-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QpzBQkhx/Wa1Z8at+sGVTq9XZepF13r1RjwR22SBXZcky3rZawKpRu8TbtRUZqZG b/YCFoJplUAXE5hzAmkEZA== 0000931763-99-001725.txt : 19990518 0000931763-99-001725.hdr.sgml : 19990518 ACCESSION NUMBER: 0000931763-99-001725 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENTAS INC CENTRAL INDEX KEY: 0000740260 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 611055020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-30212 FILM NUMBER: 99628147 BUSINESS ADDRESS: STREET 1: 4360 BROWNSBORO ROAD STREET 2: SUITE 115 CITY: LOUISVILLE STATE: KY ZIP: 40207 BUSINESS PHONE: 5025967300 MAIL ADDRESS: STREET 1: 4360 BROWNSBORO ROAD STREET 2: SUITE 115 CITY: LOUISVILLE STATE: KY ZIP: 40207 10-Q 1 VENTAS, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999. [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM ________TO ________. Commission file number: 1-10989 VENTAS, INC. (Exact name of registrant as specified in its charter) Delaware 61-1055020 (State or other jurisdiction) (I.R.S. Employer Identification Number)
4360 Brownsboro Road Suite 115 40207-1642 Louisville, Kentucky (Zip Code) (Address of principal executive offices)
(502) 357-9000 (Registrant's telephone number, including area code) 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. [X] Yes [_] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class of Common Stock Outstanding at May 11, 1999 Common stock, $.25 par value 67,962,424 shares
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VENTAS, INC. FORM 10-Q INDEX
Page ---- PART I. FINANCIAL INFORMATION......................................... 3 Item 1. Financial Statements: Condensed Consolidated Balance Sheet as of December 31,1998 and March 31, 1999............................................ 3 Condensed Consolidated Statement of Income for the three months ended March 31, 1999................................... 4 Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 1999................................... 5 Condensed Consolidated Statement of Stockholders' Equity...... 6 Notes to Condensed Consolidated Financial Statements.......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 19 PART II. OTHER INFORMATION............................................. 20 Item 1. Legal Proceedings............................................. 20 Item 6. Exhibits and Reports on Form 8-K.............................. 20
2 PART 1--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VENTAS, INC. CONDENSED CONSOLIDATED BALANCE SHEET (In Thousands)
March 31, December 31, 1999 1998 ----------- ------------ (Unaudited) (Audited) Assets Real estate investments: Land................................................ $ 120,928 $ 120,928 Building and improvements........................... 1,065,037 1,065,037 ---------- ---------- 1,185,965 1,185,965 Accumulated depreciation............................ (257,453) (246,509) ---------- ---------- Total real estate investments..................... 928,512 939,456 Cash and equivalents.................................. 58,497 338 Deferred financing costs, net......................... 7,598 8,816 Due from Vencor, Inc.................................. -- 6,967 Notes receivable from employees....................... 4,027 4,027 Other................................................. 864 102 ---------- ---------- Total assets...................................... $ 999,498 $ 959,706 ========== ========== Liabilities and stockholders' equity Liabilities: Bank credit facility and other debt................. $ 976,889 $ 931,127 Accrued salaries, wages and other compensation...... 1,920 552 Accrued interest.................................... 2,035 3,556 Other accrued liabilities........................... 2,656 2,974 Deferred income taxes............................... 30,506 30,506 ---------- ---------- Total liabilities................................. 1,014,006 968,715 Commitments and contingencies Stockholders' equity (deficit): Common stock........................................ 18,402 18,402 Capital in excess of par value...................... 140,173 140,103 Unearned compensation on restricted stock........... (3,154) (1,962) Accumulated deficit................................. (15,788) (9,637) ---------- ---------- 139,633 146,906 Treasury stock...................................... (154,141) (155,915) ---------- ---------- Total stockholders' equity (deficit).............. (14,508) (9,009) ---------- ---------- Total liabilities and stockholders' equity (deficit)........................................ $ 999,498 $ 959,706 ========== ==========
Note--The balance sheet at December 31, 1998, has been derived from audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 VENTAS, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME For the three months ended March 31, 1999 (Unaudited) (In Thousands, Except Per Share Amounts) Revenues Rental income $56,436 Interest and other income 197 ------- Total revenues 56,633 Expenses General and administrative 2,551 Non-recurring employee severance costs 1,272 Depreciation on real estate investments 10,944 Interest on bank credit facility and other debt 18,065 Net payments on interest rate swap agreement 1,593 Amortization of restricted stock grants 652 Amortization of deferred financing costs 1,218 ------- Total expenses 36,295 ------- Net Income $20,338 ======= Net income per common share: Basic $ 0.30 Diluted $ 0.30 Shares used in computing earnings per common share: Basic 67,691 Diluted 67,956
See notes to condensed consolidated financial statements. 4 VENTAS, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the three months ended March 31, 1999 (Unaudited) (In Thousands) Cash flows from operating activities: Net income $ 20,338 Adjustments to reconcile net income to cash provided by operating activities: Depreciation 10,945 Amortization of deferred financing fees 1,218 Amortization of restricted stock grants 652 Increase in other assets (641) Decrease in accounts payable and accrued liabilities (471) Decrease in amount due from Vencor, Inc. 6,967 --------- Net cash provided by operating activities 39,008 Cash flows from investing activities: Purchase of furniture and equipment (122) --------- Net cash used in investing activities (122) Cash flows from financing activities: Net change in borrowings under revolving line of credit 173,143 Repayment of other bank credit facility and other debt (127,381) Cash distributions to shareholders (26,489) --------- Net cash provided by financing activities 19,273 --------- Increase in cash and equivalents 58,159 Cash and equivalents at beginning of period 338 --------- Cash and cash equivalents at end of period $ 58,497 =========
See notes to condensed consolidated financial statements. 5 VENTAS, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY March 31, 1999 (Unaudited)
Capital Unearned in Compensation Common Excess on Stock of Par Restricted Accumulated Treasury Par Value Value Stock Deficit Stock Total --------- -------- ------------ ----------- ---------- -------- Balance at December 31, 1998 $18,402 $140,103 $(1,962) $ (9,637) $ (155,915) $ (9,009) Net Income 20,338 20,338 Proceeds from issuance of shares for stock incentive plans -- Award and amortization of restricted stock grants, net of forfeitures 70 (1,192) 1,774 652 Cash dividends paid (26,489) (26,489) ------- -------- ------- -------- ---------- -------- Balance at March 31, 1999 $18,402 $140,173 $(3,154) $(15,788) $ (154,141) $(14,508) ======= ======== ======= ======== ========== ========
See notes to condensed consolidated financial statements. 6 VENTAS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--REPORTING ENTITY Ventas, Inc. (the "Company"), formerly named Vencor, Inc., is a real estate company that owns or leases 45 hospitals, 219 nursing centers and eight personal care facilities in 36 states as of March 31, 1999. The Company conducts all of its business through a wholly owned operating partnership, Ventas Realty, Limited Partnership ("Ventas Realty"). The Company anticipates that it will meet the requirements to qualify as a real estate investment trust ("REIT") for federal income tax purposes for the tax year beginning January 1, 1999. Accordingly, no provision for income taxes has been made for the three months ended March 31, 1999, in the accompanying condensed consolidated financial statements. The Company operates in one segment which consists of owning and leasing healthcare facilities to third parties. On April 30, 1998, the Company changed its name to Ventas, Inc. and on May 1, 1998, refinanced substantially all of its long-term debt in connection with the spin off of its healthcare operations through the distribution of the common stock of a new entity (which assumed the Company's former name, Vencor, Inc. ("Vencor")) to stockholders of the Company of record as of April 27, 1998 (the "Reorganization"). The distribution was effected on May 1, 1998 (the "Distribution Date"). For financial reporting periods subsequent to the Distribution Date, the historical financial statements of the Company were assumed by Vencor and the Company is deemed to have commenced operations on May 1, 1998. Accordingly, the Company does not have comparable financial results for prior periods. In addition, for certain reporting purposes under this Form 10-Q and other filings, the Securities and Exchange Commission treats the Company as having commenced operations on May 1, 1998. NOTE 2--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the three months ended March 31, 1999 are not necessarily an indication of the results that may be expected for the year ending December 31, 1999. These financial statements and related notes should be read in conjunction with the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Beginning in May 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which established new rules for the reporting of comprehensive income and its components. SFAS 130 requires, among other things, unrealized gains or losses on available-for-sale securities to be disclosed as other comprehensive income. The adoption of SFAS 130 had no impact on the Company's net income or stockholders' equity for the three months ended March 31, 1999. In June 1997, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which became effective in December 1998 and requires interim disclosures beginning in 1999. SFAS 131 requires public companies to report certain information about operating segments, products and services, the geographic areas in which they operate and major customers. The operating segments are to be based on the structure of the enterprise's internal organization whose operating results are regularly reviewed by senior management. Management has determined that the Company operates in a single business segment. Accordingly, the adoption of SFAS 131 will have no effect on the consolidated financial statement disclosures. 7 In June 1998, FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. SFAS 133 permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt SFAS 133 effective January 1, 2000. SFAS 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be recognized immediately in earnings. Based on the Company's derivative positions and their related fair values at March 31, 1999, the Company estimates that upon adoption it will report a reduction of $9.3 million in other comprehensive income (assuming the Company has qualified as a REIT for federal income tax purposes). The Company was not required to report this $9.3 million unrealized loss for the three months ended March 31, 1999. NOTE 3--CONCENTRATION OF CREDIT RISK AND GOING CONCERN The Company leases substantially all of its properties to Vencor and, therefore, Vencor is the primary source of the Company's revenues. Vencor's financial condition and ability to satisfy its rent obligations under certain master lease agreements (the "Master Leases") and certain other agreements will impact the Company's revenues and its ability to service its indebtedness and to make distributions to its stockholders. Because the operations of Vencor have been negatively impacted by changes in reimbursement rates, by its current level of indebtedness and by certain other factors, and because of the potential effect of such events on Vencor's ability to meet its rent obligations to the Company, the Company's auditors have included an explanatory paragraph in its report to the Company's consolidated financial statements for the year ended December 31, 1998 that expresses substantial doubt as to the Company's ability to continue as a going concern. The existence of the explanatory paragraph may have a material adverse effect on the Company's relationships with its creditors and could have a material adverse effect on the Company's business, financial condition and results of operations. Management has taken certain initiatives to address the issues noted above. The Company has retained Merrill Lynch & Co. ("Merrill Lynch"), as financial advisor, to assist in its review of Vencor's financial condition. Merrill Lynch is advising the Company in its ongoing discussions with Vencor regarding its recent results of operations and Vencor's need to amend or restructure its existing capital structure. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments." Merrill Lynch is also advising the Company in its review of alternatives to repay the $275 million portion of its credit facility that matures on October 30, 1999, and to assess other strategic alternatives for the Company. As of May 11, 1999, the Company had cash and cash equivalents totaling $70.6 million. In connection with the discussions between the Company and Vencor regarding Vencor's recent results of operations and Vencor's need to amend or restructure its existing capital structure, the Company and Vencor have entered into certain agreements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments." NOTE 4--BANK CREDIT FACILITY AND OTHER DEBT On April 30, 1998, the Company, through Ventas Realty, consummated a $1.2 billion bank credit agreement (the "Bank Credit Agreement") and retained approximately $6.0 million of prior debt obligations. The Bank Credit Agreement is comprised of (i) a three year $250 million revolving credit facility (the "Revolving Credit Facility") priced at the London Interbank Offered Rate ("LIBOR") plus 2 1/4 to 2 1/2%, (ii) a $200 million Term A Loan (the "Term A Loan") payable in various installments over three years priced at LIBOR plus 2 1/4 to 2 1/2%, (iii) a $350 million Term B Loan (the "Term B Loan") payable in various installments over five years priced at LIBOR plus 2 3/4 to 3%, and (iv) a $400 million loan due October 30, 1999 and priced at LIBOR plus 2 3/4 to 3% (the "Bridge Facility Loan"). The Bank Credit Agreement is secured by a pledge of the Company's general partnership interest in Ventas Realty and contains various covenants and restrictions. 8 The following is a summary of long-term borrowings at March 31, 1999 (in thousands): Revolving line of credit, bearing interest at a base rate of LIBOR plus 2.25% (7.19% at March 31, 1999), due April 30, 2001.. $202,743 Bridge Facility Loan, bearing interest at a base rate of LIBOR plus 2.75% (7.69% at March 31, 1999), due October 30, 1999...... 275,000 Term A Loan, bearing interest at a base rate of LIBOR plus 2.25% (7.19% at March 31, 1999), due April 30, 2001.............................................. 181,818 Term B Loan, bearing interest at a base rate of LIBOR plus 2.75% (7.69% at March 31, 1999), due in quarterly installments of $875 with the balance due April 30, 2003............................. 317,307 Other............................................................ 21 -------- $976,889 ========
In connection with the Reorganization and the consummation of the Bank Credit Agreement, the Company entered into an interest rate swap agreement ($900 million outstanding at March 31, 1999) to eliminate the impact of changes in interest rates on the Company's floating rate debt. The agreement expires in varying amounts through December 2006 and provides for the Company to pay a fixed rate at 5.985% and receive LIBOR (floating rate). The fair value of the swap agreement is not recognized in the condensed consolidated financial statements (See Note 2--Basis of Presentation). The terms of the swap agreement require that the Company make a cash payment or otherwise post collateral, such as a letter of credit from one of the banks identified in the Bank Credit Agreement (which limits the aggregate amount of any such letters of credit to $25 million), to the counterparty if the market value loss to the Company exceeds certain levels. The threshold levels vary based on the relationship between the Company's debt obligations and the tangible fair market value of its assets as defined in the Bank Credit Agreement. As of March 31, 1999, no collateral was required to be posted under the interest rate swap agreement. NOTE 5--LITIGATION The following litigation and other matters arose from the Company's operations prior to the Reorganization. In connection with the Reorganization, Vencor agreed to assume the defense, on behalf of the Company, of any claims that were pending at the time of the Reorganization and which arose out of the ownership or operation of the healthcare operations. Vencor also agreed to defend, on behalf of the Company, any claims asserted after the Reorganization which arose out of the ownership and operation of the healthcare operations. However, there can be no assurance that Vencor will continue to defend the Company in such proceedings and actions or that Vencor will have sufficient assets, income and access to financing to enable it to satisfy such obligations or its obligations incurred in connection with the Reorganization. In addition, the following descriptions are based on information included in Vencor's public filings and information provided to the Company by Vencor. Because Vencor is defending the Company in each of these proceedings or actions, the Company has not conducted an independent investigation to verify the facts surrounding these proceedings or actions. A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was filed on December 24, 1997 in the United States District Court for the Western District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims were brought by an alleged stockholder of the Company against the Company and certain executive officers and directors of the Company. The complaint alleges that the Company and certain current and former executive officers of the Company during a specified time frame violated Sections 10(b) and 20(a) of the Exchange Act, by, among other things, issuing to the investing public a series of false and misleading statements concerning the Company's current operations and the inherent value of the Company's common stock. The complaint further alleges that as a result of these purported false and misleading statements concerning the Company's revenues and successful acquisitions, the price of the Company's common stock was artificially inflated. In particular, the complaint alleges that the Company issued false and misleading financial statements 9 during the first, second and third calendar quarters of 1997 which misrepresented and understated the impact that changes in Medicare reimbursement policies would have on the Company's core services and profitability. The complaint further alleges that the Company issued a series of materially false statements concerning the purportedly successful integration of its recent acquisitions and prospective earnings per share for 1997 and 1998 which the Company knew lacked any reasonable basis and were not being achieved. The suit seeks damages in an amount to be proven at trial, pre-judgment and post-judgment interest, reasonable attorneys' fees, expert witness fees and other costs, and any extraordinary equitable and/or injunctive relief permitted by law or equity to assure that the plaintiff has an effective remedy. On January 22, 1999, the court granted the Company's motion to dismiss the case. The plaintiff has appealed the dismissal to the United States Court of Appeals for the Sixth Circuit. Vencor, on behalf of the Company, is defending this action vigorously. A stockholder derivative suit entitled Thomas G. White on behalf of Vencor, Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit was brought on behalf of Vencor and the Company against certain current and former executive officers and directors of Vencor and the Company. The complaint alleges that the defendants damaged Vencor and the Company by engaging in violations of the securities laws, engaging in insider trading, fraud and securities fraud and damaging the reputation of Vencor and the Company. The plaintiff asserts that such actions were taken deliberately, in bad faith and constitute breaches of the defendants' duties of loyalty and due care. The complaint is based on substantially similar assertions to those made in the class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., discussed above. The suit seeks unspecified damages, interest, punitive damages, reasonable attorneys' fees, expert witness fees and other costs, and any extraordinary equitable and/or injunctive relief permitted by law or equity to assure that the plaintiff has an effective remedy. Vencor and the Company each believe that the allegations in the complaint are without merit and Vencor, for and on behalf of the Company, intends to defend this action vigorously. As set forth in the Company's Form 10-K for the year ended December 31, 1998, Vencor has been informed by the Department of Justice that it is the subject of ongoing investigations into various aspects of its claims for reimbursement from government payors, billing practices and various quality of care issues in the hospitals and nursing centers operated by Vencor. These investigations also include the Company's healthcare operations prior to the date of the Reorganization. Thus, the Department of Justice has informed the Company that for the period prior to the date of the Reorganization, if any liability exists in connection with such investigations, the Company may be liable for such liability. However, the Company believes that under agreements entered into at the time of the Reorganization, Vencor is obligated to assume the defense of, and to indemnify the Company for any liabilities that arise out of, any claims that may result from the investigations. There can be no assurance that Vencor will have sufficient assets, income and access to financing to enable it to satisfy these obligations. Vencor is in discussions with the Department of Justice concerning the nature of the issues under investigation and the possible settlement of some or all of the claims. Vencor is cooperating fully in the investigations. Unasserted Claim--Potential Liabilities Due to Fraudulent Transfer Considerations Transfers made and obligations incurred in the Reorganization and the simultaneous distribution of the Vencor common stock to the Company's stockholders (the "Distribution") are subject to review under state fraudulent conveyance laws, and in the event of a bankruptcy proceeding, federal fraudulent conveyance laws. Under these laws a court in a lawsuit by an unpaid creditor or a representative of creditors (such as a trustee or debtor-in- possession in bankruptcy) could avoid the transfer if it determined that, as of the time of the Reorganization, the party making the transfer or incurring the obligation did not receive fair consideration or reasonably equivalent value and, at the time of the Reorganization, the party making the transfer or incurring the obligation (i) was insolvent or was rendered insolvent, (ii) had unreasonably small capital with which to carry on its business and all businesses in which it intended to engage, or (iii) intended to incur, or believed it would incur, debts beyond its ability to repay such debts as they would mature. Although Vencor has not formally asserted a claim, Vencor's legal counsel has raised questions relating to potential fraudulent conveyance or obligation issues relating to the Reorganization. At the time of the Reorganization, the Company obtained an opinion from an independent third party that addressed issues of solvency and adequate capitalization. 10 Nevertheless, if a fraudulent conveyance or obligation claim is ultimately asserted by Vencor, creditors, or others, the ultimate outcome of such a claim cannot presently be determined. The Company intends to defend these claims vigorously if they are asserted in a legal proceeding or mediation. The Company and Vencor have entered into certain tolling agreements related to claims which may arise in a bankruptcy proceeding, as discussed below under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments." During the Company's discussions with Vencor discussed below under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments," Vencor has asserted various potential claims against the Company arising out of the Reorganization. The Company intends to defend these claims vigorously if they are asserted in a legal or mediation proceeding. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Background Information The Company has announced its intention to operate and be treated as a self- administered, self-managed real estate investment trust ("REIT") for federal income tax purposes beginning January 1, 1999. The Company is a real estate company that owns or leases 45 hospitals (comprised of two acute care hospitals and 43 long-term care hospitals), 219 nursing centers and eight personal care facilities as of March 31, 1999. The Company's portfolio of properties are located in 36 states and are leased and operated primarily by Vencor or its subsidiaries. The Company conducts all of its business through a wholly owned operating partnership, Ventas Realty, Limited Partnership. The Company was incorporated in Kentucky in 1983 as Vencare, Inc. and commenced operations in 1985. It was reorganized as a Delaware corporation in 1987 and changed its name to Vencor, Incorporated in 1989 and to Vencor, Inc. in 1993. On September 28, 1995, The Hillhaven Corporation merged with and into the Company. On March 21, 1997, the Company acquired TheraTx, Incorporated, a provider of subacute rehabilitation and respiratory therapy program management services to nursing centers and an operator of 26 nursing centers. On June 24, 1997, the Company acquired Transitional Hospitals Corporation, an operator of 16 long-term acute care hospitals and three satellite facilities located in 13 states. On May 1, 1998, the Company effected the Reorganization pursuant to which the Company was separated into two publicly held corporations. A new corporation, subsequently renamed Vencor, Inc., was formed to operate the hospital, nursing center and ancillary services businesses. Pursuant to the terms of the Reorganization, the Company distributed the common stock of Vencor to stockholders of record of the Company as of April 27, 1998. The Company, through its subsidiaries, continued to hold title to substantially all of the real property and to lease such real property to Vencor. At such time, the Company also changed its name to Ventas, Inc. and refinanced substantially all of its long-term debt. For financial reporting periods subsequent to the Reorganization, the historical financial statements of the Company were assumed by Vencor, and the Company is deemed to have commenced operations on May 1, 1998. Accordingly, the Company does not have comparable financial results for prior periods. In addition, for certain reporting purposes under this Form 10-Q and other filings, the Securities and Exchange Commission (the "Commission") treats the Company as having commenced operations on May 1, 1998. The Company's principal objectives are to maximize funds from operations for distribution to stockholders, to enhance capital growth through the appreciation of the residual value of its portfolio of properties, and to preserve and maintain the stockholders' capital. Recent Developments As is discussed in the Company's Form 10-K for the year ended December 31, 1998, the Company and Vencor had discussions regarding Vencor's recent results of operations. In those discussions, Vencor requested interim rent concessions under the Master Leases and the Company rejected that request. In connection with 11 those discussions, the Company entered into an agreement (the "Original Standstill Agreement") with Vencor whereby the Company agreed not to exercise remedies for non-payment of rent due from Vencor on April 1, 1999 for a period ending April 12, 1999. On April 12, 1999, the Company entered into an agreement (the "Second Standstill Agreement") with Vencor which provided that if Vencor paid the full amount of April 1999 rent pursuant to a specified schedule, the Company would not exercise its remedies under its lease agreements with Vencor. These payments, totaling $18.5 million, represented the full amount of rent that was due for April under the lease agreements between the companies. Vencor made all rent payments required by the Second Standstill Agreement with respect to April rent. Pursuant to the Second Standstill Agreement, each of the Company and Vencor also agreed not to pursue any claims against the other or any third party relating to the Reorganization as long as Vencor made the full lease payments for April and May 1999 under the specified schedule. The Second Standstill Agreement provided that it would terminate on the earliest to occur of May 5, 1999, any date that a voluntary or involuntary bankruptcy proceeding was commenced by or against Vencor or Vencor's failure to pay rent in accordance with the specified schedule. The Company and Vencor also entered into an agreement (the "Tolling Agreement") pursuant to which they agreed that any statutes of limitations or other time constraints in a bankruptcy proceeding that might be asserted by one party against the other would be extended or tolled from April 12, 1999 until May 5, 1999 or until the Second Standstill Agreement terminated due to Vencor's failure to make the contemplated lease payments. On April 12, 1999, the Company and Vencor also agreed to amend each of the lease agreements between the companies, effective as of their date of original execution, to delete a provision that permitted the Company to require Vencor to purchase a facility upon the occurrence of certain events of default by Vencor. On April 15, 1999, Vencor filed its Annual Report on Form 10-K for the year ended December 31, 1998 with the Commission. Vencor's auditors included an explanatory statement in its report to Vencor's financial statements for the year ended December 31, 1998 that expresses substantial doubt as to Vencor's ability to continue as a going concern. On April 15, 1999, Vencor announced that it had reported a net loss of $605.9 million for the fourth quarter of 1998 and $572.9 million for the year ended December 31, 1998. Vencor also announced that its results for the fourth quarter of 1998 included pretax charges of $411.9 million related to certain unusual transactions and $78.9 in pretax charges recorded in connection with recurring year-end accounting adjustments. On April 21, 1999, Vencor announced that it reached an agreement with the Health Care Financing Administration to extend its repayment of approximately $90 million of Medicare reimbursement overpayments over 60 months. On May 3, 1999, Vencor announced that it had elected not to make the interest payment of approximately $14.8 million due on May 3, 1999 on its $300 million 9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the "Notes"). Vencor also announced that if the interest is not paid within a 30 day grace period, and subject to providing notice to Vencor's senior bank lenders, the Notes may be declared immediately due and payable. On May 5, 1999, the Company and Vencor agreed to extend the term of the Second Standstill Agreement through the earlier of May 7, 1999 or any date that a voluntary or involuntary bankruptcy proceeding is commenced by or against Vencor. As a result of this extension, neither Vencor nor the Company could exercise remedies against the other during this period, including any remedies for the failure of Vencor to pay the $18.5 million of May rent due to the Company. Vencor did not pay the May rent on May 7, 1999, and, as a result, the Company served Vencor with a notice of non-payment of rent under each of the lease agreements between the companies. If the May rent is not paid by June 11, 1999, the Company will be entitled to exercise remedies for non-payment of rent under each of the lease agreements between the companies. 12 On May 8, 1999, the Company and Vencor agreed to extend the term of the Second Standstill Agreement through the earlier of June 6, 1999 or any date that a voluntary or involuntary bankruptcy proceeding is commenced by or against Vencor. The Company and Vencor also agreed to extend the term of the Tolling Agreement until June 6, 1999. On May 14, 1999, the Company announced that in order to preserve its current cash position, it will not declare or pay a dividend at this time. The Company expects that it will once again pay a dividend when Vencor resolves the financial difficulties contributing to the uncertainties about Vencor's continuing ability to make rent payments to the Company. However, there can be no assurances that Vencor will resolve its financial difficulties and pay the rent due the Company. The Company still intends to qualify as a REIT for the year ending December 31, 1999. The Company is not required to distribute its taxable income in quarterly installments in order to qualify as a REIT. The Company will continue to evaluate its dividend policy in light of future developments in Vencor's financial performance and ongoing discussions regarding a global restructuring of Vencor's capital structure. The Company believes that the best outcome for the Company, Vencor and their respective banks and other creditors is a consensual, global restructuring of Vencor's financial obligations. The Company has offered to make meaningful rental concessions to Vencor in the context of such a restructuring. The Company will consider appropriate action to take in response to any further proposals by Vencor as may be in the best interests of the Company. There can be no assurance that any such agreement regarding a restructuring of Vencor's financial obligations will be reached. During the Company's discussions with Vencor, Vencor has asserted various potential claims against the Company arising out of the Reorganization. See Note 5 to Condensed Consolidated Financial Statements. The Company intends to defend these claims vigorously if they are asserted in a legal or mediation proceeding. As a result of the developments related to Vencor and other healthcare industry factors, the Company has suspended the implementation of its original business strategy. Instead, management is reviewing the possible financial impact on the Company of the recent announcements by Vencor. In particular, the Company is reviewing Vencor's financial condition and Vencor's need to amend or restructure its existing capital structure. The Company has retained Merrill Lynch, as financial advisor, to assist it in this review. In addition, the Company, together with Merrill Lynch, is reviewing alternatives to repay the $275 million portion of its credit facility that matures on October 30, 1999. These alternatives include obtaining the necessary proceeds to pay down or refinance the $275 million loan through cash flows from operations, available borrowings under the Company's credit facility, the issuance of public or private debt or equity and asset sales, or a combination of the foregoing. 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-Q is derived from filings made with the Commission or other publicly available information. The Company is providing this data for informational purposes only, and the reader of this Form 10-Q is encouraged to obtain Vencor's publicly available filings from the Commission. The Company has no reason to believe that the information is inaccurate in any material respects, but the Company has not independently verified such information and there can be no assurances that all such information is accurate. Results of Operations Rental income for the quarter ended March 31, 1999 was $56.4 million, of which $55.5 million resulted from leases with Vencor. Net income was $20.3 million, or $0.30 per diluted share. The Company anticipates that it will meet the requirements to qualify as a REIT for federal income tax purposes for the tax year beginning January 1, 1999. Accordingly, no provision for income taxes has been made for the three months ended March 31, 1999 in the accompanying condensed consolidated financial statements. 13 Funds from operations ("FFO") for the three months ended March 31, 1999 totaled $31.3 million. In calculating net income and FFO, the Company included in its expenses (and thus reduced net income and FFO) non-recurring employee severance costs of $1.3 million and unusual legal and financial advisory expenses associated with evaluating the current situation with Vencor, including all agreements related thereto, and addressing alternatives related to the $275 million loan due October 30, 1999. Substantial legal and financial advisory expenses will continue to be incurred by the Company until a resolution of these matters is reached, although there can be no assurance that such a resolution will be reached. FFO for the quarter ended March 31, 1999 is summarized in the following table:
(in thousands) Net Income.................................................... $20,338 Depreciation on real estate investments....................... 10,944 ------- Funds from operations....................................... $31,282 =======
The Company considers FFO an appropriate measure of performance of an equity REIT and the Company uses the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO. NAREIT defines FFO as net income (computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies due to the fact that not all real estate companies use the same definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. The Company believes that in order to facilitate a clear understanding of the consolidated historical operating results of the Company, FFO should be examined in conjunction with net income as presented in the condensed consolidated financial statements and data included elsewhere in this Form 10-Q. Liquidity and Capital Resources Cash provided by operations totaled $39.0 million for the three months ended March 31, 1999. Net cash flows used in investing activities were $122,000. Net cash provided by financing activities totaled $19.3 million. The Company paid a cash dividend on its common stock of $26.5 million, or $.39 per common share, on February 17, 1999 to shareholders of record as of January 29, 1999. At March 31, 1999, available borrowings under the Revolving Credit Facility approximated $47.3 million, subject to certain restrictions under the Bank Credit Agreement. The Company intends to pay down or refinance the remaining $275 million principal balance of the original $400 million bridge loan due October 30, 1999, on or prior to its maturity. The Company expects to obtain the necessary proceeds to pay down or refinance the remaining $275 million principal balance of the bridge loan due October 30, 1999 and to meet other liquidity requirements through cash flows from operations, available borrowings under the Revolving Credit Facility, the issuance of public or private debt or equity and asset sales, or a combination of the foregoing. However, there can be no assurance that the Company will be successful in its efforts to pay down or refinance the remaining $275 million principal balance of the bridge loan and to meet its other liquidity requirements. The Company had cash and cash equivalents of $58.5 million and outstanding debt aggregated $976.9 million at March 31, 1999, of which $277.6 million is payable within the next twelve months. As of May 11, 1999, the Company had cash and cash equivalents of $70.6 million and outstanding debt aggregated $976.0 million. The Company leases substantially all of its properties to Vencor and, therefore, Vencor is the primary source of the Company's revenues. Vencor's financial condition and ability to satisfy its rent obligations under the Master Leases will impact the Company's revenues and its ability to service its indebtedness and to make distributions to its stockholders. Because the operations of Vencor have been negatively impacted by changes in 14 the reimbursement rates, by its current level of indebtedness and by certain other factors, and because of the potential effect of such events on Vencor's ability to meet its rent obligations to the Company, the Company's auditors have included an explanatory paragraph in its report to the Company's consolidated financial statements for the year ended December 31, 1998 that expresses substantial doubt as to the Company's ability to continue as a going concern. The existence of the explanatory paragraph may have a material adverse effect on the Company's relationships with its creditors and could have a material adverse effect on the Company's business, financial condition and results of operations. Management has taken certain initiatives to address the issues noted above. The Company has retained Merrill Lynch, as financial advisor, to assist in its review of Vencor's financial condition. Merrill Lynch is advising the Company in its ongoing discussions with Vencor regarding its recent results of operations and Vencor's need to amend or restructure its existing capital structure. See "--Recent Developments." Merrill Lynch is also advising the Company in its review of alternatives to repay the $275 million portion of its credit facility that matures on October 30, 1999, and to assess other strategic alternatives for the Company. In order to qualify as a REIT, the Company must make annual distributions to its stockholders of at least 95% of its taxable income. Under certain circumstances, the Company may be required to make distributions in excess of FFO in order to meet such distribution requirements. In such event, the Company presently would expect to borrow funds, or to sell assets for cash, to the extent necessary to obtain cash sufficient to make the distributions required for it to qualify as a REIT for federal income tax purposes. Although the Company currently expects to qualify as a REIT as of January 1, 1999, it is possible that future economic, market, legal, tax or other considerations may cause the Company to fail to qualify as a REIT. In order to preserve its current cash position, the Company announced on May 14, 1999 that it will not declare or pay a dividend at this time. The Company expects that it will once again pay a dividend when Vencor resolves the financial difficulties contributing to the uncertainties about Vencor's continuing ability to make rent payments to the Company. However, there can be no assurances that Vencor will resolve its financial difficulties and pay the rent due the Company. The Company still intends to qualify as a REIT for the year ending December 31, 1999. The Company is not required to distribute its taxable income in quarterly installments in order to qualify as a REIT. The Company will continue to evaluate its dividend policy in light of future developments in Vencor's financial performance and ongoing discussions regarding a global restructuring of Vencor's capital structure. Capital expenditures to maintain and improve the leased properties generally will be incurred by the tenants. Accordingly, the Company does not believe that it will incur any major expenditures in connection with the leased properties. After the terms of the leases expire, or in the event that the tenants are unable to meet their obligations under the leases, the Company anticipates that any expenditures for which it may become responsible to maintain the leased properties will be funded by cash flows from operations and, in the case of major expenditures, through additional borrowings or issuances of equity. To the extent that unanticipated expenditures or significant borrowings are required, the Company's liquidity may be affected adversely. Available sources of capital to finance any future growth will include cash flows from operations, available borrowings under the Revolving Credit Facility, the issuance of public or private debt or equity, and asset sales. Availability and terms of any such issuance will depend upon the market for such securities and other conditions at such time. There can be no assurance that such additional financing, capital or asset disposition transaction will be available on terms acceptable to the Company. The Company may, under certain circumstances, borrow additional amounts in connection with the acquisition of additional properties, and as necessary, to meet certain distribution requirements imposed on REITs under the Internal Revenue Code of 1986, as amended. To the extent the Company uses equity as consideration for future acquisitions, the Company will not require additional liquidity to finance such acquisitions. The Company does not currently intend to acquire any additional properties in 1999. 15 Year 2000 Compliance Year 2000 Readiness Disclosure--The Company The year 2000 ("Y2K") issue is a result of computer programs and embedded computer chips using two digits rather than four digits to define the applicable year. Without corrective action, computer programs and embedded chips potentially could recognize the date ending in "00" as the year 1900 (or some other year) rather than 2000, causing many computer applications to fail or to create erroneous results. The Company's information technology systems ("IT") and non-IT systems such as building infrastructure components (e.g., elevators, alarm systems, electrical systems and other systems) are affected by the Y2K issue. During 1998, the Company outsourced all of its information systems support to Vencor under a transition services agreement, which terminated on December 31, 1998. After December 31, 1998, Vencor continued to provide the Company with certain administrative and support services (primarily computer systems, telephone networks, mail delivery and other office services). Effective March 15, 1999, the Company moved to new office space and those services are no longer provided by Vencor. In January 1999, the Company purchased a new file server and converted to a new financial information system platform that is Y2K compliant. That conversion was completed during the first quarter of 1999 with the exception of the fixed asset system, which should be completed in the second quarter of 1999. The Company has received certification from all of its significant software and operating systems vendors that the versions of their products currently being installed are Y2K compliant. The Company has not and does not anticipate independently verifying such compliance. The Company estimates that the total cost it will incur to install a new server, financial system platform and update its computer hardware is less than $100,000. The Company also has Y2K exposure in non-IT applications with respect to its real estate properties. Computer technology employed in elevators, alarm systems, electrical systems, built-in healthcare systems and similar applications involved in the operations of the Company's properties may cause interruptions of service with respect to those properties. Under the terms of its lease agreements with Vencor, Vencor is responsible for upgrading all building infrastructure components to be Y2K compliant. Vencor has advised the Company that it has tested and verified as Y2K compliant approximately 70% of the facility components as of March 31, 1999. Vencor has indicated to the Company that it does not expect any material Y2K issues with respect to the Company's facility components. Consequently, the Company does not expect that its costs for Y2K remediation of its building infrastructure components will be material. However, there can be no assurance that Vencor's estimate with respect to estimated costs of remediation is accurate. In addition, there can be no assurance that Vencor will continue to honor its obligations under the lease agreements to upgrade all building components to be Y2K compliant or that Vencor will have sufficient assets, income and access to financing to enable it to satisfy such obligations. The most reasonably likely worse case scenario for the Company associated with the Y2K issue is the risk of significant disruptions of Vencor's business resulting from either (i) Vencor's failure to upgrade all building infrastructure components to be Y2K compliant or (ii) the failure of Vencor's significant third party payors, business partners, suppliers and vendors to be fully Y2K compliant. Failures of critical utility systems could also lead to significant business disruptions for Vencor. These occurrences could negatively impact Vencor's ability to operate the Company's properties and/or make rental payments under the lease agreements thereby negatively impacting the Company's liquidity and results of operations. The Y2K issues facing Vencor and Vencor's Y2K compliance program are discussed below under "--Year 2000 Readiness Disclosure--Vencor." To date, the Company has not established any contingency plan for the Y2K issue. Because the Company's most significant risks associated with the Y2K issue relate to significant disruptions of Vencor's business, the Company anticipates developing contingency plans during 1999, as is appropriate, based upon its continuing assessment of Vencor's progress in implementing its Y2K compliance program and developing its own contingency plans. 16 The Company's analysis of the Y2K issues affecting the Company is based on information currently available and information provided from third party vendors and suppliers. Due to the inherent uncertainties related to Y2K compliance, there can be no assurance that the Company has accurately or timely assessed all Y2K issues or that the estimated costs to remediate the Y2K issues will not be exceeded. While the Company believes it has substantially completed its assessment of all Y2K issues, its estimate of the costs to address such issues may change as it proceeds with the remediation and implementation of its new financial systems. The Company's ability to identify and remediate critical Y2K issues and the availability and cost of external resources will impact the Company's total Y2K costs and the impact of Y2K on the Company's results of operations. Year 2000 Readiness Disclosure--Vencor As a result of the Company's dependence upon Vencor as its primary tenant, the Company may also be impacted negatively by Y2K issues facing Vencor. If Vencor is unable to meet its Y2K compliance schedules or incurs costs substantially higher than its current expectations, Vencor's ability to operate the properties and/or make rental payments under the lease agreements could be impaired thereby impacting negatively the Company's liquidity and results of operations. The following discussion briefly describes the Y2K program instituted by Vencor. The information contained in this section was derived from Vencor's public filings and from disclosures made by Vencor to the Company. The Company is not the source of this information and has not verified independently the truth or accuracy thereof or the activities of Vencor. There can be no assurance that Vencor has provided the Company complete and accurate information in all instances In response to the Y2K issue, Vencor established five teams to address Y2K issues in the following specific areas: (i) IT software and hardware; (ii) third party relationships; (iii) facility components; (iv) medical equipment; and (v) telephone systems. Each team is responsible for all phases of Vencor's Y2K compliance program for both IT and non-IT systems in its designated area. Vencor's Y2K compliance program consists of five phases: (i) business assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv) implementation and rollout; and (v) post-implementation. The business assessment phase identified potential Y2K issues confronting Vencor. The inventory and assessment phase consisted of a company-wide assessment of all facility systems and components, medical devices, and IT software and hardware. During the remediation and testing phase, Vencor is repairing, upgrading or replacing any non-compliant IT and non-IT systems. Additionally, Vencor is performing verification and validation testing of IT and non-IT systems that have been remediated and those Vencor believes are Y2K compliant. For IT and non-IT systems that are developed internally, Vencor verifies compliance status directly with the development staff and performs validation testing to confirm its status. For IT and non-IT systems that are purchased from outside vendors, Vencor is requesting written assurances of compliance directly from the vendors. When non-compliant systems are identified, Vencor will either replace, upgrade or remediate the system. The implementation and rollout phase involves the installation of the new financial information and patient accounting systems and any IT or non-IT systems that have been remediated and tested to Vencor's corporate office and its facilities. The final phase, post-implementation, involves finalizing the documentation of the Y2K program and any corrective efforts surrounding date issues associated with the year 2000 being a leap year. Vencor has indicated that it has employed and will continue to employ external consultants to assist it through each of the phases. Vencor derives a substantial portion of its revenues from the Medicare and Medicaid programs. Vencor relies on these entities for accurate and timely reimbursement of claims, often through the use of electronic data interfaces. Vencor has indicated that it believes that while many commercial insurance carriers will be Y2K compliant, federal and state agencies are more likely to have system failures caused by Y2K issues. Vencor is contacting all of its significant reimbursement sources to determine their Y2K compliance status in order to make a determination of this potential risk. Vencor has not received assurance that systems used by Medicare and Medicaid will be Y2K compliant. The failure of information systems of federal and state governmental agencies 17 and other third party payors could have a material adverse effect on Vencor's liquidity and financial condition, which in turn could have a material adverse effect on the Company's liquidity and financial condition. Vencor also has initiated communications with its critical suppliers and vendors. Vencor is evaluating information provided by third party vendors and is conducting limited independent testing of critical systems and applications. In most cases, Vencor is relying on information being provided to it by such third parties. While Vencor is attempting to evaluate the information provided, there can be no assurance that in all instances accurate information is being provided. If third party suppliers and vendors fail to respond to Vencor's request for information, Vencor may seek to procure other sources of supplies. Although Vencor is assessing the readiness of the Medicare and Medicaid programs and other third party payers and preparing contingency plans, there can be no guarantee that the failure of these third parties to remediate their systems to be Y2K compliant will not have a material adverse effect on Vencor, which in turn could have a material adverse effect on the Company. Other Information This Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding the Company's expected future financial position, results of operations, cash flows, funds from operations, dividends and dividend plans, financing plans, business strategy, budgets, projected costs, capital expenditures, competitive positions, growth opportunities, expected lease income, ability to qualify as a real estate investment trust, plans and objectives of management for future operations and statements that include words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions are forward- looking statements. Such forward-looking statements are inherently uncertain, and stockholders must recognize that actual results may differ from the Company's expectations. Forward-looking statements made in this Form 10-Q relating to the operations of a partnership or limited liability company, including the Company's realty partnership, are not forward-looking statements within the meaning of Section 27A of the Securities Act or Section 21E of the Exchange Act. Actual future results and trends for the Company may differ materially depending on a variety of factors discussed in this Form 10-Q 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, (i) the ability of the Company's operators to maintain the financial strength and liquidity necessary to satisfy their obligations and duties under leases and other agreements with the Company, (ii) success in implementing its business strategy, (iii) the nature and extent of future competition, (iv) the extent of future healthcare reform and regulation, including cost containment measures and changes in reimbursement policies and procedures, (v) increases in the cost of borrowing for the Company, (vi) the ability of the Company's operators to deliver high quality care and to attract patients, (vii) the results of the ongoing investigation of the Company by the U.S. Department of Justice and other litigation affecting the Company; (viii) the Company's ability to acquire additional properties, (ix) changes in the general economic conditions and/or in the markets in which the Company may, from time to time, compete, (x) the ability of the Company to pay and/or refinance its indebtedness as it becomes due, and (xi) the ability of the Company and the Company's operators and other third parties to replace, modify or upgrade computer systems in ways that adequately address the Year 2000 issue. Many of such factors are beyond the control of the Company and its management. In addition, please note that certain information contained in this Form 10-Q has been provided by Vencor. 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. Although Vencor has provided certain information to the Company, the Company has not verified this information either through an independent investigation or by reviewing Vencor's Annual Report on Form 10-K for the year ended December 31, 1998 or its Form 10-Q for the three months ended March 31, 1999. 18 The Company has no reason to believe that such information in inaccurate in any material respects, but there can be no assurance that all such information is accurate. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion of the Company's exposure to various market risks contains "forward looking statements" that involve risks and uncertainties. These projected results have been prepared utilizing certain assumptions considered reasonable in light of information currently available to the Company. Nevertheless, because of the inherent unpredictability of interest rates as well as other factors, actual results could differ materially from those projected in such forward looking information. The Company earns revenue by leasing its assets under long-term triple net leases in which the rental rate is generally fixed with annual escalators, subject to certain limitations. The Company's debt obligations are floating rate obligations whose interest rate and related cash flows vary with the movement in LIBOR. See Note 4 to the Company's Condensed Consolidated Financial Statements included elsewhere herein. The general fixed nature of the Company's assets and the variable nature of the Company's debt obligations creates interest rate risk. If interest rates were to rise significantly, the Company's lease revenue might not be sufficient to meet its debt obligations. In order to mitigate this risk, at or about the date the Company spun off its healthcare operations in connection with the Reorganization, it also entered into interest rate swaps to convert most of its floating rate debt obligations to fixed rate debt obligations. Interest rate swaps generally involve the exchange of fixed and floating rate interest payments on an underlying notional amount. As of March 31, 1999, the Company had $900 million of interest rate swaps outstanding with a highly rated counterparty in which the Company pays a fixed rate of 5.985% and receives LIBOR from the counterparty. When interest rates rise the interest rate swap agreement increases in market value to the Company and when interest rates fall the interest rate swap agreement declines in value to the Company. Since the interest rate swap agreement was executed, interest rates have generally been lower and the market value of the interest rate swap agreement has been an unrealized loss to the Company. As of March 31, 1999, the interest rate swap agreement was in an unrealized loss position to the Company of approximately $9.3 million. To highlight the sensitivity of the interest rate swap agreement to changes in interest rates the following summary shows the effects of an instantaneous change of 100 basis points (BPS) in interest rates as of March 31, 1999:
Market Value to the Company Reflecting Change in Interest Rates Market Value to the Company ------------------------------------- Notional Amount at March 31, 1999 -100 BPS +100 BPS - --------------- --------------------------- ------------------ ----------------- $900,000,000 ($9,254,699) ($ 62,608,000) $ 38,676,000
The terms of this interest rate swap agreement require that the Company make a cash payment or otherwise post collateral, such as a letter of credit from one of the banks identified in the Bank Credit Agreement to the counterparty if the market value loss to the Company exceed certain levels (the "threshold levels"). See Note 4 to the Company's Condensed Consolidated Financial Statements included elsewhere herein. The threshold levels vary based on the relationship between the Company's debt obligations and the tangible fair market value of its assets as defined in the Bank Credit Agreement. As of March 31, 1999, the threshold level under the interest rate swap agreement was a market value loss of $35 million and the interest rate swap agreement was in an unrealized loss position to the Company of $9.3 million. Under the interest rate swap agreement, if collateral must be posted, the principal amount of such collateral must equal the difference between the market value of the interest rate swap at the time of such determination and the threshold amount. As of March 31, 1999, the market value loss of the interest rate swap agreement was below the $35 million threshold and therefore no collateral was required to be posted under the interest rate swap agreement. As of May 11, 1999, the market value of the unrealized loss of the interest rate swap agreement was $1.4 million. 19 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Except as set forth below, based on information provided to the Company by Vencor, there has been no material change in the status of the litigation reported in the Company's Form 10-K for the year ended December 31, 1998. The information contained in this section was derived from Vencor's public filings and from disclosures made by Vencor to the Company. The Company is not the source of this information and has not verified independently the truth or accuracy thereof or the activities of Vencor. There can be no assurance that Vencor has provided the Company complete and accurate information in all instances. As set forth in the Company's Form 10-K for the year ended December 31, 1998, Vencor has been informed by the Department of Justice that it is the subject of ongoing investigations into various aspects of its claims for reimbursement from government payors, billing practices and various quality of care issues in the hospitals and nursing centers operated by Vencor. These investigations also include the Company's healthcare operations prior to the date of the Reorganization. Thus, the Department of Justice has informed the Company that for the period prior to the date of the Reorganization, if any liability exists in connection with such investigations, the Company may be liable for such liability. However, the Company believes that under agreements entered into at the time of the Reorganization, Vencor is obligated to assume the defense of, and to indemnify the Company for any liabilities that arise out of, any claims that may result from the investigations. There can be no assurance that Vencor will have sufficient assets, income and access to financing to enable it to satisfy these obligations. Vencor is in discussions with the Department of Justice concerning the nature of the issues under investigation and the possible settlement of some or all of the claims. Vencor is cooperating fully in the investigations. As set forth in the Company's Form 10-K, Vencor, on behalf of the Company, is defending a class action lawsuit captioned Jules Brody v. Transitional Hospitals Corporation, et al., Case No. CV-S-97-0047-PMP, which was filed on June 19, 1997 in the United States District Court for the District of Nevada on behalf of a class consisting of all persons who sold shares of Transitional Hospitals Corporation common stock during the period from February 26, 1997 through May 4, 1997. On June 18, 1998, the court denied Vencor's motion, acting on behalf of the Company, to dismiss the Section 14(e) and Section 20(a) claims, after which Vencor filed a motion for reconsideration. On March 23, 1999, the court granted Vencor's motion to dismiss all remaining claims, and the case has been dismissed. The plaintiff has appealed this ruling. Vencor, on behalf of the Company, is defending this action vigorously. During the Company's discussions with Vencor discussed above under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments," Vencor has asserted various potential claims against the Company arising out of the Reorganization. The Company intends to defend these claims vigorously if they are asserted in a legal or mediation proceeding. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 4.1 Fourth Amendment to Rights Agreement, dated as of April 15, 1999, between the Company and National City Bank, as Rights Agent. Exhibit 1 to the Company's Form 8-A/A, filed on April 19, 1999, is incorporated herein by reference. 10.1 Employment Agreement dated March 5, 1999, between the Company and Debra A. Cafaro. 10.2 Form of Second Amendment to Master Lease, dated April 12, 1999, between the Company and Vencor, Inc. Exhibit 99.1 to the Company's Form 8-K, filed on April 19, 1999, is incorporated herein by reference. 10.3 Second Standstill Agreement, dated April 12, 1999, between the Company and Vencor, Inc. Exhibit 99.2 to the Company's Form 8-K, filed on April 19, 1999, is incorporated herein by reference.
20 10.4 Tolling Agreement, dated April 12, 1999, between the Company and Vencor, Inc. Exhibit 99.3 to the Company's Form 8-K, filed on April 19, 1999, is incorporated herein by reference. 10.5 Standstill Agreement, dated March 31, 1999, between the Company and Vencor, Inc. Exhibit 99.4 to the Company's Form 8-K, filed on April 19, 1999, is incorporated herein by reference. 10.6 Amendment Number 1 to the Second Standstill Agreement dated April 12, 1999, dated May 5, 1999, between the Company and Vencor, Inc. 10.7 Amendment Number 2 to the Second Standstill Agreement dated April 12, 1999 and Amendment Number 1 to the Tolling Agreement dated April 12, 1999, dated May 8, 1999 between the Company and Vencor, Inc. 27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K: On February 5, 1999, the Company filed a Current Report on Form 8-K announcing that on January 13, 1999, the Company's Board of Directors declared a quarterly cash dividend on its common stock of $.39 per share to be distributed February 17, 1999. The dividend was paid to shareholders of record as of January 29, 1999. The Company also announced its intention to qualify as a real estate investment trust for federal income tax purposes for 1999. On March 10, 1999, the Company filed a Current Report on Form 8-K announcing that Debra A. Cafaro had been appointed President, Chief Executive Officer and Director, replacing Thomas T. Ladt in each of those positions effective March 5, 1999. On April 19, 1999, the Company filed a Current Report on Form 8-K announcing certain agreements with Vencor, Inc., its principal tenant. Under the first agreement, the Company agreed not to exercise remedies for non-payment of rent due from Vencor on April 1, 1999 for a period ending April 12, 1999. Under a second agreement (the "Second Standstill Agreement"), the Company agreed with Vencor that if Vencor paid the full amount of April 1999 rent on an agreed schedule, the Company would not exercise its remedies under its lease agreements with Vencor. Under the Second Standstill Agreement, each of the Company and Vencor also agreed not to pursue any claims against the other or any third party relating to the April 1998 reorganization of the Company as long as Vencor made the full lease payments for April 1999 and May 1999 under the specified schedule. The Second Standstill Agreement provided that it would terminate on May 5, 1999, on any date that a voluntary or involuntary bankruptcy proceeding was commenced by or against Vencor or if Vencor failed to pay rent in accordance with the specified schedule. The Company and Vencor also agreed to amend each of the lease agreements between the companies to delete a provision that permitted the Company to require Vencor to purchase a facility upon the occurrence of certain events of default by Vencor. Finally, the Company and Vencor agreed that any statutes of limitations or other time constraints in a bankruptcy proceeding that might be asserted by one party against the other will be extended or tolled from April 12, 1999 until May 5, 1999 or until the Second Standstill Agreement terminated due to Vencor's failure to make the contemplated lease payments. These arrangements have been subsequently modified. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Recent Developments." 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VENTAS, INC. Date: May 17, 1999 /s/ Debra A. Cafaro _____________________________________ Debra A. Cafaro President and Chief Executive Officer Date: May 17, 1999 /s/ Steven T. Downey _____________________________________ Steven T. Downey Vice President and Chief Financial Officer (Principal Financial Officer) 22 EX-10.1 2 EMPLOYMENT AGREEMENT DATED MARCH 5, 1999 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made as of the 5th day of March, 1999 (the "Effective Date"), by and between Ventas, Inc., a Delaware corporation (the "Company"), and Debra A. Cafaro (the "Executive"). W I T N E S S E T H: WHEREAS, the Company desires to employ the Executive as its President and Chief Executive Officer; and WHEREAS, the Company and Executive have reached agreement concerning the terms and conditions of her employment and wish to formalize that agreement; NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements contained herein, and intending to be legally bound hereby, the Company and Executive agree as follows: 1. EMPLOYMENT. The Company hereby agrees to employ Executive and Executive hereby agrees to be employed by the Company on the terms and conditions herein set forth. The initial term of this Agreement shall be for a period commencing on the Effective Date and continuing through December 31, 2001. The term shall be automatically extended by one additional day for each day beyond the Effective Date that the Executive remains employed by the Company until such time as the Company elects to cease such extension by giving written notice of such election to the Executive. The initial term together with all extensions pursuant to the preceding sentence shall be treated as the "Employment Term." 2. DUTIES. The Company hereby employs Executive and Executive hereby accepts employment with the Company as President and Chief Executive Officer. During the Employment Term, Executive shall have the title, status and duties of President and Chief Executive Officer, shall report directly to the Board of Directors of the Company ("Board"), and shall have duties consistent with and authority comparable to Chief Executive Officers of other publicly-traded REITs, including the designation of senior management. During the Employment Term, the Company shall cause Executive to be a member of the Board. In addition, during the Employment Term, Executive together with the Chairman of the Independent Committee of the Board (or if none, Executive alone) shall have the right to designate an individual (subject to the approval of W. Bruce Lunsford, which approval shall not be unreasonably withheld) who shall be nominated by the Board to serve as a director in lieu of an individual then serving as a director and the Company shall use its best efforts to cause such designated individual to be elected as a director of the Company. It is the parties' intention that if the Board is expanded beyond seven (7) members, that the Executive together with the Chairman of the Independent Committee of the Board (or if none, Executive alone) will have the right to designate additional individuals in accordance with the prior sentence, such that Executive and all such individuals designated pursuant to the preceding sentence shall constitute at least the proportion of the members of the Board as two (2) is to ten (10), and the parties agree to cooperate to effectuate such intention. 3. EXTENT OF SERVICES. Executive, subject to the direction and control of the Board, shall have the power and authority commensurate with her status as President and Chief Executive Officer and necessary to perform her full-time duties hereunder. During the term, Executive shall devote her working time, attention, labor, skill and energies to the business of the Company, and shall not, without the consent of the Company, be actively engaged in any other business activity, whether or not such business activity is pursued for gain, profit or other pecuniary advantage, that competes, conflicts or interferes with the performance of her duties hereunder in any material way. 4. COMPENSATION. As compensation for services hereunder rendered, Executive shall receive during the Employment Term: (a) A base salary at a rate of not less than three hundred thirty five thousand dollars ($335,000) per year in the period from the Effective Date until December 31, 1999, not less than three hundred fifty one thousand seven hundred fifty dollars ($351,750) in calendar year 2000 and in each calendar year thereafter a base salary at a rate no less than 105% of the base salary rate for the immediately prior calendar year. Executive's base salary shall be payable in equal installments in accordance with the Company's normal payroll procedures (but no less frequently than semimonthly). Executive's base salary shall not be reduced after any increase and the term "Base Salary" for purposes of this Agreement shall refer to Executive's base salary annualized, as most recently increased. (b) In addition to Base Salary, Executive shall be eligible to receive such other bonuses and incentive compensation as the Board may approve from time to time. Without limitation of the foregoing, Executive shall receive no later than January 31, 2000, a bonus in an amount not less than two hundred thousand dollars ($200,000) for the period ending December 31, 1999. 5. BENEFITS. (a) Executive shall be entitled to participate in any and all pension benefit, welfare benefit (including, without limitation, medical, dental, disability and group life insurance coverages) and fringe benefit plans from time to time in effect for executives of the Company and its affiliates. Without limitation of the foregoing, the Company shall provide Executive, without any cost to Executive, with two million dollars of life insurance coverage and executive disability coverage with an "own occupation" definition of disability providing annual benefits of at least 100% of Executive's Base Salary. To the extent any of the benefits or payments within this Section are treated as taxable to the Executive, the Company shall pay Executive an additional amount such that the net amount or benefit retained by Executive after deduction or payment of all federal, state, local and other taxes with respect to amounts or benefits under this Section shall be equal to the full amount of the payments or benefits required by this Section. (b) Executive shall be granted on the Effective Date one hundred thousand (100,000) shares of common stock of the Company ("Restricted Shares") and certificates evidencing 2 Executive's ownership of such Restricted Shares shall be delivered to Executive on or before April 1, 1999. Such Restricted Shares shall vest and be fully transferable at the rate of nine thousand ninety one (9,091) Restricted Shares as of the first day of each calendar quarter beginning April 1, 1999 through the third calendar quarter in 2001 and at the rate of nine thousand ninety (9,090) Restricted Shares as of the first day of the last calendar quarter in 2001. Notwithstanding the foregoing, all remaining unvested Restricted Shares shall vest and be fully transferable immediately upon a Change of Control, the termination of Executive's employment by the Company other than for Cause or by the Executive for Good Reason or the termination of the Executive's employment by death or Disability. The Executive shall have full voting rights with respect to the Restricted Shares and shall be entitled to receive all dividends and other distributions paid with respect to such Restricted Shares, whether or not vested. In addition, Executive shall have customary registration rights with respect to the Restricted Shares as well as the Option Shares described in Section 5(c) and the Company and Executive shall promptly execute and deliver a registration rights agreement regarding such rights. (c) Executive shall be granted on the Effective Date five hundred thousand (500,000) options ("Option") to purchase shares of common stock of the Company ("Shares"), of which the maximum permissible number (calculated based on the vesting schedule described below) shall be treated as incentive stock options ("ISOs") pursuant to Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). The per share exercise price for the Shares to be issued pursuant to the exercise of the Options ("Option Shares") shall be with respect to the ISOs, the closing price of a Share on the New York Stock Exchange on the Effective Date and for the remainder of the Option the lesser of: (i) the closing price of a Share on the New York Stock Exchange on the Effective Date and (ii) the closing price of a Share on the New York Stock Exchange on the one hundred twentieth day after the execution of this Agreement (or the next business day if the one hundred twentieth day after the execution of this Agreement is not a business day). The Option shall be vested and immediately exercisable upon grant with respect to one hundred sixty seven thousand six hundred sixty seven (166,667) Option Shares and shall become vested and immediately exercisable with respect to an additional one hundred sixty seven thousand six hundred sixty seven (166,667) Option Shares on March 5, 2000 and an additional one hundred sixty seven thousand six hundred sixty six (166,666) Option Shares on March 5, 2001. For purposes of this Section, the ISOs shall vest and become immediately exercisable in the same proportion as the remainder of the Option. Notwithstanding the foregoing, the Option shall be vested and immediately exercisable with respect to all Option Shares upon the termination of Executive's employment by the Company other than for Cause or by Executive for Good Reason, termination of Executive's employment by death or Disability or upon a Change of Control; subject only to the following: Upon an Early Change of Control, only two hundred fifty thousand (250,000) Option Shares shall become vested and immediately exercisable as a result of the Early Change of Control. For purposes of this subsection, "Early Change of Control" shall mean an agreement for a Change of Control is executed and approved by the Company's Board on or before July 4, 1999 and a Change of Control occurs in accordance with and pursuant to the specific terms of such agreement. The Options shall remain vested and exercisable for a period of ten years from the date of Option grant regardless of whether 3 or when the employment of the Executive terminates. Executive may exercise the Option in a cashless exercise. (d) Executive shall be entitled to participate in such bonus, stock option and other incentive compensation plans of the Company and its affiliates in effect from time to time for executives of the Company. Without limitation of the Company's obligations under Section 4(b), the Company agrees that the existing FFO - based formula under the bonus program and all performance measurements under the Incentive Compensation Plan shall be promptly, formally and equitably revised with downward targets to take into account changed circumstances, if any, of the Company since the date of those plans, as deemed appropriate by the Executive and the Board. (e) Executive shall be entitled to four weeks of paid vacation each year, earned on the Effective Date and the first day of each subsequent calendar year. The Executive shall schedule the timing of such vacations in a reasonable manner. The Executive may also be entitled to such other leave, with or without compensation, as shall be mutually agreed by the Company and Executive. (f) Executive may incur reasonable business related expenses including for promoting the business and expenses for entertainment, travel, cellular telephone and similar items related thereto. The Company shall reimburse Executive for all such reasonable expenses subject to the Company's reimbursement procedures regarding the reporting and documentation of such expenses. (g) The Company shall pay or promptly reimburse Executive for all reasonable travel expenses incurred by Executive to travel to and from the Chicago area once each week. In addition, the Company shall pay Executive twenty-five thousand dollars ($25,000) within ten days after the Effective Date in connection with Executive's relocation expenses. To the extent any of the payments within this Section are treated as taxable to the Executive, the Company shall pay Executive an additional amount such that the net amount retained by Executive after deduction or payment of all federal, state, local and other taxes with respect to amounts under this Section shall be equal to the full amount of the payments required by this Section. (h) The Company intends that Section 5(b) and Section 5(c), as well as all other provisions of this Agreement, will be fully operative, effective, binding and enforceable as of the Effective Date and agrees to adopt such employee benefit plans, amendments to employee benefit plans or other arrangements, as applicable, take such other acts and pay such other amounts as are necessary to effectuate the provisions of Section 5(b) and Section 5(c) of this Agreement as well as the other provisions of this Agreement effective on the Effective Date. Without limitation of the foregoing, to the extent Executive experiences any economic or tax or other detriment or diminution in benefit on account of or related to any of such Sections or provisions not being fully operative, effective, binding and enforceable on the Effective Date fully in accordance with the terms and provisions of such Sections or provisions, or any delay or failure to comply with the provisions of such Sections or provisions, the Company shall immediately take such actions, and pay such amounts, as Executive reasonably determines are appropriate so that the Executive achieves at least the same economic, tax and other benefits the Executive would have had if such Section 5(b) and 4 Section 5(c) and such other provisions were fully operative, effective, binding and enforceable in accordance with their terms as of the Effective Date. 6. LOAN. The Company shall lend to Executive (the "Loan") such funds as are necessary to pay all federal, state, local and other taxes with respect to Restricted Shares as and when the value of such Restricted Shares become includible in Executive's income. For purposes of determining the amount of the Loan, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year of the Loan and state and local income taxes at the highest marginal rates of taxation in the state and locality of the Executive's residence or place of business, whichever is higher, in the calendar year of the Loan. The principal of the Loan (together with any accrued, unpaid interest) shall be payable on March 5, 2009 and may be prepaid without penalty or premium. The Loan shall bear interest at the lowest applicable federal rate. Such interest shall be payable annually out of and only to the extent of dividends from the vested Restricted Shares. To the extent dividends are not sufficient, interest shall accrue without itself bearing interest except to the extent required to avoid imputed interest. The Loan shall be secured by a pledge of all of the Restricted Shares to which such Loan relates and shall be non-recourse to Executive's assets other than the pledged Restricted Shares. The Loan shall be forgiven and there shall be no obligation to repay the Loan if there is a Change of Control, Executive's employment is terminated by the Company other than for Cause or by the Executive with Good Reason or the Executive's employment terminates by death or Disability. To the extent the Loan or its forgiveness results in taxable income to the Executive, the Company shall pay Executive an amount sufficient for the payment of all federal, state, local and other taxes with respect to the Loan, its forgiveness and the payments pursuant to this Section. 7. TERMINATION OF EMPLOYMENT. (a) DEATH OR DISABILITY. Executive's employment shall terminate automatically upon Executive's death during the Employment Term. If the Company determines in good faith that the Disability of Executive has occurred during the Employment Term (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, Executive shall not have returned to performance of Executive's duties. For purposes of this Agreement, "Disability" shall mean Executive's absence from duties hereunder for a period of 90 consecutive days within a twelve-month period because of a physical or mental incapacity which is expected to be permanent. (b) CAUSE. The Company may terminate Executive's employment during the Employment Term for Cause. For purposes of this Agreement, "Cause" shall mean the Executive's (i) conviction of or plea of nolo contendere to a crime involving moral turpitude; or (ii) willful and material breach by Executive of her duties and responsibilities which is directly and materially harmful to the business and reputation of the Company and which is committed in bad faith or without reasonable belief that such breaching conduct is in the best interests of the Company and its 5 affiliates, but with respect to (ii) only if the Board adopts a resolution by a vote of at least 75% of its members so finding after giving the Executive and her attorney an opportunity to be heard by the Board. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. (c) GOOD REASON. Executive's employment may be terminated by Executive for Good Reason or otherwise. "Good Reason" shall exist upon the occurrence, without Executive's express written consent, of any of the following events: (i) a diminution in Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities (including the assignment to Executive of any duties inconsistent with Executive's position, authority, duties or responsibilities), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) the Company shall (A) reduce the Base Salary or bonus or incentive opportunity of Executive or (B) reduce (other than pursuant to a uniform reduction applicable to all similarly situated executives of the Company) Executive's benefits and perquisites; (iii) the Company shall require Executive to relocate Executive's principal business office to any location more than 30 miles from its location on the Effective Date except that a relocation of the Executive's principal business office to the Chicago business district shall not constitute Good Reason; (iv) the Company's failure or refusal to comply with the provisions of this Agreement; (v) the Company (1) is a debtor in any bankruptcy case in which an order for relief is entered under any chapter of the federal Bankruptcy Code; (2) is adjudicated a bankrupt under any bankruptcy, insolvency, or reorganization law; (3) has a receiver of all or a substantial portion of its assets or property appointed; or (4) makes an assignment for the benefit of creditors; (vi) the failure of the Company to obtain the assumption of this Agreement as contemplated by Section 13(c). (d) NOTICE OF TERMINATION. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by a Notice of Termination given in accordance with this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated, and (iii) specifies the intended termination date (which date, in the case of a termination for Good Reason, shall be not more than thirty days 6 after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. (e) DATE OF TERMINATION. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the later of the date specified in the Notice of Termination or the date that is one day after the last day of any applicable cure period, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, or Executive resigns without Good Reason, the Date of Termination shall be the date on which the Company or Executive notified Executive or the Company, respectively, of such termination and (iii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the Disability Effective Date, as the case may be. 8. OBLIGATIONS OF THE COMPANY UPON TERMINATION. Following any termination of Executive's employment hereunder for any reason whatsoever, the Company shall pay Executive her Base Salary through the Date of Termination, all amounts earned by Executive through the Date of Termination (including accrued vacation and bonus and expenses incurred but not yet reimbursed), and all amounts owed to Executive pursuant to the terms and conditions of the benefit plans, programs and arrangements of the Company at the time such payments are due. In addition, Executive shall be entitled to the following additional payments and benefits. (a) DEATH OR DISABILITY. If, during the Employment Term, Executive's employment shall terminate by reason of Executive's death or Disability, the Company shall pay to Executive (or her designated beneficiary or estate, as the case may be) the prorated portion of any Target Bonus Executive would have received for the year of termination of employment. Such amount shall be paid within 30 days of the date when such amounts would otherwise have been payable to the Executive if Executive's employment had not terminated. In addition, if during the Employment Term, Executive's employment shall terminate by reason of Executive's Disability, the Company shall provide the benefits set forth in Section 8(b)(2). (b) GOOD REASON; OTHER THAN FOR CAUSE. If the Company shall terminate Executive's employment other than for Cause (but not for Disability), or the Executive shall terminate her employment for Good Reason: (1) (i) on or before March 5, 2000, the Company shall pay Executive one million five hundred thousand dollars on the Executive's Date of Termination or (ii) after March 5, 2000, the Company shall pay Executive on the Executive's Date of Termination an amount equal to the sum of (x) the prorated portion of the Target Bonus for Executive for the year in which the Date of Termination occurs, plus (y) an amount equal to three (3) times the sum of the Executive's Base Salary and Target Bonus as of the Date of Termination. 7 (2) For a period of two (2) years following the Date of Termination, the Executive shall be treated as if she had continued to be an Executive for all purposes under the Company's Health Insurance Plan and Dental Insurance Plan; or if the Company has not yet established its own Health Insurance Plan and/or Dental Plan or the Executive is prohibited from participating in such plan, the Company shall, at its sole cost and expense, provide health and dental insurance coverage for Executive which is equivalent to the coverage provided to Executive as of the Date of Termination. Such benefits shall not have any waiting period for coverage and shall provide coverage for any pre-existing condition. Following this continuation period, the Executive shall be entitled to receive continuation coverage under Part 6 of Title I of ERISA ("COBRA Benefits") treating the end of this period as a termination of the Executive's employment if allowed by law. (3) For a period of two (2) years following the Date of Termination, Company shall maintain in force, at its expense, all life insurance being provided or required to be provided to the Executive by the Company as of the Date of Termination and shall thereafter enable Executive to assume such life insurance at the Executive's expense. (4) For a period of two (2) years following the Executive's Date of Termination, the Company shall provide short-term and long-term disability insurance benefits to Executive equivalent to the coverage that the Executive would have had she remained employed under the disability insurance plans applicable to Executive on the Date of Termination. Should Executive become disabled during such period, Executive shall be entitled to receive such benefits, and for such duration, as the applicable plan provides. (5) To the extent not already vested pursuant to the terms of such plan, the Executive's interests under any retirement, savings, deferred compensation, profit sharing or similar arrangement of the Company shall be automatically fully (i.e., 100%) vested, without regard to otherwise applicable percentages for the vesting of employer contributions based upon the Executive's years of service with the Company. (6) The Company shall adopt such employee benefit plans or amendments to its employee benefit plans, if any, as are necessary to effectuate the provisions of this Agreement. (7) Without limitation of Section 5(b) and Section 5(c), Executive shall become vested in all restricted stock awards, stock options and other performance related compensation. (8) The Company shall provide Executive with executive office space and an executive secretary (both the office space and secretary shall be of a quality comparable to that the Executive had during the Employment Term) in a city or other locale chosen by Executive for a period of one year after the termination of Executive's employment with an aggregate cost not to exceed $50,000. 8 (c) DEATH AFTER TERMINATION. In the event of the death of Executive during the period Executive is receiving payments pursuant to this Agreement, Executive's designated beneficiary shall be entitled to receive the balance of the payments; or in the event of no designated beneficiary, the remaining payments shall be made to Executive's estate. 9. CHANGE OF CONTROL. (a) Upon any Change of Control on or before March 5, 2000, Executive shall be paid in cash in one lump sum one million five hundred thousand dollars no later than the date of the Change of Control. Upon any Change of Control occurring after March 5, 2000, Executive shall be paid no later than the Change of Control in cash in one lump sum the product of (A) 2.99 and (B) the sum of (x) the Executive's Base Salary and Target Bonus as of the date of the Change of Control, and (y) the fair market value (determined as of the date of the Change of Control) of any targeted number of restricted shares authorized to be issued to the Executive in respect of the year in which such Change of Control occurs (without regard to any acceleration of the award for such year), assuming for such purpose that all performance criteria applicable to such award with respect to the year in which such Change of Control occurs were deemed to be satisfied. (b) For the purposes of all provisions of this Agreement, the term "Target Bonus" shall mean the greater of (i) the highest actual bonus and performance compensation earned by Executive with respect to any of the three preceding calendar years and (ii) the full amount of bonuses and/or performance compensation (including assumed awards granted under the Company's Incentive Compensation Plan) that would be payable to the Executive, assuming all performance criteria (at the highest applicable level) on which such bonus and/or performance compensation are based were deemed to be satisfied, in respect of services for the calendar year in which the date in question occurs. (c) For purposes of all provisions of this Agreement, the term "Change of Control" shall mean any one or more of the following events: (i) An acquisition of any voting or other securities by any "Person" (having the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended ("1934 Act") and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d)), such that immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 under the 1934 Act) of 20% or more of either (i) any class of then-outstanding equity securities of the Company ("Outstanding Shares") or (ii) the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors ("Voting Securities"); provided, however, that in determining whether a Change of Control has occurred, Outstanding Shares or Voting Securities which are acquired in an acquisition by (i) the Company or any of its subsidiaries or, (ii) an employee benefit plan (or a trust forming a part thereof) maintained by the Company or any of its subsidiaries shall not constitute an acquisition which would cause a Change of Control. 9 (ii) The individuals who, as of the Effective Date, constituted the Board (the "Incumbent Board") cease for any reason to constitute over 50% of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of over 50% of the Incumbent Board, such new director shall, for purposes of this Section 9(c)(ii), be considered as though such person were a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Incumbent Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest. (iii) Consummation of a merger, consolidation or reorganization involving the Company, unless each of the following events occurs in connection with such merger, consolidation or reorganization: 1) the stockholders of the Company, immediately before such merger, consolidation or reorganization, have Beneficial Ownership, directly or indirectly immediately following such merger, consolidation or reorganization, of over 50% of the then outstanding shares of common stock and the combined voting power of all voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Company") in substantially the same proportion as their Beneficial Ownership of the Outstanding Shares and Voting Securities immediately before such merger, consolidation or reorganization; 2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute over 50% of the members of the board of directors of the Surviving Company; and 3) no Person (other than the Company, any of its subsidiaries, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Company or any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of 20% or more of the then Outstanding Shares or Voting Securities) has Beneficial Ownership of 20% or more of the then outstanding shares of the Surviving Company or combined voting power of the Surviving Company's then outstanding voting securities. (iv) Approval by the Company's stockholders of a complete liquidation or dissolution of the Company, or the occurrence of the same. (v) Approval by the Company's stockholders of an agreement for the assignment, sale, conveyance, transfer, lease or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a subsidiary of the Company), or the occurrence of the same. 10 (vi) The occurrence of any transaction which is reasonably likely to result in the Company not continuing to be a real estate investment trust as defined under section 856 of the Code (for example, such as because the Company will not have sufficient qualifying income or assets). (vii) Any other event that the Board shall determine constitutes an effective Change of Control of Company. (viii) Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the Outstanding Shares or Voting Securities as a result of the acquisition of Outstanding Shares or Voting Securities by the Company which, by reducing the number of Outstanding Shares or Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition of Outstanding Shares or Voting Securities by the Company, and after such acquisition of Shares or Voting Securities by the Company, the Subject Person becomes the Beneficial Owner of any additional Outstanding Shares or Voting Securities which increases the percentage of the then Outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change of Control shall occur. 10. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. If Executive becomes entitled to any payments or benefits whether pursuant to the terms of or by reason of this Agreement or any other plan, arrangement, agreement, policy or program (including without limitation any restricted stock, stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on the vesting or exercisability of any of the foregoing) with the Company, any successor to the Company or to all or a part of the business or assets of the Company (whether direct or indirect, by purchase, merger, consolidation, spin off, or otherwise and regardless of whether such payment is made by or on behalf of the Company or such successor) or any person whose actions result in a change of control or any person affiliated with the Company or such persons (in the aggregate, "Payments" or singularly, "Payment"), which Payments are reasonably determined by the Executive to be subject to the tax imposed by Section 4999 or any successor provision of the Code or any similar state or local tax, or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), the Company shall pay Executive an additional amount ("Gross-Up Payment") such that the net amount retained by Executive, after deduction or payment of (i) any Excise Tax on Payments, (ii) any federal, state and local income tax and Excise Tax upon the payment provided for by this Section, and (iii) any additional interest and penalties imposed because the Excise Tax is not paid when due, shall be equal to the full amount of the Payments. The Gross-Up Payment shall be paid to the Executive within ten (10) days of the Company's receipt of written notice from the Executive that the Excise Tax has been paid, is or was payable or will be payable at any time in the future. 11 11. TAX PAYMENT. For purposes of determining the amount of payments pursuant to Sections 5(a), 5(g), 5(h), 6, 10, 12 and 17 and elsewhere in this Agreement, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the payment is to be made and state and local income taxes at the highest marginal rates of taxation in the state and locality of the Executive's residence or the Executive's place of business, whichever is higher, on the date the payment is to be made. Without limitation on any other provision of this Agreement, all such payments involving the calculation of taxes shall be made no later than two (2) days after the receipt by the Company of written advice from a professional tax advisor selected by the Executive that taxes are payable. The expense incurred in obtaining such advice shall be paid by the Company. Without limitation on any other provisions of this Agreement, the Company shall indemnify Executive for all taxes with respect to the amounts for which payments described in the first sentence of this Section are required to be made pursuant to this Agreement and all other costs including interest and penalties with respect to the payment of such taxes. To the extent any of the payments pursuant to this Section are treated as taxable to the Executive, the Company shall pay Executive an additional amount such that the net amount retained by the Executive after deduction or payment of all federal, state, local and other taxes with respect to amounts pursuant to this Section shall be equal to the full amount of the payments required by this Section. 12. DISPUTES. Any dispute or controversy arising under, out of, or in connection with this Agreement shall, at the election and upon written demand of either party, be finally determined and settled by binding arbitration in the City of Chicago, Illinois, in accordance with the Labor Arbitration rules and procedures of the American Arbitration Association, and judgment upon the award may be entered in any court having jurisdiction thereof. The Company shall pay all costs of the arbitration and all reasonable attorneys' and accountants' fees of the Executive in connection therewith, including any litigation to enforce any arbitration award. To the extent any of the payments within this Section are treated as taxable to the Executive, the Company shall pay Executive an additional amount such that the net amount retained by Executive after deduction or payment of all federal, state, local and other taxes with respect to amounts under this Section shall be equal to the full amount of the payments required by this Section. 13. SUCCESSORS. (a) This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving corporation, or upon any transfer of all or substantially all of the Company's stock or assets. In the event of such merger, consolidation or transfer, the provisions of this Agreement shall 12 be binding upon and shall inure to the benefit of the surviving corporation or corporation to which such stock or assets of the Company shall be transferred. (c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, or any business of the Company for which Executive's services are principally performed, to assume expressly, absolutely and unconditionally and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 14. OTHER SEVERANCE BENEFITS. Executive hereby agrees that in consideration for and subject to the receipt of the payments to be received under this Agreement, Executive waives any and all rights to any payments or benefits under any other plans, programs, contracts or arrangements of the Company or their respective affiliates that provide for severance payments or benefits upon a termination of employment, except as provided in this Agreement. 15. PRESS RELEASE. The Company shall not issue or permit to be issued any press release or other public announcement regarding the Executive or the terms of Executive's employment (including related to any termination of Executive's employment for any reason) without Executive's prior approval. 16. INDEMNIFICATION AND INSURANCE. Beginning on the Effective Date and continuing thereafter, including after the termination of Executive's employment hereunder, the Company shall indemnify, defend and hold the Executive harmless from and against any and all Expenses, liabilities, damages, costs, judgments, penalties, fines and amounts paid in settlement, incurred by Executive in connection with any Proceeding involving her by reason of her being or having been an officer, director, employee or agent of the Company (or any affiliate of the Company) to the fullest extent permitted by law, whether or not Executive is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding, and whether or not Executive is successful in such Proceeding. In addition, upon receipt from Executive of (i) a written request for an advancement of Expenses which Executive reasonably believes will be subject to indemnification hereunder and (ii) a written undertaking by Executive to repay any such amounts if it shall ultimately be determined that she is not entitled to indemnification under this Agreement or otherwise, the Company shall advance such Expenses to Executive or pay such Expenses for Executive, all in advance of the final disposition of any such matter. The provisions of the preceding two sentences shall survive the termination of Executive's employment hereunder for any reason whatsoever and the termination of this Agreement. The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Executive may at any time be entitled under applicable law, the Certificate of Incorporation, the By-Laws of the Company, any other agreement, a vote of stockholders or a resolution of the Board, or otherwise. For purposes hereof, "Expenses" shall include all reasonable fees and expenses including, without limitation, reasonable attorneys' fees, retainers, court costs, 13 transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and disbursements and expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding; and "Proceeding" shall include (without limitation) any and all proceedings, including, without limitation, actions, suits, arbitrations, alternative dispute resolution mechanisms, investigations, administrative hearings and other proceedings, whether civil, criminal, administrative or investigative, and whether or not by or in the right of the Company. Beginning on the Effective Date and continuing thereafter, including after the termination of Executive's employment hereunder, Executive shall have coverage under a director's and officer's liability insurance policy in amounts no less than, and on terms no less favorable than those, as provided to officers of the Company as of the Effective Date and in amounts no less than, and on terms no less favorable than those, as provided to the other members of the Board and senior executive officers of the Company from time to time. 17. ATTORNEY FEES. The Company will pay, or reimburse Executive for, at Executive's discretion, all attorneys fees, costs and expenses incurred by Executive in connection with the negotiation, execution and delivery of this Agreement. All reasonable costs and expenses (including fees and disbursements of counsel) incurred by Executive in seeking to interpret this Agreement or enforce rights pursuant to this Agreement shall be paid on behalf of or reimbursed to Executive promptly by the Company, whether or not Executive is successful in asserting such rights; provided, however, that no reimbursement shall be made of such expenses relating to any unsuccessful assertion of rights if and to the extent that Executive's assertion of such rights was in bad faith. To the extent any of the payments within this Section are treated as taxable to the Executive, the Company shall pay Executive an additional amount such that the net amount retained by Executive after deduction or payment of all federal, state, local and other taxes with respect to amounts under this subsection shall be equal to the full amount of the payments required by this Section. 18. WITHHOLDING. All payments to be made to Executive hereunder will be subject to all applicable required withholding of taxes. 19. NO MITIGATION. Executive shall have no duty to mitigate her damages by seeking other employment or taking other action by way of mitigation of the amounts payable to the Executive under this Agreement and the payments required hereunder shall not be reduced or offset by any amounts, including compensation from other employment. Further, the Company's obligations to make any payments hereunder shall not be subject to or affected by any set off, counterclaims or defenses which the Company may have against Executive or others. 20. NOTICES. Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given and effective when delivered by personal or overnight couriers, or registered mail, in each case with confirmation of receipt, prepaid and addressed as follows: 14 If to Executive: Debra A. Cafaro 248 South Avenue Glencoe, Illinois 60022 With a copy to: Barack Ferrazzano Kirschbaum Perlman & Nagelberg 333 West Wacker Drive, Suite 2700 Chicago, Illinois 60606 Attention: Peter J. Barack and --- Debra A. Cafaro Ventas, Inc. 4360 Brownsboro Road, Suite 115 Louisville, KY 40207-1642 If to Company: Ventas, Inc. 4360 Brownsboro Road, Suite 115 Louisville, KY 40207-1642 Attn: General Counsel Either party may change its specified address by giving notice in writing to the other in accordance with the foregoing method. 21. WAIVER OF BREACH AND SEVERABILITY. The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by either party. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision, which other provision shall remain in full force and effect. In the event any provision of this Agreement is found to be invalid or unenforceable, it may be severed from the Agreement and the remaining provisions of the Agreement, including all make- whole provisions of this Agreement, including those set forth in Section 5(h), shall continue to be binding and effective. 22. ENTIRE AGREEMENT; AMENDMENT. This instrument contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements (including the agreement and definitive term sheet dated March 5, 1999 between the Company and the Executive regarding Executive's employment), promises, covenants, arrangements, 15 communications, representations and warranties between them, whether written or oral, with respect to the subject matter hereof. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is agreed to in writing signed by Executive and such officer of the Company specifically designated by the Board. 23. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware. 24. HEADINGS. The headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 25. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. VENTAS, INC. By: ---------------------------------------- W. Bruce Lunsford, Chairman of the Board -------------------------------------------- Executive 16 EX-10.6 3 AMENDMENT NO. 1 TO THE SECOND STANDSTILL AGREEMENT EXHIBIT 10.6 AMENDMENT NUMBER 1 TO THE SECOND STANDSTILL AGREEMENT DATED APRIL 12, 1999 ------------------------------------------ These amendments dated May 5, 1999 (the "Amendment") are made and entered into between Vencor, Inc., a corporation organized under the laws of Delaware, for and on behalf of itself and its various subsidiaries and affiliates, including, without limitation, Vencor Operating, Inc., and for and on behalf of any of their respective successors including, without limitation, any debtor or debtor-in-possession in a bankruptcy case commenced under Title 11 of the United States Code (the "Bankruptcy Code") or any trustee appointed in any such case (collectively, "Vencor"), and Ventas, Inc., a corporation organized under the laws of Delaware for and on behalf of itself and its various subsidiaries and affiliates, including, without limitation, Ventas Realty, Limited Partnership, and for and on behalf of any of their respective successors, including, without limitation, any debtor or debtor-in-possession in a bankruptcy case commenced under the Bankruptcy Code or any trustee appointed in any such case (collectively, "Ventas"). WHEREAS, the parties to the Amendment are in the process of attempting to resolve any and all existing and potential claims that Vencor has asserted or might in the future assert against Ventas (the "Vencor Claims"), the validity of which Ventas has disputed, and any and all existing and potential claims that Ventas has asserted or might in the future assert against Vencor (the "Ventas Claims"), the validity of which Vencor has disputed (the Vencor Claims and the Ventas Claims are collectively referred to herein as the "Claims"). NOW, THEREFORE, for good cause and adequate consideration, the parties hereto agree as follows: Extension of the Second Standstill Period The fifth numbered paragraph of the Second Standstill Agreement (annexed hereto as Exhibit A) shall be deleted and replaced with the following paragraph: During the period from the date of the Second Standstill Agreement, April 12, 1999, through and including the earlier of (a) the commencement by or against Vencor, as debtor, of a voluntary or involuntary bankruptcy case under Title 11 of the United States Code, or (b) 5:00 p.m. Eastern Daylight Savings Time on May 7, 1999 (such period being referred to herein as the "Second Standstill Period"), neither Vencor nor Ventas will file, commence, serve, or otherwise initiate any civil action, arbitration proceeding, or other similar action, litigation, case, or proceeding of any kind, character or nature whatsoever (an "Action") against the other or any third party, including, without limitation, any of Vencor's or Ventas' current or former officers, directors, or employees, arising from or relating to the Reorganization Agreement, any Ancillary Agreement, or any of the Five Leases, or with respect to the various disputes identified in Vencor's March 18, 1999 letter; nor shall Ventas exercise any rights or remedies it may have against Vencor under any of the Five Leases based on Vencor's late payment or non-payment of rent due under the Five Leases for the month of May 1999 or based on any default arising from or related to the disclosures made by Vencor to Ventas commencing on or about March 30 and 31, 1999 and continuing to the date hereof. Counterparts This Amendment may be executed in one or more counterparts and by facsimile, each of which counterparts shall be deemed an original hereof but all of which together shall constitute one agreement. Choice of Law This Amendment adopts the ninth numbered paragraph as the choice of law provision provided for in the Amendment. Dated: New York, New York May 5, 1999 CONFIRMED AND AGREED TO: VENCOR, INC. VENTAS, INC. By: By: ------------------------------- ------------------------------- Name: Name: Title: Title: EX-10.7 4 AMENDMENT NO. 2 TO THE SECOND STANDSTILL AGREEMENT EXHIBIT 10.7 AMENDMENT NUMBER 2 TO THE SECOND STANDSTILL AGREEMENT DATED APRIL 12, 1999 AND AMENDMENT NUMBER 1 TO THE TOLLING AGREEMENT DATED APRIL 12, 1999 ------------------------------------------------------ These amendments dated May 8, 1999 (the "Amendments") are made and entered into between Vencor, Inc., a corporation organized under the laws of Delaware, for and on behalf of itself and its various subsidiaries and affiliates, including, without limitation, Vencor Operating, Inc., and for and on behalf of any of their respective successors including, without limitation, any debtor or debtor-in-possession in a bankruptcy case commenced under Title 11 of the United States Code (the "Bankruptcy Code") or any trustee appointed in any such case (collectively, "Vencor"), and Ventas, Inc., a corporation organized under the laws of Delaware, for and on behalf of itself and its various subsidiaries and affiliates, including, without limitation, Ventas Realty, Limited Partnership, and for and on behalf of any of their respective successors, including, without limitation, any debtor or debtor-in-possession in a bankruptcy case commenced under the Bankruptcy Code or any trustee appointed in any such case (collectively, "Ventas"); WHEREAS, the parties to the Amendments are in the process of attempting to resolve any and all existing and potential claims that Vencor has asserted or might in the future assert against Ventas (the "Vencor Claims"), the validity of which Ventas has disputed, and any and all existing and potential claims that Ventas has asserted or might in the future assert against Vencor (the "Ventas Claims"), the validity of which Vencor has disputed (the Vencor Claims and the Ventas Claims are collectively referred to herein as the "Claims"); WHEREAS, on Friday May 7, 1999 after 5:00 p.m., Ventas, by letters of T. Richard Riney, Vice President and General Counsel of Ventas, issued five notices of non-payment of rent (the "Non-Payment Notices") pursuant to paragraph 16.1(b) of the agreements referenced in the first paragraph of each Non-Payment Notice, such agreements being collectively defined in the Second Standstill Agreement as the Five Leases; WHEREAS, the parties hereto wish to extend the cure period referred to in Section 16.1(b) of the Five Leases with respect to the Non-Payment Notices so that Vencor's cure period is coterminous with that provided to the Leasehold Mortgagee pursuant to Section 22.4 of the Five Leases, subject to the conditions set forth below; NOW, THEREFORE, in consideration of the premises and other good cause and adequate consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Extension of the Second Standstill Period and Suspension of the Expiration of the Cure Period in the Five Leases 1. The fifth numbered paragraph of the Second Standstill Agreement dated April 12, 1999 shall be deleted and replaced with the following paragraph: (a) Other than delivery of the Non-Payment Notices, during the period from the date of the Second Standstill Agreement, April 12, 1999, through and including the earlier of (a) the commencement by or against Vencor, as debtor, of a voluntary or involuntary bankruptcy case under Title 11 of the United States Code, or (b) 5:00 p.m. Eastern Daylight Savings Time on June 6, 1999 (such period being referred to herein as the "Second Standstill Period"), neither Vencor nor Ventas will file, commence, serve, or otherwise initiate any civil action, arbitration proceeding, or other similar action, litigation, case, or proceeding of any kind, character or nature whatsoever (an "Action") against the other or any third party, including, without limitation, any of Vencor's or Ventas' current or former officers, directors, or employees, arising from or relating to the Reorganization Agreement, any Ancillary Agreement, or any of the Five Leases, or with respect to the various disputes identified in Vencor's March 18, 1999 letter; nor shall Ventas exercise any rights or remedies it may have against Vencor under any of the Five Leases (including the giving of notices of termination pursuant to Section 16.1 of the Five Leases or any of them) based on Vencor's late payment or non-payment of Rent (as that term is defined in the Five Leases) due under the Five Leases, or based on any default arising from or related to the 2 disclosures made by Vencor to Ventas commencing on or about March 30 and 31, 1999 and continuing to the date hereof. (b) Ventas further agrees that if Vencor pays the Rent for the month of May 1999 on or before June 11, 1999 at 5:00 p.m. Eastern Daylight Savings Time then such payment shall be deemed to be a timely cure, within the meaning of Section 16.1 of the Five Leases and the Notices of Non-Payment, and that, in such event, no Event of Default (as that term is used in the Notices of Non-Payment and defined in the Five Leases) shall have occurred with respect to the late payment or non- payment of Rent for the month of May 1999. It is the intention of the parties that this Subparagraph 5(b) shall not affect in any way, including, without limitation, to shorten or extend, the cure period provided to the Leasehold Mortgagee, pursuant to Section 22.4 of the Five Leases. This Subparagraph 5(b) shall apply only to the Non- Payment Notices and to the non-payment or late payment of the May 1999 Rent under the Five Leases. (c) The immediately preceding Subparagraph 5(b) shall not be effective and shall be void ab initio unless on or prior to 5:00 p.m. Eastern -- ------ Daylight Savings Time on June 11, 1999, (i) Ventas is paid the Rent for the month of May 1999 or (ii) Ventas has received written confirmation from the Leasehold Mortgagee that it agrees that the period of time by which it would be entitled to cure the failure of Vencor to pay Rent for the month of May 1999 under Section 22.4 of the Five Leases in order to prevent a termination of the Five Leases is unchanged by Subparagraph 5(b) and such period of time is 35 days beginning on May 7, 1999. Amendment To Tolling Agreement 2. The first numbered paragraph of the Tolling Agreement dated April 12, 1999 shall be deleted and replaced with the following paragraph: Any Vencor Claims, including, without limitation, those arising or available under the Bankruptcy Avoidance Provisions (defined below) that Vencor could otherwise assert against Ventas if Vencor were a debtor in a case under the Bankruptcy Code commenced on the date hereof, and whether arising under the Bankruptcy Code or under other applicable federal or state law, shall not be prejudiced, impaired, or waived by Vencor's failure to commence such a bankruptcy case, and any and all statues of limitations, repose, or other legal or equitable constrains on the time by which such a bankruptcy case or pleading initiating any Vencor Claim must be filed to assert such a Vencor Claim (including, without limitation, a cause of action under (S) 548 of the Bankruptcy Code) shall be tolled during the period of time from April 12, 1999 to and including June 6, 1999 (the "Tolling Period"). For all purposes herein, both the 3 first and last day of the Tolling Period shall be deemed to be contained in the Tolling Period. Counterparts 3. These Amendments may be executed in one or more counterparts and by facsimile, each of which counterparts shall be deemed an original hereof but all of which together shall constitute one agreement. 4 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENTAS, INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-1999 58,497 0 0 0 0 0 0 0 999,498 0 0 0 0 18,402 (32,910) 999,498 0 56,633 0 33,744 2,551 0 18,065 20,338 0 0 0 0 0 20,338 0.30 0.30
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