate assets and after adjustments, if any, for unconsolidated partnerships
and joint ventures. Realty Company's "Cash Available for Distribution," which
is Funds From Operations adjusted for certain non-cash items, less reserves
for capital expenditures, is not expected to be materially different from its
Funds From Operations, principally because under the Master Lease Agreement,
Operating Company is responsible for substantially all maintenance and capital
expenditures. The Company believes that such pro forma financial information,
with the enumerated adjustments, provides a reasonable basis for setting the
Distribution Policy.

The following table sets forth certain unaudited, supplemental adjusted pro
forma financial information for the twelve month period ended December 31,
1997.

SUPPLEMENTAL ADJUSTED
PRO FORMA FINANCIAL
INFORMATION FOR THE TWELVE
MONTHS ENDED
DECEMBER 31, 1997(1)
--------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)

Rental income....................................... $225,000
Expenses(2)......................................... 89,480
Depreciation ....................................... 45,969
Funds from operations(3)............................ 135,520
Initial funds from operations per common
share(3)(4)........................................ $ 2.01

- --------
(1) Represents the pro forma results of operations for the period presented,
determined on the basis set forth in the "Realty Company Unaudited Pro
Forma Consolidated Financial Statements" and as adjusted to reflect
annualized lease revenues, and associated expenses, as if each of the
Leased Properties had been in operation from January 1, 1997.
(2) Consists of interest expenses, general and administrative expenses, and
the cost of administrative services provided by Operating Company in
connection with the Transition Services Agreement.
(3) Industry analysts generally consider Funds From Operations to be an
appropriate measure of the performance of an equity REIT. Funds From
Operations should not be considered an alternative to net income as an
indicator of Realty Company's operating performance or to cash flow as a
measure of liquidity.
(4) Based on approximately 67.3 million shares of Company Common Stock
outstanding as of December 31, 1997. Excludes shares of Company Common
Stock issuable upon conversion of Company Options. See "Realty Company Pro
Forma Capitalization" and "Description of Capital Stock--Realty Company."

Realty Company is expected to commence distributions in 1999 in accordance
with the Distribution Policy set forth above unless there is (i) a material
adverse change in the results of operations for the twelve months ended
December 31, 1998 as compared to the estimated pro forma results for the
twelve months ended December 31, 1997 described herein, (ii) a material
adverse change in economic conditions affecting Realty Company's business in
1998 or (iii) adverse changes in market and competitive factors that the
Realty Company Board deems relevant in setting a distribution policy. Subject
to restrictions under the Realty Company Debt Facilities and other
obligations, the Realty Company Board, in its sole discretion, will determine
the actual distribution amount and rate. Realty Company's actual Funds From
Operations will be affected by a number of factors, including costs incurred
to purchase the Development Properties from Operating Company, the acquisition
of additional properties, and depreciation and financing costs, including
interest expense. The timing and amount of distributions made by Realty
Company will be determined by the Realty Company Board and will depend on a
number of factors, including the amount of Funds From Operations, Realty
Company's financial condition, capital expenditure requirements for Realty
Company's properties, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Realty Company Board may
deem relevant. For a discussion of the tax treatment of distributions to
holders of shares of Realty Company Common Stock, see "Certain Federal Income
Tax Considerations."

It presently is anticipated that additional acquisitions, including initial
capital improvements thereto, will be financed primarily through borrowings
under the Realty Company Credit Facility, other debt financing or the issuance
of equity securities. To the extent that such financing is insufficient to
meet all such cash needs, or the cost of such financing exceeds the cash flow
generated by the acquired properties for any period, funds available for
distribution could be reduced. See "Risk Factors--Ability to Maintain
Distributions."

In order to maintain its qualification as a REIT, Realty Company must make
annual distributions to its stockholders of at least 95% of its taxable income
(which does not include net capital gains). Under certain circumstances,
Realty Company may be required to make distributions in excess of Funds From
Operations in order to meet such distribution requirements. In such event,
Realty Company presently would expect to borrow funds, or to sell assets for
cash, to the extent necessary to obtain cash sufficient to make the
distributions required to retain its qualification as a REIT for Federal
income tax purposes. See "Certain Federal Income Tax Considerations--Taxation
of Realty Company--Annual Distribution Requirements."

OPERATING COMPANY

Operating Company does not intend to pay cash dividends on the Operating
Company Common Stock for the foreseeable future so that it may reinvest its
earnings in the development of its business and reduce indebtedness. The
payment of dividends on the Operating Company Common Stock in the future will
be at the discretion of the Operating Company Board. Restrictions imposed by
the Operating Company Debt Facilities or other debt obligations are expected
to limit the payment of dividends by Operating Company on Operating Company
Common Stock. See "Risk Factors--Payment of Dividends."

REALTY COMPANY PRO FORMA CAPITALIZATION

The following table sets forth the unaudited pro forma capitalization of
Realty Company at December 31, 1997 which gives effect to the Distribution
Proposal and the expected Realty Company Financing Transactions. Realty
Company will not have been operated as a REIT prior to the Distribution Date.
Accordingly, no historical capitalization of Realty Company is presented
herein. See "The Distribution Proposal--Accounting Treatment" and "Realty
Company Unaudited Pro Forma Consolidated Financial Statements."

DECEMBER 31,
1997
PRO FORMA
----------------------
(DOLLARS IN THOUSANDS)

Long-term debt, including amounts due within one
year:
Realty Company Credit Facility................ $ 34,592
Realty Company Term A Loan.................... 250,000
Realty Company Term B Loan.................... 250,000
Realty Company CMBS Debt...................... 450,000
--------
Total debt................................ 984,592
Common stockholders' equity (deficit)........... (56,862)
--------
Total capitalization...................... $927,730
========

OPERATING COMPANY PRO FORMA CAPITALIZATION

The following table sets forth the actual capitalization of Operating
Company at December 31, 1997 and, as adjusted, on a pro forma basis to give
effect to the Distribution Proposal and the expected Operating Company
Financing Transactions, including the $10 million Operating Company Series A
Preferred Stock and $100 million Operating Company Offering. For accounting
purposes, the historical consolidated financial statements of the Company will
become the historical consolidated financial statements of Operating Company
on the Distribution Date. Accordingly, the actual capitalization of Operating
Company presented below is identical to that of the Company. See "The
Distribution Proposal--Accounting Treatment " and "Operating Company Unaudited
Pro Forma Consolidated Financial Statements."

DECEMBER 31, 1997
---------------------
ACTUAL PRO FORMA
---------- ----------
(DOLLARS IN
THOUSANDS)

Long-term debt, including amounts due within one year:
Senior collateralized debt............................. $ 55,651 $ -
Bank revolving credit agreement due 2002............... 1,129,300 -
8 5/8% Senior Subordinated Notes due 2007.............. 750,000 -
Other.................................................. 12,141 -
Operating Company Credit Facility...................... - -
Operating Company Term A Loan.......................... - 400,000
Operating Company Term B Loan.......................... - 400,000
Operating Company Bridge Loan.......................... - 200,000
---------- ----------
Total debt........................................... 1,947,092 1,000,000
Mandatory redeemable preferred stock..................... - 10,000
Common stockholders' equity.............................. 905,350 965,712
---------- ----------
Total capitalization............................... $2,852,442 $1,975,712
========== ==========

SOURCES AND USES

The following table sets forth the proposed sources and uses of the proceeds
to Realty Company and Operating Company, respectively, of the Reorganization
Transactions. The Company has received proposals from financial institutions
for all of Realty Company's and Operating Company's financing requirements, is
negotiating the terms of such financing and expects such financing to be
achieved on terms acceptable to the Company. See "Realty Company Pro Forma
Capitalization," "Operating Company Pro Forma Capitalization," "Realty Company
Unaudited Pro Forma Consolidated Financial Statements" and "Operating Company
Unaudited Pro Forma Consolidated Financial Statements" included elsewhere
herein.

REALTY COMPANY

(DOLLARS IN
SOURCES THOUSANDS)
------- -----------

Realty Company Credit Facility................................ $ 34,592
Realty Company Term A Loan.................................... 250,000
Realty Company Term B Loan.................................... 250,000
Realty Company CMBS Debt...................................... 450,000
--------
Total sources............................................... $984,592
========

USES
----

Company Bank Facility......................................... $977,092
Transaction costs and available cash.......................... 7,500
--------
Total uses.................................................. $984,592
========

OPERATING COMPANY

(DOLLARS IN
SOURCES THOUSANDS)
------- -----------

Operating Company Credit Facility............................ -
Operating Company Term A Loan................................ $ 400,000
Operating Company Term B Loan................................ 400,000
Operating Company Bridge Loan................................ 200,000
Proceeds from the issuance of Operating Company Series A
Preferred Stock............................................. 10,000
Proceeds from Operating Company Offering..................... 100,000
Proceeds from Operating Company Ownership Plan............... 1,500
----------
Total sources.............................................. $1,111,500
==========

USES
----

Company Bank Facility........................................ $ 152,208
Company Notes................................................ 750,000
Other Company indebtedness................................... 67,792
Transaction costs and available cash......................... 141,500
----------
Total uses................................................. $1,111,500
==========

REALTY COMPANY
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following financial statements reflect the unaudited pro forma
consolidated balance sheet of Realty Company as of December 31, 1997 and the
unaudited pro forma consolidated statement of income of Realty Company for the
year ended December 31, 1997 as if the Reorganization Transactions had
occurred on January 1, 1997. The pro forma information may not necessarily
reflect the financial position and results of operations of Realty Company
that would have been obtained had Realty Company been a separate, publicly
held company on such date or at the beginning of the period indicated. In
addition, the pro forma financial statements do not purport to be indicative
of future operating results of Realty Company.

The accompanying unaudited pro forma consolidated financial statements
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Realty Company" included
elsewhere herein.

REALTY COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

REALTY PRO FORMA
COMPANY REORGANIZATION REALTY
HISTORICAL TRANSACTIONS COMPANY
---------- -------------- ---------

Rental income............................. $ - $225,000(a) $225,000
--------- -------- --------
General and administrative expenses....... - 7,750(b) 10,150
2,400(c)
Interest expense.......................... - 79,330(d) 79,330
Depreciation.............................. - 45,969(e) 45,969
--------- -------- --------
- 135,449 135,449
--------- -------- --------
Net income................................ $ - $ 89,551 $ 89,551
========= ======== ========
Earnings per common share:
Basic.................................... $ 1.30
Diluted.................................. 1.27
Shares used in computing earnings per
common share:
Basic.................................... 68,938
Diluted.................................. 70,359

See accompanying notes to the unaudited
pro forma consolidated financial statements.

REALTY COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)

REALTY PRO FORMA
COMPANY REORGANIZATION REALTY
HISTORICAL TRANSACTIONS COMPANY
---------- -------------- ----------

ASSETS
Current assets:
Cash and cash equivalents............. $ - $ - $ -
Accounts and notes receivable......... - - -
Inventories........................... - - -
Income taxes.......................... - - -
Other................................. - - -
--------- ---------- ----------
- - -
--------- ---------- ----------
Property and equipment, at cost:
Land.................................. - 120,257 (f) 120,257
Buildings............................. - 975,363 (f) 975,363
Equipment............................. - 41,686 (f) 41,686
Construction in progress.............. - - -
--------- ---------- ----------
- 1,137,306 1,137,306
Accumulated depreciation.............. - (212,976)(f) (212,976)
--------- ---------- ----------
- 924,330 924,330
Goodwill............................... - - -
Investments in affiliates.............. - - -
Other.................................. - 7,500(g) 7,500
--------- ---------- ----------
$ - $ 931,830 $ 931,830
========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................... $ - $ - $ -
Salaries, wages and other
compensation......................... - - -
Other accrued liabilities............. - - -
Long-term debt due within one year.... - 9,150(h) 9,150
--------- ---------- ----------
- 9,150 9,150
--------- ---------- ----------
Long-term debt......................... (9,150)(h) 975,442
- 984,592 (i)
Deferred credits and other liabilities. - 4,100 (j) 4,100
Minority interests in equity of
consolidated entities................. - - -
Common stockholders' equity (deficit).. - (56,862)(k) (56,862)
--------- ---------- ----------
$ - $ 931,830 $ 931,830
========= ========== ==========

See accompanying notes to the unaudited
pro forma consolidated financial statements.

REALTY COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--BASIS OF PRESENTATION

NOTE 2--PRO FORMA ADJUSTMENTS

(a) To record the estimated Annual Base Rent from Operating Company in
connection with the Master Lease Agreement.

(b) To record the estimated general and administrative expenses to be
incurred by Realty Company which include salaries, employee benefits,
office rent and administrative costs incurred in connection with
various development activities.

(c) To record the cost of administrative services provided by Operating
Company in connection with the Transition Services Agreement.

(d) To record interest expense related to the anticipated Realty Company
Debt Facilities (dollars in thousands):

INTEREST
DEBT EXPENSE
-------- --------

Realty Company Credit Facility (assumed interest rate
8%).................................................. $ 34,592 $ 2,767
Realty Company Term A Loan (assumed interest rate 8
1/4%)................................................ 250,000 20,625
Realty Company Term B Loan (assumed interest rate 8
1/2%)................................................ 250,000 21,250
Realty Company CMBS Debt (assumed interest rate 7
3/8%)................................................ 450,000 33,188
-------- -------
$984,592 77,830
========
Add amortization of $7.5 million of deferred financing
costs related to Realty Company Debt Facilities...... 1,500
-------
Total Realty Company interest expense............... $79,330
=======

(e) To record depreciation expense related to property and equipment
retained by Realty Company.

(f) To record property and equipment and related accumulated depreciation
retained by Realty Company.

(g) To record deferred financing costs related to the Realty Company Debt
Facilities.

(h) To record long-term debt due within one year.

(i) To record anticipated amounts to be borrowed under the Realty Company
Debt Facilities.

(j) To record deferred income taxes related to the property and equipment
retained by Realty Company.

(k) To record the carrying value of the net liabilities retained by Realty
Company.

NOTE 3--WORKING CAPITAL

The pro forma consolidated balance sheet of Realty Company reflects a
working capital deficiency at December 31, 1997. It is anticipated that the
first monthly rent payment will be paid to Realty Company on a pro rata basis
on or shortly after the Distribution Date. Accordingly, management does not
believe that any contributions of working capital will be necessary at the
Distribution Date.

NOTE 4--INCOME TAXES

The pro forma consolidated financial statements assume that Realty Company
qualifies as a REIT on January 1, 1997. As a result, no provision for income
taxes have been recorded in the pro forma consolidated financial statements.

NOTE 5--PRO FORMA EARNINGS PER COMMON SHARE

Pro forma earnings per common share of Realty Company are based upon the
number of shares used in computing earnings per common share of the Company.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF REALTY COMPANY

GENERAL

Realty Company intends to make an election to qualify under the Code as a
REIT commencing with its taxable year beginning January 1, 1999. Substantially
all of Realty Company's initial revenues are expected to be derived from rents
received from Operating Company under the Leases.

Realty Company will not have been operated as a REIT prior to the
Distribution Date. Accordingly, the financial statements of Realty Company
will consist solely of its operations after the Distribution Date. For
accounting purposes, the assets and liabilities of Realty Company will be
recorded at their respective historical carrying values at the Distribution
Date. See "The Distribution Proposal--Accounting Treatment."

PRO FORMA RESULTS OF OPERATIONS

On a pro forma basis, after giving effect to the Reorganization
Transactions, the Company estimates that for the year ended December 31, 1997,
(i) Realty Company revenues would have approximated $225.0 million and (ii)
net income for Realty Company would have been $89.6 million or $1.27 per
diluted share of Realty Company Common Stock. See "Realty Company Unaudited
Pro Forma Consolidated Financial Statements."

LIQUIDITY

In connection with the Distribution Proposal, the Company will be required
to refinance substantially all of its long-term debt, including the Company
Bank Facility and the Company Notes. In lieu of repurchasing the Company
Notes, the Company may obtain consents to amend the terms of the Company
Notes, exchange Company Notes for other securities or some combination of the
foregoing. Management is considering a capitalization plan for both Operating
Company and Realty Company to be effected on or before the Distribution Date
in which the Company's long-term debt is expected to be refinanced and assumed
by either Operating Company or Realty Company at interest rates and terms
which are expected to be less favorable than those of the Company's current
debt arrangements.

In connection with the refinancing of the Company's long-term debt, it is
anticipated that the Realty Company will have consummated the Realty Company
Financing Transactions which would provide Realty Company with an aggregate of
$1.2 billion of available credit at the Distribution Date. The Realty Company
Debt Facilities are expected to comprise a (i) three year $250 million Realty
Company Credit Facility, (ii) a $250 million Realty Company Term A Loan
payable in various installments over three years and (iii) a $250 million
Realty Company Term B Loan payable in installments of 1% per year with the
outstanding balance due at the end of five years. Interest rates could
approximate LIBOR plus 2 1/4%, LIBOR plus 2 1/2% and LIBOR plus 2 3/4%,
respectively. In addition, the Realty Company Debt Facilities are expected to
include $450 million of Realty Company CMBS Debt payable based on a twenty-
five year amortization with the unpaid balance due at the end of ten years at
interest rates up to U.S. Treasury Bill rates plus 1 3/4%.

Anticipated financing arrangements to be consummated on or before the
Distribution Date will contain customary covenants which will require, among
other things, maintenance of certain financial ratios and limit amounts of
additional debt, repurchases of common stock, dividends and capital
expenditures. In addition, the Realty Company Credit Facility includes certain
limitations on amounts which may be borrowed under the agreement.

On a pro forma basis, the amount of outstanding debt under the Realty
Company Debt Facilities would approximate $984.6 million at December 31, 1997.

All subsidiary capital stock of Realty Company will be pledged as collateral
in connection with the anticipated Realty Company Credit Facility, Realty
Company Term A Loan and Realty Company Term B Loan. In addition, the Realty
Company CMBS Debt is expected to be secured by certain assets of Realty
Company.

There can be no assurance that sufficient financing will be available on the
terms discussed above, that such terms will be acceptable to the Realty
Company at the Distribution Date, or that the Realty Company will have the
financial resources necessary to implement its acquisition plans following the
Distribution Date. The Reorganization Transactions are conditioned upon the
consummation of the Financing Transactions.

In connection with the Reorganization Transactions, the Company will seek to
assign the Third Party Leases to Operating Company and obtain releases for the
Company from the lessors. If such assignments and releases cannot be obtained,
the Company will sublease the properties to Operating Company. The Company
currently leases eight long-term acute care hospitals and 78 nursing centers.
There can be no assurance that the Company will receive material consents to
assignment of and release from the Third Party Leases. In order for the
Company to obtain such consents for assignment, Realty Company may have to
remain primarily liable for the obligations of Operating Company under the
Third Party Leases. There can be no assurance that Operating Company will have
sufficient assets, income and access to financing to enable it to satisfy its
obligations under the Third Party Leases. As a result, if Operating Company
were unable to satisfy such obligations, Realty Company would be obligated to
satisfy the Third Party Lease obligations which could affect Realty Company's
ability to make distributions to its stockholders.

The pro forma consolidated balance sheet reflects a working capital
deficiency at December 31, 1997. It is anticipated that the first monthly
rental payment under the Leases will be paid to Realty Company on a pro rata
basis on or shortly after the Distribution Date. Accordingly, management does
not believe that any contribution of working capital will be necessary at the
Distribution Date. Management also believes that the expected financing plan
discussed above, cash flows from operations and available borrowings under the
Realty Company Credit Facility will be sufficient to meet the expected
liquidity needs of Realty Company in 1998.

Realty Company intends to make quarterly distributions to its stockholders
following the Conversion Date in amounts not less than the amounts necessary
to maintain its REIT status under the Code. Realty Company does not intend to
make any distributions to its stockholders in 1998. See "Distribution and
Dividend Policy" included elsewhere herein.

CAPITAL RESOURCES

Under the terms of the Master Lease Agreement, capital expenditures related
to the maintenance and improvement to the Leased Properties will generally be
incurred by Operating Company. Accordingly, Realty Company does not believe
that it will incur any major expenditures in connection with the Leased
Properties during the terms of the Leases. Realty Company anticipates entering
into similar triple-net leases with respect to additional properties,
including the properties currently being developed by Operating Company
pursuant to the Development Agreement. After the terms of the respective
Leases expire, or in the event that Operating Company is unable to meet its
obligations under the Leases, Realty Company anticipates that any expenditures
for which it may become responsible to maintain the facilities will be funded
by cash flows from operations and, in the case of major expenditures, through
additional borrowings or issuances of equity. To the extent that unanticipated
expenditures or significant borrowings are required, liquidity of Realty
Company may be adversely affected.

Other than the purchase of Development Properties pursuant to the
Development Agreement, Realty Company has no commitments with respect to
capital expenditures. However, pursuant to the Participation Agreement, Realty
Company has a right of first offer with respect to certain healthcare
properties to be sold or mortgaged by Operating Company for a period of three
years following the Distribution Date.

Available sources of capital to finance future growth will include available
borrowings under the Realty Company Credit Facility, public or private debt
and equity. Availability and terms of any such issuance will depend upon the
market for such securities and other conditions at such time. There can be no
assurance that such additional financing or capital will be available on terms
acceptable to Realty Company. Realty Company may, under certain circumstances,
borrow additional amounts in connection with the acquisition of additional
properties, including the Development Properties or, as necessary to meet
certain distribution requirements imposed on REITs under the Code. Realty
Company's liquidity requirements with respect to future acquisitions may be
reduced to the extent that it uses Realty Company Common Stock or units in the
Realty Company Partnership as consideration for such purchases.

THE COMPANY AND OPERATING COMPANY
SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth selected historical financial data of the
Company for each of the five years in the period ended December 31, 1997. For
accounting purposes, the consolidated historical financial statements of the
Company will become the historical financial statements of Operating Company
after the Distribution Date. Accordingly, the selected historical financial
data presented herein have been derived from the audited consolidated
financial statements of the Company. The following selected financial data
relate to the business of Operating Company as it was operated as part of the
Company and may not reflect the results of operations or financial position
that would have been obtained had Operating Company been a separate, publicly
held company during such periods. In particular, the effect of lease payments
that would have been incurred by Operating Company pursuant to the Leases are
not reflected herein. Operating Company will also incur interest expense
related to the Operating Company Debt Facilities at higher rates than incurred
by the Company. In addition, the historical financial statements of Operating
Company include certain expenses that, upon completion of the Reorganization
Transactions, will not be included in future Operating Company financial
statements. Such expenses include (i) expenses for depreciation on real estate
assets which Operating Company will lease from Realty Company and (ii)
interest expense related to long-term debt which will be assumed by Realty
Company. The following table should be read in conjunction with: "Realty
Company Unaudited Pro Forma Consolidated Financial Statements," "Operating
Company Unaudited Pro Forma Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Operating Company" and the historical consolidated
financial statements of the Company presented elsewhere herein.

THE COMPANY AND OPERATING COMPANY
SELECTED HISTORICAL FINANCIAL DATA

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

STATEMENT OF OPERATIONS
DATA:
Revenues................ $ 3,116,004 $ 2,577,783 $ 2,323,956 $ 2,032,827 $ 1,727,436
----------- ----------- ----------- ----------- -----------
Salaries, wages and ben-
efits.................. 1,788,053 1,490,938 1,360,018 1,167,181 985,163
Supplies................ 303,140 261,621 233,066 216,587 186,473
Rent.................... 89,474 77,795 79,476 79,371 74,323
Other operating ex-
penses................. 490,327 405,797 372,657 312,087 270,014
Depreciation and amorti-
zation................. 123,865 99,533 89,478 79,519 69,126
Interest expense........ 102,736 45,922 60,918 62,828 73,559
Investment income....... (6,057) (12,203) (13,444) (13,126) (16,056)
Non-recurring transac- - 125,200 109,423 (4,540) 5,769
tions.................. ----------- ----------- ----------- ----------- -----------
2,891,538 2,494,603 2,291,592 1,899,907 1,648,371
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 224,466 83,180 32,364 132,920 79,065
Provision for income 89,338 35,175 24,001 46,781 10,089
taxes.................. ----------- ----------- ----------- ----------- -----------
Income from operations.. 135,128 48,005 8,363 86,139 68,976
Extraordinary loss on
extinguishment of debt,
net of income taxes.... (4,195) - (23,252) (241) (2,217)
Cumulative effect on
prior years of a change
in accounting for - - - - (1,103)
income taxes........... ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 130,933 $ 48,005 $ (14,889) $ 85,898 $ 65,656
=========== =========== =========== =========== ===========
Earnings (loss) per
common share:
Basic:
Income from
operations........... $ 1.96 $ 0.69 $ 0.22 $ 1.41 $ 1.28
Extraordinary loss on
extinguishment of
debt................. (0.06) - (0.38) - (0.04)
Cumulative effect on
prior years of a
change in accounting - - - - (0.02)
for income taxes..... ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 1.90 $ 0.69 $ (0.16) $ 1.41 $ 1.22
=========== =========== =========== =========== ===========
Diluted:
Income from
operations........... $ 1.92 $ 0.68 $ 0.29 $ 1.28 $ 1.22
Extraordinary loss on
extinguishment of
debt................. (0.06) - (0.32) - (0.04)
Cumulative effect on
prior years of a
change in accounting - - - - (0.02)
for income taxes..... ----------- ----------- ----------- ----------- -----------
Net income (loss).... $ 1.86 $ 0.68 $ (0.03) $ 1.28 $ 1.16
=========== =========== =========== =========== ===========
Shares used in
computing earnings
(loss) per common
share:
Basic................. 68,938 69,704 61,196 55,522 51,985
Diluted............... 70,359 70,702 71,967 69,014 60,640
FINANCIAL POSITION:
Working capital......... $ 445,086 $ 320,123 $ 239,666 $ 129,079 $ 114,339
Assets.................. 3,334,739 1,968,856 1,912,454 1,656,205 1,563,350
Long-term debt.......... 1,919,624 710,507 778,100 746,212 784,801
Stockholders' equity.... 905,350 797,091 772,064 596,454 485,550
OPERATING DATA:
Number of hospitals..... 60 38 36 33 26
Number of hospital li-
censed beds............ 5,273 3,325 3,263 2,511 2,198
Number of hospital pa-
tient days............. 767,810 586,144 489,612 403,623 293,367
Number of nursing cen-
ters................... 309 313 311 310 325
Number of nursing center
licensed beds.......... 40,383 39,619 39,480 39,423 40,759
Number of nursing center
patient days........... 12,622,238 12,566,763 12,569,600 12,654,016 12,770,435
Number of Vencare con-
tracts................. 3,877 4,346 4,072 2,648 1,628

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

GENERAL

The Company is one of the largest providers of long-term healthcare services
in the United States. At December 31, 1997, the Company operated 60 long-term
acute care hospitals (5,273 licensed beds), 309 nursing centers (40,383
licensed beds) and the Vencare contract services business which primarily
provides respiratory and rehabilitation therapies, medical services and
pharmacy management services to approximately 2,900 healthcare facilities.

HILLHAVEN MERGER

The Hillhaven Merger was consummated on September 28, 1995. At the time of
the Hillhaven Merger, Hillhaven operated 311 nursing centers, 56 retail and
institutional pharmacies and 23 independent and assisted living communities
with 3,122 units. Annualized revenues approximated $1.7 billion. See Note 2 of
the Notes to Consolidated Financial Statements for a description of the
Hillhaven Merger.

Prior to its merger with the Company, Hillhaven completed the Nationwide
Merger on June 30, 1995. At the time of the Nationwide Merger, Nationwide
operated 23 nursing centers containing 3,257 licensed beds and four
independent and assisted living communities with 442 units. Annualized
revenues approximated $125 million. See Note 3 of the Notes to Consolidated
Financial Statements for a description of the Nationwide Merger.

As discussed in the Notes to Consolidated Financial Statements, the
Hillhaven Merger and the Nationwide Merger have been accounted for by the
pooling-of-interests method. Accordingly, the accompanying consolidated
financial statements and financial and operating data included herein give
retroactive effect to these transactions and include the combined operations
of the Company, Hillhaven and Nationwide for all periods presented.

STOCK OFFERINGS OF ATRIA

In August 1996, the Company completed the initial public offering of Atria,
its independent and assisted living business, through the issuance of
5,750,000 shares of Atria Common Stock (the "IPO"). For accounting purposes,
the accounts of Atria continued to be consolidated with those of the Company
and minority interests in the earnings and equity of Atria were recorded from
the consummation date of the IPO through June 30, 1997. In July 1997, Atria
completed a secondary equity offering which reduced the Company's ownership
percentage to less than 50%. Accordingly, the Company's investment in Atria
beginning July 1, 1997 has been accounted for under the equity method. At
December 31, 1997, the Company owned 10,000,000 shares, or approximately 43%,
of Atria's outstanding Common Stock. See Note 4 of the Notes to Consolidated
Financial Statements for a description of the stock offerings of Atria.

THERATX MERGER

On March 21, 1997, the merger with TheraTx was completed (the "TheraTx
Merger"). At the time of the TheraTx Merger, TheraTx primarily provided
rehabilitation and respiratory therapy management services and operated 26
nursing centers. Annualized revenues approximated $425 million.

The TheraTx Merger has been accounted for by the purchase method, which
requires that the accounts of acquired entities be included with those of the
Company since the acquisition of a controlling interest.

Accordingly, the accompanying consolidated financial statements include the
operations of TheraTx since March 21, 1997. See Note 5 of the Notes to
Consolidated Financial Statements for a description of the TheraTx Merger.

TRANSITIONAL MERGER

On June 24, 1997, the Company acquired approximately 95% of the outstanding
common stock of Transitional through a cash tender offer, after which time the
operations of Transitional were consolidated with those of the Company in
accordance with the purchase method of accounting. On August 26, 1997, the
merger with Transitional was completed (the "Transitional Merger"). At the
time of the Transitional Merger, Transitional operated 19 long-term acute care
hospitals and provided respiratory therapy management services. Annualized
revenues approximated $350 million. In addition, Transitional owns a 44%
voting equity interest (61% ownership interest) in BHC, an operator of
psychiatric and behavioral clinics. See Note 6 of the Notes to Consolidated
Financial Statements for a description of the Transitional Merger.

RESULTS OF OPERATIONS

A summary of key operating data follows:

YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------

REVENUES (IN THOUSANDS):
Hospitals................................ $ 785,829 $ 551,268 $ 456,486
Nursing centers.......................... 1,722,416 1,615,141 1,512,679(a)
Vencare.................................. 642,471 399,068 316,254
Atria.................................... 31,199 51,846 47,976
---------- ---------- ----------
3,181,915 2,617,323 2,333,395
Elimination.............................. (65,911) (39,540) (9,439)
---------- ---------- ----------
$3,116,004 $2,577,783 $2,323,956
========== ========== ==========
HOSPITAL DATA:
Revenue mix %:
Medicare................................ 63.0 59.4 57.5
Medicaid................................ 8.1 12.3 11.7
Private and other....................... 28.9 28.3 30.8
Patient days:
Medicare................................ 520,144 375,128 314,009
Medicaid................................ 96,490 97,521 76,781
Private and other....................... 151,176 113,495 98,822
---------- ---------- ----------
767,810 586,144 489,612
========== ========== ==========
Average daily census..................... 2,104 1,601 1,341
Occupancy %.............................. 52.9 53.7 47.6
NURSING CENTER DATA:
Revenue mix %:
Medicare................................ 32.1 29.7 28.6
Medicaid................................ 42.9 44.3 44.5
Private and other....................... 25.0 26.0 26.9
Patient days:
Medicare................................ 1,610,470 1,562,645 1,511,259
Medicaid................................ 8,152,503 8,191,450 8,146,881
Private and other....................... 2,859,265 2,812,668 2,911,460
---------- ---------- ----------
12,622,238 12,566,763 12,569,600
========== ========== ==========
Average daily census..................... 34,581 34,335 34,437
Occupancy %.............................. 90.5 91.9 92.2
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare single service con-
tracts................................. 3,846 4,346 4,072
Number of Vencare full service con-
tracts................................. 31 - -
---------- ---------- ----------
3,877 4,346 4,072
========== ========== ==========

- --------
(a) Includes a charge of $24.5 million recorded in connection with the
Hillhaven Merger.

Hospital revenues increased in both 1997 and 1996 from the acquisition of
facilities and growth in same-store patient days. Hospital patient days rose
31% to 767,810 in 1997 and 20% to 586,144 in 1996. Same-store patient days
grew 6% in 1997. Revenues attributable to the Transitional Merger were $138.9
million. Hospital revenues in 1997 were also favorably impacted by increases
in both Medicare and private patient days (for which payment rates are
generally higher than Medicaid) and a decline in Medicaid patient days. Price
increases in both 1997 and 1996 were not significant.

During 1997, the Company sold 28 under-performing or non-strategic nursing
centers and acquired 26 nursing centers in connection with the TheraTx Merger.
Excluding the effect of these sales and acquisitions, nursing center revenues
increased 3%, while patient days declined 2%. The increase in same-store
nursing center revenues resulted primarily from price increases and a 3%
increase in Medicare patient days.

Excluding the effect of sales and acquisitions, nursing center revenue
growth was adversely impacted by a 5% decline in private patient days in 1997.
In an effort to attract increased volumes of Medicare and private pay
patients, the Company implemented a plan to expend approximately $200 million
during 1997 and 1998 to improve existing facilities and expand the range of
services provided to accommodate higher acuity patients.

Vencare revenues for 1997 include approximately $199.4 million related to
contract rehabilitation therapy and certain other ancillary service businesses
acquired as part of the TheraTx Merger. Excluding the TheraTx Merger and other
sales and acquisitions, Vencare revenues grew 12% in 1997 and 26% in 1996
primarily as a result of growth in volume of ancillary services provided per
contract and, in 1996, growth in the number of contracts. Vencare ancillary
service contracts in effect at December 31, 1997 totaled 3,877 compared to
4,346 at December 31, 1996 and 4,072 at December 31, 1995. During 1997, the
Company terminated approximately 700 contracts which did not meet certain
growth criteria and eliminated approximately 670 contracts by combining
previously separate pharmacy, enteral and infusion therapy contracts.

Pharmacy revenues (included in Vencare operations) declined 4% to $167.1
million in 1997 from $174.1 million in the same period last year. The decline
was primarily attributable to the effects of the restructuring of the
institutional pharmacy business initiated in the fourth quarter of 1996 and
the sale of the retail pharmacy outlets in January 1997. Pharmacy revenues
rose 3% in 1996 from $168.8 million in 1995.

As discussed in Note 4 of the Notes to Consolidated Financial Statements,
the decline in Atria revenues in 1997 resulted from a change to the equity
method of accounting for the Company's investment in Atria beginning July 1,
1997. The increase in 1996 revenues resulted primarily from price increases,
growth in occupancy and expansion of ancillary services.

In the fourth quarter of 1996, the Company recorded pretax charges
aggregating $125.2 million ($79.9 million net of tax) primarily to complete
the integration of Hillhaven. In November 1996, the Company executed a
definitive agreement to sell certain under-performing or non-strategic nursing
centers. A charge of $65.3 million was recorded in connection with the planned
disposition of these nursing centers. In addition, the Company's previously
independent institutional pharmacy business, acquired as part of the Hillhaven
Merger, was integrated into Vencare, resulting in a charge of $39.6 million
related primarily to costs associated with employee severance and benefit
costs (approximately 500 employees), facility close down expenses and the
write-off of certain deferred costs for services to be discontinued. A
provision for loss totaling $20.3 million related to the planned replacement
of one hospital and these nursing centers was also recorded in the fourth
quarter. See Note 9 of the Notes to Consolidated Financial Statements.

During 1997, the Company sold 28 of the 34 nursing centers planned for
disposition. Proceeds from the transaction aggregated $10.4 million. One
facility was sold in January 1998, and two nursing centers are expected to be
sold pending regulatory approvals. The Company expects to sell or close the
remaining three facilities in 1998. The reorganization of the institutional
pharmacy business was completed in 1997, which included the elimination of
duplicative administrative functions and establishment of the pharmacy
operations as an integrated part of the Company's hospital operations. The
Company expects that construction activities related to the replacement of one
hospital and three nursing centers will be completed in 1998 and 1999. Accrued
provision for loss related to the facilities to be sold or replaced aggregated
$22.2 million at December 31, 1997.

In the third quarter of 1995, the Company recorded pretax charges
aggregating $128.4 million ($89.9 million net of tax) primarily in connection
with the consummation of the Hillhaven Merger. The charges included (i) $23.2
million of investment advisory and professional fees, (ii) $53.8 million of
employee benefit plan and severance costs (approximately 500 employees), (iii)
$26.9 million of losses associated with the planned disposition of certain
nursing center properties and (iv) $24.5 million of charges to reflect the
Company's change in estimates of accrued revenues recorded in connection with
certain prior-year nursing center third-party reimbursement issues. Operating
results for 1995 also include pretax charges of $5.5 million ($3.7 million net
of tax) recorded in the second quarter related primarily to the Nationwide
Merger. See Note 9 of the Notes to Consolidated Financial Statements.

Income from operations for 1997 totaled $135.1 million, compared to $48.0
million and $8.3 million for 1996 and 1995, respectively. Excluding the effect
of non-recurring transactions, income from operations increased 6% in 1997
from $127.9 million ($1.81 per share-diluted) in 1996 and 25% in 1996 from
$101.9 million ($1.45 per share-diluted) in 1995.

Operating results in 1997 were adversely impacted by a decline in fourth
quarter income from operations to $27.2 million ($0.40 per share-diluted) from
$35.9 million ($0.51 per share-diluted) in the fourth quarter of 1996
(excluding non-recurring charges). The reduction in earnings resulted
primarily from (i) a loss of certain large Vencare contracts and growth in
costs associated with the shift in Vencare product mix from fee-for-service to
fixed fee arrangements in anticipation of significant changes in Medicare
reimbursement expected to take effect on July 1, 1998 and (ii) operating
losses associated with the Transitional Merger. Vencare revenues were $158.2
million in the fourth quarter of 1997 compared to the previous quarter total
of $183.2 million. See "--Healthcare Reform Legislation."

In 1997, the Company initiated the marketing of its Vencare full-service
ancillary services contracts to provide a full range of services to nursing
centers not operated by the Company. The change in the Company's marketing
strategy for selling ancillary services was developed in response to the
anticipated prospective payment system established under the Budget Act. The
Company believes that by bundling services through one provider, nursing
centers can provide quality care more efficiently with the added benefit of
centralized patient medical records. Under the new prospective payment system
imposed under the Budget Act, ancillary services provided by nursing centers
will be subject to fixed payments. In this new environment, the Company
believes that its full-service ancillary services contract will enhance the
ability of nursing center operators to manage effectively the costs of
providing quality care.

As the nursing center industry adapts to the cost containment measures
inherent in the new prospective payment system, the Company believes that the
volume of ancillary services provided per patient day to nursing center
residents could decline. In addition, as a result of these changes, many
nursing facilities are likely to elect to provide ancillary services to its
residents through internal staff and will no longer contract with outside
parties for ancillary services. For these reasons and others, since the
enactment of the Budget Act, sales of new contracts have declined and may
continue to decline subject to the Company's success in implementing its
Vencare comprehensive, full-service contract sales strategy.

Operating results (including interest costs) associated with the hospitals
acquired in the Transitional Merger reduced income from operations in the
fourth quarter by $3.7 million or $0.05 per share and $9.2 million or $0.13
per share for the second half of 1997.

Excluding the effect of non-recurring transactions, growth in operating
income in 1996 resulted primarily from increased hospital volume, growth in
higher margin ancillary services in both Vencare and the nursing center
business and realization of substantial synergies resulting from the Hillhaven
Merger. Management believes that additional revenues resulting from patient
cross-referrals within the healthcare network created by the Hillhaven Merger
aggregated approximately $80 million in 1996. In addition, cost reductions
from elimination of duplicative functions, increased cost efficiencies and
refinancing of long-term debt increased 1996 pretax income by approximately
$20 million.

For more information concerning the provision for income taxes as well as
information regarding differences between effective income tax rates and
statutory rates, see Note 11 of the Notes to Consolidated Financial
Statements.

LIQUIDITY

Cash provided by operations totaled $270.9 million for 1997 compared to
$183.5 million for 1996 and $113.6 million for 1995. Despite growth in
operating cash flows during each of the past three years, cash flows from
operations have been adversely impacted by growth in the outstanding days of
revenues in accounts receivable. Days of revenues in accounts receivable
increased to 67 at December 31, 1997 compared to 54 at December 31, 1996.
Growth in accounts receivable was primarily attributable to growth in
rehabilitation contracts resulting from the TheraTx Merger (collection periods
for which typically require in excess of three months), delays associated with
the conversion of Transitional hospital financial systems and, in 1997 and
1996, the restructuring of the Company's pharmacy operations. Management
believes that certain of these factors may have an adverse effect on cash
flows from operations in 1998.

In connection with the TheraTx Merger and the Transitional Merger, the
Company increased the amount of the Company Bank Facility from $1.0 billion to
$2.0 billion in 1997. At December 31, 1997, available borrowings under the
Company Bank Facility approximated $822 million.

As discussed in Note 13 of the Notes to Consolidated Financial Statements,
the Company completed the $750 million private placement of the Company Notes
in July 1997. The net proceeds of the offering were used to reduce outstanding
borrowings under the Company Bank Facility.

The Company has agreed to guarantee up to $75 million of Atria's $200
million bank credit facility (the "Atria Bank Facility") at December 31, 1997
and lesser amounts each year thereafter through 2000. At December 31, 1997,
there were no outstanding guaranteed borrowings under the Atria Bank Facility.

Working capital totaled $445.1 million at December 31, 1997 compared to
$320.1 million at December 31, 1996. Management believes that current levels
of working capital are sufficient to meet expected liquidity needs.

At December 31, 1997, the Company's ratio of debt to debt and equity
approximated 68% compared to 49% at December 31, 1996. Management intends to
reduce the Company's leverage ratio from current levels. The primary sources
of funds to reduce long-term debt in the future include proceeds from the sale
of certain non-strategic assets and operating cash flows in excess of capital
expenditures and required debt repayments.

In connection with the Reorganization Transactions, the Company will be
required to refinance substantially all of its long-term debt, including the
Company Bank Facility and the $750 million of Company Notes issued in July
1997. In lieu of repurchasing the Company Notes, the Company may obtain
consents to amend the terms of the Company Notes, exchange Company Notes for
other securities or some combination of the foregoing. Management is
considering a capitalization plan for both Operating Company and Realty
Company to be effected on the Distribution Date in which the Company's long-
term debt is expected to be assumed by either Operating Company or Realty
Company at interest rates and terms which are expected to be less favorable
than those of the Company's current debt arrangements. There can be no
assurance that sufficient financing will be available on terms that are
acceptable to either Operating Company or Realty Company, or that either
entity will have the financial resources necessary to implement its respective
acquisition and development plans following the Distribution Date. See "Realty
Company Selected Unaudited Pro Forma Consolidated Financial Data and
Comparative Per Share Data" and "Operating Company Selected Unaudited Pro
Forma Consolidated Financial Data and Comparative Per Share Data" included
elsewhere herein.

CAPITAL RESOURCES

Excluding acquisitions, capital expenditures totaled $281.7 million for 1997
compared to $135.0 million for 1996 and $136.9 million for 1995 which include
$22.6 million, $7.4 million and $4.0 million related to Atria, respectively.
Planned capital expenditures in 1998 (excluding acquisitions) are expected to
approximate $200

million to $250 million and include significant expenditures related to
nursing center improvements, information systems and administrative
facilities. Management believes that its capital expenditure program is
adequate to expand, improve and equip existing facilities.

During 1997, the Company expended approximately $359.4 million and $615.6
million in connection with the TheraTx Merger and the Transitional Merger,
respectively. These acquisitions were financed primarily through the issuance
of long-term debt. See Notes 5 and 6 of the Notes to Consolidated Financial
Statements for a discussion of these acquisitions. The Company also expended
$36.6 million, $26.2 million and $59.3 million for acquisitions of new
facilities (and related healthcare businesses) and previously leased nursing
centers during 1997, 1996, and 1995, respectively, of which $14.6 million,
$5.2 million and $44.2 million related to additional hospital facilities.
Subject to certain limitations related to management's plans to reduce long-
term debt discussed above, the Company intends to acquire additional
hospitals, nursing centers and ancillary service businesses in the future.

Capital expenditures during the last three years were financed primarily
through additional borrowings, internally generated funds and, in 1996, from
the collection of notes receivable aggregating $78.2 million. In addition,
capital expenditures in 1995 were financed through the public offering of 2.2
million shares of Company Common Stock, the proceeds from which totaled $66.5
million. The Company intends to finance a substantial portion of its capital
expenditures with internally generated funds and additional long-term debt.
Sources of capital include available borrowings under the Company Bank
Facility, public or private debt and equity. At December 31, 1997, the
estimated cost to complete and equip construction in progress approximated
$119 million.

In the fourth quarter of 1997, the Company repurchased 2,925,000 shares of
Company Common Stock at an aggregate cost of $81.7 million. Repurchases of
1,950,000 shares of Company Common Stock in 1996 totaled $55.3 million. These
transactions were financed primarily through borrowings under the Company Bank
Facility.

At December 31, 1997, the Company was a party to certain interest rate swap
agreements that eliminate the impact of changes in interest rates on $400
million of outstanding floating rate debt. One agreement for $100 million
expires in April 1998 and provides for fixed rates at 5.7% plus 3/8% to 1
1/8%. A second agreement on $300 million of floating rate debt provides for
fixed rates at 6.4% plus 3/8% to 1 1/8% and expires in $100 million increments
in May 1999, November 1999 and May 2000. The fair values of the swap
agreements are not recognized in the consolidated financial statements. See
Notes 1 and 13 of the Notes to Consolidated Financial Statements.

As discussed in Note 13 of the Notes to Consolidated Financial Statements,
the Company called for redemption all of its outstanding convertible debt
securities in the fourth quarter of 1995, resulting in the issuance of
approximately 7,259,000 shares of Company Common Stock. Approximately $34.4
million of the convertible securities were redeemed in exchange for cash equal
to 104.2% of face value plus accrued interest. These transactions had no
material effect on earnings per common and common equivalent share.

HEALTHCARE REFORM LEGISLATION

The Budget Act, enacted in August 1997, contains 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, over the next five years. Under the Budget Act, annual growth
rates for Medicare will be reduced from over 10% to approximately 7.5% for the
next five years based on specific program baseline projections from the last
five years. Virtually all spending reductions will come from providers and
changes in program components. The Budget Act affects reimbursement systems
for each of the Company's operating units.

The Budget Act will reduce payments to many of the Company's facilities,
including, but not limited to, payments made to the Company's hospitals, by
reducing incentive payments pursuant to TEFRA, reducing allowable costs for
capital expenditures and bad debts and reducing payments for services to
patients transferred from a prospective payment system hospital. The Budget
Act also requires the establishment of PPS for nursing

centers for cost reporting periods beginning on or after July 1, 1998. During
the first three years, the per diem rates for nursing centers will be based on
a blend of facility-specific costs and Federal costs. Thereafter, the per diem
rates will be based solely on Federal costs. The rates for such services have
not been established or published. The payments received under PPS will cover
all services for Medicare patients, including all ancillary services, such as
respiratory therapy, physical therapy, occupational therapy, speech therapy
and certain covered drugs. The Budget Act also requires an adjustment to the
payment system for home health services for cost reporting periods beginning
on or after October 1, 1997. The new system will adjust per visit limits and
establish per beneficiary annual spending limits. A prospective payment system
for home health services will be established by October 1, 1999.

The Company management believes that the Budget Act will adversely impact
its hospital business by reducing payments previously described. Based upon
available information, management believes that the new PPS will benefit
nursing center operations because (i) the Company expects that its casemix
index will be higher than the national average casemix index and based upon
expected payment rates this will result in increases in payments per patient
day and (ii) because the Company expects to benefit from its ability to reduce
the cost of providing ancillary services to residents in its facilities. The
national average casemix index, the Company's casemix index and the average
national rate will be established by the HCFA, and as of the date hereof the
Company does not know what these amounts will be. The Company management
believes that its anticipated growth in nursing center profitability would be
reduced if Congress acts to delay the effective date of PPS. As the nursing
center industry adapts to the cost containment measures inherent in the new
prospective payment system, the Company believes that the volume of ancillary
services provided per patient day to nursing center residents could decline.
In addition, as a result of these changes, many nursing facilities are likely
to elect to provide ancillary services to its residents through internal staff
and will no longer contract with outside parties for ancillary services. For
these reasons and others, since the enactment of the Budget Act, sales of new
contracts have declined and may continue to decline subject to the Company's
success in implementing its Vencare comprehensive, full-service contracts
sales strategy. The Company is developing strategies and operational
modifications to address these changes in the Federal reimbursement system.

In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency guidelines
for speech and occupational therapy services and revised existing guidelines
for physical and respiratory therapy services. The guidelines are based on a
blend of data from wage rates for hospitals and nursing facilities, and
include salary, fringe benefit and expense factors. Rates are defined by
specific geographic market areas, based upon a modified version of the
hospital wage index. Based upon its initial review of the final rules, the
Company believes these rules are slightly more favorable to the Company than
the proposed rules published in March 1997. Under the new prospective payment
system for nursing centers, the reimbursement for these services provided to
nursing center patients will be a component of the total reimbursement allowed
per nursing center patient and the salary equivalency guidelines will no
longer be applicable.

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 the Company. 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 long-term care hospitals and changes in Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.

There can be no assurance that the Budget Act, new salary equivalency rates,
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity.

Medicare revenues as a percentage of total revenues were 34%, 31% and 30%
for 1997, 1996 and 1995, respectively, while Medicaid percentages of revenues
approximated 26%, 31% and 33% for the respective periods.

OTHER INFORMATION

In June 1997, the Company announced that it had entered into a strategic
alliance with CNA Financial Corporation ("CNA") to develop and market a long-
term care insurance product. Under this arrangement, CNA will offer a long-
term care insurance product which features as a benefit certain discounts for
services provided by members of the Company's network of long-term care
providers. Members of this network will act as preferred providers of care to
covered insureds. CNA will be responsible for underwriting, marketing and
distributing the product through its national distribution network and will
provide administrative insurance product support. The Company will reinsure
50% of the risk through a newly formed wholly owned insurance company and will
provide utilization review services. Management believes that the alliance
with CNA will not have a material impact on the Company's liquidity, financial
position or results of operations in 1998.

The Company has initiated a program to prepare its information systems for
the year 2000. Management is currently implementing a plan to replace
substantially all of the Company's financial information systems before the
year 2000, the costs of which has not been determined. Most of these costs
will be capitalized and amortized over a three to five year period.
Modifications to the Company's proprietary VenTouch(TM) clinical information
system are ongoing and will generally be accomplished through the use of
existing internal resources. Clinical equipment in the Company's facilities
will generally be modified through the use of external professional resources.
Incremental costs to complete the necessary changes to clinical equipment
could approximate $10 million to $20 million over the next two years.

Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. Resolution of litigation and other loss
contingencies is not expected to have a material adverse effect on the
Company's liquidity, financial position or results of operations. See Notes 15
and 23 of the Notes to Consolidated Financial Statements.

Both the Company Bank Facility and the Company Notes contain customary
covenants which require, among other things, maintenance of certain financial
ratios and limit amounts of additional debt and repurchases of common stock.
The Company was in compliance with all such covenants at December 31, 1997. If
the Company Bank Facility and the Company Notes are not repurchased, exchanged
or otherwise refinanced or consents are not obtained in connection with the
Reorganization Transactions, the Reorganization Transactions will violate
certain covenants contained in both the Company Bank Facility and the Company
Notes. Management is considering a capitalization plan for Operating Company
and Realty Company to be effected on the Distribution Date in which
substantially all of the Company's long-term debt is expected to be refinanced
and assumed by either Operating Company or Realty Company. See "--Liquidity."

As discussed in Note 1 of the Notes to Consolidated Financial Statements, on
December 31, 1997, Statement of Financial Accounting Standards No. 128
required the Company to change the method of computing earnings per common
share on a retroactive basis. The change in calculation method did not have a
material impact on previously reported earnings per common share.

OPERATING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following financial statements reflect the unaudited pro forma
consolidated balance sheet of Operating Company as of December 31, 1997 and
the unaudited pro forma consolidated statement of income of Operating Company
for the year ended December 31, 1997 as if the Reorganization Transactions had
occurred on January 1, 1997. The pro forma information may not necessarily
reflect the financial position and results of operations of Operating Company
that would have been obtained had Operating Company been a separate, publicly
held company on such date or at the beginning of the period indicated. In
addition, the pro forma financial statements do not purport to be indicative
of future operating results of Operating Company.

For accounting purposes, the historical consolidated financial statements of
the Company will become the historical consolidated financial statements of
Operating Company at the Distribution Date. Accordingly, the pro forma
consolidated financial statements of Operating Company are based upon the
historical consolidated statements of the Company. See "The Distribution
Proposal--Accounting Treatment."

OPERATING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THERATX
AND COMPANY PRO FORMA
COMPANY TRANSITIONAL HISTORICAL REORGANIZATION OPERATING
HISTORICAL MERGERS(A) AS ADJUSTED TRANSACTIONS COMPANY
---------- ------------ ----------- -------------- ----------

Revenues................ $3,116,004 $248,270 $3,364,274 $ - $3,364,274
---------- -------- ---------- --------- ----------
Salaries, wages and ben-
efits.................. 1,788,053 134,151 1,922,204 - 1,922,204
Supplies................ 303,140 23,960 327,100 - 327,100
Rent.................... 89,474 7,451 96,925 225,000 (b) 321,925
Other operating ex-
penses................. 490,327 51,741 542,068 (2,400)(c) 539,668
Depreciation and
amortization........... 123,865 14,558 138,423 (45,969)(d) 92,454
Interest expense........ 102,736 30,827 133,563 (48,563)(e) 85,000
Investment income....... (6,057) (2,834) (8,891) - (8,891)
---------- -------- ---------- --------- ----------
2,891,538 259,854 3,151,392 128,068 3,279,460
---------- -------- ---------- --------- ----------
Income before income
taxes.................. 224,466 (11,584) 212,882 (128,068) 84,814
Provision for income
taxes.................. 89,338 (4,611) 84,727 (46,815)(f) 37,912
---------- -------- ---------- --------- ----------
Income from operations.. $ 135,128 $ (6,973) $ 128,155 $ (81,253) $ 46,902
========== ======== ========== ========= ==========
Earnings per common
share:
Basic................. $ 1.96 $ 0.57
Diluted............... 1.92 0.56
Shares used in computing
earnings per common
share:
Basic................. 68,938 11,500 (r) 80,438
Diluted............... 70,359 11,500 (r) 81,859

See accompanying notes to the unaudited
pro forma consolidated financial statements.

OPERATING COMPANY
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)

PRO FORMA
COMPANY REORGANIZATION OPERATING
HISTORICAL TRANSACTIONS COMPANY
---------- -------------- ----------

ASSETS
Current assets:
Cash and cash equivalents............ $ 82,473 $ 10,000 (g) $ 96,473
100,000 (h)
(120,000)(i)
1,500 (j)
30,000 (k)
(7,500)(l)
Accounts and notes receivable........ 619,068 - 619,068
Inventories.......................... 27,605 - 27,605
Income taxes......................... 73,413 54,263 (i) 127,676
Other................................ 55,589 - 55,589
---------- ----------- ----------
858,148 68,263 926,411
---------- ----------- ----------
Property and equipment, at cost:
Land................................. 144,074 (120,257)(m) 23,817
Buildings............................ 1,084,770 (975,363)(m) 109,407
Equipment............................ 592,335 (41,686)(m) 550,649
Construction in progress............. 174,851 - 174,851
---------- ----------- ----------
1,996,030 (1,137,306) 858,724
Accumulated depreciation............. (488,212) 212,976 (m) (275,236)
---------- ----------- ----------
1,507,818 (924,330) 583,488
Goodwill.............................. 659,311 - 659,311
Investments in affiliates............. 178,301 - 178,301
Other................................. 131,161 (40,000)(n) 98,661
7,500 (l)
---------- ----------- ----------
$3,334,739 $ (888,567) $2,446,172
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities;
Accounts payable..................... $ 106,019 $ - $ 106,019
Salaries, wages and other compensa-
tion................................ 163,642 - 163,642
Other accrued liabilities............ 115,933 (7,737)(i) 108,196
Long-term debt due within one year... 27,468 (27,468)(k) 19,000
19,000 (o)
---------- ----------- ----------
413,062 (16,205) 396,857
---------- ----------- ----------
Long-term debt........................ 1,919,624 (919,624)(k) 981,000
(19,000)(o)
Deferred credits and other liabili-
ties................................. 94,653 (4,100)(p) 90,553
Minority interests in equity of con-
solidated entities................... 2,050 - 2,050
Mandatory redeemable preferred stock.. - 10,000 (g) 10,000
Common stockholders' equity........... 905,350 100,000 (h) 965,712
1,500 (j)
(98,000)(i)
56,862 (q)
---------- ----------- ----------
$3,334,739 $ (888,567) $2,446,172
========== =========== ==========

See accompanying notes to the unaudited
pro forma consolidated financial statements.

OPERATING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--BASIS OF PRESENTATION

For accounting purposes, the historical consolidated financial statements of
the Company will become the historical consolidated financial statements of
Operating Company at the Distribution Date. Accordingly, the accompanying
unaudited pro forma consolidated financial statements of Operating Company are
based upon the historical consolidated financial statements of the Company.

The unaudited pro forma consolidated statement of income excludes certain
non-recurring costs associated with the Reorganization Transactions which are
expected to approximate $98 million net of income taxes.

NOTE 2--THERATX AND TRANSITIONAL MERGERS

The pro forma consolidated financial statements reflect the TheraTx Merger
and Transitional Merger as if each had occurred on January 1, 1997. For both
periods presented, pro forma financial data have been derived by combining the
financial results of the Company and TheraTx (based upon year end reporting
periods ended December 31) and Transitional (based upon year end reporting
periods ended November 30). Pro forma income from operations for 1997 excludes
$29.7 million of costs incurred by both TheraTx and Transitional in connection
with the acquisitions.

NOTE 3--PRO FORMA ADJUSTMENTS

(a) To reflect the operating results of TheraTx and Transitional for
periods prior to the respective combination dates, and to record
additional interest expense and amortization incurred in connection
with the TheraTx Merger and the Transitional Merger.

(b) To record the estimated Annual Base Rent payable to Realty Company in
connection with the Master Lease Agreement.

(c) To record income related to administrative services provided to Realty
Company in connection with the Transition Services Agreement.

(d) To eliminate depreciation expense related to property and equipment
retained by Realty Company.

(e) To eliminate interest expense related to the anticipated Realty Company
Debt Facilities (dollars in thousands):

DEBT INTEREST
---------- ---------

Operating Company Term A Loan (assumed inter-
est rate 8 1/4%)............................. $ 400,000 $ 33,000
Operating Company Term B Loan (assumed inter-
est rate 8 1/2%)............................. 400,000 34,000
Operating Company Bridge Loan (assumed inter-
est rate 8 1/4%)............................. 200,000 16,500
---------- ---------
$1,000,000 83,500
==========
Add amortization of $7.5 million of deferred
financing costs related to Operating Company
Debt Facilities.............................. 1,500
---------
Total Operating Company interest expense.... 85,000
Eliminate historical interest expense......... (133,563)
---------
Total interest expense elimination........ $ (48,563)
=========

OPERATING COMPANY
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--PRO FORMA ADJUSTMENTS (CONTINUED)

(f) To record the pro forma provision for income taxes, including the
effect of an increase in the effective income tax rate as a result of
the Reorganization Transactions.

(g) To record the issuance of Operating Company Series A Preferred Stock.

(h) To record the effect of the Operating Company Offering.

(i) To record the payment of anticipated transaction costs related to the
Reorganization Transactions.

(j) To record the issuance of common stock pursuant to the Ownership
Program (as defined herein).

(k) To record anticipated amounts to be borrowed under the Operating
Company Debt Facilities.

(l) To record deferred financing costs related to the Operating Company
Debt Facilities.

(m) To eliminate property and equipment and related accumulated
depreciation retained by Realty Company.

(n) To write off deferred financing costs related to debt anticipated to be
refinanced.

(o) To record long-term debt due within one year.

(p) To eliminate deferred income taxes related to property and equipment
retained by Realty Company.

(q) To eliminate the carrying value of the net liabilities retained by
Realty Company.

(r) To reflect the effect of the Operating Company Offering (assumed
issuance of 10,000,000 shares) and the issuance of Operating Company
Common Stock pursuant to the Ownership Program (assumed issuance of
1,500,000 shares).

NOTE 4--INCOME TAXES

Estimated income taxes related to pro forma adjustments (a), (b), (c), (d),
and (e) were recorded at an assumed combined federal and state income tax rate
of 38.5% adjusted for certain nondeductible items that comprise a larger
proportionate percentage of Operating Company taxable income.

NOTE 5--PRO FORMA EARNINGS PER COMMON SHARE

Pro forma earnings per common share of Operating Company are based upon the
number of shares used in computing earnings per common share of the Company,
adjusted to reflect (i) an assumed Distribution Ratio of one share of
Operating Company Common Stock for each outstanding share of Company Common
Stock, (ii) the Operating Company Offering (assumed issuance of 10,000,000
shares), (iii) the issuance of 1,500,000 shares of Operating Company Common
Stock pursuant to the Ownership Plan and (iv) an annual dividend requirement
associated with the Operating Company Series A Preferred Stock approximating
$900,000.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF OPERATING COMPANY

GENERAL

The Selected Historical Financial Data and the consolidated financial
statements included in this Proxy Statement set forth certain data with
respect to the financial position, results of operations and cash flows of the
Company which should be read in conjunction with the following discussion and
analysis. For accounting purposes, the historical consolidated financial
statements of the Company will become the historical consolidated financial
statements of Operating Company after the Distribution Date. Accordingly,
management's discussion and analysis with respect to the historical financial
position, results of operations and cash flows of Operating Company is
substantially identical to management's discussion and analysis related to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company."

For accounting purposes, the assets and liabilities of Operating Company
will be recorded at their historical carrying values at the Distribution Date.
See "The Distribution Proposal--Accounting Treatment."

PRO FORMA RESULTS OF OPERATIONS

The historical consolidated financial statements of the Company will relate
to the business of Operating Company after the Distribution Date and may not
reflect the financial position, results of operations and cash flows that
would have been obtained had Operating Company been a separate, publicly held
company during such periods.

On a pro forma basis, after giving effect to the Reorganization
Transactions, the Company estimates that for the year ended December 31, 1997,
(i) Operating Company revenues would have approximated $3.36 billion, (ii)
rental payments to Realty Company would have approximated $225 million and
(iii) net income for Operating Company would have been $46.2 million or $0.55
per diluted share of Operating Company Common Stock. See "Operating Company
Unaudited Pro Forma Consolidated Financial Statements."

LIQUIDITY

In connection with the Distribution Proposal, the Company will be required
to refinance substantially all of its long-term debt, including the Company
Bank Facility and the Company Notes. In lieu of repurchasing the Company
Notes, the Company may obtain consents to amend the terms of the Company
Notes, exchange Company Notes for other securities or some combination of the
foregoing. Management is considering a capitalization plan for both Operating
Company and Realty Company to be effected on the Distribution Date in which
the Company's long-term debt is expected to be refinanced and assumed by
either Operating Company or Realty Company at interest rates and terms which
are expected to be less favorable than those of the Company's current debt
arrangements.

In connection with the refinancing of the Company's long-term debt, it is
anticipated that Operating Company will have consummated the Operating Company
Financing Transactions which could aggregate $1.3 billion at the Distribution
Date. The Operating Company Debt Facilities are expected to comprise a (i) six
year $300 million Operating Company Credit Facility, (ii) a $400 million
Operating Company Term A Loan payable in various installments over six years
and (iii) a $400 million Operating Company Term B Loan payable in installments
of 1% per year with the outstanding balance due at the end of seven years.
Interest rates could approximate LIBOR plus 2 1/2%, LIBOR plus 2 1/2% and
LIBOR plus 2 3/4%, respectively.

The Operating Company Financing Transactions also include the 18 to 24 month
$200 million Operating Company Bridge Loan with interest payable at LIBOR plus
2 1/2%, to be repaid from the proceeds of the sale of certain non-strategic
assets, including the sale of Atria Common Stock. The carrying value and fair
value of the Company's investment in Atria Common Stock at December 31, 1997
aggregated $85.9 million and $171.3 million, respectively. If Operating
Company is unable to sell the Atria Common Stock or other assets, Operating
Company expects that it would be required to refinance the Operating Company
Bridge Loan with available amounts under the Operating Company Credit
Facility, public or private debt and equity or a combination thereof.

The Operating Company Debt Facilities are expected to be collateralized by
all of the assets and subsidiary capital stock of Operating Company.

On a pro forma basis, the amount of outstanding debt under the Operating
Company Debt Facilities would approximate $1.0 billion at December 31, 1997.

As part of the capitalization plan for Operating Company, management intends
to consummate the Operating Company Offering in the amount of $100 million. In
addition, the Company expects to issue $10 million of Series A Preferred Stock
prior to the Distribution Date. Proceeds from the offerings are expected to be
used to reduce indebtedness.

On a pro forma basis, working capital of Operating Company totaled $529.6
million at December 31, 1997. Management believes that the expected financing
plan discussed above, cash flows from operations and available borrowings
under the Operating Company Credit Facility will be sufficient to meet the
expected liquidity needs of Operating Company.

There can be no assurance that sufficient financing will be available on the
terms discussed above, that such terms will be acceptable to Operating Company
at the Distribution Date, or that Operating Company will have the financial
resources necessary to implement its acquisition and development plans
following the Distribution Date. The Reorganization Transactions are
conditioned upon the successful financing of both Operating Company and Realty
Company as separate independent entities.

CAPITAL RESOURCES

Under the terms of the Master Lease Agreement, capital expenditures related
to the maintenance and improvement to the Leased Properties will generally be
incurred by Operating Company. Excluding acquisitions, management expects that
capital expenditures for the first year following the Distribution Date could
approximate $175 million to $200 million.

Capital expenditures are expected to be financed primarily through cash
flows from operations and additional borrowings. Sources of capital will
include available borrowings under the Operating Company Credit Facility,
public or private debt and equity.

Management intends to acquire various healthcare businesses in the future as
part of its growth strategy. However, the amount of available capital to
finance such acquisitions will be substantially less than that currently
available to the Company.

HEALTHCARE REFORM LEGISLATION

The Budget Act will reduce payments to many of Operating Company's
facilities, including, but not limited to, payments made to Operating
Company's hospitals, by reducing incentive payments pursuant to TEFRA,
reducing allowable costs for capital expenditures and bad debts and reducing
payments for services to patients transferred from a prospective payment
system hospital. The Budget Act also requires the establishment of PPS for
nursing centers for cost reporting periods beginning on or after July 1, 1998.
During the first three years, the per diem rates for nursing centers will be
based on a blend of facility-specific costs and Federal costs. Thereafter, the
per diem rates will be based solely on Federal costs. The rates for such
services have not been established or published. The payments received under
PPS will cover all services for Medicare patients, including all ancillary
services, such as respiratory therapy, physical therapy, occupational therapy,
speech therapy and certain covered drugs. The Budget Act also requires an
adjustment to the payment system for home health services for cost reporting
periods beginning on or after October 1, 1997. The new system will adjust per
visit limits and establish per beneficiary annual limits. A prospective
payment system for home health services will be established by October 1,
1999.

Operating Company management believes that the Budget Act will adversely
impact its hospital business by reducing payments previously described. Based
upon available information, management believes that the new PPS will benefit
nursing center operations because (i) Operating Company expects that its
casemix index will be higher than the national average casemix index and based
upon expected payment rates this will result in increases in payments per
patient day and (ii) because Operating Company expects to benefit from its
ability to reduce the cost of providing ancillary services to residents in its
facilities. The national average casemix index, the Operating Company's
casemix index and the average national rate will be established by HCFA, and
as of the date hereof Operating Company does not know what these amounts will
be. Operating Company management believes that its anticipated growth in
nursing center profitability would be reduced if Congress acts to delay the
effective date of PPS. As the nursing center industry adapts to the cost
containment measures inherent in the new prospective payment system, Operating
Company believes that the volume of ancillary services provided per patient
day to nursing center residents could decline. In addition, as a result of
these changes, many nursing facilities are likely to elect to provide
ancillary services to its residents through internal staff and will no longer
contract with outside parties for ancillary services. For these reasons and
others, since the enactment of the Budget Act, sales of new contracts have
declined and may continue to decline subject to Operating Company's success
implementing its Vencare comprehensive, full-service contracts sales strategy.
Operating Company is developing strategies and operational modifications to
address these changes in the Federal reimbursement system.

In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services that will be provided by the Company
(including the rehabilitation contract therapy business acquired as part of
the TheraTx Merger). Under the new rules, HCFA established salary equivalency
guidelines for speech and occupational therapy services and revised guidelines
for physical and respiratory therapy services. The guidelines are based on a
blend of data from wage rates for hospitals and nursing facilities, and
include salary, fringe benefit and expense factors. Rates are defined by
specific geographic market areas, based upon a modified version of the
hospital wage index. Based upon its initial review of the final rules,
Operating Company believes these rules are slightly more favorable to
Operating Company than the proposed rules published in March 1997. Under the
new prospective payment system for nursing centers, the reimbursement for
these services provided to nursing center residents will be a component of the
total reimbursement allowed per nursing center patient and the salary
equivalency guidelines will no longer be applicable.

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 Operating Company. 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 long-term care hospitals and changes in Medicaid
reimbursement system applicable to Operating Company's hospitals. There are
also a number of legislative proposals including cost caps and the
establishment of Medicaid prospective payment systems for nursing centers.
Moreover, by repealing the Boren Amendment, the Budget Act eases existing
impediments to the states' ability to reduce their Medicaid reimbursement
levels.

There can be no assurance that the Budget Act, new salary equivalency rates,
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on Operating Company's financial condition, results of
operations or liquidity.

Medicare revenues as a percentage of total revenues were 34%, 31% and 30%
for 1997, 1996 and 1995 respectively, while Medicaid percentages of revenues
approximated 26%, 31% and 33% for the respective periods.

OTHER INFORMATION

In connection with the Reorganization Transactions, the strategic alliance
with CNA Financial Corporation ("CNA") to develop and market a long-term care
insurance product is expected to be implemented by Operating Company. Under
this arrangement, CNA will offer a long-term care insurance product which
features as a benefit

certain discounts for services provided by members of Operating Company's
network of long-term care providers. Members of this network will act as
preferred providers of care to covered insureds. CNA will be responsible for
underwriting, marketing and distributing the product through its national
distribution network and will provide administrative insurance product
support. Operating Company will reinsure 50% of the risk through a newly
formed wholly-owned insurance company and will provide utilization review
services. Management believes that the alliance with CNA will not have a
material impact on Operating Company's liquidity, financial position or
results of operations in 1998.

Operating Company has initiated a program to prepare its information systems
for the year 2000. Management is currently implementing a plan to replace
substantially all of the Company's financial information systems before the
year 2000, the cost of which has not been determined. Most of these costs will
be capitalized and amortized over a three to five year period. Modifications
of the Company's proprietary VenTouch(TM) clinical information system are
ongoing and will generally be accomplished through the use of existing
internal resources. Clinical equipment in the Company's facilities will
generally be modified through the use of external professional resources.
Incremental costs to complete the necessary changes to clinical equipment
could approximate $10 million to $20 million over the next two years.

Various lawsuits and claims arising in the ordinary course of business will
be assumed by Operating Company in connection with the Distribution Proposal.
Resolution of litigation and other loss contingencies is not expected to have
a material adverse effect on Operating Company's liquidity, financial position
or results of operations. See Notes 15 and 23 of the Notes to Consolidated
Financial Statements of the Company.

Anticipated financing arrangements to be consummated on or before the
Distribution Date will contain customary covenants which require, among other
things, maintenance of certain financial ratios and limit amounts of
additional debt, repurchases of common stock, dividends and capital
expenditures. In addition, the Operating Company Debt Facilities are expected
to require that one-half of excess cash flow (as defined) be used to repay
outstanding borrowings under such credit agreement.

BUSINESS OF REALTY COMPANY AFTER
THE REORGANIZATION TRANSACTIONS

GENERAL

After the Reorganization Transactions, Realty Company will be a self-
administered, self-managed realty company that will continue to expand and
enhance the portfolio of healthcare related properties previously owned by the
Company. Realty Company's Properties will include 49 long-term acute care
hospitals and 205 nursing centers in 35 states. Realty Company believes it
will be a leading real estate company focused on the ownership and acquisition
of healthcare related properties, including, but not limited to, hospitals,
nursing centers, assisted living facilities and healthcare related office
buildings. Although Realty Company intends to focus its efforts on the
healthcare industry, Realty Company also may pursue real estate investment
opportunities in non-healthcare real estate. At or prior to the Distribution
Date, Realty Company will enter into a series of agreements with Operating
Company, including the Master Lease Agreement, the Development Agreement and
the Participation Agreement, pursuant to which Operating Company will lease
and operate all of the Leased Properties, and Operating Company will complete
development of the Development Properties and thereafter sell to, and lease
back from, Realty Company, the Development Properties. In addition, Realty
Company will have a right of first offer with respect to certain healthcare
properties to be sold or mortgaged by Operating Company for a period of three
years following the Distribution Date. See "Relationship Between Realty
Company and Operating Company After the Reorganization Transactions." The
Company and its predecessor companies have been engaged in the development,
construction and acquisition of healthcare properties since 1987.

Following the Reorganization Transactions, Realty Company's primary source
of revenues will be the Annual Base Rent payments by Operating Company under
the Leases. The Annual Base Rent for the Properties under the Leases, for the
twelve-month period commencing on the Distribution Date, will be approximately
$225 million. Realty Company's principal expenditures will include costs
incurred in the purchase of the Development Properties from Operating Company,
the acquisition of additional properties, and depreciation and financing
costs, including interest expense. Realty Company expects to diversify its
credit exposure by entering into leases with tenants other than Operating
Company.

Realty Company's diversified portfolio of properties will include:

. 49 long-term acute care hospitals in 22 states, which facilities
contain 4,386 licensed beds representing 43% of Annual Base Rent.

. 205 nursing centers in 28 states, which facilities contain 26,623
licensed beds representing 57% of Annual Base Rent.

. 8 nursing centers leased to parties other than Operating Company.

Realty Company will have a management team with experience in selecting,
evaluating and acquiring healthcare facilities. Realty Company management will
have in-depth knowledge of the healthcare market with particular expertise in
the state regulatory environment for both long-term acute care hospitals and
nursing centers. See "Management of the Company and Management of Realty
Company and Operating Company After the Reorganization Transactions--Realty
Company."

STRUCTURE

Realty Company will conduct substantially all of its business activities,
including future development and acquisitions of properties, through the
Realty Company Partnership. This structure will enable Realty Company to have
properties that are developed or acquired in the future contributed to the
Realty Company Partnership by the owner of such property in exchange for units
in the Realty Company Partnership and/or cash. If the owner of such property
receives units in the Realty Company Partnership in exchange for any such
properties, the owner will be able to defer all or part of the tax
consequences of the contribution. The units issued in exchange for properties
will represent limited partnership interests in the Realty Company
Partnership. This structure, which is commonly known as an UPREIT, should make
Realty Company an attractive buyer when a seller wishes to be able to defer
payment of taxes upon disposition of property.

SOURCES OF CAPITAL FOR EXPANSION

Realty Company is expected to have approximately $985 million in total
indebtedness as of the Distribution Date and approximately $215 million in
credit available under the Realty Company Credit Facility. It is expected that
such capital will be available from the following sources: (i) the Realty
Company Credit Facility in the amount of $250 million, (ii) the Realty Company
Term A Loan in the amount of $250 million, (iii) the Realty Company Term B
Loan in the amount of $250 million, and (iv) the Realty Company CMBS Debt in
the amount of $450 million. It is anticipated that the Realty Company Credit
Facility will have an opening balance of approximately $34.6 million and
unused capacity of approximately $215.4 million. The Realty Company Term A
Loan, Realty Company Term B Loan and Realty Company CMBS Debt will all be
fully funded. The initial funded debt for Realty Company will be approximately
$984.6 million.

To fund its growth strategy, Realty Company may raise additional long-term
capital by issuing, in public or private transactions, equity or debt
securities, but the availability and terms of any such issuance will depend
upon the market for such securities and other conditions at such time. Realty
Company believes that cash flows from operations and borrowings available
under the Realty Company Credit Facility will be sufficient to finance its
capital needs for the next 12 months. However, there can be no assurance that
such additional financing or capital will be available on terms acceptable to
Realty Company or that it will be as favorable as those received by the Realty
Company's competitors.

THE PROPERTIES

Following the Reorganization Transactions, the Company believes that Realty
Company will have a high quality portfolio of long-term care facilities,
diversified in terms of geography and healthcare services provided at such
facilities. The long-term acute care hospitals which will be owned by Realty
Company primarily provide long-term acute care to medically complex,
chronically ill patients. The occupancy percentage for such hospitals has
increased from 47.1% for the year ended December 31, 1995 to 52.3% for the
year ended December 31, 1997. The nursing centers which will be owned by
Realty Company are believed by the Company to be leading providers of
rehabilitation services, including physical, occupational and speech
therapies, and care for patients with Alzheimer's disease, offering
specialized programs covering approximately 3,900 beds in 88 nursing centers.
In addition, the occupancy percentage for such nursing centers has remained
high, varying from 92.9% for the year ended December 31, 1995 to 89.7% for the
year ended December 31, 1997. The Annual Base Rent pursuant to the Leases for
the twelve-month period commencing on the Distribution Date is approximately
$225 million and pursuant to such Leases the Annual Base Rent will increase
over the term of the Leases at a rate of 2% per annum.

The Leased Properties will include 49 long-term acute care hospitals in 22
states and 205 nursing centers in 28 states. In addition, Realty Company owns
and leases nine additional nursing centers in five states that generate
approximately $2.8 million in annual rental payments. The Company believes
that the geographic diversity of the Properties makes the portfolio less
susceptible to adverse changes in state regulation and regional economic
downturn.

HOSPITAL FACILITIES

Realty Company will be a leading owner of long-term hospitals. Realty
Company's hospitals generally provide long-term care to medically complex,
chronically ill patients. These hospitals have 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 parenternal 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 center or rehabilitation hospital.

The following table sets forth certain information for each hospital that is
included in the Leased Properties.

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

ARIZONA
Vencor Hospital--Phoenix............................. 69.7% 58
Vencor Hospital--Tucson.............................. 20.8 51
CALIFORNIA
THC, Orange County................................... 45.3 48
Vencor Hospital--Los Angeles......................... 83.6 81
Vencor Hospital--Ontario............................. 86.6 91
Vencor Hospital--Sacramento.......................... 69.7 39
Vencor Hospital--San Leandro......................... 35.4 99
Vencor Hospital--Orange County....................... 35.5 99
Vencor Hospital--San Diego........................... 38.1 70
Recovery Inn of Menlo Park........................... -- 16
COLORADO
Vencor Hospital--Denver.............................. 55.5 68
FLORIDA
Vencor Hospital--Central Tampa....................... 79.7 102
Vencor Hospital--Coral Gables........................ 90.0 53
Vencor Hospital--Ft. Lauderdale...................... 88.2 64
Vencor Hospital--Hollywood........................... 62.2 124
Vencor Hospital--St. Petersburg...................... 44.9 60
Vencor Hospital--North Florida....................... 73.9 60
ILLINOIS
Vencor Hospital--Chicago North....................... 43.9 205
Vencor Hospital--Sycamore............................ 88.6 77
Vencor Hospital--Northlake........................... 67.6 94
INDIANA
Vencor Hospital--Indianapolis........................ 60.6 59
Vencor Hospital--LaGrange............................ 34.0 62
KENTUCKY
Vencor Hospital--Louisville.......................... 50.0 374
LOUISIANA
Vencor Hospital--New Orleans......................... 25.2 168
MASSACHUSETTS
Vencor Hospital--Boston.............................. 78.4 36
Vencor Hospital--Boston Northshore................... 79.7 50
MICHIGAN
Vencor Hospital--Metro Detroit....................... 10.4 240
Vencor Hospital--Detroit............................. 45.1 160
MINNESOTA
Vencor Hospital--Minneapolis......................... 37.5 111
MISSOURI
Vencor Hospital--Kansas City......................... 37.3 167
Vencor Hospital--St. Louis........................... 60.0 60

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

NEVADA
THC--Las Vegas Hospital.............................. 75.7 52
Vencor Hospital--Las Vegas(1)........................ -- 15
NEW MEXICO
Vencor Hospital--Albuquerque(2)...................... 61.0 61
NORTH CAROLINA
Vencor Hospital--Greensboro.......................... 89.0 124
OKLAHOMA
Vencor Hospital--Oklahoma City....................... 50.2 59
PENNSYLVANIA
Vencor Hospital--Philadelphia........................ 70.2 52
Vencor Hospital--Pittsburgh.......................... 64.5 63
TENNESSEE
Vencor Hospital--Chattanooga......................... 54.7 49
TEXAS
Vencor Hospital--Arlington........................... 35.6 80
Vencor Hospital--Ft. Worth Southwest................. 42.8 80
Vencor Hospital--Ft. Worth West...................... 59.3 67
Vencor Hospital--Houston(2).......................... 62.1 94
Vencor Hospital--Houston Northwest................... 62.5 84
Vencor Hospital--Mansfield........................... 46.9 55
Vencor Hospital--San Antonio......................... 56.5 59
VIRGINIA
Vencor Hospital--Arlington........................... 30.6 206
WASHINGTON
THC Seattle Hospital................................. 33.1 80
WISCONSIN
Vencor Hospital--Mt. Carmel.......................... 42.8 60
- -----------------------------------------------------------------------------
TOTAL: 4,386

- --------
(1)Located in Torrey Pines Care Center, a nursing center which will be owned
by Realty Company.
(2) The land is leased under a ground lease and improvements will be owned by
Realty Company. Upon expiration of ground lease, improvements revert to
the landlord.

NURSING CENTER FACILITIES

Realty Company management believes it will be a leading owner of nursing
care facilities in the United States. Realty Company's nursing centers provide
rehabilitation services, including physical, occupational and speech
therapies. The majority of patients in rehabilitation programs stay for eight
weeks or less. Patients in rehabilitation programs generally provide higher
revenues to the operator of such facility than other nursing center patients
because they require a high level of ancillary services.

The following table sets forth certain information for each nursing center
that is included in the Leased Properties.

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

ALABAMA
Rehabilitation & Healthcare Center of Huntsville--
Huntsville......................................... 95.9 159
Rehabilitation & Healthcare Center of Birmingham--
Birmingham(1)...................................... 95.6 114
Rehabilitation & Healthcare Center of Mobile--Mo-
bile(1)............................................ 95.6 174
ARIZONA
Valley Healthcare & Rehabilitation Center--Tucson... 67.6 147
Desert Life Rehabilitation & Care Center--Tucson.... 73.2 240
Sonoran Rehabilitation & Care Center--Phoenix....... 92.9 100
Villa Campana Healthcare Center--Tucson............. 89.5 120
Kachina Point Health Care & Rehabilitation--Sedona.. 92.6 120
CALIFORNIA
Nob Hill Healthcare Center--San Francisco........... 86.9 180
Canyonwood Nursing & Rehabilitation Center--Redding. 90.0 115
Californian Care Center--Bakersfield................ 94.3 160
Magnolia Gardens Care Center--Burlingame............ 82.1 84
Lawton Healthcare Center--San Francisco............. 71.4 75
Valley Gardens Healthcare & Rehabilitation--Stock-
ton................................................ 95.6 120
Alta Vista Healthcare Center--Riverside............. 95.2 99
Maywood Acres Healthcare Center--Oxnard............. 95.3 98
La Veta Healthcare Center--Orange(1)................ 89.2 112
Bay View Nursing & Rehabilitation Center--Alameda... 88.7 180
Village Square Nursing & Rehabilitation Center--San
Marcos............................................. 47.2 120
COLORADO
Cherry Hills Health Care Center--Englewood.......... 96.4 95
Aurora Care Center--Aurora.......................... 95.5 120
Castle Garden Care Center--Northglenn............... 94.0 180
Brighton Care Center--Brighton...................... 93.0 120
CONNECTICUT
Andrew House Healthcare--New Britain................ 96.8 90
Camelot Nursing & Rehabilitation Center--New London. 97.4 66
Hamilton Rehabilitation & Healthcare Center--Nor-
wich............................................... 97.3 160
Windsor Rehabilitation & Healthcare Center--Windsor. 86.3 120
Nutmeg Pavilion Healthcare--New London.............. 96.8 140
Parkway Pavilion Healthcare--Enfield................ 96.0 140
Courtland Gardens Health Center, Inc.--Stamford..... 85.7 180
Homestead Health Center--Stamford................... 97.6 87
FLORIDA
Bay Pointe Nursing Pavilion--St. Petersburg......... 94.1 120
East Manor Medical Care Center--Sarasota............ 64.9 169
Healthcare & Rehabilitation Center of Sanford--San-
ford............................................... 96.2 114
Titusville Rehabilitation & Nursing Center--Titus-
ville.............................................. 96.8 157
Colonial Oaks Rehabilitation Center-Ft. Myers--Ft.
Myers.............................................. 94.4 120
Carrollwood Care Center--Tampa...................... 95.9 120
Boca Raton Rehabilitation Center--Boca Raton........ 96.4 120
Evergreen Woods Healthcare & Rehabilitation--
Springhill......................................... 96.6 120
Rehabilitation & Healthcare Center of Tampa--Tampa.. 71.1 174
Rehabilitation & Healthcare Center of Cape Coral--
Cape Coral......................................... 93.2 120

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

FLORIDA (CONTINUED)
Casa Mora Rehabilitation & Extended Care--Bradenton. 83.7 240
North Broward Rehabilitation & Nursing Center--Pom-
pano Beach......................................... 87.6 194
Highland Pines Rehabilitation Center--Clearwater.... 93.3 120
Pompano Rehabilitation & Nursing Center--Pompano
Beach.............................................. 87.2 127
Abbey Rehabilitation & Nursing Center--St. Peters-
burg............................................... 85.7 152
GEORGIA
Savannah Rehabilitation & Nursing Center--Savannah.. 97.7 120
Speciality Care of Marietta--Marietta............... 89.0 146
Lafayette Nursing & Rehabilitation Center--Fayette-
ville.............................................. 87.3 179
Savannah Specialty Care Center--Savannah............ 96.7 104
IDAHO
Cascade Care Center--Caldwell....................... 86.5 112
Emmett Rehabilitation and Healthcare--Emmett........ 78.4 95
Lewiston Rehabilitation and Care Center--Lewiston... 94.9 96
Nampa Care Center--Nampa............................ 80.9 151
Weiser Rehabilitation and Care Center--Weiser....... 74.9 89
Moscow Care Center--Moscow.......................... 72.6 94
Mountain Valley Care and Rehabilitation--Kellogg.... 95.2 68
INDIANA
Rolling Hills Health Care Center--New Albany........ 98.2 115
Royal Oaks Healthcare & Rehabilitation Center--Terre
Haute.............................................. 74.3 230
Southwood Health & Rehabilitation Center--Terre
Haute.............................................. 77.9 149
Valley View Health Care Center--Elkhart............. 88.4 140
Wildwood Healthcare Center--Indianapolis............ 84.1 173
Meadowvale Healthcare & Rehabilitation Center--
Bluffton........................................... 84.7 120
Columbia Healthcare Facility--Evansville............ 86.2 186
Bremen Health Care Center--Bremen................... 96.1 97
Windsor Estates Health & Rehabilitation Center--
Kokomo............................................. 83.1 145
Muncie Health Care & Rehabilitation--Muncie......... 81.7 205
Parkwood Health Care Center--Lebanon................ 75.9 153
Westview Nursing & Rehabilitation Center--Bedford... 73.5 149
Columbus Health & Rehabilitation Center--Columbus... 92.1 235
Wedgewood Healthcare Center--Clarksville............ 81.9 124
KENTUCKY
Rosewood Health Care Center--Bowling Green.......... 98.3 186
Oakview Nursing & Rehabilitation Center--Calvert
City............................................... 93.1 116
Cedars of Lebanon Nursing Center--Lebanon........... 94.3 94
Winchester Centre for Health/Rehabilitation--Win-
chester............................................ 95.0 192
Riverside Manor Health Care--Calhoun................ 97.8 84
Maple Manor Healthcare Center--Greenville........... 95.2 101
Danville Centre for Health & Rehabilitation--Dan-
ville.............................................. 98.2 106
Lexington Centre for Health & Rehabilitation--Lex-
ington............................................. 95.8 180
North Centre for Health & Rehabilitation--Louis-
ville.............................................. 95.4 120
Hillcrest Health Care Center--Owensboro............. 97.4 156
Woodland Terrace Health Care Facility--Elizabeth-
town............................................... 96.4 118
Harrodsburg Health Care Center--Harrodsburg......... 96.9 112

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

MAINE
Augusta Rehabilitation Center--Augusta.............. 83.8 78
Eastside Rehabilitation and Living Center--Bangor... 82.0 78
Winship Green Nursing Center--Bath.................. 94.5 72
Brewer Rehabilitation & Living Center--Brewer....... 86.5 114
Kennebunk Nursing Center--Kennebunk................. 88.3 80
Norway Rehabilitation & Living Center--Norway....... 83.7 73
Shore Village Rehabilitation & Nursing Center--
Rockland........................................... 69.5 61
Westgate Manor--Bangor.............................. 92.3 118
Brentwood Rehabilitation & Nursing Center--Yarmouth. 76.1 83
Fieldcrest Manor Nursing Home--Waldoboro............ 69.7 70
MASSACHUSETTS
Laurel Ridge Rehabilitation & Nursing Center--Ja-
maica Plain........................................ 95.5 120
Blue Hills Alzheimer's Care Center--Stoughton....... 93.6 101
Brigham Manor Nursing & Rehabilitation Center--New-
buryport........................................... 95.1 64
Presentation Nursing & Rehabilitation Center--Brigh-
ton................................................ 91.2 122
Country Manor Rehabilitation & Nursing Center--New-
buryport........................................... 95.2 123
Crawford Skilled Nursing & Rehabilitation Center--
Fall River......................................... 95.4 124
Hallmark Nursing & Rehabilitation Center--New Bed-
ford............................................... 88.1 124
Sachem Nursing & Rehabilitation Center--East Bridge-
water.............................................. 89.9 123
Hammersmith House Nursing Care Center--Saugus....... 92.4 88
Oakwood Rehabilitation & Nursing Center--Webster.... 94.8 81
Timberlyn Heights Nursing & Alzheimer's Center
Great--Barrington.................................. 92.1 78
Star of David Nursing & Rehabilitation/Alzheimer's
Center--West Roxbury............................... 97.4 149
Brittany Healthcare Center--Natick.................. 91.9 126
Briarwood Health Care Nursing Center--Needham....... 91.3 120
Westridge Healthcare Center--Marlborough............ 81.7 196
Bolton Manor Nursing Home--Marlborough.............. 88.8 160
Hillcrest Nursing Home--Fitchburg................... 96.6 96
Country Gardens Skilled Nursing & Rehabilitation--
Swansea............................................ 93.6 86
Quincy Rehabilitation & Nursing Center--Quincy...... 92.6 139
West Roxbury Manor--West Roxbury.................... 94.1 76
Newton and Wellesley Alzheimer Center--Wellesley.... 98.6 110
Den-Mar Rehabilitation & Nursing Center--Rock-
port(1)............................................ 95.8 80
Eagle Pond Rehabilitation & Living Center--South
Dennis............................................. 95.0 142
Blueberry Hill Healthcare--Beverly.................. 96.6 146
Colony House Nursing & Rehabilitation Center--Abing-
ton................................................ 89.5 102
Embassy House Skilled Nursing & Rehabilitation--
Brockton........................................... 88.6 123
Franklin Skilled Nursing & Rehabilitation Center--
Franklin........................................... 87.3 82
Great Barrington Rehabilitation & Nursing Center--
Great Barrington................................... 82.0 106
River Terrace--Lancaster............................ 98.0 82
Walden Rehabilitation & Nursing Center--Concord..... 92.7 123
Harrington House Nursing & Rehabilitation Center--
Walpole............................................ 89.0 90
MONTANA
Park Place Health Care Center--Great Falls.......... 85.6 223
Parkview Acres Care & Rehabilitation Center--Dillon. 78.4 108
NEVADA
Las Vegas Healthcare & Rehabilitation Center--Las
Vegas.............................................. 96.8 79
Torrey Pines Care Center--Las Vegas................. 73.1 90

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

NEW HAMPSHIRE
Dover Rehabilitation & Living Center--Dover............ 91.3 112
Greenbriar Terrace Healthcare--Nashua(1)............... 96.9 300
Hanover Terrace Healthcare--Hanover.................... 92.1 100
NORTH CAROLINA
Pettigrew Rehabilitation & Healthcare Center--Durham... 91.7 107
LaSalle Healthcare Center--Durham...................... 94.8 126
Sunnybrook Alzheimer's & Healthcare Specialist--Ra-
leigh................................................. 93.7 126
Blue Ridge Rehabilitation & Healthcare Center--Ashe-
ville................................................. 93.2 120
Raleigh Rehabilitation & Healthcare Center--Raleigh.... 94.9 174
Rose Manor Health Care Center--Durham.................. 96.0 123
Cypress Pointe Rehabilitation & Healthcare Center--Wil-
mington............................................... 96.2 100
Winston-Salem Rehabilitation & Healthcare Center--
Winston-Salem......................................... 97.9 230
Silas Creek Manor--Winston-Salem....................... 98.5 99
Lincoln Nursing Center--Lincolnton..................... 98.5 120
Guardian Care of Roanoke Rapids--Roanoke Rapids........ 97.0 110
Guardian Care of Henderson--Henderson.................. 98.1 80
Rehabilitation & Nursing Center of Monroe--Monroe...... 92.4 174
Guardian Care of Kinston--Kinston...................... 95.8 114
Guardian Care of Zebulon--Zebulon...................... 96.6 60
Guardian Care of Rocky Mount--Rocky Mount(1)........... 96.5 118
Rehabilitation & Health Center of Gastonia--Gastonia... 96.8 118
Chapel Hill Rehabilitation & Healthcare Center--Chapel
Hill.................................................. 93.5 120
OHIO
Franklin Woods Health Care Center--Columbus............ 96.0 100
Chillicothe Nursing & Rehabilitation Center--
Chillicothe........................................... 90.8 101
Pickerington Nursing & Rehabilitation Center--
Pickerington.......................................... 96.6 100
Logan Health Care Center--Logan........................ 96.8 159
Winchester Place Nursing & Rehabilitation Center
Canal--Winchester..................................... 95.8 201
Minerva Park Nursing & Rehabilitation Center--Columbus. 94.4 101
West Lafayette Rehabilitation & Nursing Center--West
Lafayette............................................. 88.5 96
Cambridge Healthcare & Rehabilitation Center--Cam-
bridge................................................ 87.1 159
Coshocton Healthcare & Rehabilitation Center--Coshoc-
ton................................................... 83.5 110
Bridgepark Center for Rehabilitation & Nursing Serv-
ice--Akron............................................ 94.1 174
Lebanon Country Manor--Lebanon......................... 96.4 100
OREGON
Sunnyside Care Center--Salem........................... 87.2 124
PENNSYLVANIA
Wyomissing Nursing & Rehabilitation Center--Reading.... 84.0 103
RHODE ISLAND
Health Havens Nursing & Rehabilitation Center--E. Prov-
idence................................................ 93.4 58
Oak Hill Nursing & Rehabilitation Center--Pawtucket.... 94.5 143
TENNESSEE
Madison Healthcare & Rehabilitation Center--Madison.... 95.9 102
Cordova Rehabilitation & Nursing Center--Cordova(2).... 95.4 284
Primacy Healthcare & Rehabilitation Center--Memphis(2). 87.3 120
Masters Health Care Center--Algood..................... 98.0 175
TEXAS
San Pedro Manor--San Antonio........................... 64.6 150

1997
AVERAGE LICENSED
FACILITY AND LOCATION OCCUPANCY RATE BEDS
- --------------------- -------------- --------

UTAH
Wasatch Care Center--Ogden............................. 81.1 69
Crosslands Rehabilitation & Health Care Center--Sandy.. 91.4 120
St. George Care and Rehabilitation Center--St. George.. 88.3 159
Federal Heights Rehabilitation & Nursing Center--Salt
Lake City............................................. 71.0 154
Wasatch Valley Rehabilitation--Salt Lake City.......... 84.7 118
VERMONT
Birchwood Terrace Healthcare--Burlington(1)............ 98.0 160
VIRGINIA
Nansemond Pointe Rehabilitation & Health Care Center--
Suffolk............................................... 94.7 194
Harbour Pointe Medical & Rehabilitation Centre--Nor-
folk.................................................. 92.4 172
River Pointe Rehabilitation & Healthcare Center--Vir-
ginia Beach........................................... 86.5 160
Bay Pointe Medical & Rehabilitation Centre--Virginia
Beach................................................. 85.2 118
WASHINGTON
Arden Rehabilitation & Healthcare Center--Seattle...... 94.0 100
Northwest Continuum Care Center--Longview.............. 91.9 74
Bellingham Health Care & Rehabilitation Services--Bel-
lingham............................................... 67.8 111
First Hill Care Center--Seattle........................ 80.8 172
Rainier Vista Care Center--Puyallup.................... 91.8 120
Lakewood Healthcare Center--Lakewood................... 92.6 80
Vencor of Vancouver Healthcare & Rehabilitation--Van-
couver................................................ 91.3 98
Heritage Health & Rehabilitation Center--Vancouver..... 75.2 53
Edmonds Rehabilitation & Healthcare Center--Edmonds.... 89.8 98
Queen Anne Healthcare--Seattle......................... 81.3 171
WISCONSIN
Eastview Medical & Rehabilitation Center--Antigo....... 96.6 173
Colonial Manor Medical & Rehabilitation Center--Wausau. 96.0 152
Colony Oaks Care Center--Appleton...................... 92.3 102
North Ridge Medical & Rehabilitation Center--Manitowoc. 85.1 120
Vallhaven Care Center--Neenah.......................... 86.2 133
Kennedy Park Medical & Rehabilitation Center--Scho-
field................................................. 93.5 164
Family Heritage Medical & Rehabilitation Center--Wis-
consin Rapid.......................................... 90.4 140
Mt. Carmel Medical & Rehabilitation Center--Burlington. 98.8 155
Mt. Carmel Healthcare & Rehabilitation Center--Milwau-
kee................................................... 94.3 657
Sheridan Medical Complex--Kenosha...................... 96.3 106
Woodstock Healthcare & Rehabilitation Center--Kenosha.. 92.1 183
San Luis Medical and Rehabilitation Center--Green Bay.. 90.3 164
WYOMING
Mountain Towers Healthcare & Rehabilitation--Cheyenne.. 92.6 170
South Central Wyoming Healthcare & Rehabilitation--
Rawlins............................................... 50.3 90
Wind River Healthcare & Rehabilitation Center--River-
ton................................................... 89.5 90
Sage View Care Center--Rock Springs.................... 73.3 101
- --------------------------------------------------------------------------------
TOTAL.................................................. 89.7% 26,623

- --------
(1) The land is leased under a ground lease and improvements will be owned by
Realty Company. Upon expiration of ground lease, improvements revert to
the landlord.
(2) Property is subject to Industrial Revenue Bond Financing Lease. Rental
payments under such lease equal the debt amortization under such Bonds.
Upon payment in full of these Bonds, the property is transferred to Realty
Company.

In addition to the nursing centers listed above, Realty Company will own and
lease to third parties eight additional nursing centers located in five states
that generate approximately $2.8 million in annual rentals.

PROPERTIES UNDER DEVELOPMENT BY OPERATING COMPANY

The table below sets forth certain information regarding the Development
Properties as of January 15, 1998. These properties, or the right to purchase
these properties, as applicable, will be owned by Operating Company following
the Distribution. Upon completion of development, Realty Company will purchase
these properties from Operating Company and lease them back to Operating
Company under terms substantially similar to the Master Lease Agreement.
Management expects that the initial annual base rent will approximate [ ]% of
acquisition cost. There are no assurances that Operating Company will complete
the development of the Development Properties. Realty Company will purchase
the Development Property from Operating Company at a purchase price equal to
the amount of Operating Company's actual costs in acquiring, developing and
improving such Development Property prior to the purchase date. The
anticipated cost to develop the Development Properties under construction and
in renovation (and purchase such Development Properties from Operating
Company) is approximately $163.4 million.

HOSPITALS

ESTIMATED
DEVELOPMENT COMPLETION PROPOSED NUMBER OF ANTICIPATED
LOCATION PHASE DATE(1) BEDS COSTS(2)
-------- ---------------------- -------------- ----------------------- -----------

Milwaukee,
WI.......... Renovation under way July 1998 90 $13,150,000
Cincinnati,
OH.......... Renovation under way October 1998 94 12,700,000
San Antonio,
TX.......... Under construction March 1999 60 9,700,000
Burbank, CA.. Renovation under way March 2000 92 7,300,000
COMBINATION HOSPITALS AND NURSING
CENTERS

ESTIMATED PROPOSED NUMBER OF
DEVELOPMENT COMPLETION HOSPITAL/NURSING CENTER ANTICIPATED
LOCATION PHASE DATE(1) BEDS COSTS(2)
-------- ---------------------- -------------- ----------------------- -----------

Dallas, TX... Under construction May 1998 52/60 $12,500,000
Las Vegas,
NV.......... Under construction December 1998 60/120 19,300,000
East Mesa,
AZ.......... Under construction January 1999 60/120 16,000,000
NURSING
CENTERS

ESTIMATED
DEVELOPMENT COMPLETION PROPOSED NUMBER OF ANTICIPATED
LOCATION PHASE DATE(1) BEDS COSTS(2)
-------- ---------------------- -------------- ----------------------- -----------

Indianapolis,
IN(3)....... Under construction May 1998 120 $ 5,200,000
Sellersburg,
IN(3)....... Under construction May 1998 110 4,410,000
Corydon, IN.. Under construction May 1998 92 6,600,000
Grapevine,
TX.......... Under construction August 1998 80 8,000,000
San Antonio,
TX.......... Under construction August 1998 80 8,400,000
Evansville,
IN(3)....... Under construction September 1998 120 4,800,000
Richardson,
TX.......... Under construction September 1998 80 8,500,000
Tucson, AZ... Under construction September 1998 80 9,400,000
Tucson, AZ... Under construction October 1998 80 8,600,000
Las Vegas,
NV.......... Under construction October 1998 80 8,800,000
Ft. Collins, Construction scheduled January 1999 120 N/A
CO..........
West Palm
Beach, FL... Construction scheduled February 1999 99 N/A
Pittsburgh,
PA.......... Construction scheduled June 1999 60 N/A
Fontana, CA.. Construction scheduled December 1999 100 N/A

ASSISTED LIVING
FACILITIES
ESTIMATED PROPOSED
DEVELOPMENT COMPLETION NUMBER
LOCATION PHASE DATE(1) OF ROOMS
-------- -------------------- -------------- ---------
Atlanta, GA............. Renovation scheduled January 2000 70

UNDEVELOPED REAL PROPERTY UNDER PURCHASE CONTRACT(4)

ESTIMATED PROPOSED
TYPE OF COMPLETION NUMBER OF
LOCATION FACILITY DATE(1) BEDS
-------- -------------------- -------------- ---------
Mountain Park Ranch, AZ. Nursing Center August 1998 80
Arlington, TX........... Nursing Center September 1998 80
Scottsdale, AZ.......... Nursing Center November 1998 80
Arvada, CO.............. Nursing Center December 1998 80
Missouri City, TX....... Nursing Center February 1999 80
Chandler, AZ............ Nursing Center June 1999 80
Shawnee, KS............. Nursing Center October 1999 80
Sun City West, AZ....... Nursing Center October 1999 80
- --------
(1) There are no assurances that zoning, construction and other delays will
not be experienced.
(2) These costs include acquisition costs and development costs incurred to
date and estimated development costs to complete.
(3) A developer is constructing the nursing center pursuant to a development
agreement. Upon completion of the nursing center, Realty Company will
lease the land and improvements from the developer under a ten year lease,
with the option to purchase the land and improvements after one year at a
predetermined amount. Operating Company will sublease the nursing center
from Realty Company upon terms substantially similar to the Master Lease
Agreement.
(4) These properties are not owned by the Company but are subject to
definitive purchase and sale agreements. The seller is obligated to sell
the property to the Company. The purchase of each of these properties is
contingent upon the review and approval of, among other things, zoning,
title, survey, environmental and engineering reports. There can be no
assurances that any of these properties will be purchased and developed.

COMPETITION

Realty Company will compete for acquisitions of real property with
healthcare providers, other healthcare related REITs, real estate partnerships
and other investors. Many of Realty Company's competitors are significantly
larger and have greater financial resources and lower cost of capital than
Realty Company. Realty Company has not entered into any agreements with
respect to any acquisitions of real property other than the Development
Properties. The success of Realty Company's growth strategy will be determined
by numerous factors, including Realty Company's ability to identify suitable
acquisition targets, the purchase price and the financial performance of the
acquired facilities after acquisitions. The Properties are subject to
competition from the properties of other healthcare providers. In addition,
the extent to which the Properties are utilized depends upon several factors,
including the number of patients using the Properties, physician referral
patterns, other competitive systems of healthcare delivery and population and
demographics. Private, federal and state payment programs and the effect of
other laws and regulations may also have a significant effect on the
utilization of the Properties. Virtually all of the Properties operate in a
competitive environment and patients and referral sources, including
physicians, may change their preferences for a healthcare facility from time
to time.

GOVERNMENTAL REGULATION

Realty Company is affected by government regulation of the healthcare
industry in that Operating Company's ability to make rental payments under the
Leases will be contingent upon such regulation. Moreover, the residual value
of Realty Company's properties and its ability to acquire and develop
additional properties may be affected by healthcare laws and regulations.
Aggressive efforts by health insurers and government agencies to limit the
costs of healthcare services and to reduce utilization of hospital and other
healthcare facilities may reduce future revenues or slow revenue growth for
in-patient facilities and shift utilization from in-patient to out-patient
facilities. See "Government Regulation."

BUSINESS OF OPERATING COMPANY AFTER
THE REORGANIZATION TRANSACTIONS

GENERAL

Following the Reorganization Transactions Operating Company will be one of
the largest providers of long-term healthcare services in the United States.
At December 31, 1997, Operating Company's operations would have included 60
long-term acute care hospitals containing 5,273 licensed beds, 309 nursing
centers containing 40,383 licensed beds, and the Vencare contract services
business which provides respiratory and rehabilitation therapies and medical
and pharmacy management services to approximately 2,900 healthcare facilities.
Operating Company will operate in 46 states. Healthcare services provided
through this network include long-term hospital care, nursing care, contract
respiratory therapy services, acute cardiopulmonary care, subacute and post-
operative care, in-patient and out-patient rehabilitation therapy, specialized
care for Alzheimer's disease, hospice care, home healthcare and pharmacy
services. Operating Company will continue to develop VenTouch(TM), a
comprehensive paperless clinical information system designed to increase the
operating efficiencies of Operating Company's facilities.

Operating Company's predecessor, the Company, was incorporated in Kentucky
in 1983 as Vencare, Inc. and commenced operations in 1985. It was reorganized
as a Delaware corporation in 1987 and changed its name to Vencor, Incorporated
in 1989 and to Vencor, Inc. in 1993. On September 28, 1995, Hillhaven was
merged into the Company. On March 21, 1997, the Company acquired TheraTx, a
provider of subacute rehabilitation and respiratory therapy program management
services to nursing centers and an operator of 26 nursing centers. On June 24,
1997, the Company acquired Transitional, an operator of 16 long-term acute
care hospitals and three satellite facilities located in 13 states.

Unless the context otherwise requires, the following discussion describes
Operating Company's business as it is expected to exist immediately after the
Reorganization Transactions. Prior year amounts refer to Operating Company's
business as it was conducted by the Company.

HOSPITAL OPERATIONS

The hospitals to be operated by Operating Company primarily provide long-
term acute care to medically complex, chronically ill patients. Operating
Company's hospitals have 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. Generally, approximately 60% of Operating Company's chronic patients
are ventilator-dependent for some period of time during their hospitalization.
Operating Company's patients suffer from conditions which require a high level
of monitoring and specialized care, yet may not necessitate the continued
services of an intensive care unit. Due to their severe medical conditions,
Operating Company's hospital patients generally are not clinically appropriate
for admission to a nursing center or rehabilitation hospital. The medical
condition of most of Operating Company's hospital patients is periodically or
chronically unstable. By combining general acute care services with the
ability to care for chronic patients, Operating Company believes that its
long-term care hospitals provide its patients with high quality, cost-
effective care. During 1997, the average length of stay for chronic patients
in the long-term care hospitals to be operated by Operating Company was
approximately 43 days. Although Operating Company's patients range in age from
pediatric to geriatric, typically more than 72% of Operating Company's chronic
patients are over 65 years of age. Operating Company's hospital operations are
subject to regulation by a number of government and private agencies. See
"Governmental Regulation--Hospitals."

HOSPITAL FACILITIES

The following table lists by state the number of hospitals and related
licensed beds that were owned by or leased from unaffiliated third parties by
the Company, as of December 31, 1997:

NUMBER OF FACILITIES
----------------------------
LICENSED OWNED BY LEASED FROM
BEDS COMPANY OTHER PARTIES TOTAL
STATE -------- -------- ------------- -----

Arizona................................... 109 2 - 2
California................................ 635 9 - 9
Colorado.................................. 68 1 - 1
Florida................................... 564 6 1 7
Georgia................................... 72 - 1 1
Illinois.................................. 613 3 2 5
Indiana................................... 159 2 1 3
Kentucky.................................. 374 1 - 1
Louisiana................................. 168 1 - 1
Massachusetts............................. 86 2 - 2
Michigan.................................. 400 2 - 2
Minnesota................................. 111 1 - 1
Missouri.................................. 227 2 - 2
Nevada.................................... 52 1 - 1
New Mexico................................ 61 1 - 1
North Carolina............................ 124 1 - 1
Ohio...................................... 94 1 - 1
Oklahoma.................................. 59 1 - 1
Pennsylvania.............................. 115 2 - 2
Tennessee................................. 49 1 - 1
Texas..................................... 663 8 2 10
Virginia.................................. 206 1 - 1
Washington................................ 80 1 - 1
Wisconsin................................. 184 2 1 3
----- --- --- ---
Totals: 5,273 52 8 60
===== === === ===

As part of the Reorganization Transactions, Operating Company and Realty
Company will enter into a Master Lease Agreement under which 49 of the
Company-owned hospitals indicated above will be leased by Operating Company
from Realty Company. For additional information with respect to the Master
Lease Agreement, see "Relationship Between Realty Company and Operating
Company After the Reorganization Transactions--Master Lease Agreement."

SERVICES PROVIDED BY HOSPITALS

Chronic. Operating Company has devised a comprehensive program of care for
its chronic patients that draws upon the talents of interdisciplinary teams,
including licensed pulmonary specialists. The teams evaluate chronic patients
upon admission to determine treatment programs. Where appropriate, the
treatment programs may involve the services of several disciplines, such as
pulmonary and physical therapy. Individual attention to patients who have the
cognitive and physical abilities to respond to therapy is emphasized. Patients
who successfully complete treatment programs are discharged to nursing
centers, rehabilitation hospitals or home care settings.

General Acute Care. Operating Company operates two general acute care
hospitals. Certain of Operating Company's long-term care hospitals also
provide general acute care and outpatient services in support of their long-
term care services. Certain of Operating Company's hospitals maintain subacute
units. General acute care and outpatient services may include inpatient
services, diagnostic services, emergency services, CT scanning, one-day
surgery, hospice services, laboratory, X-ray, respiratory therapy, cardiology
and physical therapy. Operating Company may expand its general acute care and
outpatient services as its long-term care hospitals mature.

Major factors contributing to the growth in demand for Operating Company's
intensive care hospital services include the following:

Increased Patient Population. Improved medical care and advancements in
medical technology have increased the survival rates for infants born with
severe medical problems, as well as victims of disease and trauma of all ages.
Many of these patients never fully recover and require long-term hospital
care. The incidence of chronic respiratory problems increases with age,
particularly in connection with certain degenerative conditions. As the
average age of the United States population increases, Operating Company
believes there will be an increase in the need for long-term hospital care.

Medically Displaced Patients. Operating Company's hospital patients require
a high level of monitoring and specialized care, yet may not require the
continued services of an intensive care unit. Due to their extended recovery
period, Operating Company's hospital patients generally do not receive
specialized multi-disciplinary treatment focused on the unique aspects of a
long-term recovery program in a general acute care hospital and yet are not
appropriate for admission to a nursing center or rehabilitation hospital.

Economically Displaced Patients. Historically, reimbursement policies and
practices designed to control healthcare costs have made it difficult to place
medically complex, chronically ill patients in an appropriate healthcare
setting. Under the Medicare program, general acute care hospitals are
reimbursed under the prospective payment system ("PPS"), a fixed payment
system which provides an economic incentive to general acute care hospitals to
minimize the length of patient stay. As a result, these hospitals generally
receive less than full cost for providing care to patients with extended
lengths of stay. Furthermore, PPS does not provide for reimbursement more
frequently than once every 60 days, placing an additional economic burden on a
general acute care hospital providing long-term care. Operating Company's
long-term care hospitals, however, are excluded from PPS and thus receive
reimbursement on a more favorable basis for providing long-term hospital care
to Medicare patients. Commercial reimbursement sources, such as insurance
companies and health maintenance organizations ("HMOs"), some of which pay
based on established hospital charges, typically seek the most economical
source of care available. Operating Company believes that its emphasis on
long-term hospital care allows it to provide high quality care to chronic
patients on a cost-effective basis.

HOSPITAL PATIENT ADMISSION

Substantially all of the acute and medically complex patients admitted to
Operating Company's hospitals are transfers from other healthcare providers.
Patients are referred from general acute care hospitals, rehabilitation
hospitals, nursing centers and home care settings. Referral sources include
discharge planners, case managers of managed care plans, social workers,
physicians, third party administrators, HMOs and insurance companies.

Operating Company will employ case managers who educate healthcare
professionals from other hospitals as to the unique nature of the services
provided by Operating Company's long-term care hospitals. The case managers
develop an annual admission plan for each hospital with assistance from the
hospital's administrator. To identify specific service opportunities, the
admission plan for each hospital is based on a variety of factors, including
population characteristics, physician characteristics and incidence of
disability statistics. The admission plans involve ongoing education of local
physicians, utilization review and case management personnel, acute care
hospitals, HMOs and preferred provider organizations ("PPOs"). Operating
Company maintains a pre-admission assessment system at its regional referral
centers to evaluate certain clinical and other information in determining the
appropriateness of each patient referred to its hospitals.

PROFESSIONAL STAFF

Each of Operating Company's hospitals is staffed with a multi-disciplinary
team of healthcare professionals. A professional nursing staff trained to care
for the long-term acute patient is on duty 24 hours each day in Operating
Company's hospitals. Other professional staff includes respiratory therapists,
physical therapists, occupational therapists, speech therapists, pharmacists,
registered dietitians and social workers.

The physicians at Operating Company's hospitals generally are not employees
of Operating Company and may be members of the medical staff of other
hospitals. Each of Operating Company's hospitals has a fully

credentialed, multi-specialty medical staff to meet the needs of the
clinically complex, long-term acute patient. Typically, each patient is
visited at least once a day by a physician. A broad range of physician
services is available including, but not limited to, pulmonology, internal
medicine, infectious diseases, neurology, nephrology, cardiology, radiology
and pathology. Generally, Operating Company does not enter into exclusive
contracts with physicians to provide services to its hospital patients.

Operating Company believes that its future success will depend in large part
upon its continued ability to hire and retain qualified personnel. Operating
Company seeks the highest quality of professional staff within each market.

CENTRALIZED MANAGEMENT AND OPERATIONS

A hospital administrator supervises and is responsible for the day-to-day
operations at each of Operating Company's hospitals. Each hospital also
employs a controller who monitors the financial matters of each hospital,
including the measurement of actual operating results compared to goals
established by Operating Company. In addition, each hospital employs an
assistant administrator to oversee the clinical operations of the hospital and
a quality assurance manager to direct an integrated quality assurance program.
Operating Company's corporate headquarters provides services in the areas of
system design and development, training, human resource management,
reimbursement expertise, legal advice, technical accounting support,
purchasing and facilities management. Financial control is maintained through
fiscal and accounting policies that are established at the corporate level for
use at each hospital. Operating Company has standardized operating procedures
and monitors its hospitals to assure consistency of operations.

HOSPITAL MANAGEMENT INFORMATION SYSTEM

The financial information for each hospital is centralized at the corporate
headquarters through its management information system. Prior to the
acquisition of Transitional, Operating Company had installed its VenTouch(TM)
information system, an electronic patient medical record system, in all of its
hospitals in 1995. Operating Company expects to install VenTouch(TM) in the 19
former Transitional hospitals by the end of 1998. See "--Management
Information System."

QUALITY ASSESSMENT AND IMPROVEMENT

Operating Company maintains a strategic outcomes program which includes a
centralized pre-admission evaluation program and concurrent review of all of
its patient population against utilization and quality screenings, as well as
quality of life outcomes data collection and patient and family satisfaction
surveys. In addition, each hospital has an integrated quality assessment and
improvement program administered by a quality review manager which encompasses
utilization review, quality improvement, infection control and risk
management. The objective of these programs is to ensure that patients are
appropriately admitted to Operating Company's hospitals and that quality
healthcare is rendered to them in a cost-effective manner.

Operating Company has implemented a program whereby its hospitals will be
reviewed annually by internal quality auditors for compliance with standards
of the Joint Commission on Accreditation of Health Care Organizations
("JCAHO"'). The purposes of this internal review process are to (i) ensure
ongoing compliance with industry recognized standards for hospitals, (ii)
assist management in analyzing each hospital's operations and (iii) provide
consulting and educational opportunities for each hospital to identify
opportunities to improve patient care.

SELECTED HOSPITAL OPERATING DATA

The following table sets forth certain operating data for Operating
Company's hospitals:

YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------

Hospitals in operation at end of period.............. 60 38 36
Number of licensed beds at end of period............. 5,273 3,325 3,263
Patient days......................................... 767,810 586,144 489,612
Average daily census................................. 2,104 1,601 1,341
Occupancy percentage................................. 52.9% 53.7% 47.6%

As used in the above table, the term "licensed beds" refers to the maximum
number of beds permitted in the hospital under its license regardless of
whether the beds are actually available for patient care. "Patient days"
refers to the total number of days of patient care provided by Operating
Company's hospitals for the periods indicated. "Average daily census" is
computed by dividing each hospital's patient days by the number of calendar
days the respective hospital is in operation. "Occupancy percentage" is
computed by dividing average daily census by the number of licensed beds,
adjusted for the length of time each facility was in operation during each
respective period.

SOURCES OF HOSPITAL REVENUES

Operating Company will receive payment for hospital services from third-
party payors, including government reimbursement programs such as Medicare and
Medicaid and nongovernment sources such as commercial insurance companies,
HMOs, PPOs and contracted providers. Patients covered by nongovernment payors
will generally be more profitable to Operating Company than those covered by
Medicare and Medicaid programs. The following table sets forth the approximate
percentages of Operating Company's hospital revenues derived from the
specified payor sources indicated:

YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------- -------

Medicare.......................................... 63% 59% 57%
Medicaid.......................................... 8 12 12
Private and other................................. 29 29 31

For the year ended December 31, 1997, hospital revenues totaled
approximately $785.8 million, or 24.7% of Operating Company's total revenues.
Changes caused by the Budget Act will reduce the level of Medicare payments
made to Operating Company's hospitals by reducing TEFRA incentive payments and
allowable costs of capital expenditures and bad debts and by reducing payments
for services to patients transferred from a prospective payment system
hospital. See "Governmental Regulation--Healthcare Reform Legislation."

HOSPITAL COMPETITION

As of December 31, 1997, the hospitals operated by Operating Company were
located in 38 geographic markets in 24 states. In each geographic market,
there are general acute care hospitals which provide services comparable to
those offered by Operating Company's hospitals. In addition, Operating Company
believes that as of December 31, 1997, there were approximately 180 hospitals
in the United States certified by Medicare as general long-term hospitals,
some of which provide similar cardiopulmonary services to those provided by
Operating Company's hospitals. Many of these general care hospitals and long-
term hospitals are larger and more established than Operating Company's
hospitals. Certain hospitals that compete with Operating Company's hospitals
are operated by not-for-profit, nontaxpaying or governmental agencies, which
can finance capital expenditures on a tax-exempt basis, and which receive
funds and charitable contributions unavailable to Operating Company's
hospitals. Cost containment efforts by Federal and state governments and other
third-party payors designed to encourage more efficient utilization of
hospital services have generally resulted in lower

hospital industry occupancy rates in recent years. As a result of these
efforts, a number of acute care hospitals have converted to specialized care
facilities. Some hospitals are developing step-down units which attempt to
serve the needs of patients who require care at a level between that provided
by an intensive care unit and a general medical/surgical floor. This trend is
expected to continue due to the current oversupply of acute care hospital beds
and the increasing consolidation and affiliation of free-standing hospitals
into larger systems. As a result, Operating Company may experience increased
competition from existing hospitals and converted facilities.

Competition for patients covered by non-government reimbursement sources is
intense. The primary competitive factors in the long-term intensive care
business include quality of services, charges for services and responsiveness
to the needs of patients, families, payors and physicians. Other companies
have entered the long-term intensive care market with licensed hospitals that
compete with Operating Company's hospitals.

Some nursing centers, while not licensed as hospitals, have developed units
which provide a greater intensity of care than the care typically provided by
a nursing center. The condition of patients in these nursing centers is less
acute than the condition of patients in Operating Company's hospitals.

The competitive position of any hospital, including Operating Company's
hospitals, is also affected by the ability of its management to negotiate
contracts with purchasers of group healthcare services, including private
employers, PPOs and HMOs. Such organizations attempt to obtain discounts from
established hospital charges. The importance of obtaining contracts with PPOs,
HMOs and other organizations which finance healthcare, and its effect on a
hospital's competitive position, vary from market to market, depending on the
number and market strength of such organizations.

Operating Company also competes with other healthcare companies for hospital
and other healthcare acquisitions.

NURSING CENTER OPERATIONS

At December 31, 1997, the nursing center operations to be operated by
Operating Company provided long-term care and subacute medical and
rehabilitation services in 309 nursing centers containing 40,383 licensed beds
located in 32 states. At December 31, 1997, Operating Company would have
leased 218 nursing centers from VenTrust and leased 78 nursing centers from
other third parties. Operating Company also would have managed 13 nursing
centers, including seven centers owned by Tenet, which may hold a greater than
10% interest in Operating Company following the Distribution. During 1997, the
Company completed the sale of 28 of its underperforming or non-strategic
nursing centers. The sale of three additional nursing centers under contract
will be completed upon receipt of certain regulatory approvals.

Operating Company's nursing centers provide rehabilitation services,
including physical, occupational and speech therapies. The majority of
patients in rehabilitation programs stay for eight weeks or less. Patients in
rehabilitation programs generally provide higher revenues than other nursing
center patients because they require a higher level of ancillary services. In
addition, management believes that Operating Company is one of the leading
providers of care for patients with Alzheimer's disease. At December 31, 1997,
Operating Company offered specialized programs covering approximately 3,100
beds in 88 nursing centers for patients suffering from Alzheimer's disease.
Most of these patients reside in separate units within the nursing centers and
are cared for by teams of professionals specializing in the unique problems
experienced by Alzheimer's patients.

NURSING CENTER MARKETING

The factors which affect consumers' selection of a nursing center vary by
community and include a nursing center's competitive position and its
relationships with local referral sources. Competition creates the standards
against which nursing centers in a given market are judged by various referral
sources, which include physicians, hospital discharge planners, community
organizations and families. Therefore, Operating Company's nursing center
marketing efforts are conducted at the local market level by the nursing
center administrators, admissions coordinators and others. Nursing center
personnel are assisted in carrying out their marketing strategies by regional
marketing staffs. Operating Company's marketing efforts are directed toward
improving the payor mix at the nursing centers by maximizing the census of
private pay patients and Medicare patients.

NURSING CENTER OPERATIONS

Each nursing center is managed by a state-licensed administrator who is
supported by other professional personnel, including a director of nursing,
staff development professional (responsible for employee training), activities
director, social services director, licensed dietitian, business office
manager and, in general, physical, occupational and speech therapists. The
directors of nursing are state-licensed nurses who supervise nursing staff
which include registered nurses, licensed practical nurses and nursing
assistants. Staff size and composition vary depending on the size and
occupancy of each nursing center and on the level of care provided by the
nursing center. The nursing centers contract with physicians who serve as
medical directors and serve on quality assurance committees.

The nursing centers are supported by district and/or regional staff in the
areas of nursing, dietary and rehabilitation services, maintenance, sales and
financial services. In addition, corporate staff provide other services in the
areas of sales assistance, human resource management, state and federal
reimbursement, state licensing and certification, legal, finance and
accounting support. Financial control is maintained principally through fiscal
and accounting policies established at the corporate level for use at the
nursing centers.

Quality of care is monitored and enhanced by quality assurance committees
and family satisfaction surveys. The quality assurance committees oversee
patient healthcare needs and resident and staff safety. Additionally,
physicians serve on the quality assurance committees as medical directors and
advise on healthcare policies and practices. Nursing professionals visit each
nursing center periodically to review practices and recommend improvements
where necessary in the level of care provided and to assure compliance with
requirements under applicable Medicare and Medicaid regulations. Surveys of
residents' families are conducted from time to time in which the families are
asked to rate various aspects of service and the physical condition of the
nursing centers. These surveys are reviewed by nursing center administrators
to help ensure quality care.

Operating Company provides training programs for nursing center
administrators, managers, nurses and nursing assistants. These programs are
designed to maintain high levels of quality patient care.

Substantially all of the nursing centers are currently certified to provide
services under Medicare and Medicaid programs. A nursing center's
qualification to participate in such programs depends upon many factors, such
as accommodations, equipment, services, safety, personnel, physical
environment and adequate policies and procedures.

SELECTED NURSING CENTER OPERATING DATA

The following table sets forth certain operating data for Operating
Company's nursing centers:

YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------

Number of nursing centers in operation at
end of period............................. 309 313 311
Number of licensed beds at end of period... 40,383 39,619 39,480
Patient days............................... 12,622,238 12,566,763 12,569,600
Average daily census....................... 34,581 34,335 34,437
Occupancy percentage....................... 90.5% 91.9% 92.2%

SOURCES OF NURSING CENTER REVENUES

Nursing center revenues are derived principally from Medicare and Medicaid
programs and from private pay patients. Consistent with the nursing home
industry generally, changes in the mix of Operating Company's patient
population among these three categories significantly affect the profitability
of Operating Company's operations. Although Medicare and other high acuity
patients generally produce the most revenue per patient day, profitability is
reduced by the costs associated with the higher level of nursing care and
other services

100

required by such patients. Operating Company believes that private pay
patients generally constitute the most profitable category and Medicaid
patients generally constitute the least profitable category.

The following table sets forth certain percentages related to the payor mix
of Operating Company's nursing centers:

MEDICARE MEDICAID PRIVATE AND OTHER
---------------- ---------------- ---------------------
PATIENT NET PATIENT NET PATIENT NET
YEAR DAYS REVENUES DAYS REVENUES DAYS REVENUES
- ---- ------- -------- ------- -------- -------- ---------

1997................ 13% 32% 65% 43% 22% 25%
1996................ 12 30 65 44 23 26
1995................ 12 29 65 44 23 27

For the year ended December 31, 1997, nursing center revenues totaled
approximately $1.72 billion, or 54.1% of Operating Company's total revenues.

Both governmental and private third-party payors employ cost containment
measures designed to limit payments made to healthcare providers. Those
measures include the adoption of initial and continuing recipient eligibility
criteria which may limit payment for services, the adoption of coverage
criteria which limit the services that will be reimbursed and the
establishment of payment ceilings which set the maximum reimbursement that a
provider may receive for services. Furthermore, government reimbursement
programs are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings and government funding restrictions, all
of which may materially increase or decrease the rate of program payments to
Operating Company for its services. The Budget Act requires the establishment
of a prospective payment system for nursing centers for cost reporting periods
beginning on or after July 1, 1998. During the first three years, the per diem
rates for nursing centers will be based on a blend of facility-specific costs
and Federal costs. Thereafter, the per diem rates will be based solely on
Federal costs. The rates for such services have not been established or
published. The prospective payment system also will cover ancillary services
provided to nursing center patients under the Vencare contract services
business. There can be no assurance that payments under governmental and
private third-party payor programs will remain at levels comparable to present
levels or will be sufficient to cover the costs allocable to patients eligible
for reimbursement pursuant to such programs. In addition, there can be no
assurance that facilities leased by Operating Company, or the provision of
services and supplies by Operating Company, will meet the requirements for
participation in such programs. Operating Company could be adversely affected
by the continuing efforts of governmental and private third-party payors to
contain the amount of reimbursement for healthcare services. See "Governmental
Regulation--Nursing Centers and--Healthcare Reform Legislation."

Medicare. The Medicare Part A program provides reimbursement for extended
care services furnished to Medicare beneficiaries who are admitted to nursing
centers after at least a three-day stay in an acute care hospital. Covered
services include supervised nursing care, room and board, social services,
physical and occupational therapies, pharmaceuticals, supplies and other
necessary services provided by nursing centers.

Until the implementation of PPS, nursing center reimbursement will continue
to be based upon reasonable direct and indirect costs of services provided to
beneficiaries. Under the Medicare program, routine costs are subject to a
routine cost limit ("RCL"). The RCL is a national average cost per patient day
which is adjusted for variations in local wages. Revenues under this program
are subject to audit and retroactive adjustment. Management believes that
adequate provisions for loss have been recorded to reflect any adjustments
which could result from such audits. Settlements of Medicare audits have not
had a material adverse effect on Operating Company's nursing center operating
results. During the first three years under PPS, the per diem rates for
nursing centers will be based on a blend of facility-specific costs and
Federal costs. Thereafter, the per diem rates will be based solely on Federal
costs. The rates for such services have not been established or published.

Medicaid. Medicaid is a state-administered program financed by state funds
and matching Federal funds. The program provides for medical assistance to the
indigent and certain other eligible persons. Although administered under broad
Federal regulations, states are given flexibility to construct programs and
payment

101

methods consistent with their individual goals. Accordingly, these programs
differ from state to state in many respects.

Prior to the Budget Act, Federal law, generally referred to as the Boren
Amendment, required Medicaid programs to pay rates that are reasonable and
adequate to meet the costs incurred by an efficiently and economically
operated nursing center providing quality care and services in conformity with
all applicable laws and regulations. Despite the Federal requirements,
disagreements frequently arise between nursing centers and states regarding
the adequacy of Medicaid payments. By repealing the Boren Amendment, the
Budget Act eases the restrictions on the states' ability to reduce their
Medicaid reimbursement levels for such services. In addition, the Medicaid
programs are subject to statutory and regulatory changes, administrative
rulings, interpretations of policy by the state agencies and certain
government funding limitations, all of which may materially increase or
decrease the level of program payments to nursing centers operated by
Operating Company. Management believes that the payments under many of these
programs may not be sufficient on an overall basis to cover the costs of
serving certain residents participating in these programs. Furthermore, the
Omnibus Budget Reconciliation Act of 1987, as amended ("OBRA"), mandates an
increased emphasis on ensuring quality patient care, which has resulted in
additional expenditures by nursing centers.

There can be no assurance that the payments under Medicaid programs will
remain at levels comparable to current levels or, in the future, will be
sufficient to cover the costs incurred in serving residents participating in
such programs. Operating Company provides to eligible individuals Medicaid-
covered services consisting of nursing care, room and board and social
services. In addition, states may at their option cover other services such as
physical, occupational and speech therapies and pharmaceuticals.

Private Payment. Operating Company's nursing centers seek to maximize the
number of private pay patients, including those covered under private
insurance and managed care health plans. Private payment patients typically
have financial resources (including insurance coverage) to pay for their
monthly services and do not rely on government programs for support.

NURSING CENTER COMPETITION

Operating Company's nursing centers compete on a local and regional basis
with other nursing centers. Operating Company's competitive position varies
within each community served. Operating Company believes that the quality of
care provided, reputation, location and physical appearance of its nursing
centers and, in the case of private patients, the charges for services, are
significant competitive factors. Although there is limited, if any, price
competition with respect to Medicare and Medicaid patients (since revenues
received for services provided to such patients are based on fixed rates or
cost reimbursement principles) there is significant competition for private
payment patients.

The long-term care industry is divided into a variety of competitive areas
which market similar services. These competitors include nursing centers,
hospitals, extended care centers, assisted living facilities and communities,
home health agencies and similar institutions. The industry includes
government-owned, church-owned, secular not-for-profit and for-profit
institutions.

102

NURSING CENTER FACILITIES

The following table lists by state the number of nursing centers and related
licensed beds that were owned by or leased from unaffiliated third parties by
the Company, as of December 31, 1997:

LICENSED OWNED BY LEASED FROM
STATE BEDS COMPANY OTHER PARTIES MANAGED TOTAL
- ----- -------- -------- ------------- ------- -----

Alabama(1)........................ 592 3 1 - 4
Arizona........................... 827 5 1 - 6
California........................ 2,516 13 6 2 21
Colorado.......................... 935 4 3 - 7
Connecticut(1).................... 983 8 - - 8
Florida(1)........................ 2,828 16 3 2 21
Georgia(1)........................ 1,336 4 6 - 10
Idaho............................. 903 8 1 - 9
Indiana(1)........................ 4,152 14 12 - 26
Kentucky(1)....................... 2,089 13 4 - 17
Louisiana(1)...................... 485 - 1 2 3
Maine(1).......................... 882 11 - - 11
Massachusetts(1).................. 4,232 33 3 2 38
Minnesota......................... 159 1 - - 1
Mississippi(1).................... 125 - 1 - 1
Montana(1)........................ 456 2 1 - 3
Nebraska(1)....................... 167 - 1 - 1
Nevada(1)......................... 288 3 - - 3
New Hampshire(1).................. 622 3 - 1 4
North Carolina(1)................. 3,212 20 8 - 28
Ohio(1)........................... 2,161 11 4 1 16
Oregon(1)......................... 358 2 1 - 3
Pennsylvania...................... 200 1 1 - 2
Rhode Island(1)................... 201 2 - - 2
Tennessee(1)...................... 2,541 4 11 - 15
Texas............................. 623 1 1 1 3
Utah.............................. 848 5 1 1 7
Vermont(1)........................ 310 1 - 1 2
Virginia(1)....................... 764 4 1 - 5
Washington(1)..................... 1,504 10 3 - 13
Wisconsin(1)...................... 2,633 12 3 - 15
Wyoming........................... 451 4 - - 4
------ --- --- --- ---
Totals............................ 40,383 218 78 13 309
====== === === === ===

- --------
(1)These states have CON regulations. See "Governmental Regulation--Nursing
Centers."

As part of the Reorganization Transactions, Realty Company and Operating
Company will enter into a Master Lease Agreement under which 205 of the
Company-owned nursing centers indicated above will be leased by Operating
Company from Realty Company. For additional information with respect to the
Master Lease Agreement, see "Relationship Between Realty Company and Operating
Company After the Reorganization Transactions--Master Lease Agreement."

VENCARE HEALTH SERVICES OPERATIONS

Through its Vencare health services program, Operating Company has expanded
the scope of its cardiopulmonary care by providing subacute care,
rehabilitation therapy and respiratory care services and supplies to nursing
and subacute care centers. Operating Company also manages cardiopulmonary
departments

103

for other hospitals. Operating Company provides hospice services to nursing
center patients, hospital patients and persons in private residences. In
November 1996, Operating Company consolidated its pharmacy operations under
its Vencare health services. In addition, the rehabilitation, respiratory and
other healthcare services previously provided by TheraTx have been integrated
into the Vencare operations. For the year ended December 31, 1997, revenues
from the Vencare program totaled approximately $642.5 million which
represented 20.2% of Operating Company's total revenues.

During 1997, Operating Company initiated the sale of its Vencare full-
services ancillary services contracts to provide a full range of ancillary
services to nursing centers not operated by Operating Company. Operating
Company believes that by bundling services through one provider, nursing
centers can provide quality care more efficiently with the added benefit of
centralizing their medical records. Under the new prospective payment system,
ancillary services provided by nursing centers will be subject to fixed
payments. In this new environment, Operating Company believes that its full-
service ancillary services contract will enhance the ability of nursing center
operators to manage effectively the cost of providing quality care.

RESPIRATORY CARE SERVICES

Operating Company provides respiratory care services and supplies to nursing
and subacute care center patients pursuant to contracts between Operating
Company and the nursing center or subacute center. The services are provided
by respiratory therapists based at Operating Company's hospitals. These
respiratory therapists perform a wide variety of procedures, including oxygen
therapy, bronchial hygiene, nebulizer and aerosol treatments, tracheostomy
care, ventilator management and patient respiratory education. Pulse oximeters
and arterial blood gas machines are used to evaluate the patient's condition,
as well as the effectiveness of the treatment. Operating Company also provides
respiratory equipment and supplies to nursing and subacute centers.

Operating Company receives payments from the nursing centers and subacute
care centers for services rendered and these facilities, in turn, receive
payments from the appropriate provider. Respiratory therapy and supplies are
generally covered under the Medicare program. Many commercial insurers and
managed care providers are seeking hospital discharge options for lower acuity
respiratory patients. Management believes that Operating Company's pricing and
successful clinical outcomes make its respiratory care program attractive to
commercial insurers and managed care providers.

At December 31, 1997, Operating Company had entered into contracts to
provide contract respiratory therapy services and supplies to approximately
1,600 nursing and subacute care centers, which includes approximately 300
nursing centers operated by Operating Company.

SUBACUTE SERVICES

At December 31, 1997, Operating Company had entered into contracts to
provide subacute care services to 11 nursing and subacute care centers. These
services, which are also an extension of the cardiopulmonary services provided
by Operating Company's hospitals, may include ventilator management,
tracheostomy care, continuation of airway restoration programs, enteral and
parenteral nutritional support, IV therapy for hydration and medication
administration, progressive wound care, chronic chest tube management,
laboratory, radiology, pharmacy and dialysis services, customized
rehabilitation services and program marketing. Subacute patients generally
require assisted ventilation through mechanical ventilation devices.

REHABILITATION THERAPY SERVICE

Operating Company provides physical, occupational and speech therapies to
nursing and subacute care center patients, as well as home health patients and
public school systems. At December 31, 1997, Operating Company had entered
into contracts to provide rehabilitation services to patients at 400
facilities.

104

HOSPICE SERVICES

Operating Company provides hospice services to nursing center patients,
hospital patients and persons in private residences. At December 31, 1997,
Operating Company had entered into approximately 275 contracts to provide
hospice services to patients in nursing and subacute care centers, hospitals
and residences.

MOBILE DIAGNOSTIC SERVICES

Operating Company is a hospital based provider of on-call mobile X-ray
services. These services are primarily provided to nursing facilities, but
Operating Company also provides services to correctional facilities,
rehabilitation hospitals and dialysis centers. These services are provided 24
hours a day, 365 days a year to over 130 facilities.

COMPETITION IN THE CONTRACT SERVICES MARKET

Although the respiratory therapy services, rehabilitation services, subacute
services and hospice care markets are fragmented, significant competition
exists for Operating Company's contract services. The primary competitive
factors for the contract services business are quality of services, charges
for services and responsiveness to the needs of patients, families and the
facilities in which the services are provided. Certain hospitals are
establishing and managing their own step-down and subacute facilities. Other
hospital companies have entered the contract services market through
affiliation agreements and management contracts. In addition, many nursing
centers are developing internal staff to provide those services, particularly
in response to the planned implementation of PPS.

PHARMACIES

Operating Company provides institutional and other pharmacy services. In
November 1996, Operating Company consolidated its Medisave Pharmacies into its
Vencare health services operations and now provides its hospital-based
clinical pharmacy services as part of its Vencare services.

The institutional pharmacy business focuses on providing a full array of
pharmacy services to over 600 nursing centers and specialized care centers.
Institutional pharmacy sales encompass a wide variety of products including
prescription medication, prosthetics, respiratory services, infusion services
and enteral therapies. In addition, Operating Company provides a variety of
pharmaceutical consulting services designed to assist hospitals, nursing
centers, and home health agencies in program administration. During 1997,
Operating Company sold or closed all of its retail pharmacies except one which
is in the process of being sold. The discontinuance of the retail pharmacy
operations in 1997 did not have a material adverse effect on Vencare's
operations.

HOME CARE SERVICES

During the summer of 1996, Operating Company consolidated its home health
services business to establish Operating Company Home Care Services. These
services include home health nursing products and services and home infusion
therapy. These services are generally provided to patients on an individual
basis. At December 31, 1997, Operating Company provided services from 27
locations in 13 states. For the year ended December 31, 1997, home health
services generated approximately $19.3 million in revenues, representing less
than 1% of Operating Company's total revenues.

Significant competition exists for Operating Company's home health services.
Operating Company's home health agencies compete on a local and regional basis
with other providers of home health services. Operating Company believes that
the primary competitive factors for home health services include quality of
service, charges for services provided and attention to the individual needs
of patients.

MANAGEMENT INFORMATION SYSTEM

The financial information for each of Operating Company's facilities is
centralized at the corporate headquarters through its management information
system. Operating Company uses a comprehensive financial reporting system
which enables it to monitor certain key financial data at each facility such
as payor mix,

105

admissions and discharges, cash collections, net revenues and staffing. In
addition, the financial reporting system provides monthly budget analysis,
financial comparisons to prior periods and comparisons among Operating
Company's facilities.

Operating Company has developed the VenTouch(TM) electronic patient medical
record system. VenTouch(TM) is a software application which allows nurses,
physicians and other clinicians to manage clinical information utilized in the
patient care delivery process.

Among the features of VenTouch(TM) are on-line access and update of an
electronic patient chart, an on-line trend analysis using electronic
flowsheets and graphs, and remote access for authorized users. Features
specific to the nursing centers include a complete on-line Resident Assessment
Instrument Process that incorporates state specific guidelines, computer
generated Resident Assessment Protocols, on-line HCFA Resident Assessment
Instrument manual and electronic data transfer capabilities. The system is
designed to decrease administrative time, reduce paper and support the
delivery of quality patient care.

Prior to the acquisition of Transitional, Operating Company had completed
the installation of VenTouch(TM) information system in its hospitals.
Operating Company expects to install VenTouch(TM) in the 19 former
Transitional hospitals by the end of 1998. During 1996, Operating Company
began installation of VenTouch(TM) in its nursing centers and expects to add
VenTouch(TM) to 60 to 80 additional nursing centers during 1998. In addition,
Operating Company intends to offer VenTouch(TM) as part of the menu of
services offered by Vencare to nursing centers not operated by Operating
Company.

EMPLOYEES

As of December 31, 1997, Operating Company had approximately 52,800 full-
time and 24,000 part-time and per diem employees. Operating Company was a
party to 27 collective bargaining agreements covering approximately 2,550
employees as of December 31, 1997.

LIABILITY INSURANCE

Operating Company's hospitals, contract services, nursing centers and
pharmaceutical operations are insured by Operating Company's wholly-owned
captive insurance company, Cornerstone Insurance Company. Cornerstone
Insurance Company is reinsured for losses in excess of $500,000 per claim and
$8.5 million in annual aggregation. Coverages for losses in excess of various
limits are maintained through unrelated commercial insurance carriers to
provide $130.0 million limits per claim and in the aggregate.

Operating Company believes that its insurance is adequate in amount and
coverage. There can be no assurance that in the future such insurance will be
available at a reasonable price or that Operating Company will be able to
maintain adequate levels of malpractice insurance coverage.

106

MANAGEMENT OF THE COMPANY AND MANAGEMENT
OF REALTY COMPANY AND OPERATING COMPANY AFTER THE
REORGANIZATION TRANSACTIONS

THE COMPANY

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the names, ages and present and past positions of the
persons who are the current executive officers of the Company.

NAME AND AGE PRESENT AND PAST POSITIONS
- ------------ --------------------------

A founder of the Company, certified public
accountant and attorney, Mr. Lunsford has
served as Chairman of the Board, President and
W. Bruce Lunsford, 50 Chief Executive Officer of the Company since
the Company commenced operations in 1985. Mr.
Lunsford is the Chairman of the Board of Atria
Communities, Inc. and a director of National
City Corporation, a bank holding company,
Churchill Downs Incorporated, and Res-Care,
Inc., a provider of residential training and
support services for persons with developmental
disabilities and certain vocational training
services.

W. Earl Reed, III, 46 A certified public accountant, Mr. Reed has
served as a director of the Company since 1987.
He has been Chief Financial Officer and
Executive Vice President of the Company since
November 1995. From 1987 to November 1995, Mr.
Reed served as Vice President, Finance and
Development of the Company.

Thomas T. Ladt, 47 Mr. Ladt has served as Executive Vice
President, Operations of the Company since
February 1996. From November 1995 to February
1996, he served as President of the Company's
Hospital Division. From 1993 to November 1995,
Mr. Ladt was Vice President of the Company's
Hospital Division. From 1989 to December 1993,
Mr. Ladt was a Regional Director of Operations
for the Company. Mr. Ladt is a director of
Atria Communities, Inc.

Jill L. Force, 45 Ms. Force, a certified public accountant and
attorney, has served as Senior Vice President,
General Counsel and Assistant Secretary of the
Company since January 1, 1998. From December
1996 to January 1998, she served as Senior Vice
President, General Counsel and Secretary of the
Company. From November 1995 through December
1996, she served as Vice President, General
Counsel and Secretary of the Company. From 1989
to 1995, she was General Counsel and Secretary
of the Company. Ms. Force is a director of
Healthcare Recoveries, Inc., a provider of
health insurance subrogation and related
recovery services.

107

Richard E. Chapman, 48
Mr. Chapman has served as Senior Vice President
and Chief Information Officer of the Company
since October 1997. From March 1993 to October
1997, Mr. Chapman was Senior Vice President of
Information Systems of Columbia/HCA Healthcare
Corp., Vice President of Galen Health Care,
Inc. from March 1993 to August 1993, and of
Humana Inc. from 1974 to March 1993.

James H. Gillenwater, Jr., Mr. Gillenwater has served as Senior Vice
40 President, Planning and Development of the
Company since December 1996. From November 1995
through December 1996, he served as Vice
President, Planning and Development of the
Company. From 1989 to November 1995, he was
Director of Planning and Development of the
Company.

Richard A. Lechleiter, 39 Mr. Lechleiter, a certified public accountant,
has served as Vice President, Finance and
Corporate Controller of the Company since
November 1995. From June 1995 to November 1995,
he was Director of Finance of the Company. Mr.
Lechleiter was Vice President and Controller of
Columbia/HCA Healthcare Corp. from September
1993 to May 1995, of Galen Health Care, Inc.
from March 1993 to August 1993, and of Humana
Inc. from September 1990 to February 1993.

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE OF THE COMPANY

Executive Compensation Philosophy. The Executive Compensation Committee of
the Company Board is composed entirely of outside directors. The Committee is
responsible for setting and administering the policies and programs that
govern both annual compensation and stock ownership programs for the executive
officers of the Company. The Company's executive compensation policy is based
on principles designed to ensure that an appropriate relationship exists
between executive pay and corporate performance, while at the same time
motivating and retaining executive officers.

Executive Compensation Components. The key components of the Company's
compensation program are base salary, an annual incentive awards and equity
participation. These components are administered with the goal of providing
total compensation that is competitive in the marketplace, rewards successful
financial performance and aligns executive officers' interests with those of
stockholders. The Executive Compensation Committee reviews each component of
executive compensation on an annual basis.

BASE SALARY. Base salaries for executive officers are set near the minimum
levels believed by the Executive Compensation Committee to be sufficient to
attract and retain qualified executive officers. Base pay increases are
provided to executive officers based on an evaluation of each executive's
performance, as well as the performance of the Company as a whole. While the
Committee does not establish a specific formula or target to determine base
salaries, the Committee considers the financial performance of the Company as
compared to companies included in the Standard & Poor's Hospital Management
Composite Index ("Hospital Index"). In this regard, the Committee primarily
considers earnings growth and to a lesser degree asset growth. The Committee
also considers the success of the executive officers in developing and
executing the Company's strategic plans, developing management employees and
exercising leadership. The Executive Compensation Committee believes that
executive officer base salaries for 1997 were lower than the average base
salaries paid by companies included in the Hospital Index.

ANNUAL INCENTIVE. The Executive Compensation Committee believes that a
significant proportion of total cash compensation for executive officers
should be subject to attainment of specific Company earnings criteria. This
approach creates a direct incentive for executive officers to achieve desired
performance goals and places a significant percentage of each executive
officer's compensation at risk. Consequently, at the beginning of each

108

year, the Executive Compensation Committee establishes potential bonuses for
executive officers based on the Company's achievement of certain earnings per
share goals within the ranges established by the Executive Compensation
Committee. The Executive Compensation Committee established the annual bonus
targets for 1997 of up to 65% of base salaries contingent upon the Company's
achievement of a range of the predetermined earnings per share goals. The
Committee established the potential bonuses and earnings per share criteria
based on the Committee's judgment as to desirable financial results for the
Company and the appropriate percentage of compensation which should be based
on the attainment of such results. For 1997, the Executive Compensation
Committee awarded bonuses equal to 33 1/3% of base salary based on the
achievement of predetermined earnings per share goals.

EQUITY PARTICIPATION THROUGH OPTIONS AND PERFORMANCE SHARES. The Executive
Compensation Committee believes that equity participation is a key component
of its executive compensation program. The use of such awards provides a long-
term link between the results achieved for the Company's stockholders and the
reward provided to executive officers. Stock options are granted to executive
officers primarily based on the officer's actual and potential contribution to
the Company's growth and profitability and the practices of companies such as
those included in the Hospital Index. Option grants are designed to retain
executive officers and motivate them to enhance stockholder value by aligning
the financial interests of executive officers with those of the Company's
stockholders. Stock options also provide an effective incentive for management
to create stockholder value over the long term since the full benefit of the
compensation package cannot be realized unless an appreciation in the price of
the Company Common Stock occurs over a number of years.

Options to purchase 305,000 shares of Company Common Stock were granted to
the Company Named Executive Officers (as defined herein), including Mr.
Lunsford, in 1997 with an exercise price equal to the fair market value of the
underlying Company Common Stock at the date of grant ($30.25). To encourage
long-term performance, these options vest cumulatively in four annual
installments of 25% and expire ten years from the date of grant. The Committee
granted this number of options based on its judgment that this number is
appropriate and desirable considering these executive officers' actual and
potential contribution to the Company. The assessment of actual and potential
contribution was based on the Committee's subjective evaluation of each
executive officer's ability, skills, efforts and leadership.

In November 1995, the Committee authorized performance share agreements with
its five most highly compensated executive officers providing for the
potential issuance, over a period of five years in annual installments, of a
maximum of 300,000 shares of Company Common Stock. The third performance
period expired on December 31, 1997. The Committee determined on January 19,
1998 that certain performance goals (based on earnings per share) had been met
for this period and the five most highly compensated executive officers of the
Company were allocated a total of 39,999 of a potential 78,000 shares of
Company Common Stock available under the performance share agreements for
1997. Any future entitlement to performance shares is contingent upon the
satisfaction of performance goals, as set forth in the performance share
agreements.

Compensation of Chief Executive Officer. Consistent with the executive
compensation policy and components described above, the Executive Compensation
Committee determined the salary, bonus and stock options received by W. Bruce
Lunsford, Chairman of the Board, President and Chief Executive Officer of the
Company, for services rendered in 1997. Mr. Lunsford received a base salary of
$700,000 for 1997. The Committee believes that this base salary was below
average base salaries paid to chief executive officers of companies included
in the Hospital Index. Mr. Lunsford earned a $233,333 bonus under the
Company's 1987 Incentive Compensation Program. Mr. Lunsford received the bonus
payable for the Company surpassing certain earnings per share goals specified
in advance by the Executive Compensation Committee. Mr. Lunsford also received
options to purchase 160,000 shares of Company Common Stock in 1997. The
Committee determined the number of options granted to Mr. Lunsford based on
its judgment that this number was appropriate and desirable in light of his
actual and potential contribution to the Company and his leadership in
connection with the continued implementation of the Company's growth strategy.
The assessment of actual and potential contribution was based on the
Committee's subjective evaluation of Mr. Lunsford's abilities, skills, efforts
and leadership.

109

In 1995, the Committee authorized an agreement with Mr. Lunsford providing
for the issuance of a maximum of 160,000 performance shares over a period of
five years in five annual installments, contingent upon the satisfaction of
annual performance standards. The Committee continues to believe it is in the
best interests of the Company to tie a significant additional amount of Mr.
Lunsford's potential compensation to the Company's long-term performance. On
January 19, 1998, the Committee determined that certain performance goals for
1997 had been met and 21,333 of a potential 41,600 performance shares
available under the performance agreement were allocated to Mr. Lunsford.

Omnibus Budget Reconciliation Act of 1993. Under the Omnibus Budget
Reconciliation Act of 1993 ("OBRA"), publicly held companies may not deduct
compensation paid to certain executive officers to the extent that such
compensation exceeds $1 million in any year for each such officer. The Company
will continue its efforts to preserve tax deductibility of compensation where
it is reasonable and feasible to do so.

EXECUTIVE COMPENSATION COMMITTEE
R. Gene Smith, Chairman
Greg D. Hudson
Walter F. Beran

110

EXECUTIVE COMPENSATION AND OTHER INFORMATION

Historical Compensation. The following Company Summary Compensation Table
sets forth (i) compensation earned by the Chief Executive Officer of the
Company, and the four other most highly compensated executive officers of the
Company and its subsidiaries for services rendered in all capacities to the
Company during the three fiscal years ended December 31, 1997 (the "Company
Named Executive Officers") and (ii) compensation earned by the person who will
be the Chief Executive Officer of Operating Company, and the individuals who
will be executive officers of Operating Company as of the Distribution Date
and, were, based on such compensation, the four other most highly compensated
executive officers for the fiscal year ended December 31, 1997 (the "Operating
Company Named Executive Officers").

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION
----------------------------------
LONG-TERM
BONUS COMPENSATION
-------------------- OPTIONS ---------------
PERFORMANCE (NO. OF ALL OTHER
NAME AND PRINCIPAL POSITION(1) YEAR SALARY CASH(2) SHARES(3) SHARES) COMPENSATION(4)
- ------------------------------ ---- -------- -------- ----------- ---------- ---------------

W. Bruce Lunsford $700,000 $233,345 $ 523,298 $26,735
Chairman of the Board, 1997 650,000 195,000 766,655 160,000 4,500
President and Chief 1996 500,000 250,000 1,088,000 280,000(5) 4,500
Executive Officer 1995 230,000
Michael R. Barr $320,000 $106,672 $ 130,818 40,000 $12,254
Chief Operating Officer 1997 300,000 90,000 191,655 80,000(5) 12,648
and Executive Vice 1996 225,000 112,500 272,000 65,000 4,500
President 1995
W. Earl Reed, III 1997 $320,000 $106,672 $ 130,818 40,000 $ 4,800
Chief Financial Officer 1996 300,000 90,000 191,655 80,000(5) 4,500
and Executive Vice 1995 225,000 112,500 272,000 65,000 4,500
President
Thomas T. Ladt 1997 $320,000 $106,672 $ 114,482 40,000 $ 4,800
Executive Vice 1996 240,000 72,000 167,720 53,000(5) 4,500
President Operations 1995 150,000 75,000 238,000 52,500 4,500
Jill L. Force(6) 1997 $160,000 $ 53,336 $ 81,758 25,000 $ 6,036
Senior Vice President, 1996 145,000 43,500 119,780 35,000(5) 5,828
General Counsel and 1995 125,000 62,500 170,000 37,000 3,984
Assistant Secretary
James H. Gillenwater, 1997 $140,000 $ 46,669 $ 81,758 25,000 $ 4,800
Jr.(6) 1996 125,000 37,500 119,780 35,000(5) 4,500
Senior Vice President, 1995 108,000 46,466 170,000 37,000 3,476
Planning and
Development

- --------
(1) Mr. Lunsford and Mr. Ladt will be senior executive officers of Realty
Company following the Reorganization Transactions. See "--Realty Company--
Executive Officers of Realty Company." Mr. Lunsford, Mr. Barr, Mr. Reed,
Ms. Force and Mr. Gillenwater will be senior executive officers of
Operating Company following the Reorganization Transactions. See "--
Operating Company--Executive Officers of Operating Company."
(2) The amounts shown represent cash bonuses awarded under the Company's 1987
Incentive Compensation Program for 1995 and 1996. The amounts for 1997
were awarded under the Company's 1997 Incentive Compensation Plan. These
amounts were awarded based on the Company's profitability.
(3) Amounts in this column represent the fair market value, on the date of
allocation, of performance shares awarded to the named persons upon
satisfaction of certain performance goals for the periods presented. The
table below provides the number of performance shares allocated to each
recipient for those periods. See "Long Term Incentive Awards."

MR. LUNSFORD MR. BARR MR. REED MR. LADT MS. FORCE MR. GILLENWATER
------------ -------- -------- -------- --------- ---------------

1997...... 21,333 5,333 5,333 4,667 3,333 3,333
1996...... 21,333 5,333 5,333 4,667 3,333 3,333
1995...... 32,000 8,000 8,000 7,000 5,000 5,000

111

(4) For 1995, the amounts in this column represent contributions by the
Company for the benefit of the named persons pursuant to the Company's
Retirement Savings Plan. For 1997 and 1996, the amounts in this column
represent contributions for the benefit of the named persons to the
Company's Retirement Savings Plan and Deferred Compensation Plan as
follows:

MR. LUNSFORD MR. BARR MR. REED MR. LADT MS. FORCE MR. GILLENWATER
-------------- --------------- ------------- ------------- ------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996
------- ------ ------- ------- ------ ------ ------ ------ ------ ------ ------- -------

Retirement Saving Plan.. $ 4,800 $4,500 $ 4,800 $ 4,500 $4,800 $4,500 $4,800 $4,500 $4,800 $4,500 $ 4,800 $4,500
Deferred Compensation
Plan................... 21,935 -- 7,454 8,148 -- -- -- -- 1,236 1,328 -- --
------- ------ ------- ------- ------ ------ ------ ------ ------ ------ ------- -------
Total................... $26,735 $4,500 $12,254 $12,648 $4,800 $4,500 $4,800 $4,500 $6,036 $5,828 $ 4,800 $4,500
======= ====== ======= ======= ====== ====== ====== ====== ====== ====== ======= =======

(5) Includes options issued in exchange for options to purchase shares of a
wholly-owned subsidiary of the Company, Ventech Systems, Inc., previously
awarded to the named persons in 1994 in the following amounts: Mr.
Lunsford--120,000 shares; Mr. Barr--40,000 shares; Mr. Reed--40,000
shares; Mr. Ladt--18,000 shares; Ms. Force--10,000 shares; and Mr.
Gillenwater--10,000 shares.
(6) Ms. Force and Mr. Gillenwater first became executive officers of the
Company in November 1995.

On November 19, 1997, the Company entered into new Change-in-Control
Severance Agreements with certain of its key employees, including its five
most highly compensated executive officers. These agreements provide for the
payment of severance benefits under certain circumstances. These benefits
become payable at any time within two years of a change in control of the
Company if: (i) the Company terminates the employee without cause; (ii) the
employee terminates employment with the Company for good reason (as defined in
the agreement) or within either of two 30-day periods commencing 30 days after
the change in control and one year after the change in control, respectively.
The benefits to be afforded the Company's five most highly compensated
executive officers include: (i) a cash payment equal to three times base
salary and bonus and (ii) continuation of health, life and disability
insurance coverage for three years.

Option Grants in Last Fiscal Year. The following table sets forth
information concerning options to purchase shares of Company Common Stock
granted in 1997 to the Company Named Executive Officers and the Operating
Company Named Executive Officers. As a result of the Reorganization
Transactions, each Company Option granted to the Operating Company Named
Executive Officers listed below will be replaced with a combination of a
Realty Company Option and an Operating Company Option pursuant to the Employee
Benefits Agreement, and, as a result, their value will depend on the future
value of Operating Company Common Stock as well as on the future value of
Realty Company Common Stock. See "Relationship Between Realty Company and
Operating Company After the Reorganization Transactions--Employee Benefits
Agreement."

NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE PRICE PRESENT
NAME(1) GRANTED(2) IN 1997 PER SHARE(3) EXPIRATION DATE VALUE(4)
- ------- ---------- ---------- ----------------- --------------- ----------

W. Bruce Lunsford....... 160,000 13.27% 160,000 at $30.25 2/3/07 $2,163,200
Michael R. Barr......... 40,000 3.32% 40,000 at $30.25 2/3/07 $ 540,800
W. Earl Reed, III....... 40,000 3.32% 40,000 at $30.25 2/3/07 $ 540,800
Thomas T. Ladt.......... 40,000 3.32% 40,000 at $30.25 2/3/07 $ 540,800
Jill L. Force........... 25,000 2.07% 25,000 at $30.25 2/3/07 $ 338,000
James H. Gillenwater,
Jr. ................... 25,000 2.07% 25,000 at $30.25 2/3/07 $ 338,000

112

(3) All options were granted at fair market value (closing price on the NYSE
on the date of grant). The exercise price and any tax withholding
obligations related to exercise may be paid by delivery of shares of
Company Common Stock.
(4) The Company used the Black-Scholes model of option valuation to determine
grant date present value. The present value calculation for the options
granted on February 3, 1997, is based on, among other things, the
following assumptions: (a) a .31 expected volatility factor, (b) a 5.50%
risk-free interest rate, (c) no dividend yield, and (d) expected term of
seven years. The Company does not advocate or necessarily agree that the
Black-Scholes model can properly determine the value of an option. There
is no assurance that the value, if any, realized by the option holder will
be at or near the value estimated under the Black-Scholes model.

Option Exercises and Holdings. The following table sets forth information
with respect to the Company Named Executive Officers and Operating Company
Named Executive Officers concerning the exercise of options during 1997 and
unexercised options held as of December 31, 1997. As a result of the
Reorganization Transactions, each Company Option granted to the Operating
Company Named Executive Officers will be replaced with a combination of a
Realty Company Option and an Operating Company Option pursuant to the Employee
Benefits Agreement, and, as a result, their value will depend on the future
value of Operating Company Common Stock as well as on the future value of
Realty Company Common Stock. See "Relationship Between Realty Company and
Operating Company After the Reorganization Transactions--Employee Benefits
Agreement."

AGGREGATE OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES

VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT 12/31/97 AT 12/31/97(3)
ON VALUE ------------------------- -------------------------
NAME(1) EXERCISE REALIZED(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------- -------- ----------- ----------- ------------- ----------- -------------

W. Bruce Lunsford....... 133,595 $1,384,417 329,003 457,997 $273,654 $46,603
Michael R. Barr......... 50,000 1,222,654 84,893 124,122 43,177 17,470
W. Earl Reed, III....... 80,628 363,586 66,500 124,122 -- 17,470
Thomas T. Ladt.......... 8,438 324,962 71,300 102,325 143,122 8,157
Jill L. Force........... 17,626 435,175 40,875 68,125 28,043 5,826
James H. Gillenwater,
Jr. ................... -- -- 50,063 68,125 110,051 5,826

- --------
(1) Mr. Lunsford and Mr. Ladt will be senior executive officers of Realty
Company following the Reorganization Transactions. See "--Realty Company--
Executive Officers of Realty Company." Mr. Lunsford, Mr. Barr, Mr. Reed,
Ms. Force and Mr. Gillenwater will be senior executive officers of
Operating Company following the Reorganization Transactions. See "--
Operating Company--Executive Officers of Operating Company."
(2) These amounts represent the market value of the underlying Company Common
Stock on the date of exercise less the applicable exercise price.
(3) These amounts were calculated by subtracting the exercise price from the
market value of the underlying Company Common Stock as of year-end. The
market value of the Common Stock was $24.4375 per share as of December 31,
1997, based on the closing price per share on the NYSE.

Long-Term Incentive Awards. In 1995, the Company entered into agreements
("Performance Agreements") whereby the Company may issue shares for each year
of a five-year period, which began in 1995, to its five most highly
compensated executive officers. The receipt of shares is contingent upon the
satisfaction of performance goals by the Executive Compensation Committee.
However, upon a change in control of the Company, as defined in the
Performance Agreements, the performance periods will lapse and all unearned
performance shares will become fully vested and issuable. Upon the
satisfaction of performance goals for 1997 established by the Committee, the
Company Named Executive Officers received 39,999 of the potential 78,000
performance shares available under the Performance Agreements for 1997 and the
Operating Company Named Executive Officers received 38,665 of the potential
75,400 performance shares available under the Performance

113

Agreements for 1997. For 1998, the Committee has established four levels of
performance goals. Upon the attainment of the various target performance goals
for 1998, the Company's five most highly compensated executive officers would
each receive 33.3%, 66.7%, 100% or 130% of the number of shares established as
the annual goals under the Performance Agreements as follows: W. Bruce
Lunsford--32,000 shares; Michael R. Barr--8,000 shares; W. Earl Reed, III--
8,000 shares; Thomas T. Ladt--7,000 shares; Jill L. Force--5,000 shares; and
James H. Gillenwater, Jr.--5,000 shares. The shares shown in the following
chart represent the maximum number of shares which may be issued for the
remaining two annual performance periods under the Performance Agreements.

NAME NUMBER OF SHARES PERFORMANCE PERIODS
- ---- ---------------- -------------------

W. Bruce Lunsford.......................... 85,334 1998-1999
Michael R. Barr............................ 21,334 1998-1999
W. Earl Reed, III.......................... 21,334 1998-1999
Thomas T. Ladt............................. 18,666 1998-1999
Jill L. Force.............................. 13,334 1998-1999
James H. Gillenwater, Jr. ................. 13,334 1998-1999

PERFORMANCE GRAPH

The following graph summarizes the cumulative total return to holders of
Company Common Stock from December 31, 1992 to December 31, 1997, compared to
the cumulative total return on the Standard & Poor's 500 Stock Index and the
Standard & Poor's Hospital Management Composite Index.

[GRAPH]

A graph plotting the years from 1992-1997 on the horizontal axis against
cumulative total returns to common stockholders on the vertical axis. The graph
compares the cumulative total returns of the stockholders of (1) Vencor, Inc.
(2) Standard & Poor's Hospital Management Composite Index and (3) Standard &
Poor's 500 Stock Index. The graph demonstrates that the cumulative total return
to common shareholders of Vencor, Inc. for the past five years has been at or
below the returns reflected by such Indices.

- ---------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------
Vencor, Inc. 100 82 115 134 130 101
- ---------------------------------------------------------------------------
S&P 500 Index 100 110 112 153 189 252
- ---------------------------------------------------------------------------
S&P Hospital Management 100 151 160 224 263 230
- ---------------------------------------------------------------------------

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

As of December 31, 1997, the following persons served on the Executive
Compensation Committee of the Company Board: R. Gene Smith, Greg D. Hudson and
Walter F. Beran. Although R. Gene Smith serves as Vice Chairman of the Board,
none of the members of the Executive Compensation Committee are employees of
the Company.

114

CERTAIN RELATIONSHIPS AND RELATED TRANSACTION

In 1989, the Company adopted a policy which provides that any transaction
between the Company and any of its officers, directors or their affiliates
must be approved by the disinterested members of the Company Board and must be
on terms no less favorable to the Company than those available from
unaffiliated parties.

On September 28, 1995, the Company consummated the Hillhaven Merger.
Following the Hillhaven Merger, Walter F. Beran became a director of the
Company and is currently a nominee for election to the Company Board. In
connection with the Hillhaven Merger, the Company agreed to fulfill
Hillhaven's obligations under Hillhaven's Directors' Retirement Plan with
respect to each of Hillhaven's outside directors, including Mr. Beran. Under
the Directors' Retirement Plan, each Hillhaven outside director will receive
an annual retirement payment of $25,440 for a period of ten years following
the Hillhaven Merger.

The Company currently manages seven long-term care facilities owned by
Tenet, a more than five percent stockholder of the Company. Under the
management agreements for these facilities, the Company provides all necessary
management functions in return for approximately five and one-half percent of
the monthly net revenues generated at such facilities. The Company may also be
entitled to certain incentive fees if actual results exceed budgeted amounts.
During 1997, the Company earned approximately $2.2 million in revenues from
the management of these seven facilities.

During 1997, the Company paid approximately $128,000 for legal services
rendered by the law firm of Wyatt, Tarrant & Combs. The spouse of Jill L.
Force, Senior Vice President and General Counsel of the Company, is a partner
of that firm. These fees represented less than two percent of the legal fees
paid by the Company in 1997. It is expected that Wyatt, Tarrant & Combs will
provide legal services to the Company in 1998.

REALTY COMPANY

EXECUTIVE OFFICERS OF REALTY COMPANY

Set forth below are the names, ages, future titles with Realty Company and
present and past positions of the persons who are expected to serve as
executive officers of Realty Company immediately following the Reorganization
Transactions. Each such individual will be elected to the indicated office
with Realty Company effective as of the Distribution Date and will serve at
the pleasure of the Realty Company Board.

FUTURE POSITION PRESENT AND PAST POSITIONS
NAME AND AGE WITH REALTY COMPANY SINCE JANUARY 1, 1993
------------ ------------------- ---------------------------

W. Bruce Lunsford, 50 Chairman of the A founder of the Company, certified public
Board and Chief accountant and attorney, Mr. Lunsford has
Executive Officer served as Chairman of the Board, President
and Chief Executive Officer of the Company
since it commenced operations in 1985. Mr.
Lunsford is the Chairman of the Board of
Atria Communities, Inc. and a director of
National City Corporation, a bank holding
company, Churchill Downs Incorporated, and
Res-Care, Inc. a provider of residential
training and support services for persons
with developmental disabilities and certain
vocational training services.

115

FUTURE POSITION PRESENT AND PAST POSITIONS
NAME AND AGE WITH REALTY COMPANY SINCE JANUARY 1, 1993
------------ ------------------- ---------------------------

Thomas T. Ladt, 47 President and Chief Mr. Ladt has served as Executive Vice
Operating Officer President, Operations of the Company since
February 1996. From November 1995 to
February 1996, he served as President of
the Company's Hospital Division. From 1993
to November 1995, Mr. Ladt was Vice
President of the Company's Hospital
Division. From 1989 to December 1993, Mr.
Ladt was a Regional Director of Operations
for the Company. Mr. Ladt is a director of
Atria Communities, Inc.
T. Richard Riney, 40 Vice President, Mr. Riney has served as Transactions
General Counsel and Counsel of the Company since April 1996.
Secretary From May 1992 to March 1996, he was a
partner of Hirn, Reed & Harper, a law firm
based in Louisville, Kentucky.

Realty Company expects that prior to the Distribution Date, it will have
selected individuals to serve as chief financial officer and vice president of
planning and development of Realty Company.

COMPENSATION OF CHIEF EXECUTIVE OFFICER OF REALTY COMPANY

Mr. Lunsford will serve as Chairman of the Board and Chief Executive Officer
of Realty Company following the Distribution. For these services, Mr.
Lunsford's base salary for 1998 will be $500,000 with an annual bonus target
of 50% of his base salary contingent upon Realty Company achieving certain
financial results. On the Distribution Date, Mr. Lunsford will be granted
50,000 restricted shares of Realty Company Common Stock and 150,000 Realty
Company Options. Restrictions on the restricted shares lapse in four equal
annual installments, beginning on the first anniversary of the grant date. The
Realty Company Options will be granted at an exercise price equal to the fair
market value of the Realty Company Common Stock on the Distribution Date. The
options will be exercisable in four equal annual installments, beginning on
the first anniversary of the grant date.

Realty Company will provide a loan (the "CEO Loan") to Mr. Lunsford in an
amount sufficient to cover the income taxes payable by him as a result of the
Distribution. The CEO Loan will have a term of between six and ten years, and
will bear interest, at the lowest rate required so that Mr. Lunsford will not
realize any imputed income under Section 7872 of the Code. Any interest
payment on the CEO Loan will be forgiven, however, if Mr. Lunsford remains
employed as the Chief Executive Officer of Realty Company on the date on which
such interest payment is due. Moreover, in the event of a change in control of
Realty Company (as defined in the Company Incentive Plan), the entire balance
of the CEO Loan will be forgiven. Mr. Lunsford will be required to make annual
principal and interest payments in the CEO Loan beginning with the first
anniversary of the date of the CEO Loan.

DIRECTORS OF REALTY COMPANY

See "Election of Directors" for information with respect to the persons who
are nominated to serve as directors of Realty Company as of the Distribution
Date.

OPERATING COMPANY

EXECUTIVE OFFICERS OF OPERATING COMPANY

Set forth below are the names, ages, future titles with Operating Company
and present and past positions of the persons who are expected to serve as
executive officers of Operating Company immediately following the
Reorganization Transactions. Each such individual will be elected to the
indicated office with Operating Company in anticipation of the Reorganization
Transactions and will serve at the pleasure of the Operating Company Board.
Those persons named below who are currently officers or employees of the
Company, other than Mr. Lunsford, will resign from their positions with the
Company by the Distribution Date.

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FUTURE POSITION WITH PRESENT AND PAST POSITIONS
NAME AND AGE OPERATING COMPANY SINCE JANUARY 1, 1993
------------ -------------------- --------------------------

W. Bruce Lunsford, 50 Chairman of the A founder of the Company, certified public
Board, President accountant and attorney, Mr. Lunsford has
and Chief served as Chairman of the Board, President
Executive Officer and Chief Executive Officer of the Company
since the Company commenced operations in
1985. Mr. Lunsford is the Chairman of the
Board of Atria Communities, Inc. and a
director of National City Corporation, a
bank holding company, Churchill Downs
Incorporated, and Res-Care, Inc., a
provider of residential training and
support services for persons with
developmental disabilities and certain
vocational training services.
Michael R. Barr, 48 Chief Operations A founder of the Company, physical
Officer and therapist and certified respiratory
Executive Vice therapist, Mr. Barr has served as Chief
President Operating Officer and Executive Vice
President of the Company since February
1996. From November 1995 to February 1996,
he was Executive Vice President of the
Company and Chief Executive Officer of the
Company's Hospital Division. Mr. Barr
served as Vice President, Operations from
1985 to November 1995. He has been a
director of the Company since 1985. He has
been a director of the Company since 1985.
Mr. Barr is a director of Colorado MEDtech,
Inc., a medical products and equipment
company.
W. Earl Reed, III, 46 Chief Financial A certified public accountant, Mr. Reed has
Officer and served as a director of the Company since
Executive Vice 1987. He has been Chief Financial Officer
President and Executive Vice President of the Company
since 1995. From 1987 to November 1995, Mr.
Reed served as Vice President, Finance and
Development of the Company.
Jill L. Force, 45 Senior Vice Ms. Force, a certified public accountant
President, General and attorney, has served as Senior Vice
Counsel and President, General Counsel and Assistant
Assistant Secretary of the Company since January 1,
Secretary 1998. From December 1996 to January 1998,
she served as Senior Vice President,
General Counsel and Secretary of the
Company. From November 1995 through
December 1996, she served as Vice
President, General Counsel and Secretary of
the Company. From 1989 to 1995, she was
General Counsel and Secretary of the
Company. Ms. Force is a director of
Healthcare Recoveries, Inc., a provider of
health insurance subrogation and related
recovery services.

117

FUTURE POSITION WITH PRESENT AND PAST POSITIONS
NAME AND AGE OPERATING COMPANY SINCE JANUARY 1, 1993
- ------------ -------------------- --------------------------

Richard E. Chapman, 48 Senior Vice Mr. Chapman has served as Senior Vice
President and President and Chief Information Officer of
Chief Information the Company since October 1997. From March
Officer 1993 to October 1997, Mr. Chapman was
Senior Vice President of Information
Systems of Columbia/HCA Healthcare Corp.,
Vice President of Galen Health Care, Inc.
from March 1993 to August 1993, and of
Humana Inc. from 1974 to March 1993.
James H. Gillenwater, Senior Vice Mr. Gillenwater has served as Senior Vice
Jr., 40 President, President, Planning and Development of the
Planning and Company since December 1996. From November
Development 1995 through December 1996, he served as
Vice President, Planning and Development of
the Company. From 1989 to November 1995, he
was Director of Planning and Development of
the Company.
Richard A. Lechleiter, Vice President, Mr. Lechleiter, a certified public
39 Finance and accountant, has served as Vice President,
Corporate Finance and Corporate Controller of the
Controller Company since November 1995. From June 1995
to November 1995, he was Director of
Finance of the Company. Mr. Lechleiter was
Vice President and Controller of
Columbia/HCA Healthcare Corp. from
September 1993 to May 1995, of Galen Health
Care, Inc. from March 1993 to August 1993,
and of Humana Inc. from September 1990 to
February 1993.

DIRECTORS OF OPERATING COMPANY

Prior to the Distribution Date, the Company, as sole stockholder of
Operating Company, plans to elect the eight persons named in the table below
to serve on the Operating Company Board. The Operating Company Board will be
divided into three classes. Directors for each class will be elected at the
annual meeting of stockholders held in the year in which the term for such
class expires and will serve thereafter for three years.

Information with respect to the persons who are expected to serve as
directors is set forth below. All of these persons currently serve as
directors of the Company.

DIRECTORS EXPECTED TO BE ELECTED TO TERMS EXPIRING IN 1999

NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ ---------------------------------------------
Mr. Bridgeman has served as a director of the
Company since May 1997. Since 1988, Mr. Bridgeman
has been President of Bridgeman Foods, Inc., a
Ulysses L. Bridgeman, Jr., franchisee of 51 Wendy's Old Fashioned Hamburger
44 Restaurants.

118

DIRECTORS EXPECTED TO BE ELECTED TO TERMS EXPIRING IN 2000

NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ ---------------------------------------------
A founder of the Company, physical therapist and
certified respiratory therapist, Mr. Barr has
served as Chief Operating Officer and Executive
Michael R. Barr, 48 Vice President of the Company since February 1996
and is expected to serve in the same positions at
Operating Company following the Reorganization
Transactions. From November 1995 to February
1996, he was Executive Vice President of the
Company and Chief Executive Officer of the
Company's Hospital Division. Mr. Barr served as
Vice President, Operations from 1985 to November
1995. He has been a director of the Company since
1985. Mr. Barr is a director of Colorado MEDtech,
Inc., a medical products and equipment company.

Donna R. Ecton, 50 Ms. Ecton has served as director of the Company
since 1992. Since December 1996, Ms. Ecton has
been Chief Operating Officer of PETsMART, Inc., a
pet supplies retailer. From 1995 to 1996, she was
Chairman, President and Chief Executive Officer
of Business Mail Express, Inc., an expedited
print and mail services company. From 1991 to
1994, she was President and Chief Executive
Officer of Van Houten North America, Inc. and
Andes Candies Inc., confectionery products
businesses. Ms. Ecton is a director of Barnes
Group, Inc., a diversified manufacturing,
aerospace and distribution company, PETsMART,
Inc. and H&R Block, Inc.

W. Earl Reed, III, 46 A certified public accountant, Mr. Reed has
served as a director of the Company since 1987.
He has been Chief Financial Officer and Executive
Vice President of the Company since November 1995
and is expected to serve in the same positions at
Operating Company following the Reorganization
Transactions. From 1987 to November 1995, Mr.
Reed served as Vice President, Finance and
Development of the Company.

DIRECTORS EXPECTED TO BE ELECTED TO TERMS EXPIRING IN 2001

NAME AND AGE PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS
- ------------ --------------------------------------------

Ms. Chao has served as a director of the Company
since May 1997. Ms. Chao is a Distinguished
Fellow of The Heritage Foundation in Washington,
Elaine L. Chao, 44 D.C. From 1992 to 1996, Ms. Chao was President
and Chief Executive Officer of the United Way of
America. From 1991 to 1992, she served as the
Director of the Peace Corps. Ms. Chao is a
director of Dole Food Company, Inc., NASD, Inc.
and Protective Life Corporation.

W. Bruce Lunsford, 50
A founder of the Company, certified public
accountant and attorney, Mr. Lunsford has served
as Chairman of the Board, President and Chief
Executive Officer of the Company since the
Company

119

commenced operations in 1985 and is expected to
serve in the same positions at Operating Company
following the Reorganization Transactions. Mr.
Lunsford is also expected to serve as Chairman of
the Board and Chief Executive Officer of Realty
Company following the Reorganization
Transactions. Mr. Lunsford is the Chairman of the
Board of Atria Communities, Inc. and a director
of National City Corporation, a bank holding
company, Churchill Downs Incorporated, and Res-
Care, Inc., a provider of residential training
and support services for persons with
developmental disabilities and certain vocational
training services.

R. Gene Smith, 63 A founder of the Company, Mr. Smith has served as
a director of the Company since 1985 and Vice
Chairman of the Board since 1987. Mr. Smith is
expected to serve on the Realty Company Board and
Operating Company Board following the
Reorganization Transactions. From 1987 to 1995,
Mr. Smith was President of New Jersey
Blockbuster, Ltd., which held the Blockbuster
Video franchise for northern New Jersey. Since
1988, Mr. Smith has been Chairman of the Board of
Taco Tico, Inc., an operator of Mexican fast-food
restaurants. Since 1993, Mr. Smith has been
Managing General Partner of Direct Programming
Services, which was a marketer of direct
broadcast satellite television services. Mr.
Smith is also a director of Atria Communities,
Inc.

Each of the above persons are currently members of the Company Board and
will resign as directors of the Company as of or prior to the Distribution
Date, except that Mr. Lunsford and Mr. Smith will continue as directors of the
Company at and after the Distribution Date.

COMMITTEES OF THE OPERATING COMPANY BOARD

The Operating Company Board is expected to establish several committees
including an Audit and Compliance Committee, an Executive Compensation
Committee, an Executive Committee and an Independent Committee. The membership
of these committees will be established at the initial meeting of the
Operating Company Board. A description of each committee follows:

Audit and Compliance Committee. The Audit and Compliance Committee will
review the adequacy of Operating Company's system of internal controls and
accounting practices. In addition, the Audit and Compliance Committee will
review the scope of the annual audit of Operating Company's auditors, which is
expected to be Ernst & Young, prior to its commencement, and will review the
types of services for which Operating Company will retain Ernst & Young. The
Audit and Compliance Committee will also oversee Operating Company's adoption
and implementation of policies and procedures designed to ensure that
Operating Company and its employees comply with all applicable laws,
regulations and policies. The members of the Audit and Compliance Committee
are expected to be Mr. Bridgeman, Ms. Chao, Ms. Ecton and Mr. Lomicka,
Chairman.

Executive Committee. The Executive Committee will have the power of the
Operating Company Board in directing the management of the business and
affairs of Operating Company in the intervals between meetings of the
Operating Company Board (except for certain matters reserved for the Operating
Company Board). The members of the Executive Committee are expected to be Mr.
Lomicka, Mr. Lunsford, Chairman, and Mr. Smith.

Executive Compensation Committee. The function of the Executive Compensation
Committee will be to establish annual salary levels, approve fringe benefits
and administer any special compensation plans or programs for executive
officers of Operating Company. The members of the Executive Compensation
Committee are expected to be Mr. Bridgeman, Ms. Chao and Mr. Smith, Chairman.

120

Independent Committee. The function of the Independent Committee will be to
review and approve the following actions of the Operating Company Board: (a)
the entering into of any agreements with Realty Company and its affiliates,
(b) the consummation of any transaction between Operating Company and Realty
Company or its affiliates, including, but not limited to, the negotiation,
enforcement and renegotiation of the terms of any Lease, and (c) overseeing
and monitoring the existing agreements between Realty Company and Operating
Company. The members of the Independent Committee are expected to be Ms. Ecton
and Mr. Lomicka.

COMPENSATION OF DIRECTORS

It is expected that non-employee directors of Operating Company will receive
$2,000 for each board meeting they attend and $1,000 for each committee
meeting they attend. In addition, it is expected that non-employee directors
will receive a $2,500 retainer for each calendar quarter that they serve as a
director.

Operating Company expects to adopt an Operating Company Non-Employee
Directors Deferred Compensation Plan (the "Operating Company Directors
Deferred Compensation Plan"), similar to the Company's, pursuant to which a
non-employee director may defer in stock or cash the receipt of fees which
would otherwise be paid to the director for services on the board and its
committees. Directors who choose to defer fees could elect to have the
deferred amounts invested 100% in shares of Operating Company's Common Stock
(an "Operating Company Share Election") or to accumulate and earn interest (an
"Operating Company Cash Election"). If an Operating Company Share Election is
made, the director's deferral account will be credited with 110% of the
compensation otherwise payable to the director. As of the end of each calendar
quarter, such deferred amounts would be converted into share equivalents of
Operating Company Common Stock based on the fair market value of Operating
Company Common Stock on that date. If an Operating Company Cash Election is
made, the deferred amounts earn interest at a floating rate of interest,
compounded annually.

In connection with the Distribution, each non-employee member of the
Operating Company Board, will be granted a one-time grant of 2,000 restricted
shares of Operating Company Common Stock and option to purchase 5,000 shares
of Operating Company Common Stock. The restrictions on all shares of
restricted Operating Company Common Stock lapse in four equal annual
installments, beginning on the first anniversary of their grant date. Each
Operating Company Option will have an exercise price equal to the fair market
value on the Distribution Date of the Operating Company Common Stock. These
options will become exercisable in four annual installments beginning on the
first anniversary of their grant date.

See "--Operating Company Incentive and Benefit Plans."

OPERATING COMPANY INCENTIVE AND BENEFIT PLANS

Stock Option Plan for Non-employee Directors. Prior to the Distribution
Date, Operating Company will adopt an option plan for non-employee directors
(the "Operating Company Directors Plan"). The purpose of the Operating Company
Directors Plan will be to attract and retain highly qualified non-employee
directors by permitting them to obtain or increase their proprietary interest
in Operating Company. The Operating Company Directors Plan will provide for
annual awards of options to each of Operating Company's non-employee
directors. The Operating Company Directors Plan is designed to operate
automatically and not require any significant administration. To the extent
administration is required, the Operating Company Directors Plan will be
administered by a committee appointed by the Operating Company Board which
will include two or more directors of Operating Company or the entire
Operating Company Board. No discretion concerning decisions under the
Operating Company Directors Plan will be afforded to a person who is not a
"disinterested person." Employees of Operating Company are not eligible to
participate in the Operating Company Directors Plan.

Shares Available for Issuance. The Operating Company Directors Plan will
provide that 200,000 shares of Operating Company Common Stock will be
available for the granting of awards. The Operating Company Common Stock
subject to the Operating Company Directors Plan will be authorized but
unissued shares or previously acquired shares. Pursuant to the Operating
Company Directors Plan, the number and kind of shares to which awards are
subject will be appropriately adjusted in the event of certain changes in
capitalization of

121

Operating Company, including stock dividends and splits, reclassifications,
recapitalizations, reorganizations, mergers, consolidations, spin-offs, split-
ups, combinations or exchanges of shares, and certain distributions and
repurchases of shares.

Stock Options. On January 1 of each year during the term of the Operating
Company Directors Plan, each non-employee director who is elected a director
at the preceding annual meeting of stockholders and who is acting as a
director on January 1, will receive a grant of an option to purchase 3,000
shares of Operating Company Common Stock. The exercise price of each option
will be equal to the fair market value of the shares on the date of grant.
Upon exercise, the exercise price may be paid in cash or, in lieu of all or
part of the cash, the optionee may provide Operating Company with shares owned
by the optionee having a fair market value equal to the exercise price.

Under the Operating Company Directors Plan, all options will be exercisable
in four equal annual installments, with the first installment becoming
exercisable following the first anniversary of the date of grant of the
option. Upon a change in control or the retirement of the director, the
optionee will have the right to exercise the option in full as to all shares
subject to the option. The exercise period for any stock option will be ten
years from the date of grant, unless sooner terminated.

Incentive Compensation Plan. Prior to the Distribution Date, Operating
Company will adopt an incentive compensation plan (the "Operating Company
Incentive Plan"). The purpose of the Operating Company Incentive Plan would be
to advance the interests of Operating Company and its stockholders by
attracting, retaining, and motivating employees who will be responsible for
the long term success and development of Operating Company. The Operating
Company Incentive Plan will provide for the award of a variety of economic
incentives to Operating Company's employees, including stock awards,
performance units, restricted stock, cash awards, stock options, and stock
appreciation rights ("SARs").

The Operating Company Incentive Plan will be administered by a committee
(the "Committee") composed of three or more "outside directors" within the
meaning of Section 162(m) of the Code. In administering the Operating Company
Incentive Plan, the Committee will determine, among other things: (i)
individuals to whom grants of awards will be made; (ii) the type and size of
awards; and (iii) the terms of an award including, but not limited to, a
vesting schedule, exercise price, restriction or performance criteria, and the
length of any relevant performance restriction or option.

All full-time employees of Operating Company, or any subsidiary, partnership
or limited liability company in which Operating Company owns a majority
interest, will be eligible to receive awards under the Operating Company
Incentive Plan when designated by the Committee. In selecting employees to
receive awards under the Operating Company Incentive Plan, the Committee must
take into consideration such factors as it deems relevant in promoting the
purposes of the Operating Company Incentive Plan, including the duties of the
employees, their present or potential contribution to the success of Operating
Company and their anticipated number of years of active service as employees.

Shares Available for Issuance. The Operating Company Incentive Plan will
provide that 6,000,000 shares of Operating Company Common Stock will be
available for the granting of awards. The total number of shares of Operating
Company Common Stock with respect to which stock options may be granted to any
individual during any calendar year may not exceed 500,000 shares. The maximum
number of SARs or performance units which may be awarded to an employee during
any calendar year may not exceed 100,000. The maximum amount of a cash award
which may be granted to an employee during any calendar year will not be
greater than $1,000,000. Operating Company Common Stock subject to the
Operating Company Incentive Plan will be authorized but unissued shares or
previously acquired shares. Pursuant to the Operating Company Incentive Plan,
the number and kind of shares to which awards will be subject may be
appropriately adjusted in the event of certain changes in capitalization of
Operating Company, including stock dividends and splits, reclassifications,
recapitalizations, reorganizations, mergers, consolidations, spin-offs, split-
ups, combinations or exchanges of shares, and certain distributions, and
repurchases, of shares.

122

Stock Options. The Committee may grant stock options to eligible individuals
in the form of incentive stock options or non-qualified stock options. All
incentive stock options are intended to qualify under Section 422 of the Code.
The exercise period for any stock option will be determined by the Committee
at the time of grant but may not exceed ten years from the date of grant. The
exercise price per share of the Operating Company Common Stock covered by a
stock option may not be less than 100% of the fair market value of a share of
Operating Company Common Stock on the date of grant. The exercise price is
payable, at the Committee's discretion, in cash, in shares of already owned
Operating Company Common Stock, or in any other reasonable consideration that
the Committee may deem appropriate. Stock options will be exercisable in
installments as determined by the Committee and as set forth in the employee's
option agreement. The Committee may, in its discretion and with appropriate
restrictions, authorize any non-qualified stock option to be transferable to
the employee's spouse, lineal descendants, a trust or other entity exclusively
for the benefit of the employee and such persons.

If any employee's employment terminates by reason of death or disability,
any outstanding stock option will vest fully and be exercisable at any time
within two years following the date of death or disability for a non-
qualifying stock option and one year following the date of death or disability
for an incentive stock option (but in no event beyond the stated term of the
option). Upon an employee's retirement, a stock option will be exercisable at
any time prior to the end of the stated term of the stock option or two years
following the retirement date in the case of a non-qualified stock option and
90 days after retirement, in the case of an incentive stock option, whichever
is the shorter period, but only to the extent the stock option is exercisable
at retirement. Upon termination for any reason other than for cause, any
previously vested stock option will be exercisable for the lesser of 90 days
or the balance of the stock option's stated term. In the event of termination
for cause, all options, whether or not exercisable, will terminate.

Restricted Stock. Subject to the limitations of the Operating Company
Incentive Plan, the Committee may grant restricted stock to eligible
employees. Restricted stock awards are shares of Operating Company Common
Stock that are subject to restrictions on transfer or other incidence of
ownership where the restrictions lapse based solely on continued employment
with Operating Company for specified periods or based on the achievement of
specified performance standards, in either case, as determined by the
Committee. The Committee also will determine all terms and conditions pursuant
to which such restrictions will lapse. Grantees of restricted stock will have
all the rights of a stockholder with respect to the restricted stock and may
receive dividends, unless the Committee determines otherwise. Dividends may,
at the discretion of the Committee, be deferred until the restriction period
ends and may bear interest if the Committee so determines.

If an employee's employment terminates by reason of death or disability
prior to the expiration of the restriction period applicable to any shares of
restricted stock then held by the employee, all restrictions pertaining to
such shares immediately lapse. Upon termination for any other reason, all
restricted shares are forfeited, provided, however, the Committee may provide
that the restrictions on some or all of the shares held by an employee shall
lapse upon the employee's retirement or other termination of employment other
than for cause.

Performance Units. The Committee may grant performance units to eligible
employees. Each performance unit will specify the performance goals,
performance period and the number of performance units granted. The
performance period will not be less than six months, nor more than five years,
as determined by the Committee. Performance goals are those objectives
established by the Committee which may be expressed in terms of earnings per
share, price of the Operating Company Common Stock, pre-tax profit, net
earnings, return on equity or assets, revenues, any combination of the
foregoing, or such other goals as the Committee may determine. Performance
goals may relate to the performance of Operating Company, a subsidiary, a
division or other operating unit of Operating Company. The Committee must
establish performance goals within 90 days of the commencement of the
applicable fiscal year. Performance goals may be established as a range of
goals if the
Committee so desires. If the Committee determines that the performance goals
have been met, the employee will be entitled to the appropriate payment with
respect thereto. At the option of the Committee, payment may be made solely in
shares of Operating Company Common Stock, solely in cash, or a combination of
cash and shares of Operating Company Common Stock. The award of performance
units does not create any rights in such employee as a stockholder of
Operating Company.

123

If the employee's employment terminates by reason of death or disability
prior to the expiration of the performance period applicable to any
performance unit then held by such employee, all restrictions pertaining to
such performance units shall lapse and the employee will be entitled to the
full amount of any award of performance units. Upon termination for any other
reason, all performance units are terminated.

Stock Appreciation Rights and Stock and Cash Awards. The Committee may grant
SARs to eligible individuals. SARs constitute a right to receive, without
payment to Operating Company, a number of shares of Operating Company Common
Stock, cash or any combination thereof, with the value equal to the
appreciation of the shares to which the SAR relates, determined in accordance
with the Operating Company Incentive Plan. The terms and conditions of each
SAR shall be determined by the Committee. The Committee may also award stock
and cash awards under the Operating Company Incentive Plan. Stock and cash
awards may be subject to terms and conditions, which may vary from time to
time and among employees, as the Committee deems appropriate. Each award of
stock or cash may provide for a lesser payment in the event of partial
fulfillment of performance goals.

Change in Control. Generally, in the event of a change in control of
Operating Company, all outstanding stock options become fully vested and
immediately exercisable in their entirety. In addition, upon a change in
control, all restrictions on restricted stock lapse and outstanding
performance units become fully vested and immediately payable.

Amendments and Termination. The Operating Company Board may at any time,
terminate, and from time to time, may amend or modify the Operating Company
Incentive Plan. Any such action of the Operating Company Board may be taken
without the approval of Operating Company's stockholders, but only to the
extent that such stockholder approval is not required by applicable laws or
regulations. The Operating Company Incentive Plan will terminate ten years
from its effective date.

Operating Company Management Equity Ownership Program. In connection with
the Reorganization Transactions, Operating Company will establish the
Operating Company Management Equity Ownership Program (the "Ownership
Program"), pursuant to which Operating Company will make available to officers
of Operating Company the opportunity to purchase for cash up to an aggregate
1,500,000 shares of Operating Company Common Stock at the Fair Market Value as
of the Distribution Date. For purposes of the Ownership Program, Fair Market
Value means the average of the high and low price of Operating Company Common
Stock on the Distribution Date. Each share of Operating Company Common Stock
purchased under the Ownership Program will also have a warrant attached that
entitles the holder of the warrant to purchase an additional share of
Operating Company Common Stock at a price equal to the Fair Market Value of
such share on the Distribution Date. The Ownership Program will be
administered by the Executive Compensation Committee of Operating Company.

Purchase of Shares. Each eligible employee initially will be offered the
opportunity to subscribe for up to 20,000 shares of Operating Company Common
Stock. Additional shares of Operating Company Common Stock will be made
available for subscription by an eligible employee (up to a maximum of
1,500,000 shares in aggregate) in the ratio that the number of shares of
Company Common Stock that are beneficially owned as of the Distribution Date
by such eligible employee (taking into account for such purpose any vested
options to purchase Company Common Stock) bears to the total number of shares
beneficially owned as of the Distribution Date by all eligible employees
requesting additional shares.

Financing of Purchase. Operating Company will loan eligible employees up to
90% of the purchase price of the shares of Operating Company Common Stock
purchased pursuant to the Ownership Program. The loan will be for a term of
three years, and shall bear interest, payable annually, at the lowest rate
required so that the eligible employee will not realize any imputed income
under Section 7872 of the Code. Each borrower will be required to pledge as
collateral for the loan a number of shares of Operating Company Common Stock
with a Fair Market Value equal to the amount borrowed.

124

Terms of Shares and Warrants. Each eligible employee will be fully vested in
any shares of Operating Company Common Stock purchased under the Ownership
Program and any warrants to purchase shares of Operating Company Common Stock
attached to such purchased shares, provided, however, that the holder of such
shares or shares purchased by exercising a warrant may not dispose of the
shares before January 1, 1999. The holder of a warrant is entitled to purchase
the number of shares of Operating Company Common Stock subject to the warrant
at an exercise price equal to the Fair Market Value on the Distribution Date.
The warrant may be exercised at any time within ten years following the
Distribution Date, provided, however, that the exercise period will terminate
two years following the termination of employment, death or disability of the
eligible employee.

In the event of certain changes in capitalization of Operating Company,
including stock dividends and splits, reclassifications, recapitalizations,
reorganizations, mergers, consolidations, spin-offs, split-ups, combinations
or exchanges of shares, and certain distributions and repurchases of shares,
the number and kind of shares subject to the warrants will be appropriately
adjusted in the sole discretion of the Executive Compensation Committee. The
Operating Company Board may amend or terminate the Ownership Program at any
time unless stockholder approval would be required by applicable law or
regulation. The Ownership Program will become effective upon adoption by the
Operating Company Board and approval of the Company, as sole stockholder of
Operating Company, and will terminate on the earliest to occur of (i) the date
on which all of the shares available under the Ownership Program have been
acquired through the exercise or expiration of the warrants or (ii) such other
date as the Operating Company Board may determine.

125

BUSINESS STRATEGY

REALTY COMPANY

Realty Company's principal business objectives are to maximize growth in
Funds From Operations and to enhance the value of its portfolio of properties
in order to maximize total return to stockholders. Realty Company intends to
focus on the acquisition of equity interests in healthcare related properties,
including hospitals, nursing centers, assisted living facilities, and
healthcare related office buildings. In addition, Realty Company expects to
diversify its credit exposure by entering into leases with tenants other than
Operating Company. Realty Company also may consider investments in properties
outside of the healthcare industry. If market conditions are favorable, Realty
Company may expand this focus to the development of healthcare facilities.

Realty Company intends to achieve its objectives through the implementation
of the following strategies:

GROWTH STRATEGY

The Company believes that Realty Company will benefit from a strategic
relationship with Operating Company, one of the largest providers of long-term
healthcare services in the United States. Under the terms of the Leases,
Operating Company will operate all of the Leased Properties.

As of December 31, 1997, the Company has 30 projects in various stages of
development. These Development Properties will be transferred to Operating
Company in the Reorganization Transactions for completion of development and
construction in accordance with the terms of the Development Agreement.
Seventeen of the Development Properties are currently under construction and
the 13 remaining Development Properties are tentatively scheduled to begin
construction by the first half of 1999. Once completed, a Development Property
will be purchased by Realty Company as provided in the Development Agreement.
Once purchased, each such Development Property will be leased to Operating
Company under substantially similar terms as contained in the Master Lease
Agreement. In addition to the growth provided by the 30 Development
Properties, Realty Company may realize additional growth under the
Participation Agreement which provides that Realty Company will have a right
of first offer to purchase or mortgage each facility to be sold or mortgaged
by Operating Company during the three year period following the Distribution
Date. See "Business of Realty Company After the Reorganization Transactions--
Properties To Be Developed By Operating Company."

Realty Company expects to further supplement its growth through the
acquisition of healthcare related facilities. Realty Company expects to budget
approximately $150 million to $175 million for acquisition of healthcare
facilities through 1999. Subject to Operating Company's rights under the
Participation Agreement, these acquired facilities will be leased to and
operated by qualified third party operators. Such acquisitions will be in
addition to the acquisition of the Development Properties acquired under the
Development Agreement.

Realty Company management has established numerous contacts in the
healthcare industry through Vencare, Operating Company's ancillary services
division. Management of Realty Company anticipates that these contacts may
serve as a primary source for prospective acquisitions.

If market conditions are favorable, Realty Company may expand its focus to
the development of healthcare facilities.

The Company believes that Realty Company will have a competitive advantage
as a result of its ability to access a number of capital sources, including
mortgaging properties, borrowing under the Realty Company Credit Facility or
making offerings of Realty Company Common Stock, Realty Company Preferred
Stock or units in the Realty Company Partnership. A potential seller may
receive preferential tax treatment from the issuance of Realty Company
Partnership units as consideration for the sale. In addition, Realty Company
will have a

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management team, with experience in selecting, evaluating and acquiring
healthcare facilities. Management's experience operating healthcare facilities
will enable Realty Company to indentify and evaluate potential acquisitions or
development opportunities. In evaluating potential investments, Realty Company
will consider such factors as (i) the geographic area, type of property, and
demographic profile; (ii) the location, construction quality, condition and
design of the property; (iii) the current and anticipated cash flows and its
ability to meet operational needs and lease obligations and to provide a
competitive investment return to Realty Company's investors; (iv) the
potential for capital appreciation of the property; (v) the growth, tax and
regulatory environment of the community in which the property is located; (vi)
occupancy and demand for similar healthcare facilities in the same or nearby
communities; (vii) adequate mix of private, Medicare and Medicaid patients;
(viii) potential alternative uses of the properties; and (ix) prospects for
liquidity through financing or refinancing.

OPERATING STRATEGY

Realty Company is organized to invest in income-producing facilities,
primarily in the healthcare industry. Realty Company intends to structure
leases on a triple-net or similar basis under which the tenants bear the
principal portion of the financial and operational responsibility for the
properties, allowing base rent to be absolute net to Realty Company. As a
result Realty Company will incur little, if any, operating or capital
expenditures, relative to maintaining its facilities. In addition, Realty
Company expects to incorporate step-ups and/or other rent escalation features
into leases and mortgages.

For the forseeable future, the vast majority of Realty Company's revenues
will be derived from Operating Company. Realty Company expects to diversify
its credit exposure by entering into leases with tenants other than Operating
Company.

CAPITALIZATION STRATEGY

The Company believes that cash flows from operations and borrowings
available under the Realty Company Credit Facility will be sufficient to
finance Realty Company's capital needs for the next 12 months. In addition,
Realty Company will have the flexibility to fund development and acquisition
projects from a number of capital sources, including mortgaging properties,
borrowing under the Realty Company Credit Facility or making offerings of
Realty Company Common Stock, Realty Company Preferred Stock or units in the
Realty Company Partnership, which may provide certain tax advantages for the
seller of the property.

In addition, Realty Company expects to make distributions to its
stockholders on a quarterly basis beginning in the first quarter of 1999
following its election of REIT status on January 1, 1999. Realty Company's
first distribution is expected to be equal to a payout ratio of approximately
80% of Funds From Operations. See "Distribution and Dividend Policy--Realty
Company."

OPERATING COMPANY

Operating Company believes that the demand for long-term care is increasing.
Improved medical care and advances in medical technology continue to increase
the survival rates for victims of disease and trauma. Many of these patients
never fully recover and require long-term care. The incidence of chronic
problems increases with age, particularly in connection with certain
degenerative conditions. As the average age of the United States population
increases, Operating Company believes that there will be an increase in the
demand for long-term care at all levels of the continuum of care.

At the same time, the healthcare system of the United States is experiencing
a period of significant change. Factors affecting the healthcare system
include cost containment, the expansion of managed care, improved medical
technology, an increased focus on measurable clinical outcomes and a growing
public awareness of healthcare spending by governmental agencies at Federal
and state levels. Payors are increasingly requiring

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providers to move patients from high-acuity care environments to lower-acuity
care settings as quickly as is medically appropriate.

FOCUS ON LONG-TERM CARE CONTINUUM

The factors which affect the selection of long-term care vary by community
and include Operating Company's local competitive position as well as its
relationships with local referral sources. Accordingly, Operating Company will
focus its resources on further broadening its array of services as well as
developing integrated networks within each of the local markets it serves. The
Company's history of strategic acquisitions and complementary business
development initiatives has served to enhance the Company's position as a
leader in local and regional markets, which position will be of substantial
benefit to Operating Company. In addition, Operating Company will benefit from
economies of scale through its strategic focus on the long-term care
continuum.

Operating Company intends to continue expanding its long-term care network
and will evaluate each acquisition or new market opportunity based on (i) the
need for placement of long-term patients or residents, (ii) existing provider
referral patterns, (iii) the presence of competitors, (iv) payor mix and (v)
the political and regulatory climate. From time to time, Operating Company may
also sell all or a portion of its interest in a business or the operation of a
facility where such disposition would be in the best interest of Operating
Company.

INCREASE PENETRATION OF SPECIALTY CARE AND ANCILLARY SERVICES

Operating Company intends to continue to expand the specialty care programs
and ancillary services provided in its nursing centers through its Vencare
operations. These services generally produce higher revenues than do routine
nursing care services and will serve to differentiate Operating Company's
nursing centers from others in a given market. Operating Company will focus on
the expansion of its subacute, medical and rehabilitation services, including
physical, occupational and speech therapies, wound care, oncology treatment,
brain injury care, stroke therapy and orthopedic therapy at its facilities.

Vencare also provides respiratory therapy and subacute care services
pursuant to contracts with nursing and other healthcare facilities owned by
third parties. The Vencare program includes hospice care, management of
cardiopulmonary hospital departments, rehabilitation therapy services,
pharmacy management services and mobile radiology services. Vencare will
enable Operating Company to provide its services to lower acuity patients in
cost-efficient settings.

During 1997, the Company initiated the sale of its Vencare full service
ancillary services contracts to provide a full range of services to nursing
centers not operated by the Company. Operating Company intends to continue to
offer full-service contracts. Operating Company believes that by bundling
services through one provider, nursing centers can provide quality care more
efficiently with the added benefit of centralizing their medical records.
Under the new prospective payment system imposed by the Budget Act, ancillary
services provided by nursing centers contracts will be subject to fixed
payments. In this new environment, Operating Company believes that its full
service ancillary services contracts will enhance the ability of nursing
center operators to manage effectively the cost of providing quality care.

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FURTHER IMPLEMENT PATIENT INFORMATION SYSTEM

VenTouch(TM) is a software application which allows nurses, physicians and
other clinicians to access and manage clinical information utilized in the
healthcare delivery process. Among the features of VenTouch(TM) are on-line
access and update of an electronic patient chart, on-line trend analysis using
electronic flowsheets and graphs, and remote access for authorized users. The
system is designed to decrease administrative time, reduce paper and support
the delivery of quality care. Prior to the acquisition of Transitional, the
Company had installed VenTouch(TM)in all of its hospitals. Operating Company
expects to install VenTouch(TM) in the 19 former Transitional hospitals by the
end of 1998. In 1996, the Company began installing VenTouch(TM) in its nursing
centers and Operating Company intends to continue to add VenTouch(TM) to 60 to
80 additional nursing centers during 1998. In addition, Operating Company
intends to offer its VenTouch(TM) information system as part of the menu of
services offered by Vencare to nursing centers not operated by Operating
Company.

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GOVERNMENTAL REGULATION

HOSPITALS

CERTIFICATES OF NEED AND STATE LICENSING

CON regulations control the development and expansion of healthcare services
and facilities in certain states. CON laws generally provide that approval
must be obtained from the designated state health planning agency prior to the
expansion of existing facilities, construction of new facilities, addition of
beds, acquisition of major items of equipment or introduction of new services.
The stated objective of the CON process is to promote quality healthcare at
the lowest possible cost and avoid unnecessary duplication of services,
equipment and facilities. Recently, some states (including Florida,
Massachusetts and Tennessee) have amended their CON regulations to require CON
approval prior to the conversion of a hospital from a general short-term
facility to a general long-term facility. Of the 24 states in which the
Company's hospitals were located as of December 31, 1997, Florida, Georgia,
Illinois, Kentucky, Massachusetts, Michigan, Missouri, North Carolina,
Tennessee, Virginia and Washington have CON programs. With one exception, the
Company was not required to obtain a CON in connection with previous
acquisitions, due to the relatively low renovation costs and the absence of
the need for additional licensed beds or changes in services. CONs may be
required in connection with Realty Company's or Operating Company's future
hospital and Operating Company's contract services expansion. There can be no
assurance that either Realty Company or Operating Company will be able to
obtain the CONs necessary for any or all future projects. If Realty Company or
Operating Company are unable to obtain the requisite CONs, their respective
growth and businesses could be adversely affected.

State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with Federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the Company's hospitals in operation have obtained the necessary
licenses to conduct business and it is expected that, on or before the
Distribution Date, all of Operating Company's hospitals in operation will have
obtained the necessary licenses to conduct business.

MEDICARE AND MEDICAID

Medicare is a Federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over and certain disabled persons.
Medicaid is a medical assistance program administered by each state pursuant
to which hospital benefits are available to certain indigent patients. Within
the Medicare and Medicaid statutory framework, there are substantial areas
subject to administrative rulings, interpretations and discretion which may
affect payments made under Medicare and Medicaid. A substantial portion of
Operating Company's hospital revenues will be derived from patients covered by
Medicare and Medicaid. See "Business of Operating Company After the
Reorganization Transactions--Hospital Operations."

In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by the Department of Health
and Human Services ("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. Operating Company will continue to use the management
system developed by the Company to ensure compliance with the various
standards and requirements. Each of Operating Company's hospitals will employ
a person who is responsible for an on-going quality assessment and improvement
program. Hospitals undergo periodic on-site Medicare certification surveys,
which are generally limited if the hospital is accredited by JCAHO. As of
December 31, 1997, all of the hospitals to be operated by Operating Company,
were certified as Medicare providers, and 53 of such hospitals were also
certified by their respective state Medicaid programs. Applications are
pending for certification with respect to the other hospitals to be operated
by Operating Company. A loss of certification could adversely affect a
hospital's ability to receive payments from Medicare and Medicaid programs.

Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS as a means of controlling healthcare costs.
Under PPS, Medicare inpatient costs are reimbursed based upon a fixed payment
amount per

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discharge using diagnosis related groups ("DRGs"). The DRG payment under PPS
is based upon the national average cost of treating a Medicare patient's
condition. Although the average length of stay varies for each DRG, the
average stay for all Medicare patients subject to PPS is approximately six
days. An additional outlier payment is made for patients with unusually
extended lengths of stay or higher treatment costs. Outlier payments are only
designed to cover marginal costs. Additionally, it takes 60 days or more for
PPS payments to be made. Thus, PPS creates an economic incentive for general
short-term hospitals to discharge chronic Medicare patients as soon as
clinically possible. Hospitals that are certified by Medicare as general long-
term hospitals are excluded from PPS. Management believes that the incentive
for short-term hospitals to discharge chronic medical patients as soon as
clinically possible creates a substantial referral source for Operating
Company's long-term hospitals.

The Social Security Amendments of 1983 excluded psychiatric, rehabilitation,
cancer, children's and general long-term hospitals from PPS. A general long-
term hospital is defined as a hospital which has an average length of stay
greater than 25 days. Inpatient operating costs for general long-term
hospitals are reimbursed under the cost-based reimbursement system, subject to
a computed target rate (the "Target") per discharge for inpatient operating
costs established by TEFRA. As discussed below, the recently passed Budget Act
makes significant changes to the current TEFRA provisions.

Prior to the Budget Act, Medicare operating costs per discharge in excess of
the Target were reimbursed at the rate of 50% of the excess up to 10% of the
Target. Hospitals whose operating costs were lower than the Target were
reimbursed their actual costs plus an incentive. This incentive is currently
equal to 50% of the difference between their actual costs and the Target and
may not exceed 5% of the Target. For cost report periods beginning on or after
October 1, 1997, the Budget Act reduces the incentive payments to an amount
equal to 15% of the difference between the actual costs and the Target, but
not to exceed 2% of the Target. Costs in excess of the Target will still be
reimbursed at the rate of 50% of the excess up to 10% of the Target but the
threshold to qualify for such payments will be raised from 100% to 110% of the
Target. The Budget Act also caps the Targets based on the 75th percentile for
each category of hospital using 1996 data.

Prior to October 1, 1997, new hospitals could apply for an exemption from
the TEFRA Target provisions. For hospitals certified prior to October 1, 1992,
the exemption was optional and, if granted, lasted for three years. For
certifications since October 1, 1992, the exemption is automatic and is
effective for two years. Under the Budget Act, a new provider will no longer
receive unlimited cost-based reimbursement for its first few years in
operation. Instead, for the first two years, it will be paid the lower of its
costs or 110% of the median TEFRA Target for 1996 adjusted for inflation.
During this two year period, providers remain subject to the TEFRA penalty and
incentive payments discussed in the previous paragraph.

As of December 31, 1997, 50 of the hospitals to be operated by Operating
Company were subject to TEFRA Target provisions. Operating Company's other
long-term hospitals were not subject to TEFRA because they had qualified for
the new hospital exemptions described above. During 1998, five more of
Operating Company's hospitals will become subject to TEFRA Target provisions.
The TEFRA Target limits have not had a material adverse effect on the
Company's results of operations, and the Company does not expect that the
TEFRA limits will have a material adverse effect on Operating Company's
results of operation in 1998. The reductions in the TEFRA incentive payments
which are expected to be effective beginning on September 1, 1998 with respect
to the Company's hospitals, will have an adverse impact on hospital revenues
in the future.

Medicare and Medicaid reimbursements were generally determined from annual
cost reports filed by the Company which are subject to audit by the respective
agency administering the programs. Management believes that adequate
provisions for loss have been recorded for Operating Company to reflect any
adjustments which could result from audits of these cost reports. Adjustments
to the Company's cost reports have not had an adverse effect on the Company's
hospital operating results.

Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer review
organizations ("PROs") in order to ensure efficient utilization of hospitals
and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments for
services provided to a patient. Such review is subject to administrative and

131

judicial appeal. Each of Operating Company's hospitals will employ a clinical
professional to administer the hospital's integrated quality assurance and
improvement program, including its utilization review program. PRO denials
have not had a material adverse effect on the Company's hospital operating
results.

Medicare and Medicaid Antikickback Amendments prohibit certain business
practices and relationships that might affect the provision and cost of
healthcare services reimbursable under Medicare and Medicaid. Sanctions for
violating the Antikickback Amendments include criminal and civil penalties and
exclusion from the Medicare and Medicaid programs. Pursuant to the Medicare
and Medicaid Patient and Program Protection Act of 1987, HHS and the Office of
the Inspector General ("OIG") specified certain Safe Harbors which describe
conduct and business relationships permissible under the Antikickback
Amendments. These Safe Harbor regulations may result in more aggressive
enforcement of the Antikickback Amendments by HHS and the OIG.

Section 1877 of the Social Security Act (commonly known as "Stark I") states
that a physician who has a financial relationship with a clinical laboratory
is generally prohibited from referring patients to that laboratory. The
Omnibus Budget Reconciliation Act of 1993 contains provisions ("Stark II")
amending Section 1877 to greatly expand the scope of Stark I. Effective
January 1995, Stark II broadened the referral limitations of Stark I to
include, among other designated health services, inpatient and outpatient
hospital services. Under Stark I and Stark II (collectively referred to as the
"Stark Provisions"), a "financial relationship" is defined as an ownership
interest or a compensation arrangement. If such a financial relationship
exists, the entity is generally prohibited from claiming payment for such
services under the Medicare or Medicaid programs. Compensation arrangements
are generally exempted from the Stark Provisions if, among other things, the
compensation to be paid is set in advance, does not exceed fair market value
and is not determined in a manner that takes into account the volume or value
of any referrals or other business generated between the parties. These laws
and regulations, however, are extremely complex and the industry has the
benefit of little judicial or regulatory interpretation. Operating Company
expects that business practices of providers and financial relationships
between providers will be subject to increased scrutiny as healthcare reform
efforts continue on Federal and state levels.

The Budget Act provides a number of new antifraud and abuse provisions. The
Budget Act contains new civil monetary penalties for violations of the
Antikickback Amendments and imposes an affirmative duty on providers to insure
that they do not employ or contract with persons excluded from the Medicare
program. The Budget Act also provides a minimum ten year period for exclusion
from participation in Federal healthcare programs for persons convicted of a
prior healthcare offense.

JCAHO ACCREDITATION

Hospitals receive accreditation from JCAHO, a nationwide commission which
establishes standards relating to the physical plant, administration, quality
of patient care and operation of medical staffs of hospitals. Generally,
hospitals and certain other healthcare facilities are required to have been in
operation at least six months in order to be eligible for accreditation by
JCAHO. After conducting on-site surveys, JCAHO awards accreditation for up to
three years to hospitals found to be in substantial compliance with JCAHO
standards. Accredited hospitals are periodically resurveyed, at the option of
JCAHO, upon a major change in facilities or organization and after merger or
consolidation. As of December 31, 1997, 58 of the hospitals to be operated by
Operating Company were accredited by JCAHO. Operating Company intends to apply
for JCAHO accreditation for its other hospitals within the next year.
Operating Company intends to seek and obtain JCAHO accreditation for any
additional facilities it may purchase or lease and convert into long-term
hospitals. The Company does not believe that the failure to obtain JCAHO
accreditation at any hospital would have a material adverse effect on
Operating Company's results of operations.

STATE REGULATORY ENVIRONMENT

Operating Company will operate seven hospitals and a chronic unit in
Florida, a state which regulates hospital rates. These operations will
contribute a significant portion of Operating Company's revenues and operating
income from its hospitals. Accordingly, Operating Company's hospital revenues
and operating income

132

could be materially adversely affected by Florida rate setting laws or other
cost containment efforts. Operating Company will also operate ten hospitals in
Texas, nine hospitals in California, and five hospitals in Illinois which will
contribute a significant portion of Operating Company's revenues and operating
income from its hospitals. Although Texas, California and Illinois do not
currently regulate hospital rates, the adoption of such legislation or other
cost containment measures in these or other states could have a material
adverse effect on Operating Company's hospital revenues and operating income.
Moreover, the repeal of the Boren Amendment by the Budget Act provides the
states with greater flexibility to reduce their Medicaid reimbursement levels.
The Company is unable to predict whether and in what form such legislation
will be adopted. Certain other states in which Operating Company will operate
hospitals require disclosure of specified financial information. In evaluating
markets for expansion, Operating Company will consider the regulatory
environment, including but not limited to, any mandated rate setting.

NURSING CENTERS

The Federal government and all states in which Operating Company will
operate regulate various aspects of its nursing center business. In
particular, the development and operation of nursing centers and assisted and
independent living communities and the provision of healthcare services are
subject to Federal, state and local laws relating to the adequacy of medical
care, equipment, personnel, operating policies, fire prevention, rate-setting
and compliance with building codes and environmental laws. Nursing centers are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with various standards, their continued licensing under
state law, certification under the Medicare and Medicaid programs and
continued participation in the Veterans Administration program. The failure to
obtain or renew any required regulatory approvals or licenses could adversely
affect Operating Company's operations.

Effective October 1, 1990, OBRA increased the enforcement powers of state
and Federal certification agencies. Additional sanctions were authorized to
correct noncompliance with regulatory requirements, including fines, temporary
suspension of admission of new patients to nursing centers and, in extreme
circumstances, decertification from participation in the Medicare or Medicaid
programs.

The nursing centers to be managed and operated by Operating Company are
licensed either on an annual or bi-annual basis and certified annually for
participation in 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, the
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 centers. From time to time
the nursing centers receive statements of deficiencies from regulatory
agencies. In response, Operating Company will implement plans of correction
with respect to these nursing centers to address the alleged deficiencies. The
Company believes that its nursing centers are currently in material compliance
with all applicable regulations or laws.

In certain circumstances, Federal law mandates that conviction for certain
abusive or fraudulent behavior with respect to one nursing center may subject
other facilities under common control or ownership to disqualification for
participation in Medicare and Medicaid programs. In addition, some state
regulations provide that all nursing centers under common control or ownership
within a state are subject to delicensure if any one or more of such
facilities are delicensed.

Revised Federal regulations under OBRA, which became effective in 1995,
affect the survey process for nursing centers and the authority of state
survey agencies and the Health Care Financing Administration ("HCFA") to
impose sanctions on facilities based upon noncompliance with requirements.
Available sanctions include imposition of civil monetary penalties, temporary
suspension of payment for new admissions, appointment of a temporary manager,
suspension of payment for eligible patients and suspension or decertification
from participation in the Medicare and/or Medicaid programs. The Company is
unable to project how these regulatory changes and their implementation will
affect Operating Company.

In addition to license requirements, many states have statutes that require
a CON to be obtained prior to the construction of a new nursing center, the
addition of new beds or services or the incurring of certain capital

133

expenditures. Certain states also require regulatory approval prior to certain
changes in ownership of a nursing center. Certain states have eliminated their
CON programs and other states are considering alternatives to their CON
programs. To the extent that CONs or other similar approvals are required for
expansion of Realty Company's or Operating Company's operations, either
through facility acquisitions or expansion or provision of new services or
other changes, such expansion could be adversely affected by the failure or
inability to obtain the necessary approvals, changes in the standards
applicable to such approvals or possible delays and expenses associated with
obtaining such approvals.

Operating Company's operations are also subject to Federal and state laws
which govern financial and other arrangements between healthcare providers.
These laws often prohibit certain direct and indirect payments or fee-
splitting arrangements between healthcare providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Such laws include the
Antikickback Amendments. These provisions prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. These operations also are
subject to additional antifraud and abuse provisions contained in the Budget
Act. In addition, some states restrict certain business relationships between
physicians and pharmacies, and many states prohibit business corporations from
providing, or holding themselves out as a provider of, medical care. Possible
sanctions for violation of any of these restrictions or prohibitions include
loss of licensure or eligibility to participate in reimbursement programs as
well as civil and criminal penalties. These laws vary from state to state.

A substantial portion of Operating Company's nursing center revenues will be
derived from patients covered by Medicare and Medicaid. The Budget Act
requires the establishment of a prospective payment system for nursing centers
for cost reporting periods beginning on or after July 1, 1998. During the
first three years, the per diem rates for nursing centers will be based on a
blend of facility-specific costs and Federal costs. Thereafter, the per diem
rates will be based solely on Federal costs. The rates for such services have
not been established or published. The prospective payment system also will
cover ancillary services provided to nursing center patients under Operating
Company's Vencare contract services business.

PHARMACIES

Operating Company's pharmaceutical operations will be subject to regulation
by the various states in which Operating Company will conduct its business as
well as by the Federal government. Operating Company's pharmacies will be
regulated under the Food, Drug and Cosmetic Act and the Prescription Drug
Marketing Act, which are administered by the United States Food and Drug
Administration. Under the Comprehensive Drug Abuse Prevention and Control Act
of 1970, which is administered by the United States Drug Enforcement
Administration ("DEA"), dispensers of controlled substances must register with
the DEA, file reports of inventories and transactions and provide adequate
security measures. Failure to comply with such requirements could result in
civil or criminal penalties.

HEALTHCARE REFORM LEGISLATION

In recent years, an increasing number of legislative proposals have been
introduced or proposed in Congress and in some state legislatures that could
effect major changes in the healthcare system. The Budget Act, enacted in
August 1997, contains 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, over the next five
years. Under the Budget Act, annual growth rates for Medicare will be reduced
from over 10% to approximately 7.5% for the next five years based on specific
program baseline projections from the last five years. Virtually all spending
reductions will come from providers and changes in program components. The
Budget Act will affect reimbursement systems for each of Operating Company's
operating units.

The Budget Act will reduce payments made to Operating Company's hospitals by
reducing TEFRA incentive payments, reducing allowable costs for capital
expenditures and bad debts and reducing payments for services to patients
transferred from a prospective payment system hospital. The Budget Act also
requires the

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establishment of PPS for nursing centers for cost reporting periods beginning
on or after July 1, 1998. During the first three years, the per diem rates for
nursing centers will be based on a blend of facility-specific costs and
Federal costs. Thereafter, the per diem rates will be based solely on Federal
costs. The rates for such services have not been established or published. The
payments received under PPS will cover all services for Medicare patients,
including all ancillary services, such as respiratory therapy, physical
therapy, occupational therapy, speech therapy and certain covered drugs. The
Budget Act also requires an adjustment to the payment system for home health
services for cost reporting periods beginning on or after October 1, 1997. The
new system will adjust per visit limits and establish per beneficiary annual
spending limits. A prospective payment system for home health services will be
established by October 1, 1999.

Operating Company management believes that the Budget Act will adversely
impact its hospital business by reducing the payments previously described.
Based on information currently available, management believes that the new PPS
will benefit nursing center operations because (i) Operating Company expects
that its casemix index will be higher than the national average casemix index
and based upon expected payment rates this will result in increases in
payments per patient day and (ii) because Operating Company expects to benefit
from its ability to reduce the cost of providing ancillary services to
residents in its facilities. The national average casemix index, Operating
Company's casemix index and the average national rate will be established by
HCFA, and as of the date hereof Operating Company does not know what these
amounts will be. Operating Company management believes that its anticipated
growth in nursing center profitability would be reduced if Congress acts to
delay the effective date of PPS. As the nursing center industry adapts to the
cost containment measures inherent in the new prospective payment system,
Operating Company believes that the volume of ancillary services provided per
patient day to nursing center residents could decline. In addition, as a
result of these changes, many nursing facilities are likely to elect to
provide ancillary services to its residents through internal staff and will no
longer contract with outside parties for ancillary services. For these reasons
and others, since the enactment of the Budget Act, sales of new contracts have
declined and may continue to decline subject to Operating Company's success in
implementing its Vencare comprehensive, full-service contracts sales strategy.
The Operating Company will actively implement strategies and operational
modifications to address these changes in the Federal reimbursement system.

In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services which will be provided by Operating Company
(including the rehabilitation contract therapy business acquired as part of
the acquisition of TheraTx). Under the new rules, HCFA established salary
equivalency guidelines for speech and occupational therapy services and
revised existing guidelines for physical and respiratory therapy services. The
guidelines are based on a blend of data from wage rates for hospitals and
nursing facilities, and include salary, fringe benefit and expense factors.
Rates are defined by specific geographic market areas, based upon a modified
version of the hospital wage index. Based upon its initial review of the final
rules, Operating Company believes these rules are slightly more favorable to
Operating Company than the proposed rules published in March 1997. Under the
new prospective payment system for nursing centers, the reimbursement for
these services provided to nursing centers patients will be a component of the
total reimbursement allowed per nursing center patient and the salary
equivalency guidelines will no longer be applicable.

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 Operating Company. 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 long-term care hospitals and changes in the
Medicaid reimbursement system applicable to Operating Company's hospitals.
There are also a number of legislative proposals including cost caps and the
establishment of Medicaid prospective payment systems for nursing centers.
Moreover, by repealing the Boren Amendment, the Budget Act eases existing
impediments on the states' ability to reduce their Medicaid reimbursement
levels.

There can be no assurance that the Budget Act, new salary equivalency rates,
future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on Operating Company's financial condition, results of
operations and liquidity.

135

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
OF COMPANY COMMON STOCK

THE COMPANY

NAME OF INDIVIDUAL OR COMMON STOCK PERCENT
NUMBER IN GROUP BENEFICIALLY OWNED(1),(2) OF CLASS
--------------------- ------------------------- --------

Michael R. Barr............................. 456,638(3) *
Walter F. Beran............................. 14,127(4) *
Ulysses L. Bridgeman, Jr.................... 1,000(5) *
Elaine L. Chao.............................. 1,000(6) *
Donna R. Ecton.............................. 10,041(7) *
Jill L. Force............................... 78,184(8) *
Greg D. Hudson.............................. 199,174(9) *
Thomas T. Ladt.............................. 149,182(10) *
William H. Lomicka.......................... 61,067 *
W. Bruce Lunsford........................... 2,080,167(11) 3.1%
W. Earl Reed, III........................... 345,649 *
R. Gene Smith............................... 1,525,914(12) 2.3%
All executive officers and directors as a
group (15 persons)......................... 5,020,782 7.5%
Firstar Corporation......................... 5,343,279(13) 7.9%
Firstar Investment Research & Management
Company.................................... 5,340,879(14) 7.9%
Tenet Healthcare Corporation................ 8,301,067(15) 12.3%
Wellington Management Company, LLP.......... 3,750,802(16) 5.6%

136

(6) Excludes 474 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(7) Excludes 1,514 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(8) Includes 1,400 shares held by Ms. Force's spouse as custodian for their
children. Ms. Force shares voting and investment power with her spouse
with regard to these shares.
(9) Includes 176,921 shares with respect to which Mr. Hudson shares voting
and investment power with his wife, 562 shares held by a trust of which
Mr. Hudson is a co-trustee, 13,392 shares held by his gift trust, and
1,923 shares held by a trust for the benefit of Mr. Hudson and his
siblings. Excludes 2,590 phantom stock units held under the Company's
Non-Employee Directors Deferred Compensation Plan.
(10) Includes 7,029 shares held by his spouse as custodian for his children
and 20,058 shares held by his spouse. With respect to these 27,087
shares, Mr. Ladt shares voting and investment power with his spouse. Also
includes 3,887 shares held in his mother's estate of which Mr. Ladt is
the executor.
(11) Includes 152,127 shares held by a private foundation with respect to
which Mr. Lunsford has sole voting power and shared investment power.
Excludes 16,365 shares held in trust for the benefit of his children.
(12) Includes 36,250 shares held by a private foundation with respect to which
Mr. Smith shares voting and investment power and 140,625 shares held by a
limited partnership with respect to which he has sole voting and
investment power.
(13) The ownership given for Firstar Corporation is based on information
contained in the Schedule 13G dated February 14, 1997, filed by Firstar
Corporation with the Commission. The address of Firstar Corporation is
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(14) The ownership given for Firstar Investment Research & Management Company
is based on information contained in the Schedule 13G dated February 14,
1997, filed by Firstar Investment Research & Management Company with the
Commission. The address of Firstar Investment Research & Management
Company is 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. Firstar
Investment Research & Management Company is a subsidiary of Firstar
Corporation.
(15) The ownership given for Tenet is based on information contained in the
Schedule 13G dated January 10, 1996, filed by Tenet and certain
subsidiaries with the Commission. The address of Tenet and such
subsidiaries is 3820 State Street, Santa Barbara, California 93105.
(16) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated February 13, 1997, filed
by Wellington Management Company, LLP with the Commission. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.

137

REALTY COMPANY

NAME OF INDIVIDUAL OR COMMON STOCK PERCENT
NUMBER IN GROUP BENEFICIALLY OWNED(1),(2) OF CLASS
--------------------- ------------------------- --------

Walter F. Beran............................. 14,127(3) *
Ronald G. Geary............................. 1,000 *
Greg D. Hudson.............................. 199,174(4) *
Thomas T. Ladt.............................. 149,182(5) *
W. Bruce Lunsford........................... 2,080,167(6) 3.1%
T. Richard Riney............................ 3,125 *
R. Gene Smith............................... 1,525,914(7) 2.3%
All executive officers and directors as a
group (7 persons).......................... 3,972,689 5.9%
Firstar Corporation......................... 5,343,279(8) 7.9%
Firstar Investment Research & Management
Company.................................... 5,340,879(9) 7.9%
Tenet Healthcare Corporation................ 8,301,067(10) 12.3%
Wellington Management Company, LLP.......... 3,750,802(11) 5.6%

- --------
(*) Less than 1%
(1) Beneficial ownership of shares, for purposes of this Proxy Statement, as
determined in accordance with applicable Commission rules, includes
shares as to which a person has or shares voting power and/or investment
power. Beneficial ownership is given as of January 1, 1998, except as
otherwise noted below.
(2) Except as set forth in the accompanying footnotes, the named persons have
sole voting power and sole investment power over the shares beneficially
owned by them. The number of shares shown does not include the interest
of certain persons in shares held by family members in their own right or
in shares held for their benefit in the Company's 401(k) Plan. The
numbers shown include the shares which may be acquired by them through
the exercise of options, which are exercisable as of, or within 60 days
after, January 1, 1998, under the Company's stock option plans as
follows: Mr. Beran--2,156 shares; Mr. Hudson--6,376 shares; Mr. Ladt--
84,900 shares; Mr. Lunsford--393,003 shares; Mr. Riney--3,125 shares; and
Mr. Smith--4,969 shares. The number of shares shown does not include
shares which may be issued to executive officers upon the satisfaction of
performance goals. See "Management of the Company and Management of
Realty Company and Operating Company After the Reorganization
Transactions--Realty Company--Executive Compensation and Other
Information--Long-Term Incentive Awards."
(3) Excludes 1,411 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(4) Includes 176,921 shares with respect to which Mr. Hudson shares voting
and investment power with his wife, 562 shares held by a trust of which
Mr. Hudson is a co-trustee, 13,392 shares held by his gift trust, and
1,923 shares held by a trust for the benefit of Mr. Hudson and his
siblings. Excludes 2,590 phantom stock units held under the Company's
Non-Employee Directors Deferred Compensation Plan.
(5) Includes 7,029 shares held by his spouse as custodian for his children
and 20,058 shares held by his spouse. With respect to these 27,087
shares, Mr. Ladt shares voting and investment power with his spouse. Also
includes 3,887 shares held in his mother's estate of which Mr. Ladt is
the executor.
(6) Includes 152,127 shares held by a private foundation with respect to
which Mr. Lunsford has sole voting power and shared investment power.
Excludes 16,365 shares held in trust for the benefit of his children.
(7) Includes 36,250 shares held by a private foundation with respect to which
Mr. Smith shares voting and investment power and 140,625 shares held by a
limited partnership with respect to which he has sole voting and
investment power.

138

(8) The ownership given for Firstar Corporation is based on information
contained in the Schedule 13G dated February 14, 1997, filed by Firstar
Corporation with the Commission. The address of Firstar Corporation is
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(9) The ownership given for Firstar Investment Research & Management Company
is based on information contained in the Schedule 13G dated February 14,
1997, filed by Firstar Investment Research & Management Company with the
Commission. The address of Firstar Investment Research & Management
Company is 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. Firstar
Investment Research & Management Company is a subsidiary of Firstar
Corporation.
(10) The ownership given for Tenet is based on information contained in the
Schedule 13G dated January 10, 1996, filed by Tenet and certain
subsidiaries with the Commission. The address of Tenet and such
subsidiaries is 3820 State Street, Santa Barbara, California 93105.
(11) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated February 13, 1997, filed
by Wellington Management Company, LLP with the Commission. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.

OPERATING COMPANY

The following table sets forth certain information with respect to the
beneficial ownership of Company Common Stock, as of January 1, 1998, by (a)
each person known to the Company to be the beneficial owner of more than five
percent of the outstanding Company Common Stock, (b) each person who is
expected to be a director or Operating Company Named Executive Officer
immediately following the Reorganization Transactions (see "Management of the
Company and Management of Realty Company and Operating Company After the
Reorganization Transactions--Operating Company") and (c) all of the persons
expected to be directors and executive officers of Operating Company, as a
group. In accordance with the Distribution Ratio, the persons listed below
will receive one share of Operating Company Common Stock for [each] [every]
share[s] of Company Common Stock held by them on the Distribution Date. In
addition, as a result of the Reorganization Transactions, the Company Options
referenced in the footnotes below will be converted into a combination of
Realty Company Options and Operating Company Options, in each case with the
same overall value at the time of the Reorganization Transactions as the
existing award. See "Relationship Between Realty Company and Operating Company
After the Reorganization Transactions--Employee Benefits Agreement."

NAME OF INDIVIDUAL OR COMMON STOCK PERCENT
NUMBER IN GROUP BENEFICIALLY OWNED(1),(2) OF CLASS
--------------------- ------------------------- --------

Michael R. Barr............................. 456,638(3) *
Ulysses L. Bridgeman, Jr.................... 1,000(4) *
Elaine L. Chao.............................. 1,000(5) *
Donna R. Ecton.............................. 10,041(6) *
Jill L. Force............................... 78,184(7) *
James H. Gillenwater, Jr. .................. 62,546 *
William H. Lomicka.......................... 61,067 *
W. Bruce Lunsford........................... 2,080,167(8) 3.1%
W. Earl Reed, III........................... 345,649 *
R. Gene Smith............................... 1,525,914(9) 2.3%
All executive officers and directors as a
group (12 persons)......................... 4,658,344 6.9%
Firstar Corporation......................... 5,343,279(10) 7.9%
Firstar Investment Research & Management
Company.................................... 5,340,879(12) 7.9%
Tenet Healthcare Corporation................ 8,301,067(13) 12.3%
Wellington Management Company, LLP.......... 3,750,802(14) 5.6%

139

(2) Except as set forth in the accompanying footnotes, the named persons have
sole voting power and sole investment power over the shares beneficially
owned by them. The number of shares shown does not include the interest
of certain persons in shares held by family members in their own right or
in shares held for their benefit in the Company's 401(k) Plan. The
numbers shown include the shares which may be acquired by them through
the exercise of options, which are exercisable as of, or within 60 days
after, January 1, 1998, under the Company's stock option plans as
follows: Mr. Barr--102,893 shares; Ms. Ecton--9,891 shares; Ms. Force--
49,125 shares; Mr. Gillenwater--58,313 shares; Mr. Lomicka--29,580
shares; Mr. Lunsford--393,003 shares; Mr. Reed--84,500 shares; and Mr.
Smith--4,969 shares. The number of shares shown does not include shares
which may be issued to executive officers upon the satisfaction of
performance goals. See "Management of the Company and Management of
Realty Company and Operating Company After the Reorganization
Transactions--The Company--Executive Compensation and Other Information--
Long-Term Incentive Awards."
(3) Excludes 42,744 shares held in trust for his minor children and 3,250
shares held in trust for other family members.
(4) Excludes 394 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(5) Excludes 474 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(6) Excludes 1,514 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(7) Includes 1,400 shares held by Ms. Force's spouse as custodian for their
children. Ms. Force shares voting and investment power with her spouse
with regard to these shares.
(8) Includes 152,127 shares held by a private foundation with respect to
which Mr. Lunsford has sole voting power and shared investment power.
Excludes 16,365 shares held in trust for the benefit of his children.
(9) Includes 36,250 shares held by a private foundation with respect to which
Mr. Smith shares voting and investment power and 140,625 shares held by a
limited partnership with respect to which he has sole voting and
investment power.
(10) The ownership given for Firstar Corporation is based on information
contained in the Schedule 13G dated February 14, 1997, filed by Firstar
Corporation with the Commission. The address of Firstar Corporation is
777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(11) The ownership given for Firstar Investment Research & Management Company
is based on information contained in the Schedule 13G dated February 14,
1997, filed by Firstar Investment Research & Management Company with the
Commission. The address of Firstar Investment Research & Management
Company is 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202. Firstar
Investment Research & Management Company is a subsidiary of Firstar
Corporation.
(12) The ownership given for Tenet is based on information contained in the
Schedule 13G dated January 10, 1996, filed by Tenet and certain
subsidiaries with the Commission. The address of Tenet and such
subsidiaries is 3820 State Street, Santa Barbara, California 93105.
(13) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated February 13, 1997, filed
by Wellington Management Company, LLP with the Commission. The address of
Wellington Management Company, LLP is 75 State Street, Boston,
Massachusetts 02109.

140

MARKET INFORMATION CONCERNING COMPANY COMMON STOCK

The Company Common Stock is listed and traded on the NYSE under the ticker
symbol of VC. As of the close of business on , 1998, the Record Date,
there were shares of Company Common Stock outstanding and approximately
stockholders of record. The prices in the table below, for the calendar
quarters indicated, represent the high and low sales prices for the Company
Common Stock as reported on the NYSE Composite Tape. No cash dividends were
paid on Company Common Stock during such period.

SALES PRICE
OF COMMON STOCK
----------------
CALENDAR YEAR HIGH LOW
- ------------- -------- -------

1996:
First Quarter................................................ 39 7/8 31 1/2
Second Quarter............................................... 35 28 1/8
Third Quarter................................................ 34 1/2 25 1/2
Fourth Quarter............................................... 33 1/4 27 1/2
1997:
First Quarter................................................ 40 3/8 29
Second Quarter............................................... 45 1/8 36 5/8
Third Quarter................................................ 44 3/8 37 3/8
Fourth Quarter............................................... 43 5/16 23

141

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

The following summary of material federal income tax considerations
regarding the Reorganization Transactions is based upon current law, is for
general information only and is not tax advice. The information set forth
below, to the extent that it constitutes summaries of legal matters or legal
conclusions, has been reviewed by Sullivan & Cromwell, counsel to the Company,
and it is their opinion that such information is accurate in all material
respects. The discussion below is based on existing Federal income tax law,
which is subject to change, with possible retroactive effect. The discussion
below does not address all aspects of taxation that may be relevant in the
particular circumstances of each stockholder or to certain types of
stockholders (including insurance companies, tax-exempt entities, financial
institutions or broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States, except to the extent discussed)
subject to special treatment under the federal income tax laws.

As used herein, the term "U.S. Stockholder" means a holder of Company,
Realty Company or Operating Company Common Stock that is for United States
Federal income tax purposes (i) a resident or citizen of the United States,
(ii) a corporation, partnership, or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) an estate the income of which is subject to the United States Federal
income taxation regardless of its source or (iv) a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more United States persons have the authority to
control all substantial decisions of the trust. As used herein, the term
"Foreign Stockholder" means a holder of Company, Realty Company or Operating
Company Common Stock that is not a U.S. Stockholder.

STOCKHOLDERS ARE URGED TO CONSULT WITH THEIR INDIVIDUAL TAX ADVISORS
CONCERNING THE CONSEQUENCES OF THE DISTRIBUTION OF OPERATING COMPANY COMMON
STOCK AND OWNERSHIP AND SALE OF REALTY COMPANY COMMON STOCK AND OPERATING
COMPANY COMMON STOCK UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS,
INCLUDING THE EFFECT OF POSSIBLE CHANGES IN TAX LAW.

THE DISTRIBUTION

U.S. STOCKHOLDERS

A U.S. Stockholder of the Company will include the fair market value of the
shares of Operating Company Common Stock received pursuant to the Distribution
in gross income as ordinary dividend income only to the extent of the U.S.
Stockholder's share of the current or accumulated tax earnings and profits of
the Company through the end of 1998. The exact amount of the Company's
earnings and profits depends upon a variety of factors and cannot be
determined until the end of 1998. Based on the Company's analysis of its
earnings and profits and assuming that the value of the Operating Company
Common Stock at the time of the Distribution is not greater than $ per
share, the Company expects that a U.S. Stockholder will not have more than
$ of dividend income per share of Company Common Stock. To the extent the
value of Operating Company Common Stock on the Distribution Date exceeds the
per share earnings and profits of the Company, a U.S. Stockholder will be
required to reduce its basis in its shares of the Company Common Stock by such
excess. A U.S. Stockholder whose basis in its shares of Company Common Stock
is thereby reduced to zero will recognize capital gain in the amount of any
remaining value of Distributed Shares received. A U.S. Stockholder's holding
period in the Distributed Shares will begin on the day after the Distribution
Date. See "--Ownership and Disposition of Distributed Shares." The Company
will report to U.S. Stockholders the portion of the Distribution that should
be treated as a dividend in February 1999.

A U.S. Stockholder that is a corporation will, subject to generally
applicable limitations, be entitled to a dividends received deduction in an
amount equal to 70% of the amount of the Distribution received by it that is a
dividend. If a dividend is deemed to be "extraordinary" under Section 1059 of
the Code, a corporate stockholder may be required to reduce its basis in the
stock by the nontaxed portion of the dividend.

142

FOREIGN STOCKHOLDERS

A Foreign Stockholder will be subject to a United States withholding tax
equal to 30% of the gross amount to be received by it pursuant to the
Distribution (including amounts that are not treated as dividends for United
States Federal income tax purposes) unless the receipt of the Distributed
Shares is effectively connected with the Foreign Stockholder's United States
trade or business (in which case it would be required to submit an Internal
Revenue Service Form 4224 to the Company) or the Foreign Stockholder is
eligible for a lower rate under an applicable treaty (in which case it would
be required to submit an Internal Revenue Service Form 1001 to the Company).
In order to comply with this withholding requirement, the Company plans to
sell Distributed Shares that would otherwise have been distributed to a
Foreign Stockholder until the amount necessary to generate a sufficient amount
of cash such that the Company can comply with its withholding obligation with
respect to such Foreign Stockholder. If the cash received by the Company upon
such a sale is in excess of the amount required to be remitted to the United
States taxing authorities, such excess will be distributed to the Foreign
Stockholder in the Distribution. A Foreign Stockholder who is subject to a
withholding tax upon the Distribution may file a claim for refund to the
extent of the withholding tax that has been imposed on a portion of the
Distribution representing amounts in excess of current and accumulated
earnings and profits of the Company.

TAXATION OF REALTY COMPANY

GENERAL

Realty Company will elect to be taxed as a REIT under Sections 856 through
860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements"), which are the requirements for qualifying as a REIT,
commencing with its taxable year beginning on January 1, 1999. Realty Company
believes that, commencing with its taxable year ending beginning on January 1,
1999, it will be owned and organized, and will operate in such a manner, as to
qualify for taxation as a REIT under the Code. Realty Company intends to
continue to operate in such a manner, but no assurance can be given that it
will operate in a manner so as to qualify or remain qualified.

The REIT Requirements are technical and complex. The following discussion
sets forth only the material aspects of those requirements. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.

In the opinion of Sullivan & Cromwell, commencing with Realty Company's
taxable year beginning on January 1, 1999, Realty Company will be organized in
conformity with the requirements for qualification as a REIT, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT under the Code. It must be emphasized that this opinion
is based on certain factual assumptions relating to the organization and
operation of Realty Company and is conditioned upon certain representations
made by Realty Company as to factual matters, such as the organization and
expected manner of operation of Realty Company. In addition, this opinion is
based upon factual assumptions and representations of Realty Company
concerning its business and assets. Moreover, Realty Company's qualification
and taxation as a REIT depends upon its ability to meet, through actual annual
operating results, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the REIT Requirements discussed
below, the results of which will not be reviewed by Sullivan & Cromwell on a
continuing basis. Satisfaction of these tests both as an initial and ongoing
matter is more complicated in the case of a REIT, such as Realty Company,
which owns properties leased to an operating company with which it was
historically related and has common stockholders, directors and officers. No
assurance can be given that the actual results of Realty Company's operation
for any one taxable year will satisfy such requirements. See "--Failure to
Qualify."

If Realty Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. Such
treatment substantially eliminates the Federal "double taxation" on earnings
(at the corporate and the stockholder levels) that generally results from
investment in a corporation.

143

Despite the REIT election, Realty Company may be subject to Federal income
and excise tax as follows:

First, Realty Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.

Second, under certain circumstances, Realty Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences, if
any.

Third, if Realty Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale to
customers in the ordinary course of business or (ii) other nonqualifying
net income from foreclosure property, it will be subject to tax at the
highest corporate rate on such income.

Fourth, if Realty Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
held primarily for sale to customers in the ordinary course of business,
other than sales of foreclosure property and sales that qualify for a
statutory safe harbor), such income will be subject to a 100% tax.

Fifth, if Realty Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which Realty Company fails the
75% or 95% test, multiplied by a fraction intended to reflect Realty
Company's profitability.

Sixth, if Realty Company should fail to distribute, or fail to be treated
as having distributed, with respect to each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year (other than capital gain income
Realty Company elects to retain and pay tax on) and (iii) any undistributed
taxable income from prior periods, Realty Company would be subject to a 4%
excise tax on the excess of such required distribution over the amounts
actually distributed.

Seventh, if Realty Company should receive rents from Operating Company
deemed not to be fair market value rents or if Realty Company misvalues its
assets, Realty Company may be liable for valuation penalties.

Realty Company will own appreciated assets that it held before electing to
be treated as a REIT. If such appreciated property is sold within the 10-year
period following Realty Company's qualification as a REIT, Realty Company will
generally be subject to regular corporate tax on that gain to the extent of
the built-in gain in that property at the time Realty Company becomes a REIT.
The total amount of gain on which Realty Company can be taxed is limited to
its net built-in gain at the time it became a REIT, i.e., the excess of the
aggregate fair market value of its assets at the time it became a REIT over
the adjusted tax bases of those assets at that time. In certain circumstances,
Realty Company may also be subject to tax on the disposition of any
appreciated assets that it acquires from a taxable corporation in a
transaction in which any gain on the transfer is not fully recognized. Realty
Company may have a net operating loss carryover to its first year as a REIT.
That carryover may be available to offset recognized net built-in gain. If so,
Realty Company will only be able to offset 90% of that gain for alternative
minimum tax purposes.

ORGANIZATIONAL REQUIREMENTS

The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (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 the REIT Requirements; (iv) that is not a bank, an insurance company
or certain other specified types of financial institutions; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) not more than 50% in

144

value of the outstanding stock of which is owned, directly or indirectly, by
five or fewer individuals (as defined in the Code to include private
foundations and certain pension trusts and other entities) at any time during
the last half of each taxable year; and (vii) that meets certain other tests,
described below, regarding the nature of its income and assets. The Code
provides that conditions (i) through (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335
days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. Conditions (v) and (vi) will not apply
until after the first taxable year for which an election is made to be taxed
as a REIT. For purposes of condition (vi), certain tax-exempt entities are
generally treated as individuals, and the beneficiaries of a pension trust
that qualifies under Section 401(a) of the Code and that holds shares of a
REIT will be treated as holding shares of the REIT in proportion to their
actuarial interests in the pension trust. See "--Taxation of United States
Stockholders of Realty Company--Treatment of Tax-Exempt Stockholders." In
addition, if a REIT fails to satisfy condition (vi) for any taxable year, the
REIT will nonetheless be deemed to have satisfied the condition if it complied
with Treasury regulations requiring the maintenance of records to ascertain
ownership and did not know (and would not have known using reasonable
diligence) that it was closely held for the year.

The Company expects Realty Company will satisfy conditions (v) and (vi). In
addition, Realty Company's Charter will provide for restrictions preventing
any person from owning more than 9.9% of Realty Company's outstanding capital
stock. In addition, Realty Company will request on an annual basis of certain
stockholders, and those stockholders will be required to provide, information
relating to the number of shares actually or constructively owned by the
Stockholder. Such transfer restrictions are described in "Description of
Capital Stock--Realty Company--Common Stock." Ownership for purposes of
conditions (v) and (vi) is defined using certain constructive ownership rules.
As a result, the acquisition of less than 9.9% of Realty Company capital stock
by an individual or entity may cause that individual or entity to
constructively own more than 9.9% of such stock, thereby triggering the
transfer restrictions described above.

In order to be treated as a REIT, a corporation may not have earnings and
profits accumulated in periods before it elected REIT status. The Company
believes that the Reorganization Transactions will cause it to recognize
losses and deductions which will eliminate any of its earnings and profits
accumulated in pre-REIT periods.

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 Realty Company for purposes of the REIT
Requirements, including satisfying the gross income tests and the assets test.

INCOME TESTS

In order to maintain qualification as a REIT, Realty Company must annually
satisfy two gross income requirements. First, at least 75% of Realty Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived directly or indirectly from investments relating
to real property or mortgages on real property (such as interest on
obligations secured by mortgages on real property, certain "rents from real
property" or gain on the sale or exchange of such property and certain fees
with respect to agreements to make or acquire mortgage loans), from certain
types of temporary investments or certain other types of gross income. Second,
at least 95% of Realty Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments as aforesaid and from dividends, interest, and gain from
the sale or other disposition of stock or securities and certain other types
of gross income (or from any combination of the foregoing).

In order to qualify as a REIT, the income received by Realty Company
pursuant to the Leases must constitute "rents from real property." The rents
received by Realty Company pursuant to the Leases will qualify as "rents from
real property" in satisfying the gross income requirements for a REIT
described above only if several conditions are met. First, the Leases must be
respected as true leases for Federal income tax purposes

145

and not treated as service contracts, joint ventures or some other type of
arrangement. The determination of whether the 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) 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.

Sullivan & Cromwell is of the opinion that the Leases will be treated as
true leases for Federal income tax purposes. Such opinion is based, in part,
on the following facts: (i) the Leases are styled as leases (e.g., Realty
Company holds legal title to the Leased Properties and the Leases give
Operating Company the right to possession of the Leased Properties) and Realty
Company and Operating Company have represented that they intend their
relationship to be that of a lessor and lessee, (ii) lessor will obtain
possession of the Leased Properties for a significant period after the
maturity of the Leases, (iii) Realty Company has represented that the Leased
Properties will have significant residual value after the expiration of the
terms of the Leases, even after there is taken into account all possible
renewals, (iv) the Leased Properties do not constitute limited use property,
(v) the Leases do not provide Operating Company with the right to purchase the
Leased Properties at a bargain price, (vi) Realty Company will be entitled to
receive significant rental income under the Leases, and (vii) the rent to be
paid under the Leases are fair market rents.

Investors should be aware that there are no controlling Treasury
Regulations, published rulings or judicial decisions involving leases with
terms substantially the same as the Leases that discuss whether such leases
constitute true leases for Federal income tax purposes. Therefore, the opinion
of Sullivan & Cromwell with respect to the relationship between Realty Company
and Operating Company is based upon all of the facts and circumstances and
upon rulings and judicial decisions involving situations that are considered
to be analogous. Opinions of counsel are not binding upon the Service or any
court, and there can be no complete assurance that the Service will not
successfully assert a contrary position. If the Leases are recharacterized as
service contracts or partnership agreements, rather than true leases, part or
all of the payments that Realty Company receives from Operating Company would
not be considered rent or would not otherwise satisfy the various requirements
for qualification as "rents from real property." In that case, Realty Company
likely would not be able to satisfy either the 75% or 95% gross income tests
and, as a result, would lose its REIT status.

In addition to the above requirements, 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, 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," Realty Company generally must not operate or manage the property or
furnish or render services to tenants, other than through an "independent
contractor" from whom Realty Company derives no revenue. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by Realty Company are "usually or customarily rendered" in connection
with the rental of space for occupancy only and are not otherwise considered
"rendered to the occupant." Realty Company does not and will not (i) derive
rental income attributable to personal property (other than personal property
leased in connection with the lease of real property, the amount of which is
less than 15% of the total rent received under the lease), or (ii) perform
services considered to be rendered to the occupant of the property, other than
through an independent contractor from whom Realty Company derives no revenue.

If the Lease payments do not represent fair market value rentals and the
Service determines that Realty Company and Operating Company are under common
control, the Service may reallocate income between Realty Company and
Operating Company. The reallocation could cause all or some of the Lease
payments to fail to qualify as "rents from real property" and may cause Realty
Company or Operating Company to be subject to valuation penalties. Realty
Company believes that the Lease payments represent fair market rentals.

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Tenet will beneficially own, in the aggregate, 12.3% of Realty Company
Common Stock and Operating Company Common Stock as a result of the
Distribution (based on the information contained in the Schedule 13G dated
January 10, 1996 filed by Tenet). Under applicable provisions of the Code,
Realty Company will not be treated as a REIT unless it satisfies, among other
things, requirements relating to the sources of its gross income. See "Federal
Income Tax Considerations." Rents received or accrued by Realty Company from
Operating Company will not be treated as qualifying rent for purposes of these
requirements if Realty Company is treated, either directly or under the
applicable attribution rules, as owning 10% or more of Operating Company
Common Stock. Realty Company will be treated as owning, under the applicable
attribution rules, 10% or more of Operating Company Common Stock at any time
that Tenet owns, directly or under the applicable attribution rules, (a) 10%
or more of Realty Company Common Stock and (b) 10% or more of Operating
Company Common Stock. Thus, in order for the rents received or accrued by
Realty Company from Operating Company to be treated as qualifying rent for
purposes of the REIT gross income requirements, the Company intends to reduce
Tenet's ownership in Realty Company or Operating Company to under 10% prior to
the Conversion Date. If, prior to December 31, 1998, Tenet does not directly
or under the applicable attribution rules own less than 10% of the Common
Stock of either Realty Company or Operating Company, Realty Company may fail
to qualify as a REIT for the 1999 tax year and would be subject to tax on its
taxable income at regular corporate rates. In addition, distributions to
stockholders during such tax year would not be deductible by Realty Company
and would not be required to be made.

RELIEF PROVISIONS

If Realty Company fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if certain relief provisions of the Code apply. These relief
provisions will generally apply if Realty Company's failure to meet such tests
was due to reasonable cause and not due to willful neglect, Realty Company
attaches a schedule of the sources of its income to its return, and any
incorrect information on the schedule was not due to fraud with intent to
evade tax. Under certain circumstances, Realty Company may prefer not to have
the relief provisions apply.

ASSET TESTS

At the close of each quarter of its taxable year, Realty Company must
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of Realty Company's total assets must be represented by real
estate assets (including stock or debt instruments that do not otherwise
qualify as real estate assets and that are not held for more than one year
that were purchased with the proceeds of a stock offering or long-term (at
least five years) debt offering of Realty Company), cash, cash items, and
government securities. Second, not more than 25% of Realty Company's total
assets may be represented by securities other than those in the 75% asset
class. Third, of the investments included in the 25% asset class, the value of
any one issuer's securities owned by Realty Company may not exceed 5% of the
value of Realty Company's total assets and Realty Company may not own more
than 10% of any one issuer's outstanding voting securities.

After initially meeting the asset tests at the close of any quarter, Realty
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. Realty Company intends to maintain adequate records of the
value of its assets to ensure compliance with the asset tests, and to take
such action within 30 days after the close of any quarter as may be required
to cure any noncompliance but no assurance can be given that such asset tests
will be met.

ANNUAL DISTRIBUTION REQUIREMENTS

In order to be treated as a REIT, Realty Company is required to distribute
dividends (other than capital gains dividends) to its stockholders in an
amount at least equal to (A) the sum of (i) 95% of Realty Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and
Realty Company's net

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capital gain) plus (ii) 95% of the net income, if any, from foreclosure
property in excess of the special tax on income from foreclosure property,
minus (B) 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 Realty Company timely files its tax return for such
year and if paid on or before the first regular dividend payment after such
declaration. To the extent that Realty Company does not distribute (or is not
treated as having distributed) all of its net capital gain or distributes (or
is treated as having distributed) at least 95%, but less than 100% of its
"REIT taxable income," as adjusted, it will be subject to tax thereon at
regular ordinary and capital gains corporate tax rates. If a Realty Company so
elects, the net capital gain retained by it will be treated as having been (i)
distributed to its stockholders, (ii) taxed at the stockholder level and (iii)
contributed to the Realty Company in amount equal to the gain less the tax. In
such a case, stockholders will receive certain tax credits and basis
adjustments reflecting the deemed distribution and deemed payment of taxes by
stockholders. The Code also permits a stockholder to elect to be treated for
tax purposes as having (i) received a distribution in the amount specified in
the election and (ii) contributed the amount thereof to the capital of Realty
Company. If Realty Company should fail to distribute during each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year (other than capital gain
income which Realty Company elects to retain and pay tax on), and (iii) any
undistributed taxable income from prior periods, Realty Company would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. Pursuant to recently enacted legislation,
Realty Company may elect to retain rather than distribute its net long-term
capital gains. The effect of such an election is that (i) Realty Company is
required to pay the tax on such gains, (ii) U.S. Stockholders, while required
to include their proportionate share of the undistributed long-term capital
gain in income, will receive a credit or refund for their share of the tax
paid by Realty Company, and (iii) the basis of a U.S. Stockholder's stock
would be increased by the amount of the undistributed long-term capital gains
(minus the amount of capital gains tax paid by Realty Company) included in the
U.S. Stockholder's long-term capital gains. Realty Company intends to make
timely distributions sufficient to satisfy the annual distribution
requirement.

"REIT taxable income" is the taxable income of a REIT, which generally is
computed in the same fashion as the taxable income of any corporation, except
that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.

It is possible that, from time to time, Realty Company may not have
sufficient cash or other liquid assets to meet the 95% distribution
requirement due to 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 calculating the taxable income of
Realty Company. In the event that such an insufficiency or such timing
differences occur, in order to meet the 95% distribution requirement Realty
Company may find it necessary to arrange for borrowings or to pay dividends in
the form of taxable stock dividends if it is practicable to do so.

Under certain circumstances, Realty Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Realty
Company's deduction for dividends paid for the earlier year. Thus, Realty
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Realty Company will be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.

FAILURE TO QUALIFY

If Realty Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions described above do not apply, Realty Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
in any year in which Realty Company fails to qualify will not be deductible by
Realty Company and they will not be required to be made. In such event, 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 of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific
statutory

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provisions, Realty Company will also be disqualified from taxation as a REIT
for the four taxable years following the year during which qualification was
lost, and will not be permitted to requalify unless it distributes any
earnings and profits attributable to the period when it failed to qualify. In
addition, it would be subject to tax on any built-in gains on property held
during the period during which it did not qualify if it sold such property
within 10 years of requalification, to the extent of its net built-in gain at
the time of requalification. It is not possible to state whether in all
circumstances Realty Company would be entitled to such statutory relief.

TAXATION OF U.S. STOCKHOLDERS OF REALTY COMPANY

DISTRIBUTIONS GENERALLY

As long as Realty Company qualifies as a REIT, distributions to a U.S.
Stockholder up to the amount of Realty Company's current or accumulated
earnings and profits (and not designated as capital gains dividends) will be
taken into account as ordinary income and will not be eligible for the
dividends-received deduction for corporations. Distributions that are
designated by Realty Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed Realty Company's
actual net capital gain) for the taxable year without regard to the period for
which the stockholder has held its stock. However, corporate stockholders may
be required to treat up to 20% of certain capital gains dividends as ordinary
income, pursuant to Section 291(d) of the Code. Individuals are generally
subject to differing rates of tax on various transactions giving rise to long-
term capital gains or losses. In general, the long-term capital gains rate is
(i) 28% on capital gain from the sale or exchange of assets held for more than
one year but not more than 18 months, (ii) 20% on capital gain from the sale
or exchange of assets held for more than 18 months and (iii) 25% on capital
gain from the sale or exchange of certain depreciable real estate eligible for
the 20% rate up to the amount of depreciation deductions taken with respect to
the real estate. Subject to certain limitations concerning the classification
of Realty Company's long-term capital gains, Realty Company may designate a
capital gain dividend as a 28% rate distribution, a 25% rate distribution or a
20% rate distribution. If Realty Company elects to retain capital gains rather
than distribute them, a U.S. Stockholder will be deemed to receive a capital
gain dividend equal to the amount of such retained capital gains. Such gains
are subject to apportionment among the three rate groups set forth above. In
such a case, a U.S. Stockholder will receive certain tax credits and basis
adjustments reflecting the deemed distribution and deemed payment of taxes by
the U.S. Stockholder. A distribution in excess of current or accumulated
earnings and profits will first be treated as a tax-free return of capital,
reducing the tax basis in the U.S. Stockholder's Realty Company Common Stock,
and a distribution in excess of the U.S. Stockholder's tax basis in its Realty
Company Common Stock will be a taxable gain realized from the sale of such
shares. Dividends declared by Realty Company in October, November or December
of any year payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by Realty Company and received by the
stockholder on December 31 of such year, provided that the dividend is
actually paid by Realty Company during January of the following calendar year.
U.S. Stockholders may not claim the benefit of any tax losses of Realty
Company on their own income tax returns.

Realty Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by Realty Company up to the amount
required to be distributed in order to avoid imposition of the 4% excise tax
discussed under "--Taxation of Realty Company--General" and "--Taxation of
Realty Company--Annual Distribution Requirements" above. As a result,
stockholders may be required to treat as taxable dividends certain
distributions that would otherwise result in tax-free returns of capital.
Moreover, any "deficiency dividend" will be treated as a "dividend" (an
ordinary dividend or a capital gain dividend, as the case may be), regardless
of Realty Company's earnings and profits.

Losses incurred on the sale or exchange of Realty Company Common Stock held
for less than six months will be deemed a long-term capital loss to the extent
of any capital gain dividends received by the selling stockholder with respect
to such stock.

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TREATMENT OF TAX-EXEMPT STOCKHOLDERS

Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), generally
are exempt from federal income taxation. However, they are subject to taxation
on their unrelated businesses taxable income ("UBTI"). While many investments
in real estate generate UBTI, the Service has published a ruling that dividend
distributions from a REIT to an exempt employee pension trust do not
constitute UBTI, provided that the shares of the REIT are not otherwise used
in an unrelated trade or business of the exempt employee pension trust. Based
on this ruling, amounts distributed by Realty Company to Exempt Organizations
generally should not constitute UBTI. However, if an Exempt Organization
finances its acquisition of the Common Stock with debt, a portion of its
income from Realty Company will constitute UBTI pursuant to the "debt financed
property" rules. In addition, in certain circumstances, a pension trust that
owns more than 10% of Realty Company's Common Stock is required to treat a
percentage of the dividends from Realty Company as UBTI. This rule applies to
a pension trust holding more than 10% of Realty Company's Common Stock only if
(i) the percentage of income of Realty Company that is UBTI (determined as if
Realty Company were a pension trust) is at least 5%, (ii) Realty Company
qualifies as a REIT by reason of the modification of the 5/50 Rule that allows
beneficiaries of the pension trust to be treated as holding shares of Realty
Company in proportion to their actuarial interests in the pension trust, and
(iii) either (A) one pension trust owns more than 25% of the value of Realty
Company's Common Stock or (B) a group of pension trusts individually holding
more than 10% of the value of Realty Company's Common Stock collectively owns
more than 50% of the value of Realty Company's Common Stock.

TAXATION OF FOREIGN STOCKHOLDERS OF REALTY COMPANY

The rules governing United States income taxation of Foreign Stockholders of
Realty Company are complex, and no attempt will be made herein to provide more
than a summary of such rules. A Foreign Stockholder should consult with its
own tax advisor to determine the effect of Federal, state, local and country
of tax residence income tax laws on an investment in Realty Company, including
any reporting requirements.

In general, a Foreign Stockholder will be subject to regular United States
income tax to the same extent as a U.S. Stockholder with respect to income or
gain derived from its investment in Realty Company if under all facts and
circumstances such income or gain is "effectively connected" with such
stockholder's conduct of a trade or business in the United States. See
"Certain Federal Income Tax Considerations--Taxation of U.S. Stockholders of
Realty Company." In general, a Foreign Stockholder will not be considered
engaged in a United States trade or business solely as a result of its
ownership of Realty Company Common Stock. A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of
the Code, which is payable in addition to the regular United States corporate
income tax. The following discussion will apply to a Foreign Stockholder whose
income or gain derived from investment in Realty Company, is in light of the
facts and circumstances, not so effectively connected.

The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the Federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "U.S. real property interest" ("USRPI")
by a foreign taxpayer is treated by statute as effectively connected with a
United States trade or business as a matter of law, without regard to the
particular facts and circumstances. A distribution of cash to a Foreign
Stockholder that is not attributable to gain from sales or exchanges by Realty
Company of USRPIs and not designated by Realty Company as a capital gain
dividend is not subject to FIRPTA but generally will be subject to the
withholding of United States Federal income tax at a rate of 30%, unless (i) a
lower treaty rate applies or (ii) the Foreign Stockholder files an IRS Form
4224 with the withholding agent certifying that the investment to which the
distribution relates is effectively connected to a United States trade or
business of such Foreign Stockholder. Recently, the United States has
announced an objective of excluding REIT dividends from the withholding tax
rate reductions contained in tax treaties and has announced that it will
endeavor to renegotiate several recently negotiated treaties. A Foreign
Stockholder who receives a distribution that has been subject to such
withholding

150

tax may file a claim for refund to the extent the withholding has been imposed
on a portion of such distributions representing amounts in excess of current
and accumulated earnings and profits.

Under FIRPTA, distributions of proceeds attributable to gain from Realty
Company's sale or exchange of a USRPI are subject to income tax at the normal
capital gains rates applicable to U.S. Stockholders (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of a
nonresident alien individual). Also, these distributions may be subject to a
30% branch profits tax in the hands of a corporate Foreign Stockholder not
entitled to a treaty exemption or reduced rate of tax. Treasury Regulations
require the withholding of 35% of any distribution that could be designated by
Realty Company as a capital gain dividend. This amount is creditable against
the Foreign Stockholder's tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the maximum rate
(which may be 20%, 25% or 28% on capital gains of individuals depending on all
the facts and circumstances) on long-term capital gains of individuals.
Capital gain dividends not attributable to gain on the sale or exchange of
USRPIs are not subject to United States taxation if there is no requirement of
withholding.

If Realty Company is a "domestically-controlled REIT," a sale of Realty
Company Common Stock by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically-controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by
Foreign Stockholders. It is currently anticipated that Realty Company will be
a domestically-controlled REIT and, therefore, the sale of the Realty Company
Common Stock will not be subject to taxation under FIRPTA. However, no
assurance can be given that Realty Company will be a domestically-controlled
REIT and, even if it is, that it will be able so to demonstrate.

If Realty Company is not a domestically-controlled REIT, a sale of Realty
Company Common Stock will be subject to tax under FIRPTA as a sale of a USRPI.
Gain or loss from the sale is deemed effectively connected with a United
States trade or business unless (i) Realty Company Common Stock is "regularly
traded" (as defined by applicable Treasury Regulations) on an established
securities market during the quarter in which the Realty Company Common Stock
was sold and the selling stockholder holds, directly or indirectly, 5% or less
of the Realty Company Common Stock during the five-year period ending on the
date of disposition. The applicable Treasury Regulations that define
"regularly traded" for this purpose may be interpreted to provide that a
security will not be "regularly traded" for any calendar quarter during which
100 or fewer persons (treating related persons as one person) in the aggregate
own 50% or more of such security or the quarterly trading volume is less than
7.5% of the average number of the issued and outstanding shares of such
security (2.5% if there are 2,500 or more stockholders of record). In the
event that the Realty Company Common Stock is not "regularly traded" and
Realty Company did not at that time constitute a domestically-controlled REIT,
a Foreign Stockholder (without regard to its ownership percentage of Realty
Company Common Stock) must treat as effectively connected with a United States
trade or business any gain or loss on any sale or other disposition of Realty
Company Common Stock that occurs within a calendar quarter during which the
Realty Company Common Stock was not "regularly traded" and the shares were a
USRPI.

If the gain on the sale of Realty Company Common Stock were subject to
taxation under FIRPTA, the Foreign Stockholder would be subject to the same
treatment as a U.S. Stockholder with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in
the case of a nonresident alien individual). Notwithstanding the foregoing,
capital gain from sale of shares of a REIT not subject to FIRPTA will
nonetheless be taxable to a Foreign Stockholder who is an individual (under
rules generally applicable to U.S. Stockholders) if such person is in the
United States for 183 days or more during the taxable year of disposition and
certain other conditions apply. In any event, a purchaser of Realty Company
Common Stock from a Foreign Stockholder will not be required under FIRPTA to
withhold on the purchase price if the purchased Realty Company Common Stock is
"regularly traded" on an established securities market or if Realty Company is
a domestically-controlled REIT. Otherwise, under FIRPTA the purchaser of
Realty Company Common Stock may be required to withhold 10% of the purchase
price and remit such amount to the Service.

151

Shares of Realty Company owned by a Foreign Stockholder decedent are subject
to United States Federal estate tax (which is imposed at rates up to 55%)
unless an estate tax treaty binding upon the United States provides otherwise.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX

Realty Company will report to its stockholders and the Service the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any, unless an exemption to reporting requirements applies.

UNITED STATES STOCKHOLDERS

Under certain circumstances, a U.S. Stockholder may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash
proceeds of a sale or exchange of, Realty Company Common Stock. Backup
withholding will apply only if the holder (i) fails to furnish the person
required to withhold with its Taxpayer Identification Number ("TIN") which,
for an individual, would be his or her Social Security Number, (ii) furnishes
an incorrect TIN, (iii) is notified by the Service that it has failed properly
to report payments of interest and dividends, or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the Service that it is
subject to backup withholding for failure to report interest and dividend
payments. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
A U.S. Stockholder should consult with a tax advisor regarding qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption. Backup withholding is not an additional tax. Rather, the amount of
any backup withholding with respect to a payment to a U.S. Stockholder will be
allowed as a credit against such U.S. Stockholder's United States Federal
income tax liability and may entitle such U.S. Stockholder to a refund,
provided that the required information is furnished to the Service.

FOREIGN STOCKHOLDERS

Additional issues may arise pertaining to information reporting and backup
withholding with respect to Foreign Stockholders, and a Foreign Stockholder
should consult with a tax advisor with respect to any such information
reporting and backup withholding requirements. Backup withholding with respect
to a Foreign Stockholder is not an additional tax. Rather, the amount of any
backup withholding with respect to a payment to a Foreign Stockholder will be
allowed as a credit against any United States Federal income tax liability of
such Foreign Stockholder. If withholding results in an overpayment of taxes, a
refund may be obtained provided that the required information is furnished to
the Service.

OTHER TAX CONSEQUENCES

Realty Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of
Realty Company and its stockholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax
laws on an investment in Realty Company.

OWNERSHIP AND DISPOSITION OF DISTRIBUTED SHARES

TAXATION OF DIVIDENDS AND STOCK DISTRIBUTIONS

U.S. Stockholders generally will treat the gross amount of any cash
dividends paid by Operating Company as dividend income for United States
Federal income tax purposes to the extent of Operating Company's then current
or accumulated tax earnings and profits. The amount of a distribution that
exceeds Operating Company's current or accumulated tax earnings and profits
will reduce a U.S. Stockholder's basis in its Distributed Shares to the extent
of such basis, and any amount of a distribution in excess of such U.S.
Stockholder's basis will be

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capital gain to the U.S. Stockholder. Corporate holders of Distributed Shares
will, subject to generally applicable limitations, be entitled to a 70%
dividends received deduction with respect to amounts treated as dividends for
United States Federal income tax purposes. Dividends paid to Foreign
Stockholders will be subject to a 30% withholding tax. The rate of tax may be
reduced by applicable treaties.

SALE OR OTHER DISPOSITION

The sale or other disposition (including, in some cases, redemption) of the
Distributed Shares by a U.S. Stockholder generally will result in the
recognition of capital gain or loss to the holder in an amount equal to the
difference between the amount realized and the U.S. Stockholder's adjusted
basis in the Distributed Shares. A U.S. Stockholder's adjusted basis in
Distributed Shares generally will be the fair market value of such shares as
of the Distribution Date, reduced (but not below zero) by the amount of any
distributions received with respect to such shares that are not treated as
dividends. If the U.S. Stockholder has held its Distributed Shares for more
than one year, such capital gain or loss will be long-term capital gain or
loss. Individual holders are subject to a 28% tax on long-term capital gains,
but are subject to only a maximum 20% tax on such gain if they have held the
Distributed Shares for more than 18 months. Corporate holders are generally
subject to a 35% tax on all capital gain, regardless of the period they hold
Distributed Shares. A U.S. Stockholder's holding period for Distributed Shares
acquired in the Distribution will begin on the day after Distribution Date.

Capital losses are generally deductible to the extent of capital gains. Non-
corporate taxpayers may deduct the excess of capital losses over capital
gains, whether long-term or short-term, in an amount up to $3,000 a year
($1,500 in the case of a married individual filing separately). Non-corporate
taxpayers may carry forward unused capital losses indefinitely. Unused capital
losses of a corporation may be carried back three years and carried forward
five years.

Distributed Shares owned by a Foreign Stockholder are subject to United
States Federal estate tax (which is imposed at rates up to 55%) unless an
estate tax treaty binding upon the United States provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING

Dividend payments on the Distributed Shares will be subject to certain
information, reporting and backup withholding requirements. See "--
Information, Reporting Requirements and Backup Withholding Tax."

153

DESCRIPTION OF CAPITAL STOCK

REALTY COMPANY

GENERAL

If approved by the stockholders as set forth in this Proxy Statement, and
subject to certain conditions set forth herein, the Company will adopt the
Charter Amendment Proposals which will (a) add certain transfer restrictions
and related provisions with respect to the Company's capital stock desirable
for the Company to protect its status as a REIT for Federal income tax
purposes, (b) change the name of the Company to "VenTrust, Inc.," and (c)
increase the number of authorized shares of Company Preferred Stock from
1,000,000 shares to 10,000,000 shares.

The authorized capital stock of the Company currently consists of
180,000,000 shares of Company Common Stock, par value $.25 per share, and
1,000,000 shares of Company Preferred Stock, of which 65,000 shares are
designated Series A Preferred Stock ("Company Series A Preferred Stock") and
300,000 shares are designated Series A Participating Preferred Stock ("Company
Series A Participating Preferred Stock"). Each share of Company Common Stock
trades with an associated Company Right. See "--Description of Company
Rights." As of , 1998, there were shares of Company Common Stock
outstanding, with an additional shares issued and held in treasury. In
addition, as of , 1998, an aggregate of shares of Company Common Stock
were reserved for issuance pursuant to various option plans. There are no
shares of Company Preferred Stock outstanding.

COMMON STOCK

The holders of Company Common Stock are entitled to one vote per share for
each share held of record on all matters submitted to a vote of stockholders
and are entitled to receive ratably such dividends as may be declared by the
Company Board out of funds legally available therefor. As a Delaware
corporation, the Company is subject to statutory limitations on the
declaration and payment of dividends. In the event of a liquidation,
dissolution or winding up of the Company, holders of Company Common Stock have
the right to a ratable portion of the assets remaining after payment of all
liabilities and the aggregate liquidation preferences of any outstanding
shares of Company Preferred Stock. The holders of Company Common Stock have no
preemptive rights. All outstanding shares of Company Common Stock are fully
paid and non-assessable. As of , 1998, there were holders of record
of Company Common Stock.

The REIT Charter Amendments. The Ownership Limitation Provision provides
that, subject to certain exceptions specified in the Company Charter, no
person may own, or be deemed to own by virtue of the applicable attribution
provision of the Code, more than the Ownership Limit. The Company Board may,
but in no event will be required to, waive the Ownership Limit if it
determines that such ownership will not jeopardize Realty Company's status as
a REIT. As a condition of such waiver, the Company Board may require opinions
of counsel satisfactory to it and undertakings or representations from the
applicant with respect to preserving the REIT status of Realty Company. The
Ownership Limitation Provision will not apply if the Company Board and the
holders of at least 66 2/3% of the outstanding shares of capital stock
entitled to vote on such matter determine that it is no longer in the best
interest of Realty Company to attempt to qualify, or to continue to qualify,
as a REIT.

154

own any right or interest) in such excess shares. Also, if any purported
transfer of capital stock of Realty Company or any other event would otherwise
cause Realty Company to own, or be deemed to own by virtue of the applicable
attribution provisions of the Code, 10% or more of the ownership interests in
Operating Company or in any sublessee, then any such purported transfer will
be void and of no force or effect as to that number of shares in excess of the
number that could have been transferred without such result, and the
Prohibited Transferee shall acquire no right or interest (or, in the case of
any event other than a transfer, the Prohibited Owner shall cease to own any
right or interest) in such excess shares.

Any such excess shares described above will be transferred automatically, by
operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by Realty Company (the "Beneficiary"). The
trustee of the trust who shall be designated by Realty Company and be
unaffiliated with Realty Company and any Prohibited Owner, will be empowered
to sell such excess shares to a qualified person or entity and distribute to a
Prohibited Transferee an amount equal to the lesser of the price paid by the
Prohibited Transferee for such excess shares or the sales proceeds received by
the trust for such excess shares. In the case of any excess shares resulting
from any event other than a transfer, or from a transfer for no consideration,
the trustee will be empowered to sell such excess shares to a qualified person
or entity and distribute to the Prohibited Owner an amount equal to the lesser
of the fair market value of such excess shares on the date of such event or
the sales proceeds received by the trust for such excess shares. Prior to a
sale of any such excess shares by the trust, the trustee will be entitled to
receive, in trust for the benefit of the Beneficiary, all dividends and other
distributions paid by Realty Company with respect to such excess shares, and
also will be entitled to exercise all voting rights with respect to such
excess shares.

PREFERRED STOCK

The Company Board may, without further action by the stockholders of the
Company, designate and issue preferred stock in one or more series and fix the
rights and preferences thereof, including the voting rights, dividend rights
and rates, redemption rights (including sinking fund provisions), conversion
rights, liquidation rights, priority as to other series of preferred stock and
any other powers, preferences, privileges and relative participating, optional
or other special rights of the series and the qualifications, limitations or
restrictions thereof.

The rights of the holders of Company Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any shares of
preferred stock that may be issued in the future. Issuance of shares of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company. If the Preferred Stock Charter Amendment is approved, the Company
will have 10,000,000 shares of Company Preferred Stock authorized. See "The
Company Charter Amendment Proposals--Preferred Stock Charter Amendment" and
"--Description of Company Rights." The Company has no present plans to issue
any shares of Company Preferred Stock.

DESCRIPTION OF COMPANY RIGHTS

On July 20, 1993, the Company Board declared a dividend of one Company Right
(currently 0.667 of a Company Right as adjusted for the Company's three-for-
two stock split effected October 25, 1994) for each outstanding share of
Company Common Stock. Each Company Right entitles the holder to purchase from
the Company one one-hundredth of a share of Company Series A Participating
Preferred Stock at a purchase price

155

of $110, subject to future adjustment (currently and as so adjusted, the
"Company Purchase Price"). The dividend was paid to holders of record as of
August 1, 1993 (the "Company Record Date"). Company Rights are also issued
with shares of Company Common Stock issued after the initial dividend
distribution and before the occurrence of certain specified events (which have
not occurred as of the date hereof). Until a Company Right is exercised, the
holder thereof, as such, has no rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends.

The terms and conditions of the Company Rights are set forth in a Rights
Agreement dated as of July 20, 1993 (the "Company Rights Agreement"), between
the Company and National City Bank of Cleveland, Ohio, as Rights Agent, as
amended by the First Amendment to Rights Agreement, dated as of August 11,
1995 (the "First Amendment"), and as to be amended by the Second Amendment to
Rights Agreement, dated as of February 1, 1998 (the "Second Amendment"). The
Company Rights Agreement has been filed with the Commission as an exhibit to
the Company's Registration Statement on Form 8-A filed on July 21, 1993, the
First Amendment has been filed with the Commission as an exhibit to the
Company's Registration Statement on Form 8-A/A filed on August 11, 1995 and
the Second Amendment will be filed with the Commission as an exhibit to the
Company's Registration Statement on Form 8-A/A filed on , 1998. The
existence of the Company Rights may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, a majority of the outstanding voting stock of the Company. The
following summary description of the Company Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights
Agreement, the First Amendment and the Second Amendment.

The Company Rights are currently attached to all Company Common Stock
certificates representing outstanding shares, and no separate Company Rights
certificates have been distributed. Until the earlier to occur of (i) the
first date (the "Company Stock Acquisition Date") of a public announcement
that, without the prior approval of the Company (which approval is prohibited
under certain circumstances as described below), a person or group of
affiliated or associated persons (a "Company Acquiring Person") has acquired,
or obtained the right to acquire beneficial ownership of securities having
9.9% or more of the voting power of all outstanding voting securities of the
Company or (ii) ten days (unless such date is extended by the Company Board)
following the commencement of (or a public announcement of an intention to
make) a tender offer or exchange offer which would result in any person or
group of related persons becoming a Company Acquiring Person (the earlier of
such dates being called the "Company Rights Distribution Date"), the Company
Rights will continue to be evidenced by the Company Common Stock certificates.
Until the Company Rights Distribution Date, the Company Rights will be
transferred only with Company Common Stock certificates. New Company Common
Stock certificates issued after the Company Record Date upon transfer or new
issuance of the Company Common Stock contain a notation incorporating the
Company Rights Agreement by reference. Until the Company Rights Distribution
Date (or earlier redemption, exchange, or expiration of the Company Rights),
the surrender for transfer of any certificates for Company Common Stock will
also constitute the transfer of the Company Rights associated with the Company
Common Stock represented by such certificate. As soon as practicable following
the Company Rights Distribution Date, separate certificates evidencing the
Company Rights ("Company Rights Certificates") will be mailed to holders of
record of the Company Common Stock as of the close of business on the Company
Rights Distribution Date, and the separate Company Rights Certificates alone
will evidence the Company Rights.

The Company Rights will not be exercisable until the Company Rights
Distribution Date. The Company Rights will expire on the earliest of (i) the
close of business on July 19, 2003; (ii) consummation of a merger transaction
with a person or group who acquired Company Common Stock pursuant to a Company
Permitted Offer (as defined in the Company Rights Agreement), and is offering
in the merger the same form of consideration, and not less than the price per
share, paid pursuant to the Company Permitted Offer; (iii) redemption by the
Company as described below; or (iv) exchange by the Company as described
below.

The Company Purchase Price payable, and the number of shares of Company
Series A Participating Preferred Stock or other securities issuable, upon
exercise of the Company Rights will be subject to an adjustment from time to
time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision,

156

combination or reclassification of the Company Series A Participating
Preferred Stock, (ii) upon the grant to holders of the Company Series A
Participating Preferred Stock, certain convertible securities or securities
having rights, privileges and preferences the same as, or more favorable than,
the Company Series A Participating Preferred Stock at less than the current
market price of the Company Series A Participating Preferred Stock or (iii)
upon the distribution to holders of the Company Series A Participating
Preferred Stock of evidences of indebtedness, cash (excluding regular
quarterly cash dividends out of earnings or retained earnings), assets (other
than a dividend payable in Company Series A Participating Preferred Stock) or
of subscription rights or warrants (other than those referred to above).

In the event that, after the first date of public announcement by the
Company or a Company Acquiring Person that a Company Acquiring Person has
become such, the Company is involved in a merger or other business combination
transaction in which the Company Common Stock is exchanged or changed (other
than a merger with a person or group who acquired Company Common Stock
pursuant to a Company Permitted Offer and is offering in the merger not less
than the price paid pursuant to the Company Permitted Offer and the same form
of consideration paid in the Company Permitted Offer), or 50% or more of the
Company's assets or earning power are sold (in one transaction or a series of
transactions), proper provision shall be made so that each holder of a Company
Right (other than such Company Acquiring Person) shall thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Company Right, that number of shares of common stock of the acquiring
company (or, in the event that there is more than one acquiring company, the
acquiring company receiving the greatest portion of the assets or earning
power transferred) which at the time of such transaction would have a market
value of two times the exercise price of the Company Right (such right being
called the "Flip-over Right").

In the event that a Company Acquiring Person becomes such, proper provision
shall be made so that each holder of a Company Right will for a 60 day period
thereafter have the right to receive upon exercise that number of shares of
Company Common Stock having a market value of two times the exercise price of
the Company Right, to the extent available, and then (after all authorized and
unreserved shares of Company Common Stock have been issued), a common stock
equivalent (such as Company Series A Participating Preferred Stock or another
equity security with at least the same economic value as the Company Common
Stock) having a market value of two times the exercise price of the Company
Right, with Company Common Stock to the extent available being issued first
(such right being called the "Flip-in Right").

The holder of a Company Right will continue to have the Flip-over Right
whether or not such holder exercises the Flip-in Right. Upon a Company
Acquiring Person becoming such (other than pursuant to a Permitted Offer), any
Company Rights that are issued to or beneficially owned by such Company
Acquiring Person or, under certain circumstances, transferees thereof, shall
become null and void and thereafter may not be transferred to any person.

With certain exceptions, no adjustments in the Company Purchase Price will
be required until cumulative adjustments require an adjustment of at least 1%
in such Company Purchase Price. No fractions of shares will be issued and, in
lieu thereof, an adjustment in cash will be made based on the market price of
the Company Common Stock on the last trading date prior to the date of
exercise.

At any time prior to the earlier to occur of (i) a person becoming a Company
Acquiring Person or (ii) the expiration of the Company Rights, the Company may
redeem the Company Rights in whole, but not in part, at a price of $.01 in
cash per Company Right (the "Company Rights Redemption Price"), which
redemption shall be effective upon the action of the Company Board in the
exercise of its sole discretion. Additionally, the Company may, following the
Company Stock Acquisition Date, redeem the then outstanding Company Rights in
whole, but not in part, at the Company Rights Redemption Price, following an
event giving rise to, and the expiration of the exercise period for, the Flip-
in Right, provided that redemption is prior to an event giving rise to the
Flip-over Right, either (i) in connection with a merger or other business
combination transaction or series of transactions involving the Company in
which all holders of Company Common Stock are treated alike but not involving
(other than as a holder of Company Common Stock being treated like all other
such holders) a

157

Company Acquiring Person or (ii) if and for as long as the Company Acquiring
Person is not thereafter the beneficial owner of 9.9% of the shares of Company
Common Stock and, at the time of the redemption, no other persons are Company
Acquiring Persons. Upon the effective date of the redemption of the Company
Rights, the right to exercise the Company Rights will terminate and the only
right of the holders of Company Rights will be to receive the Company Rights
Redemption Price.

The Company Board may, at its option, at any time after any person becomes a
Company Acquiring Person, exchange all or part of the then outstanding and
exercisable Company Rights for shares of Company Common Stock at an exchange
ratio of one share of Company Common Stock per Company Right, appropriately
adjusted to reflect any stock split, stock dividend or similar transaction
occurring after the Company Rights Record Date. Notwithstanding the foregoing,
the Company Board is not empowered to effect such exchange at any time after
any person (other than the Company, any subsidiary of the Company, any
employee benefit plan of the Company or any such subsidiary, or any entity
holding Company Common Stock for or pursuant to the terms of any such plan),
together with all affiliates and associates of such person, becomes the
beneficial owner of 50% or more of the Company Common Stock then outstanding.
Immediately upon the action of the Company Board ordering the exchange of any
Company Rights, and without any further action and without any notice, the
right to exercise such Company Rights shall terminate and the only right
thereafter of a holder of such Company Rights shall be to receive that number
of shares of Company Common Stock equal to the number of such Company Rights
held by such holder.

Prior to a person becoming a Company Acquiring Person the Company Board may
amend the Company Rights Agreement without approval of the holders of the
Company Rights in order to cure any ambiguity, to correct or supplement any
provision contained in the Company Rights Agreement, to make any other
provisions with respect to the Company Rights that the Company may deem
necessary or desirable or to lower the threshold at which a Company Acquiring
Person becomes such to not less than the greater of (i) .001% plus the
percentage amount then beneficially owned by any person (other than the
Company and certain of its affiliates) and (ii) 10%. After the time a person
becomes a Company Acquiring Person, the provisions of the Company Rights
Agreement may only be amended by the Company Board to make changes that do not
adversely affect the interests of holders of Company Rights.

The Company Series A Participating Preferred Stock purchasable upon exercise
of the Company Rights will be nonredeemable and junior to any other series of
preferred stock the Company may issue (unless otherwise provided in the terms
of such stock). Each share of Company Series A Participating Preferred Stock
will have a preferential quarterly dividend in an amount equal to 100 times
the dividend declared on each share of Company Common Stock, but in no event
less than $1.00. In the event of liquidation, the holders of Company Series A
Participating Preferred Stock will receive a preferred liquidation payment
equal to $100 per share, plus an amount equal to accrued and unpaid dividends
thereon to the date of such payment. Each share of Company Series A
Participating Preferred Stock will have 100 votes, voting together with the
shares of Company Common Stock as a single voting group. In the event of any
merger, consolidation or other transaction in which shares of Company Common
Stock are exchanged, each share of Company Series A Participating Preferred
Stock will be entitled to receive 100 times the amount and type of
consideration received per share of Company Common Stock. The Company shall
not be required to issue fractions of a share of Company Series A
Participating Preferred Stock.

Until a Company Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends. The Company shall not be required to
issue fractions of Company Rights.

TRANSFER AGENT

The transfer agent and registrar for Company Common Stock is National City
Bank, Cleveland, Ohio.

158

OPERATING COMPANY

GENERAL

The authorized capital stock of Operating Company currently consists of
1,000 shares of Operating Company Common Stock, par value $.25 per share, of
which 100 shares are issued and outstanding and are owned by the Company.
Prior to the Distribution Date, the Operating Company Charter will be amended
by the Operating Company Board and by the Company, as sole stockholder of
Operating Company. Under the amended Operating Company Charter, which will be
substantially in the form set forth as an exhibit to the Registration
Statement, the total number of shares of all classes of stock that Operating
Company will have authority to issue under the Operating Company Charter will
be 160,000,000, of which 150,000,000 will be shares of Operating Company
Common Stock and 10,000,000 will be shares of preferred stock, par value $1.00
per share (the "Operating Company Preferred Stock"). Based on the number of
shares of Company Common Stock outstanding as of , 1998, approximately
shares of Operating Company Common Stock, constituting approximately % of the
authorized Operating Company Common Stock, will be issued to stockholders of
the Company in the Reorganization Transactions. In addition, an aggregate of
approximately 6,600,000 shares of Operating Company Common Stock will be
reserved for issuance pursuant to various option and warrant plans of
Operating Company. All of the shares of Operating Company Common Stock issued
in the Reorganization Transactions will be validly issued, fully paid and
nonassessable. In addition, as part of the consideration to be paid by
Operating Company to the Company for the Transferred Assets, Operating Company
will issue $10 million of the Operating Company Series A Preferred Stock to
the Company. The Company currently expects to sell all of the Operating
Company Series A Preferred Stock to one or more unaffiliated third parties
immediately following the Reorganization Transactions. See "The Distribution
Proposal--The Reorganization Transactions."

COMMON STOCK

The holders of Operating Company Common Stock will be entitled to one vote
per share for each share held of record on all matters submitted to a vote of
stockholders and will be entitled to receive ratably such dividends as may be
declared by the Operating Company Board out of funds legally available
therefor. As a Delaware corporation, Operating Company will be subject to
statutory limitations on the declaration and payment of dividends. In the
event of a liquidation, dissolution or winding up of Operating Company,
holders of Operating Company Common Stock will have the right to a ratable
portion of assets remaining after payment of all liabilities and the aggregate
liquidation preferences of any outstanding shares of Operating Company
Preferred Stock. See "Risk Factors--Payment of Dividends." The holders of
Operating Company Common Stock will have no preemptive rights. All shares of
Operating Company Common Stock issued in the Reorganization Transactions will
be fully paid and non-assessable.

PREFERRED STOCK

The Operating Company Board will be authorized to, without further action by
the stockholders of Operating Company, designate and issue preferred stock in
one or more series and fix the rights and preferences thereof, including the
voting rights, dividend rights and rates, redemption rights (including sinking
fund provisions), conversion rights, liquidation rights, priority as to other
series of preferred stock and any other powers, preferences, privileges and
relative participating, optional or other special rights of the series and the
qualifications, limitations or restrictions thereof.

The rights of the holders of Operating Company Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any shares
of preferred stock that may be issued in the future. Issuance of shares of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of
Operating Company. See "Certain Antitakeover Effects of Certain Charter and
By-laws Provisions and the Company Rights."

See "The Distribution Proposal--The Reorganization Transactions--Operating
Company Series A Preferred Stock" for a description of the Operating Company
Series A Preferred Stock to be issued to the Company.

159

TRANSFER AGENT

The transfer agent and registrar for Operating Company Common Stock will be
National City Bank, Cleveland, Ohio.

CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN
CHARTER AND BY-LAWS PROVISIONS AND THE COMPANY RIGHTS

GENERAL

Both the Company Charter, including certain of the Charter Amendment
Proposals if approved, and the Operating Company Charter will contain
provisions that will make more difficult the acquisition of control of the
Company or Operating Company, respectively, by means of a tender offer, open
market purchases, a proxy fight or otherwise that are not approved by their
respective boards. The Company By-laws and the Operating Company By-laws will
also contain provisions that could have an antitakeover effect.

The purposes of such provisions of the Company Charter and the Company By-
laws and the Operating Company Charter and the Operating Company By-laws are
to discourage certain types of transactions, described below, which may
involve an actual or threatened change of control of the Company or Operating
Company and to encourage persons seeking to acquire control of the Company or
Operating Company to negotiate the terms of any proposed business combination
or offer with their respective boards. The provisions are designed to reduce
the vulnerability of the Company or Operating Company to an unsolicited
proposal for a takeover that does not contemplate the acquisition of all
outstanding shares or is otherwise unfair to stockholders of the Company or
Operating Company, or an unsolicited proposal for the restructuring or sale of
all or part of the Company or Operating Company. The Company believes that, as
a general rule, such proposals would not be in the best interests of the
Company, Operating Company and the stockholders of each. These provisions will
help ensure that the Company Board or the Operating Company Board, if
confronted by a surprise proposal from a third party which has acquired a
block of stock, will have sufficient time to review the proposal and
appropriate alternatives to the proposal and to act in what it believes to be
the best interests of the stockholders.

There has been a marked increase in hostile takeover activity during the
last three years. The Company believes that the provisions discussed herein
may provide some measure of protection for stockholders against certain
potentially coercive takeover tactics. Such takeover tactics include the
accumulation of substantial stock positions in public companies by third
parties as a prelude to proposing a hostile takeover, a restructuring or a
sale of all or part of a company or another similar extraordinary corporate
action. Such actions are often undertaken by a third party without advance
notice to, or consultation with, the management or board of directors of a
company. In many cases, the purchaser seeks representation on a company's
board of directors in order to increase the likelihood that its proposal will
be implemented by a company. If a company resists the efforts of the purchaser
to obtain representation on the company's board, a purchaser may commence a
proxy contest to have its nominees elected to the board of directors in place
of certain directors or in place of the entire board of directors. In some
cases, a purchaser may not truly be interested in taking over a company, but
may use the threat of a proxy fight and/or a bid to take over a company as a
means of forcing the company to repurchase its equity position at a
substantial premium over market price.

The Company believes that the imminent threat of removal of the Company's or
Operating Company's management or board of directors in such situations would
severely curtail the ability of management or the board of directors to
negotiate effectively with such purchasers. Management or the board of
directors would be deprived of the time and information necessary to evaluate
the takeover proposal, to study alternative proposals and to help ensure that
the best price is obtained in any transaction involving the Company or
Operating Company which may ultimately be undertaken. If the real purpose of a
takeover bid were to force the Company or Operating Company to repurchase an
accumulated stock interest at a premium price, management or the board of
directors would face the risk that, if it did not repurchase the purchaser's
stock interest, the Company's or Operating Company's business and management
would be disrupted, perhaps irreparably.

160

These provisions, individually and collectively, will make difficult and may
discourage a merger, tender offer or proxy fight, even if such transaction or
occurrence may be favorable to the interests of the stockholders, and may
delay or frustrate the assumption of control by a holder of a large block of
Operating Company Common Stock or Company Common Stock and the removal of
incumbent management, even if such removal might be beneficial to
stockholders. Furthermore, these provisions may deter or could be used to
frustrate a future takeover attempt which is not approved by the incumbent
board of directors, but which the holders of a majority of the shares may deem
to be in their best interests or in which stockholders may receive a
substantial premium for their stock over prevailing market prices of such
stock. By discouraging takeover attempts these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual or rumored takeover attempts.

Set forth below is a description of such provisions in the Charter Amendment
Proposals and the Company By-laws, and the Operating Company Charter and the
Operating Company By-laws. Such description is intended as a summary only and
is qualified in its entirety by reference to "The Charter Amendment Proposals"
and the Company Charter and the Company By-laws, which are exhibits to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
the Operating Company Charter and the Operating Company By-laws, which will be
filed as exhibits to the Registration Statement. Capitalized terms used and
not defined herein are defined in the Company Charter or the Company By-laws
and the Operating Company Charter or the Operating Company By-laws, as the
case may be.

CLASSIFIED BOARD OF DIRECTORS

The Operating Company Charter will provide for the Operating Company Board
to be divided into three classes serving staggered terms so that directors'
initial terms will expire either at the 1999, 2000 or 2001 Annual Meeting of
Operating Company stockholders. Starting with the 1999 Annual Meeting of
Operating Company stockholders, one class of directors would be elected each
year for three-year terms. See "Management of the Company and Management of
Realty Company and Operating Company After the Reorganization Transactions--
Operating Company--Directors of Operating Company."

The classification of the Operating Company Board will have the effect of
making it more difficult for its stockholders to change the composition of the
Operating Company Board in a relatively short period of time. At least two
annual meetings of stockholders, instead of one, will generally be required to
effect a change in a majority of the Operating Company Board. Such a delay may
help ensure that the Operating Company Board, if confronted by a stockholder's
attempt to force a stock repurchase at a premium above market price, a proxy
contest or an extraordinary corporate transaction, will have sufficient time
to review the proposal and appropriate alternatives to the proposal and to act
in what it believes are the best interests of the stockholders. The Company
also believes that a classified board of directors will help assure the
continuity and stability of the Operating Company Board and Operating
Company's business strategies and policies as determined by the Operating
Company Board, because generally a majority of the directors at any given time
will have had prior experience as directors of Operating Company.

The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
Operating Company even though such an attempt might be beneficial to Operating
Company and its stockholders. The classified board provision could thus
increase the likelihood that incumbent directors will retain their positions.

NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES

The Operating Company Charter will provide that the number of directors will
be fixed from time to time by the Operating Company Board. Accordingly, the
Operating Company Board could prevent any stockholder from obtaining majority
representation on the Operating Company Board by enlarging such board of
directors and filling the new directorships with its own nominees.

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Moreover, while the Company Charter currently permits removal of directors
with or without cause by vote of the holders of a majority of the outstanding
stock, the Operating Company Charter will provide that directors may be
removed only for cause and only by the affirmative vote of holders of 66 2/3%
of the voting power of all of the then-outstanding shares of Operating Company
Common Stock voting together as a single class. This provision would preclude
stockholders from removing incumbent directors without cause and filling the
vacancies created by such removal with their own nominees.

LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT; ANNUAL MEETINGS

Under the Delaware Law, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken by the
stockholders of a Delaware corporation may be taken without a meeting, without
prior notice and without a stockholder vote if a written consent setting forth
the action to be taken is signed by the holders of outstanding stock having
the requisite number of shares that would be necessary to authorize such
action at a meeting at which all shares entitled to vote thereon were present
and voted. The Company Charter currently provides that stockholders may take
action by written consent if a consent in writing, setting forth the actions
so taken, shall be signed by the holders of at least 80% of all the issued and
outstanding shares of stock of the Company entitled to vote thereon. The
Operating Company Charter will provide that stockholder action can be taken
only at an annual or special meeting of stockholders, and prohibit stockholder
action by written consent in lieu of a meeting. The Company By-laws provide
and the Operating Company By-laws will provide that special meetings of
stockholders can be called only by the Chairman of the Board or pursuant to
resolution of the respective board of directors. Stockholders are not
permitted to call a special meeting or to require that the respective board of
directors call a special meeting of stockholders.

The provisions of the Company Charter and the Operating Company Charter
restricting stockholder action by written consent may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by the Chairman of the Board or pursuant to
a board resolution. These provisions would also prevent the holders of a
majority of the voting power of Company Common Stock or Operating Company
Common Stock, as the case may be, from using the written consent procedure to
take stockholder action and, in the case of Operating Company, from taking
action by consent without giving all the stockholders of Operating Company
entitled to vote on a proposed action the opportunity to participate in
determining such proposed action. Moreover, a stockholder could not force
stockholder consideration of a proposal over the opposition of the Company
Board or the Operating Company Board, as the case may be, by calling a special
meeting of stockholders prior to the time the board believed such
consideration to be appropriate.

ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS

The Operating Company By-laws will establish an advance notice procedure
with regard to the nomination, other than by or at the direction of the
respective board of directors, of candidates for election as directors (the
"Nomination Procedure") and, also with respect to the Company By-laws, with
regard to certain matters to be brought before an annual meeting of
stockholders (the "Business Procedure").

Pursuant to the Operating Company By-laws, the Nomination Procedure provides
that only persons who are nominated by, or at the direction of, the board of
directors or by a stockholder of record who has given timely prior written
notice to the Secretary of the Company or Operating Company, respectively,
prior to the meeting at which directors are to be elected will be eligible for
election as directors. The Business Procedure provides that at an annual
meeting only such business can be conducted as has been brought before the
meeting pursuant to the notice of the meeting, by, or at the direction of, the
board of directors or by a stockholder of record who has given timely prior
written notice to the Secretary of such stockholder's intention to bring such
business before the meeting. To be timely, notice must generally be received
by the Company or Operating Company, as applicable, not less than 60 days nor
more than 90 days prior to the first anniversary of the previous year's annual
meeting. For notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received not earlier than the 90th day before such meeting and not later

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than the later of (1) the 60th day prior to such meeting and (2) the tenth day
after public announcement of the date of such meeting is first made.

Under the Nomination Procedure, notice to Operating Company from a
stockholder who proposes to nominate a person at a meeting for election as
director must contain certain information about that person, including such
person's consent to be nominated and such information as would be required to
be included in a proxy statement soliciting proxies for the election of the
proposed nominee, and certain information about the stockholder proposing to
nominate that person or the beneficial owner, if any, on whose behalf the
nomination is made. Under the Business Procedure, notice relating to the
conduct of business must contain certain information about such business and
about the stockholder who proposes to bring the business before the meeting
including a brief description of the business the stockholder proposes to
bring before the meeting, the reasons for conducting such business at such
meeting, the class and number of shares of stock beneficially owned by such
stockholder, and by the beneficial owner, if any, on whose behalf the proposal
is made, and any material interest of such stockholder, and such beneficial
owner in the business so proposed. If the Chairman or other officer presiding
at a meeting determines that a person was not nominated in accordance with the
Nomination Procedure, such person will not be eligible for election as a
director, or if he or she determines that other business was not properly
brought before such meeting in accordance with the Business Procedure, such
business will not be conducted at such meeting.

The purpose of the Nomination Procedure is, by requiring advance notice of
nominations by stockholders, to afford the Operating Company Board a
meaningful opportunity to consider the qualifications of the proposed nominees
and, to the extent deemed necessary or desirable by the Operating Company
Board, to inform stockholders about such qualifications. The purpose of the
Business Procedure is, by requiring advance notice of proposed business, to
provide a more orderly procedure for conducting annual meetings of
stockholders and, to the extent deemed necessary or desirable by the Operating
Company Board or the Company Board to provide such board with a meaningful
opportunity to inform stockholders, prior to such meetings, of any business
proposed to be conducted at such meetings, together with any recommendation as
to the board's position or belief as to action to be taken with respect to
such business, so as to enable stockholders better to determine whether they
desire to attend such meeting or grant a proxy to the board as to the
disposition of any such business. Although the Operating Company By-laws will
not give the Operating Company Board any power to approve or disapprove
stockholder nominations for the election of directors or, also in the case of
the Company By-laws, of any other business desired by a stockholder to be
conducted at an annual meeting, the Operating Company By-laws may have the
effect of precluding a nomination for the election of directors or, also in
the case of the Company Bylaws, precluding the conducting of business at a
particular annual meeting if the proper procedures are not followed, and may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
the Company or Operating Company, as the case may be, even if the conduct of
such solicitation or such attempt might be beneficial to the Company or
Operating Company and their stockholders.

PREFERRED STOCK

The Company Charter authorizes and the Operating Company Charter will
authorize the Company Board and the Operating Company Board, respectively, to
establish series of preferred stock and to determine, with respect to any
series of preferred stock, the voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions thereof as are stated in the board resolutions providing for such
series. The number of authorized shares of Company Preferred Stock is
1,000,000 (and, if the Company Charter Amendment Proposals are approved, the
number of authorized shares of Company Preferred Stock will be 10,000,000 and
the number of authorized shares of Operating Company Preferred Stock is
10,000,000.

The Company and Operating Company believe that the availability of such
preferred stock will provide the Company and Operating Company with increased
flexibility in structuring possible future financings and acquisitions, and in
meeting other corporate needs which might arise. Having such authorized shares
available

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for issuance will allow the Company and Operating Company to issue shares of
preferred stock without the expense and delay of a special stockholder's
meeting. The authorized shares of preferred stock, as well as shares of common
stock, will be available for issuance without further action by stockholders,
unless such action is required by applicable law or the rules of any stock
exchange on which the Company and Operating Company securities may be listed.
The Company Board and the Operating Company Board could issue a series of
preferred stock that could, subject to certain limitations imposed by the
securities laws and stock exchange rules, depending on the terms of such
series, impede the completion of a merger, tender offer or other takeover
attempt. For instance, such series of preferred stock might impede a business
combination by including class voting rights that would enable the holder to
block such a transaction. The Company Board and the Operating Company Board
will make any determination to issue such shares based on their judgment as to
the best interests of either company and its then existing stockholders. The
Company Board or the Operating Company Board, in so acting, could issue
preferred stock having terms which could discourage an acquisition attempt or
other transaction that some, or a majority, of the stockholders might believe
to be in their best interests or in which stockholders might receive a premium
for their stock over the then market price of such stock. The authorized and
unissued preferred stock of each of the Company and Operating Company, as well
as the authorized and unissued common stock of the Company and Operating
Company, would be available, and the Company Charter and the Operating Company
Charter explicitly authorize use of their capital stock, for the above
purposes.

COMMON STOCK

The Company Charter presently authorizes the issuance of 180,000,000 shares
of Company Common Stock. Effective as of the Distribution, the Operating
Company Charter will authorize the Operating Company Board to issue up to
150,000,000 shares of Operating Company Common Stock of which approximately
million are expected to be issued in the Distribution.

The authorized but unissued shares of Company Common Stock will provide the
Company, and the authorized but unissued Operating Company Common Stock will
provide Operating Company, with the ability to meet future capital needs and
to provide shares for possible acquisitions and stock dividends or stock
splits. The Company Board and the Operating Company Board would each have the
ability, in the event of a proposed merger, tender offer or other attempt to
gain control of the company that was not approved by such board, to issue
additional common stock that would dilute the stock ownership of the acquiror.
Except as provided under the terms of the Company Rights Agreement, the
Company does not currently contemplate any issuance of common stock that might
be deemed to have an antitakeover purpose.

OWNERSHIP LIMITATION PROVISION

The Ownership Limitation Provision contained in the Realty Company Charter
Amendments and the Operating Company Charter provide that, subject to certain
exceptions specified in each such Charter, no person may own, or be deemed to
own by virtue of the applicable attribution provision of the Code, more than
the Ownership Limit. Each of the Realty Company Board and Operating Company
Board, as the case may be, may, but in no event will be required to, waive the
Ownership Limit if such Board determines that such ownership will not
jeopardize Realty Company's status as a REIT. As a condition of such waiver,
each of the Realty Company Board and Operating Company Board may require
opinions of counsel satisfactory to such Board and undertakings or
representations from the applicant with respect to preserving the REIT status
of Realty Company. In the case of Realty Company, the Ownership Limitation
Provision will not apply if the Realty Company Board and the holders of at
least 66 2/3% of the outstanding shares of capital stock entitled to vote on
such matter determine that it is no longer in the best interest of Realty
Company to attempt to qualify, or to continue to qualify, as a REIT.

Any purported transfer of capital stock of Realty Company or Operating
Company and/or any other event that would otherwise result in any person or
entity violating the Ownership Limit will be void and of no force or effect as
to that number of shares in excess of the Ownership Limit and the Prohibited
Transferee shall acquire no right or interest (or, in the case of any event
other than a purported transfer, the Prohibited Owner shall cease

164

to own any right or interest) in such excess shares. In addition, if any
transfer of capital stock of Realty Company or any other event would cause
Realty Company to become "closely held" under the Code or otherwise to fail to
qualify as a REIT under the Code, then such purported transfer will be void
and of no force or effect as to that number of shares in excess of the number
that could have been transferred without such result and the Prohibited
Transferee shall acquire no right or interest (or, in the case of any event
other than a transfer, the Prohibited Owner shall cease to own any right or
interest) in such excess shares. Also, if any purported transfer of capital
stock of Realty Company or any other event would otherwise cause Realty
Company to own, or be deemed to own by virtue of the applicable attribution
provisions of the Code, 10% or more of the ownership interests in Operating
Company or in any sublessee, or if any purported transfer of capital stock of
Operating Company or any other event caused Operating Company to own, or be
deemed to own by virtue of the applicable attribution provisions of the Code,
10% or more of the ownership interests of Realty Company, then any such
purported transfer will be void and of no force or effect as to that number of
shares in excess of the number that could have been transferred without such
result, and the Prohibited Transferee shall acquire no right or interest (or,
in the case of any event other than a transfer, the Prohibited Owner shall
cease to own any right or interest) in such excess shares.

Any such excess shares described above will be transferred automatically, by
operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by Realty Company or Operating Company, as
the case may be (the "Beneficiary"). The trustee of the trust who shall be
designated by Realty Company or Operating Company, as the case may be, and be
unaffiliated with Realty Company and any Prohibited Owner, will be empowered
to sell such excess shares to a qualified person or entity and distribute to a
Prohibited Transferee an amount equal to the lesser of the price paid by the
Prohibited Transferee for such excess shares or the sales proceeds received by
the trust for such excess shares. In the case of any excess shares resulting
from any event other than a transfer, or from a transfer for no consideration,
the trustee will be empowered to sell such excess shares to a qualified person
or entity and distribute to the Prohibited Owner an amount equal to the lesser
of the fair market value of such excess shares on the date of such event or
the sales proceeds received by the trust for such excess shares. Prior to a
sale of any such excess shares by the trust, the trustee will be entitled to
receive, in trust for the benefit of the Beneficiary, all dividends and other
distributions paid by Realty Company or Operating Company, as the case may be,
with respect to such excess shares, and also will be entitled to exercise all
voting rights with respect to such excess shares.

The Ownership Limitation Provision may have the effect of precluding an
acquisition of control of Realty Company or Operating Company without approval
of the Realty Company Board or Operating Company Board, as the case may be.
See "The Charter Amendment Proposals--REIT Charter Amendments."

AMENDMENT OF CERTAIN CHARTER PROVISIONS AND THE BY-LAWS

The Company Charter may currently be amended by the affirmative vote of a
majority of the outstanding shares of Company Common Stock, and the Company
By-laws may currently be amended by the affirmative vote of 66 2/3% of the
outstanding shares of Company Common Stock. The Operating Company Charter will
contain provisions requiring the affirmative vote of the holders of at least
two-thirds of the outstanding Operating Company Common Stock to amend the
provisions of the Operating Company Charter pertaining to classification of
the Operating Company Board, the number of directors and removal of directors.
The Company By-laws require, and the Operating Company Charter and the
Operating Company By-laws will also require, the vote of at least 66 2/3% of
the outstanding Company Common Stock and the Operating Company Common Stock,
respectively, for stockholders to adopt, amend or repeal any provision of the
Company By-laws or the Operating Company By-laws, respectively. These
provisions will make it more difficult for stockholders to make changes in the
Company By-laws or the Operating Company Charter and the Operating Company By-
laws, respectively, including changes designed to facilitate the exercise of
control over the Company or Operating Company. In

165

addition, the requirement for approval by at least a two-thirds stockholder
vote will enable the holders of a minority of the Company's or Operating
Company's capital stock to prevent holders of a less-than two thirds majority
from amending the Company By-laws or the Operating Company Charter and the
Operating Company By-laws, respectively.

PREFERRED SHARE PURCHASE RIGHTS

The Company has entered into the Company Rights Agreement. The Company
Rights will have certain antitakeover effects. The Company Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
and thereby effect a change in the composition of the Company Board on terms
not approved by the Company Board, including by means of a tender offer at a
premium to the market price, other than an offer conditioned on a substantial
number of Company Rights being acquired. The Company Rights should not
interfere with any merger or business combination approved by the Company
Board since the Company Rights may be redeemed by the Company at the
applicable redemption price prior to the time that a person or group has
become a Company Acquiring Person. See "Description of Capital Stock--Realty
Company."

ANTITAKEOVER LEGISLATION

Business Combinations (as defined herein) of either the Company or Operating
Company would be subject to the applicable voting requirements, if any,
specified under the Delaware Law, the Company Charter or the Operating Company
Charter, as the case may be, and the rules of the NYSE or other applicable
stock exchange. In general, under current provisions of the Delaware Law, most
mergers and consolidations, the sale of substantially all of the assets and
any reclassification of securities or plan for the dissolution of a
corporation must be approved by the board of directors of the corporation and
by the vote of the holders of a majority of the outstanding shares entitled to
vote thereon. Under each of the Company Charter and the Operating Company
Charter, the holder of each currently outstanding share of Company Common
Stock and Operating Company Common Stock, respectively, is entitled to one
vote per share on all such matters. Under the rules of the NYSE, acquisitions
involving substantial security holders or the issuance of additional shares of
common stock aggregating 20% or more of the outstanding shares of common stock
require the approval of the holders of a majority of the shares voting
thereon.

In addition, Section 203 of the Delaware Law ("Section 203") prohibits
certain "Business Combination" (as defined in Section 203) transactions
between a publicly held Delaware corporation, such as the Company or Operating
Company, and any Interested Stockholder (as defined herein) for a period of
three years after the date the Interested Stockholder became an Interested
Stockholder, unless (i) prior to the Interested Stockholder becoming an
Interested Stockholder, either the proposed Business Combination or the
proposed acquisition of stock which would make such Interested Stockholder an
Interested Stockholder was approved by the company's board of directors, (ii)
in the same transaction in which the Interested Stockholder becomes an
Interested Stockholder, the Interested Stockholder acquires at least 85% of
the voting stock of the company (excluding shares owned by directors who are
also officers and certain shares held in employee stock plans), or (iii) the
Interested Stockholder obtains the approval of a company's board of directors
and the approval of the holders of at least two-thirds of the outstanding
shares of a company's voting stock other than any shares of voting stock held
by the Interested Stockholder.

For purposes of Section 203, an "Interested Stockholder" is any person that
(i) beneficially owns 15% or more of the outstanding voting stock of the
company or (ii) is an affiliate or associate of the company and at any time
within the preceding three-year period was the beneficial owner of 15% or more
of the outstanding voting stock of the company, together, in each case, with
the affiliates and associates of such person.

The Business Combination transactions to which Section 203 applies include:
(i) any merger or consolidation with an Interested Stockholder; (ii) any sale,
lease, exchange, or other disposition to or with an Interested Stockholder
(except proportionately as a stockholder of the company) of 10% or more of the

166

company's assets; (iii) any issuance or transfer of stock to the Interested
Stockholder except pursuant to the exercise of previously outstanding options
or rights; (iv) any transaction involving the company that has the effect of
increasing the Interested Stockholder's percentage ownership; and (v) any
loan, guarantee, or other financial benefit provided by or through the company
to the Interested Stockholder, except proportionately as a stockholder of such
company.

Section 203 should encourage persons interested in acquiring the Company or
Operating Company to negotiate in advance with the relevant board of directors
since the higher stockholder voting requirements imposed would not be invoked
if such person, prior to acquiring 15% of the Company's or Operating Company's
voting stock, as the case may be, obtains the approval of the relevant board
of directors for such stock acquisition or for the proposed business
combination transaction (unless such person acquires 85% or more of such
voting stock in the transaction). As stated above, in the event of a proposed
acquisition of the Company or Operating Company, the Company believes that the
interests of the Company's or Operating Company's stockholders will best be
served by a transaction that results from negotiations based upon careful
consideration of the proposed terms, such as the price to be paid to minority
stockholders, the form of consideration paid and tax effects of the
transaction.

In addition, Section 203 should tend to prevent certain of the potential
inequities of business combinations which are part of a two-tier transaction.
Any merger, consolidation or similar transaction following a partial tender
offer not approved by a board of directors under Section 203 would have to be
approved by the holders of at least two-thirds of the remaining shares of
stock unless the acquiror obtains 85% or more of Company's voting stock in
such partial tender offer. Section 203 should also tend to discourage the
accumulation of large blocks of the Company's or Operating Company's stock by
third parties which each of the respective boards of directors believes can be
disruptive to the stability of each of the respective companies' important
relationships with its employees, customers and major lenders, since the
acquiror would run the risk of being required to wait three years in order to
eliminate the remaining public stockholders of the Company or Operating
Company if the two-thirds stockholder vote could not be obtained.

Section 203 will not prevent a hostile takeover of the Company or Operating
Company. It may, however, make more difficult or discourage a takeover of the
Company or Operating Company or the acquisition of control of the Company or
Operating Company by a principal stockholder and thus the removal of incumbent
management. Some stockholders may find this disadvantageous in that they may
not be afforded the opportunity to participate in takeovers which are not
approved by the board of directors, but in which they might receive, for at
least some of their shares, a substantial premium above the market price at
the time of a tender offer or other acquisition transaction. Section 203
should not prevent or discourage transactions in which an acquiring person is
willing to negotiate in good faith with the Company Board or the Operating
Company Board, as the case may be, and is prepared to pay the same price to
all stockholders of each class of the Company's or Operating Company's voting
stock, respectively.

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LIABILITY AND INDEMNIFICATION OF
OFFICERS AND DIRECTORS OF OPERATING COMPANY

LIMITATION OF LIABILITY OF OPERATING COMPANY DIRECTORS

The Operating Company Charter will provide that a director of Operating
Company will not be personally liable to Operating Company or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to Operating
Company 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 Delaware Law, which concerns unlawful payments of
dividends, stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit.

While the Operating Company Charter will provide directors with protection
from awards for monetary damages for breaches of their duty of care, it does
not eliminate such duty. Accordingly, the Operating Company Charter will have
no effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care. The
provisions of the Operating Company Charter described above apply to an
officer of Operating Company only if he or she is a director of Operating
Company and is acting in his or her capacity as director, and do not apply to
officers of Operating Company who are not directors.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Operating Company Charter will provide that each person who is or was or
has agreed to become a director or officer of Operating Company, or each such
person who is or was serving or has agreed to serve at the request of
Operating Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, will be
indemnified by Operating Company, in accordance with the Operating Company By-
laws, to the fullest extent permitted from time to time by the Delaware Law,
as the same exists or may hereafter be amended or any other applicable laws as
presently or hereafter in effect. Operating Company may be required to
indemnify any person seeking indemnification in connection with a proceeding
(or part thereof) initiated by such person only if such proceeding (or part
thereof) was authorized by the Operating Company Board or is a proceeding to
enforce such person's claim to indemnification pursuant to the rights granted
by the Operating Company Charter or otherwise by Operating Company. In
addition, Operating Company may enter into one or more agreements with any
person providing for indemnification greater than or different from that
provided in the Operating Company Charter.

The Operating Company By-laws will provide that each 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 (a "Proceeding"), by reason of the fact that he or she or a
person of whom he or she is the legal representative is or was a director,
officer or employee of Operating Company or any such person who is or was
serving at the request of Operating Company as a director, officer, employee
or agent of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such Proceeding is alleged action in an official capacity
as a director, officer or employee or in any other capacity while serving as a
director, officer or employee, will be indemnified and held harmless by
Operating Company to the fullest extent authorized by the Delaware Law as the
same exists or may in the future be amended against all expense, liability and
loss (including attorneys' fees, judgments, fines Employee Retirement Income
Security Act of 1974, as amended, excise taxes or penalties and amounts paid
or to be paid in settlement) reasonably incurred or suffered by such person in
connection therewith; provided, however, except as described in the next
paragraph with respect to Proceedings to enforce rights to indemnification,
Operating Company will indemnify any such person seeking indemnification in
connection with a Proceeding (or part thereof) initiated by such person only
if such Proceeding (or part thereof) was authorized by the Operating Company
Board.

Pursuant to the Operating Company By-laws, if a claim is not paid in full by
Operating Company within 30 days after a written claim has been received by
Operating Company, the claimant may at any time thereafter

168

bring suit against Operating Company to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant will also be entitled to
be paid the expense of prosecuting such claim. The Operating Company By-laws
will provide that it will be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required makes it
permissible under the Delaware Law for Operating Company to indemnify the
claimant for the amount claimed, but the burden of providing such defense will
be on Operating Company.

The Operating Company By-laws will provide that the right to indemnification
conferred therein is a contract right and includes the right to be paid by
Operating Company the expenses incurred in defending any Proceeding in advance
of its final disposition, subject to certain exceptions and conditions.

The Operating Company By-laws will provide that the right to indemnification
and the payment of expenses incurred in defending a Proceeding in advance of
its final disposition conferred in the Operating Company By-laws will not be
exclusive of any other right which any person may have or may in the future
acquire under any statute, provision of the Operating Company Charter, the
Operating Company By-laws, agreement, vote of stockholders or disinterested
directors or otherwise.

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SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of the Company Common
Stock to file initial stock ownership reports and reports of changes in
ownership with the Commission and the NYSE. Based on a review of these reports
and on written representations from the reporting persons that no other
reports were required, the Company believes that applicable Section 16(a)
reporting requirements were complied with for all transactions which occurred
in 1997.

SUBMISSION OF STOCKHOLDER PROPOSALS
FOR 1999 ANNUAL MEETING

For inclusion in the Company's proxy statement and form of proxy, any
proposals of stockholders intended to be presented at the 1999 Annual Meeting
of Stockholders of the Company have to be received by the Company no later
than , 1998.

Subject to completion of the Reorganization Transactions, it is expected
that the 1999 Annual Meeting of Stockholders of Operating Company will be held
on . For inclusion in Operating Company's proxy statement and form of
proxy, any proposals of stockholders intended to be presented at the 1999
Annual Meeting of Stockholders of Operating Company must be received by
Operating Company no later than , 1998.

ADDITIONAL INFORMATION

The Company is subject to the informational reporting requirements of the
Exchange Act and in accordance therewith, files reports, proxy and information
statements and other information with the Commission. Such reports, proxy and
information statements and other information may be inspected and copied at
the public reference facilities of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the following
Regional Offices: 7 World Trade Center, 14th Floor, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained from the Commission by mail at prescribed rates.
Requests should be directed to the Commission's Public Reference Section, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. In
addition, the Commission maintains a website (http:/www.sec.gov) that contains
such reports, proxy statements and other information filed by the Company.
Information filed by the Company can be inspected at the offices of the NYSE,
20 Broad Street, New York, New York 10005.

Following the Reorganization Transactions, Operating Company will be
required to comply with the reporting requirements of the Exchange Act and, in
accordance therewith, to file annual and quarterly reports, proxy statements
and other information with the Commission. Additionally, Operating Company
will be required to provide annual reports containing audited financial
statements to its stockholders in connection with its annual meetings of
stockholders. After the Reorganization Transactions, such reports, proxy
statements and other information will be available to be inspected and copied
at the public reference facilities of the Commission or obtained by mail or
over the internet from the Commission, as described above.

THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. DOCUMENTS RELATING TO THE COMPANY, EXCLUDING
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
HEREIN, ARE AVAILABLE WITHOUT CHARGE UPON REQUEST TO SECRETARY, VENCOR, INC.
3300 AEGON CENTER, 400 WEST MARKET STREET, LOUISVILLE, KENTUCKY 40202.
TELEPHONE REQUESTS MAY BE DIRECTED TO JILL L. FORCE AT (502) 596-7300.

The following documents filed with the Commission by the Company (File No.
1-10989) are incorporated herein by reference: (a) Annual Report on Form 10-K
of the Company for the fiscal year ended December 31,

170

1996; (b) the portions of the Company Proxy Statement for the 1997 Annual
Meeting of Stockholders that have been incorporated by reference in the 1996
Company 10-K; (c) Quarterly Reports on Form 10-Q for the quarterly periods
ended March 31, 1997, June 30, 1997 and September 30, 1997; (d) Current
Reports on Form 8-K and Form 8-K/A filed on April 1, 1997, May 23, 1997, July
3, 1997, July 31, 1997, August 11, 1997, October 21, 1997, October 22, 1997
and October 23, 1997; (e) the description of Company Common Stock contained in
the Company's Registration Statement on Form 8-A filed with the Commission on
January 22, 1992 and (f) the description of the Company Participating
Preferred Stock Purchase Rights contained in the Company's Registration
Statement on Form 8-A and Form 8-A/A filed with the Commission on July 21,
1993 and August 11, 1995, respectively.

All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Proxy Statement and prior to the date of the Annual Meeting shall be deemed to
be incorporated by reference herein and to be a part hereof from the date of
filing of such reports and other documents. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Proxy
Statement to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.

171

VENCOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

PAGE
----

Report of Independent Auditors............................................ F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1997, 1996 and 1995.................................................... F-3
Consolidated Balance Sheet for the years ended December 31, 1997 and
1996................................................................... F-4
Consolidated Statement of Stockholders' Equity for the years ended De-
cember 31, 1997, 1996 and 1995......................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Quarterly Consolidated Financial Information (Unaudited)................ F-24
Financial Statement Schedules (a):
Schedule II--Valuation and Qualifying Accounts for the years ended De-
cember 31, 1997, 1996 and 1995......................................... F-25

- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Vencor, Inc.

We have audited the accompanying consolidated balance sheet of Vencor, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed on page F-1. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Vencor, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

ERNST & YOUNG LLP

Louisville, Kentucky
January 26, 1998

F-2

VENCOR, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997 1996 1995
---------- ---------- ----------

Revenues................................... $3,116,004 $2,577,783 $2,323,956
---------- ---------- ----------
Salaries, wages and benefits............... 1,788,053 1,490,938 1,360,018
Supplies................................... 303,140 261,621 233,066
Rent....................................... 89,474 77,795 79,476
Other operating expenses................... 490,327 405,797 372,657
Depreciation and amortization.............. 123,865 99,533 89,478
Interest expense........................... 102,736 45,922 60,918
Investment income.......................... (6,057) (12,203) (13,444)
Non-recurring transactions................. - 125,200 109,423
---------- ---------- ----------
2,891,538 2,494,603 2,291,592
---------- ---------- ----------
Income before income taxes................. 224,466 83,180 32,364
Provision for income taxes................. 89,338 35,175 24,001
---------- ---------- ----------
Income from operations..................... 135,128 48,005 8,363
Extraordinary loss on extinguishment of
debt, net of income
tax benefit of $2,634 in 1997 and $14,839
in 1995................................... (4,195) - (23,252)
---------- ---------- ----------
Net income (loss)....................... 130,933 48,005 (14,889)
Preferred stock dividend requirements and
other items............................... - - (5,280)
Gain on redemption of preferred stock...... - - 10,176
---------- ---------- ----------
Income (loss) available to common stock-
holders................................ $ 130,933 $ 48,005 $ (9,993)
========== ========== ==========
Earnings (loss) per common share:
Basic:
Income from operations................... $ 1.96 $ 0.69 $ 0.22
Extraordinary loss on extinguishment of
debt.................................... (0.06) - (0.38)
---------- ---------- ----------
Net income (loss)....................... $ 1.90 $ 0.69 $ (0.16)
========== ========== ==========
Diluted:
Income from operations................... $ 1.92 $ 0.68 $ 0.29
Extraordinary loss on extinguishment of
debt.................................... (0.06) - (0.32)
---------- ---------- ----------
Net income (loss)....................... $ 1.86 $ 0.68 $ (0.03)
========== ========== ==========
Shares used in computing earnings (loss)
per common share:
Basic.................................... 68,938 69,704 61,196
Diluted.................................. 70,359 70,702 71,967

See accompanying notes.

F-3

VENCOR, INC.
CONSOLIDATED BALANCE SHEET
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997 1996
---------- ----------

ASSETS
Current assets:
Cash and cash equivalents............................. $ 82,473 $ 112,466
Accounts and notes receivable less allowance for loss
of $63,551--1997
and $23,915--1996.................................... 619,068 420,758
Inventories........................................... 27,605 24,939
Income taxes.......................................... 73,413 67,808
Other................................................. 55,589 35,162
---------- ----------
858,148 661,133
Property and equipment, at cost:
Land.................................................. 144,074 113,749
Buildings............................................. 1,084,770 975,399
Equipment............................................. 592,335 435,787
Construction in progress (estimated cost to complete
and equip after December 31, 1997--$119,000)......... 174,851 84,835
---------- ----------
1,996,030 1,609,770
Accumulated depreciation.............................. (488,212) (416,608)
---------- ----------
1,507,818 1,193,162
Goodwill less accumulated amortization of $18,886--1997
and $7,228--1996...................................... 659,311 14,644
Investments in affiliates.............................. 178,301 14,837
Other.................................................. 131,161 85,080
---------- ----------
$3,334,739 $1,968,856
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 106,019 $ 103,518
Salaries, wages and other compensation................ 163,642 111,366
Other accrued liabilities............................. 115,933 71,434
Long-term debt due within one year.................... 27,468 54,692
---------- ----------
413,062 341,010

Long-term debt......................................... 1,919,624 710,507
Deferred credits and other liabilities................. 94,653 84,053
Minority interests in equity of consolidated entities.. 2,050 36,195
Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 1,000
shares; none issued and outstanding.................. - -
Common stock, $0.25 par value; authorized 180,000
shares;
issued 73,470 shares--1997 and 72,615 shares--1996... 18,368 18,154
Capital in excess of par value........................ 766,078 713,527
Retained earnings..................................... 281,803 150,870
---------- ----------
1,066,249 882,551
Common treasury stock; 6,159 shares--1997 and 3,730
shares--1996......................................... (160,899) (85,460)
---------- ----------
905,350 797,091
---------- ----------
$3,334,739 $1,968,856
========== ==========

See accompanying notes.

F-4

VENCOR, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

SHARES PAR VALUE
-------------------------------- ----------------- CAPITAL IN COMMON
PREFERRED COMMON COMMON PREFERRED COMMON EXCESS OF RETAINED TREASURY
STOCK STOCK TREASURY STOCK STOCK STOCK PAR VALUE EARNINGS STOCK TOTAL
--------- ------ -------------- --------- ------- ---------- -------- --------- --------

Balances, December 31,
1994................... 98 59,178 (2,174) $15 $14,794 $472,661 $136,614 $ (27,630) $596,454
Net loss............... (14,889) (14,889)
Cash dividends on
preferred stock
($67.98 per share) and
provision for
redemption value...... (2,380) (2,380)
In-kind dividend on
preferred stock....... 3 2,900 (2,900) -
Issuance of common
stock in connection
with employee benefit
plans................. 664 (150) 166 24,111 (11,098) 13,179
Issuance of common
stock in connection
with acquisitions..... 439 (3,227) 5,498 2,271
Increase in value of
common stock purchase
warrants of acquired
entities.............. 9,810 (9,810) -
Public offering of
common stock.......... 2,200 550 65,944 66,494
Conversion of long-term
debt.................. 7,260 1,815 149,645 151,460
Issuance of common
stock to grantor
trust................. 3,927 (3,927) 982 87,297 (88,279) -
Hillhaven Merger:
Issuance of common
stock and
related income tax
benefits.............. 2,732 683 51,561 52,244
Termination of grantor
trust................. (3,786) 3,786 (946) (87,146) 88,279 187
Redemption of preferred
stock................. (101) (15) (91,253) (91,268)
Other.................. (17) 1 (4) 2,074 (3,770) 12 (1,688)
---- ------ ------ --- ------- -------- -------- --------- --------
Balances, December 31,
1995................... - 72,158 (2,025) - 18,040 684,377 102,865 (33,218) 772,064
Net income............. 48,005 48,005
Increase in equity
resulting from initial
public offering of
Atria Communities,
Inc. common stock..... 19,828 19,828
Issuance of common
stock in connection
with employee benefit
plans................. 457 246 114 9,223 3,083 12,420
Repurchase of common
stock................. (1,950) (55,305) (55,305)
Other.................. (1) 99 (20) 79
---- ------ ------ --- ------- -------- -------- --------- --------
Balances, December 31,
1996................... - 72,615 (3,730) - 18,154 713,527 150,870 (85,460) 797,091
Net income............. 130,933 130,933
Increase in equity
resulting from
secondary public
offering of Atria
Communities, Inc.
common stock.......... 22,553 22,553
Issuance of common
stock in connection
with employee benefit
plans................. 855 496 214 29,336 6,212 35,762
Repurchase of common
stock................. (2,925) (81,651) (81,651)
Other.................. 662 662
---- ------ ------ --- ------- -------- -------- --------- --------
Balances, December 31,
1997................... - 73,470 (6,159) - $18,368 $766,078 $281,803 $(160,899) $905,350
==== ====== ====== === ======= ======== ======== ========= ========

See accompanying notes.

F-5

VENCOR, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

1997 1996 1995
----------- -------- ---------

Cash flows from operating activities:
Net income (loss)........................... $ 130,933 $ 48,005 $ (14,889)
Adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
Depreciation and amortization.............. 123,865 99,533 89,478
Provision for doubtful accounts............ 31,176 15,001 7,851
Deferred income taxes...................... 53,164 (34,814) (23,570)
Extraordinary loss on extinguishment of
debt...................................... 6,829 - 38,091
Non-recurring transactions................. - 121,789 102,166
Other...................................... (9,737) (9,316) 6,958
Change in operating assets and liabilities:
Accounts and notes receivable............. (87,914) (64,304) (107,761)
Inventories and other assets.............. (2,309) 1,284 (3,478)
Accounts payable.......................... (14,177) 2,165 22,157
Income taxes payable...................... 22,850 (23,892) 5,356
Other accrued liabilities................. 16,251 28,088 (8,722)
----------- -------- ---------
Net cash provided by operating
activities............................. 270,931 183,539 113,637
----------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment.......... (281,672) (135,027) (136,893)
Acquisition of TheraTx, Incorporated........ (359,439) - -
Acquisition of Transitional Hospitals
Corporation................................ (615,620) - -
Other acquisitions.......................... (36,630) (26,236) (59,343)
Sale of assets.............................. 75,988 9,147 899
Collection of notes receivable.............. 8,687 78,151 4,715
Net change in investments................... (4,513) (445) (12,779)
Other....................................... (20,461) (6,576) (8,241)
----------- -------- ---------
Net cash used in investing activities... (1,233,660) (80,986) (211,642)
----------- -------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving
lines of credit............................ 418,700 (1,500) 161,600
Issuance of long-term debt.................. 734,630 10,495 438,052
Repayment of long-term debt................. (130,516) (31,586) (474,896)
Payment of deferred financing costs......... (22,052) (1,816) (3,863)
Public offering of common stock............. - 52,247 66,494
Other issuances of common stock............. 13,832 2,242 6,520
Repurchase of common stock.................. (81,651) (55,305) -
Redemption of preferred stock............... - - (91,268)
Payment of dividends........................ - - (2,779)
Other....................................... (207) (46) (5,691)
----------- -------- ---------
Net cash provided by (used in) financing
activities............................. 932,736 (25,269) 94,169
----------- -------- ---------
Change in cash and cash equivalents.......... (29,993) 77,284 (3,836)
Cash and cash equivalents at beginning of
period...................................... 112,466 35,182 39,018
----------- -------- ---------
Cash and cash equivalents at end of period... $ 82,473 $112,466 $ 35,182
=========== ======== =========
Supplemental information:
Interest payments........................... $ 76,864 $ 46,527 $ 69,916
Income tax payments......................... 16,042 55,303 42,218

See accompanying notes.

F-6

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ACCOUNTING POLICIES

REPORTING ENTITY

Vencor, Inc. (the "Company") operates an integrated network of healthcare
services in 46 states primarily focused on the needs of the elderly. At
December 31, 1997, the Company operated 60 long-term acute care hospitals
(5,273 licensed beds), 309 nursing centers (40,383 licensed beds) and the
Vencare contract services business ("Vencare") which primarily provides
respiratory and rehabilitation therapies, medical services and pharmacy
management services to approximately 2,900 healthcare facilities.

On September 28, 1995, the Company consummated a merger with The Hillhaven
Corporation ("Hillhaven") in a tax-free, stock-for-stock transaction (the
"Hillhaven Merger"). See Note 2.

Prior to its merger with the Company, Hillhaven consummated a merger with
Nationwide Care, Inc. ("Nationwide") on June 30, 1995 in a tax-free, stock-
for-stock transaction (the "Nationwide Merger"). See Note 3.

In the third quarter of 1996, the Company completed an initial public
offering related to its independent and assisted living business through the
issuance of 5,750,000 common shares of Atria Communities, Inc. ("Atria") (the
"Atria IPO"). See Note 4.

On March 21, 1997, the Company completed the acquisition of TheraTx,
Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy
management services and operator of nursing centers (the "TheraTx Merger"),
pursuant to a cash tender offer. See Note 5.

On June 24, 1997, the Company acquired substantially all of the outstanding
common stock of Transitional Hospitals Corporation ("Transitional"), an
operator of 19 long-term acute care hospitals, pursuant to a cash tender
offer. The Company completed the merger of its wholly owned subsidiary with
and into Transitional on August 26, 1997 (the "Transitional Merger"). See Note
6.

BASIS OF PRESENTATION

The consolidated financial statements include all subsidiaries. Significant
intercompany transactions have been eliminated. Investments in affiliates in
which the Company has a 50% or less interest are accounted for by the equity
method.

The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon the estimates and judgments of management. Actual amounts may
differ from these estimates.

The Hillhaven Merger and the Nationwide Merger have been accounted for by
the pooling-of-interests method. Accordingly, the consolidated financial
statements included herein give retroactive effect to these transactions and
include the combined operations of the Company, Hillhaven and Nationwide for
all periods presented.

The TheraTx Merger and Transitional Merger have been accounted for by the
purchase method, which requires that the accounts and operations of acquired
entities be included with those of the Company since the acquisition of a
controlling interest. Accordingly, the accompanying consolidated financial
statements include the operations of TheraTx and Transitional since March 21,
1997 and June 24, 1997, respectively. The Company expects to finalize the
purchase price allocations related to these transactions in 1998.

For accounting purposes, the accounts of Atria continued to be consolidated
with those of the Company and minority interests in the earnings and equity of
Atria were recorded from the consummation date of the Atria IPO through June
30, 1997. In July 1997, Atria completed a secondary equity offering which
reduced the Company's ownership percentage to less than 50%. Accordingly, the
Company's investment in Atria beginning July 1, 1997 has been accounted for
under the equity method.

F-7

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ACCOUNTING POLICIES (CONTINUED)

REVENUES

Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.

A summary of revenues by payor type follows (dollars in thousands):

1997 1996 1995
---------- ---------- ----------

Medicare.................................... $1,068,624 $ 822,589 $ 691,297
Medicaid.................................... 841,598 821,828 776,278
Private and other........................... 1,271,693 972,906 865,820
---------- ---------- ----------
3,181,915 2,617,323 2,333,395
Elimination................................. (65,911) (39,540) (9,439)
---------- ---------- ----------
$3,116,004 $2,577,783 $2,323,956
========== ========== ==========

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.

ACCOUNTS RECEIVABLE

Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.

INVENTORIES

Inventories consist primarily of medical supplies and are stated at the
lower of cost (first-in, first-out) or market.

PROPERTY AND EQUIPMENT

Depreciation expense, computed by the straight-line method, was $105.3
million in 1997, $91.6 million in 1996 and $79.7 million in 1995. Depreciation
rates for buildings range generally from 20 to 45 years. Estimated useful
lives of equipment vary from 5 to 15 years.

GOODWILL

Costs in excess of the fair value of identifiable net assets of acquired
entities are amortized using the straight-line method principally over 40
years. Amortization expense for 1997, 1996 and 1995 totaled $11.4 million,
$2.7 million and $2.0 million, respectively.

The Company regularly reviews the carrying value of certain long-lived
assets and the related identifiable intangible assets with respect to any
events or circumstances that indicate impairment or that the amortization
period may require adjustment. If such circumstances suggest the recorded
amounts cannot be recovered, calculated based on estimated cash flows
(undiscounted) over the remaining amortization period, the carrying value of
such assets are reduced accordingly. At December 31, 1997, the Company does
not believe that the carrying value or the amortization period of its long-
lived assets and related identifiable intangibles requires such adjustments.

F-8

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ACCOUNTING POLICIES (CONTINUED)

PREOPENING COSTS

Costs incurred prior to the opening of new facilities are deferred and
amortized on a straight-line basis over a three year period. At December 31,
1997 and 1996, the Company's unamortized preopening costs (included in other
assets) were $15.0 million and $1.5 million, respectively.

PROFESSIONAL LIABILITY RISKS

Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.

DERIVATIVE INSTRUMENTS

The Company is a party to interest rate swap agreements that eliminate the
impact of changes in interest rates on certain outstanding floating rate debt.
Each interest rate swap agreement is associated with all or a portion of the
principal balance of a specific debt obligation. These agreements involve the
exchange of amounts based on variable rates for amounts based on fixed
interest rates over the life of the agreement, without an exchange of the
notational amount upon which the payments are based. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment of interest expense related to the debt, and the related amount
payable to or receivable from counterparties is included in accrued interest.
The fair values of the swap agreements are not recognized in the financial
statements. Gains and losses on terminations of interest rate swap agreements
are deferred (included in other assets) and amortized as an adjustment to
interest expense over the remaining term of the original contract life of the
terminated swap agreement.

EARNINGS PER COMMON SHARE

In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"), replacing the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. Earnings per share for all periods presented
have been restated to conform to the requirements of SFAS 128. The impact of
the restatement was not significant.

The computation of diluted earnings per common share give retroactive effect
to the Hillhaven Merger and the Nationwide Merger and is based upon the
weighted average number of common shares outstanding and the dilutive effect
of common stock equivalents consisting primarily of stock options. In
addition, the 1995 computation also includes the dilutive effect of
convertible debt securities.

During 1995, all convertible debt securities were redeemed in exchange for
cash or converted into the Company's common stock. Accordingly, the
computation of diluted earnings per common share assumes that the equivalent
number of common shares underlying such debt securities were outstanding
during the entire year even though the result thereof is antidilutive.

In connection with the Hillhaven Merger, the Company realized a gain in 1995
of approximately $10.2 million upon the cash redemption of Hillhaven preferred
stock. Although the gain had no effect on net income, diluted earnings per
common and common equivalent share were increased by $0.14.

F-9

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which will become
effective on December 31, 1998 and requires interim disclosures beginning in
1999. SFAS 131 requires public companies to report certain information about
operating segments, products and services, the geographic areas in which they
operate, and major customers. The operating segments are to be based on the
structure of the enterprise's internal organization whose operating results
are regularly reviewed by senior management. Management has not yet determined
the effect, if any, of SFAS 131 on the consolidated financial statements.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with the 1997
presentation.

NOTE 2--HILLHAVEN MERGER

On September 27, 1995, the stockholders of both the Company and Hillhaven
approved the Hillhaven Merger, effective September 28, 1995. In connection
with the Hillhaven Merger, the Company issued approximately 31,651,000 shares
of common stock in exchange for all of the outstanding common stock of
Hillhaven (an exchange ratio of 0.935 of a share of Company common stock for
each share of Hillhaven common stock).

The Hillhaven Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Hillhaven Merger and include the combined operations of the Company and
Hillhaven for all periods presented. The following is a summary of the 1995
results of operations of the separate entities prior to the Hillhaven Merger
(dollars in thousands):

NON-
RECURRING
VENCOR HILLHAVEN TRANSACTIONS ELIMINATION CONSOLIDATED
-------- ---------- ------------ ----------- ------------

Nine months ended Sep-
tember 30, 1995
(unaudited):
Revenues.............. $411,233 $1,322,873 $(24,500) $(3,775) $1,705,831
Income (loss) from
operations........... 31,566 41,367 (93,561) - (20,628)
Net income (loss)..... 30,711 20,235 (93,561) - (42,615)

NOTE 3--NATIONWIDE MERGER

Prior to its merger with the Company, Hillhaven completed the Nationwide
Merger on June 30, 1995. In connection therewith, 4,675,000 shares of common
stock (effected for the Hillhaven Merger exchange ratio) were issued in
exchange for all of the outstanding shares of Nationwide.

The Nationwide Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Nationwide Merger and include the combined operations of Hillhaven and
Nationwide for all periods presented. The following is a summary of the 1995
results of operations of the separate entities prior to the Nationwide Merger
(dollars in thousands):

NON-
RECURRING
HILLHAVEN NATIONWIDE TRANSACTIONS CONSOLIDATED
--------- ---------- ------------ ------------

Six months ended June 30, 1995
(unaudited):
Revenues...................... $803,793 $66,800 $ - $870,593
Income from operations........ 23,837 2,147 (3,686) 22,298
Net income (loss)............. 23,459 (266) (3,686) 19,507

F-10

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--STOCK OFFERINGS OF ATRIA

In the third quarter of 1996, the Company completed the Atria IPO, the
proceeds from which aggregated approximately $52.2 million. In connection with
the Atria IPO, the Company entered into various agreements with Atria relating
to risk-sharing for prior year income tax issues, registration rights,
administrative services and liabilities and indemnifications. In addition, the
Company guaranteed up to $75 million of Atria's $200 million bank credit
facility (the "Atria Bank Facility") at December 31, 1997 and lesser amounts
each year thereafter through 2000. At December 31, 1997, there were no
outstanding guaranteed borrowings under the Atria Bank Facility.

In July 1997, Atria completed a secondary equity offering which reduced the
Company's ownership percentage to less than 50%. Accordingly, the Company's
investment in Atria beginning July 1, 1997 has been accounted for under the
equity method. At December 31, 1997, the Company owned 10,000,000 shares, or
approximately 43%, of Atria common stock.

NOTE 5--THERATX MERGER

On March 21, 1997, the TheraTx Merger was consummated following a cash
tender offer in which the Company paid $17.10 for each outstanding share of
TheraTx common stock. A summary of the TheraTx Merger follows (dollars in
thousands):

Fair value of assets acquired........................................ $ 633,793
Fair value of liabilities assumed.................................... (259,439)
---------
Net assets acquired................................................. 374,354
Cash received from acquired entity................................... (14,915)
---------
Net cash paid....................................................... $ 359,439
=========

The purchase price paid in excess of the fair value of identifiable net
assets acquired aggregated $307.6 million. In September and October 1997, the
Company completed the sales of certain non-strategic assets acquired in
connection with the TheraTx Merger. Proceeds from the transactions aggregated
$54.6 million.

NOTE 6--TRANSITIONAL MERGER

On June 24, 1997, the Company acquired approximately 95% of the outstanding
shares of common stock of Transitional through a cash tender offer in which
the Company paid $16.00 per common share. The Company completed the merger of
its wholly owned subsidiary with and into Transitional on August 26, 1997. A
summary of the Transitional Merger follows (dollars in thousands):

Fair value of assets acquired......................................... $713,336
Fair value of liabilities assumed..................................... (44,842)
--------
Net assets acquired.................................................. 668,494
Cash received from acquired entity.................................... (52,874)
--------
Net cash paid........................................................ $615,620
========

The purchase price paid in excess of the fair value of identifiable net
assets acquired aggregated $349.1 million.

F-11

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--BUSINESS COMBINATIONS OTHER THAN HILLHAVEN, NATIONWIDE, THERATX AND
TRANSITIONAL

The Company has acquired a number of healthcare facilities (including
certain previously leased facilities) and other related businesses,
substantially all of which have been accounted for by the purchase method.
Accordingly, the aggregate purchase price of these transactions has been
allocated to tangible and identifiable intangible assets acquired and
liabilities assumed based upon their respective fair values. The consolidated
financial statements include the operations of acquired entities since the
respective acquisition dates. The pro forma effect of these acquisitions on
the Company's results of operations prior to consummation was not significant.

The following is a summary of acquisitions consummated during the last three
years under the purchase method of accounting (dollars in thousands):

1997 1996 1995
-------- ------- --------

Fair value of assets acquired...................... $ 71,601 $26,621 $ 78,893
Fair value of liabilities assumed.................. (34,971) (385) (16,475)
-------- ------- --------
Net assets acquired............................... 36,630 26,236 62,418
Cash received from acquired entities............... - - (804)
Issuance of common stock........................... - - (2,271)
-------- ------- --------
Net cash paid for acquisitions.................... $ 36,630 $26,236 $ 59,343
======== ======= ========

The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $5.7 million in 1997, $4.8 million in
1996 and $9.7 million in 1995.

NOTE 8--PRO FORMA INFORMATION (UNAUDITED)

The pro forma effect of the TheraTx Merger and Transitional Merger assuming
that the transactions occurred on January 1, 1996 follows (dollars in
thousands, except per share amounts):

YEAR ENDED
DECEMBER 31,
---------------------
1997 1996
---------- ----------

Revenues................................................. $3,364,274 $3,475,217
Income from operations................................... 98,446 14,001
Net income............................................... 94,251 12,867
Earnings per common share:
Basic:
Income from operations.................................. $ 1.43 $ 0.20
Net income.............................................. 1.37 0.18
Diluted:
Income from operations.................................. $ 1.40 $ 0.20
Net income.............................................. 1.34 0.18

For both periods presented, pro forma financial data have been derived by
combining the financial results of the Company and TheraTx (based upon year
end reporting periods ending on December 31) and Transitional (based upon year
end reporting periods ending on November 30).

Pro forma income from operations for 1997 includes costs incurred by both
TheraTx and Transitional in connection with the acquisitions which reduced net
income by $29.7 million. Pro forma income from operations for 1996 includes a
gain on the sale of Transitional's United Kingdom psychiatric hospitals
aggregating $33 million and losses of $53 million related primarily to the
sale of Transitional's United States psychiatric hospitals.

F-12

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--NON-RECURRING TRANSACTIONS

1996

In the fourth quarter of 1996, the Company recorded pretax charges
aggregating $125.2 million primarily to complete the integration of Hillhaven.
In November 1996, the Company executed a definitive agreement to sell 34
underperforming or non-strategic nursing centers in early 1997. A charge of
$65.3 million was recorded in connection with the disposition. In addition,
the Company's previously independent institutional pharmacy business, acquired
as part of the Hillhaven Merger, was integrated into Vencare, resulting in a
charge of $39.6 million related primarily to costs associated with employee
severance and benefit costs (approximately 500 employees), facility close-down
expenses and the writeoff of certain deferred costs for services to be
discontinued. A provision for loss totaling $20.3 million related to the
planned replacement of one hospital and three nursing centers was also
recorded in the fourth quarter.

1995

In the third quarter of 1995, the Company recorded pretax charges
aggregating $128.4 million primarily in connection with the consummation of
the Hillhaven Merger. The charges included (i) $23.2 million of investment
advisory and professional fees, (ii) $53.8 million of employee benefit plan
and severance costs (approximately 500 employees), (iii) $26.9 million of
losses associated with the planned disposition of certain nursing center
properties and (iv) $24.5 million of charges to reflect the Company's change
in estimates of accrued revenues recorded in connection with certain prior-
year nursing center third-party reimbursement issues (recorded as a reduction
of revenues). During 1996 and 1997, these activities were substantially
completed.

Pretax charges aggregating $5.5 million were recorded in the second quarter
primarily in connection with the Nationwide Merger.

F-13

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--INVESTMENTS IN AFFILIATES

Affiliated companies accounted for on the equity method include Atria (since
July 1, 1997), Behavioral Healthcare Corporation ("BHC"), a non-public
operator of psychiatric and behavioral centers, and various other healthcare
related companies. The Company obtained a 44% voting equity interest in BHC
(61% ownership interest) as part of the Transitional Merger. Summarized
financial data reported by these affiliates and a summary of the amounts
recorded in the Company's consolidated financial statements as of and for the
year ended December 31, 1997 follow (for the six month period ended December
31, 1997 for Atria and BHC) (dollars in thousands):

ATRIA BHC OTHER TOTAL
-------- ------- ------- --------

Financial position:
Current assets.............................. $192,108 $74,526 $44,107 $310,741
Current liabilities......................... 10,622 32,876 18,359 61,857
Working capital............................. 181,486 41,650 25,748 248,884
Noncurrent assets........................... 276,626 196,394 22,916 495,936
Noncurrent liabilities...................... 265,273 112,190 16,908 394,371
Stockholders' equity........................ 192,839 125,854 31,756 350,449
Results of operations:
Revenues.................................... 37,679 158,597 97,604 293,880
Net income.................................. 4,328 788 9,913 15,029
Amounts recorded by the Company:
Investments in affiliates................... 85,886 73,046 19,369 178,301
Equity in earnings.......................... 1,870 407 5,904 8,181

The fair value of the Company's investment in Atria approximated $171.3
million at December 31, 1997.

NOTE 11--INCOME TAXES

Provision for income taxes consists of the following (dollars in thousands):

1997 1996 1995
------- ------- -------

Current:
Federal.............................................. $31,006 $59,470 $40,008
State................................................ 5,168 10,519 7,563
------- ------- -------
36,174 69,989 47,571
Deferred.............................................. 53,164 (34,814) (23,570)
------- ------- -------
$89,338 $35,175 $24,001
======= ======= =======

Reconciliation of federal statutory rate to effective income tax rate
follows:

1997 1996 1995
---- ---- ----

Federal statutory rate........................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit......... 3.6 3.6 4.3
Merger and restructuring costs................................ - 3.5 34.6
Goodwill amortization......................................... 1.6 - -
Other items, net.............................................. (0.4) 0.2 0.3
---- ---- ----
Effective income tax rate..................................... 39.8% 42.3% 74.2%
==== ==== ====

F-14

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--INCOME TAXES (CONTINUED)

A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31 follows (dollars in thousands):

1997 1996
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------

Depreciation......................... $ - $65,018 $ - $47,256
Insurance............................ 17,948 - 12,058 -
Doubtful accounts.................... 37,689 - 37,989 -
Property............................. 23,428 - 34,767 -
Compensation......................... 16,154 - 17,030 -
Subsidiary net operating losses (ex-
piring in 2017)..................... 15,864 - - -
Other................................ 26,236 27,170 33,120 19,990
-------- ------- -------- -------
$137,319 $92,188 $134,964 $67,246
======== ======= ======== =======

Management believes that the deferred tax assets in the table above will
ultimately be realized. Management's conclusion is based primarily on the
existence of sufficient taxable income within the allowable carryback periods
to realize the tax benefits of deductible temporary differences recorded at
December 31, 1997.

Deferred income taxes totaling $73.4 million and $62.4 million at December
31, 1997 and 1996, respectively, are included in other current assets.
Noncurrent deferred income taxes, included in other long-term liabilities,
totaled $28.3 million at December 31, 1997. Noncurrent deferred income taxes
at December 31, 1996 totaling $5.3 million are included in other long-term
assets.

NOTE 12--PROFESSIONAL LIABILITY RISKS

The Company insures a substantial portion of its professional liability
risks through a wholly owned insurance subsidiary. Provisions for such risks
underwritten by the subsidiary were $10.7 million for 1997, and $10.4 million
for 1996, and $11.1 million for 1995.

Amounts funded for the payment of claims and expenses incident thereto,
included principally in cash and cash equivalents and other assets, aggregated
$26.4 million and $20.7 million at December 31, 1997 and 1996, respectively.
Allowances for professional liability risks, included principally in deferred
credits and other liabilities, were $26.3 million and $21.6 million at
December 31, 1997 and 1996, respectively.

NOTE 13--LONG-TERM DEBT

Capitalization

A summary of long-term debt at December 31 follows (dollars in thousands):

1997 1996
---------- --------

Senior collateralized debt, 5% to 10% (rates generally
floating) payable in periodic
installments through 2019............................... $ 55,651 $119,634
Non-interest bearing residential mortgage bonds.......... - 33,917
Bank revolving credit agreement due 2002 (floating rates
averaging 6.6%)......................................... 1,129,300 333,100
Bank term loan (floating rates averaging 6.3%)........... - 271,000
8 5/8% Senior Subordinated Notes due 2007................ 750,000 -
Other.................................................... 12,141 7,548
---------- --------
Total debt, average life of six years (rates averaging
7.3%)................................................. 1,947,092 765,199
Amounts due within one year.............................. (27,468) (54,692)
---------- --------
Long-term debt......................................... $1,919,624 $710,507
========== ========

F-15

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--LONG-TERM DEBT (CONTINUED)

In connection with the TheraTx Merger, the Company entered into a new five-
year bank credit facility (the "Company Bank Facility") aggregating $1.75
billion on March 31, 1997, replacing the Company's $1.0 billion bank credit
facility. On June 24, 1997, the Company Bank Facility was amended to increase
the amount of the credit to $2.0 billion. Interest is payable, depending on
certain leverage ratios and the period of borrowing, at rates up to either (i)
the prime rate plus 1/2% or the daily federal funds rate plus 1%, (ii) LIBOR
plus 1 1/8% or (iii) the bank certificate of deposit rate plus 1 1/4%. The
Company Bank Facility is collateralized by the capital stock of certain
subsidiaries and intercompany borrowings and contains covenants which require,
among other things, maintenance of certain financial ratios and limit the
amount of additional debt and repurchases of common stock.

In July 1997, the Company completed the private placement of $750 million
aggregate principal amount of 8 5/8% Senior Subordinated Notes due 2007 (the
"Company Notes"). The Company Notes were issued at 99.575% of face value and
are not callable by the Company until 2002. The net proceeds of the offering
were used to reduce outstanding borrowings under the Company Bank Facility.
The Company exchanged the Company Notes for publicly registered Company Notes
having identical terms and conditions in November 1997.

REFINANCING ACTIVITIES

In connection with the TheraTx Merger and the Transitional Merger, the
Company refinanced a substantial portion of its long-term debt. These
transactions resulted in after-tax losses of $4.2 million in 1997. During
1995, the Company recorded $23.3 million of after-tax losses from refinancing
of long-term debt, substantially all of which was incurred in connection with
the Hillhaven Merger. Amounts refinanced in 1995 included $171 million of 10
1/8% Senior Subordinated Notes due 2001, $112 million of outstanding
borrowings under prior revolving credit agreements, and $173 million of other
senior debt.

In the fourth quarter of 1995, the Company called for the redemption of its
6% Convertible Subordinated Notes due 2002 aggregating $115 million (the "6%
Notes") and its 7 3/4% Convertible Subordinated Debentures due 2002
aggregating $75 million (the "7 3/4% Debentures") which were convertible into
the Company's common stock at the rate of $26.00 and $17.96 per share,
respectively. Approximately $80.6 million principal amount of the 6% Notes
were converted into approximately 3,098,000 shares of common stock and the
remainder were redeemed in exchange for cash equal to 104.2% of face value
plus accrued interest. All outstanding 7 3/4% Debentures were converted into
approximately 4,161,000 shares of common stock. These transactions had no
material effect on earnings per common and common equivalent share.

OTHER INFORMATION

At December 31, 1997, the Company was a party to certain interest rate swap
agreements that eliminate the impact of changes in interest rates on $400
million of floating rate debt outstanding. One agreement for $100 million
expires in April 1998 and provides for fixed rates at 5.7% plus 3/8% to 1
1/8%. A second agreement provides for fixed rates on $300 million of floating
rate debt at 6.4% plus 3/8% to 1 1/8% and expires in $100 million increments
in May 1999, November 1999 and May 2000. The fair values of the swap
agreements are not recognized in the consolidated financial statements.

Maturities of long-term debt in years 1999 through 2002 are $25.8 million,
$25.4 million, $27.6 million and $1.0 billion, respectively.

F-16

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--LONG-TERM DEBT (CONTINUED)

The estimated fair value of the Company's long-term debt was $1.96 billion
and $752 million at December 31, 1997 and 1996, respectively, compared to
carrying amounts aggregating $1.95 billion and $765 million. The estimate of
fair value includes the effect of the interest rate swap agreements and is
based upon the quoted market prices for the same or similar issues of long-
term debt, or on rates available to the Company for debt of the same remaining
maturities.

NOTE 14--LEASES

The Company leases real estate and equipment under cancelable and non-
cancelable arrangements. Future minimum payments and related sublease income
under non-cancelable operating leases are as follows (dollars in thousands):

MINIMUM SUBLEASE
PAYMENTS INCOME
-------- --------

1998.......................................................... $57,728 $7,119
1999.......................................................... 56,879 6,101
2000.......................................................... 46,376 5,886
2001.......................................................... 34,924 4,513
2002.......................................................... 24,020 2,221
Thereafter.................................................... 86,048 13,425

Sublease income aggregated $8.0 million, $8.8 million and $13.7 million for
1997, 1996 and 1995, respectively.

NOTE 15--CONTINGENCIES

Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.

Management believes that allowances for losses have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially
affect the Company's liquidity, financial position or results of operations.

Principal contingencies are described below:

Revenues--Certain third-party payments are subject to examination by
agencies administering the programs. The Company is contesting certain
issues raised in audits of prior year cost reports.

Professional liability risks--The Company has provided for loss for
professional liability risks based upon actuarially determined estimates.
Actual settlements may differ from the provisions for loss.

Interest rate swap agreements--The Company is a party to certain
agreements which reduce the impact of changes in interest rates on $400
million of its floating rate long-term debt. In the event of nonperformance
by other parties to these agreements, the Company may incur a loss to the
extent that market rates exceed contract rates.

Guarantees of indebtedness--Letters of credit and guarantees of
indebtedness aggregated $140 million at December 31, 1997, of which $75
million relates to the Atria Credit Facility.

F-17

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--CONTINGENCIES (CONTINUED)

Income taxes--The Company is contesting adjustments proposed by the
Internal Revenue Service for years 1990, 1991 and 1992.

Litigation--Various suits and claims arising in the ordinary course of
business are pending against the Company. See Note 23.

NOTE 16--EARNINGS PER COMMON SHARE

A computation of the earnings per common share follows (in thousands, except
per share amounts):

1997 1996 1995
-------- ------- -------

Earnings (loss):
Income (loss) available to common stockholders--ba-
sic computation .................................. $130,933 $48,005 $(9,993)
Interest addback on convertible securities, net of
income tax benefit................................ - - 7,380
-------- ------- -------
Income (loss) available to common stockholders--
dilutive
computation...................................... $130,933 $48,005 $(2,613)
======== ======= =======
Shares used in the computation:
Weighted average shares outstanding--basic computa-
tion.............................................. 68,938 69,704 61,196
Dilutive effect of employee stock options and other
dilutive securities............................... 1,421 998 10,771
-------- ------- -------
Adjusted weighted average shares outstanding--di-
luted computation................................. 70,359 70,702 71,967
======== ======= =======
Earnings (loss) per common share:
Basic:
Income from operations............................ $ 1.96 $ 0.69 $ 0.22
Extraordinary loss on extinguishment of debt...... (0.06) - (0.38)
-------- ------- -------
Net income (loss)................................ $ 1.90 $ 0.69 $ (0.16)
======== ======= =======
Diluted:
Income from operations............................ $ 1.92 $ 0.68 $ 0.29
Extraordinary loss on extinguishment of debt...... (0.06) - (0.32)
-------- ------- -------
Net income (loss)................................ $ 1.86 $ 0.68 $ (0.03)
======== ======= =======

F-18

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--CAPITAL STOCK

PLAN DESCRIPTIONS

The Company has plans under which options to purchase common stock may be
granted to officers, employees and certain non-employee directors. Options
have been granted at not less than market price on the date of grant. Exercise
provisions vary, but most options are exercisable in whole or in part
beginning one to four years after grant and ending ten years after grant.
Activity in the plans is summarized below:

SHARES WEIGHTED
UNDER OPTION PRICE AVERAGE
OPTION PER SHARE EXERCISE PRICE
--------- ---------------- --------------

Balances, December 31, 1994......... 2,046,650 $ 0.53 to $24.25 $12.77
Granted............................ 1,537,820 11.50 to 32.50 27.32
Exercised.......................... (593,918) 0.53 to 29.14 11.57
Canceled or expired................ (51,151) 5.35 to 28.50 21.02
---------
Balances, December 31, 1995......... 2,939,401 0.53 to 32.50 20.48
Granted............................ 1,467,451 25.50 to 38.38 26.02
Exercised.......................... (368,758) 0.53 to 28.50 6.10
Canceled or expired................ (351,271) 14.17 to 32.63 26.65
---------
Balances, December 31, 1996......... 3,686,823 0.53 to 38.38 23.54
Granted............................ 1,309,900 25.50 to 43.88 30.47
Assumed in connection with TheraTx
Merger............................ 475,643 0.20 to 38.83 27.05
Exercised.......................... (775,431) 0.53 to 35.46 17.90
Canceled or expired................ (301,765) 19.92 to 34.25 26.78
---------
Balances, December 31, 1997......... 4,395,170 $ 0.20 to $43.88 $26.77
=========

A summary of stock options outstanding at December 31, 1997 follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DECEMBER 31, CONTRACTUAL EXERCISE AT DECEMBER 31, EXERCISE
EXERCISE PRICES 1997 LIFE PRICE 1997 PRICE
--------------- --------------- ------------- -------- --------------- --------

$0.20 to $24.86......... 120,692 1 to 4 years $ 8.30 120,692 $ 8.30
$1.02 to $38.83......... 482,941 5 to 7 years 21.72 419,578 21.40
$23.37 to $43.88........ 3,791,537 8 to 10 years 28.00 991,485 27.00
--------- ---------
4,395,170 $26.77 1,531,755 $23.99
========= =========

The weighted average remaining contractual life of options outstanding at
December 31, 1997 approximated eight years. Shares of common stock available
for future grants were 3,980,678, 1,387,396 and 2,740,066 at December 31,
1997, 1996 and 1995, respectively. The number of options exercisable at
December 31, 1996 and 1995 were 1,142,688 and 1,021,168, respectively.

In 1995, the Company issued long-term incentive agreements to certain
officers and key employees whereby the Company may annually issue shares of
common stock to such individuals in satisfaction of predetermined performance
goals. Share awards aggregated 74,330 for 1997, 80,913 for 1996 and 92,500 for
1995.

F-19

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--CAPITAL STOCK (CONTINUED)

PLAN DESCRIPTIONS (CONTINUED)

In May 1997, stockholders voted to approve a stock option plan for non-
employee directors and an employee incentive compensation plan. Shares
issuable under the plans aggregated 200,000 and 3,400,000, respectively.

A Shareholder Rights Plan allows common stockholders the right to purchase
Series A Preferred Stock in the event of accumulation of or tender offer for
15% or more of the Company's common stock. The rights will expire in 2003
unless redeemed earlier by the Company.

STATEMENT NO. 123 DATA

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options is equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value of such options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.50% for 1997, 6.33% for 1996 and
1995; no dividend yield; expected term of seven years and volatility factors
of the expected market price of the Company's common stock of .31 for 1997,
.24 for 1996 and .25 for 1995.

The Black-Scholes option 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 the 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.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the respective vesting period. The
weighted average fair values of options granted during 1997, 1996 and 1995
under the Black-Scholes model were $13.75, $10.95 and $11.74, respectively.
Pro forma information follows (in thousands except per share amounts):

1997 1996 1995
-------- ------- --------

Pro forma income (loss) available to common stock-
holders........................................... $120,941 $42,530 $(10,842)
Pro forma earnings (loss) per common and common
equivalent share:
Basic............................................. $ 1.75 $ 0.61 $ (0.18)
Diluted........................................... 1.71 0.61 (0.05)

Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1999.

F-20

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 18--EMPLOYEE BENEFIT PLANS

The Company maintains defined contribution retirement plans covering
employees who meet certain minimum eligibility requirements. Benefits are
determined as a percentage of a participant's contributions and are generally
vested based upon length of service. Retirement plan expense was $13.0 million
for 1997, $8.8 million for 1996 and $9.7 million for 1995. Amounts equal to
retirement plan expense are funded annually.

NOTE 19--ACCRUED LIABILITIES

A summary of other accrued liabilities at December 31 follows (dollars in
thousands):

1997 1996
-------- -------

Interest...................................................... $ 30,662 $ 3,502
Taxes other than income....................................... 15,462 20,238
Income taxes payable.......................................... 7,737 -
Patient accounts.............................................. 21,370 17,919
Merger related costs.......................................... 15,338 16,640
Other......................................................... 25,364 13,135
-------- -------
$115,933 $71,434
======== =======

NOTE 20--TRANSACTIONS WITH TENET HEALTHCARE CORPORATION

Hillhaven became an independent public company in January 1990 as a result
of a spin-off transaction with Tenet Healthcare Corporation (formerly National
Medical Enterprises, Inc.) ("Tenet"). The following is a summary of
significant transactions with Tenet:

Debt guarantees--Tenet and the Company are parties to a guarantee
agreement under which the Company pays a fee to Tenet in consideration for
Tenet's guarantee of certain obligations of the Company. Such fees totaled
$2.0 million in 1997, $3.0 million in 1996, and $3.8 million in 1995.

Leases--The Company leases certain nursing centers from a joint venture
in which Tenet has a minority interest. Lease payments to the joint venture
aggregated $9.4 million, $10.3 million and $9.9 million for 1997, 1996 and
1995, respectively.

Equity ownership--At December 31, 1997, Tenet owned 8,301,067 shares of
the Company common stock. Prior to the Hillhaven Merger, Tenet also owned
all of Hillhaven's outstanding Series C and Series D Preferred Stock.

Management agreements--Fees paid by Tenet for management, consulting and
advisory services in connection with the operation of seven nursing centers
owned or leased by Tenet aggregated $2.6 million in 1997 and $2.7 million
in both 1996 and 1995.

NOTE 21--FAIR VALUE DATA

A summary of fair value data at December 31 follows (dollars in thousands):

1997 1996
--------------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- -------- --------

Cash and cash equivalents.............. $ 82,473 $ 82,473 $112,466 $112,466
Long-term debt, including amounts due
within one year....................... 1,947,092 1,955,097 765,199 751,843

F-21

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 22--STOCK REPURCHASES

In the fourth quarter of 1997, the Company repurchased 2,925,000 shares of
common stock at an aggregate cost of $81.7 million. Repurchases of 1,950,000
shares common stock in 1996 totaled $55.3 million. These transactions were
financed primarily through borrowings under the Credit Facility.

NOTE 23--LITIGATION

A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al. was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company, namely W. Bruce
Lunsford, W. Earl Reed, III, Michael R. Barr, Thomas T. Ladt, Jill L. Force
and James H. Gillenwater, Jr. The complaint alleges that the Company and
certain executive officers of the Company during a specified time frame
violated Sections 10(b) and 20(a) of the Exchange Act, by, among other things,
issuing to the investing public a series of false and misleading statements
concerning the Company's current operations and the inherent value of the
Company's common stock. The complaint further alleges that as a result of
these purported false and misleading statements concerning the Company's
revenues and successful acquisitions, the price of the Company's common stock
was artificially inflated. In particular, the complaint alleges that the
Company issued false and misleading financial statements during the first,
second and third calendar quarters of 1997 which misrepresented and
understated the impact that changes in Medicare reimbursement policies would
have on the Company's core services and profitability. The complaint further
alleges that the Company issued a series of materially false statements
concerning the purportedly successful integration of its recent acquisitions
and prospective earnings per share for 1997 and 1998 which the Company knew
lacked any reasonable basis and were not being achieved. The Company believes
that the allegations in the complaint are without merit and intends to
vigorously defend this action.

On June 19, 1997, a class action lawsuit was filed in the United States
District Court for the District of Nevada on behalf of a class consisting of
all persons who sold shares of Transitional common stock during the period
from February 26, 1997 through May 4, 1997, inclusive. The complaint alleges
that Transitional purchased shares of its common stock from members of the
investing public after it had received a written offer to acquire all of
Transitional's common stock and without disclosing that such an offer had been
made. The complaint further alleges that defendants disclosed that there were
"expressions of interest" in acquiring Transitional when, in fact, at that
time, the negotiations had reached an advanced stage with actual firm offers
at substantial premiums to the trading price of Transitional's stock having
been made which were actively being considered by Transitional's Board of
Directors. The complaint asserts claims pursuant to Sections 10(b) and 20(a)
of the Exchange Act and common law principles of negligent misrepresentation
and names as defendants Transitional as well as certain senior executives and
directors of Transitional. The Company is vigorously defending this action.

The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in
a qui tam lawsuit which was filed in the United States District Court for the
Eastern District of Arkansas and served on the Company on
July 7, 1997. The United States Department of Justice intervened in the suit
which was brought under the Federal Civil False Claims Act. AXR provided
portable X-ray services to nursing facilities (including those operated by the
Company) and other healthcare providers. The Company acquired an interest in
AXR when Hillhaven was merged into the Company in September 1995 and purchased
the remaining interest in AXR in February 1996. The suit alleges that AXR
submitted false claims to the Medicare and Medicaid programs. In conjunction
with the qui tam action, the United States Attorney's Office for the Eastern
District of Arkansas also is conducting a criminal investigation into the
allegations contained in the qui tam complaint. The Company is cooperating
fully in the investigation.

F-22

VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 23--LITIGATION (CONTINUED)

NOTE 24--SUBSEQUENT EVENT

In January 1998, the Board of Directors of the Company authorized management
to proceed with a plan to separate the Company into two publicly held
corporations, one to operate the hospital, nursing center and Vencare
businesses ("'Operating Company") and the other to own substantially all of
the real property of the Company and lease such properties to Operating
Company through the formation of a real estate investment trust ("Realty
Company") (the "Reorganization Transactions"). The Board's action is subject
to, among other things, Company stockholder approval and the consummation of a
capitalization plan for each entity. Management anticipates that the
Reorganization Transactions will be completed in the second quarter of 1998.

The Reorganization Transactions will be effected through the issuance to
Company common stockholders of all of the outstanding shares of Operating
Company (the "Distribution"). Subsequent to the Distribution, Vencor, Inc.
will be the legal entity that will comprise Operating Company and VenTrust,
Inc. will be the legal entity comprising Realty Company.

For accounting purposes the historical consolidated financial statements of
the Company will become the historical consolidated financial statements of
Operating Company at the time of the Distribution. Realty Company will not
have been operated as a real estate investment trust prior to the
Distribution. Accordingly, the consolidated financial statements of Realty
Company will consist solely of its operations after the Distribution. The
assets and liabilities of both Operating Company and Realty Company will be
recorded at their respective historical carrying values at the time of the
Distribution.

Both the Company Bank Facility and the Company Notes contain customary
covenants which require, among other things, maintenance of certain financial
ratios and limit amounts of additional debt and repurchases of common stock.
If the Company Bank Facility and the Company Notes are not repurchased,
exchanged or otherwise refinanced, or consents obtained, in connection with
the Reorganization Transactions, the Distribution will violate certain
covenants contained in both the Company Bank Facility and the Company Notes.
Management is considering a capitalization plan for Operating Company and
Realty Company to be effected on the Distribution Date in which substantially
all of the Company's long-term debt is expected to be refinanced and assumed
by either Operating Company or Realty Company.

F-23

VENCOR, INC.
QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------

Revenues...................... $680,696 $778,295 $844,740 $812,273
Net income:
Income from operations....... 33,982 37,010 36,902 27,234
Extraordinary loss on extin-
guishment of debt........... (2,259) (1,590) (346) -
Net income................. 31,723 35,420 36,556 27,234
Per common share:
Basic earnings:
Income from operations...... 0.49 0.53 0.53 0.40
Extraordinary loss on extin-
guishment of debt.......... (0.03) (0.02) - -
Net income................. 0.46 0.51 0.53 0.40
Diluted earnings:
Income from operations...... 0.48 0.52 0.52 0.40
Extraordinary loss on extin-
guishment of debt.......... (0.03) (0.02) (0.01) -
Net income................. 0.45 0.50 0.51 0.40
Market prices (a):
High........................ 40 3/8 45 1/8 44 3/8 43 5/16
Low......................... 29 36 5/8 37 3/8 23

1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------

Revenues...................... $626,337 $634,554 $650,551 $666,341
Net income (loss) (b)......... 27,610 30,865 33,558 (44,028)
Per common share:
Basic earnings (loss)........ 0.39 0.44 0.48 (0.64)
Diluted earnings (loss)...... 0.39 0.43 0.48 (0.64)
Market prices (a):
High........................ 39 7/8 35 34 1/2 33 1/4
Low......................... 31 1/2 28 1/8 25 1/2 27 1/2

- --------
Earnings per share amounts for all periods presented have been restated to
comply with the provisions of SFAS 128. See Notes 1 and 16 of the Notes to
Consolidated Financial Statements.

(a) The Company's common stock is traded on the New York Stock Exchange
(ticker symbol--VC).

(b) Fourth quarter results include $79.9 million ($1.16 per share) of costs in
connection with the sale of certain nursing centers, the restructuring of
the pharmacy operations and the planned replacement of certain facilities.
See Note 9 of the Notes to Consolidated Financial Statements.

F-24

VENCOR, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)

ADDITIONS
-------------------------
BALANCE
BALANCE AT CHARGED TO AT END
BEGINNING COSTS AND DEDUCTIONS OF
OF PERIOD EXPENSES ACQUISITIONS OR PAYMENTS PERIOD
---------- ---------- ------------ ----------- -------

Allowances for loss on
accounts and
notes receivable:
Year ended December
31, 1995............. $28,265 $ 7,851 $ - $ (4,026) $32,090
Year ended December
31, 1996............. 32,090 15,001 - (23,176) 23,915
Year ended December
31, 1997............. 23,915 31,176 26,144 (17,684) 63,551
Allowances for loss on
assets held
for disposition:
Year ended December
31, 1995............. $ - $26,900(a) $ - $ - $26,900
Year ended December
31, 1996............. 26,900 64,000(b) - (22,812) 68,088
Year ended December
31, 1997............. 68,088 - 7,225 (43,891) 31,422

- --------
(a) Reflects provision for loss associated with the planned disposition of
certain nursing center properties recorded in connection with the
Hillhaven Merger.

(b) Reflects provision for loss associated with the sale of certain nursing
centers and the planned replacement of one hospital and three nursing
centers.

F-25

APPENDIX A

FORM OF DISTRIBUTION AGREEMENT

[TO BE FILED BY AMENDMENT]

A-1

APPENDIX B

FORM OF
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
VENCOR, INC.

[TO BE FILED BY AMENDMENT]

B-1