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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-10989
VENTAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 61-1055020
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
4360 Brownsboro Road
Suite 115
Louisville, Kentucky 40207-1642
(Address of principal executive (Zip Code)
offices)
(502) 357-9000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
-------------------- -----------------------
Common Stock, par value $.25 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. _____
As of March 30, 2001, there were 68,698,807 shares of the Registrant's
common stock, $.25 par value ("Common Stock"), outstanding. The aggregate
market value of the shares of Common Stock of the Registrant held by non-
affiliates of the Registrant, based on the closing price of such stock on the
New York Stock Exchange on March 30, 2001, was approximately $564.5 million.
For purposes of the foregoing calculation only, all directors and executive
officers of the Registrant have been deemed affiliates.
Part III of this Annual Report on Form 10-K is incorporated herein by
reference from the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 15, 2001 to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the fiscal year
covered by this Form 10-K.
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CAUTIONARY STATEMENTS
Forward-looking Statements
This Form 10-K includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding Ventas, Inc.'s ("Ventas" or the
"Company") and its subsidiaries' expected future financial position, results
of operations, cash flows, funds from operations, dividends and dividend
plans, financing plans, business strategy, budgets, projected costs, capital
expenditures, competitive positions, growth opportunities, expected lease
income, continued qualification as a real estate investment trust ("REIT"),
plans and objectives of management for future operations and statements that
include words such as "if," "anticipate," "believe," "plan," "estimate,"
"expect," "intend," "may," "could," and other similar expressions are forward-
looking statements. Such forward-looking statements are inherently uncertain,
and stockholders must recognize that actual results may differ from the
Company's expectations. The Company does not undertake a duty to update such
forward-looking statements.
Actual future results and trends for the Company may differ materially
depending on a variety of factors discussed in this Form 10-K and elsewhere in
the Company's filings with the Securities and Exchange Commission (the
"Commission"). Factors that may affect the plans or results of the Company
include, without limitation, (a) the treatment of the Company's claims in the
chapter 11 cases of its primary tenant, Vencor, Inc. and certain of its
affiliates (collectively, "Vencor"), as well as certain of its other tenants,
(b) the ability and willingness of Vencor to consummate its plan of
reorganization, and to continue to meet and/or honor its obligations under its
contractual arrangements with the Company and the Company's wholly owned
operating partnership, Ventas Realty, Limited Partnership ("Ventas Realty"),
including without limitation the various agreements (the "Spin Agreements")
entered into by the Company and Vencor at the time of the corporate
reorganization on May 1, 1998 (the "1998 Spin Off") pursuant to which the
Company was separated into two publicly held corporations, (c) the ability and
willingness of Vencor to continue to meet and/or honor its obligation to
indemnify and defend the Company for all litigation and other claims relating
to the health care operations and other assets and liabilities transferred to
Vencor in the 1998 Spin Off, (d) the ability of Vencor and the Company's other
operators to maintain the financial strength and liquidity necessary to
satisfy their respective obligations and duties under the leases and other
agreements with the Company, and their existing credit agreements, (e) the
Company's success in implementing its business strategy, (f) the nature and
extent of future competition, (g) the extent of future health care reform and
regulation, including cost containment measures and changes in reimbursement
policies and procedures, (h) increases in the cost of borrowing for the
Company, (i) the ability of the Company's operators to deliver high quality
care and to attract patients, (j) the results of litigation affecting the
Company, (k) changes in general economic conditions and/or economic conditions
in the markets in which the Company may, from time to time, compete, (l) the
ability of the Company to pay down, refinance, restructure, and/or extend its
indebtedness as it becomes due and to amend certain provisions in the Amended
Credit Agreement (as defined below) that could require the Company to repay
all of its indebtedness under the Amended Credit Agreement if Vencor does not
emerge from bankruptcy by June 30, 2001, (m) the movement of interest rates
and the resulting impact on the value of the Company's interest rate swap
agreement and the ability of the Company to satisfy its obligation to post
cash collateral if required to do so under such interest rate swap agreement,
(n) the ability and willingness of Atria, Inc. ("Atria") to continue to meet
and honor its contractual arrangements with the Company and Ventas Realty
entered into connection with the Company's spin off of its assisted living
operations and related assets and liabilities to Atria in August 1996 (the
"Atria Spin Off"), (o) the ability and willingness of the Company to maintain
its qualification as a REIT due to economic, market, legal, tax or other
considerations, (p) the outcome of the audit being conducted by the Internal
Revenue Service for the Company's tax years ended December 31, 1997 and 1998,
(q) final determination of the Company's net taxable income for the tax year
ended December 31, 2000, and (r) the results of the settlement among the
Company, Vencor and the federal government concerning federal civil and
administrative claims against the Company and Vencor arising from the
participation of Vencor facilities in various federal health benefit programs.
Many of such factors are beyond the control of the Company and its management.
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Vencor Information
Vencor is subject to the reporting requirements of the Commission and is
required to file with the Commission annual reports containing audited
financial information and quarterly reports containing unaudited financial
information. The information related to Vencor provided in this Form 10-K is
derived from filings made with the Commission or other publicly available
information, or has been provided by Vencor. The Company has not verified this
information either through an independent investigation or by reviewing
Vencor's public filings. The Company has no reason to believe that such
information is inaccurate in any material respect, but there can be no
assurance that all such information is accurate. The Company is providing this
data for informational purposes only, and the reader of this Form 10-K is
encouraged to obtain Vencor's publicly available filings from the Commission.
3
TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 5
Item 2. Properties.................................................. 62
Item 3. Legal Proceedings........................................... 69
Item 4. Submission of Matters to a Vote of Security Holders......... 69
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 70
Item 6. Selected Financial Data..................................... 72
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 73
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.. 84
Item 8. Financial Statements and Supplementary Data................. 84
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 84
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 85
Item 11. Executive Compensation...................................... 85
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 85
Item 13. Certain Relationships and Related Transactions.............. 85
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 85
Item 14(c). Financial Statements and Supplemental Data.................. F-1
4
PART I
Item 1. Business
General
The Company is a Delaware corporation that elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"), beginning
with the tax year ended December 31, 1999. Although the Company believes that
it has satisfied the requirements to continue to qualify as a REIT for the
year ended December 31, 2000 and although the Company intends to continue to
qualify as a REIT for the year ending December 31, 2001 and subsequent tax
years, it is possible that economic, market, legal, tax or other
considerations may cause the Company to fail or elect not to qualify as a REIT
in any such tax year. The Company owned or leased 45 hospitals, 216 nursing
facilities and eight personal care facilities in 36 states as of December 31,
2000. The Company conducts substantially all of its business through a wholly
owned operating partnership, Ventas Realty. The Company operates in one
segment which consists of owning and leasing health care facilities and
leasing or subleasing such facilities to third parties.
The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and
commenced operations in 1985. The Company changed its name to Vencor
Incorporated in 1989 and to Vencor, Inc. in 1993. From 1985 through April 30,
1998, the Company was engaged in the business of owning, operating and
acquiring health care facilities and companies engaged in providing health
care services.
On May 1, 1998, the Company effected the 1998 Spin Off pursuant to which
the Company was separated into two publicly held corporations. A new
corporation, subsequently named Vencor, Inc., was formed to operate the
hospital, nursing facility and ancillary services businesses. Pursuant to the
terms of the 1998 Spin Off, the Company distributed the common stock of Vencor
to stockholders of record of the Company as of April 27, 1998. The Company,
through its subsidiaries, continued to hold title to substantially all of the
real property and to lease such real property to Vencor. At such time, the
Company also changed its name to Ventas, Inc. and refinanced substantially all
of its long-term debt. For financial reporting periods subsequent to and
including the 1998 Spin Off, the historical financial statements of the
Company were assumed by Vencor, and the Company is deemed to have commenced
operations on May 1, 1998. In addition, for certain reporting purposes under
this Form 10-K and other filings, the Commission treats the Company as having
commenced operations on May 1, 1998.
The Company owns and leases a geographically diverse portfolio of health
care related facilities, including hospitals, nursing facilities and personal
care facilities whose principal tenants are health care related companies. As
a result of announcements during 1999 by Vencor, the subsequent bankruptcy
filing by Vencor and industry-wide factors, the Company suspended the
implementation of its original business strategy in 1999. The Company
continued the suspension of the implementation of its original business
strategy during 2000 due to the ongoing Vencor bankruptcy proceedings. See "--
Recent Developments Regarding Vencor." The Company's current principal
objectives are preserving and maximizing stockholders' capital by seeking to
achieve the maximum possible recovery in the Vencor bankruptcy proceeding and
by means that include the identification and evaluation of opportunities to
reduce (a) the Company's average all-in cost of indebtedness and (b) the
Company's dependence on Vencor. The ability of the Company to pursue certain
of these objectives may be restricted by the terms of the Company's Amended
and Restated Credit, Security, Guaranty and Pledge Agreement dated January 31,
2000 between the Company and all of its lenders (the "Amended Credit
Agreement").
Dependence on Vencor
The Company leases all of its hospitals and 210 of its nursing facilities
to Vencor under four master lease agreements entered into at the time of the
1998 Spin Off among the Company, Ventas Realty, Vencor and certain other
entities and the single facility lease between Ventas Realty and Vencor
Nursing Centers Limited Partnership dated August 7, 1999 (each, a "Master
Lease" and collectively, the "Master Leases"). For the years
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ended December 31, 2000 and 1999 and the period from May 1, 1998 to December
31, 1998, Vencor accounted for approximately 98.6% (98.4%, net of write-offs),
98.5% (98.3%, net of write-offs) and 98.7% of the Company's rental revenues,
respectively. See "--Risk Factors--Dependence of the Company on Vencor" and
"Note 3--Concentration of Credit Risk" to the Consolidated Financial
Statements.
The operations of Vencor have been negatively impacted by changes in
governmental reimbursement rates, by its current level of indebtedness and by
certain other factors. On September 13, 1999 (the "Petition Date"), Vencor
filed for protection under chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") with the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). On December 14, 2000, Vencor
filed its fourth amended plan of reorganization (the "Fourth Amended Plan")
with the Bankruptcy Court, incorporating the final terms of the restructuring
of Vencor's debt and lease obligations into the third amended plan which had
previously been filed with the Bankruptcy Court. The Fourth Amended Plan,
which was modified on the record of the Confirmation Hearing, was confirmed
(as confirmed, the "Final Plan") by an order of the Bankruptcy Court, which
order was signed on March 16, 2001 and entered on the docket on March 19, 2001
(the "Vencor Confirmation Date"). See "--Recent Developments Regarding
Vencor--Vencor Bankruptcy."
The 1998 Spin Off
In order to govern certain of the relationships between the Company and
Vencor after the 1998 Spin Off and to provide mechanisms for an orderly
transition, the Company and Vencor entered into various agreements at the time
of the 1998 Spin Off, including the Master Leases (collectively, the "Spin
Agreements").
Certain material terms of the Master Leases and certain of the other Spin
Agreements are described below. The reader is also strongly encouraged to
review and consider the factors described in "--Recent Developments Regarding
Vencor" and "--Risk Factors--Effects of Bankruptcy Proceedings."
Summary of the Terms of Current Agreements with Vencor
Master Lease Agreements
In the 1998 Spin Off, the Company and Ventas Realty (collectively, the
"Landlord") and Vencor, Inc. and Vencor Operating, Inc. (collectively, the
"Tenant") entered into the four Master Leases governing the lease of
substantially all of the Company's real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing
facilities). The leased properties under the four Master Leases were divided
into groups of properties and a Master Lease was entered into with respect to
each such group of properties. In August 1998, Ventas Realty and Vencor
Nursing Centers Limited Partnership entered into a fifth Master Lease for a
single nursing facility in Corydon, Indiana.
The Company's ability to exercise certain rights and remedies under the
Master Leases described below has been stayed as a result of Vencor's filing
for protection under the Bankruptcy Code. The Bankruptcy Code, however,
generally provides that a landlord is entitled to receive rent during the
pendency of a tenant's bankruptcy proceeding, subject to such tenant's rights
to reject the lease and its other legal defenses and rights. Vencor has
disputed that it is required to pay rent at the rate set forth in the Master
Leases and in the Stipulation entered into by the Company and Vencor in
connection with Vencor's bankruptcy filing (the "Stipulation") has reserved
the right during its chapter 11 bankruptcy case to challenge such payments in
the event the Stipulation is terminated. The Stipulation, discussed below,
provides for Vencor to pay $15.1 million per month in minimum base rent under
the Master Leases while the Stipulation is in effect. Various provisions of
the Master Leases may ultimately be challenged in Vencor's chapter 11
bankruptcy case, and certain provisions regarding payment of rent have been
modified by the Stipulation in anticipation of the contemplated restructuring.
The terms of the Master Leases would be substantially amended and restated in
the terms of the Amended Master Leases (as defined below) that would be
implemented under the Final Plan, if the Final Plan is consummated. See "--
Recent Developments Regarding Vencor--Amended Master Leases." Consummation of
the Final Plan is subject to the satisfaction of numerous conditions, many of
which are outside the control of the Company and Vencor. See "--Risk Factors--
Conditions to the Consummation of the Final Plan."
6
The Master Leases are structured as triple-net leases pursuant to which
Vencor is required to pay all or substantially all insurance, taxes, utilities
and maintenance related to the properties. The base annual contract rent was
approximately $231.2 million, $226.6 million and $222.2 million at December
31, 2000, 1999 and 1998, respectively. Base annual rent increases 2% per
annum, effective May 1 of each year, provided Vencor achieves net patient
service revenue for the applicable year in excess of 75% of net patient
service revenue for the base year of 1997. The initial terms of the Master
Leases were for periods ranging from 10 to 15 years.
Under the terms of each Master Lease, except as noted below, upon the
occurrence of an Event of Default thereunder, the Company may, at its option,
exercise the remedies under a Master Lease on all properties included within
that particular Master Lease. The remedies which may be exercised under a
Master Lease by the Company, at its option, include the following: (i) after
not less than 10 days' notice to Vencor, terminate the Master Lease, repossess
the leased property and relet the leased property to a third party and require
that Vencor pay to the Company, as liquidated damages, the net present value
of the rent for the balance of the term, discounted at the prime rate; (ii)
without terminating the Master Lease, repossess the leased property and relet
the leased property with Vencor remaining liable under the Master Lease for
all obligations to be performed by Vencor thereunder, including the
difference, if any, between the rent under the Master Lease and the rent
payable as a result of the reletting of the leased property and (iii) any and
all other rights and remedies available at law or in equity. The Master Leases
require Vencor to cooperate with the Company in connection with license
transfers and certain other regulatory matters arising from a lease
termination.
Each Master Lease provides that the remedies under such Master Lease may be
exercised with respect only to the property that is the subject of the default
upon the occurrence of any one of the following events of default: (i) the
occurrence of a final non-appealable revocation of Vencor's license to operate
a facility; (ii) the reduction in the number of licensed beds at a facility in
excess of 10% or the revocation of certification of a facility for
reimbursement under Medicare; or (iii) Vencor becomes subject to regulatory
sanctions at a facility and fails to cure the regulatory sanctions within the
applicable cure period. Upon the occurrence of the fifth such event of default
under a Master Lease with respect to any one or more properties, the Master
Lease permits the Company, at its option, to exercise the rights and remedies
under the Master Lease on all properties included within that Master Lease.
The occurrence of any one of the following Events of Default constitutes an
event of default under all Master Leases, permitting the Company, at its
option, to exercise the rights and remedies under all of the Master Leases
simultaneously: (i) the occurrence of an event of default under the Agreement
of Indemnity--Third Party Leases between the Company and Vencor, (ii) the
liquidation or dissolution of Vencor, (iii) if Vencor files a petition of
bankruptcy or a petition for reorganization or arrangement under the federal
bankruptcy laws, and (iv) a petition is filed against Vencor under federal
bankruptcy laws and the same is not dismissed within 90 days of its
institution.
Any notice of the occurrence of an Event of Default under a Master Lease
which the Company sends to Vencor must be sent simultaneously to Vencor's
leasehold mortgagee (the "Leasehold Mortgagee"). Prior to terminating a Master
Lease for all or any part of the leased property covered thereunder, the
Company must give the Leasehold Mortgagee prior written notice and the
opportunity to cure any such event of default within the cure period for
Leasehold Mortgagees set forth in the Master Leases. Following the expiration
of such cure period, the Company may then terminate a Master Lease by giving
at least 10 days prior written notice of such termination.
Vencor may, with the prior written approval of the Company, sell, assign or
sublet its interest in all or any portion of the leased property under a
Master Lease. The Company may not unreasonably withhold its approval to any
such transfer provided (i) the assignee is creditworthy, (ii) the assignee has
at least four years of operational experience, (iii) the assignee has a
favorable business and operational reputation, (iv) the assignee
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assumes the Master Lease in writing, (v) the sublease is subject and
subordinate to the terms of the Master Lease, and (vi) Vencor and any
guarantor remains primarily liable under the Master Lease.
Each Master Lease requires Vencor to maintain specified levels of
liability, all risk property and workers' compensation insurance for the
properties.
Development Agreement
Under the terms of the Development Agreement, Vencor, if it so desires,
will complete the construction of certain development properties substantially
in accordance with the existing plans and specifications for each such
property. Upon completion of each such development property, the Company has
the option to purchase the development property from Vencor at a purchase
price equal to the amount of Vencor's actual costs in acquiring and developing
such development property prior to the purchase date. If the Company purchases
the development property, Vencor will lease the development property from the
Company. The initial annual base rent under such a lease will be 10% of the
actual costs incurred by Vencor in acquiring and developing the development
property. The other terms of the lease for the development property will be
substantially similar to those set forth in the Master Leases. During the
years ended December 31, 2000 and 1999, the Company did not acquire any
facilities under the Development Agreement. During the period from May 1, 1998
to December 31, 1998, the Company acquired one skilled nursing facility under
the Development Agreement for $6.2 million and has entered into a separate
Master Lease with Vencor with respect to such facility. The Development
Agreement has a five year term, and the Company and Vencor each has the right
to terminate the Development Agreement in the event of a change of control.
The ability of the Company to purchase properties pursuant to the terms of the
Development Agreement is restricted by the terms of the Amended Credit
Agreement. Any such future purchases would likely require the consent of the
"Required Lenders" under the Amended Credit Agreement, and there can be no
assurance that such consent would be obtained. The Development Agreement would
be terminated under the Final Plan, if the Final Plan is consummated. See--
"Recent Developments Regarding Vencor--Vencor Bankruptcy" and "--Risk
Factors--Conditions to Consummation of the Final Plan."
Participation Agreement
Under the terms and conditions of the Participation Agreement, Vencor has a
right of first offer to become the lessee of any real property acquired or
developed by the Company which is to be operated as a hospital, nursing
facility or other health care facility, provided that Vencor and the Company
can negotiate a mutually satisfactory lease arrangement and provided that the
property is not leased by the Company to the existing operator of such
facility. The Participation Agreement also provides, subject to certain terms,
that the Company has a right of first offer to purchase or finance any health
care related real property that Vencor determines to sell or mortgage to a
third party, provided that Vencor and the Company can negotiate mutually
satisfactory terms for such purchase or mortgage. The Participation Agreement
has a three year term, and the Company and Vencor each has the right to
terminate the Participation Agreement in the event of a change of control. The
ability of the Company to purchase or finance properties pursuant to the terms
of the Participation Agreement is restricted by the terms of the Company's
Amended Credit Agreement. Any such future purchases or financings would likely
require the consent of the "Required Lenders" under the Amended Credit
Agreement, and there can be no assurance that such consent would be obtained.
The Participation Agreement would be terminated under the Final Plan, if the
Final Plan is consummated. See "--Recent Developments Regarding Vencor--Vencor
Bankruptcy" and "--Risk Factors--Conditions to Consummation of the Final
Plan."
Tax Allocation Agreement and Tax Stipulation
The Tax Allocation Agreement, entered into at the time of the Spin Off,
provides that Vencor will be liable for, and will hold the Company harmless
from and against, (i) any taxes of Vencor and its then subsidiaries (the
"Vencor Group") for periods after the 1998 Spin Off, (ii) any taxes of the
Company and its then subsidiaries (the "Company Group") or the Vencor Group
for periods prior to the 1998 Spin Off (other than taxes associated with the
Spin Off) with respect to the portion of such taxes attributable to assets
owned by the Vencor Group
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immediately after completion of the 1998 Spin Off and (iii) any taxes
attributable to the 1998 Spin Off to the extent that Vencor derives certain
tax benefits as a result of the payment of such taxes. Vencor will be entitled
to any refund or credit in respect of taxes owed or paid by Vencor under (i),
(ii) or (iii) above. Vencor's liability for taxes for purposes of the Tax
Allocation Agreement will be measured by the Company's actual liability for
taxes after applying certain tax benefits otherwise available to the Company
other than tax benefits that the Company in good faith determines would
actually offset tax liabilities of the Company in other taxable years or
periods. Any right to a refund for purposes of the Tax Allocation Agreement
will be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Company.
The Company will be liable for, and will hold Vencor harmless against, any
taxes imposed on the Company Group or the Vencor Group other than taxes for
which the Vencor Group is liable as described in the above paragraph. The
Company will be entitled to any refund or credit for taxes owed or paid by the
Company as described in this paragraph. The Company's liability for taxes for
purposes of the Tax Allocation Agreement will be measured by the Vencor
Group's actual liability for taxes after applying certain tax benefits
otherwise available to the Vencor Group other than tax benefits that the
Vencor Group in good faith determines would actually offset tax liabilities of
the Vencor Group in other taxable years or periods. Any right to a refund will
be measured by the actual refund or credit attributable to the adjustment
without regard to offsetting tax attributes of the Vencor Group. See "Note 7--
Income Taxes" to the Consolidated Financial Statements.
On February 3, 2000, the Company received a refund (the "February 2000
Refund") of approximately $26.6 million from the Internal Revenue Service
representing the refund of income taxes paid by it from 1996 and 1997 and
accrued interest thereon arising out of the Company's 1998 federal income tax
return. The Company asserted that it was entitled to the February 2000 Refund
pursuant to the terms of the Tax Allocation Agreement and on other legal
grounds. Vencor also asserted that it was entitled to the February 2000 Refund
pursuant to the terms of the Tax Allocation Agreement and on other legal
grounds.
The Company and Vencor are also engaged in a dispute regarding the
entitlement to additional federal, state and local tax refunds for the Subject
Periods which have been received or which may be received by either company.
The Company, Ventas Realty, and Vencor entered into a stipulation relating to
certain of these federal, state and local tax refunds (including the February
2000 Refund) on or about May 23, 2000 (the "Tax Stipulation"). Under the terms
of the Tax Stipulation, which was approved by the Vencor Bankruptcy Court on
May 31, 2000, proceeds of certain federal, state and local tax refunds for the
tax periods prior to and including the 1998 Spin Off (the "Subject Periods"),
received by either company on or after September 13, 1999, with interest
thereon from the date of deposit at the lesser of the actual interest earned
and 3% per annum, are to be held by the recipient of such refunds in
segregated interest bearing accounts. The Tax Stipulation contains notice
provisions relating to the withdrawal of funds by either company from the
segregated accounts for the payment of certain federal, state and local taxes
for the Subject Periods and related fees and expenses.
Under the Final Plan, if consummated, the Tax Allocation Agreement would be
amended and the Tax Stipulation would be superseded by a Tax Refund Escrow
Agreement (as defined below), which would be entered into by Vencor and the
Company on the date the Final Plan is consummated (the "Vencor Effective
Date"). See "--Recent Developments Regarding Vencor--Vencor Bankruptcy."
The Stipulation
In connection with the bankruptcy filing by Vencor, the Company and Vencor
entered into the Stipulation for the payment by Vencor to the Company of
approximately $15.1 million per month starting in September 1999, to be
applied against the total amount of minimum monthly base rent that is due and
payable under the Master Leases. The Stipulation was approved by the
Bankruptcy Court. During the period in which the Stipulation is in effect,
Vencor has agreed to fulfill all of its obligations under the Spin Agreements
as such obligations become due, including its obligation to indemnify and
defend Ventas from and against all claims arising out of the Company's former
health care operations or assets or liabilities transferred to Vencor in the
1998 Spin Off. Vencor has not, however, agreed to assume the Spin Agreements
and has reserved its right to
9
seek to reject such agreements pursuant and subject to the applicable
provisions of the Bankruptcy Code. A termination of the Stipulation and/or
rejection by Vencor of the Spin Agreements could have a material adverse
effect on the business, financial condition, results of operations and
liquidity of the Company, on the Company's ability to service its indebtedness
and on the Company's ability to make distributions to its stockholders as
required to continue to qualify as a REIT (a "Material Adverse Effect"). See
"--Risk Factors--Effects of Bankruptcy Proceedings." Under the Final Plan, if
consummated, Vencor would assume and agree to fulfill its obligations under
all Spin Agreements other than the Development Agreement and the Participation
Agreement. See "--Recent Developments Regarding Vencor" and "--Risk Factors--
Conditions to Consummation of the Final Plan."
The payments under the Stipulation are required to be made by the fifth day
of each month, or on the first business day thereafter. Starting in September
1999, the difference between the amount of minimum monthly base rent due under
the Company's Master Leases with Vencor and the monthly payment of
approximately $15.1 million accrues as a superpriority administrative expense
in Vencor's bankruptcy, junior in right only to the following: (i) any liens
or superpriority claims provided to lenders under Vencor's debtor-in-
possession credit agreement (the "DIP facility"); (ii) any fees due to the
Office of the United States Trustee; (iii) certain fees of Vencor's
professionals; (iv) any liens or superpriority claims granted to pre-petition
secured creditors as adequate protection for their claims under the interim
DIP order issued by the bankruptcy court and the final DIP order; and (v) pre-
petition liens granted to the lenders under Vencor's credit agreement, as
amended, and related agreements, to the extent such pre-petition claims are
allowed as secured, subject to challenge in the Vencor bankruptcy proceeding.
The monthly payment of approximately $15.1 million under the Stipulation is
not subject to offset, recoupment or challenge. August 1999 Rent, in the
amount of approximately $18.9 million, remains unpaid and was asserted as a
claim in Vencor's chapter 11 case.
The Stipulation by its terms initially would have expired on October 31,
1999, but automatically renews for one-month periods unless either party
provides a fourteen-day notice of its election to terminate the Stipulation.
To date, no such notice of termination has been given. The Stipulation may
also be terminated prior to its expiration upon a payment default by Vencor,
the consummation of a plan of reorganization for Vencor, or the occurrence of
certain events under the DIP facility. There can be no assurance as to how
long the Stipulation will remain in effect or that Vencor will continue to
perform under the terms of the Stipulation. If the Final Plan is consummated,
the Stipulation would be terminated on the Vencor Effective Date. See "--
Recent Developments Regarding Vencor" and "--Risk Factors--Conditions to
Consummation of the Final Plan."
The Stipulation also addresses an agreement by Ventas and Vencor concerning
any statutes of limitations and other time constraints. See "--The Tolling
Agreement" below.
The Tolling Agreement
The Company and Vencor also entered into an agreement (the "Tolling
Agreement") pursuant to which they have agreed that any statutes of
limitations or other time constraints in a bankruptcy proceeding, including
the assertion of certain "bankruptcy avoidance provisions" that might be
asserted by one party against the other, are extended or tolled for a
specified period. That period currently terminates on the termination date of
the Stipulation. Pursuant to the Stipulation, the Tolling Agreement does not
shorten any time period otherwise provided under the Bankruptcy Code. If the
Final Plan is consummated, the Tolling Agreement would be terminated on the
Vencor Effective Date. See "--Recent Developments Regarding Vencor" and "--
Risk Factors--Conditions to Consummation of the Final Plan."
Agreement of Indemnity--Third Party Leases
In connection with the 1998 Spin Off, the Company assigned its former third
party lease obligations (i.e., leases under which an unrelated third party is
the landlord) as a tenant or as a guarantor of tenant obligations to Vencor
(the "Third Party Leases"). The lessors of these properties may claim that the
Company remains liable on the Third Party Leases assigned to Vencor. Under the
terms of the Agreement of Indemnity--Third Party Leases, Vencor and its
subsidiaries have agreed to indemnify and hold the Company harmless from and
against
10
all claims against the Company arising out of the Third Party Leases assigned
by the Company to Vencor. Either prior to or following the 1998 Spin Off, the
tenant's rights under a subset of the Third Party Leases were assigned or
sublet to unrelated third parties (the "Subleased Third Party Leases"). If
Vencor or such third party subtenants are unable to or do not satisfy the
obligations under any Third Party Lease assigned by the Company to Vencor, and
if the lessors prevail in a claim against the Company under the Third Party
Leases, then the Company may be liable for the payment and performance of the
obligations under any such Third Party Lease. The Company believes it may have
valid legal defenses to any such claim by certain lessors under the Third
Party Leases. However, there can be no assurance the Company would prevail in
a claim brought by a lessor under a Third Party Lease. In the event that a
lessor should prevail in a claim against the Company, the Company may be
entitled to receive revenues from those properties that would mitigate the
costs incurred in connection with the satisfaction of such obligations. The
annual minimum rental payments under the Third Party Leases equals
approximately $15.7 million, $6.5 million and $5.9 million for 2001, 2002 and
2003, respectively. The Third Party Leases relating to nursing facilities,
hospitals, offices and warehouses have remaining terms (excluding renewal
periods) of 1 to 10 years and total aggregate remaining minimum rental
payments under those leases amount to $42.6 million. The Third Party Leases
relating to ground leases have remaining terms from 1 to 80 years and total
aggregate remaining minimum rental payments under those leases amount to $31.8
million.
Pursuant to the Stipulation, Vencor has agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Leases during the period in
which the Stipulation is in effect and, except for disputes with Health Care
Property Investors discussed in "Note 9--Commitments and Contingencies" to the
Consolidated Financial Statements, has to date performed its obligations. See
"--Risk Factors--Dependence of the Company on Vencor." There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations under the Agreement of
Indemnity--Third Party Leases or that Vencor will continue to honor its
obligations under the Agreement of Indemnity--Third Party Leases. If Vencor
does not satisfy or otherwise honor the obligations under the Agreement of
Indemnity--Third Party Leases, then the Company may be liable for the payment
and performance of such obligations. See "--Risk Factors--Dependence of the
Company on Vencor" and "Note 8--Transactions with Vencor" and "Note 9--
Commitments and Contingencies" to the Consolidated Financial Statements. Under
the Final Plan, if consummated, Vencor would assume and agree to fulfill its
obligations under the Agreement of Indemnity--Third Party Leases. See "--
Recent Developments Regarding Vencor" and "--Risk Factors--Conditions to
Consummation of the Final Plan."
Agreement of Indemnity--Third Party Contracts
In connection with the 1998 Spin Off, the Company assigned its former third
party guaranty agreements to Vencor (the "Third Party Guarantees"). The
Company may remain liable on the Third Party Guarantees assigned to Vencor.
Under the terms of the Agreement of Indemnity--Third Party Contracts, Vencor
and its subsidiaries have agreed to indemnify and hold the Company harmless
from and against all claims against the Company arising out of the Third Party
Guarantees assigned by the Company to Vencor. If Vencor is unable to or does
not satisfy the obligations under any Third Party Guarantee assigned by the
Company to Vencor, then the Company may be liable for the payment and
performance of the obligations under any such agreement. The Third Party
Guarantees were entered into in connection with certain acquisitions and
financing transactions. The aggregate exposure under these guarantees is
approximately $9.2 million.
Pursuant to the Stipulation, Vencor has agreed to fulfill its obligations
under the Agreement of Indemnity--Third Party Contracts during the period in
which the Stipulation is in effect. There can be no assurance that Vencor will
have sufficient assets, income and access to financing to enable it to satisfy
its obligations incurred in connection with the Agreement of Indemnity--Third
Party Contracts or that Vencor will continue to honor its obligations under
the Agreement of Indemnity--Third Party Contracts. If Vencor does not satisfy
or otherwise honor the obligations under the Agreement of Indemnity--Third
Party Contracts, then the Company may be liable for the payment and
performance of such obligations. See "--Risk Factors--Dependence of the
Company on Vencor." Under the Final Plan, if consummated, Vencor would assume
and agree to fulfill its obligations under the Agreement of Indemnity--Third
Party Contracts. See "--Recent Developments Regarding Vencor"and "--Risk
Factors--Conditions to Consummation of the Final Plan."
11
Assumption of Certain Operating Liabilities and Litigation
In connection with the 1998 Spin Off, Vencor agreed in various Spin
Agreements to assume and to indemnify the Company for any and all liabilities
that may arise out of the ownership or operation of the health care operations
either before or after the date of the 1998 Spin Off. The indemnification
provided by Vencor also covers losses, including costs and expenses, which may
arise from any future claims asserted against the Company based on these
health care operations. In addition, at the time of the 1998 Spin Off, Vencor
agreed to assume the defense, on behalf of the Company, of any claims that
were pending at the time of the 1998 Spin Off, and which arose out of the
ownership or operation of the health care operations. Vencor also agreed to
defend, on behalf of the Company, any claims asserted after the 1998 Spin Off
which arise out of the ownership and operation of the health care operations.
Vencor has not agreed to assume the Spin Agreements and has reserved its right
to seek to reject such agreements pursuant and subject to the applicable
provisions of the Bankruptcy Code. Under the Stipulation, Vencor has agreed to
fulfill its obligations incurred in connection with the 1998 Spin Off during
the period in which the Stipulation remains in effect. There can be no
assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the 1998 Spin Off or that Vencor will continue to honor its obligations
incurred in connection with the 1998 Spin Off. If Vencor does not satisfy or
otherwise honor the obligations, the Company may have to assume the defense of
such claims. In addition, if the Final Plan is consummated, it is likely that
the Company will be required to make payments to settle certain government
claims which will not be subject to recovery from or indemnification by
Vencor. See "--Risk Factors--Dependence of the Company on Vencor" and "--Risk
Factors--Conditions to Consummation of the Final Plan." Under the Final Plan,
if consummated, Vencor would assume and agree to fulfill its obligations
incurred in connection with the 1998 Spin Off. See "--Recent Developments
Regarding Vencor" and "--Risk Factors--Conditions to Consummation of the Final
Plan."
Recent Developments Regarding Vencor
Vencor Bankruptcy
On the Petition Date, Vencor filed for protection under the Bankruptcy Code
with the Bankruptcy Court. At that time, the Company, Vencor and Vencor's
major creditors were engaged in negotiations to restructure Vencor's debt and
lease obligations. Although the parties had not reached an agreement on the
restructuring of Vencor's debt and lease obligations, Vencor, with the
apparent support of its major creditors, filed a plan of reorganization (the
"Preliminary Plan") on September 29, 2000. At that time, the Company informed
Vencor and Vencor's major creditors that the Company would not vote for the
Preliminary Plan or any other plan of reorganization which was not acceptable
to the Company, taking into consideration all facts and circumstances at the
time. After the filing of Vencor's Preliminary Plan, the Company, Vencor and
Vencor's major creditors continued the discussions to reach a consensual
global restructuring of Vencor's debt and lease obligations.
On November 6, 2000, Vencor filed its first Amended Plan of Reorganization
(the "First Amended Plan") with the Bankruptcy Court incorporating into the
Preliminary Plan certain terms relating to the comprehensive settlement of the
claims by the United States against the Company and Vencor arising from the
Company's prior health care operations and Vencor's health care operations.
The Company reached agreement with Vencor and Vencor's major creditors on the
material economic terms of a plan of reorganization for Vencor in November
2000. On December 1, 2000, Vencor filed a second amended plan of
reorganization with the Bankruptcy Court (the "Second Amended Plan")
incorporating into the First Amended Plan the material economic terms for the
restructuring of Vencor agreed upon by the Company, Vencor and Vencor's major
creditors. On December 6, 2000, Vencor filed its third amended plan (the
"Third Amended Plan") of reorganization with the Bankruptcy Court making
certain additional changes to the Second Amended Plan.
On December 14, 2000, Vencor filed the Fourth Amended Plan with the
Bankruptcy Court, incorporating the final terms of the restructuring of
Vencor's debt and lease obligations into the Third Amended Plan. On December
15, 2000, the Bankruptcy Court entered an order approving the disclosure and
solicitation materials for distribution to creditors for approval of the
Fourth Amended Plan. The Company voted to accept the Fourth Amended Plan on
March 1, 2001. The Fourth Amended Plan was overwhelmingly accepted by those
voting on the Fourth Amended Plan.
12
A hearing on the confirmation of the Fourth Amended Plan was held before
the Bankruptcy Court on March 1, 2001 (the "Confirmation Hearing"). The Fourth
Amended Plan, which was modified on the record of the Confirmation Hearing,
was confirmed as the Final Plan by an order of the Bankruptcy Court, which
order was signed on March 16, 2001 and entered on the docket on March 19,
2001. Consummation of the Final Plan is subject to the satisfaction of
numerous conditions, many of which are outside of the control of the Company
and Vencor. There can be no assurance (a) that the Final Plan will be
consummated, (b) if the conditions to consummation of the Final Plan are
satisfied, of the date that the Final Plan would be consummated, or (c) that,
if the Final Plan is not amended to provide for a later effective date and the
Final Plan is not consummated, (i) Vencor will pursue or be successful in
obtaining the approval of its creditors or the Company for a plan of
reorganization on the same terms as the Final Plan or on alternate terms, (ii)
that the terms of any alternate plan of reorganization will be acceptable to
the Company, or (iii) the final terms of any alternate plan of reorganization
will not have a Material Adverse Effect on the Company. The Final Plan
provides that the effective date of the Final Plan (the "Vencor Effective
Date") shall occur no later than May 1, 2001, but the Final Plan does not
address the consequences if the Vencor Effective Date does not occur on or
before May 1, 2001. It could have a Material Adverse Effect on the Company if
the Final Plan is not consummated. The Company believes that the Final Plan
will likely become effective.
Summary of Economic Terms of the Final Plan
Under the Final Plan, if consummated, the Company would, among other
things, (i) retain all rent paid by Vencor through the Vencor Effective Date,
(ii) amend and restate its Master Leases with Vencor in the form of four
amended and restated master leases (collectively, the "Amended Master Leases")
and (iii) receive 1,498,500 shares of the New Vencor Common Stock, as defined
below, together with certain registration rights. Consummation of the Final
Plan is subject to the satisfaction of numerous conditions, many of which are
outside the control of the Company and Vencor. See "--Risk Factors--Conditions
to Consummation of the Final Plan." The Company believes that the Final Plan
will likely become effective.
The annual base rent under the Amended Master Leases would be $180.7
million from the first day of the first month following the Vencor Effective
Date to April 30, 2002. For the period from the first day of the first month
following the Vencor Effective Date through April 30, 2004, annual base rent,
payable in all cash, would escalate 3.5% on May 1 of each year, commencing May
1, 2002, if certain tenant revenue parameters have been achieved. Assuming
such tenant revenue parameters have been achieved, annual base rent under the
Amended Master Leases would be $187.0 million from May 1, 2002 to April 30,
2003 and $193.6 million from May 1, 2003 to April 30, 2004. All of the annual
base rent would be paid in cash through April 30, 2004. Commencing May 1,
2004, if a Vencor Bank Refinancing Transaction (as defined below) has
occurred, the 3.5% annual escalator would be paid in cash and the full amount
of the annual base rent would be paid in cash. If a Vencor Bank Refinancing
Transaction has not occurred, then on May 1, 2004 the 3.5% annual escalator
under the Amended Master Leases would be comprised of (a) an annual cash
escalator of approximately 2% on the rent payable in cash during the prior
lease year, and (b) a 1.5% annual non-cash rent escalator that would accrue at
the annual rate of LIBOR plus 450 basis points until the occurrence of a
"Vencor Bank Refinancing Transaction", at which time the accrual with interest
would be due and payable and thereafter the 1.5% non-cash rent escalator would
convert to a cash escalator so that the total cash escalator thereafter would
equal 3.5% per year. Under the terms of the Final Plan, Vencor would be
required to pay $15.1 million in base rent for the month in which the Vencor
Effective Date occurs, which is the monthly base rent amount under the
Stipulation. The Company would also have the one time right to reset the rents
under the Amended Master Leases, exercisable 5 1/4 years after the Vencor
Effective Date on an Amended Master Lease by Amended Master Lease basis, to a
then fair market rental rate, for a total fee of $5.0 million payable on a
pro-rata basis at the time of exercise under the applicable Amended Master
Lease. See "--Amended Master Leases."
Under the Final Plan, if consummated, Ventas Realty would receive 1,498,500
shares of the common stock in Vencor, Inc. as restructured, representing 9.99%
of the issued and outstanding common stock in Vencor, Inc. as of the Vencor
Effective Date (the "New Vencor Common Stock"). The New Vencor Common Stock
issued
13
to Ventas Realty would be subject to dilution from stock issuances occurring
after the Vencor Effective Date. The New Vencor Common Stock would be issued
to Ventas Realty as additional future rent in consideration of the Company's
and Ventas Realty's agreement to charge the base rent which would be provided
in the Amended Master Leases.
Except as explained below, under the Final Plan, if consummated, Vencor
would assume and agree to continue to perform its obligations under the Spin
Agreements including, without limitation, its obligation to indemnify and
defend the Company for all litigation and other claims relating to the health
care operations and other assets and liabilities transferred to Vencor in the
1998 Spin Off. See "--Spin Agreements and Other Arrangements under Final
Plan."
Under the Final Plan, if consummated, certain federal, state and local tax
refund proceeds received on or after the Petition Date by Vencor or the
Company for the Subject Periods would be placed into an escrow account to be
used to satisfy any potential tax liabilities for the Subject Periods. When
audits of the relevant tax periods have been concluded, any residual amount
remaining in escrow would be shared equally by the Company and Vencor. All
interest accruing on the escrowed amounts would be distributed annually
equally between the Company and Vencor. See "--Tax Allocation Agreement, Tax
Stipulation and Tax Refund Escrow Agreement."
Under the Final Plan, if consummated, the Company would waive the right to
the payment of (a) $18.9 million for the August 1999 unpaid monthly base rent
under the Master Leases and (b) the difference between the rent required to be
paid under the terms of the Master Leases and the rent paid to the Company
after the Petition Date and prior to the first calendar month following the
Vencor Effective Date pursuant to the terms of the Stipulation.
Under the Final Plan, if consummated, the Vencor Senior Bank Debt would be
restructured as follows: (i) the principal and accrued interest amount of the
Vencor Senior Bank Debt would be reduced from approximately $578.0 million to
$300.0 million, (ii) the restructured debt would have a maturity date on the
seventh anniversary of the Vencor Effective Date and bear interest at LIBOR
plus 450 basis points, (iii) interest would not accrue on the restructured
debt until the amount of foregone interest equaled $15.9 million, (iv) the
restructured debt would be secured by a second lien on substantially all of
the assets of Vencor, and (v) the holders of the Vencor Senior Bank Debt would
receive 9,826,092 shares of the New Vencor Common Stock representing
approximately 65.5% of the issued and outstanding New Vencor Common Stock as
of the Vencor Effective Date, subject to dilution from stock issuances by
Vencor after the Vencor Effective Date.
Under the Final Plan, if consummated, the holders of the Vencor Senior
Subordinated Notes would convert their claim of approximately $374.0 million
of principal and accrued interest as of the Petition Date into (i) 3,675,408
shares of New Vencor Common Stock, representing approximately 24.5% of the
issued and outstanding New Vencor Common Stock as of the Vencor Effective
Date, subject to dilution from stock issuances by Vencor after the Vencor
Effective Date and (ii) warrants to purchase in the aggregate 7 million shares
of New Vencor Common Stock divided into two series, one of which would
represent the right to purchase 2 million shares at an exercise price of
$30.00 per share and the second of which would represent the right to purchase
5 million shares at an exercise price of $33.33 per share. These warrants, if
exercised, would result in the issuance of New Vencor Common Stock
representing approximately 30% of the fully diluted equity of Vencor assuming
the warrants were exercised on the Vencor Effective Date.
Under the Final Plan, if consummated, stock incentive plans would be
adopted and implemented by Vencor (the "Stock Incentive Plans") for the
benefit of the senior management of Vencor. Options to purchase 0.6 million
shares of New Vencor Common Stock and 0.6 million restricted shares of New
Vencor Common Stock would be available for grant under the Stock Incentive
Plans.
14
Spin Agreements and Other Arrangements Under the Final Plan
Set forth below is a description of the material terms of (a) certain of
the Spin Agreements which would be assumed by Vencor under the Final Plan, if
consummated, including the terms of amendments or restatements of such Spin
Agreements, where applicable, (b) those Spin Agreements and other agreements
that would be terminated on the Vencor Effective Date pursuant to the Final
Plan, if consummated, and (c) new agreements that would be entered into
between the Company and Vencor on the Vencor Effective Date in accordance with
the Final Plan, if consummated.
Amended Master Leases
Under the Final Plan, if consummated, on the Vencor Effective Date the
Tenant would assume the Master Leases and the Tenant and the Landlord would
simultaneously amend and restate the Master Leases in the form of four Amended
Master Leases setting forth the material terms governing the properties
covered by the Amended Master Leases. The Corydon, Indiana facility would be
incorporated into Amended Master Lease #4. The following description of the
Amended Master Leases is a summary of the form of amended lease filed with the
Bankruptcy Court in connection with the confirmation of the Final Plan and
does not purport to be a complete description of the Amended Master Leases,
the terms of which could change.
Each Amended Master Lease would include land, buildings, structures and
other improvements on the land, easements and similar appurtenances to the
land and improvements, and permanently affixed equipment, machinery and other
fixtures relating to the operation of the properties covered by the Amended
Master Leases.
Each Amended Master Lease would cover between 47 and 100 leased properties
and would be a "triple-net lease" or an "absolute-net lease" pursuant to which
Tenant would be required to pay all insurance, property taxes, utilities,
maintenance and repairs related to the properties. Under each Amended Master
Lease, the aggregate annual rent would be referred to as Base Rent (as defined
in each Amended Master Lease). Base Rent would equal the sum of Current Rent
(as defined in each Amended Master Lease) and Accrued Rent (as defined in each
Amended Master Lease). The Tenant would be obligated to pay the portion of
Base Rent that is Current Rent, and unpaid Accrued Rent would be paid as set
forth below. From the first day of the first month after the Vencor Effective
Date through April 30, 2004, Base Rent would equal Current Rent. Under the
Amended Master Leases, the initial annual aggregate Base Rent would be $180.7
million from the first day of the first month after the Vencor Effective Date
to April 30, 2002. For the period from May 1, 2002 through April 30, 2004,
annual aggregate Base Rent, payable in all cash, would escalate at an annual
rate of 3.5% over the Prior Period Base Rent (as defined in the Amended Master
Leases) on May 1 of each year, if certain Tenant revenue parameters have been
achieved. Assuming such Tenant revenue parameters have been achieved, Annual
Base Rent under the Amended Master Leases would be $187.0 million from May 1,
2002 to April 30, 2003 and $193.6 million from May 1, 2003 to April 30, 2004.
Base Rent for the month in which the Vencor Effective Date occurs would be
$15.1 million, which equals the monthly rent to be paid under the Stipulation.
If the Final Plan is consummated, of the $180.7 million of Base Rent under
the Amended Master Leases to be paid for the period commencing on the first
day of the first month after the Vencor Effective Date, 67.1% is attributable
to nursing facilities and 32.9% is attributable to hospitals.
Each Amended Master Lease would provide that beginning May 1, 2004, if a
Vencor Bank Refinancing Transaction has occurred, the 3.5% annual escalator
would be paid in cash and the Base Rent would continue to equal Current Rent.
If a Vencor Bank Refinancing Transaction has not occurred, then on May 1, 2004
the annual aggregate Base Rent would be comprised of (a) Current Rent payable
in cash which would escalate annually by an amount equal to 2% of prior period
Base Rent and (b) an additional annual non-cash accrued escalator amount of
1.5% of the Prior Period Base Rent which would accrete from year to year
including an interest accrual at LIBOR (as defined in the Amended Master
Leases) plus 450 basis points (compounded annually) to be added to the annual
accreted amount (but such interest would not be added to the aggregate Base
Rent in subsequent years). The Unpaid Accrued Rent would become payable, and
all future Base Rent escalators would be payable
15
in cash, upon the occurrence of any one of the following (a "Vencor Bank
Refinancing Transaction"): (a) any transaction pursuant to which all or
substantially all of the indebtedness of the Tenant under the Tenant's new
senior secured credit agreement is purchased by the Tenant or another party at
the Tenant's direction or is repaid; (b) any amendment of the new senior
secured notes or new senior secured credit agreement pursuant to which either
(i) the principal amount of the Tenant's indebtedness thereunder (as such
indebtedness is in effect immediately prior to such amendment) is increased
(excepting therefrom increases attributable to the capitalization of accrued
interest or protective advances by the lenders under the new senior secured
notes), or (ii) the loan amount, maturity or other material terms and
conditions thereof (as such terms and conditions are in effect immediately
prior to such amendment), are modified to match, better or otherwise respond
to the terms and conditions of alternative financing which has been offered to
the Tenant; (c) any bona fide, binding offer is made to the Tenant to provide
financing on terms better than those of the new senior secured credit
agreement, sufficient to (i) pay in full, or purchase at or above par, all of
the indebtedness of the Tenant under the new senior secured credit agreement
and (ii) pay in full all Unpaid Accrued Rent owing as of such date, whether or
not such offer is accepted or consummated; and (d) the termination or
expiration of the applicable Amended Master Lease as to all properties under
such lease. However, with respect to subsection (d) above, the Landlord's
right to receive payment of the Unpaid Accrued Rent is subordinate to the
receipt of payment of the indebtedness of the Tenant by the lenders under the
new senior secured notes issued pursuant to the new senior secured credit
agreement. Upon the occurrence of any of the events referenced in subsections
(a) through (d) above, the annual aggregate Base Rent payable in cash would
thereafter escalate at the annual rate of 3.5% and there would be no further
accrual feature for rents arising after the occurrence of such events.
There would be several renewal bundles of properties under each Amended
Master Lease, with each bundle containing approximately 7 to 12 properties.
All properties within a bundle would have primary terms ranging from 10 to 15
years from May 1, 1998, subject to certain exceptions. Subject to the
Landlord's rental reset right described below, the Tenant would have the
option to renew the term of all, but not less than all, of the properties in a
bundle, for one five-year renewal term beyond the initial term at the then
existing rental rate plus the then existing escalation amount per annum, and
further renew for two additional five-year renewal terms beyond the first
renewal term at the greater of the then existing rental rate plus the then
existing escalation amount per annum or the then fair market value rental
rate. The rental rate during the first renewal term and any additional renewal
term in which rent due is based on the then existing rental rate would
escalate each year during such term(s) at the applicable initial escalation
rate. The term of each Amended Master Lease would generally be subject to
termination upon the occurrence of an Event of Default and certain other
conditions described in the Amended Master Leases.
During the one-year period commencing on the date which is 5 1/4 years
after the Vencor Effective Date, the Landlord would have a one-time option
(the "Reset Right") to reset the Base Rent, Current Rent and Accrued Rent (as
defined in each Amended Master Lease) under any one or more Amended Master
Leases to the then fair market rental. Upon exercising this reset right, the
Landlord would be required to pay the Tenant a fee equal to a prorated portion
of $5.0 million based upon the proportion of Base Rent payable under the
Amended Master Lease(s) with respect to which rent is reset to the total Base
Rent payable under all of the Amended Master Leases. The fair market rental
would be determined through the appraisal procedures in the Amended Master
Leases. Once the fair market rental is so determined, the Landlord, in its
sole discretion, could determine whether to exercise the Reset Right. If the
Landlord elects to exercise the Reset Right, the new fair market rental would
be effective retroactive on the later of (a) the date the Landlord notifies
the Tenant of its interest in exercising the Reset Right, and (b) the date
which is 5 1/4 years after the Vencor Effective Date. The rental rate for any
renewal term would also be reset in connection with a Reset Right.
The Amended Master Leases would require that the Tenant utilize the leased
properties solely for the provision of health care services and related uses
and as the Landlord may otherwise consent (such consent not to be unreasonably
withheld). The Tenant would be responsible for maintaining or causing to be
maintained all licenses, certificates and permits necessary for it to comply
with various health care regulations. The Tenant would be obligated to operate
continuously each leased property as a provider of health care services.
16
The Tenant would be required to maintain the leased properties in good
repair and condition, making all repairs, modifications and additions required
by law, including any Capital Addition (as defined in each of the Amended
Master Leases). The Tenant would be required to pay for all capital
expenditures and other expenses for the maintenance, repair, restoration or
refurbishment of a leased property (and any Capital Addition). The Tenant
would also be required to maintain all personal property at each of the leased
properties in good order, condition and repair, as is necessary to operate the
leased property in compliance with all applicable licensure, certification,
legal and insurance requirements and otherwise in accordance with customary
practice in the industry.
The Tenant would be required to maintain liability, all risk property and
workers' compensation insurance for the leased properties at a level at least
comparable to those in place with respect to the leased properties prior to
the 1998 Spin Off.
Subject to certain restrictions, each Amended Master Lease would permit the
Landlord, as determined in its sole discretion and for a legitimate business
purpose, to remove properties from the Amended Master Leases and place such
properties in newly created separate lease(s), which newly created lease(s)
would be on the same terms as the original Amended Master Leases. Any such new
lease would not be cross-defaulted with the original Amended Master Leases or
with any other new leases. The Tenant would not be permitted to remove
properties from an Amended Master Lease without the consent of the Landlord.
An "Event of Default" would be deemed to have occurred under an Amended
Master Lease if, among other things, (i) the Tenant failed to pay rent or
other amounts when due and failed to cure such default within five days after
notice; (ii) the Tenant failed to comply with covenants, which failure
continued for 30 days after notice or, so long as diligent efforts to cure
such failure were being made, such longer period (not over 180 days) as would
be necessary to cure such failure; (iii) certain bankruptcy or insolvency
events occurred, including the filing of a petition of bankruptcy or a
petition for reorganization under the Bankruptcy Code; (iv) the Tenant ceased
to operate any property as a provider of health care services for the
particular required use (e.g., hospital or nursing center); (v) a default
occurred under any guaranty of the lease or the Indemnity Agreement (as
defined in the Amended Master Leases) and was not cured within the cure period
specified in the Amended Master Leases; (vi) the Tenant or its applicable
subtenant lost any required health care license, permit or approval or failed
to comply with any legal requirements in each case by a final unappealable
determination; (vii) the Tenant failed to maintain required insurance; (viii)
the Tenant created or suffered to exist certain liens and did not cure the
same within the cure period specified in the Amended Master Leases; (ix) the
Tenant failed to perform any covenant with respect to complying with or
contesting any legal requirements, impositions or insurance requirements and
did not cure the same within the cure period specified in the Amended Master
Leases; (x) Tenant breached any of its material representations or warranties;
(xi) a reduction occurred in the number of licensed beds in excess of 10% (or
5% in certain cases), or less than 10% if the Tenant voluntarily banked more
than 15% (or, in certain cases, a percentage less than 5% if the Tenant
voluntarily banked more than 20%) of licensed beds, of the number of licensed
beds in, or deemed to be in, the applicable facility on the Commencement Date
(as defined in the Amended Master Leases) (subject to certain exceptions for
involuntary reductions in excess of 10%) (a "Licensed Bed Event of Default");
(xii) certification for reimbursement under Medicare or Medicaid with respect
to a participating facility was revoked and re-certification did not occur for
120 days (plus an additional 60 days in certain circumstances) (a
"Medicare/Medicaid Event of Default"); (xiii) the appointment of a receiver or
custodian by any federal, state or local government pursuant to a final
unappealable determination; (xiv) the Tenant became subject to regulatory
sanctions and failed to cure such regulatory sanctions within its specified
cure period in any material respect with respect to any facility; (xv) the
Tenant failed to cure its breach of any Permitted Encumbrance (as defined in
the Amended Master Leases) within the applicable cure period and, as a result,
a real property interest or other beneficial property right of the Lessor was
terminated or at material risk of being terminated; (xvi) the Tenant failed to
cure its breach of any of the obligations of the Landlord as lessee under an
Existing Ground Lease (as defined in the Amended Master Leases) within the
applicable cure period and, if such breach was a non-monetary, non-material
breach, such Existing Ground Lease was terminated or at material risk of being
terminated; (xvii) the Tenant failed to pay principal or
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interest with respect to the new senior secured notes that would be issued by
Tenant on the Vencor Effective Date or otherwise failed to pay principal or
interest when due (including applicable notice and cure periods) with respect
to any indebtedness for borrowed money of Tenant with an aggregate outstanding
principal balance equal to or exceeding $50.0 million; or (xviii) the maturity
of the new senior secured notes that would be issued by Tenant on the Vencor
Effective Date or any other indebtedness owing under the Tenant's new senior
secured credit agreement or any other indebtedness for borrowed money of
Tenant with an aggregate outstanding principal balance equal to or exceeding
$50.0 million has been accelerated. The Amended Master Leases would not be
cross-defaulted with each other.
Except as noted below, upon an Event of Default under one of the Amended
Master Leases, the Landlord could, at its option, be able to exercise the
following remedies: (i) after not less than 10 days notice to the Tenant (less
in certain circumstances), terminate that particular entire Amended Master
Lease, repossess all leased properties under such Amended Master Lease and
require that the Tenant pay to the Landlord, as liquidated damages, the net
present value of the rent for the balance of the term; (ii) without
terminating the particular Amended Master Lease agreement, repossess all
leased properties under such Amended Master Lease and relet the leased
properties with the Tenant remaining liable under the particular Amended
Master Lease for all obligations to be performed by the Tenant thereunder,
including the difference, if any, between the rent under the particular
Amended Master Lease and the rent payable as a result of the reletting of the
leased property; and (iii) seek any and all other rights and remedies
available under law or in equity. In the case of an Event of Default that
relates specifically to a particular leased property, in lieu of terminating
the Amended Master Lease and/or dispossessing the Tenant as to all leased
properties under such Amended Master Lease and subject to the special rules
noted below relative to Licensed Bed Events of Default and Medicare/Medicaid
Events of Default, the Landlord could terminate the Amended Master Lease
and/or dispossess Tenant as to the aforesaid leased property. Each of the
Amended Master Leases would include special rules relative to
Medicare/Medicaid Events of Default and Licensed Bed Events of Default. In the
event Medicare/Medicaid Events of Default and/or Licensed Bed Events of
Default shall occur and be continuing (i) with respect to not more than two
properties at the same time under an Amended Master Lease that covers 41 or
more properties, and (ii) with respect to not more than one property at the
same time under an Amended Master Lease that covers 21 to and including 40
properties, the Lessor would not be able to exercise termination/dispossession
remedies against any property other than the property(ies) to which the Events
of Default described above relate.
Except as noted below, Events of Default existing under the Master Leases
as of the Vencor Effective Date would not be waived by the Company and would
be governed by and treated in accordance with the terms of the Amended Master
Leases. Any Event of Default relating to a third party claim under the Master
Leases (with certain exceptions) would be considered waived if any member of
senior management of the Landlord was aware of the Event of Default and Vencor
was not aware of the Event of Default and the Landlord failed to inform Vencor
of such Event of Default. In addition, any Events of Default existing under
the Master Leases as of the Vencor Effective Date and that are identified in
Schedule 1.3 of the Amended Master Leases would be waived by the Landlord.
The Amended Master Leases would provide that the Tenant may not partially
assign any Amended Master Lease and could not assign in whole or sublease or
otherwise transfer any leased property or any portion of a leased property as
a whole (or in substantial part), including by virtue of a change of control
(as defined in the Amended Master Leases), without the consent of Ventas,
which could not be unreasonably withheld if the proposed assignee is a
creditworthy entity with sufficient financial stability to satisfy its
obligations under the particular Amended Master Lease, has not less than four
years experience in operating health care facilities, has a favorable business
and operational reputation and character and agrees to comply with the use
restrictions in the particular Amended Master Lease. The obligation of the
Landlord to consent to subletting or assignment would be subject to the
reasonable approval rights of any mortgagee and/or the lenders under its
credit agreement. The Tenant could sublease up to 20% of each leased property
for restaurants, gift shops and other stores or services customarily found in
hospitals or nursing centers without the consent of the Landlord, subject,
however, to the sublessee's possession of necessary licenses and governmental
authorizations.
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Upon any assignment or subletting, the Tenant would not be released from
its obligations under the applicable Amended Master Lease. Subject to certain
exclusions, the Tenant would have to pay to the Landlord 80% of any excess
consideration received by it on account of an assignment and 80% (50% in the
case of existing subleases) of Sublease Rent Payments (roughly equal to the
excess of all consideration payable to Tenant under a sublease net of certain
transaction costs, over the sum of the Rent under the Amended Master Lease
(including all taxes, insurance, maintenance and other impositions) allocable
to the subleased premises plus specified costs attributable to the subleased
premises), provided that the Landlord's right to such payments would be
subordinate to that of the Tenant's lenders.
Tax Allocation Agreement, Tax Stipulation and Tax Refund Escrow Agreement
Under the Final Plan, if consummated, Vencor and the Company would enter
into the Tax Refund Escrow Agreement and First Amendment of the Tax Allocation
Agreement (the "Tax Refund Escrow Agreement"), which would govern their
relative entitlement to certain tax refunds for the Subject Periods that each
received or may receive in the future. The Tax Refund Escrow Agreement would
amend and supplement the Tax Allocation Agreement and supersede the Tax
Stipulation. The following summary of the Tax Refund Escrow Agreement is a
summary of the form of such agreement filed with the Bankruptcy Court in
connection with the confirmation of the Final Plan and does not purport to be
a complete description of the Tax Refund Escrow Agreement, the terms of which
could change.
Under the terms of the Tax Refund Escrow Agreement, refunds ("Subject
Refunds") received on or after the Petition Date by either Vencor or the
Company with respect to federal, state or local income, gross receipts,
windfall profits, transfer, duty, value-added, property, franchise, license,
excise, sales and use, capital, employment, withholding, payroll, occupational
or similar business taxes (including interest, penalties and additions to tax,
but excluding certain refunds), for the Subject Periods ("Subject Taxes")
would be deposited into an escrow account with a third-party escrow agent on
the Vencor Effective Date.
The Tax Refund Escrow Agreement would provide that each party must notify
the other of any asserted Subject Tax liability of which it becomes aware,
that either party could request that asserted liabilities for Subject Taxes be
contested, that neither party would be allowed to settle such a contest
without the consent of the other, that each party would have a right to
participate in any such contest, and that the parties generally must cooperate
with regard to Subject Taxes and Subject Refunds and mutually and jointly
control any audit or review process related thereto.
The funds in the escrow account (the "Escrow Funds") could be released from
the escrow account to pay Subject Taxes and as otherwise provided therein.
The Tax Refund Escrow Agreement would provide generally that Vencor and the
Company waive their rights under the Tax Allocation Agreement to make claims
against each other with respect to Subject Taxes satisfied by the Escrow
Funds, notwithstanding the indemnification provisions of the Tax Allocation
Agreement. To the extent that the Escrow Funds would be insufficient to
satisfy all liabilities for Subject Taxes that are finally determined to be
due (such excess amount, "Excess Taxes"), the relative liability of Vencor and
the Company to pay such Excess Taxes would be determined as provided in the
Tax Refund Escrow Agreement. Disputes under the Tax Refund Escrow Agreement,
and the determination of the relative liability of Vencor and the Company to
pay Excess Taxes, if any, would be governed by the arbitration provision of
the Tax Allocation Agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities would be distributed equally to each of Vencor
and the Company on an annual basis. Any Escrow Funds remaining in the escrow
account after no further claims may be made by governmental authorities with
respect to Subject Taxes or Subject Refunds (because of the expiration of
statutes of limitation or otherwise) would be distributed equally to Vencor
and the Company.
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Agreement of Indemnity--Third Party Leases
Under the Final Plan, if consummated, Vencor would assume and agree to
fulfill its obligations under the Agreement of Indemnity--Third Party Leases.
There can be no assurance that Vencor will have sufficient assets, income and
access to financing to enable it to satisfy its obligations under the
Agreement of Indemnity--Third Party Leases or that Vencor will continue to
honor its obligations under the Agreement of Indemnity--Third Party Leases. If
Vencor does not satisfy or otherwise honor the obligations under the Agreement
of Indemnity--Third Party Leases, then the Company may be liable for the
payment and performance of such obligations. See "--Risk Factors--Dependence
of the Company on Vencor," and "Note 9--Commitments and Contingencies" to the
Consolidated Financial Statements. It is a condition to the consummation of
the Final Plan that Vencor shall not have renewed or extended any Third Party
Lease on or after December 10, 2000 unless it first obtained a release of the
Company from liability under such Third Party Lease.
Agreement of Indemnity--Third Party Contracts
Under the Final Plan, if consummated, Vencor would assume and agree to
fulfill its obligations under the Agreement of Indemnity--Third Party
Contracts. See "--Risk Factors--Dependence of the Company on Vencor" and "Note
8--Transactions With Vencor--The 1998 Spin Off" to the Consolidated Financial
Statements. There can be no assurance that Vencor will have sufficient assets,
income and access to financing to enable it to satisfy its obligations
incurred in connection with the Agreement of Indemnity--Third Party Contracts
or that Vencor will continue to honor its obligations under the Agreement of
Indemnity--Third Party Contracts. If Vencor does not satisfy or otherwise
honor the obligations under the Agreement of Indemnity--Third Party Contracts,
then the Company may be liable for the payment and performance of such
obligations. See "--Risk Factors--Dependence of the Company on Vencor."
Assumption of Certain Operating Liabilities and Litigation
Under the Final Plan, if consummated, Vencor would assume and agree to
perform its indemnification obligations under the Spin Agreements. There can
be no assurance that Vencor will have sufficient assets, income and access to
financing to enable it to satisfy its obligations incurred in connection with
the 1998 Spin Off or that Vencor will continue to honor its obligations
incurred in connection with the 1998 Spin Off. If Vencor does not satisfy or
otherwise honor the obligations under these arrangements, then the Company may
be liable for the payment and performance of such obligations and may have to
assume the defense of such claims. See "--Risk Factors--Dependence of the
Company on Vencor."
Registration Rights Agreement
Under the Final Plan, if consummated, 1,498,500 shares of New Vencor Common
Stock would be distributed to Ventas Realty on the Vencor Effective Date. On
the Vencor Effective Date, if it occurs, Vencor would execute and deliver to
Ventas Realty, certain other initial holders of New Vencor Common Stock and
other signatories, a Registration Rights Agreement. The following description
of the Registration Rights Agreement is a summary of the form of such
agreement filed with the Bankruptcy Court in connection with the confirmation
of the Final Plan and does not purport to be a complete description of the
Registration Rights Agreement, the terms of which could change.
The Registration Rights Agreement would, among other things, provide that
(a) Vencor file a shelf registration statement with respect to the securities
subject thereto, including the New Vencor Common Stock as soon as practicable
after the Vencor Effective Date, but in no event later than 120 days following
the Vencor Effective Date and (b) Vencor use its reasonable best efforts to
cause such registration statement to be declared effective as soon as
practicable and to keep such registration statement continuously effective for
a period of two years with respect to such securities (subject to customary
exceptions). Under the Registration Rights Agreement, Ventas Realty would be
entitled to exercise certain demand and "piggyback" registration rights with
respect to the New Vencor Common Stock, subject to customary exceptions and
black-out and suspension periods. In
20
addition, until such time as the New Vencor Common Stock would be listed on a
national securities exchange, Vencor would covenant to comply with certain of
the corporate governance requirements in the rules of the National Association
of Securities Dealers, Inc. as if it were subject to such rules. In the event
Vencor failed to comply with its obligations under the Registration Rights
Agreement, the other parties to the Registration Rights Agreement would be
entitled to seek specific performance in addition to other remedies that might
be available.
Agreements That Would be Terminated Under the Final Plan
Under the Final Plan, if consummated, the Participation Agreement and the
Development Agreement would be terminated on the Vencor Effective Date and the
Company and Vencor would be deemed to have waived any and all damages, claims,
liabilities, obligations, and causes of action related to or arising out of
these agreements. Under the Final Plan, if consummated, the Tolling Agreement,
the Tax Stipulation and the Stipulation would also terminate on the Vencor
Effective Date.
Settlement of United States Claims
Vencor and the Company have been the subject of investigations by the
United States Department of Justice into various aspects of claims for
reimbursement from government payers, billing practices and various quality of
care issues in the hospitals and nursing facilities formerly operated by the
Company and presently operated by Vencor. These investigations cover the
Company's former health care operations prior to the date of the 1998 Spin
Off, and include matters arising from lawsuits filed under the qui tam, or
whistleblower, provision of the Federal Civil False Claims Act, which allows
private citizens to bring a suit in the name of the United States. See "Note
11--Litigation" to the Consolidated Financial Statements. The United States
Department of Justice, Civil Division filed two proofs of claim in the
Bankruptcy Court covering the United States' claims and the qui tam suits. The
United States asserted claims of approximately $1.3 billion, including treble
damages, against Vencor in these proofs of claim.
The Final Plan contains a comprehensive settlement of all of the foregoing
United States claims (the "United States Settlement"). The provisions of the
United States Settlement are documented in the Final Plan.
Under the United States Settlement, the Company will pay $103.6 million to
the United States, of which $34.0 million will be paid on the Vencor Effective
Date. The balance of $69.6 million will bear interest at 6% per annum and will
be payable in equal quarterly installments over a five-year term commencing on
the last day of the first full quarter following the quarter in which the
Vencor Effective Date occurs. Vencor will pay the United States a total of
$25.9 million, $10.0 million of which will be paid on the Vencor Effective
Date and the balance (with interest at 6% per annum) of which will be paid
during the first two quarters following the Vencor Effective Date. The Company
will pay $0.4 million to legal counsel for the relators in the qui tam
actions.
If the Company fails to make any payment under the United States Settlement
within five business days of receipt of written notice from the United States
that such payment was delinquent, then the United States could, in its
discretion, by written notice to the Company, declare all unpaid principal and
accrued and unpaid interest payable by the Company under the United States
Settlement to be immediately due and payable.
Under the United States Settlement, the Company agreed with the United
States, that if, from and after the Vencor Effective Date either:
(a) the loans under the Company's Amended Credit Agreement (the "Ventas
Senior Bank Debt") are amended and, as a result of such amendment, (i) the
final maturity date of the Ventas Senior Bank Debt is scheduled to occur
prior to the final maturity date of the payments due from the Company under
the United States Settlement, or (ii) less than $100.0 million of the
outstanding principal under the Ventas Senior Bank Debt is scheduled to be
paid after the final maturity date of the obligations due from the Company
under the United States Settlement, or
21
(b) the Ventas Senior Bank Debt is replaced in whole by new debt (the
"Refinancing Debt"), and (i) the final maturity date of the Refinancing
Debt is scheduled to occur prior to the final maturity date of the payments
due from the Company under the United States Settlement, or (ii) less than
$100.0 million of the outstanding principal of the Refinancing Debt are
scheduled to be paid after the final maturity date of the obligations due
from the Company under the United States Settlement,
then in either case, the final maturity date of the obligations payable by the
Company under the United States Settlement and the remaining payments
thereunder shall be proportionately and equitably adjusted in time and amount
so that the final maturity date and the scheduled principal payments of the
Ventas Senior Bank Debt or the Refinancing Debt, as the case may be, and the
remaining obligations of the Company under the United States Settlement shall
have the same proportionate relationship as before such amendment or
replacement, and in any such event, at least $100.0 million of the outstanding
principal balance of the Ventas Senior Bank Debt or the Refinancing Debt, as
applicable, shall be scheduled to be paid after the due date of the final
payment under the United States Settlement.
The United States Settlement provides that if the Company fails to make any
payment required to be paid by the Company under the United States Settlement
as and when due, then, during the period commencing on the due date of the
delinquent payment and continuing to and until such time as the delinquent
payment shall be paid to the United States (such period being referred to as a
"Delinquency Period"), the Company shall suspend the payment of dividends on
account of shares of any class of stock of the Company, provided, however,
during any Delinquency Period, the Company may declare and pay an amount equal
to the minimum REIT dividend for the applicable taxable year (or the unpaid
portion of the minimum REIT dividend for the applicable taxable year) as
necessary for the Company to maintain its status as a REIT under the Code for
the applicable tax year.
The United States Settlement provides that the Company will not be
responsible in any manner for the payments owed by Vencor under the United
States Settlement, and any failure of Vencor to make such payments will not
affect the Company's rights, duties, benefits, and/or obligations under the
United States Settlement.
Under the terms of the United States Settlement, as to the Company and
Vencor and their officers, directors and employees, solely in their capacity
as such, the United States agreed to: (a) move to dismiss all of the qui tam
cases with prejudice as to the qui tam relators; (b) move to dismiss all of
the qui tam cases with prejudice as to the United States for all claims which
have been investigated by the Department of Justice; and (c) move to dismiss
all of the qui tam cases without prejudice as to the United States for all
claims which were not investigated by the Department of Justice. See "Note
11--Litigation" to the Consolidated Financial Statements.
Under the terms of the United States Settlement, the United States releases
the Company from all civil or administrative monetary claims or causes of
actions the United States or others authorized to bring suits in its name and
on its behalf including third party claimants under 31 U.S.C. Section 3730(b)
or (d), had or may have against the Company under the False Claims Act, 31
U.S.C. Section 3729-3733 (the "False Claims Act"), the Civil Monetary
Penalties Law, 42 U.S.C. Section 1320a-7a (the "Civil Monetary Penalties
Law"), the Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-3812 (the
"Program Fraud Civil Remedies Act"), and/or common law doctrines of payment by
mistake, unjust enrichment, breach of contract or fraud, for certain conduct
of the Company and/or Vencor alleged to have occurred under the qui tam
actions and certain other conduct investigated by the United States. Such
conduct includes, without limitation, overbilling in connection with the
provision of mobile radiology and diagnostic services, improper pharmacy
charges, improper billing for respiratory therapy services and associated
supplies, certain quality of care issues and certain other facility specific
conduct (collectively, the "Covered Conduct"). With respect to the Covered
Conduct, the United States also releases the Company for administrative
overpayments under the Medicare Program ("Medicare"), Title XVIII of the
Social Security Act, 42 U.S.C. Sections 1395-1395ggg (the "Social Security
Act") under the TRICARE Program, 10 U.S.C. Sections 1071-1106 (the "TRICARE
Program"), civil monetary penalties imposed under 42 U.S.C. (S) 1395i--
3(h)(2)(B)(ii) and 42 U.S.C. Section 1396r(h)(2)(A)(ii) and actions for
permissive exclusion from Medicare, Medicaid and other federal health
programs. The Company also receives a release from the United States and
others authorized to bring suits in its name and on its behalf including third
22
party claims under 31 U.S.C. Section 3730(b) or (d) for all known or unknown,
asserted or unasserted, civil and administrative monetary claims, actions and
causes of actions arising on or before the Vencor Effective Date for (a)
administrative overpayments under Medicare, the Social Security Act, and the
TRICARE Program, (b) claims relating to any of the federal health care
programs under the False Claims Act, Civil Monetary Penalties Law, the Program
Fraud Civil Remedies Act, Medicare and the regulations thereunder, and other
federal statutes, (c) claims for money arising out of quality of care issues,
(d) claims based on submission of Medicare cost reports, or payments made with
respect thereto or otherwise relating to participation in the Medicare program
for periods prior to September 1999, (e) common law claims relating to any of
the federal health care programs, (f) all claims asserted by the United States
in its proof of claims filed in the Vencor Bankruptcy and (g) all claims
alleged in the qui tam cases.
Except as set forth below, the current and former directors, officers and
employees of the Company generally receive a release from the United States
coextensive with the United States' release of the Company but only to the
extent a current or former director, officer or employee of the Company is
entitled to indemnification, contribution and/or similar relief from the
Company or Vencor. However, if the United States were to bring a claim against
a current or former officer, director or employee of either Vencor or the
Company, even though such claim would otherwise have been released as provided
above, the United States could collect for any such claim the lesser of (i)
$13.0 million in the aggregate for all such claims against all directors,
officers and employees of the Company and Vencor, and (ii) the amount of any
insurance proceeds actually available to satisfy such claims. Any and all such
claims by the United States against the directors, officers and employees of
the Company or Vencor over and above this specified amount are released. Under
the Final Plan, if consummated, Vencor and the Company would covenant not to
materially alter the coverage as it existed as of September 1, 2000 under such
corporate liability policy.
The following claims are specifically excluded from the releases provided
by the United States under the United States Settlement: (a) claims under the
Code, (b) claims for criminal liability, (c) claims brought by the Securities
and Exchange Commission or other governmental or regulatory agency related to
securities laws violations, including but not limited to, claims based on the
Securities Act, the Exchange Act, the Investment Advisors Act of 1940, the
Investment Company Act, the Commodity Exchange Act and the rules and
regulations under such statutes, (d) claims under state health care
reimbursement programs, and (e) claims for mandatory exclusion from federal
health care benefit programs.
Releases under the Final Plan
In consideration for the Company and Ventas Realty entering into the
Amended Master Leases and agreeing to their treatment under the Final Plan,
Vencor would directly release the Company and Ventas Realty and their current
and former directors, officers and employees, in their capacities as such,
from all claims, whether reduced to judgment or not, liquidated or
unliquidated, contingent or noncontingent, asserted or unasserted, fixed or
not, matured or unmatured, disputed or undisputed, legal or equitable, known
or unknown, that arose before the Vencor Confirmation Date and including,
without limitation, any claim, demand, debt, right, cause of action or
liability for an avoidance or a recovery on account of or due to fraudulent
conveyance, preferential payment, fraudulent transfer and fraudulent
obligations and all other claims relating to or arising out of the 1998 Spin
Off. However, the Company would not be released from, and the Company would
remain liable for, the performance of its obligations under the Final Plan,
the Spin Agreements, the Amended Master Leases and all other agreements
between the Company or Ventas Realty and Vencor which were assumed by or
entered into by Vencor under the Final Plan.
In further consideration for the Company and Ventas Realty entering into
the Amended Master Leases and agreeing to their treatment under the Final
Plan, the Final Plan would generally provide that the Company and Ventas
Realty and their current and former directors, officers and employees, solely
in their capacity as such, would be released by the holders of certain claims
against Vencor (including the holders of general unsecured claims, senior bank
debt claims, subordinated noteholder claims and certain preferred equity put
right claims), of all claims, whether reduced to judgment or not, liquidated
or unliquidated, contingent or noncontingent, asserted
23
or unasserted, fixed or not, matured or unmatured, disputed or undisputed,
legal or equitable, known or unknown that arose before the Vencor Confirmation
Date and including, without limitation, any claim, demand, debt, right, cause
of action or liability for an avoidance or a recovery on account of or due to
fraudulent conveyance, preferential payment, fraudulent transfer and
fraudulent obligations and all other claims relating to or arising out of the
1998 Spin Off. The following claims would be specifically excluded from these
releases: (a) obligations of the Company and Ventas Realty under the Final
Plan and all of the documents related thereto; and (b) direct claims against
the Company or Ventas Realty which (i) are unrelated to the 1998 Spin Off,
(ii) are unrelated to Vencor (including Vencor's operations prior to the 1998
Spin Off), and (iii) were not asserted and could not have been asserted
against Vencor in the Vencor bankruptcy proceedings. At the Confirmation
Hearing, the Bankruptcy Court judge approved these releases. The Company
believes that these releases would generally meet the requirements to be
enforceable against non-debtor parties. However, there exists a complex and
evolving body of case law governing the enforceability of releases in
bankruptcy by non-debtor parties and there can be no assurance that such a
releasing party would not seek to challenge such releases or what the outcome
would be if the enforceability of the releases was so challenged.
The releases in favor of the Company's officers, directors or employees
would be limited to claims that arose out of the officer/director/employee
relationship. The Company would not be released from any indemnification
claims of any current and former officers, directors and employees of the
Company.
The Company would directly release Vencor and its officers, directors and
employees, solely in their capacity as such, from all claims, whether reduced
to judgment or not, liquidated or unliquidated, contingent or noncontingent,
asserted or unasserted, fixed or not, matured or unmatured, disputed or
undisputed, legal or equitable, known or unknown that arose before the Vencor
Confirmation Date. However, Vencor would not be released from, and Vencor
would remain liable for, the performance of all obligations under the Final
Plan and the Spin Agreements, the Amended Master Leases and all other
agreements between Vencor and the Company or Ventas Realty which would be
assumed or entered into by Vencor under the Final Plan. The releases by the
Company of the officers, directors and employees of Vencor would be limited to
those claims against an officer, director or employee that arose out of the
officer/director/employee relationship.
The Company would release the holders of the Vencor senior bank debt and
the Vencor subordinated noteholders, and their respective officers, directors,
employees, members, principals, attorneys advisors, agents, professionals,
representatives, benefit plan administrators or trustees (each of the
foregoing, solely in their capacity as such) from all claims, whether reduced
to judgment or not, liquidated or unliquidated, contingent or noncontingent,
asserted or unasserted, fixed or not, matured or unmatured, disputed or
undisputed, legal or equitable, known or unknown, that arose before the Vencor
Effective Date and are related to the 1998 Spin Off. The Company would not
release any claims under the Company's Amended Credit Agreement or any
document or instrument related thereto or any direct claims unrelated to the
1998 Spin Off.
Recent Developments Regarding Liquidity
On January 31, 2000, the Company and all of its lenders entered into the
Amended Credit Agreement, which amended and restated the $1.2 billion credit
agreement (the "Bank Credit Agreement") the Company entered into at the time
of the 1998 Spin Off. Under the Amended Credit Agreement, borrowings bear
interest at an applicable margin over an interest rate selected by the
Company. Such interest rate may be either (a) the Base Rate, which is the
greater of (i) the prime rate or (ii) the federal funds rate plus 50 basis
points or (b) the London Interbank Offered Rate ("LIBOR"). Borrowings under
the Amended Credit Agreement are comprised of: (1) a $25.0 million revolving
credit line (the "Revolving Credit Line") that expires on December 31, 2002,
which bears interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%;
(2) a $200.0 million term loan due December 31, 2002 (the "Tranche A Loan"),
which bears interest at either LIBOR plus 2.75% or the Base Rate plus 1.75%;
(3) a $300.0 million term loan due December 31, 2005 (the "Tranche B Loan"),
which bears interest at either LIBOR plus 3.75% or the Base Rate plus 2.75%;
and (4) a $473.4 million term loan due December 31, 2007 (the "Tranche C
Loan"), which bears interest at either LIBOR plus 4.25% or the Base Rate plus
3.25%. The interest rate on the Tranche B Loan will be reduced by .50% (50
basis points) once $150.0
24
million of the Tranche B Loan has been repaid. In addition, in connection with
the consummation of the Amended Credit Agreement on January 31, 2000, the
Company paid a $7.3 million loan-restructuring fee. This fee is being
amortized proportionately over the terms of the related loans and agreements.
Under the terms of the Amended Credit Agreement, it would have been an
Event of Default if the Vencor Effective Date did not occur on or before
December 31, 2000 (the "Vencor Effective Date Deadline"). When it became
apparent that the Vencor Effective Date would not occur by December 31, 2000,
the Company initiated discussions with the administrative agent for the
lenders under the Amended Credit Agreement in an effort to obtain a waiver or
amendment of this covenant. The Company and substantially all of its lenders
entered into an Amendment and Waiver dated as of December 20, 2000 (the
"Amendment and Waiver") to the Amended Credit Agreement, whereby the Vencor
Effective Date Deadline was extended from December 31, 2000 to March 31, 2001.
In consideration for this extension, the Company paid a fee of $0.2 million to
the lenders executing the Amendment and Waiver and agreed to amend the
principal amortization schedules of certain of the loans under the Amended
Credit Agreement. The Company exercised its option under the Amendment and
Waiver to extend the Vencor Effective Date Deadline from March 31, 2001 to
April 30, 2001. In consideration of this extension, the Company paid a fee of
approximately $0.1 million to the lenders that executed the Amendment and
Waiver. Under the Amendment and Waiver, the Company has the further option to
extend the Vencor Effective Date Deadline through (a) May 31, 2001 in exchange
for the payment on or before April 30, 2001 of a fee equal to 0.20% per annum
on the outstanding principal balance of the loans under the Amended Credit
Agreement, and (b) June 30, 2001 in exchange for the payment on or before May
31, 2001 of a fee of 0.25% per annum on the outstanding principal balance of
the loans under the Amended Credit Agreement.
Under the terms of the Amended Credit Agreement, an Event of Default will
be deemed to have occurred if the Vencor Effective Date does not occur on or
before the Vencor Effective Date Deadline, as same may be extended. Subject to
any defenses available to the Company, if such an Event of Default were to
occur, the Company could be required to immediately repay all the indebtedness
under the Amended Credit Agreement upon the demand of the "Required Lenders,"
as defined in the Amended Credit Agreement. If it appears that the Vencor
Effective Date will not occur by the Vencor Effective Date Deadline, as
extended, the Company intends to initiate discussions with the administrative
agent for its lenders under the Amended Credit Agreement to obtain a waiver or
amendment of this covenant. Under the Amended Credit Agreement, a waiver or
amendment of this covenant must be approved by lenders holding (in the
aggregate) greater than 50% of the total credit exposure under the Amended
Credit Agreement. There can be no assurance (i) that the Final Plan or an
alternate plan of reorganization for Vencor will become effective on or before
the Vencor Effective Date Deadline, as same may be extended, (ii) that the
Company will obtain a waiver or amendment of the covenant if the Final Plan or
an alternate plan of reorganization for Vencor does not become effective on or
before the Vencor Effective Date Deadline, as same may be extended, (iii) that
the terms of such a waiver or amendment would not have a Material Adverse
Effect on the Company, or (iv) that the failure to obtain such a waiver or
amendment would not have a Material Adverse Effect on the Company.
The Amended Credit Agreement, as revised by the Amendment and Waiver,
provides for the following amortization schedule: (a) with respect to the
Tranche A Loan, (i) $50.0 million was paid at closing on January 31, 2000,
(ii) $35.0 million was paid on December 20, 2000, (iii) $15.0 million was paid
on March 30, 2001, and (iv) after the Vencor Effective Date, all Excess Cash
Flow pursuant to a monthly sweep as more fully described below (the "Monthly
Sweep") will be applied to the Tranche A Loan until $200.0 million in total
has been paid down on the Amended Credit Agreement, with the remaining
principal balance of the Tranche A Loan due December 31, 2002; (b) with
respect to the Tranche B Loan, (i) $20.0 million was paid on March 30, 2001,
(ii) a one-time paydown of Excess Cash (as defined in the Amended Credit
Agreement) is scheduled to be made on or before the thirtieth day after the
Vencor Effective Date as more fully described below (the "B Sweep"), (iii)
$30.0 million is scheduled to be paid on December 30, 2003 and $50.0 million
is scheduled to be paid on December 30, 2004, and (iv) the remaining principal
balance is due December 31, 2005; and (c) with respect to the Tranche C Loan,
there are no scheduled paydowns of principal and the final maturity is
scheduled for December 31, 2007. The facilities under the Amended Credit
Agreement are pre-payable without premium or
25
penalty. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The B Sweep, if any, is scheduled to be made on the thirtieth day after the
Vencor Effective Date (the "B Sweep Payment Date"). The B Sweep is a one-time
payment equal to the Company's cash and cash equivalents on hand on the B
Sweep Payment Date minus the sum of (to the extent not then paid) (i) amounts
payable under the United States Settlement during the succeeding three months,
(ii) a reasonable reserve to pay the applicable portion of the Company's
minimum REIT dividend for quarters prior to and including the Vencor Effective
Date, (iii) $1.0 million and (iv) other specified amounts. Currently, the
Company believes that it will not be required to pay any amounts under the B
Sweep.
The first Monthly Sweep is scheduled to be made on the last day of the
month following the first full calendar month after the date that is thirty
days after the Vencor Effective Date and will cover the period from 30 days
after the Vencor Effective Date to the end of the last day of the month
preceding the payment date. Thereafter, the Monthly Sweep will be made on the
last business day of each month for the preceding month. The Monthly Sweep
will be in an amount equal to the Company's total cash receipts for the
applicable period, minus the sum of (i) cash disbursements by the Company
during the applicable period, (ii) up to $1.0 million for a working capital
reserve, (iii) a reserve in an amount equal to the unpaid minimum REIT
dividend for all prior periods and for the current calendar quarter, (iv) the
obligations due under the United States Settlement during the next three
months, (v) taxes and (vi) other specified amounts.
The Amended Credit Agreement is secured by liens on substantially all of
the Company's real property and any related leases, rents and personal
property. Certain properties are being held in escrow by counsel for the
agents under the Amended Credit Agreement pending the receipt of third party
consents and/or resolution of certain other matters. In addition, the Amended
Credit Agreement contains certain restrictive covenants, including, but not
limited to, the following: (a) until such time that $200.0 million in
principal amount has been paid down, the Company can only pay dividends based
on a certain minimum percentage of its taxable income (equal to 95% of its
taxable income for the year ending December 31, 2000 and 90% of its taxable
income for years ending on or after December 31, 2001); however, after $200.0
million in total principal paydowns, the Company will be allowed to pay
dividends for any year in amounts up to 80% of funds from operations ("FFO"),
as defined in the Amended Credit Agreement; (b) limitations on additional
indebtedness, acquisitions of assets, liens guarantees, investments,
restricted payments, leases, affiliate transactions and capital expenditures;
and (c) certain financial covenants, including requiring that the Company have
(i) no more than $1.1 billion of total indebtedness on the Vencor Effective
Date; and (ii) at least $99.0 million of Projected Consolidated EBITDA, as
defined in the Amended Credit Agreement, for the 270 day period beginning in
the first month after the Vencor Effective Date.
The Amended Credit Agreement does not contain any financial covenants that
are applicable to the Company prior to the Vencor Effective Date, and
provides, among other things, that no action taken by any person in the Vencor
bankruptcy case (other than by the Company and its affiliates) shall be deemed
to constitute or result in a "Material Adverse Effect," as defined in the
Amended Credit Agreement. In addition, the Amended Credit Agreement provides
that if the Company is in compliance with its financial covenants and the
covenant relating to releases in the Vencor bankruptcy on the Vencor Effective
Date, no event or condition arising primarily from the Final Plan shall be
deemed to have caused a "Material Adverse Effect," as defined in the Amended
Credit Agreement, to have occurred.
If the Vencor Effective Date occurs, the Company thereafter would be
subject to certain financial covenants under the Amended Credit Agreement,
including those requiring the Company to have (i) Consolidated EBITDA (as
defined in the Amended Credit Agreement) on the last day of each fiscal
quarter after the Vencor Effective Date at least equal to 80% of the Company's
Projected Consolidated EBITDA (as defined in the Amended Credit Agreement) on
the Vencor Effective Date; and (ii) a ratio of Consolidated EBITDA to
Consolidated Interest Expense (as defined in the Amended Credit Agreement) on
a trailing four quarter basis, of at least 1.20 to 1.00.
26
Certain of these covenants may be waived by holders of more than 50% of the
principal indebtedness under the Amended Credit Agreement.
Other Recent Developments
Certain of the Company's other operators have experienced financial
difficulties that have impacted their ability to perform their obligations
under agreements with the Company. See "--Risk Factors--Effects of Bankruptcy
Proceedings" and "Note 9--Commitments and Contingencies" to the Consolidated
Financial Statements.
Portfolio of Properties
The following table reflects the Company's portfolio of properties as of
December 31, 2000.
Percentage
of Number of Number of Number of
Type of Facility Portfolio(1) Facilities Beds/Units States(2)
---------------- ------------ ---------- ---------- ---------
Hospitals......................... 40.1% 45 4,093 21
SkilledNursingFacilities.......... 59.6% 216 27,952 31
PersonalCareFacilities............ 0.3% 8 136 1
----- --- ------ ---
Total............................. 100.0% 269 32,181 36
===== === ====== ===
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(1) Based on the percentage of gross rent earned before write-offs by the
Company for the year ended December 31, 2000.
(2) The Company has properties located in 36 states operated by six different
operators.
Hospital Facilities
The Company's hospitals generally are long-term acute care hospitals that
serve medically complex, chronically ill patients. The operator of these
hospitals has the capability to treat patients who suffer from multiple
systemic failures or conditions such as neurological disorders, head injuries,
brain stem and spinal cord trauma, cerebral vascular accidents,