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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X]Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
OR
[_]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1055020
(I.R.S. Employer Identification
(State or other jurisdiction of Number)
incorporation or organization)
4360 Brownsboro Road 40207-1642
Suite 115 (Zip Code)
Louisville, Kentucky
(Address of principal executive
offices)
(502) 357-9000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
Common Stock, par value $.25 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment of this Form 10-K. X
As of March 22, 1999, there were 67,895,781 shares of the Registrant's
common stock, $.25 par value ("Common Stock"), outstanding. The aggregate
market value of the shares of the Registrant held by non-affiliates of the
Registrant, based on the closing price of such stock on the New York Stock
Exchange on March 22, 1999, was approximately $231,351,268 For purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
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Part III of this Annual Report on Form 10-K is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 18, 1999.
CAUTIONARY STATEMENTS
This Form 10-K includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding the Company's expected future
financial position, results of operations, cash flows, funds from operations,
dividends and dividend plans, financing plans, business strategy, budgets,
projected costs, capital expenditures, competitive positions, growth
opportunities, expected lease income, ability to qualify as a real estate
investment trust, plans and objectives of management for future operations and
statements that include words such as "anticipate," "believe," "plan,"
"estimate," "expect," "intend," and other similar expressions are forward-
looking statements. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ from the
Company's expectations. Forward-looking statements made in this Form 10-K
relating to the operations of a partnership or limited liability company,
including the Company's realty partnership, are not forward-looking statements
within the meaning of Section 27A of the Securities Act or Section 21E of the
Exchange Act.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this "Cautionary Statements"
section and elsewhere in this Form 10-K, including, without limitation, the
"Business--Risk Factors" section. Factors that may affect the plans or results
of the Company include, without limitation, (i) the ability of the Company's
operators to maintain the financial strength and liquidity necessary to
satisfy their obligations and duties under leases and other agreements with
the Company, (ii) success in implementing its business strategy, (iii) the
nature and extent of future competition, (iv) the extent of future healthcare
reform and regulation, including cost containment measures and changes in
reimbursement policies and procedures, (v) increases in the cost of borrowing
for the Company, (vi) the ability of the Company's operators to deliver high
quality care and to attract patients, (vii) the Company's ability to acquire
additional properties, (viii) changes in the general economic conditions
and/or in the markets in which the Company may, from time to time, compete,
(ix) the ability of the Company to pay and/or refinance its indebtedness as it
becomes due, and (x) the ability of the Company and the Company's operators
and other third parties to replace, modify or upgrade computer systems in ways
that adequately address the Year 2000 issue. Many of such factors are beyond
the control of the Company and its management.
In addition, please note that certain information contained in this Form 10-
K has been provided by the Company's primary tenant, Vencor, Inc. ("Vencor").
Vencor is subject to the reporting requirements of the Securities and Exchange
Commission (the "Commission") and is required to file with the Commission
annual reports containing audited financial information and quarterly reports
containing unaudited financial information. Although Vencor has provided
certain information to the Company, the Company has not verified this
information either through an independent investigation or by reviewing
Vencor's Annual Report on Form 10-K for the year ended December 31, 1998,
which as of March 30, 1999 had not been filed with the Commission. The Company
has no reason to believe that such information is inaccurate in any material
respects, but there can be no assurances that all such information is
accurate.
2
TABLE OF CONTENTS
Page
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PART I
Item 1. Business............................................................................... 4
Item 2. Properties............................................................................. 32
Item 3. Legal Proceedings...................................................................... 40
Item 4. Submission of Matters to a Vote of Security Holders.................................... 43
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 44
Item 6. Selected Financial Data................................................................ 46
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 46
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 57
Item 8. Financial Statements and Supplementary Data............................................ 58
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... 58
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 58
Item 11. Executive Compensation................................................................. 58
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 58
Item 13. Certain Relationships and Related Transactions......................................... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 59
3
PART I
Item 1. Business
General
Ventas, Inc. ("Ventas" or the "Company") is a real estate company that owns
or leases 45 hospitals (comprised of two acute care hospitals and 43 long-term
care hospitals), 219 nursing centers and eight personal care facilities as of
December 31, 1998. The Company's portfolio of properties are located in 36
states and are leased and operated primarily by Vencor or its subsidiaries.
The Company conducts all of its business through a wholly owned operating
partnership, Ventas Realty, Limited Partnership. The Company has announced its
intention to operate and be treated as a self-administered, self-managed real
estate investment trust ("REIT") for federal income tax purposes beginning
January 1, 1999.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987 and changed its name to Vencor, Incorporated in 1989 and to Vencor, Inc.
in 1993. On September 28, 1995, The Hillhaven Corporation merged with and into
the Company. On March 21, 1997, the Company acquired TheraTx, Incorporated, a
provider of subacute rehabilitation and respiratory therapy program management
services to nursing centers and an operator of 26 nursing centers. On June 24,
1997, the Company acquired Transitional Hospitals Corporation, an operator of
16 long-term acute care hospitals and three satellite facilities located in 13
states.
On May 1, 1998, the Company effected a reorganization (the "Reorganization")
pursuant to which the Company was separated into two publicly held
corporations. A new corporation, subsequently renamed Vencor, Inc., was formed
to operate the hospital, nursing center and ancillary services businesses.
Pursuant to the terms of the Reorganization, the Company distributed the
common stock of Vencor to stockholders of record of the Company as of April
27, 1998. The Company, through its subsidiaries, continued to hold title to
substantially all of the real property and to lease such real property to
Vencor. At such time, the Company also changed its name to Ventas, Inc. and
refinanced substantially all of its long-term debt. For financial reporting
periods subsequent to the Reorganization, the historical financial statements
of the Company were assumed by Vencor, and the Company is deemed to have
commenced operations on May 1, 1998. Accordingly, the Company does not have
comparable financial results for prior periods. In addition, for certain
reporting purposes under this Form 10-K and other filings, the Commission
treats the Company as having commenced operations on May 1, 1998.
The Company's principal objectives are to maximize funds from operations for
distribution to stockholders, to enhance capital growth through the
appreciation of the residual value of its portfolio of properties, and to
preserve and maintain the stockholders' capital. The Company is currently
invested in high quality healthcare related facilities including hospitals,
nursing centers and personal care facilities whose principal tenants are
healthcare related companies. If financial conditions warrant, the Company may
make additional investments in the form of operating leases or permanent
mortgage financing and may seek to reduce its tenant concentration with
Vencor. Any such acquired facilities will be leased to and operated by
experienced and qualified third party operators. The Company also may consider
opportunities in non-healthcare related properties.
The Company's evaluation of potential investments will include such factors
as (i) the quality and experience of the operator; (ii) the financial status
of the tenant/mortgagor and any guarantor; (iii) the geographic area, type of
property, and demographic profile; (iv) the construction quality, condition
and design of the improvements; (v) the current and anticipated cash flows and
its ability to meet operational needs and lease obligations and to provide a
competitive investment return to the Company's stockholders; (vi) the
potential for appreciation in the residual value of the property; (vii) the
growth, tax and regulatory environment of the community in which the property
is located; (viii) occupancy and demand for similar healthcare facilities in
the same or nearby communities; (ix) adequate mix of private, Medicare and
Medicaid patients; (x) potential alternative uses of the property; (xi) the
sources of patient referrals for the facility; and (xii) prospects for
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liquidity through financing or refinancing. The Company will also closely
evaluate the value of the property, the cost of the Company's capital needed
to acquire the property and the anticipated return thereon.
Recent Developments
On January 26, 1999, Vencor announced that it expected earnings for the
fourth quarter, exclusive of unusual transactions, to be substantially lower
than the third quarter of 1998. Vencor had reported a loss of $0.02 per share
for the third quarter ended September 30, 1998, excluding the effect of
unusual transactions and a change in the effective tax rate. Vencor also
announced that it expected 1998 results to be impacted adversely by certain
recurring year-end adjustments, the most significant of which relates to an
increase in the provision for bad debts for its nursing center and ancillary
service businesses which could aggregate approximately $20 million.
Adjustments to other accruals, as well as balance sheet adjustments related to
the Hillhaven, TheraTx and Transitional mergers were also expected to impact
negatively fourth quarter results.
In addition, Vencor disclosed that certain additional adjustments may be
recorded in connection with asset valuations in the fourth quarter, including
a write-down of its investment in a nursing center in Wisconsin and a
previously announced write-down of its investment in Behavioral Healthcare
Corporation. Vencor indicated that it also was reviewing the expected
recoverability of recorded amounts of goodwill and deferred tax assets at
year-end and may record a fourth quarter charge based on the results of the
review.
Vencor also announced that it may be required to renegotiate its bank credit
facility since the foregoing operating results and adjustments may result in
certain covenant violations. Vencor stated that it was in discussions with its
lead banks and anticipated that it would successfully conclude its
negotiations prior to releasing its financial results for 1998. Vencor
announced that its was in default of certain covenants, but that it has
received a waiver of those covenants contained in its bank credit facility
until March 31, 1999.
The Company and Vencor have discussed Vencor's recent results of operations
and Vencor's need to amend or restructure its existing indebtedness. In those
discussions, Vencor has requested interim rent concessions under the Master
Lease Agreements and the Company has rejected that request. The Company will
consider appropriate action to take in response to any further proposals by
Vencor as may be in the best interests of the Company. The Company has entered
into an agreement with Vencor whereby the Company has agreed not to exercise
remedies for non-payment of rent, which is due from Vencor on April 1, 1999,
for a period ending on April 12, 1999. During the Company's discussions with
Vencor, Vencor has asserted various potential claims against the Company
arising out of the Reorganization. The Company intends to vigorously defend
these claims if they are asserted in a legal or mediation proceeding.
As a result of the recent announcements by Vencor and similar industry-wide
factors, the Company has suspended the implementation of its original business
strategy. Instead, management is reviewing the possible financial impact on
the Company of the recent announcements by Vencor. In particular, the Company
is reviewing Vencor's financial condition and ability to comply with the
covenants in its bank credit facility. The Company has retained Merrill, Lynch
& Co., as financial advisor, to assist it in this review. In addition, the
Company, together with Merrill Lynch & Co., is reviewing alternatives to repay
the $275 million portion of its credit facility that matures on October 30,
1999. These alternatives include obtaining the necessary proceeds to pay down
or refinance the $275 million loan through cash flows from operations,
available borrowings under the Company's credit facility, the issuance of
public or private debt or equity and asset sales, or a combination of the
foregoing.
In connection with the Reorganization, an Independent Committee of the Board
of Directors was formed. The function of the Independent Committee is to
review and approve all agreements and transactions between the Company and
Vencor to ensure that such agreements and transactions represent arm's length
negotiations including, without limitation, the negotiation, enforcement and
renegotiations of any leases between the Company and Vencor. On November 17,
1998, the Company appointed Douglas Crocker II as an independent director of
the Company and as Chairman of the Independent Committee. In addition, the
Company has undertaken other initiatives to alleviate the potential conflict
of interest between the Company and Vencor. On September 21, 1998, the Company
hired Steven T. Downey as Chief Financial Officer. Mr. Downey was not
5
previously employed by Vencor. Effective March 5, 1999, the Company accepted
the resignation of Thomas T. Ladt as President, Chief Executive Officer and
Chief Operating Officer and as a director of the Company. The Company
appointed Debra A. Cafaro as President and Chief Executive Officer and as a
director. Ms. Cafaro had previously served as president and a director of
Ambassador Apartments, Inc., a public real estate investment trust, from April
1997 to May 1998. W. Bruce Lunsford and R. Gene Smith, each directors of the
Company, have resigned as directors of Vencor. As of the date hereof, the
Company and Vencor have no common directors or officers.
As described below under "--Relationship with Vencor," Vencor provided the
Company with certain administrative services after the Reorganization. The
Company has recently moved its offices from space it shared with Vencor and is
in the process of assembling the resources necessary so that it no longer
requires administrative support from Vencor. However, as discussed below,
Vencor has agreed to assist in the preparation of certain tax returns for the
Company and to defend certain litigation to which the Company is or may become
a party.
Vencor is subject to the reporting requirements of the Commission and is
required to file with the Commission annual reports containing audited
financial information and quarterly reports containing unaudited financial
information. The information related to Vencor provided in this Form 10-K is
derived from filings made with the Commission or other publicly available
information. The Company is providing this data for informational purposes
only, and the reader of this Form 10-K is encouraged to obtain Vencor's
publicly available filings from the Commission. The Company has no reason to
believe that the information is inaccurate in any material respects, but the
Company has not independently verified such information and there can be no
assurances that all such information is accurate. As of March 30, 1999, Vencor
had not released financial results for 1998 or filed its Annual Report on Form
10-K for the year ended December 31, 1998.
Relationship with Vencor
The Company leases all of its hospitals and 210 of its nursing centers to
Vencor under four Master Lease Agreements. For the eight months ended December
31, 1998, Vencor accounted for approximately 98.7% of the Company's revenues.
In order to govern certain of the relationships between the Company and
Vencor after the Reorganization and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the Reorganization. The Company believes that the agreements contain terms
which generally are comparable to those which would have been reached in arm's
length negotiations with unaffiliated parties. The most significant terms of
the Master Lease Agreements and other related agreements are described below.
The reader is also strongly encouraged to review and consider the factors
described in "Business--Risk Factors."
Master Lease Agreements
In the Reorganization, the Company retained substantially all of its real
property, buildings and other improvements (primarily long-term care hospitals
and nursing centers) and leased these facilities to Vencor under four Master
Lease Agreements. Such Master Lease Agreements contain terms which govern the
rights, duties and responsibilities of the Company and Vencor relative to each
of the leased properties. The leased properties include land, buildings,
structures, easements, improvements on the land and permanently affixed
equipment, machinery and other fixtures relating to the operation of the
facilities.
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all insurance, taxes, utilities and maintenance
related to the properties. The base annual rent is approximately $221.5
million, plus a 2% per annum escalator, which escalator is contingent upon
Vencor achieving net patient service
revenue for the applicable year in excess of 75% of net patient service
revenue for the base year of 1997. The initial terms of these leases were for
periods ranging from 10 to 15 years.
Except as noted below, upon the occurrence of an event of default under a
Master Lease, the Company may, at its option, exercise the remedies under a
Master Lease on all properties included within that particular
6
Master Lease. The remedies which may be exercised under the Master Lease by
the Company, at its option, include the following: (i) after not less than 10
days' notice to Vencor, terminate the Master Lease, repossess the leased
property and relet the leased property to a third party and require that
Vencor pay to the Company, as liquidated damages, the net present value of the
rent for the balance of the term, discounted at the prime rate; (ii) without
terminating the Master Lease, repossess the leased property and relet the
leased property with Vencor remaining liable under the Master Lease for all
obligations to be performed by Vencor thereunder, including the difference, if
any, between the rent under the Master Lease and the rent payable as a result
of the reletting of the leased property; (iii) demand that Vencor purchase
either the property which is the subject of the default or all of the
properties included within that Master Lease, at the Company's option, for the
higher of the fair market value or the minimum repurchase price, both as
defined in the Master Lease; and (iv) any and all other rights and remedies
available at law or in equity. The Master Leases require Vencor to cooperate
with the Company in connection with license transfers and certain other
regulatory matters arising from a lease termination.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the property that is the subject of the default
upon the occurrence of any one of the following events of default: (i) the
occurrence of a final non-appealable revocation of Vencor's license to operate
a facility; (ii) the revocation of certification of a facility for
reimbursement under Medicare; or (iii) Vencor becomes subject to regulatory
sanctions at a facility and fails to cure the regulatory sanctions within the
applicable cure period. Upon the occurrence of the fifth such event of default
under a Master Lease with respect to any one or more properties, the Master
Lease permits the Company, at its option, to exercise the rights and remedies
under the Master Lease on all properties included within that Master Lease.
The occurrence of any one of the following events of default constitute an
event of default under all Master Leases permitting the Company, at its
option, to exercise the rights and remedies under all of the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the federal
bankruptcy laws, and (iv) a petition is filed against Vencor under federal
bankruptcy laws and same is not dismissed within 90 days of its institution.
Any notice of the occurrence of an event of default under a Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the "Leasehold Mortgagee"). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee 30 days prior written notice and the
opportunity to cure any such event of default. Following the expiration of
such cure period, the Company may then terminate a Master Lease by giving at
least 10 days prior written notice of such termination.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a
Master Lease. The Company may not unreasonably withhold its approval to any
such transfer provided (i) the assignee is creditworthy, (ii) the assignee has
at least four years of operational experience, (iii) the assignee has a
favorable business and operational reputation, (iv) the assignee assumes the
Master Lease in writing, (v) the sublease is subject and subordinate to the
terms of the Master Lease, and (vi) Vencor and any guarantor remains primarily
liable under the Master Lease.
Each Master Lease requires Vencor to maintain liability, all risk property
and workers' compensation insurance for the properties at a level reasonable
with respect to the properties. Each Master Lease further provides that in the
event a property is totally destroyed, or is substantially destroyed such that
the damage renders the property unsuitable for its intended use, Vencor will
have the option either to restore the property at its cost to its pre-
destruction condition or offer to purchase the leased property (in either
event all insurance
7
proceeds, net of administrative and related costs, will be made available to
Vencor). If the Company rejects the offer to purchase, Vencor will have the
option either to restore the property or terminate the applicable Master Lease
with respect to the property. If the damage is such that the property is not
rendered unsuitable for its intended use, or if it is not covered by
insurance, each Master Lease requires Vencor to restore the property to its
original condition.
Pursuant to the Agreement and Plan of Reorganization dated as of April 30,
1998, all controversies, claims or disputes arising out of the Master Leases
shall be subject to mediation between the parties for a reasonable period of
time in an effort to settle such dispute. If the parties are unable to reach
resolution after such period of time, then the dispute shall then be submitted
to arbitration.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires, will
complete the construction of certain development properties substantially in
accordance with the existing plans and specifications for each such property.
Upon completion of each such development property, the Company has the option
to purchase the development property from Vencor at a purchase price equal to
the amount of Vencor's actual costs in acquiring and developing such
development property prior to the purchase date. If the Company purchases the
development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be 10% of the
actual costs incurred by Vencor in acquiring and developing the development
property. The other terms of the lease for the development property will be
substantially similar to those set forth in the Master Leases. As of December
31, 1998, the Company had acquired one skilled nursing center under the
Development Agreement for $6.2 million and has entered into a separate lease
with Vencor with respect to such facility. The Development Agreement has a
five year term, and the Company and Vencor each have the right to terminate
the Development Agreement in the event of a change of control.
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing center
or other healthcare facility, provided that Vencor and the Company can
negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility.
The Participation Agreement also provides, subject to certain terms, that
the Company has a right of first offer to purchase or finance any healthcare
related real property that Vencor determines to sell or mortgage to a third
party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term, and the Company and Vencor each have the right to
terminate the Participation Agreement in the event of a change of control.
Tax Allocation Agreement
The Tax Allocation Agreement provides that the Company will be liable for
taxes of the Company's consolidated group attributable to periods prior to the
Reorganization with respect to the portion of such taxes attributable to the
property held by the Company after the Reorganization, and Vencor will be
liable for such pre-distribution taxes with respect to the portion of such
taxes attributable to the property held by Vencor after the Reorganization.
The Tax Allocation Agreement further provides that the Company will be liable
for any taxes attributable to the Reorganization except that Vencor will be
liable for any such taxes to the extent that Vencor derives certain future tax
benefits as a result of the payment of such taxes. The Company and its
subsidiaries are liable for taxes payable with respect to periods after the
Reorganization that are attributable to the Company's operations, and Vencor
and its subsidiaries are liable for taxes payable with respect to periods
after the Reorganization that are attributable to Vencor's operations. If, in
connection with a tax audit or filing of an amended return, a taxing authority
adjusts the Company's or Vencor's tax liability with respect to taxes for
which the other party was liable under the Tax Allocation Agreement, such
other party would be liable for the resulting tax assessment or would be
entitled to the resulting tax refund.
8
Agreement of Indemnity--Third Party Leases
In connection with the Reorganization, the Company assigned its former third
party lease obligations as a tenant or as a guarantor of tenant obligations to
Vencor. The Company remains primarily liable on substantially all of the third
party lease obligations assigned to Vencor. Under the terms of the Agreement
of Indemnity--Third Party Leases, Vencor and its subsidiaries have agreed to
indemnify and hold the Company harmless from and against all claims against
the Company arising out of the third party lease obligations assigned by the
Company to Vencor. If Vencor is unable to satisfy the obligations under any
third party lease assigned by the Company to Vencor, then the Company will be
liable for the payment and performance of the obligations under any such third
party lease. These leases have remaining terms ranging from 1 to 63 years. The
total aggregate remaining minimum rental payments under these leases are
approximately $177.7 million. The annual minimum rental payments under these
leases for 1999 will be approximately $39.2 million. See Note 8 to
Consolidated Financial Statements.
Agreement of Indemnity--Third Party Contracts
In connection with the Reorganization, the Company assigned its former third
party guaranty agreements to Vencor. The Company remains primarily liable on
substantially all of the third party guarantees assigned to Vencor. Under the
terms of the Agreement of Indemnity--Third Party Contracts, Vencor and its
subsidiaries have agreed to indemnify and hold the Company harmless from and
against all claims against the Company arising out of the third party
guarantees assigned by the Company to Vencor. If Vencor is unable to satisfy
the obligations under any third party guaranty agreement assigned by the
Company to Vencor, then the Company will be liable for the payment and
performance of the obligations under any such agreement. These third party
guarantees were entered into in connection with certain acquisitions and
financing transactions. The total aggregate exposure under these guarantees is
approximately $45.9 million. Atria Communities, Inc. has also agreed to
indemnify and hold the Company harmless from and against all claims against
the Company arising out of one of the third party contracts, which has an
aggregate principal amount of approximately $35 million.
Transition Services Agreement
The Transition Services Agreement, which expired pursuant to its terms on
December 31, 1998, provided that Vencor would provide the Company with
transitional administrative and support services, including but not limited to
finance and accounting, human resources, risk management, legal, and
information systems support. The Company paid Vencor $1.6 million for the
eight months ended December 31, 1998 for services provided under the
Transition Services Agreement.
After December 31, 1998, Vencor continued to provide the Company with
certain administrative and support services (primarily computer systems,
telephone networks, mail delivery and other office services). Effective March
15, 1999, the Company moved to new office space and those services are no
longer provided by Vencor. Vencor has also agreed to assist in the preparation
of certain tax returns and other tax filings to be made on behalf of the
Company for the period ending on or before December 31, 1998. There can be no
assurance that Vencor will continue to assist the Company in the preparation
of these tax documents or that the Company will be able to timely and
accurately complete such tax filings if Vencor should discontinue its
assistance, although the Company intends to take all actions necessary to
enable it do so.
Assumption of Certain Operating Liabilities and Litigation
In connection with the Reorganization, Vencor agreed to assume and to
indemnify the Company for any and all liabilities that may arise out of the
ownership or operation of the healthcare operations either before or after the
date of the Reorganization. The indemnification provided by Vencor also covers
losses, including costs and expenses, which may arise from any future claims
asserted against the Company based on these healthcare operations. In
addition, at the time of the Reorganization, Vencor agreed to assume the
defense, on behalf of the Company, of any claims that were pending at the time
of the Reorganization, and which arose out of the
9
ownership or operation of the healthcare operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the Reorganization
which arise out of the ownership and operation of the healthcare operations.
There can be no assurance that Vencor will have sufficient assets, income and
access to financing to enable it to satisfy its obligations incurred in
connection with the Reorganization. If Vencor is unable to satisfy the
obligations under these arrangements, then the Company will be liable for the
payment and performance of such obligations and will have to assume the
defense of such claims.
Vencor maintains insurance for certain professional liability claims and
losses through a wholly owned captive insurance company that insures the first
$2 million of claims and losses. Losses in excess of $2 million are insured
through unrelated commercial insurance carriers.
9--1
Portfolio of Properties
The following table reflects the Company's portfolio of properties as of
December 31, 1998.
Type of Percentage Number of Number of Number of Number of
Facility of Portfolio (1) Facilities Beds/Units Operators States (2)
-------- ---------------- ---------- ---------- --------- ----------
Hospitals............... 40.1% 45 4,194 1 21
Nursing Centers......... 59.8% 219 28,492 6 (3) 31
Personal Care
Facilities............. 0.1% 8 136 1 1
- - --------
(1) Based on the percentage of total rent paid to the Company for the eight
months ended December 31, 1998.
(2) The Company has properties located in 36 states managed by seven different
operators.
(3) One of the six operators is Vencor.
Hospital Facilities
The Company's hospitals generally are long-term care hospitals that serve
medically complex, chronically ill patients. The operator of these hospitals
has the capability to treat patients who suffer from multiple systemic
failures or conditions such as neurological disorders, head injuries, brain
stem and spinal cord trauma, cerebral vascular accidents, chemical brain
injuries, central nervous system disorders, developmental anomalies and
cardiopulmonary disorders. Chronic patients are often dependent on technology
for continued life support, such as mechanical ventilators, total 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.
Nursing Center Facilities
The Company's nursing centers generally are skilled nursing facilities. In
addition to the customary services provided by skilled nursing centers, the
operators of the Company's nursing centers typically provide rehabilitation
services, including physical, occupational and speech therapies. The majority
of patients in rehabilitation programs stay in a facility for eight weeks or
less.
Personal Care Facilities
The Company's personal care facilities serve persons with acquired or
traumatic brain injury. The operator of the personal care facilities provides
services including supported living services, neurorehabilitation,
neurobehavioral management and vocational programs.
Competition
The Company competes for real property investments with healthcare
providers, other healthcare related REITs, real estate partnerships, banks,
insurance companies and other investors. Many of the Company's competitors are
significantly larger and have greater financial resources and lower cost of
capital than the Company. If the Company reinstates its original business
strategy, the Company's ability to compete successfully for real property
investments will be determined by numerous factors, including the ability of
the Company to identify suitable acquisition targets, the ability of the
Company to negotiate acceptable terms for any such acquisition, and the
availability and cost of capital.
The operators of the Company's properties compete on a local and regional
basis with other healthcare operators. The ability of the Company's operators
to compete successfully for patients at the Company's facilities depends upon
several factors, including the quality of care at the facility, the
operational reputation of the operator, physician referral patterns, physical
appearance of the facilities, other competitive systems of healthcare delivery
within the community, population and demographics, and the financial condition
of the operator. Private, federal and state reimbursement programs and the
effect of other laws and regulations also may have a significant effect on the
Company's operators to compete successfully for patients for the properties.
10
Environmental Regulation
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property from
which there is a release or threatened release of hazardous or toxic
substances or an entity that arranges for the disposal or treatment of
hazardous or toxic substances at a disposal site may be held jointly and
severally liable for the cost of removal or remediation of certain hazardous
or toxic substances, that could be located on, in or under such property or
other affected property. Such laws and regulations often impose liability
whether or not the owner, operator or otherwise responsible party, knew of, or
caused the presence of the hazardous or toxic substances. The costs of any
required remediation or removal of these substances could be substantial, and
the liability of a responsible party as to any property is generally not
limited under such laws and regulations and could exceed the property's value
and the aggregate assets of the liable party. The presence of these substances
or failure to remediate such substances properly also may adversely affect the
owner's ability to sell or rent the property, or to borrow using the property
as collateral. In connection with the ownership and leasing of the Company's
properties, the Company could be liable for these costs as well as certain
other costs, including governmental fines and injuries to person or properties
or natural resources. In addition, owners and operators of real property are
liable for the costs of complying with environmental, health, and safety laws,
ordinances, and regulations and can be subjected to penalties for failure to
comply. Such ongoing compliance costs and penalties for non-compliance can be
substantial. Changes to existing or the adoption of new environmental, health,
and safety laws, ordinances, and regulations could substantially increase an
owner or operator's environmental, health, and safety compliance costs and/or
associated liabilities. Environmental, health, and safety laws, ordinances,
and regulations potentially affecting the Company address a wide variety of
topics, including, but not limited to, asbestos, polychlorinated biphenyls
("PCBs"), fuel oil management, wastewater discharges, air emissions,
radioactive materials, medical wastes, and hazardous wastes. Under the Master
Leases, Vencor has agreed to indemnify the Company against any environmental
claims (including penalties and clean up costs) resulting from any condition
arising in, on or under, or relating to, the leased properties at any time on
or after the commencement date of the applicable Master Lease. Vencor also has
agreed to indemnify the Company against any environmental claim (including
penalties and clean up costs) resulting from any condition permitted to
deteriorate, on or after the commencement date of the applicable Master Lease
(including as a result of migration from adjacent properties not owned or
operated by the Company or any of its affiliates other than Vencor and its
direct affiliates). There can be no assurance that Vencor will have the
financial capability to satisfy any such environmental claims. See "--Recent
Developments." If Vencor is unable to satisfy such claims the Company will be
required to satisfy the claims. The Company has agreed to indemnify Vencor
against any environmental claims (including penalties and clean-up costs)
resulting from any condition arising on or under, or relating to, the leased
properties at any time before the commencement date of the Master Leases.
The Company does not expect that the Company will have to make any material
capital expenditures in connection with such environmental, health, and safety
laws, ordinances, and regulations during 1999.
Governmental Regulation
General
The operators of the Company's properties derive a substantial portion of
their revenues from third party payors, including the Medicare and Medicaid
programs. Medicare is a federal program that provides certain hospital and
medical insurance benefits to persons age 65 and over and certain disabled
persons. Medicaid is a medical assistance program administered by each state
pursuant to which benefits are available to certain indigent patients. Within
the Medicare and Medicaid statutory framework, there are substantial areas
subject to administrative rulings, interpretations and discretion which may
affect payments made under Medicare and Medicaid. The amounts of program
payments received by the operators can be changed by legislative or regulatory
actions and by determinations by agents for the programs. The Balanced Budget
Act of 1997 (the "Budget Act") is intended to reduce the increase in Medicare
payments by $115 billion and reduce the increase in Medicaid payments by $13
billion between 1998 through 2002 and made extensive changes in the Medicare
11
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 upon
operators by private payors are expected to continue. Further, on March 25,
1999, President Clinton signed legislation preventing nursing center operators
that decide to withdraw from the Medicaid program from evicting or
transferring patients who rely on Medicaid to cover their long-term care
expenses. There can be no assurances that adequate reimbursement levels will
continue to be available for services to be provided by the operators of the
Company's properties which currently are being reimbursed by Medicare,
Medicaid or private payors. Significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on these operators' liquidity, financial condition and results of
operations which could affect adversely their ability to make rental payments
to the Company.
The operators of the Company's properties are subject to extensive federal,
state and local laws and regulations including, but not limited to, laws and
regulations relating to licensure, conduct of operations, ownership of
facilities, addition of facilities, services, prices for services and billing
for services. These laws authorize periodic inspections and investigations,
and deficiencies which if not corrected can result in sanctions which include
loss of licensure to operate and loss of rights to participate in the Medicare
and Medicaid programs. Regulatory agencies have substantial powers to affect
the actions of operators of the Company's properties if the agencies believe
that there is an imminent threat to patient welfare, and in some states these
powers can include assumption of interim control over facilities through
receiverships. Medicare and Medicaid anti-kickback laws codified under Section
1128B(b) of the Social Security Act (the "Anti-kickback Laws") prohibit
certain business practices and relationships that might affect the provision
and cost of healthcare services reimbursable under Medicare 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 Anti-kickback Laws include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs
such as the Medicare and Medicaid programs. In the ordinary course of its
business, the operators of the Company's properties are subject regularly to
inquiries, investigations and audits by federal and state agencies that
oversee these laws and regulations.
Pursuant to the Medicare and Medicaid Patient and Program Protection Act of
1987, the Department of Health and Human Services ("HHS") has issued
regulations that describe some of the conduct and business relationships
permissible under the Anti-kickback Laws ("Safe Harbors"). The fact that a
given business arrangement does not fall within a Safe Harbor does not render
the arrangement per se illegal. Business arrangements of healthcare service
providers that fail to satisfy the applicable Safe Harbors criteria, however,
risk increased scrutiny and possible sanctions by enforcement authorities.
The operators of the Company's properties also are subject to Sections 1877
and 1903(s) of the Social Security Act, which restrict referrals by physicians
of Medicare and other government-program patients to providers of a broad
range of designated health services with which they have ownership interests
or certain other financial arrangements. 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. These actions could
have a material adverse effect on these operators' liquidity, financial
condition and results of operations which could affect adversely their ability
to make rental payments to the Company.
12
Government investigations and enforcement of healthcare laws has increased
dramatically over the past several years and is expected to continue. The
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104- 191)
("HIPAA"), which became effective January 1, 1997, greatly expanded the
definition of healthcare fraud and related offenses and broadened the scope to
include private healthcare plans in addition to government payors. HIPAA also
greatly increased funding for the Department of Justice, Federal Bureau of
Investigation and the Office of the Inspector General to audit, investigate
and prosecute suspected healthcare fraud. Private
enforcement of healthcare fraud also has increased due in large part to
amendments to the civil False Claims Act in 1986 that were designed to
encourage private individuals to sue on behalf of the government. These
whistleblower suits by private individuals, known as qui tam relators, may be
filed by almost anyone, including present and former patients, colleagues and
nurses and other employees. These actions could have a material adverse effect
on these operators' liquidity, financial condition and results of operations
which could affect adversely their ability to make rental payments to the
Company.
12--1
The Budget Act also provides a number of additional anti-fraud and abuse
provisions. The Budget Act contains new civil monetary penalties for an
operator's violation of the Anti-kickback Laws and imposes an affirmative duty
on operators to ensure that they do not employ or contract with persons
excluded from the Medicare and other government programs. The Budget Act also
provides a minimum ten-year period for exclusion from participation in federal
healthcare programs for operators convicted of a prior healthcare offense.
Some states require state approval for development and expansion of
healthcare facilities and services, including findings of need for additional
or expanded healthcare facilities or services. A certificate of need ("CON"),
which is issued by governmental agencies with jurisdiction over healthcare
facilities, is at times required for expansion of existing facilities,
construction of new facilities, addition of beds, acquisition of major items
of equipment or introduction of new services. The CON rules and regulations
may restrict an operator's ability to expand the Company's properties in
certain circumstances.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable healthcare
regulations, and, in either case, such operators or their lenders fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that operator and substitute another operator or
operators may be materially delayed or limited by various state licensing,
receivership, CON or other laws, as well as by Medicare and Medicaid change-
of-ownership rules. Such delays and limitations could have a material adverse
effect on the Company's ability to collect rent, to obtain possession of
leased properties, or otherwise to exercise remedies for tenant default. In
addition, the Company may also incur substantial additional expenses in
connection with any such licensing, receivership or change-of-ownership
proceedings.
Long-Term Hospitals
All but two of the Company's hospitals are operated as long-term hospitals.
In order to receive Medicare and Medicaid reimbursement, each hospital must
meet the applicable conditions of participation set forth by HHS relating to
the type of hospital, its equipment, personnel and standard of medical care,
as well as comply with state and local laws and regulations. Hospitals undergo
periodic on-site certification surveys, which generally are limited if the
hospital is accredited by the Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO"). A loss of certification could adversely affect a
hospital's ability to receive payments from Medicare and Medicaid programs,
which could in turn adversely impact Vencor's ability to make rental payments
under the Master Leases.
Hospitals that are certified by Medicare as long-term hospitals are excluded
from the prospective payment system that applies to acute care hospitals
("PPS"). A long-term hospital has an average length of stay greater than 25
days. Inpatient operating costs for long-term hospitals are reimbursed under
the cost-based reimbursement system, subject to a computed target rate per
discharge for inpatient operating costs established by the Tax Equity and
Fiscal Responsibility Act of 1982 ("TEFRA"). Medicare and Medicaid
reimbursements generally are determined from annual cost reports filed by
Vencor and other operators which are subject to audit by the respective agency
administering the program. Under such programs of cost-based reimbursement,
costs which will be accepted for reimbursement are limited by statutes,
regulations and program policies relating to numerous factors, including
necessity, reasonableness, related-party principles and relatedness to patient
care.
Nursing Centers
The operators of the Company's nursing centers generally are licensed on an
annual or bi-annual basis and certified annually for participation in the
Medicare and Medicaid programs through various regulatory agencies which
determine compliance with federal, state and local laws. These legal
requirements relate to the quality of the nursing care provided,
qualifications of the administrative personnel and nursing staff, the adequacy
of the physical plant and equipment and continuing compliance with the laws
and regulations governing the operation of nursing centers.
13
The Budget Act also established a prospective payment system for nursing
centers for cost reporting periods beginning on or after July 1, 1998
("Nursing Center PPS"). During a nursing center's first three cost reporting
periods under Nursing Center PPS, the per diem rates are 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 were first
published in the Federal Register on May 12, 1998, after the consummation of
the Reorganization. The payments
13--1
received under the new Nursing Center PPS cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs. The new Nursing Center PPS has resulted, and will likely continue to
result in, reduced reimbursement for the operators of the Company's
properties, thereby adversely impacting the operators' ability to satisfy
their obligations, including payment of rent, under the leases with the
Company.
Healthcare Reform
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,
between 1998 and 2002. Under the Budget Act, annual growth rates for Medicare
will be reduced from over 10% to approximately 7.5% for the period between
1998 and 2002 based on specific program baseline projections from 1993 to
1997. Virtually all spending reductions will come from healthcare operators
and changes in program components.
The Budget Act reduced payments made to the hospitals operated by Vencor and
others by reducing incentive payments pursuant to TEFRA, allowable costs for
capital expenditures and bad debts, and payments for services to patients
transferred from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts became effective between
May 1, 1998 and September 1, 1998 with respect to the Company's hospitals. The
reductions for payments for services to patients transferred from a PPS
hospital became effective October 1, 1998. The Budget Act also established
Nursing Center PPS for cost reporting periods beginning on or after July 1,
1998. During a nursing center's first three cost reporting periods under
Nursing Center PPS, the per diem rates 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 were published by the
Health Care Financing Administration ("HCFA") in the Federal Register on May
12, 1998. The payments received under PPS cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs. The payments that Vencor and others are receiving under Nursing Center
PPS are substantially less than before enactment of the Budget Act. Vencor has
been subject to Nursing Center PPS since July 1, 1998.
The Budget Act established the National Bipartisan Commission on the Future
of Medicare, which held its first meeting on March 6, 1998, and charged it
with reviewing and analyzing financial conditions of Medicare, identifying
problems that threaten the financial integrity of the Medicare Trust Fund, and
making recommendations to address the program's long-term financing
challenges. The Commission recently concluded its deliberations without making
an official recommendation, but proposals considered by the Commission are now
under independent consideration by the Congress. The Budget Act also afforded
states more flexibility in administering their Medicaid plans, including the
ability to shift most Medicaid enrollees into managed care plans without first
obtaining a federal waiver. Accordingly, the Medicare and Medicaid programs,
including payment levels and methods, are in a state of change and are less
predictable than before enactment of the Budget Act.
There can be no assurance that the Budget Act, future healthcare legislation
or other changes in the administration or interpretation of governmental
healthcare programs will not have a material adverse effect on the liquidity,
financial condition or results of operations of the Company's operators which
could have a material adverse effect on their ability to make rental payments
to the Company.
Federal Income Tax Considerations
The Company intends to make an election to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year that began on January 1, 1999. The Company believes it has been
organized and has operated in such a manner as to enable it to qualify as a
REIT commencing with that taxable year, and the Company intends to continue to
operate in such a manner as to enable it to so qualify. The Company's actual
qualification and taxation as a REIT, however, will depend upon its ability to
14
meet on a continuing basis, through actual annual operating results,
distribution levels, and stock ownership, the various qualification tests
imposed under the Code. These tests are discussed below. No assurance can be
given that the actual results of the Company's operations for any particular
taxable year will satisfy such requirements. For a discussion of the tax
consequences of failing to qualify as a REIT, see "--Failure to Qualify,"
below.
The discussion of "Federal Income Tax Considerations" set forth herein is
not exhaustive of all possible tax considerations and is not tax advice.
Moreover this summary does not deal with all tax aspects that might be
relevant to a particular stockholder in light of his personal circumstances,
nor does it deal with particular types of stockholders that are subject to
special treatment under the Code, such as insurance companies, financial
institutions and broker-dealers. The Code provisions governing the federal
income tax treatment of REITs are highly technical and complex, and this
summary is qualified in its entirety by the applicable Code provisions, rules
and Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof. The following discussion is based on current
law, which could be changed at any time, possibly retroactively.
Federal Income Taxation of the Company
As noted above, the Company intends to make an election to be taxed as a
REIT commencing with its taxable year that began on January 1, 1999. With
respect to that taxable year and subsequent taxable years, if the Company
qualifies for taxation as a REIT, it generally will not be subject to federal
corporate income tax on net income that it currently distributes to
stockholders. This treatment substantially eliminates the "double taxation"
(i.e., taxation at both the corporate and stockholder levels) that generally
results from investment in a corporation. Notwithstanding its REIT election,
however, the Company will be subject to federal income tax in the following
circumstances. First, the Company will be taxed at regular corporate rates on
any undistributed taxable income, including undistributed net capital gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its undistributed items of tax preference. Third,
if the Company has (i) net income from the sale or other disposition of
"foreclosure property" (which is, in general, property acquired by foreclosure
or otherwise on default of a loan secured by the property) that is held
primarily for sale to customers in the ordinary course of business or (ii)
other non-qualifying income from foreclosure property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if the Company has
net income from "prohibited transactions" (which are, in general, certain
sales or other dispositions of property (other than foreclosure property) held
primarily for sale to customers in the ordinary course of business), such
income will be subject to a 100% tax. Fifth, if the Company should fail to
satisfy the 75% gross income test or the 95% gross income test (as discussed
below), and has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
the product of (a) the gross income attributable to the greater of the amount
by which the Company fails the 75% or 95% gross income test, and (b) a
fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year (other than retained long-term capital
gain the Company elects to treat as having been distributed to stockholders),
and (iii) any undistributed taxable income from prior years, the Company would
be subject to a non-deductible 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
should receive rents from a tenant deemed not to be fair market value rents,
or if the Company values its assets incorrectly, the Company may be liable for
valuation penalties. Finally, if the Company acquires any asset from a C
corporation (i.e., a corporation generally subject to full corporate level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other asset) in
the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the 10-year period (the "Recognition Period")
beginning on the date on which such asset was acquired by the Company, then,
to the extent of such asset's "Built-in Gain" (i.e., the excess of the fair
market value of such property at the time of acquisition by the Company over
the adjusted basis of such asset at such time), such gain will be subject to
tax at the highest regular corporate rate applicable (as provided in
regulations that have been announced but not yet promulgated (the "Built-in
Gain Rules")).
15
The Company owns appreciated assets that it held on January 1, 1999, the
effective date of its anticipated REIT election. These assets are subject to
the Built-in Gain Rules discussed above because the Company was a taxable C
corporation prior to January 1, 1999. If the Company recognizes taxable gain
upon the disposition of any of these assets within the ten-year Recognition
Period, the Company generally will be subject to regular corporate income tax
on that gain to the extent of the Built-in Gain in that asset as of January 1,
1999. The total amount of gain on which the Company can be taxed under the
Built-in Gain Rules is limited to its net built-in gain at the time it became
a REIT, i.e., the excess of the aggregate fair market value of its assets at
the time it became a REIT over the adjusted tax bases of those assets at that
time.
Requirements for Qualification
To qualify as a REIT, the Company must elect to be so treated and must meet
the requirements, discussed below, relating to the Company's organization,
sources of income, nature of assets and distributions of income to
stockholders.
Organizational Requirements
The Code defines a REIT as a corporation, trust or association (i) that is
managed by one or more directors or trustees; (ii) the beneficial ownership of
which is evidenced by transferable shares or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation,
but for Sections 856 through 859 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the
Code; (v) the beneficial ownership of which is held by 100 or more persons
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a shorter taxable year (the "100 Shareholder Rule");
(vi) not more than 50% in value of the outstanding stock of which is owned,
directly or indirectly, by five or fewer individuals (as defined in the Code
to include certain entities) during the last half of each taxable year (the
"5/50 Rule"); (vii) that makes an election to be a REIT (or has made such
election for a previous taxable year) and satisfies all relevant filing and
other administrative requirements established by the IRS that must be met in
order to elect and to maintain REIT status; (viii) that uses a calendar year
for federal income tax purposes; and (ix) that meets certain other tests,
described below, regarding the nature of its income and assets. The 5/50 Rule
and the 100 Shareholder Rule do not apply to the first taxable year for which
an election is made to be taxed as a REIT; thus, these rules will not apply to
the Company until the year 2000 (assuming as is anticipated that 1999 will be
the Company's first taxable year as a REIT).
For purposes of the 5/50 Rule, an unemployment compensation benefits plan, a
private foundation or a portion of a trust permanently set aside or used
exclusively for charitable purposes generally is considered an individual. A
trust that is a qualified trust under Section 401(a) of the Code, however,
generally is not considered an individual and the beneficiaries of such trust
are treated as holding shares of a REIT in proportion to their actuarial
interests in such trust for purposes of the 5/50 Rule. A REIT will be treated
as having satisfied the 5/50 Rule if it complies with certain regulations for
ascertaining the ownership of its stock and if it did not know (or after the
exercise of reasonable diligence would not have known) that its stock was
sufficiently closely held to cause it to violate the 5/50 Rule. See "Annual
Record Keeping Requirements," below.
In order prevent a concentration of ownership of the Company's stock that
would cause the Company to fail the 5/50 Rule or the 100 Shareholder Rule, the
Company amended its Certificate of Incorporation on April 30, 1998 to provide
that no holder (with certain exceptions) is permitted to own, either actually
or constructively under the applicable attribution rules of the Code, more
than 9.0% of the Common Stock or 9.9% of any class of preferred stock issued
by the Company. Certain persons who owned stock in the Company in excess of
the foregoing limits on April 30, 1998 (the date that the Certificate of
Incorporation was amended) are not subject to the general ownership limits
applicable to other stockholders; rather, they generally are permitted to own
up to the same percentage of the Company's outstanding stock that they owned
on April 30, 1998. No holder, however, is permitted to own, either actually or
constructively under the applicable attribution rules of the Code, any shares
of any class of the Company's stock if such ownership would cause more than
50% in value of the Company's outstanding stock to be owned by five or fewer
individuals or would result in the Company's stock being beneficially owned by
fewer than 100 persons (determined without reference to any rule of
attribution).
16
To qualify as a REIT, a corporation may not have (as of the end of the
taxable year) any earnings and profits that were accumulated in periods before
it elected REIT status. The Company believes that it currently does not have,
and believes that it will not have as of December 31, 1999, any accumulated
earnings and profits that are attributable to periods during which the Company
was not a REIT.
Section 856(i) of the Code provides that a corporation that is a "qualified
REIT subsidiary" will not be treated as a separate corporation for federal
income tax purposes, and all assets, liabilities, and items of income,
deduction and credit of a qualified REIT subsidiary will be treated as assets,
liabilities, and items of income, deduction, and credit of the REIT. A
"qualified subsidiary" is defined as any wholly owned corporate subsidiary of
a REIT. The Company does not currently have any qualified REIT subsidiaries.
Pursuant to Treasury Regulations relating to entity classification (the
"Check-the-Box Regulations"), an unincorporated entity that has a single owner
is disregarded as an entity separate from its owner for federal income tax
purposes. The Company directly owns a 98% general partnership interest in the
Operating Partnership and indirectly owns the remaining 2% limited partnership
interest in the Operating Partnership through two wholly owned limited
liability companies. Under the Check-the-Box Regulations, the two limited
liability companies, and therefore the Operating Partnership, are disregarded
as entities separate from the Company for federal income tax purposes.
In the case of a REIT that is a partner in a partnership, Treasury
regulations provide that the REIT will be deemed to own its proportionate
share of the assets of the partnership and will be deemed to be entitled to
the income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of the income and asset
tests described below. If and when the Operating Partnership admits a partner
other than the Company, a qualified REIT subsidiary of the Company, or a
entity that is disregarded under the Check-the-Box Regulations as an entity
separate from the Company, the Company's proportionate share of the assets and
gross income of the Operating Partnership will be treated as the assets and
gross income of the Company for purposes of applying the requirements
described herein.
Income Tests
To qualify as a REIT, the Company must satisfy certain annual gross income
requirements. First, at least 75% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must consist
of defined types of income derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents from
real property" (defined below) and, in certain circumstances, interest) or
certain types of temporary investment income. Second, at least 95% of the
Company's gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived from such real property or temporary
investments, dividends, interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing.
Substantially all of the Company's gross income is derived from leasing its
properties to Vencor under the Master Leases. Rents received or deemed
received by the Company under its leases (including the Master Leases) will
qualify as "rents from real property" in satisfying the gross income
requirements described above only if the Company's leases are respected as
"true" leases for federal income tax purposes and are not treated as service
contracts, joint ventures, or some other type of arrangement. The
determination of whether the Company's leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties, (ii) the form of the agreement,
(iii) the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the operation of
the property or whether the lessee was required to use its best efforts to
perform its obligations under the agreement), and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property) or the potential for economic gains (e.g.,
appreciation) with respect to the property. Based upon advice of counsel at
the time the Master Leases
17
were negotiated, the Company believes that its leases should be treated as
"true" leases for federal income tax purposes. Investors should be aware,
however, that there are no controlling Treasury regulations, published
rulings, or judicial decisions involving leases with terms substantially the
same as the Company's leases that discuss whether such leases constitute true
leases for federal income tax purposes. If the leases are recharacterized as
service contracts or partnership agreements, rather than true leases, part or
all of the payments that the Company receives from its tenants would not be
considered rent or would not otherwise satisfy the various requirements for
qualification as "rents from real property." In that case, the Company likely
would not be able to satisfy either the 75% or the 95% gross income tests,
and, as a result, would lose its REIT status.
Assuming that the Company's leases are "true" leases for tax purposes, rents
received by the Company will qualify as "rents from real property" for
purposes of the REIT gross income tests only if several additional conditions
are satisfied. First, the amount of rent generally must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, amounts received from a tenant will not qualify
as "rents from real property" if the Company, or an owner of 10% or more of
the Company, directly or constructively is deemed to own 10% or more of the
ownership interests in the tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, for rents received to qualify as "rents
from real property," the Company generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an "independent contractor" who is adequately compensated and
from whom the Company derives no income. The "independent contractor"
requirement, however, does not apply to the extent that the services provided
by the Company are "usually or customarily rendered in connection with the
rental of space for occupancy only," which are services of a type that a tax-
exempt organization can provide to its tenants without causing its rental
income to be unrelated business taxable income ("UBTI"). In addition, the
"independent contractor" requirement does not apply to noncustomary services
provided by the Company, the annual value of which does not exceed 1% of the
gross income derived from the property with respect to which the services are
provided (the "1% de minimis exception"). For this purpose, such services may
not be valued at less than 150% of the Company's direct cost of providing the
services.
The Company has not, and does not anticipate that it will in the future, (i)
charge rent that is based in whole or in part on the income or profits of any
person (except by reason of being based on a fixed percentage or percentages
of receipts or sales consistent with the rule described above), (ii) derive
rent attributable to personal property leased in connection with real property
that exceeds 15% of the total rents, (iii) derive rent attributable to a
Related Party Tenant, or (iv) provide any noncustomary services to tenants
other than through qualifying independent contractors, except as permitted by
the 1% de minimis exception or to the extent that the amount of resulting
nonqualifying income would not cause the Company to fail to satisfy the 95%
and 75% gross income tests.
If rents received by the Company from Vencor under the Master Leases do not
represent fair market value rentals at the time of execution of the Master
Leases and the IRS determines that the Company and Vencor were under common
control at that time, the IRS may reallocate income between the Company and
Vencor. The reallocation could cause the Company or Vencor to become subject
to valuation penalties. The Company believes that the rent payments represent
fair market value rentals.
If the 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 it is entitled to relief under certain provisions of the Code. These
relief provisions generally will be available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its return and any
incorrect information on the schedules was not due to fraud with intent to
evade tax. It is not possible, however, to state whether in all circumstances
the Company would be entitled to the benefit of these
18
relief provisions. Even if these relief provisions were to apply, a tax would
be imposed with respect to the excess net income.
Asset Tests
At the close of each quarter of its taxable year, the Company must satisfy
two tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets"
or, in cases where the Company raises new capital through stock or long-term
(at least five years) debt offerings, temporary investments in stock or debt
instruments during the one-year period following the Company's receipt of such
capital (the "75% asset test"). The term "real estate asset" includes
interests in real property, interests in mortgages on real property to the
extent the mortgage balance does not exceed the value of the associated real
property, and shares of other REITs. For purposes of the 75% asset test, the
term "interest in real property" includes an interest in land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold in real property and an option to acquire real property (or a
leasehold in real property). Second, of the investments not included in the
75% asset class, the value of any one issuer's debt and equity securities
owned by the Company (other than the Company's interest in any entity
classified as a partnership for federal income tax purposes, or the stock of a
qualified REIT subsidiary) may not exceed 5% of the value of the Company's
total assets (the "5% asset test"), and the Company may not own more than 10%
of any one issuer's outstanding voting securities (except for the Company's
ownership interest in an entity that is classified as a partnership for
federal income tax purposes or the stock of a qualified REIT subsidiary) (the
"10% voting securities test").
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to fail to qualify as a
REIT or to lose its REIT status if (i) it satisfied all of the asset tests at
the close of the preceding calendar quarter and (ii) the discrepancy between
the value of the Company's assets and the asset test requirements arose from
changes in the market values of its assets and was not wholly or partly caused
by an acquisition of nonqualifying assets. If the condition described in
clause (ii) of the preceding sentence were not satisfied, the Company still
could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose. The Company intends
to maintain adequate records of the value of its assets to ensure compliance
with the asset tests and to take such other actions as may be required to
comply with those tests.
Annual Distribution Requirements
In order to be taxed as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (i) the sum of (A) 95% of the Company's "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax on the undistributed amount at regular capital gains and ordinary
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income for such year, (ii) 95% of its REIT capital gain net income for such
year (other than long-term capital gain the Company elects to retain and treat
as having been distributed to stockholders), and (iii) any undistributed
taxable income from prior periods, the Company will be subject to a 4%
nondeductible excise tax on the excess of such required distribution over the
amounts actually distributed. In addition, during its Recognition Period, if
the Company disposes of any assets subject to the Built-in Gain Rules, the
Company will be required, pursuant to guidance issued by the IRS, to
distribute at least 95% of the Built-in Gain (after tax), if any, recognized
on the disposition of the asset.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash deductions
in computing REIT taxable income. Accordingly, the Company
19
anticipates that it generally will have sufficient cash or liquid assets to
enable it to satisfy the 95% distribution requirement. It is possible,
however, that the Company, from time to time, may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement or to distribute
such greater amount as may be necessary to avoid income and excise taxation,
as a result of timing differences between (i) the actual receipt of income and
actual payment of deductible expenses and (ii) the inclusion of such income
and deduction of such expenses in arriving at the Company's taxable income, or
as a result of nondeductible expenses such as principal amortization or
repayments, or capital expenditures in excess of noncash deductions. In the
event that such timing differences occur, the Company may find it necessary to
borrow funds or to issue equity securities (there being no assurance that it
will be able to do so) or, if possible, to pay taxable stock dividends in
order to meet the REIT distribution requirements. The Company's debt
facilities may restrict the Company's ability to incur additional indebtedness
under certain circumstances, thereby preventing the Company from borrowing
funds in order to make such distributions. In addition, the failure of Vencor
to make rental payments under the Master Leases would impair materially the
ability of the Company to make distributions. Consequently, there can be no
assurance that the Company will be able to make distributions at the required
distribution rate or any other rate.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Although the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends, it
will be required to pay interest to the IRS based upon the amount of any
deduction taken for deficiency dividends.
Annual Record Keeping Requirements
In its first taxable year in which it qualifies as a REIT and thereafter,
the Company is required to maintain certain records and request on an annual
basis certain information from its stockholders designed to disclose the
actual ownership of its outstanding shares. The Company intends to comply with
these requirements. The Company will be subject to a penalty of $25,000
($50,000 for intentional violations) for any year in which it does not comply
with the rules.
Failure to Qualify
If the Company does not make an election to be taxed as a REIT because it
cannot meet the applicable requirements for REIT qualification, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
will not be deductible by the Company, nor will they be required to be made.
To the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate stockholders may be eligible for
the dividends received deduction. If the Company does not make an election to
be taxed as a REIT with respect to the current taxable year (1999), it will
not for that reason be prevented from making an election to be taxed as a REIT
with respect to any subsequent taxable year.
If the Company elects to be taxed as a REIT and that election is revoked or
terminated (e.g., due to a failure to meet the REIT qualification tests), the
Company and its stockholders generally would be subject to the same tax
consequences that are described in the preceding paragraph in the taxable year
in which the Company ceased to qualify as a REIT. In addition, the Company
would be prohibited from re-electing REIT status for the four taxable years
following the year during which the Company ceased to qualify as a REIT,
unless certain relief provisions of the Code applied. It is impossible to
predict whether the Company would be entitled to such statutory relief.
Taxation of U.S. Stockholders
As used herein, the term "U.S. Stockholder" means a holder of the Company's
common stock (the "Common Stock") that for U.S. federal income tax purposes is
(i) a citizen or resident of the United States,
20
(ii) a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof,
(iii) an estate whose income from sources without the United States is
includible in gross income for U.S. federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United
States or (iv) any trust with respect to which (A) a U.S. court is able to
exercise primary supervision over the administration of such trust and (B) one
or more U.S. persons have the authority to control all substantial decisions
of the trust.
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. Stockholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. Stockholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations.
Distributions that are designated as capital gain dividends will be taxed as a
capital gain (to the extent such distributions do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the stockholder has held its shares. The tax rates applicable to such
capital gains are discussed below. However, corporate stockholders may be
required to treat up to 20% of certain capital gain dividends as ordinary
income. Distributions in excess of current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's shares, but rather will reduce
the adjusted basis of such shares. To the extent that distributions in excess
of current and accumulated earnings and profits exceed the adjusted basis of a
stockholder's shares, such distributions will be included in income as capital
gains assuming the shares are capital assets in the hands of the stockholder.
The tax rate applicable to such capital gain will depend on the stockholder's
holding period for the shares. In addition, any distribution declared by the
Company in October, November or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the distribution is actually paid by the Company
during January of the following calendar year.
The Company may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to its stockholders (including for
purposes of the 4% excise tax discussed above under "Requirements for
Qualification--Annual Distribution Requirements"). If the Company should make
such an election, the Company's stockholders would be required to include in
their income as long-term capital gain their proportionate share of the
Company's undistributed net capital gain, as designated by the Company. Each
such stockholder would be deemed to have paid its proportionate share of the
income tax imposed on the Company with respect to such undistributed net
capital gain, and this amount would be credited or refunded to the
stockholder. In addition, the tax basis of the stockholder's shares would be
increased by its proportionate share of undistributed net capital gains
included in its income, less its proportionate share of the income tax imposed
on the Company with respect to such gains.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would
be carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, stockholders generally will not be able to
apply any "passive activity losses" (such as losses from certain types of
limited partnerships in which the stockholder is a limited partner) against
such income. In addition, taxable distributions from the Company generally
will be treated as investment income for purposes of the investment interest
limitations. Capital gains from the disposition of the shares (or
distributions treated as such) will be treated as investment income only if
the stockholder so elects, in which case such capital gains will be taxed at
ordinary income rates. The Company will notify stockholders after the close of
the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital
and capital gain.
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a stockholder who is not a dealer in securities will be
treated as capital gain or loss. Lower marginal tax rates for individuals may
apply in the case of capital gains, depending on the holding period of the
shares that are sold. However, any loss upon a sale or exchange of shares by a
stockholder who has held such shares for six months or less (after
21
applying certain holding period rules) will be treated as a long-term capital
loss to the extent of distributions from the Company required to be treated by
such stockholder as long-term capital gain. All or a portion of any loss
realized upon a taxable disposition of shares may be disallowed if other
shares are purchased within 30 days before or after the disposition.
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal individual income
tax rate applicable to ordinary income is 39.6%. Any capital gain generally
will be taxed to a non-corporate taxpayer at a maximum rate of 20% with
respect to capital assets held for more than one year. The tax rates
applicable to ordinary income apply to gain attributable to the sale or
exchange of capital assets held for one year or less. In the case of capital
gain attributable to the sale or exchange of certain real property held for
more than one year, an amount of such gain equal to the amount of all prior
depreciation deductions not otherwise required to be taxed as ordinary
depreciation recapture income will be taxed at a maximum rate of 25%. With
respect to distributions designated by a REIT as capital gain dividends
(including deemed distributions of retained capital gains), the REIT also may
designate (subject to certain limits) whether the dividend is taxable to non-
corporate stockholders as a 20% rate gain distribution or an unrecaptured
depreciation distribution taxed at a 25% rate.
The characterization of income as capital or ordinary may affect the
deductibility of capital losses. Capital losses not offset by capital gains
may be deducted against a non-corporate taxpayer's ordinary income only up to
a maximum annual amount of $3,000. Non-corporate taxpayers may carry forward
their unused capital losses. All net capital gain of a corporate taxpayer is
subject to tax at ordinary corporate rates. A corporate taxpayer can deduct
capital losses only to the extent of capital gains, with unused losses being
carried back three years and forward five years.
Treatment of Tax-Exempt Stockholders
Tax-exempt organizations, including qualified employee pension and profit
sharing trusts and individual retirement accounts, (collectively, "Exempt
Organizations") generally are exempt from federal income taxation. However,
they are subject to taxation on their UBTI. While many investments in real
estate generate UBTI, the IRS has issued a published ruling that dividend
distributions by a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on
that ruling, and subject to the exceptions discussed below, amounts
distributed by the Company to Exempt Organizations generally should not
constitute UBTI. However, if an Exempt Organization finances its acquisition
of the Common Stock with debt, a portion of its income from the Company will
constitute UBTI pursuant to the "debt-financed property" rules. Furthermore,
social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under paragraphs (7), (9), (17) and (20), respectively,
of Section 501(c) of the Code are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. In addition, in certain circumstances, a pension trust that owns more
than 10% of the Company's stock is required to treat a percentage of the
dividends from the Company as UBTI (the "UBTI Percentage"). The UBTI
Percentage is the gross income, less related direct expenses, derived by the
Company from an unrelated trade or business (determined as if the Company were
a pension trust) divided by the gross income, less related direct expenses, of
the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's stock only
if (i) the UBTI Percentage is at least 5%, (ii) the Company qualifies as a
REIT by reason of the modification of the 5/50 Rule that allows the
beneficiaries of the pension trust to be treated as holding shares of the
Company in proportion to their actuarial interests in the pension trust and
(iii) either (A) one pension trust owns more than 25% of the value of the
Company's stock or (B) a group of pension trusts individually holding more
than 10% of the value of the Company's stock collectively own more than 50% of
the value of the Company's stock.
Special Tax Considerations for Non-U.S. Stockholders
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders (collectively, "Non-U.S. Stockholders") are complex, and
22
no attempt will be made herein to provide more than a summary of such rules.
Non-U.S. stockholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to their
ownership of the Common Stock, including any reporting requirements.
For purposes of this discussion, the term "Non-U.S. Stockholder" does not
include any foreign stockholder whose investment in the Company's stock is
"effectively connected" with the conduct of a trade or business in the United
States. Such a foreign stockholder, in general, will be subject to United
States federal income tax with respect to its investment in the Company's
stock in the same manner as a U.S. Stockholder is taxed (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals). In addition, a foreign corporation receiving
income that is treated as effectively connected with a U.S. trade or business
also may be subject to an additional 30% "branch profits tax," unless an
applicable tax treaty provides a lower rate or an exemption. Certain
certification requirements must be satisfied in order for effectively
connected income to be exempt from withholding.
Distributions to Non-U.S. Stockholders that are not attributable to gain
from sales or exchanges by the Company of U.S. real property interests and are
not designated by the Company as capital gain dividends (or deemed
distributions of retained capital gains) will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of the Company. Such distributions ordinarily will be
subject to a withholding tax equal to 30% of the gross amount of the
distribution unless an applicable tax treaty reduces or eliminates that tax.
Distributions in excess of current and accumulated earnings and profits of the
Company will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted basis of the stockholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
distributions in excess of current and accumulated earnings and profits exceed
the adjusted basis of a Non-U.S. Stockholder's shares, such distributions will
give rise to tax liability if the Non-U.S. Stockholder would otherwise be
subject to tax on any gain from the sale or disposition of its shares, as
described below.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Stockholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, distributions attributable to gain from sales of
U.S. real property interests are taxed to a Non-U.S. Stockholder as if such
gain were effectively connected with a U.S. business. Non-U.S. Stockholders
thus would be taxed at the normal capital gain rates applicable to U.S.
Stockholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals).
Distributions subject to FIRPTA also may be subject to a 30% branch profits
tax in the hands of a foreign corporate stockholder not entitled to treaty
relief or exemption.
Unless a reduced rate of withholding applies under an applicable tax treaty,
the Company generally will withhold from distributions to Non-U.S.
Stockholders, and remit to the IRS, 30% of all distributions out of current or
accumulated earnings and profits, subject to the application of FIRPTA
withholding rules discussed below. In addition, the Company is required to
withhold 10% of any distribution in excess of its current and accumulated
earnings and profits. Because the Company generally cannot determine at the
time a distribution is made whether or not it will be in excess of earnings
and profits, the Company intends to withhold 30% of the entire amount of any
distribution (other than distributions subject to the 35% withholding
discussed below). Generally, however, a Non-U.S. Stockholder will be entitled
to a refund from the IRS to the extent an amount is withheld from a
distribution that exceeds the amount of U.S. tax owed by such Non-U.S.
Stockholder.
Under FIRPTA, the Company is required to withhold 35% of any distribution
that is designated as a capital gain dividend or which could be designated as
a capital gain dividend. Thus, if the Company designates previously made
distributions as capital gain dividends, subsequent distributions (up to the
amount of such prior distributions) will be treated as capital gain dividends
for purposes of FIRPTA withholding.
Under Regulations that are currently in effect, dividends paid to an address
in a country outside the United States generally are presumed to be paid to a
resident of such country for purposes of determining the
23
applicability of withholding discussed above and the applicability of a tax
treaty rate. Regulations issued in October 1997, however, provide that a Non-
U.S. Stockholder who wishes to claim the benefit of an applicable treaty rate
must satisfy certain certification and other requirements. Such Regulations
generally will be effective for distributions made after December 31, 1999.
For so long as the Common Stock continues to be regularly traded on an
established securities market, the sale of such stock by any Non-U.S.
Stockholder who is not a Five Percent Non-U.S. Stockholder (as defined below)
generally will not be subject to United States federal income tax (unless the
Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for more than 182 days during the taxable year of the sale and
certain other conditions apply, in which case such gain will be subject to a
30% tax on a gross basis). A "Five Percent Non-U.S. Stockholder" is a Non-U.S.
Stockholder who, at some time during the five-year period preceding such sale
or disposition, beneficially owned (including under certain attribution rules)
more than 5% of the total fair market value of the Common Stock (as
outstanding from time to time) or owned shares of another class of stock of
the Company that represented value greater than 5% of the Common Stock
(measured at the time such shares were acquired).
In general, the sale or other taxable disposition of the Common Stock by a
Five Percent Non-U.S. Stockholder (as defined below) also will not be subject
to United States federal income tax if the Company is a "domestically
controlled REIT." A REIT is a "domestically controlled REIT" if, at all times
during the five-year period preceding the relevant testing date, less than 50%
in value of its shares is held directly or indirectly by Non-U.S. Stockholders
(taking into account those persons required to include the Company's dividends
in income for United States federal income tax purposes). Although the Company
believes that it currently qualifies as a "domestically controlled REIT,"
because the Common Stock is publicly traded, no assurance can be given that
the Company will qualify as a domestically controlled REIT at any time in the
future. If the Company does not constitute a domestically controlled REIT, a
Five Percent Non- U.S. Stockholder will be taxable in the same manner as a
U.S. Stockholder with respect to gain on the sale of the Common Stock (subject
to applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals).
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. Stockholders and to the IRS the amount
of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides
a taxpayer identification number, certifies as to no loss of exemption from
backup withholding and otherwise complies with the applicable requirements of
the backup withholding rules. A stockholder who does not provide the Company
with its correct taxpayer identification number also may be subject to
penalties imposed by the IRS. In addition, the Company may be required to
withhold a portion of capital gain distributions to any stockholders who fail
to certify their non-foreign status to the Company.
U.S. Stockholders should consult their own tax advisors regarding their
qualifications for an exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
U.S. Stockholder will be allowed as a credit against the U.S. Stockholder's
United States federal income tax liability and may entitle the U.S.
Stockholder to a refund, provided that the required information is furnished
to the IRS.
Backup withholding tax and information reporting generally will not apply to
distributions paid to Non-U.S. Stockholders outside the United States that are
treated as (i) dividends subject to the 30% (or lower treaty rate) withholding
tax discussed above, (ii) capital gain dividends or (iii) distributions
attributable to gain from the sale or exchange by the Company of U.S. real
property interests. As a general matter, backup withholding and information
reporting will not apply to a payment of the proceeds of a sale of the Common
Stock by or through a foreign office of a foreign broker. Information
reporting (but not backup withholding) will apply, however, to a payment of
the proceeds of a sale of the Common Stock by a foreign office of a broker
that (i) is a United
24
States person, (ii) derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, or (iii)
is a "controlled foreign corporation" for United States tax purposes, unless
the broker has documentary evidence in its records that the holder is a Non-
U.S. Stockholder and certain other conditions are satisfied, or the
stockholder otherwise establishes an exemption. Payment to or through a United
States office of a broker of the proceeds of a sale of the Common Stock is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalties of perjury that the stockholder is a
Non- U.S. Stockholder or otherwise establishes an exemption. A Non-U.S.
Stockholder may obtain a refund of any amounts withheld under the backup
withholding rules by filing the appropriate claim for a refund with the IRS.
The Treasury Department issued final Regulations in October 1997 concerning
the withholding of tax and information reporting for certain amounts paid to
non-resident alien individuals and foreign corporations. These new withholding
rules alter the current withholding regime, and generally will be effective
for distributions made after December 31, 1999. Stockholders should consult
their tax advisors concerning the impact, if any, of these new Regulations on
their ownership of shares of the Common Stock.
Other Tax Considerations
The Company and its stockholders may be subject to state and local tax in
states and localities in which they do business or own property. The tax
treatment of the Company and the stockholders in such jurisdictions may differ
from the federal income tax treatment described above. Consequently,
stockholders should consult their own tax advisors regarding the effect of
state and local tax laws on their ownership of shares of the Common Stock.
Employees
As of December 31, 1998, the Company had seven full-time employees. The
Company considers its relationship with its employees to be good.
Insurance
The Company maintains, or causes its operators to maintain, appropriate
liability and casualty insurance on its assets and operations. Under the
Master Leases, Vencor is required to maintain, at its expense, certain
insurance coverages related to the properties under the Master Leases and
Vencor's operations at the related facilities. See "Relationship with Vencor--
Master Lease Agreements with Vencor." There can be no assurance that Vencor
will maintain such insurance and any failure by Vencor to do so could have a
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreements and could prevent the Company from paying dividends to its
stockholders as required to maintain its status as a REIT.
The Company believes that its insurance protection 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 the Company will be able to maintain
adequate levels of insurance coverage.
25
RISK FACTORS
Going Concern
Because the operations of Vencor have been negatively impacted by changes in
reimbursement rates, by its current level of indebtedness and by certain other
factors, and because of the potential effect of such events on Vencor's
ability to meet its rent obligations to the Company, the Company's auditors
have included an explanatory paragraph in its report to the Company's
consolidated financial statements for the year ended December 31, 1998 that
expresses substantial doubt as to the Company's ability to continue as a going
concern. See "Business--Recent Developments," "--Government Regulation," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The inclusion of the explanatory paragraph regarding the ability
of the Company to continue as a going concern could have a material adverse
effect on the results of operations and financial condition of the Company and
on the ability of the Company to meet the terms of its credit agreements.
Dependence of the Company on Vencor
The Company leases substantially all its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to meet its rent obligations will determine
the Company's revenues and its ability to service its indebtedness and to make
distributions to its stockholders. In addition, any failure by Vencor to
conduct its operations effectively could have a material adverse effect on its
business reputation and on its ability to enlist or maintain patients in its
facilities. There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Master Leases. Since the Company derives approximately 98.7% of its
revenue from Vencor and since the Master Leases are triple-net leases under
which Vencor is responsible for all insurance, taxes and maintenance and
repair expenses required in connection with the leased properties, the
inability of Vencor to satisfy its obligations under the Master Leases would
have a material adverse effect on the condition of the leased properties, as
well as on the results of operations and financial condition of the Company
and on the ability of the Company to meet the terms of its credit agreements,
and could prevent the Company from paying dividends to its stockholders as
required to maintain its status as a REIT. In addition, the credit standing of
the Company is affected by the general creditworthiness of Vencor.
Due to the Company's dependence on Vencor's rental payments as the primary
source of the Company's revenues, the Company may be negatively affected by
enforcing its rights under the Master Leases or by terminating a Master Lease.
If Vencor fails to comply with the terms of a Master Lease or to comply with
applicable healthcare regulations and, in either case, Vencor or its lenders
fail to cure such default within the specified cure period, the Company may
have to find another lessee/operator for the properties covered by one or all
of the Master Leases. While the Company is attempting to locate one or more
lessee/operators there could be a decrease or cessation of rental payments by
Vencor. There can be no assurance that the Company will be able to locate
another suitable lessee/operator or that if the Company is successful in
locating such an operator, that the rental payments from such new operator
would not be materially less than the existing rental payments. The ability of
the Company to locate another suitable lessee/operator may be materially
delayed or limited by various state licensing, receivership, CON or other
laws, as well as by Medicare and Medicaid change of ownership rules.
In addition, pursuant to the Reorganization, the Company assigned to Vencor
and Vencor assumed leases, and the rights, obligations and duties as a tenant
thereunder, to seven long-term acute care hospitals and 76 nursing centers
(the "Third Party Leases"), as well as certain third party guarantees (the
"Third Party Guarantees"). The rent obligation under the Third Party Leases
for the 1999 fiscal year is expected to be approximately $39.2 million. See
Note 8 to Consolidated Financial Statements. In connection with these
assignments, the Company remained primarily liable for substantially all of
the obligations under the Third Party Leases and the Third Party Guarantees.
Vencor has indemnified the Company for any losses, claims, liabilities and the
like which may be incurred by or asserted against the Company in connection
with the Third Party Leases and the Third Party Guarantees. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the arrangements or
the indemnification. If Vencor
26
is unable to satisfy such obligations, the Company will be obligated to
satisfy the Third Party Lease obligations and the Third Party Guarantees. The
Company's performance of these obligations could have a material adverse
effect on the results of operations and financial condition of the Company and
on the ability of the Company to meet the terms of its credit agreements and
could prevent the Company from paying dividends to its stockholders as
required to maintain its status as a REIT.
In connection with the Reorganization, Vencor agreed to assume and to
indemnify the Company for any and all liabilities that may arise out of the
ownership or operation of the healthcare operations either before or after the
date of the Reorganization. The indemnification provided by Vencor also covers
losses, including costs and expenses, which may arise from any future claims
asserted against the Company based on these healthcare operations. In
addition, at the time of the Reorganization, Vencor agreed to assume the
defense, on behalf of the Company, of any claims that were pending at the time
of the Reorganization, and which arose out of the ownership or operation of
the healthcare operations. Vencor also agreed to defend, on behalf of the
Company, any claims asserted after the Reorganization which arise out of the
ownership and operation of the healthcare operations. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the Reorganization. If Vencor is unable to satisfy the obligations under these
arrangements, then the Company will be liable for the payment and performance
of such obligations and will have to assume the defense of such claims. The
Company's performance of these obligations and/or the assumption of the
defense of such claims could have a material adverse effect on the results of
operations and financial condition of the Company and on the ability of the
Company to meet the terms of its credit agreement and could prevent the
Company from paying dividends to its stockholders as required to maintain its
status as a REIT.
Vencor maintains insurance for certain professional liability claims and
losses through a wholly owned captive insurance company that insures the first
$2 million of claims and losses. Losses in excess of $2 million are insured
through unrelated commercial insurance carriers.
Lack of Operating History
In connection with the Reorganization, the Company ceased being one of the
largest providers of long-term healthcare services and instead has limited its
activities to owning and acquiring real estate and real estate related assets.
With the exception of the Company's Chief Executive Officer, management has no
experience operating a REIT, and management has no experience in operating a
REIT in the healthcare industry. The Company has relied, and for the
foreseeable future will need to rely, on Vencor to generate sufficient cash
flow from its healthcare operations to enable Vencor to meet the rent
obligations under the Master Leases.
Substantial Leverage and Ability to Raise Capital
The Company is highly leveraged and a substantial portion of its cash flow
from operations is dedicated to the payment of principal and interest on
indebtedness. The Company is substantially dependent upon lease payments from
Vencor to meet its interest expense and principal repayment obligations under
its current debt facilities. These obligations will need to be met before
distributions for any period are made to holders of Common Stock, except that
the Company is permitted under its credit agreements to make such
distributions as are necessary to maintain its status as a REIT. In addition,
the credit standing of the Company will be affected by the general
creditworthiness of Vencor.
27
The Company has $275 million of indebtedness that matures on October 30,
1999. The Company will have to refinance the indebtedness, extend the maturity
date of such indebtedness, raise equity, liquidate assets to pay such
indebtedness, or implement a plan which includes a combination of the
foregoing. There can be no assurance that the Company will be able to
successfully implement such alternatives and any failure to do so could lead
to an event of default under the Company's indebtedness.
Adverse economic conditions could cause the terms on which the Company can
obtain additional borrowings to become unfavorable. In such circumstances, if
the Company is in need of capital to repay indebtedness as it matures or to
otherwise finance indebtedness, the Company may 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 the Company. In addition, certain healthcare regulations may
constrain the ability of the Company to sell assets. There can be no
assurances that the Company
27--1
will be able to meet its debt service obligations and, to the extent that it
cannot, the Company risks the loss of some or all of its assets.
Lack of Control Over Properties
The Company is dependent on the ability of Vencor, as triple-net lessee
under the Master Leases, and its other lessees to manage and maintain the
leased properties. The Company may be unable to take action if it believes
Vencor is operating one of the leased properties inefficiently or in a manner
adverse to the Company's interests, unless a specific material default exists
under a Master Lease. In the case of such a default, the Company's redress may
be limited to terminating the applicable Master Lease and seeking to recover
damages from Vencor. See "--Relationship with Vencor--Master Lease
Agreements." In such event, the Company would have to locate a suitable
lessee/operator for the property under the applicable Master Lease. There can
be no assurance that the Company will be able to locate another suitable
lessee/operator or that if the Company is successful in locating such an
operator, that the rental payments from such new operator would not be
materially less than the existing rental payments. In addition, the ability of
the Company to locate another suitable lessee/operator may be materially
delayed or limited by various state licensing, receivorship, CON or other
laws, as well as Medicare and Medicaid change of ownership rules.
Conflicts of Interest
While the Company believes that the terms of the Master Leases and the other
agreements with Vencor reflect terms that would have been obtained in arm's
length negotiations, the Company and Vencor may be subject to conflicts of
interest and loyalties when enforcing such terms. Because of the pre-existing
and continuing ownership interests and interrelationships between certain
members of management and directors of the Company and Vencor, there may be
conflicts of interest and loyalties with respect to the ongoing operations of
the Company and Vencor. W. Bruce Lunsford is currently Chairman of the Board
of the Company and was Chief Executive Officer of the Company until December
1998. Mr. Lunsford was also Chairman of the Board and Chief Executive Officer
of Vencor through January 1999 and President of Vencor through November 1998.
Currently, however, there are no common members of management or common
directors. In the event that the Master Leases or other agreements are not
enforced on an arm's length basis, the Company's results of operations could
be affected adversely. There can be no assurance that the enforcement of the
terms of such agreements will occur in a manner similar to that which would
occur between unrelated parties, although the Independent Committee of the
Company's Board of Directors has taken and will continue to take steps to
ensure arm's length enforcement by the Company of all agreements with Vencor.
Healthcare Industry Risks
Dependence on Healthcare Industry
Because all of the properties are used as healthcare facilities, the Company
is directly affected by the risks associated with the healthcare industry. The
ability of Vencor and the Company's other tenants and operators to generate
profits and pay rent under their leases may be adversely affected by such
risks. See "Business-- Governmental Regulation."
Vencor and the other lessees derive a substantial portion of their net
operating revenues from third-party payors, including the Medicare and
Medicaid programs. Such programs are highly regulated and subject to frequent
and substantial changes. The Budget Act is intended to reduce the increase in
Medicare payments by $115 billion and reduce the increase in Medicaid payments
by $13 billion between 1998 through 2002 and made extensive changes 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
of operating a healthcare facility. 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 Vencor and other lessees which
28
are currently being reimbursed by Medicare, Medicaid or private payors.
Significant limits on the scope of services reimbursed and on reimbursement
rates and fees could have a material adverse effect on the liquidity,
financial condition and results of operations of Vencor and other lessees.
Extensive Regulation
The healthcare industry is subject to extensive federal, state and local
laws and regulations including, but not limited to, laws and regulations
relating to licensure, conduct of operations, ownership of facilities,
addition of facilities, services, prices for services and billing for
services. These laws authorize periodic inspections and investigations, and
deficiencies which if not corrected can result in sanctions which include loss
of licensure to operate and loss of rights to participate in the Medicare and
Medicaid programs. Regulatory agencies have substantial powers to affect the
actions of operators of the Company's properties if the agencies believe that
there is an imminent threat to patient welfare, and in some state these powers
can include assumption of interim control over facilities through
receiverships. The Anti-kickback Laws prohibit certain business practices and
relationships that might affect the provision 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 Anti-kickback Laws
include criminal penalties and civil sanctions, including fines and possible
exclusion from government programs such as the Medicare and Medicaid programs.
In the ordinary course of its business, the Company's operators are subject
regularly to inquiries, investigations and audits by federal and state
agencies that oversee these laws and regulations. See "Business--Governmental
Regulation."
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Changes in the regulatory framework could have a material adverse
effect on the operators' results of operations, financial condition, and their
ability to make rental payments to the Company.
In the event that any operator of the Company's properties fails to make
rental payments to the Company or to comply with the applicable healthcare
regulations and, in either case, such,operators or their lendors fail to cure
the default prior to the expiration of the applicable cure period, the ability
of the Company to evict that operator and substitute another operator or
operators may be materially delayed or limited by various state licensing,
receivership, CON or other laws, as well as by Medicare and Medicaid change-
of-ownership rules. Such delays and limitations could have a material adverse
effect on the Company's ability to collect rent, to obtain possession of
leased properties, or otherwise to exercise remedies for tenant default. In
addition, the Company may also incur substantial additional expenses in
connection with any such licensing, receivership or change-of-ownership
proceedings.
Healthcare Reform
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,
between 1998 and 2002. Under the Budget Act, annual growth rates for Medicare
will be reduced from over 10% to approximately 7.5% for the period between
1998 and 2002 based on specific program baseline projections from the last
five years. Virtually all spending reductions will come from healthcare
operators and changes in program components.
The Budget Act reduced payments made to the hospitals operated by Vencor by
reducing incentive payments pursuant to TEFRA, allowable costs for capital
expenditures and bad debts, and payments for services to patients transferred
from a PPS hospital. The reductions in allowable costs for capital
expenditures became effective October 1, 1997. The reductions in the TEFRA
incentive payments and allowable costs for bad debts became effective between
May 1, 1998 and September 1, 1998 with respect to the Company's hospitals. The
reductions for payments for services to patients transferred from a PPS
hospital became effective October 1, 1998. The Budget Act also established
Nursing Center PPS for cost reporting periods beginning on or after July 1,
1998. During a nursing center's first three cost reporting periods under
Nursing Center PPS, the per diem rates will be based on a blend of facility-
specific costs and federal costs. Thereafter, the per diem rates will be
29
based solely on federal costs. The rates for such services were published by
HCFA in the Federal Register on May 12, 1998. The payments received under
Nursing Center PPS cover all services for Medicare patients, including all
ancillary services, such as respiratory therapy, physical therapy,
occupational therapy, speech therapy and certain covered drugs. The payments
that Vencor is receiving under Nursing Center PPS are substantially less than
before enactment of the Budget Act. Vencor has been subject to Nursing Center
PPS since July 1, 1998.
The Budget Act established the National Bipartisan Commission on the Future
of Medicare, which held its first meeting on March 6, 1998, and charged it
with reviewing and analyzing financial conditions of Medicare, identifying
problems that threaten the financial integrity of the Medicare Trust Fund, and
making recommendations to address the program's long-term financing
challenges. This Commission recently concluded its deliberations without
making an official recommendation, but proposals considered by the commission
are now under independent consideration by the Congress. The Budget Act also
afforded states more flexibility in administering their Medicaid plans,
including the ability to shift most Medicaid enrollees into managed care plans
without first obtaining a federal waiver. Accordingly, the Medicare and
Medicaid programs, including payment levels and methods, are in a state of
change and are less predictable than before enactment of the Budget Act.
There can be no assurance that the Budget Act, future healthcare legislation
or other changes in the administration or interpretation of governmental
healthcare programs will not have a material adverse effect on the liquidity,
financial condition or results of operations of the Company's operators which
could have a material adverse effect on their ability to make rental payments
to the Company.
Implementation of Original Business Strategy
At the time of the Reorganization, the business strategy of the Company was
to diversify itself from its Vencor tenant concentration. However, current
conditions have impeded this strategy. If and when Vencor has stabilized its
financial condition and the Company has resolved its short-term debt
maturities, the Company intends to re-implement its original business
strategy. Accordingly, if the Company does begin to pursue acquisitions or
development of additional healthcare or other properties, it may encounter
certain risks and/or financing constraints. Acquisitions entail general
investment risk associated with any real estate investments, including risks
that investments will fail to perform in accordance with expectations, the
estimates of the cost of improvements necessary for acquired properties will
prove inaccurate, and the inability of the lessee/operator to meet performance
expectations. The Company does not presently contemplate any development
projects, although if the Company were to pursue new development projects,
such projects would be subject to numerous risks, including risks of
construction delays or cost overruns that may increase project costs, new
project commencement risks such as receipt of zoning, occupancy and other
required governmental approvals and permits and the incurrence of development
costs in connection with projects that are not pursued to completion. The fact
that the Company must distribute 95% of its net taxable income in order to
maintain its qualification as a REIT may limit the Company's ability to rely
upon rental payments from its properties or subsequently acquired properties
to finance acquisitions or new developments. As a result, if debt or equity
financing is not available on acceptable terms, further acquisitions or
development activities might be curtailed or cash available for distribution
would be affected adversely.
The Company competes for investment opportunities with entities that have
substantially greater financial resources than the Company. The Company's
ability to compete successfully for such opportunities is affected by many
factors, including the cost to the Company of obtaining debt and equity
capital at rates comparable to or better than its competitors. Competition
generally may reduce the number of suitable investment opportunities available
to the Company and increase the bargaining power of property owners seeking to
sell, thereby impeding the implementation of the Company's business strategy.
Risks Associated with REIT Status
Failure to Qualify
If the Company does not make an election to be taxed as a REIT because it
cannot meet the applicable requirements for REIT qualification, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
will not be deductible by the Company, nor will they be required to be made.
To the extent of current and accumulated
30
earnings and profits, all distributions to stockholders will be taxable as
ordinary income, and, subject to certain limitations in the Code, corporate
stockholders may be eligible for the dividends received deduction. If the
Company does not make an election to be taxed as a REIT with respect to the
current taxable year (1999), it will not for that reason be prevented from
making an election to be taxed as a REIT with respect to any subsequent
taxable year.
If the Company elects to be taxed as a REIT and that election is revoked or
terminated (e.g., due to a failure to meet the REIT qualification tests), the
Company and its stockholders generally would be subject to the same tax
consequences that are described in the preceding paragraph in the taxable year
in which the Company ceased to qualify as a REIT. In addition, the Company
would be prohibited from re-electing REIT status for the four taxable years
following the year during which the Company ceased to qualify as a REIT,
unless certain relief provisions of the Code applied. It is impossible to
predict whether the Company would be entitled to such statutory relief.
Inability to Maintain Required Distributions
The Company is required to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise
tax. See "Business--Federal Income Tax Considerations--Annual Distribution
Requirements." The Company's funds from operations will be generated primarily
by rental income from the Master Leases. Differences in timing between taxable
income and cash flow could require the Company to borrow funds on a short-term
basis to meet the 95% distribution requirement. The Company's debt facilities
may restrict the ability of the Company to incur additional indebtedness under
certain circumstances, thereby preventing the Company from borrowing funds in
order to make such distributions. In addition, the failure of Vencor to make
rental payments under the Master Leases would impair materially the ability of
the Company to make distributions. Consequently, there can be no assurance
that the Company will be able to make distributions at the required
distribution rate or any other rate.
Potential Liabilities Due to Fraudulent Transfer Considerations and Legal
Dividend Requirements
The Reorganization and the simultaneous distribution of the Vencor common
stock to the Ventas stockholders (the "Distribution") are subject to review
under state fraudulent conveyance laws, and in the event of a bankruptcy
proceeding, federal fraudulent conveyance laws. Under these laws, if a court
in a lawsuit by an unpaid creditor or a representative of creditors (such as a
trustee or debtor-in-possession in bankruptcy of the Company or any of its
respective subsidiaries) were to determine that, as of the Reorganization, 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) was insolvent or was
rendered insolvent, (ii) had unreasonably small capital with which to carry on
its business and all businesses in which it intended to engage, or (iii)
intended to incur, or believed it would incur, debts beyond its ability to
repay such debts as they would mature, then such court could 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.
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 believes that (i) the Company and each of its subsidiaries were
solvent (in accordance with the foregoing definitions) at the time of
Distribution, were able to repay their debts as they matured following the
Reorganization and the Distribution and had sufficient capital to carry on
their respective businesses and (ii) the Distribution was made entirely in
compliance with Delaware Law.
31
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 and the Distribution or whether lawful
funds were available for the Distribution.
The agreement between the Company and Vencor pursuant to which the
Reorganization was effected (the "Reorganization Agreement") and certain of
the ancillary agreements to the Reorganization Agreement provide for the
allocation, immediately prior to the Distribution, of certain debt of the
Company. Further, pursuant to the Reorganization Agreement, from and after the
date of the Reorganization and the Distribution, each of the Company and
Vencor is responsible for the debts, liabilities and other obligations related
to the businesses which it owns and operates following the consummation of the
Reorganization and the Distribution. It is possible that a court would
disregard the allocation agreed to among the parties, and require the Company
or Vencor to assume responsibility for obligations allocated to the other,
particularly if the other were to refuse or to be unable to pay or perform the
subject allocated obligations.
Unasserted Claims
During the Company's discussions with Vencor, Vencor has asserted various
potential claims against the Company arising out of the Reorganization. The
Company intends to vigorously defend these claims if they are asserted in a
legal or mediation proceeding. If these claims were to prevail, it could have
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreement and could prevent the Company from paying dividends to its
stockholders required to maintain its status as a REIT.
Effects of Bankruptcy Proceedings
The Company's ability to manage its assets and operations is subject to
state laws that limit creditors' rights and remedies available to real
property owners to collect delinquent rents, and with respect to tenants of
the Company who are subject to a bankruptcy proceeding, to federal bankruptcy
laws. If a tenant files for bankruptcy protection, the tenant, including
without limitation, Vencor, will have an obligation to pay rent to the Company
as landlord during the pendancy of the proceeding. The tenant will also have
the right to assume or reject any real property lease to which the tenant is a
party. If the tenant assumes a real property lease, it must do so pursuant to
the original contract terms and it must cure all pre-petition and all post-
petition defaults under the lease. If the tenant rejects a real property
lease, the Company may lease the property to another tenant. If a tenant
becomes insolvent or files for bankruptcy protection, there can be no
assurances that the Company will be able to timely recover the premises from
the tenant or from a trustee or debtor-in-possession in any bankruptcy
proceeding relating to that tenant. There can also be no assurances that the
Company will receive rent in the proceeding equal to the amount set forth in
the leases or sufficient to cover the Company's expenses with respect to the
premises. If a tenant becomes subject to bankruptcy protection, the U.S.
Bankruptcy Code will apply, which may restrict the amount and recoverability
of the Company's claims against the tenant. These proceedings could have a
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreements and could prevent the Company from paying dividends to its
stockholders as required to maintain its status as a REIT.
If Vencor were to become a debtor in a bankruptcy case commenced under the
U.S. Bankruptcy Code, then Vencor as a debtor in possession or any trustee
appointed for it could seek to avoid transfers made and obligations incurred
as part of the Reorganization. Under fraudulent transfer laws, such transfers
and obligations could be avoided if they were made or incurred with the actual
intent to delay, hinder or defraud creditors. They also could be avoided if,
as of the Reorganization, Vencor did not receive fair consideration or
reasonably equivalent value in exchange for the transfers and obligations made
and incurred by it and, at the time of the Reorganization, Vencor (i) was
insolvent or was rendered insolvent, (ii) had unreasonably small capital with
which to carry on its business and all businesses in which it intended to
engage, or (iii) intended to incur, or believed it would incur, debts beyond
its ability to repay such debts as they would mature.
32
The Company believes that Vencor was solvent (in accordance with the
foregoing definitions) at the time of Reorganization, was able to repay its
debts as they matured following the Reorganization and had sufficient capital
to carry on its business. Moreover, the Company at the time of the
Reorganization received third party opinions as to Vencor's solvency and the
adequacy of Vencor's capitalization. There is no certainty, however, that a
court would reach the same conclusions in determining whether Vencor was
insolvent or adequately capitalized at the time of, or after giving effect to,
the Reorganization.
Item 2. Properties
The Company believes that it has a high quality portfolio of healthcare
facilities, diversified in terms of geography and healthcare services provided
at such facilities. The Company believes that the geographic diversity of the
leased properties makes the portfolio less susceptible to adverse changes in
state regulation and regional economic downturns. The long-term acute care
hospitals owned by the Company primarily provide long-term acute care to
medically complex, chronically ill patients, covering approximately 4,194 beds
in 45 hospitals. The nursing centers owned by the Company are leading
providers of rehabilitation services, including physical, occupational and
speech therapies, and care for patients with Alzheimer's disease, covering
approximately 28,492 beds in 219 nursing centers. The personal care facilities
owned by the Company provide services including supporting living services,
neurorehabilitation, neurobehavioral management and vocational programs,
covering approximately 136 beds in eight centers.
32--1
The following table sets forth certain information for each hospital owned by
the Company:
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
ARIZONA: $ 2,814,000
Vencor Hospital--Phoenix..................... 58
Vencor Hospital--Tucson...................... 51
CALIFORNIA: $11,187,000
THC, Orange County........................... 48
Vencor Hospital--Ontario..................... 91
Vencor Hospital--San Leandro................. 99
Vencor Hospital--Orange County............... 99
Vencor Hospital--San Diego................... 70
Recovery Inn of Menlo Park................... 16
COLORADO: $ 2,360,000
Vencor Hospital--Denver...................... 68
FLORIDA: $13,458,000
Vencor Hospital--Central Tampa............... 102
Vencor Hospital--Coral Gables................ 53
Vencor Hospital--Ft. Lauderdale.............. 64
Vencor Hospital--Hollywood................... 124
Vencor Hospital--St. Petersburg.............. 60
Vencor Hospital--North Florida............... 60
ILLINOIS: $11,921,000
Vencor Hospital--Chicago North............... 205
Vencor Hospital--Sycamore.................... 77
Vencor Hospital--Northlake................... 94
Vencor Hospital--Lake Shore.................. 103
INDIANA: $ 3,392,000
Vencor Hospital--Indianapolis................ 59
Vencor Hospital--LaGrange.................... 62
KENTUCKY: $ 4,189,000
Vencor Hospital--Louisville.................. 374
LOUISIANA: $ 500,000
Vencor Hospital--New Orleans................. 168
MASSACHUSETTS: $ 2,912,000
Vencor Hospital--Boston...................... 36
Vencor Hospital--Boston Northshore........... 50
MICHIGAN: $ 2,556,000
Vencor Hospital--Metro Detroit............... 240
Vencor Hospital--Detroit..................... 160
MINNESOTA: $ 800,000
Vencor Hospital--Minneapolis................. 111
MISSOURI: $ 5,212,000
Vencor Hospital--Kansas City................. 167
Vencor Hospital--St. Louis................... 60
33
Total Licensed
Annual Rent Beds by
Facility and Location by State(1) Facility
- - --------------------- ----------- --------
NEVADA: $ 500,000
THC--Las Vegas Hospital.................................... 52
NEW MEXICO: $ 600,000
Vencor Hospital--Albuquerque(2)............................ 61
NORTH CAROLINA: $ 6,147,000
Vencor Hospital--Greensboro................................ 124
OKLAHOMA: $ 1,492,000
Vencor Hospital--Oklahoma City............................. 59
PENNSYLVANIA: $ 3,508,000
Vencor Hospital--Philadelphia.............................. 52
Vencor Hospital--Pittsburgh................................ 63
TENNESSEE: $ 1,602,000
Vencor Hospital--Chattanooga............................... 49
TEXAS:..................................................... $10,454,000
Vencor Hospital--Ft. Worth Southwest....................... 80
Vencor Hospital--Ft. Worth West............................ 67
Vencor Hospital--Houston(2)................................ 94
Vencor Hospital--Houston Northwest......................... 84
Vencor Hospital--Mansfield................................. 55
Vencor Hospital--San Antonio............................... 59
VIRGINIA:.................................................. $ 3,802,000
Vencor Hospital--Arlington................................. 206
WISCONSIN:................................................. $ 834,000
Vencor Hospital--Mt. Carmel................................ 60
----------- -----
TOTAL...................................................... $90,240,000 4,194
=========== =====
- - --------
(1) Based on contract rental amounts as of March 1, 1999
(2) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of ground lease, improvements revert to the
landlord.
The following table sets forth certain information for each nursing center
that is owned or leased by the Company:
Total
Annual Licensed
Rent by Beds by
Facility and Location State(1) Facility
- - --------------------- ---------- --------
ALABAMA:.................................................. $2,507,000
Rehabilitation & Healthcare Center of Huntsville--
Huntsville............................................... 159
Rehabilitation & Healthcare Center of Birmingham--
Birmingham(2)............................................ 114
Rehabilitation & Healthcare Center of Mobile--Mobile(2)... 174
ARIZONA:.................................................. $2,624,000
Valley Healthcare & Rehabilitation Center--Tucson......... 147
Desert Life Rehabilitation & Care Center--Tucson.......... 240
Sonoran Rehabilitation & Care Center--Phoenix............. 100
Villa Campana Healthcare Center--Tucson................... 120
Kachina Point Health Care & Rehabilitation--Sedona........ 120
Hacienda Rehabilitation and Care Center--Sierra Vista(3).. 100
34
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
CALIFORNIA:............................. $5,389,000
Nob Hill Healthcare Center--San
Francisco.............................. 180
Canyonwood Nursing & Rehabilitation
Center--Redding........................ 115
Californian Care Center--Bakersfield.... 160
Magnolia Gardens Care Center--
Burlingame............................. 84
Lawton Healthcare Center--San
Francisco.............................. 75
Valley Gardens Healthcare &
Rehabilitation--Stockton............... 120
Alta Vista Healthcare Center--
Riverside.............................. 99
Maywood Acres Healthcare Center--
Oxnard................................. 98
La Veta Healthcare Center--Orange(2).... 112
Bay View Nursing & Rehabilitation
Center--Alameda........................ 180
Village Square Nursing & Rehabilitation
Center--San Marcos..................... 120
COLORADO: $4,910,000
Cherry Hills Health Care Center--
Englewood.............................. 95
Aurora Care Center--Aurora.............. 120
Castle Garden Care Center--Northglenn... 180
Brighton Care Center--Brighton.......... 120
CONNECTICUT: $4,625,000
Andrew House Healthcare--New Britain.... 90
Camelot Nursing & Rehabilitation
Center--New London..................... 66
Hamilton Rehabilitation & Healthcare
Center--Norwich........................ 160
Windsor Rehabilitation & Healthcare
Center--Windsor........................ 120
Nutmeg Pavilion Healthcare--New London.. 140
Parkway Pavilion Healthcare--Enfield.... 140
Courtland Gardens Health Center, Inc.--
Stamford............................... 180
Homestead Health Center--Stamford....... 87
FLORIDA: $8,400,000
Bay Pointe Nursing Pavilion--St.
Petersburg............................. 120
East Manor Medical Care Center--
Sarasota............................... 169
Healthcare & Rehabilitation Center of
Sanford--Sanford....................... 114
Titusville Rehabilitation & Nursing
Center--Titusville..................... 157
Colonial Oaks Rehabilitation Center-Ft.
Myers--Ft. Myers....................... 120
Carrollwood Care Center--Tampa.......... 120
Evergreen Woods Healthcare &
Rehabilitation--Springhill............. 120
Rehabilitation & Healthcare Center of
Tampa--Tampa........................... 174
Rehabilitation & Healthcare Center of
Cape Coral--Cape Coral................. 120
Casa Mora Rehabilitation & Extended
Care--Bradenton........................ 240
North Broward Rehabilitation & Nursing
Center--Pompano Beach.................. 194
Highland Pines Rehabilitation Center--
Clearwater............................. 120
Pompano Rehabilitation & Nursing
Center--Pompano Beach.................. 127
Abbey Rehabilitation & Nursing Center--
St. Petersburg......................... 152
Windsor Woods Convalescent Center--
Hudson................................. 103
GEORGIA: $2,597,000
Savannah Rehabilitation & Nursing
Center--Savannah....................... 120
Specialty Care of Marietta--Marietta.... 146
Lafayette Nursing & Rehabilitation
Center--Fayetteville................... 179
Savannah Specialty Care Center--
Savannah............................... 104
Tucker Nursing Center--Tucker........... 148
35
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
IDAHO: $ 4,127,000
Cascade Care Center--Caldwell.............. 112
Emmett Rehabilitation and Healthcare--
Emmett.................................... 95
Lewiston Rehabilitation and Care Center--
Lewiston.................................. 96
Nampa Care Center--Nampa................... 151
Weiser Rehabilitation and Care Center--
Weiser.................................... 89
Moscow Care Center--Moscow................. 94
Mountain Valley Care and Rehabilitation--
Kellogg................................... 68
Hillcrest Rehabilitation and Care Center--
Boise..................................... 123
INDIANA: $11,879,489
Rolling Hills Health Care Center--New
Albany.................................... 115
Royal Oaks Healthcare & Rehabilitation
Center--Terre Haute....................... 230
Southwood Health & Rehabilitation Center--
Terre Haute............................... 149
Valley View Health Care Center--Elkhart.... 140
Wildwood Healthcare Center--Indianapolis... 173
Meadowvale Healthcare & Rehabilitation
Center--Bluffton.......................... 120
Columbia Healthcare Facility--Evansville... 186
Bremen Health Care Center--Bremen.......... 97
Windsor Estates Health & Rehabilitation
Center--Kokomo............................ 145
Muncie Health Care & Rehabilitation--
Muncie.................................... 205
Parkwood Health Care Center--Lebanon....... 153
Westview Nursing & Rehabilitation Center--
Bedford................................... 149
Columbus Health & Rehabilitation Center--
Columbus.................................. 235
Wedgewood Healthcare Center--Clarksville... 124
Vencor Corydon--Corydon.................... 80
KENTUCKY: $ 7,247,000
Rosewood Health Care Center--Bowling
Green..................................... 186
Oakview Nursing & Rehabilitation Center--
Calvert City.............................. 116
Cedars of Lebanon Nursing Center--Lebanon.. 94
Winchester Centre for
Health/Rehabilitation--Winchester......... 192
Riverside Manor Health Care--Calhoun....... 84
Maple Manor Healthcare Center--Greenville.. 101
Danville Centre for Health &
Rehabilitation--Danville.................. 106
Lexington Centre for Health &
Rehabilitation--Lexington................. 180
North Centre for Health & Rehabilitation--
Louisville................................ 120
Hillcrest Health Care Center--Owensboro.... 156
Woodland Terrace Health Care Facility--
Elizabethtown............................. 118
Harrodsburg Health Care Center--
Harrodsburg............................... 112
MAINE: $ 4,121,000
Augusta Rehabilitation Center--Augusta..... 78
Eastside Rehabilitation and Living Center--
Bangor.................................... 78
Winship Green Nursing Center--Bath......... 72
Brewer Rehabilitation & Living Center--
Brewer.................................... 114
Kennebunk Nursing Center--Kennebunk........ 80
Norway Rehabilitation & Living Center--
Norway.................................... 73
Shore Village Rehabilitation & Nursing
Center--Rockland.......................... 61
Westgate Manor--Bangor..................... 118
Brentwood Rehabilitation & Nursing Center--
Yarmouth.................................. 83
Fieldcrest Manor Nursing Center--
Waldoboro................................. 70
36
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
MASSACHUSETTS: $15,609,000
Laurel Ridge Rehabilitation & Nursing
Center--Jamaica Plain..................... 120
Blue Hills Alzheimer's Care Center--
Stoughton................................. 101
Brigham Manor Nursing & Rehabilitation
Center--Newburyport....................... 64
Presentation Nursing & Rehabilitation
Center--Brighton.......................... 122
Country Manor Rehabilitation & Nursing
Center--Newburyport....................... 123
Crawford Skilled Nursing & Rehabilitation
Center--Fall River........................ 124
Hallmark Nursing & Rehabilitation Center--
New Bedford............................... 124
Sachem Nursing & Rehabilitation Center--
East Bridgewater.......................... 123
Hammersmith House Nursing Care Center--
Saugus.................................... 88
Oakwood Rehabilitation & Nursing Center--
Webster................................... 81
Timberlyn Heights Nursing & Alzheimer's
Center Great--Barrington.................. 78
Star of David Nursing &
Rehabilitation/Alzheimer's Center--West
Roxbury................................... 149
Brittany Healthcare Center--Natick......... 126
Briarwood Health Care Nursing Center--
Needham................................... 120
Westridge Healthcare Center--Marlborough... 196
Bolton Manor Nursing Center--Marlborough... 160
Hillcrest Nursing Center--Fitchburg........ 96
Country Gardens Skilled Nursing &
Rehabilitation--Swansea................... 86
Quincy Rehabilitation & Nursing Center--
Quincy.................................... 139
West Roxbury Manor--West Roxbury........... 76
Newton and Wellesley Alzheimer Center--
Wellesley................................. 110
Den-Mar Rehabilitation & Nursing Center--
Rockport(2)............................... 80
Eagle Pond Rehabilitation & Living Center--
South Denis............................... 142
Blueberry Hill Healthcare--Beverly......... 146
Colony House Nursing & Rehabilitation
Center--Abington.......................... 102
Embassy House Skilled Nursing &
Rehabilitation--Brockton.................. 123
Franklin Skilled Nursing & Rehabilitation
Center--Franklin.......................... 82
Great Barrington Rehabilitation & Nursing
Center--Great Barrington.................. 106
River Terrace--Lancaster................... 82
Walden Rehabilitation & Nursing Center--
Concord................................... 123
Harrington House Nursing & Rehabilitation
Center--Walpole........................... 90
MICHIGAN: $ 1,489,704
Birchwood Care Center--Marne............... 239
Grayling Health Care Center--Grayling...... 120
Clara Barton Terrace--Flint................ 149
Mary Avenue Care Center--Lansing........... 134
MINNESOTA: $ 250,000
Bearcreek Rehabilitation Center--
Rochester(7).............................. 159
MONTANA: $ 1,972,000
Park Place Health Care Center--Great
Falls..................................... 223
Parkview Acres Care & Rehabilitation
Center--Dillon............................ 108
NEBRASKA: $ 1,629,000
Homestead Healthcare and Rehabilitation
Center--Lincoln........................... 167
NEVADA: $ 1,042,188
Las Vegas Healthcare & Rehabilitation
Center--Las Vegas......................... 79
Torrey Pines Care Center--Las Vegas(4)..... 105(4)
Shadowmountain Convalescent Center--Las
Vegas..................................... 125
37
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
NEW HAMPSHIRE: $3,029,000
Dover Rehabilitation & Living Center--
Dover..................................... 112
Greenbriar Terrace Healthcare--Nashua(2)... 300
Hanover Terrace Healthcare--Hanover........ 100
NORTH CAROLINA: $9,277,000
Pettigrew Rehabilitation & Healthcare
Center--Durham............................ 107
LaSalle Healthcare Center--Durham.......... 126
Sunnybrook Alzheimer's & Healthcare
Specialist--Raleigh....................... 126
Blue Ridge Rehabilitation & Healthcare
Center--Asheville......................... 120
Raleigh Rehabilitation & Healthcare
Center--Raleigh........................... 174
Rose Manor Health Care Center--Durham...... 123
Cypress Pointe Rehabilitation & Healthcare
Center--Wilmington........................ 100
Winston-Salem Rehabilitation & Healthcare
Center--Winston-Salem..................... 230
Silas Creek Manor--Winston-Salem........... 99
Lincoln Nursing Center--Lincolnton......... 120
Guardian Care of Roanoke Rapids--Roanoke
Rapids.................................... 110
Guardian Care of Henderson--Henderson...... 80
Rehabilitation & Nursing Center of Monroe--
Monroe.................................... 174
Guardian Care of Kinston--Kinston.......... 114
Guardian Care of Zebulon--Zebulon.......... 60
Guardian Care of Rocky Mount--Rocky
Mount(1).................................. 118
Rehabilitation & Health Center of
Gastonia--Gastonia........................ 118
Chapel Hill Rehabilitation & Healthcare
Center--Chapel Hill....................... 120
Guardian Care of Elizabeth City--Elizabeth
City(5)................................... 120
OHIO: $8,552,836
Franklin Woods Health Care Center--
Columbus.................................. 100
Chillicothe Nursing & Rehabilitation
Center--Chillicothe....................... 101
Pickerington Nursing & Rehabilitation
Center--Pickerington...................... 100
Logan Health Care Center--Logan............ 159
Winchester Place Nursing & Rehabilitation
Center Canal--Winchester.................. 201
Minerva Park Nursing & Rehabilitation
Center--Columbus.......................... 101
West Lafayette Rehabilitation & Nursing
Center--West Lafayette.................... 96
Cambridge Healthcare & Rehabilitation
Center--Cambridge......................... 159
Coshocton Healthcare & Rehabilitation
Center--Coshocton......................... 110
Bridgepark Center for Rehabilitation &
Nursing Service--Akron.................... 174
Lebanon Country Manor--Lebanon............. 100
Marietta Convalescent Center--Marietta..... 150
Marigande--Sylvania Nursing Center--
Toledo.................................... 99
OREGON: $ 706,000
Sunnyside Care Center--Salem............... 124
Medford Rehabilitation and Healthcare
Center--Medford........................... 130
PENNSYLVANIA: $ 625,000
Wyomissing Nursing & Rehabilitation
Center--Reading........................... 103
RHODE ISLAND: $1,082,000
Health Havens Nursing & Rehabilitation
Center--E. Providence..................... 58
Oak Hill Nursing & Rehabilitation Center--
Pawtucket................................. 143
38
Total Annual Licensed
Facility and Location Rent by State (1) Beds by Facility
- - --------------------- ----------------- ----------------
TENNESSEE: $ 3,616,322
Madison Healthcare & Rehabilitation
Center--Madison........................... 102
Cordova Rehabilitation & Nursing Center--
Cordova................................... 284
Primacy Healthcare & Rehabilitation
Center--Memphis........................... 120
Masters Health Care Center--Algood......... 175
TEXAS: $ 250,000
San Pedro Manor--San Antonio............... 150
UTAH: $ 3,173,000
Wasatch Care Center--Ogden................. 69
Crosslands Rehabilitation & Health Care
Center--Sandy............................. 120
St. George Care and Rehabilitation Center--
St. George................................ 159
Federal Heights Rehabilitation & Nursing
Center--Salt Lake City.................... 154
Wasatch Valley Rehabilitation--Salt Lake
City...................................... 118
VERMONT: $ 738,000
Birchwood Terrace Healthcare--
Burlington(2)............................. 160
VIRGINIA: $ 2,262,000
Nansemond Pointe Rehabilitation & Health
Care Center--Suffolk...................... 194
Harbour Pointe Medical & Rehabilitation
Centre--Norfolk........................... 172
River Pointe Rehabilitation & Healthcare
Center--Virginia Beach.................... 160
Bay Pointe Medical & Rehabilitation
Centre--Virginia Beach.................... 118
WASHINGTON: $ 5,658,000
Arden Rehabilitation & Healthcare Center--
Seattle................................... 100
Northwest Continuum Care Center--Longview.. 74
Bellingham Health Care & Rehabilitation
Services--Bellingham...................... 111
Rainier Vista Care Center--Puyallup........ 120
Lakewood Healthcare Center--Lakewood....... 80
Vencor of Vancouver Healthcare &
Rehabilitation--Vancouver................. 98
Heritage Health & Rehabilitation Center--
Vancouver................................. 53
Edmonds Rehabilitation & Healthcare
Center--Edmonds........................... 98
Queen Anne Healthcare--Seattle............. 171
WISCONSIN: $ 13,147,000
Eastview Medical & Rehabilitation Center--
Antigo.................................... 173
Colonial Manor Medical & Rehabilitation
Center--Wausau............................ 152
Colony Oaks Care Center--Appleton.......... 102
North Ridge Medical & Rehabilitation
Center--Manitowoc......................... 120
Vallhaven Care Center--Neenah.............. 133
Kennedy Park Medical & Rehabilitation
Center--Schofield......................... 164
Family Heritage Medical & Rehabilitation
Center--Wisconsin Rapid................... 140
Mt. Carmel Medical & Rehabilitation
Center--Burlington........................ 155
Mt. Carmel Healthcare & Rehabilitation
Center--Milwaukee......................... 657(5)
Sheridan Medical Complex--Kenosha.......... 106
Woodstock Healthcare & Rehabilitation
Center--Kenosha........................... 183
San Luis Medical and Rehabilitation
Center--Green Bay......................... 164
WYOMING: $ 2,236,000
Mountain Towers Healthcare &
Rehabilitation--Cheyenne.................. 170
South Central Wyoming Healthcare &
Rehabilitation--Rawlins................... 90
Wind River Healthcare & Rehabilitation
Center--Riverton.......................... 90
Sage View Care Center--Rock Springs........ 101
------------ ------
TOTAL...................................... $134,770,539 28,492
============ ======
39
- - --------
(1) Based on contract rental amounts as of March 1, 1999
(2) The land is leased under a ground lease and improvements are owned by the
Company. Upon expiration of ground lease, improvements revert to the
landlord.
(3) Property is leased by the Company with an absolute option to purchase on
or after September 1, 1999. The consideration to be paid by the Company
will be in the form of the cancellation of a $2.7 million note made by the
landlord/owner payable to the order of the Company.
(4) In accordance with the terms of the Master Lease, the 15 acute care
hospital beds located in this facility were converted to nursing center
beds in 1998.
(5) Property is leased by the Company. The Company has exercised its option to
purchase the facility and is in a dispute with the present owner of the
property regarding the validity of the Company's option to purchase the
facility.
(6) In January 1999, the Company agreed to a reduction in the number of
licensed beds to 457 beds. The Company agreed to this reduction in
connection with a global settlement by Vencor of certain de-certification
actions by the state and federal regulatory authorities relative to this
facility. See "Legal Proceedings."
(7) The operator of this facility has failed to pay rent since February 1,
1999. In addition, the operator has indicated that it may file liquidation
proceedings under the federal bankruptcy laws.
The following table sets forth certain information for each personal care
facility owned by the Company:
Total Annual Licensed
Facility and Location Rent by State(1) Beds by Facility
- - --------------------- ---------------- ----------------
TEXAS: $730,644
========
Tangram -- 8 sites............................ 136
===
- - --------
(1) Based on contract rental amounts as of March 1, 1999
Item 3. Legal Proceedings
The following litigation and other matters arose from the Company's
operations prior to the Reorganization. In connection with the Reorganization,
Vencor agreed to assume the defense, on behalf of the Company, of any claims
that were pending at the time of the Reorganization and which arose out of the
ownership or operation of the healthcare operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the Reorganization
which arose out of the ownership and operation of the healthcare operations.
However, there can be no assurance that Vencor will continue to defend the
Company in such proceedings and actions or that Vencor will have sufficient
assets, income and access to financing to enable it to satisfy such
indemnification obligations or its obligations incurred in connection with the
Reorganization. In addition, the following descriptions are based on
information provided to the Company by Vencor. Because the Company and Vencor
have been unable to agree to date on acceptable terms for the sharing of
certain information, the Company has not been able to and has not conducted an
independent investigation to verify the facts surrounding these proceedings or
actions.
On October 21, 1998, Vencor was notified by HCFA Administrator in Chicago,
Illinois and the State of Wisconsin that the Medicare and Medicaid
certification for its 657-bed skilled nursing facility known as Mt. Carmel
Health & Rehabilitation Center in Milwaukee, Wisconsin (the "Facility") would
be terminated effective November 6, 1998. The State of Wisconsin Department of
Health and Family Services also informed Vencor that the Facility's license
would be terminated as of February 13, 1999. The Facility appealed that
termination. These actions resulted from the Facility's failure to attain
substantial compliance with federal and state requirements by an October 12,
1998 deadline. On November 6, 1998, Vencor filed an action against HCFA in
Federal District Court in Washington, D.C. and obtained an order enjoining
HCFA and its agents, including the State of Wisconsin, from terminating the
Facility's certification and from relocating any of the Facility's
40
residents. That case was dismissed after Vencor reached agreements with state
and federal authorities to settle all fines and penalties and extend the
threatened certification termination date to January 29, 1999. Vencor has paid
state and federal fines totaling $500,000. On January 29, 1999, the Facility
was determined to be in substantial compliance with federal and state
requirements, which removed the threat of Medicare and Medicaid
decertification. On January 29, 1999, the Facility's license and operations
were transferred to Benedictine Health Dimensions ("BHD"), an unrelated
entity, under a management agreement with Vencor. There was no reduction in
the rent under the applicable Master Lease in connection with the transfer of
the licenses and operations to BHD, and Vencor remains primarily liable for
the payment of the full rental amount and the performance of all the tenant's
obligations under the applicable Master Lease. Vencor pays BHD a management
fee under the management agreement.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida (which was subsequently transferred
to Vencor in the Reorganization), which ordered the nursing center to cease
notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition,
HCFA imposed a fine of $113,000. Vencor, on behalf of the Company, appealed
both the AHCA and HCFA fines and has settled both appeals for a total of
$370,000. Vencor, on behalf of the Company, submitted an acceptable plan of
correction at the Tampa nursing center and was informed by AHCA that
"immediate jeopardy" no longer existed. The threatened termination of the
Tampa nursing center's Medicare provider agreement also was reversed. The
temporary injunction order has been dissolved, and that legal action has been
dismissed.
The Tampa Prosecuting Attorney's office has indicated to Vencor that it was
conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. Vencor cooperated fully with this
investigation and has been informed that no action will be taken against
Vencor.
Vencor received notice in June 1998 that the State of Georgia found
regulatory violations with respect to patient discharges, among other things,
at one of Vencor's nursing centers in Savannah, Georgia. The state recommended
a federal fine of $543,000 for these violations, which HCFA has imposed.
Vencor has appealed this fine.
The HCFA Administrator of the Medicare and Medicaid programs indicated in
April 1998 that the operations at the Company's facilities in other states
also are being monitored.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported
class consisting of certain residents of the Tampa nursing center and other
residents in the Company's nursing centers nationwide (which were subsequently
transferred to Vencor in the Reorganization). The complaint alleges various
breaches of contract, and statutory and regulatory violations including
violations of federal and state RICO statutes. The original complaint has been
amended to delineate several purported subclasses. The plaintiffs seek class
certification, unspecified damages, attorneys' fees and costs. Vencor, on
behalf of the Company, is defending this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning the Company's current operations
and the inherent value of the Company's common stock. The complaint further
alleges that as a result of these purported false and misleading statements
concerning the Company's revenues and successful acquisitions, the price of
the Company's common stock was artificially
41
inflated. In particular, the complaint alleges that the Company issued false
and misleading financial statements during the first, second and third
calendar quarters of 1997 which misrepresented and understated the impact that
changes in Medicare reimbursement policies would have on the Company's core
services and profitability. The complaint further alleges that the Company
issued a series of materially false statements concerning the purportedly
successful integration of its recent acquisitions and prospective earnings per
share for 1997 and 1998 which the Company knew lacked any reasonable basis and
were not being achieved. The suit seeks damages in an amount to be proven at
trial, pre-judgment and post-judgment interest, reasonable attorneys' fees,
expert witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has
an effective remedy. On January 22, 1999, the court granted Vencor's motion,
acting on behalf of the Company, to dismiss the case. The plaintiff has
appealed the dismissal to the United States Court of Appeals for the Sixth
Circuit. Vencor, on behalf of the Company, is defending this action
vigorously.
A stockholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of Vencor and the Company against certain current and
former executive officers and directors of Vencor and the Company. The
complaint alleges that the defendants damaged the Vencor and the Company by
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of Vencor and the
Company. The plaintiff asserts that such actions were taken deliberately, in
bad faith and constitute breaches of the defendants' duties of loyalty and due
care. The complaint is based on substantially similar assertions to those made
in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that Vencor and the Company have an effective remedy. Vencor
and the Company each believe that the allegations in the complaint are without
merit and Vencor, on behalf of the Company, intends to defend this action
vigorously.
A class action lawsuit entitled Jules Brody v. Transitional Hospital
Corporation, et al., Case No. CV-S-97-00747-PMP, was filed on June 19, 1997 in
the United States District Court for the District of Nevada on behalf of a
class consisting of all persons who sold shares of Transitional 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 making the required
disclosure that such an offer had been made. The complaint further alleges
that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had
reached an advanced stage with actual firm offers at substantial premiums to
the trading price of Transitional's stock having been made which were actively
being considered by Transitional's Board of Directors. The complaint asserts
claims pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and
common law principles of negligent misrepresentation and names as defendants
Transitional as well as certain former senior executives and directors of
Transitional. The plaintiff seeks class certification, unspecified damages,
attorneys' fees and costs. On June 18, 1998, the court granted Vencor's
motion, acting on behalf of the Company, to dismiss with leave to amend the
Section 10(b) claim and the state law claims for misrepresentation. The court
denied Vencor's motion to dismiss the Section 14(e) and Section 20(a) claims.
Vencor, on behalf of the Company, has filed a motion for reconsideration and
intends to defend vigorously this action.
Vencor's subsidiary, American X-Rays, Inc. ("AXR"), which was previously a
subsidiary of the Company, is the defendant in a civil qui tam lawsuit which
was filed in the United States District Court for the Eastern District of
Arkansas and served on the Company on July 7, 1997. The United States
Department of Justice has intervened in the suit which was brought under the
Federal Civil False Claims Act. AXR provided portable X-ray services to
nursing facilities (including those operated by the Company) 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 civil law suit alleges that AXR
submitted false claims to the Medicare and Medicaid programs. The suit seeks
damages in an amount of not less than
42
$1,000,000, treble damages and civil penalties. In a related criminal
investigation, the United States Attorney's Office for the Eastern District of
Arkansas indicted four former employees of AXR; those individuals were
convicted of various fraud related counts in January 1999. AXR had been
informed previously that it was not a target of the criminal investigation,
and AXR was not indicted. Vencor, on behalf of the Company, cooperated fully
in the criminal investigation. Vencor, on behalf of the Company, is defending
vigorously the qui tam action.
On June 6, 1997, Transitional announced that it had been advised that it was
the target of a federal grand jury investigation being conducted by the United
States Attorney's Office for the District of Massachusetts 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. In
March 1998, the Company was added as a defendant to a previously pending qui
tam lawsuit against the other partners related to the partnerships' former
Medicare billing practices. Vencor, on behalf of the Company, is vigorously
defending the action.
Vencor's subsidiary, TheraTx, which was previously a subsidiary of the
Company, was a defendant and counterclaimant in an action pending in state
court in Jacksonville, Florida entitled Highland Pines Nursing Center, Inc.,
et al. v. TheraTx, Incorporated, et al. The plaintiffs claimed that they were
entitled to up to $40 million in earnout compensation from TheraTx's purchase
of several businesses from the plaintiffs in 1995 and to damages from related
tort claims. TheraTx asserted fraud counterclaims against the plaintiffs
relating to the original purchase. This case, along with other pending claims
between TheraTx and the various plaintiffs, was settled in January 1999 by
TheraTx's payment of $16.2 million in cash and other consideration to the
plaintiffs. All legal actions between the parties have been dismissed pursuant
to the settlement.
Vencor has been informed by the U.S. Department of Justice that it is the
subject of ongoing investigations into various aspects of its Medicare billing
practices. This investigation also includes the Company's healthcare
operations prior to the date of the Reorganization. Vencor is cooperating
fully in the investigations.
Vencor is a party to certain legal actions and regulatory investigations
arising in the normal course of its business. Neither the Company nor Vencor
is able to predict the ultimate outcome of pending litigation and regulatory
investigations. In addition, there can be no assurance that HCFA or other
regulatory agencies will not initiate additional investigations related to
Vencor's business in the future, nor can there be any assurance that the
resolution of any litigation or investigations, either individually or in the
aggregate, would not have a material adverse effect on Vencor's liquidity,
financial position or results of operations, which in turn could have a
material adverse effect on the results of operations and financial condition
of the Company and on the ability of the Company to meet the terms of its
credit agreements and could prevent the Company from paying dividends to its
stockholders as required to maintain its status as a REIT.
The Company is a party to certain legal actions and regulatory
investigations which arise from the normal course of its prior healthcare
operations. The Company is unable to predict the ultimate outcome of pending
litigation and regulatory investigations. In addition, there can be no
assurance that other regulatory agencies will not initiate additional
investigations related to the Company's business in the future, nor can there
be any assurance that the resolution of any litigation or investigations,
either individually or in the aggregate, would not have a material adverse
effect on the Company's liquidity, financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
43
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages (as of January 1, 1999) and present and
past positions of the persons who are the current executive officers of the
Company.
Name Age Position
---- --- --------
W. Bruce Lunsford........... 51 Chairman of the Board
Debra A. Cafaro............. 41 Chief Executive Officer, President and Director
Steven T. Downey............ 41 Vice President and Chief Financial Officer
T. Richard Riney............ 41 Vice President, General Counsel and Secretary
John C. Thompson............ 31 Vice President, Corporate Development
W. Bruce Lunsford, an attorney, has served as Chairman of the Board since
the Company commenced operations on May 1, 1998. From May 1, 1998 through
December 1998, Mr. Lunsford also served as Chief Executive Officer of the
Company. Mr. Lunsford was a founder of Vencor and served as Chairman of the
Board, Chief Executive Officer and President of Vencor from the time it
commenced operations in 1985 until the time of the Reorganization. Mr.
Lunsford served as Chairman of the Board and Chief Executive Officer of Vencor
from May 1, 1998 until January 21, 1999 and as President of Vencor from May 1,
1998 until November 1998. Mr. Lunsford is a director of Churchill Downs
Incorporated, and Res-Care, Inc.
Debra A. Cafaro joined the Company on March 5, 1999. From April 1997 to May
1998, she served as President and Director of Ambassador Apartments, Inc.
(NYSE: AAH), a real estate investment trust. Ms. Cafaro was a founding member
of the Chicago law firm Barack Ferrazzano Kirschbaum Perlman & Nagelberg,
becoming a partner in 1987, where her areas of concentration were real estate,
finance and corporate transactions. Ms. Cafaro is admitted to the Bar in
Illinois and Pennsylvania. She is a member of the National Association of Real
Estate Investment Trusts ("NAREIT"), the National Multi-Housing Council, and
both the American and Chicago Bar Associations.
Steven T. Downey, a certified public accountant, has served as Vice
President and Chief Financial Officer of the Company since September 1998. He
served as Vice President and Controller of Providian Corporation from 1993
until 1997. Prior to that position, Mr. Downey held various management
positions with Providian Corporation from 1991 until 1993. Mr. Downey was
employed by Ernst & Young from 1978 to 1991. Mr. Downey is a member of NAREIT,
the American Institute of Certified Public Accountants and is a certified
public accountant in the State of Florida.
T. Richard Riney has served as Vice President, General Counsel and Secretary
of the Company since May 1998. He served as Transactions Counsel of Vencor
from April 1996 to April 1998. From May 1992 to March 1996, Mr. Riney was a
partner of Hirn, Reed & Harper, a law firm based in Louisville, Kentucky. Mr.
Riney is a member of NAREIT and the American, Indiana and Kentucky Bar
Associations.
John C. Thompson has served as Vice President, Corporate Development of the
Company since January 1999. He served as Director of Acquisitions from May
1998 to January 1999. Mr. Thompson served as Director of Development of Vencor
from April 1996 to May 1998 and as Development Manager of Vencor from 1993 to
April 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock is listed and traded on the New York Stock Exchange
("NYSE") under the ticker symbol of VTR. As of the close of business on March
22, 1999, there were 67,895,781 shares of Common Stock outstanding and
approximately 4,098 stockholders of record. The prices in the table below, for
the calendar
44
quarters indicated since the Reorganization, represent the high and low sales
prices for the Common Stock as reported on the NYSE. No cash dividends were
paid on Common Stock during such periods.
Sales Price
of Common Stock
---------------
Calendar Quarter High Low
- - ---------------- ------- -------
Second Quarter (since May 1,1998).............................. $18 1/8 $13 1/2
Third Quarter.................................................. 15 10
Fourth Quarter................................................. 13 1/8 9 1/2
The Company declared its first dividend of $0.39 per share on January 13,
1999 payable to stockholders of record on January 29, 1999. The Company
currently intends to make distributions to its stockholders on a quarterly
basis and anticipates that its quarterly dividends will be equal to a payout
ratio of approximately 80% of funds from operations (the "Distribution
Policy"). There can be no assurances that the Company will meet or maintain
its Distribution Policy. See "Business--Risk Factors."
The Company's Distribution Policy and the frequency and amounts of any
dividends could be affected by an adverse change in the results of operations
of the Company, an adverse change in economic conditions affecting the
Company's business or the business of Vencor and the other operators of its
properties or adverse changes in market and competitive factors that the
Company's Board deems relevant in setting a distribution policy. In
particular, any nonpayment of rent by Vencor under the Master Leases, or any
expectation that such nonpayment will occur in the future, would have a
material impact on the amount of the Company's distributions. Subject to
restrictions under the Company's debt facilities and other obligations, the
Board, in its sole discretion, will determine the actual distribution amount
and rate.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its stockholders of at least 95% of its REIT taxable
income (which does not include net capital gains). Under certain
circumstances, the Company may be required to make distributions in excess of
funds from operations in order to meet such distribution requirements. In such
event, the Company presently would expect to borrow funds, or to sell assets
for cash, to the extent necessary to obtain cash sufficient to make the
distributions required to retain its qualification as a REIT for federal
income tax purposes, although there can be no assurance that the Company would
be successful in such efforts. Although the Company is currently expected to
qualify as a REIT for the year ending December 31, 1999, it is possible that
economic, market, legal, tax or other considerations may cause the Company to
fail to qualify as a REIT. See "Business--Federal Income Tax Considerations--
Annual Distribution Requirements."
45
Item 6. Selected Financial Data
The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are listed under Item 14 and are included on pages F-1 through F-17.
Eight months
ended
December 31,
1998
---------------
(In thousands,
except per
share amounts)
OPERATING DATA
Revenues...................................................... $ 149,933
Net Earnings Available to Common (before extraordinary
charge)...................................................... 34,809
Net Earnings Available to Common.............................. 26,758
Net Share Amounts:
Net Earnings (before extraordinary charge), Basic............. $ .51
Net Earnings Available to Common, Basic....................... .39
Net Earnings Available to Common, Diluted..................... .39
Weighted Average Shares Outstanding, Basic.................... 67,819
Weighted Average Shares Outstanding, Diluted.................. 67,865
As of December
31, 1998
---------------
(in thousands)
BALANCE SHEET DATA
Costs of Investments.......................................... $1,185,965
Assets Held for Sale.......................................... --
Total Assets.................................................. 959,706
Bank Credit Facility and Other Debt........................... 931,127
Stockholders' Equity.......................................... (9,009)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is a discussion of background information on the Company and a
discussion of the consolidated results of operations, financial position and
liquidity and capital resources of the Company, which should be read in
conjunction with the consolidated financial statements and accompanying notes
thereto.
Background Information
The Company has announced its intention to operate and be treated as a self-
administered, self-managed REIT for federal income tax purposes beginning
January 1, 1999. The Company is a real estate company that owns or leases 45
hospitals (comprised of two acute care hospitals and 43 long-term care
hospitals), 219 nursing centers and eight personal care facilities as of
December 31, 1998. The Company's portfolio of properties are located in 36
states and are leased and operated primarily by Vencor or its subsidiaries.
The Company conducts all of its business through a wholly owned operating
partnership,Ventas Realty, Limited Partnership.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. It was reorganized as a Delaware corporation in
1987 and changed its name to Vencor, Incorporated in 1989 and to Vencor, Inc.
in 1993. On September 28, 1995, The Hillhaven Corporation merged with and into
the Company. On March 21, 1997, the Company acquired TheraTx, Incorporated, a
provider of subacute rehabilitation and respiratory therapy program management
services to nursing centers and an operator of 26 nursing centers. On June 24,
1997, the Company acquired Transitional Hospitals Corporation, an operator of
16 long-term acute care hospitals and three satellite facilities located in 13
states.
46
On May 1, 1998, the Company effected the Reorganization pursuant to which
the Company was separated into two publicly held corporations. A new
corporation, subsequently renamed Vencor, Inc., was formed to operate the
hospital, nursing center and ancillary services businesses. Pursuant to the
terms of the Reorganization, the Company distributed the common stock of
Vencor to stockholders of record of the Company as of April 27, 1998. The
Company, through its subsidiaries, continued to hold title to substantially
all of the real property and to lease such real property to Vencor. At such
time, the Company also changed its name to Ventas, Inc. and refinanced
substantially all of its long-term debt. For financial reporting periods
subsequent to the Reorganization, the historical financial statements of the
Company were assumed by Vencor and the Company is deemed to have commenced
operations on May 1, 1998. Accordingly, the Company does not have comparable
financial results for prior periods. In addition, for certain reporting
purposes under this Form 10-K and other filings, the Commission treats the
Company as having commenced operations on May 1, 1998.
The Company's principal objectives are to maximize funds from operations for
distribution to stockholders, to enhance capital growth through the
appreciation of the residual value of its portfolio of properties, and to
preserve and maintain the stockholders' capital.
Results of Operations
Rental income for the eight months ended December 31, 1998 totaled $149.9
million, of which $147.9 million resulted from leases with Vencor. Income from
operations was $34.8 million, or $0.51 per share. The Company incurred an
extraordinary loss for the eight months of $8.1 million, or $0.12 per share,
net of income taxes, related to the extinguishment of debt. Net income for the
eight months was $26.8 million, or $0.39 per share.
The Company considers funds from operations ("FFO") an appropriate measure
of performance of an equity REIT, and with the exception of non-cash
compensation expense, the Company uses the National Association of Real Estate
Investment Trusts ("NAREIT") definition of FFO. Pro forma FFO assumes that the
Company qualified to be taxed as a REIT on May 1, 1998, and the provision for
income taxes was therefore excluded. Pro forma FFO is defined to mean net
income available to common stockholders determined in accordance with
generally accepted accounting principles ("GAAP"), excluding income taxes,
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real estate assets and certain non-cash compensation expense.
FFO presented herein is not necessarily comparable to FFO presented by other
real estate companies due to the fact that not all real estate companies use
the same definition. Pro forma FFO should not be considered as an alternative
to net income (determined in accordance with GAAP) as an indicator of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it necessarily indicative of sufficient cash flow to fund all of the
Company's needs. The Company believes that in order to facilitate a clear
understanding of the consolidated historical operating results of the Company,
pro forma FFO should be examined in conjunction with net income as presented
in the consolidated financial statements and data included elsewhere in this
Form 10-K.
Pro forma FFO for the eight months ended December 31, 1998 are summarized in
the following table:
Eight Months
Ended
December 31,
1998
--------------
(In thousands)
Net income.................................................. $26,758
Extraordinary loss on extinguishment of debt, net of income
tax benefit of $4,935...................................... 8,051
-------
Income from operations before extraordinary loss............ 34,809
Provision for income taxes.................................. 21,151
-------
Pro forma income from operations............................ 55,960
Depreciation on real estate assets.......................... 28,700
Certain non-cash compensation expense....................... 139
-------
Pro forma funds from operations............................. $84,799
=======
47
On a pro forma basis, excluding the provision for income taxes based upon
the assumption that the Company qualified to be taxed as a REIT on May 1,
1998, FFO for the eight months would have totaled $84.8 million, or $1.25 per
share. Pro forma income from operations would have been $56.0 million, or
$0.82 per share. Rental income would not have changed on a pro forma basis for
the eight-month period.
Interest expense includes interest of $53.9 million on the Company's Bank
Credit Agreement (described below), swap payments of $1.2 million on the
Company's interest rate swap agreement (described below) and $0.9 million of
interest on other obligations.
Asset/Liability Management
Asset/liability management is a key element of the Company's overall risk
management program. The objective of asset/liability management is to support
the achievement of business strategies while maintaining appropriate risk
levels. The asset/liability management process focuses on a variety of risks,
including market risk (primarily interest rate risk) and credit risk.
Effective management of these risks is an important determinant of the
absolute levels and variability of FFO and net worth. The following discussion
addresses the Company's integrated management of assets and liabilities,
including the use of derivative financial instruments. The Company does not
use derivative financial instruments for speculative purposes.
Market Risk
The Company earns revenue by leasing its assets under long-term triple net
leases in which the rental rate is generally fixed with annual escalators,
subject to certain limitations. See Note 8 to the Consolidated Financial
Statements. The Company's debt obligations are floating rate obligations whose
interest rate and related cash flows vary with the movement in the London
Interbank Offered Rate ("LIBOR"). See "--Liquidity and Capital Resources." The
general fixed nature of the Company's assets and the variable nature of the
Company's debt obligations creates interest rate risk. If interest rates were
to rise significantly, the Company's lease revenue might not be sufficient to
meet its debt obligations. In order to mitigate this risk, at or about the
date the Company spun off its healthcare operations under the Reorganization,
it also entered into interest rate swaps to convert most of its floating rate
debt obligations to fixed rate debt obligations. Interest rate swaps generally
involve the exchange of fixed and floating rate interest payments on an
underlying notional amount. As of December 31, 1998, the Company had $900
million of interest rate swaps outstanding with a highly rated counterparty in
which the Company pays a fixed rate of 5.985% to the counterparty and receives
LIBOR from the counterparty. When interest rates rise the interest rate swap
agreement increases in market value to the Company and when interest rates
fall the interest rate swap agreement declines in value to the Company. Since
the interest rate swap agreement was executed, interest rates have generally
been lower and the market value of the interest rate swap agreement has been
an unrealized loss to the Company. As of December 31, 1998, the interest rate
swap agreement was in an unrealized loss position to the Company of
approximately $39.2 million. To highlight the sensitivity of the interest rate
swap agreement to changes in interest rates the following summary shows the
effects of an instantaneous change of 100 basis points (BPS) in interest rates
as of December 31, 1998:
Market Value to the Company
Reflecting Change in
Market Value Interest Rates
to the Company at -------------------------------------
Notional Amount December 31, 1998 -100 BPS +100 BPS
--------------- ----------------- ------------ -----------
$900,000,000 ($39,175,449) ($95,222,331) $13,493,122
The terms of this interest rate swap agreement require that the Company make
a cash payment or otherwise post collateral, such as a letter of credit from
one of the banks identified in the Bank Credit Agreement to the counterparty
if the market value loss to the Company exceed certain levels (the "threshold
levels"). See "--Liquidity and Capital Resources." The threshold levels vary
based on the relationship between the Company's debt obligations and the
tangible fair market value of its assets as defined in the Bank Credit
Agreement. As of December 31, 1998, the threshold level under the interest
rate swap agreement was a market value loss of $35 million and the interest
rate swap agreement was in an unrealized loss position to the Company of $39.2
million. Under the interest rate swap agreement, if collateral must be posted,
the principal amount of
48
such collateral must equal the difference between the market value of the
interest rate swap at the time of such determination and the threshold amount.
As of December 31, 1998, the Company had a letter of credit outstanding as
posted collateral under the interest rate swap agreement in the amount of
$10.9 million, which reduced the availability of the Company's revolving line
of credit under its Bank Credit Agreement as of that date by a similar amount.
As of March 19, 1999, the market value unrealized loss of the interest rate
swap agreement had declined below the $35 million threshold to $15 million and
the letter of credit outstanding had been reduced to one dollar ($1). Under
the Bank Credit Agreement, the maximum amount that may be outstanding under
such letters of credit at anytime is $25 million.
Credit Risk
The Company monitors credit risk under its lease agreements with its lessees
by monitoring publicly available financial information, discussions with its
lessees and review of information otherwise available to the Company. Pursuant
to the Reorganization, the Company has a significant concentration of credit
risk under its four Master Lease Agreements with Vencor. For the eight months
ended December 31, 1998, lease revenues from Vencor comprised $147.9 million,
or approximately 98.7% of the Company's total lease revenues of $149.9
million. Accordingly, Vencor's financial condition and ability to meet its
rent obligations will determine the Company's revenues and its ability to make
distributions to its stockholders. The operations of Vencor have been
negatively impacted by changes in reimbursement rates, by its current level of
indebtedness and by certain other factors. See "Business--Recent Developments"
and "Business--Governmental Regulation." In addition, any failure by Vencor to
effectively conduct its operations could have a material adverse effect on its
business reputation or on its ability to enlist and maintain patients in its
facilities. There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy its obligations under
the Master Leases. Since the Company derives in excess of 98% of its revenues
from Vencor and since the Master Leases are triple-net leases under which
Vencor is responsible for all insurance, taxes and maintenance and repair
expenses required in connection with the leased properties, the inability of
Vencor to satisfy its obligations under the Master Leases would have a
material adverse effect on the condition of the leased properties, as well as
on the results of operations and the financial condition of the Company and on
the ability of the Company to meet the terms of the Bank Credit Agreement, and
could prevent the Company from paying dividends to its stockholders as
required to maintain its status as a REIT.
Portfolio Overview
The following information provides an overview of the Company's portfolio of
healthcare properties, which primarily include skilled nursing facilities and
hospitals operated by Vencor. For a description of the principal terms and
provisions of the Master Lease Agreements, see "Business--Relationship with
Vencor--Master Lease Agreements."
Eight months
ended
December
# of 31,1998
Portfolio by Type Properties # of Beds/Units Revenue Percentage
- - ----------------- ---------- --------------- -------------- ----------
(In thousands) (In thousands)
Skilled Nursing
Facilities.............. 219 28,492 $ 89,621 59.8%
Personal Care
Facilities.............. 8 136 152 0.1
Hospitals................ 45 4,194 60,160 40.1
--- ------ -------- -----
Total.................... 272 32,822 $149,933 100.0%
=== ====== ======== =====
Investment
Investment Percentage Per Bed
-------------- ---------- ----------
(In thousands)
Skilled Nursing Facilities................. $ 834,052 70.3% $29,273
Personal Care Facilities................... 7,133 0.6 52,448
Hospitals.................................. 344,780 29.1 82,207
---------- -----
Total...................................... $1,185,965 100.0% $36,133
========== ===== -------
49
Eight months
ended
Portfolio December 31,
by 1998
Oerator/Tenantp Revenue Percentage
- - --------------- -------------- ----------
(In thousands)
Vencor........................................................ $147,952 98.7%
Other......................................................... 1,981 1.3
-------- -----
Total......................................................... $149,933 100.0%
======== =====
The Company's portfolio is broadly diversified by geographic location with
lease revenues from facilities in any state not comprising more than ten
percent of the Company's revenues.
Eight months ended
December 31, 1998
Portfolio by State Revenue Percentage
------------------ ------------------ ----------
(In thousands)
1 Florida....................................... $ 14,572 9.7%
2 Massachusetts................................. 12,347 8.2
3 California.................................... 11,051 7.4
4 North Carolina................................ 10,283 6.9
5 Indiana....................................... 10,026 6.7
6 Wisconsin..................................... 9,321 6.2
7 Illinois...................................... 7,947 5.3
8 Kentucky...................................... 7,624 5.1
9 Texas......................................... 7,279 4.9
10 Ohio.......................................... 5,643 3.7
Other (26 states)................................ 53,840 35.9
-------- -----
$149,933 100.0%
======== =====
In addition to diversification of lease revenues from geographic
diversification of the portfolio, the majority of the Company's facilities are
located in states which have certificate of need requirements. Certain states
require state approval for development and expansion of healthcare facilities
and services, including findings of need for additional or expanded healthcare
facilities or services. A certificate of need ("CON"), which is issued by
governmental agencies with jurisdiction over healthcare facilities, is at
times required for expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. The CON rules and regulations may restrict an
operator's ability to expand the Company's properties in certain
circumstances.
Revenue Revenue
Percentage Percentage
Certificate of Need States SNFs Hospitals
- - -------------------------- ---------- ----------
States with CON Requirement......................................... 73.3% 58.1%
States without CON Requirement ..................................... 26.7 41.9
----- -----
100.0% 100.0%
===== =====
As previously noted, almost all of the Company's leases are with Vencor and
were entered into as of the date of the Reorganization. The initial terms of
these leases were for periods ranging from 10 to 15 years. The following is a
summary of the Company's leases and the related period in which they are
subject to expiration or renewal.
50
Annual Revenue (in thousands)
-----------------------------
Renewal Information(*) Vencor Other Total Percent
- - ---------------------- ------- ----- ------- -------
1999.............................................. -- -- -- 0.0%
2000.............................................. -- -- -- 0.0%
2001.............................................. -- 462 462 0.2%
2002.............................................. -- -- -- 0.0%
2003.............................................. -- 592 592 0.3%
Thereafter........................................ 222,159 2,528 224,687 99.5%
------- ----- ------- -----
222,159 3,582 225,741 100.0%
======= ===== ======= =====
- - --------
(*) Excludes future rent escalations.
Liquidity and Capital Resources
Cash provided by operations totaled $86.8 million for the eight months ended
December 31, 1998. Net cash provided by investing activities totaled $.9
million. Net cash used in financing activities totaled $85.5 million.
In connection with the Reorganization, the Company refinanced substantially
all of its long-term debt. In connection with the refinancing arrangements,
the Company entered into a $1.2 billion bank credit agreement, dated April 29,
1998, with NationsBank, N.A., as Administrative Agent (the "Bank Credit
Agreement") and retained approximately $6 million of prior debt obligations.
The Bank Credit Agreement comprises (i) a three year $250 million Revolving
Credit Facility priced at LIBOR plus 2 to 2 1/2% (the "Revolving Credit
Facility"), (ii) a $200 million Term A Loan payable in various installments
over three years priced at LIBOR plus 2 1/4 to 2 1/2%, (iii) a $350 million
Term B Loan payable in various installments over five years priced at LIBOR
plus 2 3/4 to 3%, and (iv) a $400 million loan due on October 30, 1999 priced
at LIBOR plus 2 3/4 to 3%. For the eight months ended December 31, 1998, the
Company paid $12 million in financing fees related to establishing the Bank
Credit Agreement. As of December 31, 1998, the outstanding balances under the
Bank Credit Agreement and related principal payments due in 1999 are as
follows:
Balance Current
Dec. 31, 1998 Maturity
------------- ------------
$250 million Revolving Credit Facility.............. $ 29,600,000 $ 0
$200 million Term A Loan............................ 181,818,182 0
$350 million Term B Loan............................ 318,181,818 3,500,000
$400 million Loan due October 30, 1999.............. 400,000,000 400,000,000
------------ ------------
$929,600,000 $403,500,000
============ ============
At December 31, 1998, available borrowings under the Revolving Credit
Facility approximated $209.5 million. Subsequent to December 31, 1998, the
Company borrowed $125 million under its Revolving Credit Facility and used the
proceeds to pay down the $400 million loan due October 30, 1999. The Company
intends to pay down or refinance the remaining $275 million loan due October
30, 1999, on or prior to its maturity. The Company expects to obtain the
necessary proceeds to pay down or refinance the remaining $275 million loan
due October 30, 1999 and to meet other liquidity requirements through cash
flows from operations, available borrowings under the Revolving Credit
Facility, the issuance of public or private debt or equity and asset sales, or
a combination of the foregoing. However, there can be no assurance that the
Company will be successful in its efforts to pay down or refinance the $275
million loan and to meet its other liquidity requirements. As of March 19,
1999, the Company had outstanding borrowings and available borrowings under
its Revolving Credit Facility of $202.7 million and $47.3 million,
respectively. The $47.3 million is subject to certain restrictions under the
Bank Credit Agreement. In addition, as of March 19, 1999, cash and overnight
investments in banks totaled $65.8 million.
The Company leases substantially all its properties to Vencor and,
therefore, Vencor is the primary source of the Company's revenues. Vencor's
financial condition and ability to satisfy its rent obligations under the
51
Master Leases will impact the Company's revenues and its ability to service
its indebtedness and to make distributions to its stockholders. Because the
operations of Vencor have been negatively impacted by changes in reimbursement
rates, by its current level of indebtedness and by certain other factors, and
because of the potential effect of such events on Vencor's ability to meet its
rent obligations to the Company, the Company's auditors have included an
explanatory paragraph in its report to the Company's consolidated financial
statements for the year ended December 31, 1998 that expresses substantial
doubt as to the Company's ability to continue as a going concern. The
existence of the explanatory paragraph may have a material adverse affect on
the Company's relationships with its creditors and could have a material
adverse affect on the Company's business, financial condition and results of
operations.
Management has taken certain initiatives to address these issues. The
Company has retained Merrill Lynch & Co., as financial advisor, to assist it
in its review of Vencor's financial condition and its ability to comply with
the covenants in its bank credit facility. Merrill Lynch is also assisting the
Company in its review of alternatives to repaying the $275 million portion of
its credit facility that matures on October 30, 1999 and to assess other
strategic alternatives for the Company.
The Company has increased its cash position so that it has cash and
overnight investment, in banks, totaling $65.8 million as of March 19, 1999.
The Company and Vencor have discussed Vencor's recent results of operations
and Vencor's need to amend or restructure its existing indebtedness. In those
discussions, Vencor has requested interim rent concessions under the Master
Leases and the Company has rejected that request. The Company will consider
appropriate action to take in response to any further proposals by Vencor as
may be in the best interests of the Company. The Company has entered into an
agreement with Vencor whereby the Company has agreed not to exercise remedies
for non-payment of rent, which is due from Vencor on April 1, 1999, for a
period ending on April 12, 1999. During the Company's discussions with Vencor,
Vencor has asserted various potential claims against the Company arising out
of the Reorganization. The Company intends to vigorously defend these claims
if they are asserted in a legal mediation or proceeding.
As of March 31, 1998, the Company was in compliance with the covenants
contained in the Bank Credit Agreement. Continued payment of rent by Vencor
under the Master Leases is essential to the Company's ability to remain in
compliance with the covenants contained in the Bank Credit Facility.
In connection with the Reorganization, the Company entered into an interest
rate swap agreement to eliminate the impact of changes in interest rates on
its floating rate debt obligations. The agreement expires in varying amounts
through December 2006 and provides for the Company to pay a fixed rate at
5.985% and receive LIBOR (floating rate). The fair value of the swap agreement
is not recognized in the condensed consolidated financial statements. See "--
Asset/Liability Management" and Note 1 of the Notes to Consolidated Financial
Statements.
In connection with the Reorganization, the Company sought to obtain
necessary consents to assign its former third party lease obligations to
Vencor. The Company has not and does not expect to receive consents for
assignments on one long-term care hospital and 16 nursing centers. The Company
remains primarily liable on substantially all lease obligations assigned to
Vencor, as well as certain third party guarantees. Vencor has contractually
indemnified the Company for these leases and guaranty obligations. See
"Business--Relationship with Vencor" and Note 8 of the Notes to Consolidated
Financial Statements.
The Company loaned, with interest provisions, approximately $3.9 million to
certain former executive officers of the Company to finance the income taxes
payable by them as a result of the Reorganization. The loans are payable over
a ten year period.
In connection with the Reorganization, the Company also received newly
issued Vencor Series A Non-Voting Convertible Preferred Stock. The Company
sold the preferred stock to certain of its employees, which
52
includes both current Vencor employees and employees of the Company, for $17.7
million and used the proceeds to refinance long-term debt.
In order to qualify as a REIT, the Company must make annual distributions to
its stockholders of at least 95% of its "REIT taxable income" (excluding net
capital gain). Under certain circumstances, the Company may be required to
make distributions in excess of FFO in order to meet such distribution
requirements. In such event, the Company presently would expect to borrow
funds, or to sell assets for cash, to the extent necessary to obtain cash
sufficient to make the distributions required to retain its qualification as a
REIT for federal income tax purposes although there can be no assurance that
the Company would be successful in such efforts. Although the Company is
currently expected to qualify as a REIT for the year ending December 31, 1999,
it is possible that economic, market, legal, tax or other considerations may
cause the Company to fail to qualify as a REIT. See "Market for Registrant's
Common Equity and Related Stockholder Matters."
Capital expenditures to maintain and improve the leased properties generally
will be incurred by the tenants. Accordingly, the Company does not believe
that it will incur any major expenditures in connection with the leased
properties. After the terms of the leases expire, or in the event that the
tenants are unable to meet their obligations under the leases, the Company
anticipates that any expenditures for which it may become responsible to
maintain the leased properties will be funded by cash flows from operations
and, in the case of major expenditures, through additional borrowings, asset
sales or issuances of equity. To the extent that unanticipated expenditures or
significant borrowings are required, the Company's liquidity may be affected
adversely.
The Company has invested $14.5 million for the eight months ended December
31, 1998 to acquire healthcare-related properties. The properties purchased
include two skilled nursing centers and eight personal care facilities. One of
the properties acquired was a skilled nursing facility purchased from Vencor
under the Development Agreement for $6.2 million in the third quarter of 1998.
The Company does not currently intend to acquire any additional properties in
1999.
Available sources of capital to finance any future growth will include cash
flows from operations, available borrowings under the Revolving Credit
Facility, the issuance of public or private debt or equity and asset sales, or
a combination of the foregoing. 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 the Company. The Company may, under
certain circumstances, borrow additional amounts in connection with the
acquisition of additional properties, and as necessary to meet certain
distribution requirements imposed on REITs under the Code. To the extent the
Company uses equity as consideration for future acquisitions, the Company will
not require additional liquidity to finance such acquisitions. The Company
does not currently intend to acquire any additional properties in 1999.
Year 2000 Readiness Disclosure--The Company
The year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the
applicable year. Without corrective action, computer programs and embedded
chips potentially could recognize the date ending in "00" as the year 1900 (or
some other year)
rather than 2000, causing many computer applications to fail or to create
erroneous results. The Company's information technology systems ("IT") and
non-IT systems such as building infrastructure components (e.g., elevators,
alarm systems, electrical systems and other systems) are affected by the Y2K
issue.
During 1998, the Company outsourced all of its information systems support
to Vencor under its Transition Services Agreement which terminated on December
31, 1998. After December 31, 1998, Vencor continued to provide the Company
with certain administrative and support services (primarily computer systems,
telephone networks, mail delivery and other office services). Effective March
15, 1999, the Company moved to new office space and those services are no
longer provided by Vencor.
In January 1999, the Company purchased a new file server and is converting
to a new financial information system platform that is Y2K compliant. The
Company expects that the conversion should be completed during
53
the first quarter of 1999. The Company also may be required to replace its
computer hardware with new equipment that is Y2K compliant. The Company has
received certification from all of its significant software and operating
systems vendors that the versions of their products currently being installed
are Y2K compliant. The Company has not and does not anticipate independently
verifying such compliance. The Company estimates that the total cost it will
incur to install a new server, financial system platform and update its
computer hardware is less than $100,000.
The Company also has Y2K exposure in non-IT applications with respect to its
real estate properties. Computer technology employed in elevators, alarm
systems, electrical systems, built-in healthcare systems and similar
applications involved in the operations of the Company's properties may cause
interruptions of service with respect to those properties. Under the terms of
the Master Leases, Vencor is responsible for upgrading all building
infrastructure components to be Y2K compliant. As of December 31, 1998, Vencor
advised the Company that it has tested and verified as Y2K compliant
approximately 70% of the facility components. Vencor has indicated to the
Company that it does not expect any material Y2K issues with respect to the
Company's facility components. Consequently, the Company does not expect that
its costs for Y2K remediation of its building infrastructure components will
be material. However, there can be no assurance that Vencor's estimate with
respect to estimated costs of remediation is accurate. In addition, there can
be no assurance that Vencor will continue to honor its obligations under the
Master Leases to upgrade all building components to be Y2K compliant or that
Vencor will have sufficient assets, income and access to financing to enable
it to satisfy such obligations.
The most reasonably likely worse case scenario for the Company associated
with the Y2K issue is the risk of significant disruptions of Vencor's business
resulting from either (i) Vencor's failure to upgrade all building
infrastructure components to be Y2K compliant or (ii) the failure of Vencor's
significant third party payors, business partners, suppliers and vendors to be
fully Y2K compliant. Failures of critical utility systems could also lead to
significant business disruptions for Vencor. These occurrences could
negatively impact Vencor's ability to operate the Company's properties and/or
make rental payments under the Master Leases thereby negatively impacting the
Company's liquidity and results of operations. The Y2K issues facing Vencor
and Vencor's Y2K compliance program are discussed below under "--Year 2000
Readiness Disclosure--Vencor."
To date, the Company has not established any contingency plan for the Y2K
issue. Because the Company's most significant risks associated with the Y2K
issue relate to significant disruptions of Vencor's business, the Company
anticipates developing contingency plans during 1999, as is appropriate, based
upon its continuing assessment of Vencor's progress in implementing its Y2K
compliance program and developing its own contingency plans.
The Company's analysis of the Y2K issues affecting the Company is based on
information currently available and information provided from third party
vendors and suppliers. Due to the inherent uncertainties related to Y2K
compliance, there can be no assurance that the Company has accurately or
timely assessed all Y2K issues or that the estimated costs to remediate the
Y2K issues will not be exceeded. While the Company believes it has
substantially completed its assessment of all Y2K issues, its estimate of the
costs to address such issues may change as it proceeds with the remediation
and implementation of its new financial systems. The Company's ability to
identify and remediate critical Y2K issues and the availability and cost of
external resources will impact the Company's total Y2K costs and the impact of
Y2K on the Company's results of operations.
Year 2000 Readiness Disclosure--Vencor
As a result of the Company's dependence upon Vencor as its primary tenant,
the Company may also be impacted negatively by Y2K issues facing Vencor. If
Vencor is unable to meet its Y2K compliance schedules or incurs costs
substantially higher than its current expectations, Vencor's ability to
operate the properties and/or make rental payments under the Master Leases
could be impaired thereby impacting negatively the Company's liquidity and
results of operations. The following discussion briefly describes the Y2K
program instituted by Vencor. The information contained in this section was
provided to the Company by Vencor. The Company is
54
not the source of this information, has not verified independently the
activities of Vencor, and there can be no assurance that Vencor has provided
the Company with complete and accurate information in all instances. The
Company is in contact with Vencor to monitor its progress.
In response to the Y2K issue, Vencor established five teams to address Y2K
issues in the following specific areas: (i) IT software and hardware; (ii)
third party relationships; (iii) facility components; (iv) medical equipment;
and (v) telephone systems. Each team is responsible for all phases of Vencor's
Y2K compliance program for both IT and non-IT systems in its designated area.
Vencor's Y2K compliance program consists of five phases: (i) business
assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv)
implementation and rollout; and (v) post-implementation. The business
assessment phase identified potential Y2K issues confronting Vencor. The
inventory and assessment phase consisted of a company-wide assessment of all
facility systems and components, medical devices, and IT software and
hardware. During the remediation and testing phase, Vencor is repairing,
upgrading or replacing any non-compliant IT and non-IT systems. Additionally,
Vencor is performing verification and validation testing of IT and non-IT
systems that have been remediated and those Vencor believes are Y2K compliant.
For IT and non-IT systems that are internally developed, Vencor verifies
compliance status directly with the development staff and performs validation
testing to confirm its status. For IT and non-IT systems that are purchased
from outside vendors, Vencor is requesting written assurances of compliance
directly from the vendors. When non-compliant systems are identified, Vencor
will either replace, upgrade or remediate the system. The implementation and
rollout phase involves the installation of the new financial information and
patient accounting systems and any IT or non-IT systems that have been
remediated and tested to Vencor's corporate office and its facilities. The
final phase, post-implementation, involves finalizing the documentation of the
Y2K program and any corrective efforts surrounding date issues associated with
the year 2000 being a leap year. Vencor has indicated that it has employed and
will continue to employ external consultants to assist it through each of the
phases.
55
Vencor derives a substantial portion of its revenues from the Medicare and
Medicaid programs. Vencor relies on these entities for accurate and timely
reimbursement of claims, often through the use of electronic data interfaces.
Vencor has indicated that it believes that while many commercial insurance
carriers will be Y2K compliant, federal and state agencies are more likely to
have system failures caused by Y2K issues. Vencor is contacting all of its
significant reimbursement sources to determine their Y2K compliance status in
order to make a determination of this potential risk. Vencor has not received
assurance that systems used by Medicare and Medicaid will be Y2K compliant.
The failure of information systems of federal and state governmental agencies
and other third party payors could have a material adverse effect on Vencor's
liquidity and financial condition, which in turn could have a material adverse
effect on the Company's liquidity and financial condition.
Vencor also has initiated communications with its critical suppliers and
vendors. Vencor is evaluating information provided by third party vendors and
is conducting limited independent testing of critical systems and
applications. In most cases, Vencor is relying on information being provided
to it by such third parties. While Vencor is attempting to evaluate the
information provided, there can be no assurance that in all instances accurate
information is being provided. If third party suppliers and vendors fail to
respond to Vencor's request for information, Vencor may seek to procure other
sources of supplies.
56
Although Vencor is assessing the readiness of the Medicare and Medicaid
programs and other third party payers and preparing contingency plans, there
can be no guarantee that the failure of these third parties to remediate their
systems to be Y2K compliant will not have a material adverse effect on Vencor,
which in turn could have a material adverse effect on the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion of the Company's exposure to various market risks
contains "forward looking statements" that involve risks and uncertainties.
These projected results have been prepared utilizing certain assumptions
considered reasonable in light of information currently available to the
Company. Nevertheless, because of the inherent unpredictability of interest
rates as well as other factors, actual results could differ materially from
those projected in such forward looking information.
The Company earns revenue by leasing its assets under long-term triple net
leases in which the rental rate is generally fixed with annual escalators,
subject to certain limitations. See Note 8 to the Consolidated Financial
Statements. The Company's debt obligations are floating rate obligations whose
interest rate and related cash flows vary with the movement in LIBOR. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources". The general fixed nature of the
Company's assets and the variable nature of the Company's debt obligations
creates interest rate risk. If interest rates were to rise significantly, the
Company's lease revenue might not be sufficient to meet its debt obligations.
In order to mitigate this risk, at or about the date the Company spun off its
healthcare operations under the Reorganization, it also entered into interest
rate swaps to convert most of its floating rate debt obligations to fixed rate
debt obligations. Interest rate swaps generally involve the exchange of fixed
and floating rate interest payments on an underlying notional amount. As of
December 31, 1998, the Company had $900 million of interest rate swaps
outstanding with a highly rated counterparty in which the Company pays a fixed
rate of 5.985% and receives LIBOR from the counterparty. When interest rates
rise the interest rate swap agreement increases in market value to the Company
and when interest rates fall the interest rate swap agreement declines in
value to the Company. Since the interest rate swap agreement was executed,
interest rates have generally been lower and the market value of the interest
rate swap agreement has been an unrealized loss to the Company. As of December
31, 1998, the interest rate swap agreement was in an unrealized loss position
to the Company of approximately $39.2 million. To highlight the sensitivity of
the interest rate swap agreement to changes in interest rates the following
summary shows the effects of an instantaneous change of 100 basis points (BPS)
in interest rates as of December 31, 1998:
Market Value to the Company
Market Value Reflecting Change in Interest Rates
to the Company at -------------------------------------
Notional Amount December 31, 1998 -100 BPS +100 BPS
--------------- ----------------- ------------------ -----------------
$900,000,000 ($39,175,449) ($95,222,331) $ 13,493,122
57
The terms of this interest rate swap agreement require that the Company make
a cash payment or otherwise post collateral, such as a letter of credit from
one of the banks identified in the Bank Credit Agreement to the counterparty
if the market value loss to the Company exceed certain levels (the "threshold
levels"). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." The threshold levels
vary based on the relationship between the Company's debt obligations and the
tangible fair market value of its assets as defined in the Bank Credit
Agreement. As of December 31, 1998, the threshold level under the interest
rate swap agreement was a market value loss of $35 million and the interest
rate swap agreement was in an unrealized loss position to the Company of $39.2
million. Under the interest rate swap agreement, if collateral must be posted,
the principal amount of such collateral must equal the difference between the
market value of the interest rate swap at the time of such determination and
the threshold amount. As of December 31, 1998, the Company had a letter of
credit outstanding as posted collateral under the interest rate swap agreement
in the amount of $10.9 million, which reduced the availability of the
Company's revolving line of credit under its Bank Credit Agreement as of that
date by a similar amount. As of March 19, 1999, the market value unrealized
loss of the interest rate swap agreement had declined below the $35 million
threshold to $15 million and the letter of credit outstanding had been reduced
to one dollar ($1). Under the Bank Credit Agreement, the maximum amount that
may be outstanding under such letters of credit at any time is $25 million.
Item 8. Financial Statements and Supplementary Data
The information required by this Item 8 is included in appendix pages F-1
through F-17 of this Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Items 10, 11, 12 and 13. Directors and Executive Officers of the Registrant;
Executive Compensation; Security Ownership of Certain Beneficial Owners and
Management; and Certain Relationships and Related Transactions
The information required by these Items other than the information set forth
above under Part I, "Executive Officers of the Registrant," is omitted because
the Company is filing a definitive proxy statement pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this Form
10-K which includes the required information. The required information
contained in the Company's proxy statement is incorporated herein by
reference.
58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
------- -----------------------
3.1 Certificate of Incorporation of the Company, as amended. Exhibit 3 to
the Company's Form 10-Q for the quarterly period ended September 30,
1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
3.2 Certificate of Amendment to Certificate of Incorporation of the
Company. Exhibit 3.1 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 (Comm. File No. 1-10989) is hereby
incorporated by reference.
3.3 Third Amended and Restated Bylaws of the Company. Exhibit 3.2 to the
Company's Form 10-K for the year ended December 31, 1997 (Comm. File
No. 1-10989) is hereby incorporated by reference.
4.1 Specimen Common Stock Certificate.
4.2 Article IV of the Certificate of Incorporation of the Company is
included in Exhibit 3.1.
4.3 Credit Agreement dated as of April 29, 1998, among Ventas Realty,
Limited Partnership, NationsBank, N.A., as Administrative Agent,
Morgan Guaranty Trust Company of New York, as Documentation Agent, the
Senior Managing Agents, the Managing Agents and Co-Agents party
thereto, the Banks listed therein, and J.P. Morgan Securities, Inc.
and NationsBanc Montgomery Securities LLC, as Co-Arrangers. Exhibit
10.1 to the Company's Form 10-Q for the quarterly period ended
September 30, 1998 (Comm. File No. 1-10989) is hereby incorporated by
reference.
4.4 Rights Agreement dated as of July 20, 1993 between the Company and
National City Bank, as Rights Agent. Exhibit 1 to the Company's
Registration Statement on Form 8-A (Comm. File No. 1-10989) is hereby
incorporated by reference.
4.5 First Amendment to Rights Agreement dated as of August 11, 1995
between the Company and National City Bank, as Rights Agent. Exhibit 2
to the Company's Registration Statement on Form 8-A/A (Comm. File No.
1-10989) is hereby incorporated by reference.
4.6 Second Amendment to Rights Agreement dated February 1, 1998 between
the Company and National City Bank, as Rights Agent. Exhibit 1 to the
Company's Registration Statement on Form 8-A/A (Reg. No. 33-30212) is
hereby incorporated by reference.
4.7 Third Amendment to Rights Agreement dated July 27, 1998 between the
Company and National City Bank, as Rights Agent. Exhibit 1 to the
Company's Registration Statement on Form 8-A12B/A (Reg. No. 33-30212)
is hereby incorporated by reference.
10.1* Directors and Officers Insurance and Company Reimbursement Policies.
Exhibit 10.1 to the Company's Form 10-K for the year ended December
31, 1995 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.2 Guaranty of Payment dated as of April 29, 1998 between the Company and
its subsidiaries as guarantors and Morgan Guaranty Trust Company of
New York. Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.3* Form of Ventas, Inc. Promissory Note. Exhibit 10.3 to the Company's
Form 10-Q for the quarterly period ended June 30, 1998 (Comm. File No.
1-10989) is hereby incorporated by reference.
10.4* Amendment to Promissory Note entered into as of December 31, 1998 by
and between Venias Realty, Limited Partnership and W. Bruce Lunsford.
10.5* Promissory Note dated October 22, 1998 by Steven T. Downey in favor of
Ventas, Inc.
10.6 Form of Agreement and Plan of Reorganization between the Company and
Vencor, Inc.
59
Exhibit
Number Description of Document
------- -----------------------
10.7 Form of Distribution Agreement between Vencor, Inc. and the Company.
10.8 Form of Master Lease Agreement between Vencor, Inc. and the Company.
10.9 Form of Amendment to Master Lease Agreement between Vencor, Inc. and
the Company.
10.10 Form of Development Agreement between Vencor, Inc. and the Company.
10.11 Form of Participation Agreement between Vencor, Inc. and the Company.
10.12 Tax Allocation Agreement dated as of April 30, 1998 by and between the
Company and Vencor, Inc. Exhibit 10.9 to the Company's Form 10-Q for
the quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.13 Transition Services Agreement dated April 30, 1998 by and between the
Company and Vencor, Inc. Exhibit 10.10 to the Company's Form 10-Q for
the quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.14 Agreement of Indemnity--Third Party Leases dated April 30, 1998 by and
between Vencor, Inc. and its subsidiaries and the Company. Exhibit
10.11 to the Company's Form 10-Q for the quarterly period ended June
30, 1998 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.15 Agreement of Indemnity--Third Party Contracts dated April 30, 1998 by
and between Vencor, Inc. and its subsidiaries and the Company. Exhibit
10.12 to the Company's Form 10-Q for the quarterly period ended June
30, 1998 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.16* Form of Employment Agreement dated as of July 31, 1998 between Ventas,
Inc. and each of W. Bruce Lunsford and Thomas T. Ladt. Exhibit 10.2 to
the Company's Form 10-Q for the quarterly period ended September 30,
1998 (Comm. File No. 1-10989) is hereby incorporated by reference.
10.17* Amendment to Employment Agreement entered into as of December 31, 1998
by and between Ventas, Inc. and W. Bruce Lunsford.
10.18* Employment Agreement dated as of September 21, 1998 between Ventas,
Inc. and Steven T. Downey. Exhibit 10.3 to the Company's Form 10-Q for
the quarterly period ended September 30, 1998 (Comm. File No. 1-10989)
is hereby incorporated by reference.
10.19* Employment Agreement dated as of July 31, 1998 between Ventas, Inc.
and T. Richard Riney. Exhibit 10.4 to the Company's Form 10-Q for the
quarterly period ended September 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.20* Employment Agreement dated as of January 13, 1999 between Ventas, Inc.
and John Thompson
10.21* Separation Agreement and Release of Claims dated as of March 5, 1999
between Ventas, Inc. and Thomas T. Ladt.
10.22* 1987 Non-Employee Directors Stock Option Plan. Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-30212) is
hereby incorporated by reference.
10.23* 1987 Incentive Compensation Program. Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-30212) is hereby
incorporated by reference.
10.24* Amendment to the 1987 Incentive Compensation Program dated May 15,
1991. Exhibit 4.4 to the Company's Registration Statement on Form S-8
(Reg. No. 33-40949) is hereby incorporated by reference.
60
Exhibit
Number Description of Document
------- -----------------------
10.25* Amendments to the 1987 Incentive Compensation Program dated May 18,
1994. Exhibit 10.13 to the Company's Form 10-K for the year ended
December 31, 1994 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.26* Amendment to the 1987 Incentive Compensation Program dated February
15, 1995. Exhibit 10.14 to the Company's Form 10-K for the year ended
December 31, 1994 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.27* Amendment to the 1987 Incentive Compensation Program dated September
27, 1995. Exhibit 10.17 to the Company's Form 10-K for the year ended
December 31, 1995 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.28* Amendment to the 1987 Incentive Compensation Program dated May 15,
1996. Exhibit 10.19 to the Company's Form 10-K for the year ended
December 31, 1996 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.29* Amendment to 1987 Incentive Compensation Program dated April 30, 1998.
Exhibit 10.13 to the Company's Form 10-Q for the quarterly period
ended June 30, 1998 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.30* Amendment to the 1987 Incentive Compensation Program dated December
31, 1998.
10.31* Amendment to the 1987 Non-Employee Directors Stock Option Plan dated
April 30, 1998. Exhibit 10.14 to the Company's Form 10-Q for the
quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.32* 1997 Incentive Compensation Plan dated December 31, 1996. Exhibit
10.23 to the Company's Form 10-K for the year ended December 31, 1996
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.33* Amendment No. 1 dated May 8, 1997 to the 1997 Incentive Compensation
Plan. Exhibit 10.3 to the Company's Form 10-Q for the quarterly period
ended June 30, 1997 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.34* Amendment to the 1997 Incentive Compensation Plan dated April 30,
1998. Exhibit 10.15 to the Company's Form 10-Q for the quarterly
period ended June 30, 1998 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.35* Amendment to the Ventas, Inc. 1997 Incentive Compensation Plan dated
December 31, 1998.
10.36* 1997 Stock Option Plan for Non-Employee Directors dated December 31,
1996. Exhibit 10.25 to the Company's Form 10-K for the year ended
December 31, 1996 (Comm. File No. 1-10989) is hereby incorporated by
reference.
10.37* Amendment to the 1997 Stock Option Plan for Non-Employee Directors
dated April 30, 1998. Exhibit 10.16 to the Company's Form 10-Q for the
quarterly period ended June 30, 1998 (Comm. File No. 1-10989) is
hereby incorporated by reference.
10.38* TheraTx, Incorporated Amended and Restated 1994 Stock Option/Stock
Issuance Plan, as amended. Exhibit 10.7 to the Registration Statement
on Form S-1 of TheraTx (Reg. No. 33-92402) is hereby incorporated by
reference.
10.39* Amendment to the TheraTx, Incorporated Amended and Restated 1994 Stock
Option/Stock Issuance Plan. Exhibit 4.7 to the Company's Registration
Statement on Form S-8 (Reg. No. 333-25519) is hereby incorporated by
reference.
10.40* TheraTx, Incorporated 1996 Stock Option/Stock Issuance Plan. Exhibit
99.1 to the Registration Statement on Form S-8 of TheraTx (Reg. No.
333-15171) is hereby incorporated by reference.
61
Exhibit
Number Description of Document
------- -----------------------
10.41* 1989 Amended and Restated Stock Option Plan of Helian Health Group,
Inc. ("Helian"). Exhibit 10.47 to the Registration Statement on Form
S-8 of Helian (Reg. No. 33-31520), Amendment No. 2 thereto filed
November 21, 1989 and Post-Effective Amendment No. 1 and No. 2 thereto
filed November 22, 1990 and January 16, 1991, is hereby incorporated
by reference.
10.42* Form of Vencor, Inc. Change-in-Control Severance Agreement. Exhibit
10.32 to the Company's Form 10-K for the year ended December 31, 1997
(Comm. File No. 1-10989) is hereby incorporated by reference.
10.43* Amendment No. 1 to Change-in-Control Severance Agreement entered into
as November 19, 1997 between the Company and W. Bruce Lunsford.
10.44* Amendment No. 2 to Change-in-Control Severance Agreement entered into
as of December 31, 1998 by and between the Company and W. Bruce
Lunsford.
10.45 Form of Indemnification Agreement for directors of TheraTx. Exhibit
10.13 to the Registration Statement on Form S-1 of TheraTx (Reg. No.
33-78786) is hereby incorporated by reference.
10.46 Form of Assignment and Assumption of Lease Agreement between Hillhaven
and certain subsidiaries, on the one hand, and Tenet and certain
subsidiaries on the other hand, together with the related Guaranty by
Hillhaven, dated on or prior to January 31, 1990. Exhibit 10.37 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.47 Guarantee Reimbursement Agreement between Hillhaven and Tenet, dated
as of January 31, 1990. Exhibit 10.40 to the Company's Form 10-K for
the year ended December 31, 1995 (Comm. File No. 1-10989) is hereby
incorporated by reference.
10.48 First Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of October 30, 1990. Exhibit 10.41 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.49 First Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of May 30, 1991. Exhibit 10.42 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.50 Second Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of October 2, 1991. Exhibit 10.43 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.51 Third Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of April 1, 1992. Exhibit 10.44 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.52 Fourth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of November 12, 1992. Exhibit 10.45 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.53 Fifth Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of February 19, 1993. Exhibit 10.46 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
10.54 Sixth Amendment to Guarantee Reimbursement Agreement between Hillhaven
and Tenet, dated as of May 28, 1993. Exhibit 10.47 to the Company's
Form 10-K for the year ended December 31, 1995 (Comm. File No. 1-
10989) is hereby incorporated by reference.
10.55 Seventh Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of May 28, 1993. Exhibit 10.48 to the
Company's Form 10-K for the year ended December 31, 1995 (Comm. File
No. 1-10989) is hereby incorporated by reference.
62
Exhibit
Number Description of Document
------- -----------------------
10.56 Eighth Amendment to Guarantee Reimbursement Agreement between
Hillhaven and Tenet, dated as of September 2, 1993. Exhibit 10.49 to
the Company's Form 10-K for the year ended December 31, 1995 (Comm.
File No. 1-10989) is hereby incorporated by reference.
10.57 Other Debt Instruments--Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished to the
Commission upon request.
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule (included only in filings under the Electronic
Data Gathering, Analysis, and Retrieval System).
- - --------
* Compensatory plan or arrangement required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
On November 19, 1998, the Company filed a Current Report on Form 8-K
announcing that Thomas T. Ladt would replace W. Bruce Lunsford as Chief
Executive Officer effective January 1, 1999. In addition, the Company reported
that Douglas Crocker II, a director of the Company, had been appointed to the
Executive Committee of the Company's Board and would serve as Chairman of the
Company's Independent Committee.
(c) Exhibits.
The response to this portion of Item 14 is submitted as a separate section
of this Report.
(d) Financial Statement Schedules.
The response to this portion of Item 14 is included in appendix pages S-1
through S-2 of this Report.
63
ITEM X. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Ventas, Inc.
We have audited the accompanying consolidated balance sheet of Ventas, Inc.
and subsidiaries as of December 31, 1998 and the related consolidated
statements of income, stockholders' equity (deficit) and cash flows for the
period May 1, 1998 through December 31, 1998. Our audit also included the
financial statement schedule listed in the Index at Item 14. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Ventas, Inc. and subsidiaries at December 31, 1998, and the consolidated
results of its operations and its cash flows for the period May 1, 1998
through December 31, 1998, 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.
As discussed in Note 3 to the consolidated financial statements,
approximately 98.7% of the Company's 1998 rental income was received from
Vencor, Inc. As a result thereof, the Company is financially dependent upon
Vencor's ability to pay the rental income which is contractually due the
Company. Vencor has also announced that it will incur a significant loss for
1998. This could have a material adverse effect on Vencor's financial
condition and adversely affect its ability to make contractual and timely
rental payments to the Company. Vencor has also received approval to extend
its credit facility and a waiver of covenant violations through March 31,
1999, and there is no assurance that Vencor's lenders will further extend the
credit facility or provide additional waivers. As discussed in Notes 4 and 12,
the Company has a bridge loan in the amount of $275 million which is due on
October 30,1999, which will either have to be extended, refinanced or repaid.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Ernst & Young LLP
Louisville, Kentucky
January 22, 1999
F-A1
VENTAS, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1998
(In Thousands)
Assets
Real estate investments:
Land............................................................. $ 120,928
Building and improvements........................................ 1,065,037
Furniture and equipment.......................................... 15
----------
1,185,980
Accumulated depreciation......................................... (246,509)
----------
Total real estate investments.................................. 939,471
Cash and cash equivalents.......................................... 338
Deferred financing costs, net...................................... 8,816
Due from Vencor, Inc............................................... 6,967
Notes receivable from employees.................................... 4,027
Other.............................................................. 87
----------
Total assets................................................... $ 959,706
==========
Liabilities and stockholders' equity (deficit)
Liabilities:
Bank credit facility and other debt.............................. 931,127
Accrued salaries, wages and other compensation................... 552
Accrued interest................................................. 3,556
Other accrued liabilities........................................ 1,974
Deferred income taxes............................................ 31,506
----------
Total liabilities.............................................. 968,715
----------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.25 par value; authorized 180,000 shares; issued
73,608 shares................................................... 18,402
Capital in excess of par value................................... 140,103
Unearned compensation on restricted stock........................ (1,962)
Accumulated deficit.............................................. (9,637)
----------
146,906
Treasury stock--5,759 shares..................................... (155,915)
----------
Total stockholders' equity (deficit)........................... (9,009)
----------
Total liabilities and stockholders' equity (deficit)........... $ 959,706
==========
See accompanying notes.
F-1
VENTAS, INC.
CONSOLIDATED STATEMENT OF INCOME
May 1, 1998 through December 31, 1998
(In Thousands, except per share amounts)
Rental income....................................................... $149,933
Operating expenses:
General and administrative........................................ 5,697
Amortization of unearned compensation on restricted stock......... 349
Depreciation...................................................... 28,700
Interest.......................................................... 56,004
Amortization of deferred financing costs.......................... 3,223
--------
Total operating expenses............................................ 93,973
--------
Income before provision for income taxes and extraordinary loss..... 55,960
Provision for income taxes.......................................... 21,151
--------
Income from operations before extraordinary loss.................... 34,809
Extraordinary loss on extinquishment of debt, net of income tax ben-
efit of $4,935..................................................... (8,051)
--------
Net income.......................................................... $ 26,758
========
Earnings per common share:
Basic:
Income from operations.......................................... $ 0.51
Extraordinary loss on extinguishment of debt.................... (0.12)
--------
Net income...................................................... $ 0.39
========
Diluted:
Income from operations.......................................... $ 0.51
Extraordinary loss on extinguishment of debt.................... (0.12)
--------
Net income...................................................... $ 0.39
========
See accompanying notes.
F-2
VENTAS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
May 1, 1998 through December 31, 1998
(In Thousands)
Unearned
Common Capital in Compensation
Stock Excess of on Restricted Accumulated Treasury
Par Value Par Value Stock Deficit Stock Total
--------- ---------- ------------- ----------- --------- --------
Balance at May 1, 1998.. $18,389 $139,480 $ -- $(36,395) $(157,869) $(36,395)
Net income.............. -- -- -- 26,758 -- 26,758
Proceeds from issuance
of shares for stock
incentive plans........ 13 142 -- -- -- 155
Grant of restricted
stock.................. -- 481 (2,311) -- 1,954 124
Amortization of
restricted stock
grants................. -- -- 349 -- -- 349
------- -------- -------- -------- --------- --------
Balance at December 31,
1998................... $18,402 $140,103 $(1,962) $ (9,637) $(155,915) $ (9,009)
======= ======== ======== ======== ========= ========
See accompanying notes.
F-3
VENTAS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
May 1, 1998 through December 31, 1998
(In Thousands)
Cash flows from operating activities:
Net income...................................................... $ 26,758
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 28,700
Amortization of deferred financing costs...................... 3,223
Amortization of restricted stock grants....................... 349
Extraordinary loss on extinguishment of debt, net of deferred
tax benefit of $4,935........................................ 8,051
Provision for deferred income taxes........................... 21,151
Increase in other assets...................................... (87)
Increase in accounts payable and accrued liabilities.......... 5,455
Increase in amount due from Vencor, Inc....................... (6,843)
-----------
Net cash provided by operating activities................... 86,757
Cash flows from investing activities:
Purchase of real estate investments and equipment............... (14,581)
Notes receivable from employees................................. (4,027)
Sale of Vencor, Inc. preferred stock in connection with the
Reorganization Transactions.................................... 17,700
-----------
Net cash used by investing activities....................... (908)
Cash flows from financing activities:
Net change in borrowings under revolving line of credit......... 29,600
Proceeds from long-term debt.................................... 951,540
Repayment of long-term debt..................................... (54,596)
Repayment of long-term debt in connection with the
Reorganization Transactions.................................... (1,000,171)
Payment of deferred financing costs............................. (12,039)
Issuance of common stock........................................ 155
-----------
Net cash used by financing activities....................... (85,511)
Increase in cash and cash equivalents............................. 338
Cash and cash equivalents at beginning of period.................. --
-----------
Cash and cash equivalents at end of period........................ $ 338
===========
See accompanying notes.
F-4
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Organization and Significant Accounting Policies
Organization
Ventas, Inc. (the Company), formerly named Vencor, Inc., is a real estate
company that owns or leases 45 hospitals, 219 nursing centers and eight
personal care facilities in 36 states as of December 31, 1998. The Company
conducts all of its business through a wholly-owned operating partnership,
Ventas Realty, Limited Partnership. The Company anticipates that it will meet
the requirements to qualify as a real estate investment trust (REIT) for
Federal income tax purposes for the tax year beginning January 1, 1999. The
Company expects to use an operating partnership (UPREIT) upon election of REIT
status. The Company operates in one segment which consists of owning and
leasing healthcare facilities to third parties.
On April 30, 1998, the Company changed its name to Ventas, Inc. and on May
1, 1998, refinanced substantially all of its long-term debt in connection with
the spin off of its healthcare operations through the distribution of the
common stock of a new entity (which assumed its former name), Vencor, Inc.
(Vencor) to stockholders of the Company of record as of April 27, 1998 (the
Reorganization Transactions). The distribution was effected on May 1, 1998
(the Distribution Date). For financial reporting periods subsequent to the
Distribution Date, the historical financial statements of the Company were
assumed by Vencor and the Company is deemed to have commenced operations on
May 1, 1998. Accordingly, the Company does not have comparable financial
results for prior periods. The beginning balances in shareholders' equity at
May 1, 1998 reflect the net historical balances of the Company's real estate
investments, long-term borrowings and other real estate related assets and
liabilities after giving effect to the Reorganization Transactions.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. SFAS 133 permits early adoption as of the
beginning of any fiscal quarter after its issuance. The Company expects to
adopt SFAS 133 effective January 1, 2000. SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings
or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be recognized immediately in earnings. Based on the Company's
derivative positions and their related fair values at December 31, 1998, the
Company estimates that if adopted on December 31, 1998 it would report a
reduction of $39.2 million in other comprehensive income. The Company was not
required to report this $39.2 million unrealized loss in 1998.
Consolidation
The consolidated financial statements include the accounts of the Company,
Ventas Realty, Limited Partnership (the Partnership) and other subsidiaries
after elimination of all material intercompany accounts and transactions.
Real Estate Investments
Investments in real estate properties are recorded at cost. The cost of the
properties acquired is allocated between land and buildings based generally
upon independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 50 years.
F-5
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Assets
Provisions for impairment losses related to long-lived assets, if any, are
recognized when expected future cash flows are less than the carrying values
of the assets. If indicators of impairment are present, the Company evaluates
the carrying value of the related real estate investments in relationship to
the future undiscounted cash flows of the underlying operations. The Company
adjusts the net book value of leased properties and other long-lived assets to
fair value, if the sum of the expected future cash flow or sales proceeds is
less than book value. No impairment losses have been recorded for the period
ended December 31, 1998.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity date
of three months or less when purchased. These investments are stated at cost
which approximates fair value.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings and are net of accumulated amortization of
approximately $3.22 million at December 31, 1998.
Revenue Recognition
Rental income is recognized as earned over the terms of the related Master
Leases and are treated as operating leases. Such income includes periodic
increases based on pre-determined formulas as defined in the Master Lease
agreements (see Master Lease Agreements in Transactions with Vencor--Note 8).
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period ended December 31, 1998. Average
shares outstanding for basic earnings per share were 67,819,205 for 1998. The
calculation of diluted earnings per share amounts reflect the additional
dilutive effect of stock options of 45,657 shares for 1998.
Stock Based Compensation
The Company grants stock options to employees and directors with an exercise
price equal to the fair value of the shares at the date of the grant. In
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
In addition, the Company grants shares of restricted stock to certain
executive officers and directors. Shares of restricted stock vest cumulatively
in four equal annual installments beginning on the first anniversary of the
date of the grant. In accordance with the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, compensation expense is recognized
for these restricted stock grants over the vesting period.
Accounting Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-6
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Real Estate Investments
Substantially all of the Company's real estate investments are leased under
provisions of four Master Leases with Vencor with initial terms ranging from
10 to 15 years, plus renewal options. Each Master Lease provides for minimum
annual rentals which are subject to annual increases on May 1 of each calendar
year of two percent (2%) as long as net patient service revenues of the
facilities covered under the applicable Master Lease for the prior calendar
year exceed seventy-five percent (75%) of patient service revenues in the base
year of 1997. Under the terms of the Master Leases, the lessee is responsible
for all maintenance, repairs, taxes and insurance on the leased properties.
The future contracted minimum rentals, excluding rent escalations, for the
remainder of the initial terms of the master leases and other leases are as
follows (in thousands):
Vencor Other Total
---------- ------- ----------
1999........................................... $ 222,159 $ 3,582 $ 225,741
2000........................................... 222,159 3,582 225,741
2001........................................... 222,159 3,428 225,587
2002........................................... 222,159 3,119 225,278
2003........................................... 222,159 2,862 225,021
Thereafter..................................... 1,416,213 11,884 1,428,097
---------- ------- ----------
Total........................................ $2,527,008 $28,457 $2,555,465
========== ======= ==========
3. Concentration of Credit Risk and Going Concern
As of December 31, 1998, 70% of the Company's real estate investments
related to skilled nursing facilities. The remaining real estate investments
consist of hospitals and personal care facilities. The Company's facilities
are located in 36 states and lease revenues from operations in any one state
do not account for more than ten percent (10%). Approximately ninety-seven and
two-tenths percent (97.2%) of the Company's real estate investments, based on
the original cost of such investments, are operated by Vencor and
approximately ninety-eight and seven-tenths percent (98.7%) of rental income
is from Vencor leases. Of the remaining six operators, none operate
investments in facilities representing more than five percent (5%) of the
total real estate investments.
The Company is very dependent on the financial stability of Vencor and
Vencor's financial ability to meet its obligations under the Master Lease
Agreements and the other agreements identified in Note 8. Vencor has announced
that it expects fourth quarter results to be significantly lower than the
third quarter of 1998. Vencor has also disclosed that it expects to record
additional adjustments in the fourth quarter which could have a material
adverse effect on its financial condition. Vencor has also announced that it
may be necessary to renegotiate its bank credit facility since its operating
results and fourth quarter adjustments may result in covenant violations with
its lenders. Vencor has received approval to extend its credit facility and a
waiver of its covenant violations through March 31, 1999. Vencor is also
subject to significant government regulations in connection with operating
long-term acute care hospitals and nursing homes. Further, as a result of the
Balanced Budget Act of 1997, Vencor is now subject to the prospective payment
system which could adversely affect Vencor's revenues as a result of reduced
reimbursements from its Medicare and Medicaid patients and reduced revenue
from ancillary services.
If Vencor defaults on any of its lease payments to the Company, it will
adversely affect the Company's ability to meet its current obligations,
including the required payments on its bank credit facility, and in making the
required distributions to the stockholders required for the Company to qualify
as a REIT. Also, if Vencor is unable to meet its indemnification
responsibilities under the reorganization agreement, the agreement for
F-7
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
indemnity for third party contracts and the agreement of indemnity under third
party leases, these obligations could revert back to the Company. These
obligations include, among other things, lawsuits, investigations and other
matters such as patient issues, third party contracts and the third party
leases, which arose prior to the Reorganization Transactions. The consolidated
financial statements do not contain any adjustments in the event that Vencor
defaults on any of its agreements with the Company and, therefore, would be
unable to fulfill its indemnity and other legal responsibilities to the
Company.
Continuation of the Company's operations in its present form is dependent
upon Vencor's ability to fulfill its indemnity and other legal
responsibilities to the Company in accordance with the agreements between the
two entities as described in Note 8. Also, the Company is dependent upon
Vencor's ability to make its lease payments on a timely basis and in
accordance with their contractual terms. As further described in Notes 4 and
12, the Company has a bridge loan in the amount of $275 million which is due
on October 30, 1999, which will have to be extended, refinanced or repaid. The
consolidated financial statements do not contain any adjustments that might
result from the outcome of these uncertainties. If and when Vencor has
stabilized its financial condition and the Company has resolved its short-term
debt maturities, the Company intends to reimplement its business strategy in
pursuing acquisitions or development of additional healthcare or other
properties.
Management has taken certain initiatives to address these issues. The
Company has retained Merrill Lynch & Co., as financial advisor, to assist in
its review of Vencor's financial condition and its ability to comply with the
covenants in its bank credit facility. Merrill Lynch is also assisting the
Company in its review of alternatives to repay the $275 million portion of its
credit facility that matures on October 30, 1999, and to assess other
strategic alternatives for the Company.
The Company has subsequently increased its cash position so that it has cash
and overnight investments in banks totaling $65.8 million.
The Company and Vencor have discussed Vencor's recent results of operations
and Vencor's need to amend or restructure its existing indebtedness. In those
discussions, Vencor has requested interim rent concessions under the Master
Leases and the Company has rejected that request. The Company will consider
appropriate actions to take in response to any further proposals by Vencor as
may be in the best interests of the Company.
4. Borrowing Arrangements
The following is a summary of long-term borrowings at December 31, 1998 (in
thousands):
Revolving line of credit, bearing interest at a base rate of LIBOR
plus 2.25% (7.52% at December 31, 1998), due April 30, 2001....... $ 29,600
Bridge facility loan, bearing interest at a base rate of LIBOR plus
2.75% (8.02% at December 31, 1998), due October 30, 1999.......... 400,000
Term loan A, bearing interest at a base rate of LIBOR plus 2.25%
(7.52% at December 31, 1998), due April 30, 2001.................. 181,818
Term loan B, bearing interest at a base rate of LIBOR plus 2.75%
(8.02% at December 31, 1998), due in annual installments of $3.5
million with the balance due April 30, 2003....................... 318,182
Other.............................................................. 1,527
--------
$931,127
========
On April 30, 1998, the Company, through Ventas Realty, Limited Partnership,
consummated a $1.2 billion bank credit agreement (the Bank Credit Agreement).
The Bank Credit Agreement comprises (i) a three year $250 million revolving
letter of credit facility (the Revolving Credit Facility) priced at the London
Interbank Offered
F-8
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rate (LIBOR) plus 2 to 2 1/2%, (ii) a $200 million Term A Loan (the Term A
Loan) payable in various installments over three years priced at LIBOR plus 2
1/4 to 2 1/2%, (iii) a $350 million Term B Loan (the Term B Loan) payable in
various installments over five years priced at LIBOR plus 2 3/4 to 3%, and
(iv) a $400 million loan due October 30, 1999 and priced at LIBOR plus 2 3/4
to 3%. The Bank Credit Agreement is secured by a pledge of the Company's
general partnership interest in the operating partnership, Ventas Realty,
Limited Partnership and contains various covenants.
In connection with the Reorganization Transactions and the consummation of
the Bank Credit Agreement, the Company entered into an interest rate swap
agreement ($900 million outstanding at December 31, 1998) to eliminate the
impact of changes in interest rates on approximately $1 billion of floating
rate debt. The agreement expires in varying amounts through December 2006 as
set out in the table below and provides for the Company to pay a fixed rate at
5.985% and receive LIBOR (floating rate). The fair value of the swap agreement
is not recognized in the consolidated financial statements (see New Accounting
Pronouncements in Note 1). The terms of the swap agreement require that the
Company make a cash payment or otherwise post collateral, such as a letter of
credit from one of the banks identified in the Bank Credit Agreement (which
limits the amount of any such letters of credit to $25 million) to the
counterparty if the market value loss to the Company exceed certain levels.
The threshold levels vary based on the relationship between the Company's debt
obligations and the tangible fair market value of its assets as defined in the
Bank Credit Agreement. As of December 31, 1998, the Company had a letter of
credit outstanding as posted collateral under the interest rate swap agreement
in the amount of $10.9 million, which reduced the availability of the
Revolving Credit Facility as of that date by a similar amount.
F-8--1
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The interest rate swap agreement will amortize as follows (in thousands):
December 31, 1999................................................... $ 25,000
December 31, 2000................................................... 25,000
December 31, 2001................................................... 50,000
December 31, 2002................................................... 25,000
December 31, 2003................................................... 25,000
December 31, 2004................................................... 50,000
December 31, 2005................................................... 50,000
December 31, 2006................................................... 650,000
In connection with the Reorganization Transactions, the Company refinanced
substantially all of its long-term debt. As a result, the Company incurred an
after tax extraordinary loss on extinguishment of debt of $8.1 million, net of
a $4.9 million tax benefit, for the eight months ended December 31, 1998.
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each
of the five years following December 31, 1998 are as follows (in thousands)
(See Note 12--Subsequent Events):
1999................................................................ $405,023
2000................................................................ 3,504
2001................................................................ 214,918
2002................................................................ 3,500
2003................................................................ 304,182
--------
Total............................................................... $931,127
========
5. Financial Instruments
At December 31, 1998, the carrying amounts and fair values of the Company's
financial instruments are as follows (in thousands):
Carrying Fair
Amount Value
-------- --------
Cash and cash equivalents................................. $ 338 $ 338
Notes receivable from employees........................... 4,027 4,027
Long-term debt, including amounts due within one year..... 931,127 970,327
The estimate of fair value of the Company's long-term debt includes the
effect of the interest rate swap agreement (See New Accounting Pronouncements
in Note 1) and is based upon estimates of fair value based on the present
value of discounted cash flows for the same or similar issues of long-term
debt and the related interest rate swap agreement.
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not necessarily
indicative of the amounts the Company would realize in a current market
exchange.
6. Shareholders' Equity and Stock Options
The Company has plans under which options to purchase common stock may be
granted to officers, employees and certain non-employee directors. Options are
exercisable at the market price at the date of grant,
F-9
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
expire ten years from the date of grant, and vest over four years. The Company
also grants restricted stock to officers, employees and certain non-employee
directors that vest over four years. As of December 31, 1998, options for
5,603,136 shares had been granted to eligible participants and remained
outstanding (including options granted and held by Vencor employees--see
Organization in Note 1) under the provisions of these plans. The Company
granted 150,000 shares of restricted stock for the period May 1, 1998 through
December 31, 1998. The market value of the restricted shares on the date of
the award has been recorded as unearned compensation on restricted stock, with
the unamortized balance shown as a separate component of shareholders' equity.
Unearned compensation is amortized to expense over the vesting period, with
charges to operations of approximately $349,000 in 1998.
At December 31, 1998, options currently exercisable (2,262,232) have a
weighted average exercise price of $15.74. Shares available for future grants
as of December 31, 1998 are 1,658,450.
The following is a summary of stock option activity under the plan:
Stock Options
---------------------------------
Weighted
Average
Number of Exercise
Shares Exercise Price Price
--------- -------------- --------
Outstanding at May 1, 1998................. 5,612,034 $ .33--$27.01 $ 15.76
Granted.................................. 669,000 10.81-- 17.25 17.25
Exercised................................ 51,607 .33-- 16.55 2.67
Canceled................................. 626,291 11.39-- 26.55 16.44
---------
Outstanding at December 31, 1998........... 5,603,136 $ .33--$27.01 $ 15.64
=========
Under the terms of the Ventas, Inc. 1997 Incentive Compensation Plan (the
Employee Plan), the Company has reserved 3,400,000 shares for grants to be
issued to employees. Under the terms of the Ventas, Inc. 1997 Stock Option
Plan for Non-Employee Directors, the Company has reserved 200,000 shares for
grants to be issued to non-employee directors.
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation
(Statement 123). This standard prescribes a fair value based method of
accounting for employee stock options or similar equity instruments and
requires certain pro forma disclosures. For purposes of the pro forma
disclosures required under Statement 123, the estimated fair value of the
options is amortized to expense over the option's vesting period. The
estimated weighted average fair value of options granted in 1998 was
approximately $817,000.
Pro forma information follows (in thousands, except per share amounts):
Pro forma income available to common stockholders.................. $ 19,803
Pro forma earnings per common share:
Basic............................................................ $ .29
Diluted.......................................................... .29
In determining the estimated fair value of the Company's stock options as of
the date of grant, a Black-Scholes option pricing model was used with the
following weighted-average assumptions: risk-free interest rates of 6%; a
dividend yield of 9%; volatility factors of the expected market price of the
Company's common stock at .25%; and a weighted-average expected life of the
options of 8 years.
F-10
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
7. Income Taxes
As part of the Reorganization Transactions, the Company entered into a Tax
Allocation Agreement with Vencor which provides that the Company will be
liable for taxes of the Company's consolidated group attributable to periods
prior to the Distribution Date with respect to the portion of such taxes
attributable to the property held by the Company after the Distribution Date
and Vencor will be liable for such pre-distribution taxes with respect to the
portion of such taxes attributable to the property held by Vencor after the
Distribution Date. The Tax Allocation Agreement further provides that the
Company will be liable for any taxes attributable to the Reorganization
Transactions except that Vencor will be liable for any such taxes to the
extent that Vencor derives certain future tax benefits as a result of the
payment of such taxes. The Company and its subsidiaries are liable for taxes
payable with respect to periods after the Reorganization Transactions that are
attributable to the Company's operations and Vencor and its subsidiaries are
liable for taxes payable with respect to periods after the Reorganization
Transactions that are attributable to Vencor's operations. If, in connection
with a tax audit or filing of an amended return, a taxing authority adjusts
the Company's or Vencor's tax liability with respect to taxes for which the
other party was liable under the Tax Allocation Agreement, such other party
would be liable for the resulting tax assessment or would be entitled to the
resulting tax refund.
The provision for income taxes for the period May 1, 1998 through December
31, 1998, consists of the following (in thousands):
Deferred:
Federal......................................................... $18,602
State........................................................... 2,549
-------
21,151
Current tax benefit of extraordinary loss on extinguishment of
debt:
Federal......................................................... (4,350)
State........................................................... (585)
-------
(4,935)
-------
Provision for income taxes........................................ $16,216
=======
A summary of non-current deferred income taxes by source included in the
consolidated balance sheet at December 31, 1998 follows (in thousands):
(Assets)
Liabilities
-----------
Depreciation..................................................... $15,700
Property......................................................... 905
Interest rate swap loss.......................................... 14,972
Compensation..................................................... (71)
-------
$31,506
=======
F-11
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also has capital loss carryovers of approximately $260 million
which can only be utilized against future capital gains, if any.
A reconciliation of the federal statutory rate to the effective income tax
rate follows:
Federal statutory rate................................................ 33.05%
State income taxes, net of federal income tax benefit................. 4.75%
-----
Effective income tax rate............................................. 37.80%
=====
8. Transactions with Vencor
In order to govern certain of the relationships between the Company and
Vencor after the Reorganization Transactions and to provide mechanisms for an
orderly transition, the Company and Vencor entered into various agreements at
the time of the Reorganization Transactions. The Company believes that the
agreements contain terms which generally are comparable to those which would
have been reached in arms' length negotiations with unaffiliated parties. The
terms of the Master Lease Agreements and other related agreements are
described below:
Master Lease Agreements
In the Reorganization Transactions, the Company retained substantially all
of its real property, buildings and other improvements (primarily long-term
care hospitals and nursing centers) and leased these facilities to Vencor
under four Master Lease Agreements. Such Master Lease Agreements contain terms
which govern the rights, duties and responsibilities of the Company and Vencor
relative to each of the leased properties. The leased properties include land,
buildings, structures, easements, improvements on the land and permanently
affixed equipment, machinery and other fixtures relating to the operations of
the facilities.
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all insurance, taxes, utilities and maintenance
related to the properties. The base annual rents is approximately $221.5
million plus a two percent (2%) per annum escalator, which escalator is
contingent upon Vencor achieving net patient service revenue for the
applicable year in excess of seventy-five percent (75%) of patient service
revenues in the base year of 1997. The initial terms of these leases were for
periods ranging from 10 to 15 years.
Except as noted below, upon the occurrence of an event of default under a
Master Lease, the Master Lease provides that the Company may, at its option,
exercise the remedies under the Master Lease on all properties included within
that Master Lease. The remedies which may be exercised under the Master Lease
by the Company, at its option, include the following: (i) after not less than
ten (10) days notice to Vencor, terminate the Master Lease, repossess the
leased property and relet the leased property to a third party and require
that Vencor pay to the Company, as liquidated damages, the net present value
of the rent for the balance of the term, discounted at the prime rate; (ii)
without terminating the Master Lease, repossess the leased property and relet
the leased property with Vencor remaining liable under the Master Lease for
all obligations to be performed by Vencor thereunder, including the
difference, if any, between the rent under the Master Lease and the rent
payable as a result of the reletting of the leased property; (iii) demand that
Vencor purchase either the property which is the subject of the default or all
of the properties included within that Master Lease, at the Company's option,
for the higher of the fair market value or the minimum repurchase price, both
as defined in the Master Lease; and (iv) any and all other rights and remedies
available at law or in equity.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the properties that is the subject of the
default upon the occurrence of any one of the following events of
F-12
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
default: (i) the occurrence of a final non-appealable revocation of Vencor's
license to operate a facility; (ii) the revocation of certification of a
facility for reimbursement under Medicare; or (iii) Vencor becomes subject to
regulatory sanctions at a facility and fails to cure the regulatory sanctions
within the applicable cure period. Upon the occurrence of the fifth such event
of default under a Master Lease with respect to any one or more properties,
the Master Lease permits the Company, at its option, to exercise the rights
and remedies under the Master Lease on all properties included within that
Master Lease.
The occurrence of any one of the following events of default constitute an
event of default under all Master Leases permitting the Company, at its
option, to exercise the rights and remedies under all the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the Federal
bankruptcy laws, and (iv) a petition is filed against Vencor under Federal
bankruptcy laws and same is not dismissed within ninety (90) days of its
institution.
Any notice of the occurrence of an event of default under the Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the Leasehold Mortgagee). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee thirty (30) days prior written
notice and an opportunity to cure the default.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a
Master Lease. The Company may not unreasonably withhold its approval to any
such transfer provided (i) the assignee is creditworthy, (ii) the assignee has
at least four years of operational experience, (iii) the assignee has a
favorable business and operational reputation, (iv) the assignee assumes the
Master Lease in writing, (v) the sublease is subject and subordinate to the
terms of the Master Lease and (vi) Vencor and any guarantor remains primarily
liable under the Master Lease.
Each Master Lease requires Vencor to maintain liability, all risk property
and workers' compensation insurance for the properties at a level reasonable
with respect to the properties. Each Master Lease further provides that in the
event a property is totally destroyed, or is substantially destroyed such that
the damage renders the property unsuitable for its intended use, Vencor will
have the option to either restore the property at its 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 Vencor). If the Company rejects the offer to purchase,
Vencor will have the option to either restore the property or terminate the
applicable Master Lease with respect to the property. If the damage is such
that the property is not rendered unsuitable for its intended use, or if it is
not covered by insurance, each Master Lease requires Vencor to restore the
property to its original condition.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires, will
complete the construction of certain development properties substantially in
accordance with the existing plans and specifications for each such property.
Upon completion of each such development property, the Company has the option
to purchase the development property from Vencor at a purchase price equal to
the amount of Vencor's actual costs in acquiring and developing and such
development property prior to the purchase date. If the Company purchases the
development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be ten percent
(10%) of the actual costs incurred by Vencor in acquiring and developing the
development property. The other terms of the lease for the development
property will be substantially similar to those set forth in the Master
Leases. As of December 31, 1998, the Company had acquired one skilled nursing
center under the Development Agreement for $6.2 million and has entered into
separate lease with Vencor with respect to such facility. The Development
Agreement has a five year term, and the Company and Vencor each have the right
to terminate the Development Agreement in the event of a change of control.
F-13
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing center
or other healthcare facility, provided that Vencor and the Company can
negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility.
The Participation Agreement also provides, subject to certain terms, that
the Company has a right of first offer to purchase or finance any healthcare
related real property that Vencor determines to sell or mortgage to a third
party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term and the Company and Vencor each have the right to
terminate the Participation Agreement in the event of a change of control.
Transition Services Agreement
The Transition Services Agreement, which expired pursuant to its terms on
December 31, 1998, provided that Vencor would provide the Company with
transitional administrative and support services, including but not limited to
finance and accounting, human resources, risk management, legal, and
information systems support. The Company paid Vencor $1.6 million for the
eight months ended December 31, 1998, for services provided under the
Transition Services Agreement.
After December 31, 1998, Vencor continued to provide the Company with
certain administrative and support services (primarily computer systems,
telephone networks, mail delivery and other office services). Subsequent to
year end, the Company moved to new office space and those services are no
longer provided by Vencor. Vencor has also agreed to assist in the preparation
of certain tax returns and other tax filings to be made on behalf of the
Company for the period ending on or before December 31, 1998. There can be no
assurance that Vencor will continue to assist the Company in the preparation
of these tax documents or that the Company will be able to timely and
accurately complete such tax filings if Vencor should discontinue its
assistance, although the Company intends to take all actions necessary to
enable it do so.
Agreement of Indemnity--Third Party Leases
In connection with the Reorganization Transactions, the Company assigned its
former third party lease obligations as a tenant or as a guarantor of tenant
obligations to Vencor. The Company remains primarily liable on substantially
all of the third party lease obligations assigned to Vencor. Under the terms
of the Agreement of Indemnity--Third Party Leases, Vencor and its subsidiaries
have agreed to indemnify and hold the Company harmless from and against all
claims against the Company arising out of the third party lease obligations
assigned by the Company to Vencor. If Vencor is unable to satisfy the
obligations under any third party lease assigned by the Company to Vencor,
then the Company will be liable for the payment and performance of the
obligations under any such third party lease. The leases have remaining terms
ranging from 1 to 63 years.
F-14
The total aggregate remaining minimum rental payments under these leases are
as follows (in thousands):
Skilled
Nursing Office
Facilities Hospitals Land Leases Sub-leases Other Total
---------- --------- ------- ------- ---------- ------ --------
1999........ $21,039 $ 6,987 $ 1,030 $ 2,761 $ 6,919 $ 457 $ 39,193
2000........ 18,981 2,792 1,033 2,187 6,688 372 32,053
2001........ 13,857 2,805 1,025 1,582 4,996 284 24,549
2002........ 8,836 2,661 987 940 2,466 285 16,175
2003........ 5,253 2,160 990 671 2,421 259 11,754
Thereafter.. 6,618 6,900 23,535 3,332 12,918 653 53,956
------- ------- ------- ------- ------- ------ --------
$74,584 $24,305 $28,600 $11,473 $36,408 $2,310 $177,680
======= ======= ======= ======= ======= ====== ========
Agreement of Indemnity--Third Party Contracts
In connection with the Reorganization Transactions, the Company assigned its
former third party guaranty agreements to Vencor. The Company remains
primarily liable on substantially all of the third party guarantees assigned
to Vencor. Under the terms of the Agreement of Indemnity--Third Party
Contracts, Vencor and its
F-14--1
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
subsidiaries have agreed to indemnify and hold the Company harmless from and
against all claims against the Company arising out of the third party
guarantees assigned by the Company to Vencor. If Vencor is unable to satisfy
the obligations under any third party guaranty agreement assigned by the
Company to Vencor, then the Company will be liable for the payment and
performance of the obligations under any such agreement. These third party
guarantees were entered into in connection with certain acquisitions and
financing transactions. The total aggregate exposure under these guarantees is
approximately $45.9 million at December 31, 1998. Atria Communications, Inc.
has also agreed to indemnify and hold the Company harmless form and against
all claims against the Company arising out of the third party contracts, which
has an aggregate principal amount of approximately $35 million.
9. Supplemental Disclosure of Cash Flow Information
During the period May 1, 1998 through December 31, 1998, the Company paid
taxes and interest of approximately $616,000 and $52,448,000, respectively.
10. Litigation
The following litigation and other matters arose from the Company's
operations prior to the Reorganization Transactions. In connection with the
Reorganization Transactions, Vencor agreed to assume the defense, on behalf of
the Company, of any claims that were pending at the time of the Reorganization
Transactions and which arose out of the ownership or operation of the
healthcare operations. Vencor also agreed to defend, on behalf of the Company,
any claims asserted after the Reorganization Transactions which arose out of
the ownership and operation of the healthcare operations. However, there can
be no assurance that Vencor will continue to defend the Company in such
proceedings and actions or that Vencor will have sufficient assets, income and
access to financing to enable it to satisfy such obligations or its
obligations incurred in connection with the Reorganization Transactions.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Exchange Act, by, among other things, issuing to the investing public a series
of false and misleading statements concerning the Company's current operations
and the inherent value of the Company's common stock. The complaint further
alleges that as a result of these purported false and misleading statements
concerning the Company's revenues and successful acquisitions, the price of
the Company's common stock was artificially inflated. In particular, the
complaint alleges that the Company issued false and misleading financial
statements during the first, second and third calendar quarters of 1997 which
misrepresented and understated the impact that changes in Medicare
reimbursement policies would have on the Company's core services and
profitability. The complaint further alleges that the Company issued a series
of materially false statements concerning the purportedly successful
integration of its recent acquisitions and prospective earnings per share for
1997 and 1998 which the Company knew lacked any reasonable basis and were not
being achieved. The suit seeks damages in an amount to be proven at trial,
pre-judgment and post-judgment interest, reasonable attorneys' fees, expert
witness fees and other costs, and any extraordinary equitable and/or
injunctive relief permitted by law or equity to assure that the plaintiff has
an effective remedy. On January 22, 1999, the court granted the Company's
motion to dismiss the case. The plaintiff has appealed the dismissal to the
United States Court of Appeals for the Sixth Circuit. Vencor, on behalf of the
Company, is defending this action vigorously.
A stockholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of Vencor and Ventas against certain current and former
executive officers and directors of Vencor and Ventas. The complaint alleges
that the defendants damaged Vencor and Ventas by
F-15
VENTAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
engaging in violations of the securities laws, engaging in insider trading,
fraud and securities fraud and damaging the reputation of Vencor and Ventas.
The plaintiff asserts that such actions were taken deliberately, in bad faith
and constitute breaches of the defendants' duties of loyalty and due care. The
complaint is based on substantially similar assertions to those made in the
class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al.,
discussed above. The suit seeks unspecified damages, interest, punitive
damages, reasonable attorneys' fees, expert witness fees and other costs, and
any extraordinary equitable and/or injunctive relief permitted by law or
equity to assure that Vencor and Ventas have an effective remedy. Vencor and
the Company each believe that the allegations in the complaint are without
merit and Vencor, on behalf of the Company, intends to defend this action
vigorously.
Unasserted claim--Potential Liabilities Due to Fraudulent Transfer
Considerations
Transfers made and obligations incurred in the Reorganization Transactions
and the simultaneous distribution of the Vencor common stock to the Ventas
stockholders (the "Distribution") are subject to review under state fraudulent
conveyance laws, and in the event of a bankruptcy proceeding, federal
fraudulent conveyance laws. Under these laws a court in a lawsuit by an unpaid
creditor or a representative of creditors (such as a trustee or debtor-in-
possession in bankruptcy) could avoid the transfer if it determined that, as
of the time of the Reorganization Transactions, the party making the transfer
or incurring the obligation did not receive fair consideration or reasonably
equivalent value and, at the time of the Reorganization Transactions, the
party making the transfer or incurring the obligation (i) was insolvent or was
rendered insolvent, (ii) had unreasonably small capital with which to carry on
its business and all businesses in which it intended to engage, or
(iii) intended to incur, or believed it would incur, debts beyond its ability
to repay such debts as they would mature. In the context of the Distribution,
upon such a determination, any 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. Although Vencor has not asserted a claim, Vencor's legal counsel
has raised questions relating to potential fraudulent conveyance issues
relating to the Reorganization Transactions. At the time of the Reorganization
Transactions, the Company obtained an opinion from an independent third party
that addressed issues of solvency and adequate capitalization. Nevertheless,
if a fraudulent conveyance claim is ultimately asserted by Vencor, creditors,
or others, the ultimate outcome of such a claim cannot presently be
determined. The Company intends to vigorously defend these claims if they are
asserted in a legal proceeding or mediation.
11. Related Party Transactions
At December 31, 1998, the Company had receivables of approximately $4
million due from certain executive officers of the Company. The loans include
interest provisions and were to finance the income taxes payable by the
executive officers as a result of the Reorganization Transactions. The loans
are payable over a ten year period.
On October 15, 1998, the Company acquired eight personal care facilities and
related facilities for approximately $7 million from Tangram Rehabilitation
Network, Inc. (Tangram). Tangram is a wholly owned subsidiary of Res-Care,
Inc. (Res-Care) of which a director of the Company is the Chairman, President
and Chief Executive Officer. The Company leases the Tangram facilities to
Tangram pursuant to a Master Lease Agreement which is guaranteed by Res-Care.
Through December 31, 1998, Tangram has paid the Company approximately $155,000
in rent payments.
12. Subsequent Events
Subsequent to December 31, 1998, the amount Due from Vencor, Inc. was paid
in full. Subsequent to December 31, 1998, the Company drew $125 million under
the revolving line of credit and used the proceeds to pay down the bridge
facility loan due October 30, 1999 reducing the balance of that loan to $275
million. In addition, the Company drew $50 million under the revolving line of
credit to use for working capital purposes.
F-16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999
Ventas, Inc.
/s/ Debra A. Cafaro
By: _________________________________
Debra A. Cafaro
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Walter F. Beran Director Date March 31, 1999
______________________________________
Walter F. Beran
/s/ Douglas Crocker II Director Date March 31, 1999
______________________________________
Douglas Crocker II
/s/ Ronald G. Geary Director Date March 31, 1999
______________________________________
Ronald G. Geary
/s/ Greg D. Hudson Director Date March 31, 1999
______________________________________
Greg D. Hudson
/s/ Debra A. Cafaro Chief Executive Officer, Date March 31, 1999
______________________________________ President (Principal
Debra A. Cafaro Executive Officer) and
Director
/s/ W. Bruce Lunsford Chairman of the Board and Date March 31, 1999
______________________________________ Director
W. Bruce Lunsford
/s/ Steven T. Downey Vice President and Chief Date March 31, 1999
______________________________________ Financial Officer
Steven T. Downey (Principal Financial and
Principal Accounting
Officer)
/s/ R. Gene Smith Director Date March 31, 1999
______________________________________
R. Gene Smith
VENTAS, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Dollars in Thousands)
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - -------------------------------------- ----------------- Capitalized -----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- -------------- ----- ----- ----------- ----------- ----- ----------- ------------ ------------ --------
VENCOR SKILLED
NURSING
FACILITIES
Rehab. &
Healthc. Ctr.
of Huntsville Huntsville AL 534 4,216 -- 534 4,216 1,268 1968 1998
Rehab. &
Healthc. Ctr.
of Birmingham Birmingham AL -- 1,921 -- -- 1,921 747 1971 1998
Rehab. &
Healthcare Ctr.
of Mobile Mobile AL 5 2,981 -- 5 2,981 733 1967 1998
Valley
Healthcare &
Rehab. Center Tucson AZ 383 1,954 -- 383 1,954 517 1964 1998
Sonoran Rehab &
Care Center Phoenix AZ 781 2,755 -- 781 2,755 530 1962 1998
Desert Life
Rehab & Care
Center Tuscon AZ 611 5,117 -- 611 5,117 2,064 1979 1998
Hacienda Rehab.
& Care Center Sierra Vista AZ 31 294 -- 31 294 169 1982 1998
Villa Campana
Health Center Tuscon AZ 533 2,201 -- 533 2,201 463 1983 1998
Kachina Point
Health Care &
Rehab. Sedona AZ 364 4,179 -- 364 4,179 1,406 1983 1998
Nob Hill
Healthcare
Center San Francisco CA 1,902 7,531 -- 1,902 7,531 1,852 1967 1998
Canyonwood
Nursing &
Rehab. Ctr. Redding CA 401 3,784 -- 401 3,784 815 1989 1998
Californian Care
Center Bakersfield CA 1,438 5,609 -- 1,438 5,609 907 1988 1998
Magnolia Gardens
Care Center Burlingame CA 1,832 3,186 -- 1,832 3,186 760 1955 1998
Lawton
Healthcare
Center San Francisco CA 943 514 -- 943 514 158 1962 1998
Valley Gardens
HC & Rehab. Stockton CA 516 3,405 -- 516 3,405 876 1988 1998
Alta Vista
Healthcare
Center Riverside CA 376 1,669 -- 376 1,669 453 1966 1998
Maywood Acres
Healthcare
Center Oxnard CA 465 2,363 -- 465 2,363 542 1964 1998
La Veta
Healthcare
Center Orange CA 47 1,459 -- 47 1,459 353 1964 1998
Bay View Nursing
& Rehab. Center Alameda CA 1,462 5,981 -- 1,462 5,981 1,425 1967 1998
Village Square
Nsg. & Rehab.
Ctr. San Marcos CA 766 3,507 -- 766 3,507 491 1989 1998
Cherry Hills
Health Care
Center Englewood CO 241 2,180 -- 241 2,180 706 1960 1998
Aurora Care
Center Aurora CO 197 2,328 -- 197 2,328 556 1962 1998
Castle Garden
Care Center Northglenn CO 501 8,294 -- 501 8,294 1,821 1971 1998
Brighton Care
Center Brighton CO 282 3,377 -- 282 3,377 747 1969 1998
Andrew House
Healthcare New Britain CT 247 1,963 -- 247 1,963 417 1967 1998
Camelot Nursing
& Rehab. Center New London CT 202 2,363 -- 202 2,363 437 1969 1998
Hamilton Rehab.
& Healthcare
Center Norwich CT 456 2,808 -- 456 2,808 627 1969 1998
Windsor Rehab. &
Healthcare
Center Windsor CT 368 2,520 -- 368 2,520 560 1965 1998
Nutmeg Pavilion
Healthcare New London CT 401 2,777 -- 401 2,777 670 1968 1998
Parkway Pavilion
Healthcare Enfield CT 337 3,607 -- 337 3,607 823 1968 1998
Courtland
Gardens Health
Ctr., Inc. Stamford CT 1,126 9,399 -- 1,126 9,399 411 1956 1998
Homestead Health
Center Stamford CT 511 2,764 -- 511 2,764 128 1959 1998
East Manor
Medical Care
Center Sarasota FL 390 5,499 -- 390 5,499 1,223 1966 1998
Healthcare &
Rehab Ctr of
Sanford Sanford FL 329 3,074 -- 329 3,074 708 1965 1998
Titusville
Rehab. &
Nursing Center Titusville FL 398 3,810 -- 398 3,810 898 1966 1998
Bay Pointe
Nursing
Pavilion St. Petersburg FL 750 4,392 -- 750 4,392 594 1984 1998
Colonial Oaks
Rehab.Ctr-Ft.
Myers Ft. Meyers FL 1,058 5,754 -- 1,058 5,754 490 1995 1998
Carrollwood Core
Center Tampa FL 268 4,128 -- 268 4,128 1,027 1986 1998
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- - ----------------- ------------
VENCOR SKILLED
NURSING
FACILITIES
Rehab. &
Healthc. Ctr.
of Huntsville 25 years
Rehab. &
Healthc. Ctr.
of Birmingham 20 years
Rehab. &
Healthcare Ctr.
of Mobile 29 years
Valley
Healthcare &
Rehab. Center 28 years
Sonoran Rehab &
Care Center 29 years
Desert Life
Rehab & Care
Center 37 years
Hacienda Rehab.
& Care Center 20 years
Villa Campana
Health Center 35 years
Kachina Point
Health Care &
Rehab. 45 years
Nob Hill
Healthcare
Center 28 years
Canyonwood
Nursing &
Rehab. Ctr. 45 years
Californian Care
Center 40 years
Magnolia Gardens
Care Center 28.5 years
Lawton
Healthcare
Center 20 years
Valley Gardens
HC & Rehab. 29 years
Alta Vista
Healthcare
Center 29 years
Maywood Acres
Healthcare
Center 29 years
La Veta
Healthcare
Center 28 years
Bay View Nursing
& Rehab. Center 45 years
Village Square
Nsg. & Rehab.
Ctr. 42 years
Cherry Hills
Health Care
Center 30 years
Aurora Care
Center 30 years
Castle Garden
Care Center 29 years
Brighton Care
Center 30 years
Andrew House
Healthcare 29 years
Camelot Nursing
& Rehab. Center 28 years
Hamilton Rehab.
& Healthcare
Center 29 years
Windsor Rehab. &
Healthcare
Center 30 years
Nutmeg Pavilion
Healthcare 29 years
Parkway Pavilion
Healthcare 28 years
Courtland
Gardens Health
Ctr., Inc. 45 years
Homestead Health
Center 20 years
East Manor
Medical Care
Center 28 years
Healthcare &
Rehab Ctr of
Sanford 29 years
Titusville
Rehab. &
Nursing Center 29 years
Bay Pointe
Nursing
Pavilion 35 years
Colonial Oaks
Rehab.Ctr-Ft.
Myers 45 years
Carrollwood Core
Center 37.5 years
S-1
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - -------------------------------------- ----------------- Capitalized -----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- -------------- ----- ----- ----------- ----------- ----- ----------- ------------ ------------ --------
Evergreen Woods
Health & Rehab. Springhill FL 234 3,566 -- 234 3,566 668 1988 1998
Rehab. &
Healthcare Ctr.
of Tampa Tampa FL 355 8,291 -- 355 8,291 1,271 1969 1998
Rehab & Health
Ctr. of Cape
Coral Cape Coral FL 1,002 4,153 -- 1,002 4,153 948 1978 1998
Windsor Woods
Convalescent
Center Hudson FL 859 3,172 -- 859 3,172 704 N/A 1998
Casa Mora Rehab.
& Ext Care Bradenton FL 823 6,093 -- 823 6,093 272 1977 1998
North Broward
Rehab. & Nsg.
Ctr. Pompano Beach FL 1,360 5,913 -- 1,360 5,913 247 1965 1998
Highland Pines
Rehab. Center Clearwater FL 863 5,793 -- 863 5,793 253 1965 1998
Pompano
Rehab/Nursing
Ctr. Pompano Beach FL 890 3,252 -- 890 3,252 135 1975 1998
Abbey Rehab. &
Nsg. Center St. Petersburg FL 563 2,842 -- 563 2,842 218 1962 1998
Savannah Rehab.
& Nursing
Center Savannah GA 213 2,772 -- 213 2,772 655 1968 1998
Specialty Care
of Marietta Marietta GA 241 2,782 -- 241 2,782 732 1968 1998
Savannah
Specialty Care
Center Savannah GA 157 2,219 -- 157 2,219 611 1972 1998
Lafayette Nsg. &
Rehab. Ctr. Fayetteville GA 598 6,623 -- 598 6,623 551 1989 1998
Tucker Nursing
Center Tucker GA 512 8,153 -- 512 8,153 370 1972 1998
Hillcrest Rehab.
Care Center Boise ID 256 3,593 -- 256 3,593 405 1977 1998
Cascade Care
Center Caldwell ID 312 2,050 -- 312 2,050 208 1974 1998
Emmett
Rehabilitation
and Healthcare Emmett ID 185 1,670 -- 185 1,670 944 1960 1998
Lewiston
Rehabilitation
and Care Ctr. Lewiston ID 133 3,982 -- 133 3,982 1,006 1964 1998
Nampa Care
Center Nampa ID 252 2,810 -- 252 2,810 1,533 1950's 1998
Weiser
Rehabilitation
and Care Ctr. Weiser ID 157 1,760 -- 157 1,760 1,103 1963 1998
Moscow Care
Center Moscow ID 261 2,571 -- 261 2,571 846 1955 1998
Mountain Valley
Care and Rehab. Kellogg ID 68 1,281 -- 68 1,281 732 1971 1998
Rolling Hills
Health Care
Center New Albany IN 81 1,894 -- 81 1,894 406 1984 1998
Royal Oaks
Healthcare &
Rehab Ctr. Terre Haute IN 418 5,779 -- 418 5,779 463 1995 1998
Southwood Health
& Rehab Center Terre Haute IN 90 2,868 -- 90 2,868 502 1988 1998
Vencor Corydon Corydon IN 125 6,068 -- 125 6,068 59 N/A 1998
Valley View
Health Care
Center Elkhart IN 87 2,665 -- 87 2,665 533 1985 1998
Wildwood
Healthcare
Center Indianapolis IN 134 4,983 -- 134 4,983 907 1988 1998
Meadowvale
Health & Rehab.
Ctr. Bluffton IN 7 787 -- 7 787 40 1962 1998
Columbia
Healthcare
Facility Evansville IN 416 6,317 -- 416 6,317 1,245 1983 1998
Bremen Health
Care Center Bremen IN 109 3,354 -- 109 3,354 374 1982 1998
Windsor Estates
Health & Rehab
Ctr Kokomo IN 256 6,625 -- 256 6,625 897 1962 1998
Muncie Health
Care & Rehab. Muncie IN 108 4,202 -- 108 4,202 641 1980 1998
Parkwood Health
Care Center Lebanon IN 121 4,512 -- 121 4,512 753 1977 1998
Wedgewood
Healthcare
Center Clarksville IN 119 5,115 -- 119 5,115 478 1985 1998
Westview Nursing
& Rehab. Center Bedford IN 255 4,207 -- 255 4,207 779 1970 1998
Columbus Health
& Rehab. Center Columbus IN 345 6,817 -- 345 6,817 1,925 1966 1998
Rosewood Health
Care Center Bowling Green KY 248 5,371 -- 248 5,371 1,452 1970 1998
Oakview Nursing
& Rehab. Ctr. Calvert City KY 124 2,882 -- 124 2,882 775 1967 1998
Cedars of
Lebanon Nursing
Center Lebanon KY 40 1,253 -- 40 1,253 339 1930 1998
Winchester
Centre for
Health/Rehab. Winchester KY 137 6,120 -- 137 6,120 1,637 1967 1998
Riverside Manor
Health Care Calhoun KY 103 2,119 -- 103 2,119 577 1963 1998
Maple Manor
Healthcare
Center Greenville KY 59 3,187 -- 59 3,187 864 1968 1998
Danville Centre
for Health &
Rehab. Danville KY 322 3,538 -- 322 3,538 637 1962 1998
Lexington Centre
for Health &
Rehab. Lexington KY 647 4,892 -- 647 4,892 1,171 1963 1998
North Centre for
Health & Rehab. Louisville KY 285 1,555 -- 285 1,555 484 1969 1998
Hillcrest Health
Care Center Owensboro KY 544 2,619 -- 544 2,619 1,733 1963 1998
Life on
Which
Depreciation
Income
Statement is
Facility name Computed
- - ----------------- ------------
Evergreen Woods
Health & Rehab. 25 years
Rehab. &
Healthcare Ctr.
of Tampa 28 years
Rehab & Health
Ctr. of Cape
Coral 32 years
Windsor Woods
Convalescent
Center 45 years
Casa Mora Rehab.
& Ext Care 45 years
North Broward
Rehab. & Nsg.
Ctr. 45 years
Highland Pines
Rehab. Center 20 years
Pompano
Rehab/Nursing
Ctr. 45 years
Abbey Rehab. &
Nsg. Center 35 years
Savannah Rehab.
& Nursing
Center 28.5 years
Specialty Care
of Marietta 28.5 years
Savannah
Specialty Care
Center 26 years
Lafayette Nsg. &
Rehab. Ctr. 20 years
Tucker Nursing
Center 45 years
Hillcrest Rehab.
Care Center 45 years
Cascade Care
Center 45 years
Emmett
Rehabilitation
and Healthcare 28 years
Lewiston
Rehabilitation
and Care Ctr. 29 years
Nampa Care
Center 25 years
Weiser
Rehabilitation
and Care Ctr. 25 years
Moscow Care
Center 25 years
Mountain Valley
Care and Rehab. 25 years
Rolling Hills
Health Care
Center 25 years
Royal Oaks
Healthcare &
Rehab Ctr. 45 years
Southwood Health
& Rehab Center 25 years
Vencor Corydon 45 years
Valley View
Health Care
Center 25 years
Wildwood
Healthcare
Center 25 years
Meadowvale
Health & Rehab.
Ctr. 22 years
Columbia
Healthcare
Facility 35 years
Bremen Health
Care Center 45 years
Windsor Estates
Health & Rehab
Ctr 35 years
Muncie Health
Care & Rehab. 25 years
Parkwood Health
Care Center 25 years
Wedgewood
Healthcare
Center 35 years
Westview Nursing
& Rehab. Center 29 years
Columbus Health
& Rehab. Center 25 years
Rosewood Health
Care Center 30 years
Oakview Nursing
& Rehab. Ctr. 30 years
Cedars of
Lebanon Nursing
Center 30 years
Winchester
Centre for
Health/Rehab. 30 years
Riverside Manor
Health Care 30 years
Maple Manor
Healthcare
Center 30 years
Danville Centre
for Health &
Rehab. 30 years
Lexington Centre
for Health &
Rehab. 28 years
North Centre for
Health & Rehab. 30 years
Hillcrest Health
Care Center 22 years
S-2
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - ---------------------------------------- ---------------- Capitalized ----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- ---------------- ----- ---- ----------- ----------- ---- ----------- ------------ ------------ --------
Woodland Terrace
Health Care
Fac. Elizabethtown KY 216 1,795 -- 216 1,795 1,176 1969 1998
Harrodsburg
Health Care
Center Harrodsburg KY 137 1,830 -- 137 1,830 736 1974 1998
Laurel Ridge
Rehab. &
Nursing Ctr. Jamaica Plain MA 194 1,617 -- 194 1,617 531 1968 1998
Blue Hills
Alzheimer's
Care Center Stoughton MA 511 1,026 -- 511 1,026 666 1965 1998
Brigham Manor
Nursing & Rehab
Ctr Newburyport MA 126 1,708 -- 126 1,708 595 1806 1998
Presentation
Nursing &
Rehab. Ctr. Brighton MA 184 1,220 -- 184 1,220 736 1968 1998
Country Manor
Rehab. & Nsg.
Center Newburyport MA 199 3,004 -- 199 3,004 1,061 1968 1998
Crawford Skilled
Nsg. & Rehab.
Ctr. Fall River MA 127 1,109 -- 127 1,109 609 1968 1998
Hallmark Nursing
& Rehab. Ctr. New Bedford MA 202 2,694 -- 202 2,694 983 1968 1998
Sachem Nursing &
Rehab. Ctr. East Bridgewater MA 529 1,238 -- 529 1,238 767 1968 1998
Hammersmith
House Nsg. Care
Ctr. Saugus MA 112 1,919 -- 112 1,919 615 1965 1998
Oakwood Rehab. &
Nursing Center Webster MA 102 1,154 -- 102 1,154 621 1967 1998
Timberlyn
Heights Nsg. &
Alz. Ctr. Great Barrington MA 120 1,305 -- 120 1,305 609 1968 1998
Star of David
Nsg. &
Rehab/Alz Ctr. West Roxbury MA 359 2,324 -- 359 2,324 1,425 1968 1998
Brittany
Healthcare
Center Natick MA 249 1,328 -- 249 1,328 652 1996 1998
Briarwood Health
Care Nursing
Ctr Needham MA 154 1,502 -- 154 1,502 697 1970 1998
Westridge
Healthcare
Center Marlborough MA 453 3,286 -- 453 3,286 1,720 1964 1998
Bolton Manor
Nursing Home Marlborough MA 222 2,431 -- 222 2,431 1,075 1973 1998
Hillcrest
Nursing Home Fitchburg MA 175 1,461 -- 175 1,461 865 1957 1998
Country Gardens
Sk. Nsg. &
Rehab. Swansea MA 415 2,675 -- 415 2,675 893 1969 1998
Quincy Rehab. &
Nursing Center Quincy MA 216 2,911 -- 216 2,911 1,316 1965 1998
West Roxbury
Manor West Roxbury MA 91 1,001 -- 91 1,001 739 1960 1998
Newton and
Wellesley
Alzheimer Ctr. Wellesley MA 297 3,250 -- 297 3,250 1,109 1971 1998
Den-Mar Rehab. &
Nursing Center Rockport MA 23 1,560 -- 23 1,560 675 1963 1998
Eagle Pond
Rehab. & Living
Center South Dennis MA 296 6,896 -- 296 6,896 1,658 1985 1998
Blueberry Hill
Healthcare Beverly MA 129 4,290 -- 129 4,290 1,664 1965 1998
Colony House
Nsg. & Rehab.
Ctr. Abington MA 132 999 -- 132 999 650 1965 1998
Embassy House
Sk. Nsg. &
Rehab. Brockton MA 166 1,004 -- 166 1,004 591 1968 1998
Franklin Sk.
Nsg. & Rehab.
Center Franklin MA 156 757 -- 156 757 500 1967 1998
Great Barrington
Rehab. & Nsg.
Ctr. Great Barrington MA 60 1,142 -- 60 1,142 716 1967 1998
River Terrace Lancaster MA 268 957 -- 268 957 642 1969 1998
Walden Rehab. &
Nursing Center Concord MA 181 1,347 -- 181 1,347 909 1969 1998
Harrington House
Nsg. & Rehab.
Ctr. Walpole MA 4 4,444 -- 4 4,444 771 1991 1998
Eastside Rehab.
and Living
Center Bangor ME 316 1,349 -- 316 1,349 457 1967 1998
Winship Green
Nursing Center Bath ME 110 1,455 -- 110 1,455 543 1974 1998
Brewer
Rehabilitation
& Living Center Brewer ME 228 2,737 -- 228 2,737 873 1974 1998
Augusta
Rehabilitation
Center Augusta ME 152 1,074 -- 152 1,074 477 1968 1998
Kennebunk
Nursing Center Kennebunk ME 99 1,898 -- 99 1,898 632 1977 1998
Norway
Rehabilitation
& Living Center Norway ME 133 1,658 -- 133 1,658 590 1972 1998
Shore Village
Rehab. &
Nursing Ctr. Rockland ME 100 1,051 -- 100 1,051 455 1968 1998
Westgate Manor Bangor ME 287 2,718 -- 287 2,718 872 1969 1998
Brentwood Rehab.
& Nsg. Center Yarmouth ME 181 2,789 -- 181 2,789 912 1945 1998
Fieldcrest Manor
Nursing Home Waldoboro ME 101 1,020 -- 101 1,020 463 1963 1998
Park Place
Health Care
Center Great Falls MT 600 6,311 -- 600 6,311 1,510 1963 1998
Parkview Acres
Care & Rehab
Ctr. Dillon MT 207 2,578 -- 207 2,578 612 1965 1998
Pettigrew Rehab.
& Healthcare
Ctr. Durham NC 101 2,889 -- 101 2,889 724 1969 1998
LaSalle
Healthcare
Center Durham NC 140 3,238 -- 140 3,238 661 1969 1998
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- - ----------------- ------------
Woodland Terrace
Health Care
Fac. 26 years
Harrodsburg
Health Care
Center 35 years
Laurel Ridge
Rehab. &
Nursing Ctr. 30 years
Blue Hills
Alzheimer's
Care Center 28 years
Brigham Manor
Nursing & Rehab
Ctr 27 years
Presentation
Nursing &
Rehab. Ctr. 28 years
Country Manor
Rehab. & Nsg.
Center 27 years
Crawford Skilled
Nsg. & Rehab.
Ctr. 29 years
Hallmark Nursing
& Rehab. Ctr. 26 years
Sachem Nursing &
Rehab. Ctr. 27 years
Hammersmith
House Nsg. Care
Ctr. 28 years
Oakwood Rehab. &
Nursing Center 31 years
Timberlyn
Heights Nsg. &
Alz. Ctr. 29 years
Star of David
Nsg. &
Rehab/Alz Ctr. 26 years
Brittany
Healthcare
Center 31 years
Briarwood Health
Care Nursing
Ctr 30 years
Westridge
Healthcare
Center 28.5 years
Bolton Manor
Nursing Home 34.5 years
Hillcrest
Nursing Home 25 years
Country Gardens
Sk. Nsg. &
Rehab. 27 years
Quincy Rehab. &
Nursing Center 24 years
West Roxbury
Manor 20 years
Newton and
Wellesley
Alzheimer Ctr. 30 years
Den-Mar Rehab. &
Nursing Center 30 years
Eagle Pond
Rehab. & Living
Center 50 years
Blueberry Hill
Healthcare 40 years
Colony House
Nsg. & Rehab.
Ctr. 40 years
Embassy House
Sk. Nsg. &
Rehab. 40 years
Franklin Sk.
Nsg. & Rehab.
Center 40 years
Great Barrington
Rehab. & Nsg.
Ctr. 40 years
River Terrace 40 years
Walden Rehab. &
Nursing Center 40 years
Harrington House
Nsg. & Rehab.
Ctr. 45 years
Eastside Rehab.
and Living
Center 30 years
Winship Green
Nursing Center 35 years
Brewer
Rehabilitation
& Living Center 33 years
Augusta
Rehabilitation
Center 30 years
Kennebunk
Nursing Center 35 years
Norway
Rehabilitation
& Living Center 39 years
Shore Village
Rehab. &
Nursing Ctr. 30 years
Westgate Manor 31 years
Brentwood Rehab.
& Nsg. Center 45 years
Fieldcrest Manor
Nursing Home 32 years
Park Place
Health Care
Center 28 years
Parkview Acres
Care & Rehab
Ctr. 29 years
Pettigrew Rehab.
& Healthcare
Ctr. 28 years
LaSalle
Healthcare
Center 29 years
S-3
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - ---------------------------------------- ----------------- Capitalized -----------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- ---------------- ----- ----- ----------- ----------- ----- ----------- ------------ ------------ --------
Sunnybrook
Alzheimer's &
HC Spec. Raleigh NC 187 3,409 -- 187 3,409 975 1971 1998
Blue Ridge
Rehab. &
Healthcare Ctr. Asheville NC 250 3,819 -- 250 3,819 854 1977 1998
Raleigh Rehab. &
Healthcare
Center Raleigh NC 316 5,470 -- 316 5,470 1,584 1969 1998
Rose Manor
Health Care
Center Durham NC 201 3,527 -- 201 3,527 975 1972 1998
Cypress Pointe
Rehab & HC
Center Winmington NC 233 3,710 -- 233 3,710 955 1966 1998
Winston-Salem
Rehab & HC
Center Winston-Salem NC 305 5,142 -- 305 5,142 1,462 1968 1998
Silas Creek
Manor Winston-Salem NC 211 1,893 -- 211 1,893 452 1966 1998
Lincoln Nursing
Center Lincoln NC 39 3,309 -- 39 3,309 1,160 1976 1998
Guardian Care of
Roanoke Rapids Roanoke Rapids NC 339 4,132 -- 339 4,132 1,156 1967 1998
Guardian Care of
Henderson Henderson NC 206 1,997 -- 206 1,997 482 1957 1998
Rehab. & Nursing
Center of
Monroe Monroe NC 185 2,654 -- 185 2,654 781 1963 1998
Guardian Care of
Kinston Kinston NC 186 3,038 -- 186 3,038 703 1961 1998
Guardian Care of
Zebulon Zebulon NC 179 1,933 -- 179 1,933 457 1973 1998
Guardian Care of
Rocky Mount. Rocky Mount NC 240 1,732 -- 240 1,732 291 1975 1998
Rehab. & Health
Center of
Gastonia Gastonia NC 158 2,359 -- 158 2,359 596 1968 1998
Guardian Care of
Elizabeth City Elizabeth City NC 71 561 -- 71 561 308 1977 1998
Chapel Hill
Rehab. &
Healthcare Ctr. Chapel Hill NC 347 3,029 -- 347 3,029 834 1984 1998
Homestead Health
Care & Rehab
Ctr Lincoln NE 277 1,528 1,178 277 2,706 1,809 1961 1998
Dover Rehab. &
Living Center Dover NH 355 3,797 -- 355 3,797 1,232 1969 1998
Greenbriar
Terrace
Healthcare Nashua NH 776 6,011 -- 776 6,011 1,790 1963 1998
Hanover Terrace
Healthcare Hanover NH 326 1,825 -- 326 1,825 425 1969 1998
Las Vegas
Healthcare &
Rehab. Ctr. Las Vegas NV 454 1,018 -- 454 1,018 156 1940 1998
Torrey Pines
Care Center Las Vegas NV 256 1,324 -- 256 1,324 324 1971 1998
Franklin Woods
Health Care
Center Columbus OH 190 4,712 -- 190 4,712 885 1986 1998
Chillicothe
Nursing &
Rehab. Center Chillecothe OH 128 3,481 -- 128 3,481 1,186 1976 1998
Pickerington
Nursing &
Rehab. Ctr. Pickerington OH 312 4,382 -- 312 4,382 791 1984 1998
Logan Health
Care Center Logan OH 169 3,750 -- 169 3,750 882 1979 1998
Winchester Place
Nsg. & Rehab.
Ctr. Canal Winchestr. OH 454 7,149 -- 454 7,149 1,706 1974 1998
Minerva Park
Nursing &
Rehab. Ctr. Columbus OH 210 3,684 -- 210 3,684 388 1973 1998
West Lafayette
Rehab & Nsg Ctr West Lafayette OH 185 3,278 -- 185 3,278 354 1972 1998
Cambridge Health
& Rehab. Center Cambridge OH 108 2,642 -- 108 2,642 559 1975 1998
Coshocton Health
& Rehab. Center Coshocton OH 203 1,979 -- 203 1,979 423 1974 1998
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. Akron OH 341 5,491 -- 341 5,491 1,367 1970 1998
Lebanon Country
Manor Lebanon OH 105 3,617 -- 105 3,617 995 1984 1998
Sunnyside Care
Center Salem OR 1,519 2,688 -- 1,519 2,688 690 1981 1998
Medford Rehab. &
Healthcare
Center Medford OR 362 4,610 -- 362 4,610 1,084 N/A 1998
Wyomissing Nsg.
& Rehab. Ctr. Reading PA 61 5,095 -- 61 5,095 232 1966 1998
Health Havens
Nursing &
Rehab. Ctr. E. Providence RI 174 2,643 -- 174 2,643 123 1962 1998
Oak Hill Nursing
& Rehab. Ctr. Pawtucket RI 91 6,724 -- 91 6,724 314 1966 1998
Madison
Healthcare &
Rehab Ctr. Madison TN 168 1,445 -- 168 1,445 359 1968 1998
Cordova Rehab. &
Nursing Center Cordova TN 322 8,830 -- 322 8,830 2,699 1979 1998
Primacy
Healthcare &
Rehab Ctr. Memphis TN 1,222 8,344 -- 1,222 8,344 1,646 1980 1998
Masters Health
Care Center Algood TN 524 4,370 -- 524 4,370 1,271 1981 1998
San Pedro Manor San Antonio TX 602 4,178 -- 602 4,178 209 1985 1998
Wasatch Care
Center Ogden UT 373 597 -- 373 597 343 1964 1998
Crosslands
Rehab. & Health
Care Ctr Sandy UT 334 4,300 -- 334 4,300 680 1987 1998
St. George Care
and Rehab.
Center St. George UT 420 4,465 -- 420 4,465 1,161 1976 1998
Life on
Which
Depreciation
in Income
Statement is
Facility name Computed
- - ----------------- ------------
Sunnybrook
Alzheimer's &
HC Spec. 25 years
Blue Ridge
Rehab. &
Healthcare Ctr. 32 years
Raleigh Rehab. &
Healthcare
Center 25 years
Rose Manor
Health Care
Center 26 years
Cypress Pointe
Rehab & HC
Center 28.5 years
Winston-Salem
Rehab & HC
Center 25 years
Silas Creek
Manor 28.5 years
Lincoln Nursing
Center 35 years
Guardian Care of
Roanoke Rapids 25 years
Guardian Care of
Henderson 29 years
Rehab. & Nursing
Center of
Monroe 28 years
Guardian Care of
Kinston 29 years
Guardian Care of
Zebulon 29 years
Guardian Care of
Rocky Mount. 25 years
Rehab. & Health
Center of
Gastonia 29 years
Guardian Care of
Elizabeth City 20 years
Chapel Hill
Rehab. &
Healthcare Ctr. 28 years
Homestead Health
Care & Rehab
Ctr 45 years
Dover Rehab. &
Living Center 25 years
Greenbriar
Terrace
Healthcare 25 years
Hanover Terrace
Healthcare 29 years
Las Vegas
Healthcare &
Rehab. Ctr. 30 years
Torrey Pines
Care Center 29 years
Franklin Woods
Health Care
Center 38 years
Chillicothe
Nursing &
Rehab. Center 34 years
Pickerington
Nursing &
Rehab. Ctr. 37 years
Logan Health
Care Center 30 years
Winchester Place
Nsg. & Rehab.
Ctr. 28 years
Minerva Park
Nursing &
Rehab. Ctr. 45 years
West Lafayette
Rehab & Nsg Ctr 45 years
Cambridge Health
& Rehab. Center 25 years
Coshocton Health
& Rehab. Center 25 years
Bridgepark Ctr.
for Rehab. &
Nsg. Sv. 28 years
Lebanon Country
Manor 43 years
Sunnyside Care
Center 30 years
Medford Rehab. &
Healthcare
Center 34 years
Wyomissing Nsg.
& Rehab. Ctr. 45 years
Health Havens
Nursing &
Rehab. Ctr. 45 years
Oak Hill Nursing
& Rehab. Ctr. 45 years
Madison
Healthcare &
Rehab Ctr. 29 years
Cordova Rehab. &
Nursing Center 39 years
Primacy
Healthcare &
Rehab Ctr. 37 years
Masters Health
Care Center 38 years
San Pedro Manor 45 years
Wasatch Care
Center 25 years
Crosslands
Rehab. & Health
Care Ctr 40 years
St. George Care
and Rehab.
Center 29 years
S-4
Gross Amount
Initial Cost to Carried at Close
Location Company Cost of Period
- - ---------------------------------------- ------------------ Capitalized ------------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- ---------------- ----- ------ ----------- ----------- ------ ----------- ------------ ------------ --------
Federal Heights
Rehab. & Nsg.
Ctr. Salt Lake City UT 201 2,322 -- 201 2,322 564 1962 1998
Wasatch Valley
Rehabilitation Salt Lake City UT 389 3,545 -- 389 3,545 722 1962 1998
Nansemond Pointe
Rehab. & HC
Ctr. Suffolk VA 534 6,990 -- 534 6,990 1,580 1963 1998
Harbour Pointe
Med. & Rehab.
Ctr Norfolk VA 427 4,441 -- 427 4,441 1,071 1969 1998
River Pointe
Rehab. &
Healthc. Ctr. Virginia Beach VA 770 4,440 -- 770 4,440 1,415 1953 1998
Bay Pointe
Medical &
Rehab. Centre Virginia Beach VA 805 2,886 -- 805 2,886 663 1971 1998
Birchwood
Terrace
Healthcare Burlington VT 15 4,656 -- 15 4,656 1,438 1965 1998
Arden
Rehabilitation
& Healthcare
Ctr Seattle WA 1,111 4,013 -- 1,111 4,013 944 1950's 1998
Northwest
Continuum Care
Center Longview WA 145 2,563 -- 145 2,563 627 1955 1998
Bellingham
Health Care &
Rehab Svc Bellingham WA 441 3,824 -- 441 3,824 882 1972 1998
Rainier Vista
Care Center Puyallup WA 520 4,780 -- 520 4,780 887 1986 1998
Lakewood
Healthcare
Center Lakewood WA 504 3,511 -- 504 3,511 607 1989 1998
Vencor of
Vancouver HC &
Rehab. Vancouver WA 449 2,964 -- 449 2,964 741 1970 1998
Heritage Health
& Rehab. Center Vancouver WA 76 835 -- 76 835 185 1955 1998
Edmonds Rehab. &
Healthcare Ctr. Edmonds WA 355 3,032 -- 355 3,032 824 1961 1998
Queen Anne
Healthcare Seattle WA 570 2,750 -- 570 2,750 658 1970 1998
San Luis Medical
& Rehab Center Greenbay WI 259 5,299 -- 259 5,299 930 N/A 1998
Eastview Medical
& Rehab. Center Antigo WI 200 4,047 -- 200 4,047 1,129 1962 1998
Colonial Manor
Medical & Rehab
Ctr. Wausau WI 169 3,370 -- 169 3,370 917 1964 1998
Colony Oaks Care
Center Appleton WI 353 3,571 -- 353 3,571 917 1967 1998
North Ridge Med.
& Rehab. Center Manitowoc WI 206 3,785 -- 206 3,785 893 1964 1998
Vallhaven Care
Center Neenah WI 337 5,125 -- 337 5,125 1,275 1966 1998
Kennedy Park
Medical &
Rehab. Ctr. Schofield WI 301 3,596 -- 301 3,596 1,934 1966 1998
Family Heritage
Med. & Rehab.
Ctr. Wisconsin Rapids WI 240 3,350 -- 240 3,350 1,978 1966 1998
Mt. Carmel
Medical &
Rehab. Ctr. Burlington WI 274 7,205 -- 274 7,205 1,578 1971 1998
Mt. Carmel
Medical &
Rehab. Ctr. Milwaukee WI 2,356 22,571 -- 2,356 22,571 5,777 1958 1998
Sheridan Medical
Complex Kenosha WI 282 4,910 -- 282 4,910 1,418 1964 1998
Woodstock Health
& Rehab. Center Kenosha WI 562 7,424 -- 562 7,424 2,256 1970 1998
Mountain Towers
Healthcare &
Rehab Cheyenne WY 342 3,814 -- 342 3,814 812 1964 1998
South Central
Wyoming HC. &
Rehab Rawlins WY 151 1,738 -- 151 1,738 400 1955 1998
Wind River
Healthcare &
Rehab. Ctr Riverton WY 179 1,559 -- 179 1,559 355 1967 1998
Sage View Care
Center Rock Springs WY 287 2,392 -- 287 2,392 575 1964 1998
------ ------- ----- ------ ------- -------
TOTAL VENCOR
NURSING HOMES 74,970 731,661 1,178 74,970 732,839 179,268
Life on
LocatiWhichon
- - ------------------Depreciation----------------------
in Income
Statement is
Facility name Computed
- - ----------------- ------------
Federal Heights
Rehab. & Nsg.
Ctr. 29 years
Wasatch Valley
Rehabilitation 29 years
Nansemond Pointe
Rehab. & HC
Ctr. 32 years
Harbour Pointe
Med. & Rehab.
Ctr 28 years
River Pointe
Rehab. &
Healthc. Ctr. 25 years
Bay Pointe
Medical &
Rehab. Centre 29 years
Birchwood
Terrace
Healthcare 27 years
Arden
Rehabilitation
& Healthcare
Ctr 28.5 years
Northwest
Continuum Care
Center 29 years
Bellingham
Health Care &
Rehab Svc 28.5 years
Rainier Vista
Care Center 40 years
Lakewood
Healthcare
Center 45 years
Vencor of
Vancouver HC &
Rehab. 28 years
Heritage Health
& Rehab. Center 29 years
Edmonds Rehab. &
Healthcare Ctr. 25 years
Queen Anne
Healthcare 29 years
San Luis Medical
& Rehab Center 25 years
Eastview Medical
& Rehab. Center 28 years
Colonial Manor
Medical & Rehab
Ctr. 30 years
Colony Oaks Care
Center 29 years
North Ridge Med.
& Rehab. Center 29 years
Vallhaven Care
Center 28 years
Kennedy Park
Medical &
Rehab. Ctr. 29 years
Family Heritage
Med. & Rehab.
Ctr. 26 years
Mt. Carmel
Medical &
Rehab. Ctr. 30 years
Mt. Carmel
Medical &
Rehab. Ctr. 30 years
Sheridan Medical
Complex 25 years
Woodstock Health
& Rehab. Center 25 years
Mountain Towers
Healthcare &
Rehab 29 years
South Central
Wyoming HC. &
Rehab 29 years
Wind River
Healthcare &
Rehab. Ctr 29 years
Sage View Care
Center 30 years
TOTAL VENCOR
NURSING HOMES
NON-VENCOR
SKILLED NURSING
FACILITIES
Birchwood Care
Center MI 291 6,187 - 291 6,187 2,162 N/A 1998
Grayling Health
Care Center MI 76 3,234 -- 76 3,234 1,010 N/A 1998
Clara Barton
Terrace MI 375 2,219 -- 375 2,219 1,902 N/A 1998
Mary Avenue Care
Center MI 162 1,744 -- 162 1,744 1,412 N/A 1998
Woodside
Convalescent
Center MN 639 3,440 56 639 3,496 2,010 N/A 1998
Hillhaven
Convalescent
Center NV 121 1,181 -- 121 1,181 735 N/A 1998
Marigarde-
Sylvania
Nursing Home OH 667 2,428 -- 667 2,428 1,032 N/A 1998
Marietta
Convalescent
Center OH 158 3,266 -- 158 3,266 552 N/A 1998
------ ------- ----- ------ ------- -------
TOTAL NON-VENCOR
SKILLED NURSING
FACILITIES 2,489 23,699 56 2,489 23,755 10,815
------ ------- ----- ------ ------- -------
TOTAL FOR
SKILLED NURSING
FACILITIES 77,459 755,360 1,234 77,459 756,594 190,083
NON-VENCOR
SKILLED NURSING
FACILITIES
Birchwood Care
Center J36 years
Grayling Health
Care Center 43 years
Clara Barton
Terrace 21 years
Mary Avenue Care
Center 21 years
Woodside
Convalescent
Center 28 years
Hillhaven
Convalescent
Center 40 years
Marigarde-
Sylvania
Nursing Home 30 years
Marietta
Convalescent
Center 25 years
TOTAL NON-VENCOR
SKILLED NURSING
FACILITIES
TOTAL FOR
SKILLED NURSING
FACILITIES
S-5
Gross Amount
Initial Cost to Carried at Close of
Location Company Cost Period
- - --------------------------------------- ------------------- Capitalized -------------------
Buildings Subsequent Buildings
and Improv- to and Improv- Accumulated Date of Date
Facility name City State Land ments Acquisition Land ments Depreciation Construction Acquired
- - ---------------- --------------- ----- ------- ----------- ----------- ------- ----------- ------------ ------------ --------
Life on
LocatiWhichon
- - ------------------Depreciation---------------------
in Income
Statement is
Facility name Computed
- - ----------------- ------------
VENCOR HOSPITALS
Vencor
Hospital--
Phoenix Phoenix AZ 226 3,359 -- 226 3,359 876 N/A 1998
Vencor
Hospital--
Tucson Tuscon AZ 130 3,091 -- 130 3,091 809 N/A 1998
Vencor
Hospital--
Ontario Ontario CA 523 2,988 -- 523 2,988 572 N/A 1998
Vencor
Hospital--San
Leandro San Leandro CA 2,735 5,870 -- 2,735 5,870 2,500 N/A 1998
Vencor
Hospital--
Orange County Westminster CA 728 7,384 -- 728 7,384 2,043 N/A 1998
THC--Orange
County Orange County CA 3,144 2,611 -- 3,144 2,611 119 1990 1998
Vencor
Hospital--San
Diego San Diego CA 670 11,764 -- 670 11,764 1,877 N/A 1998
Recovery Inn of
Menlo Park Menlo Park CA -- 2,799 -- 2,799 843 1992 1998
Vencor
Hospital--
Denver Denver CO 896 6,367 -- 896 6,367 1,842 N/A 1998
Vencor
Hospital--Coral
Gables Coral Gables FL 1,071 5,348 -- 1,071 5,348 1,705 N/A 1998
Vencor
Hospital--St.
Petersburg St. Petersburg FL 1,418 17,525 7 1,418 17,532 1,793 1968 1998
Vencor
Hospital--Ft.
Lauderdale Ft. Lauderdale FL 1,758 14,080 -- 1,758 14,080 3,617 N/A 1998
Vencor
Hospital--North
Florida Green Cove Spr. FL 145 4,613 -- 145 4,613 744 N/A 1998
Vencor
Hospital--
Central Tampa Tampa FL 2,732 7,676 -- 2,732 7,676 413 1970 1998
Vencor
Hospital--
Hollywood Hollywood FL 605 5,229 -- 605 5,229 401 1937 1998
Vencor
Hospital--
Sycamore Sycamore IL 77 8,549 -- 77 8,549 1,590 N/A 1998
Vencor
Hospital--
Chicago North Chicago IL 1,583 19,980 -- 1,583 19,980 2,739 N/A 1998
Vencor
Hospital--Lake
Shore Chicago IL 1,513 9,525 -- 1,513 9,525 1,438 1995 1998
Vencor
Hospital--
Northlake Northlake IL 850 6,498 -- 850 6,498 1,859 N/A 1998
Vencor
Hospital--
LaGrange LaGrange IN 173 2,330 -- 173 2,330 1,428 N/A 1998
Vencor
Hospital--
Indianapolis Indianapolis IN 985 3,801 -- 985 3,801 1,061 N/A 1998
Vencor
Hospital--
Louisville Louisville KY 3,041 12,330 -- 3,041 12,330 1,743 N/A 1998
Vencor
Hospital--New
Orleans New Orleans LA 648 4,971 -- 648 4,971 1,870 1968 1998
Vencor Hosp--
Boston
Northshore Peabody MA 543 7,568 -- 543 7,568 433 1974 1998
Vencor
Hospital--
Boston Boston MA 1,551 9,796 -- 1,551 9,796 3,319 N/A 1998
Vencor
Hospital--
Detroit Detroit MI 355 3,544 -- 355 3,544 1,110 N/A 1998
Vencor
Hospital--Metro
Detroit Detroit MI 564 4,896 -- 564 4,896 212 1980 1998
Vencor
Hospital--
Minneapolis Golden Valley MN 223 8,120 -- 223 8,120 420 1952 1998
Vencor
Hospital--
Kansas City Kansas City MO 277 2,914 -- 277 2,914 855 N/A 1998
Vencor
Hospital--St.
Louis St. Louis MO 1,126 2,087 -- 1,126 2,087 769 N/A 1998
Vencor
Hospital--
Greensboro Greensboro NC 1,010 7,586 -- 1,010 7,586 1,751 N/A 1998
Vencor
Hospital--
Albuquerque Albuquerque NM 11 4,253 -- 11 4,253 197 1985 1998
THC--Las Vegas
Hospital Las Vegas NV 1,110 2,177 -- 1,110 2,177 119 1980 1998
Vencor
Hospital--
Oklahoma City Oklahoma City OK 293 5,607 -- 293 5,607 1,239 N/A 1998
Vencor
Hospital--
Philadelphia Philadelphia PA 135 5,223 -- 135 5,223 600 N/A 1998
Vencor
Hospital--
Pittsburgh Oakdale PA 662 12,854 -- 662 12,854 1,296 N/A 1998
Vencor
Hospital--
Chattanooga Chattanooga TN 757 4,415 -- 757 4,415 1,262 N/A 1998
Vencor
Hospital--San
Antonio San Antonio TX 249 11,413 -- 249 11,413 2,421 N/A 1998
Vencor
Hospital--Ft.
Worth Southwest Ft. Worth TX 2,342 7,458 -- 2,342 7,458 761 1987 1998
Vencor
Hospital--
Houston
Northwest Houston TX 1,699 6,788 -- 1,699 6,788 643 1986 1998
Vencor
Hospital--
Mansfield Mansfield TX 267 2,462 -- 267 2,462 628 N/A 1998
Vencor
Hospital--Ft.
Worth West Ft. Worth TX 648 10,608 -- 648 10,608 1,662 N/A 1998
Vencor
Hospital--
Houston Houston TX 33 7,062 -- 33 7,062 1,629 N/A 1998
Vencor
Hospital--
Arlington, VA Arlington VA 3,025 3,105 -- 3,025 3,105 669 N/A 1998
Vencor
Hospital--Mt.
Carmel Mt. Carmel WI 322 3,296 -- 322 3,296 468 1989 1998
------- --------- ----- ------- --------- -------
TOTAL FOR VENCOR
HOSPITALS 42,853 301,920 7 42,853 301,927 56,345
PERSONAL CARE
FACILITIES
ResCare--
Tangram--8
sites San Marcos TX 616 6,512 4 616 6,516 81 N/A
------- --------- ----- ------- --------- -------
120,928 1,063,792 1,245 120,928 1,065,037 246,509
======= ========= ===== ======= ========= =======
VENCOR HOSPITALS
Vencor
Hospital--
Phoenix 30 years
Vencor
Hospital--
Tucson 25 years
Vencor
Hospital--
Ontario 25 years
Vencor
Hospital--San
Leandro 25 years
Vencor
Hospital--
Orange County 20 years
THC--Orange
County 40 years
Vencor
Hospital--San
Diego 25 years
Recovery Inn of
Menlo Park 20 years
Vencor
Hospital--
Denver 20 years
Vencor
Hospital--Coral
Gables 30 years
Vencor
Hospital--St.
Petersburg 40 years
Vencor
Hospital--Ft.
Lauderdale 30 years
Vencor
Hospital--North
Florida 20 years
Vencor
Hospital--
Central Tampa 40 years
Vencor
Hospital--
Hollywood 20 years
Vencor
Hospital--
Sycamore 20 years
Vencor
Hospital--
Chicago North 25 years
Vencor
Hospital--Lake
Shore 20 years
Vencor
Hospital--
Northlake 30 years
Vencor
Hospital--
LaGrange 25 years
Vencor
Hospital--
Indianapolis 30 years
Vencor
Hospital--
Louisville 20 years
Vencor
Hospital--New
Orleans 20 years
Vencor Hosp--
Boston
Northshore 40 years
Vencor
Hospital--
Boston 25 years
Vencor
Hospital--
Detroit 20 years
Vencor
Hospital--Metro
Detroit 40 years
Vencor
Hospital--
Minneapolis 40 years
Vencor
Hospital--
Kansas City 30 years
Vencor
Hospital--St.
Louis 40 years
Vencor
Hospital--
Greensboro 20 years
Vencor
Hospital--
Albuquerque 40 years
THC--Las Vegas
Hospital 40 years
Vencor
Hospital--
Oklahoma City 30 years
Vencor
Hospital--
Philadelphia 35 years
Vencor
Hospital--
Pittsburgh 40 years
Vencor
Hospital--
Chattanooga 22 years
Vencor
Hospital--San
Antonio 30 years
Vencor
Hospital--Ft.
Worth Southwest 20 years
Vencor
Hospital--
Houston
Northwest 40 years
Vencor
Hospital--
Mansfield 40 years
Vencor
Hospital--Ft.
Worth West 34 years
Vencor
Hospital--
Houston 20 years
Vencor
Hospital--
Arlington, VA 28 years
Vencor
Hospital--Mt.
Carmel 20 years
TOTAL FOR VENCOR
HOSPITALS
PERSONAL CARE
FACILITIES
ResCare--
Tangram--8
sites 20 years
S-6
VENTAS, INC.
SCHEDULE IV
MORTGAGE ON REAL ESTATE
December 31, 1998
(Dollars in Thousands)
Not Applicable.
S-7