UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: [X]
Filed by a Party other than the Registrant: [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
KINDRED HEALTHCARE, INC.
-----------------
(Name of Registrant as Specified in Its Charter)
-----------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee was calculated and state how it was determined):
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
[LOGO] Kindred
Healthcare
KINDRED HEALTHCARE, INC.
March , 2002
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Kindred Healthcare, Inc. ("Kindred"), to be held at 10:00 a.m. on Tuesday,
April 16, 2002, at Kindred's offices at 680 South Fourth Street, Louisville,
Kentucky 40202-2412.
Information concerning the business to be conducted at the meeting is
included in the accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement. Please give all of the information contained in the Proxy Statement
your careful attention.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the meeting,
it is important that your shares be represented. Therefore, we urge you to
sign, date and promptly return the enclosed proxy in the enclosed postage paid
envelope. Please refer to the enclosed voting form for instructions. If you
attend the meeting, you will, of course, have the right to vote in person.
I look forward to greeting you personally, and on behalf of the Board of
Directors and management, I would like to express our appreciation for your
interest in Kindred.
Sincerely,
/s/ Edward L. Kuntz
Edward L. Kuntz
Chairman of the Board and Chief
Executive Officer
Kindred Healthcare, Inc.
680 South Fourth Street
Louisville, Kentucky 40202-2412
[LOGO] Kindred
Healthcare
KINDRED HEALTHCARE, INC.
680 SOUTH FOURTH STREET
LOUISVILLE, KENTUCKY 40202-2412
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 16, 2002
To the Shareholders of Kindred Healthcare, Inc.:
The Annual Meeting of Shareholders of Kindred Healthcare, Inc. will be held
at 10:00 a.m. on Tuesday, April 16, 2002, at Kindred's offices at 680 South
Fourth Street, Louisville, Kentucky 40202-2412 for the following purposes:
(1) To elect a board of seven directors;
(2) To consider and ratify the Kindred Healthcare, Inc. 2000 Stock Option
Plan;
(3) To consider and approve the Kindred Healthcare, Inc. 2001 Stock
Incentive Plan;
(4) To consider and ratify the Kindred Healthcare, Inc. 2000 Long-Term
Incentive Plan;
(5) To consider and approve the Kindred Healthcare, Inc. Short-Term
Incentive Plan;
(6) To consider and approve an amendment to Kindred's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares
of common stock; and
(7) To transact such other business as may properly come before the meeting.
Only shareholders of record at the close of business on March 7, 2002 will
be entitled to vote at the meeting and any adjournments thereof.
IT IS IMPORTANT THAT YOU VOTE YOUR SHARES. WHETHER YOU PLAN TO ATTEND THE
MEETING OR NOT, PLEASE SUBMIT YOUR PROXY AS SOON AS POSSIBLE IN THE ENCLOSED
POSTAGE PAID ENVELOPE IN ORDER TO AVOID ADDITIONAL SOLICITING EXPENSES TO
KINDRED. THE PROXY IS REVOCABLE AND WILL NOT AFFECT YOUR RIGHT TO VOTE IN
PERSON IN THE EVENT YOU FIND IT CONVENIENT TO ATTEND THE MEETING.
Edward L. Kuntz
Chairman of the Board and Chief
Executive Officer
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 16, 2002
GENERAL INFORMATION
This Proxy Statement and the accompanying form of proxy are furnished in
connection with the solicitation of proxies by the Board of Directors of
Kindred Healthcare, Inc. ("Kindred" or the "Company") for use at the Annual
Meeting of Shareholders (the "Annual Meeting"), to be held at 10:00 a.m. on
April 16, 2002, at the Company's offices at 680 South Fourth Street,
Louisville, Kentucky 40202-2412, and at any adjournment or postponement
thereof. Only shareholders of record on the books of the Company at the close
of business on March 7, 2002 (the "Record Date") will be entitled to notice of,
and to vote at, the Annual Meeting. This Proxy Statement is dated March 8, 2002
and was first mailed to shareholders on or about March 11, 2002.
Proxies are solicited by the Board of Directors in order to provide each
shareholder an opportunity to vote on all matters scheduled to come before the
meeting, whether or not he or she attends the meeting in person. When the
enclosed proxy card is returned properly signed, the shares represented by the
proxy card will be voted by the proxy holders named on the proxy card in
accordance with the shareholder's directions. You are urged to specify your
choice by marking the appropriate box on the proxy card. If the proxy card is
signed and returned without specifying a choice, the shares will be voted as
recommended by the Board of Directors.
The cost of preparing, assembling and mailing the notice of annual meeting,
proxy statement and proxy card will be borne by the Company. In addition to the
use of the mail, proxies may be solicited by directors, officers and regular
employees of the Company, without additional compensation, in person or by
telephone or other electronic means. Furthermore, the Company may retain an
investor relations firm to solicit proxies by telephone or mail. Kindred will
reimburse brokerage houses and other nominees for their expenses in forwarding
proxy materials to beneficial owners of the Company's common stock.
Revocability of Proxy
Executing and returning the enclosed proxy card will not affect your right
to attend the Annual Meeting and vote in person. If you do attend, you may, if
you wish, vote by ballot at the meeting, thereby effectively canceling any
proxies previously given. In addition, a shareholder giving a proxy may revoke
it at any time before it is voted at the meeting by filing with the secretary
of the Company any instrument revoking it, or by filing with the Company a duly
executed proxy bearing a later date.
Voting Rights and Outstanding Shares
Each share of common stock, $0.25 par value ("Common Stock"), of the Company
outstanding at the close of business on March 7, 2002 is entitled to one vote
at the Annual Meeting. As of March 7, 2002, there were [.] shares of Common
Stock outstanding.
The presence at the Annual Meeting in person or by proxy of holders of
record of a majority of the outstanding shares of Common Stock is required to
constitute a quorum for the transaction of all business at the Annual Meeting.
The vote of a plurality of the outstanding shares of Common Stock present in
person or by proxy will be necessary to elect the director-nominees listed in
this Proxy Statement. The affirmative vote of a majority of the outstanding
shares of Common Stock present in person or by proxy will be necessary to
approve all other proposals and matters that may come before the Annual Meeting
for shareholder consideration. Abstentions and proxies relating to "street
name" shares for which brokers have not received voting instruction from the
beneficial owner ("Broker Non-Votes") are counted in determining whether a
quorum is present. In the election of directors, the nominees receiving the
highest number of votes will be elected. Therefore, abstentions or Broker
Non-Votes for a director-nominee will have no effect. With respect to any
matters submitted to the
1
shareholders for their consideration other than the election of directors,
abstentions will be counted as part of the total number of votes cast on such
proposals in determining whether the proposals have received the requisite
number of favorable votes, whereas Broker Non-Votes will not be counted as part
of the total number of votes cast on such proposals. Thus, abstentions will
have the same effect as votes against any such proposal, whereas Broker
Non-Votes will have no effect in determining whether any such proposal has been
approved by the shareholders. Therefore, it is important that you complete and
return your proxy early so that your vote may be recorded.
Votes cast by proxy or in person at the Annual Meeting will be tabulated by
the inspectors of election appointed for the meeting, who also will determine
whether or not a quorum is present.
BACKGROUND INFORMATION
On May 1, 1998, Ventas, Inc. ("Ventas") completed the spin-off of its
healthcare operations to its shareholders through the distribution of the
Company's former common stock (the "Spin-off"). In anticipation of the
Spin-off, the Company was incorporated on March 27, 1998 as a Delaware
corporation.
As a result of decreased Medicare and Medicaid reimbursement rates
introduced by the Balanced Budget Act of 1997 and other issues associated with
the Company, the Company was unable to meet its then existing financial
obligations, including rent payable to Ventas and debt service obligations
under existing indebtedness. Accordingly, on September 13, 1999, the Company
filed voluntary petitions for protection under Chapter 11 of Title 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Delaware. From the date of the bankruptcy filing until it emerged
from bankruptcy, the Company operated its businesses as a
"debtor-in-possession" subject to the jurisdiction of the bankruptcy court. The
bankruptcy court approved the Company's Fourth Amended Joint Plan of
Reorganization (the "Plan of Reorganization") which became effective on April
20, 2001 (the "Effective Date").
Pursuant to the Plan of Reorganization, the Company issued to certain
claimholders, including senior creditors and Ventas, in exchange for their
claims: an aggregate of (1) $300 million of senior secured notes, (2)
15,000,000 shares of Common Stock, (3) 2,000,000 Series A warrants to purchase
Common Stock, and (4) 5,000,000 Series B warrants to purchase Common Stock. The
Company also entered into amended and restated master lease agreements with
Ventas covering 210 of the nursing centers and 44 of the hospitals that the
Company operates. As part of the Plan of Reorganization, the Company's then
existing senior indebtedness and debt and equity securities were canceled. As a
result of the exchange described above, the holders of certain claims acquired
control of the Company and the holders of the Company's former common stock
relinquished control. In addition, the Company changed its name to Kindred
Healthcare, Inc. and a new board of directors, including representatives of the
principal security holders following the exchange, was appointed.
1. PROPOSAL TO ELECT DIRECTORS
The Board of Directors of the Company currently consists of seven persons.
The Board of Directors has nominated the seven persons listed below to be
elected as directors at the Annual Meeting. Each director elected at the Annual
Meeting will serve, subject to the provisions of the bylaws, until his
successor is duly elected and qualified. The names and ages of the nominees
proposed for election as directors, all of whom are presently directors of the
Company, together with certain information concerning the nominees, are set
forth below:
EDWARD L. KUNTZ (56) has served as the Company's Chairman of the Board and
Chief Executive Officer since January 1999. He served as the President, Chief
Operating Officer and a director of the Company from November 1998 to January
1999. He served as President of the Company until January 2002. Mr. Kuntz was
Chairman and Chief Executive Officer of Living Centers of America, Inc., a
leading provider of long-term healthcare, from 1992 to 1997. After leaving
Living Centers of America, Inc., he served as an advisor and
2
consultant to a number of healthcare services and investment companies and was
affiliated with Austin Ventures, a venture capital firm. In addition, Mr. Kuntz
served as Associate General Counsel and later as Executive Vice President of
ARA Living Centers until the formation of Living Centers of America, Inc. in
1992.
JAMES BOLIN (43) has served as a director of the Company since April 2001.
Since 1995, Mr. Bolin has been Vice President and Secretary of Appaloosa
Management L.P. Mr. Bolin serves as a director of Inamed Corporation, a global
surgical and medical device company, and Bio-Plexus, Inc., a designer and
manufacturer of safety medical products. (1)
MICHAEL J. EMBLER (37) has served as a director of the Company since July
2001. Since July 2001, Mr. Embler has been Vice President of Franklin Mutual
Advisers, LLC. From October 1992 to May 2001, he served in various positions
with Nomura Holding America, most recently as Managing Director.
GARRY N. GARRISON (55) has served as a director of the Company since April
2001. From 1997 to 2000, Mr. Garrison served as Senior Vice President of
Dynamic Healthcare Solutions, Inc., a venture capital firm specializing in
high-growth, health related businesses. From 1996 to 1997, he served as
President and Chief Executive Officer, Specialty Services Division of the
Foundation Health Systems, Inc., overseeing operations for various specialty
services companies. Mr. Garrison also served as President and Chief Operating
Officer of Integrated Pharmaceutical Services from 1994 to 1996. (1)(2)
ISAAC KAUFMAN (54), a certified public accountant, has served as a director
of the Company since April 2001. Since September 1998, Mr. Kaufman has served
as the Senior Vice President and Chief Financial Officer of Advanced Medical
Management Inc., a manager of medical practices and an outpatient surgical
center. From February 1998 to September 1998, he served as the Chief Financial
Officer of Bio Science Contract Production Corp., a contract manufacturer of
bulk pharmaceuticals and biologics. Mr. Kaufman also served as Chief Financial
Officer of VSI Group, Inc. from October 1996 to February 1998. Mr. Kaufman
serves as a director of TransWorld Entertainment Corporation, a leading
specialty retailer of music and video products. (1)
JOHN H. KLEIN (55) has served as a director of the Company since April 2001.
Mr. Klein has been the Chairman and Chief Executive Officer of Strategic
Business and Technology Solutions, LLC, a strategy business and technology
advisory firm, since June 1998. Since 2001, he also has served as Chairman and
Managing Director of True North Partners, a consulting and private equity fund.
Mr. Klein also has served as the Chairman and Chief Executive Officer of BI
Logix, Inc., a business intelligence software solutions company, since May
1998. In addition, he has served as Chairman and Chief Executive Officer of
DentalLine.com, a group benefit and internet company, since July 1999. From
March 1998 to August 2000, he served as Director and Vice Chairman of Image
Vision, a developer and marketer of imaging systems and products. Mr. Klein
also served as Chairman and Chief Executive Officer of the MIM Corporation, a
provider of pharmacy benefit services, from 1996 to May 1998. Mr. Klein is a
director of U.S. Interactive, Inc. and Sunbeam Corporation. (1)(2)
DAVID A. TEPPER (44) has served as a director of the Company since April
2001. Mr. Tepper has been President of Appaloosa Management L.P. since 1993.
Mr. Tepper also serves as a director of Inamed Corporation, a global surgical
and medical device company. (2)
The information contained in this Proxy Statement concerning the nominees is
based upon statements made or confirmed to the Company by or on behalf of such
nominees, except to the extent certain information appears in its records.
Directors' ages are given as of January 1, 2002.
--------
(1) Member of the Audit and Compliance Committee, of which Mr. Kaufman and Mr.
Klein serve as Co-Chairmen.
(2) Member of the Executive Compensation Committee, of which Mr. Klein is
Chairman.
3
SHARES OF COMMON STOCK OF THE COMPANY COVERED BY PROXIES EXECUTED AND
RECEIVED IN THE ACCOMPANYING FORM WILL BE VOTED FOR THE ELECTION AS DIRECTORS
OF ALL OF THE NOMINEES, UNLESS OTHERWISE SPECIFIED ON THE PROXY. The Board of
Directors does not contemplate that any of the nominees will be unable to
accept election as a director. However, in the event that one or more nominees
are unable or unwilling to accept or are unavailable to serve, the persons
named in the proxies or their substitutes will have authority, according to
their judgment, to vote or refrain from voting for other individuals as
directors.
CERTAIN INFORMATION CONCERNING THE BOARD OF DIRECTORS
In connection with the Company's emergence from bankruptcy, a new board of
directors, including representatives of the principal security holders
following the reorganization, was appointed. Each of the prior Board members
resigned on April 20, 2001.
During 2001, the Board of Directors held twelve meetings, including four
regular and eight special meetings. Each director attended more than 75% of the
total number of meetings of the Board and the committees on which each served.
The Board of Directors has established an Audit and Compliance Committee and an
Executive Compensation Committee. The Company does not have a nominating or
similar committee.
Audit and Compliance Committee. The Audit and Compliance Committee held five
meetings during 2001. The Audit and Compliance Committee assists the Board of
Directors in monitoring (a) the adequacy of the Company's system of internal
controls, accounting policies, financial reporting practices, and the quality
and integrity of the Company's financial reporting and (b) the Company's
compliance with applicable laws, regulations and policies.
Executive Compensation Committee. The Executive Compensation Committee held
four meetings in 2001. The Executive Compensation Committee assists the Board
of Directors in fulfilling its responsibility to the shareholders and
investment community to ensure that the Company's key executives and Board
members are compensated in accordance with the Company's overall compensation
policies. The Committee recommends and approves compensation policies, programs
and pay levels that are necessary to support the Company's objectives and that
are rational and reasonable to the value of the services rendered.
COMPENSATION OF DIRECTORS
During 2001, non-employee directors of the Company received $2,000 for each
board meeting attended and $1,000 for each committee meeting attended. In
addition, non-employee directors received a $2,500 retainer for each calendar
quarter that they served as a director.
Pursuant to the Company's Stock Option Plan for Non-Employee Directors (the
''Directors Plan''), each non-employee member of the Board received an option
to purchase 10,000 shares of Common Stock. Each non-employee director serving
on May 21, 2001 received an option having an exercise price of $32.00 per share
which was the Executive Compensation Committee's determination of the fair
market value of the Common Stock on the date of grant. On July 17, 2001, Mr.
Embler was granted an option to purchase 10,000 shares of Common Stock having
an exercise price of $47.50 per share in connection with his appointment to the
Board of Directors. All of these options are exercisable in four equal annual
installments beginning on the first anniversary of their grant date and have a
ten year term.
In addition, under the Directors Plan, the Company also will issue, on
January 1 of each year during the term of the Directors Plan, an option to
purchase 3,000 shares of Common Stock to each non-employee director. In
addition, upon the appointment or election of a person as a non-employee
director for the first time, such
4
director will receive a one-time grant of an option to purchase 10,000 shares
of Common Stock. These options will have an exercise price equal to the fair
market value of the Common Stock on the date the option is granted in
accordance with the terms of the Directors Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Common Stock and the Company's Series A and Series B warrants, as
of January 31, 2002, by (1) each shareholder known by the Company to be the
beneficial owner of more than 5% of its outstanding shares of Common Stock, (2)
each person who is a director or nominee for director, (3) each of the
Company's Named Executive Officers (as defined herein), and (4) all of the
persons who are directors and executive officers of the Company, as a group.
Amount and Nature of Beneficial
Ownership (1) Percent of Class
------------------------------- ------------------------
Common Series A Series B Common Series A Series B
Name of Beneficial Owner Stock Warrants Warrants Stock Warrants Warrants
------------------------ --------- -------- --------- ------ -------- --------
Directors and Named Executive Officers
Edward L. Kuntz.......................... 125,000 -- -- * -- --
James Bolin (2).......................... 4,996,822 720,398 1,800,996 24.7 36.0 36.0
Michael J. Embler........................ -- -- -- -- -- --
Garry N. Garrison........................ -- -- -- -- -- --
Isaac Kaufman............................ -- -- -- -- -- --
John H. Klein............................ -- -- -- -- -- --
David A. Tepper (2)...................... 4,996,822 720,398 1,800,996 24.7 36.0 36.0
Frank J. Battafarano..................... 30,905 -- -- * -- --
Richard E. Chapman....................... 31,062 -- -- * -- --
Donald D. Finney......................... 28,500 -- -- * -- --
Richard A. Schweinhart................... 31,050 -- -- * -- --
All Directors and Executive Officers as a
Group (16 persons) (3)................. 5,326,030 720,398 1,800,996 26.4 36.0 36.0
Other Security Holders with More than
5% Ownership
Appaloosa Management L.P., Appaloosa
Partners, Inc. and David A. Tepper (2). 4,996,822 720,398 1,800,996 24.7 36.0 36.0
Stephen Feinberg (4)..................... 1,181,451 -- -- 5.7 -- --
Franklin Mutual Advisers, LLC (5)........ 5,047,831 560,242 1,400,603 25.7 28.0 28.0
Goldman, Sachs & Co. and The Goldman
Sachs Group, Inc. (6).................. 1,778,704 170,594 426,484 9.7 8.5 8.5
Van Kampen Prime Rate Income Trust (7)... 978,504 -- -- 5.5 -- --
Ventas, Inc. and Ventas Realty, Limited
Partnership (8)........................ 1,080,314 -- -- 6.1 -- --
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* Denotes less than 1%.
(1) Such information assumes that (a) options or warrants that are held by such
person (but not those held by any other person) and which are exercisable
within 60 days from the date of this Proxy Statement have been exercised
and (b) to the extent publicly available information does not specify which
portion of certain shares of Common Stock is in the form of warrants, such
shares are held in the form of Common Stock. Unless otherwise noted, the
Company believes that all persons named in the table have sole voting and
investment power with respect to all shares of Common Stock and/or warrants
beneficially owned by them. With respect to Mr. Schweinhart, his total
includes 50 shares held jointly with his spouse.
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(2) Based on a Schedule 13D/A jointly filed by Appaloosa Management L.P.,
Appaloosa Partners, Inc. and David A. Tepper dated November 14, 2001 with
the Securities and Exchange Commission (the "SEC") and a Form 4 jointly
filed with the SEC by Appaloosa Management L.P., Appaloosa Partners, Inc.,
David A. Tepper and James A. Bolin. According to these filings, Mr. Tepper
is the sole stockholder and President of Appaloosa Partners, Inc. Mr. Bolin
is Vice President and Secretary of Appaloosa Partners, Inc. Appaloosa
Partners, Inc. is the general partner of Appaloosa Management L.P.
Appaloosa Management L.P. is the general partner of Appaloosa Investment
Limited Partnership I and acts as an investment advisor to Palomino Fund
Ltd. According to the Schedule 13D/A, Appaloosa Management L.P., Appaloosa
Partners, Inc. and Mr. Tepper may be deemed to have the sole voting and
dispositive power with respect to 4,996,822 shares of Common Stock, of
which 2,521,394 represent shares issuable upon exercise of the Series A and
Series B warrants. The address of Appaloosa Management L.P., Appaloosa
Partners, Inc., Mr. Tepper and Mr. Bolin is 26 Main Street, 1/st/ Floor,
Chatham, New Jersey 07928.
(3) The number of shares of Common Stock shown in the table includes shares
issuable upon the exercise of 720,398 Series A warrants and 1,800,996
Series B warrants. See note 2.
(4) Based on a Schedule 13D filed by Stephen Feinberg on May 8, 2001 with the
SEC and other information provided to the Company. Cerberus Institutional
Partners, L.P. is the holder of 244,530 shares of Common Stock, Cerberus
International, Ltd. is the holder of 630,157 shares of Common Stock and
various other private investment funds own in the aggregate 306,764 shares
of Common Stock. Based on the Schedule 13D, Stephen Feinberg possesses sole
power to vote and direct the disposition of all securities described in the
immediately preceding sentence. The address of Mr. Feinberg is 450 Park
Avenue, 28/th/ Floor, New York, New York 10022.
(5) Based on a Schedule 13D/A filed by Franklin Mutual Advisers, LLC dated
January 9, 2002 with the SEC and other information available to the
Company. According to the Schedule 13D/A, the Common Stock is beneficially
owned by one or more open-end investment companies or other management
accounts of Franklin Mutual Advisers, LLC. Under its advisory contracts,
Franklin Mutual Advisers, LLC has sole voting and investment discretion
over these securities. The number of shares of Common Stock shown in the
table includes shares issuable upon the exercise of 560,242 Series A
warrants and 1,400,603 Series B warrants. Michael J. Embler is a Vice
President of Franklin Mutual Advisers, LLC and disclaims beneficial
ownership of shares held by Franklin Mutual Advisers, LLC. The address of
Franklin Mutual Advisers, LLC is 51 John F. Kennedy Parkway, Short Hills,
New Jersey 07078.
(6) Based on a Schedule 13G/A jointly filed by Goldman, Sachs & Co. and The
Goldman Sachs Group, Inc. on February 14, 2002 with the SEC and other
information available to the Company. According to the Schedule 13G/A,
Goldman, Sachs & Co. and The Goldman Sachs Group, Inc. share voting and
dispositive power with respect to these securities. The number of shares of
Common Stock shown in the table includes shares issuable upon the exercise
of 170,594 Series A warrants and 426,484 Series B warrants. The address of
Goldman, Sachs & Co. and The Goldman Sachs Group, Inc. is 85 Broad Street,
New York, New York 10004.
(7) Based on information provided to the Company by Van Kampen Prime Rate
Income Trust. The address of Van Kampen Prime Rate Income Trust is 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
(8) Based on a Schedule 13G/A jointly filed by Ventas, Inc. and Ventas Realty,
Limited Partnership on January 22, 2002 with the SEC. According to the
Schedule 13G/A, each of Ventas, Inc. and Ventas Realty, Limited Partnership
has shared ownership and voting dispositive power with respect to these
securities. Ventas, Inc. is the sole general partner of Ventas Realty,
Limited Partnership, and the sole member of the only limited partner of
Ventas Realty, Limited Partnership. The address of each of Ventas, Inc. and
Ventas Realty, Limited Partnership is 4360 Brownsboro Road, Suite 115,
Louisville, Kentucky 40207-1642.
6
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of the
Common Stock to file initial stock ownership reports and reports of changes in
ownership with the SEC. Based on a review of these reports and on written
representations from the reporting persons that no other reports were required,
the Company believes that the applicable Section 16(a) reporting requirements
were complied with for all transactions which occurred in 2001 except for a
late Form 3 filed by Franklin Mutual Advisers, LLC, reflecting the Company's
securities distributed to it under the Plan of Reorganization. The Form 3 was
subsequently filed by Franklin Mutual Advisers, LLC that reflects the
securities of the Company it received under the Plan of Reorganization.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following Summary Compensation Table sets forth compensation earned
during the three fiscal years ended December 31, 2001 by the Chief Executive
Officer of the Company and the other four most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Long-Term
Compensation Compensation
----------------------------------- ------------------------
Restricted Securities
Other Annual Stock Underlying All Other
Name and Principal Position Year Salary Bonus(1) Compensation(2) Awards Options Compensation(3)
--------------------------- ---- -------- ---------- --------------- ---------- ---------- ---------------
Edward L. Kuntz............... 2001 $795,700 $1,392,475 $123,902 $5,197,500(4) 135,000 $2,630,100
Chairman of the Board and 2000 771,630 1,120,125 113,695 -- -- 5,100
Chief Executive Officer 1999 735,385 337,500 115,911 450,000(5) 200,000 317,300
Richard A. Schweinhart........ 2001 $291,760 $ 481,404 -- $1,482,250(4) 38,500 $ 738,879
Senior Vice President and 2000 282,935 390,886 -- -- -- 13,325
Chief Financial Officer 1999 272,115 123,750 -- -- -- 122,376
Donald D. Finney.............. 2001 $291,760 $ 481,404 -- $1,482,250(4) 38,500 $ 234,267
President, Health Services 2000 282,935 390,886 -- -- -- 3,966
Division 1999 279,711 123,750 -- -- 80,000 120,625
Frank J. Battafarano.......... 2001 $257,500 $ 424,875 -- $1,305,150(4) 33,900 $ 202,705
President, Hospital Division 2000 248,651 345,000 -- -- -- 16,786
1999 213,654 96,750 -- -- -- 253,637
Richard E. Chapman............ 2001 $291,760 $ 481,404 -- $1,482,250(4) 38,500 $ 235,896
Chief Administrative and 2000 282,935 390,886 -- -- -- 5,100
Information Officer and 1999 274,421 123,750 -- -- -- 139,758
Senior Vice President
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(1) The amounts shown represent cash bonuses awarded under the Company's
short-term incentive plan and, for 2001 and 2000, amounts earned under the
Kindred Healthcare, Inc. 2000 Long-Term Incentive Plan. For 2001 and 2000,
the awards under the Long-Term Incentive Plan earned by the Named Executive
Officers were as follows:
Year Mr. Kuntz Mr. Schweinhart Mr. Finney Mr. Battafarano Mr. Chapman
---- --------- --------------- ---------- --------------- -----------
2001 $795,700 $262,584 $262,584 $231,750 $262,584
2000 540,750 178,448 178,448 157,500 178,448
See "--Long-Term Incentive Plan."
(2) These amounts represent travel and living expenses (including a gross-up
for applicable taxes) paid to Mr. Kuntz of $81,003 for each of 2001, 2000
and 1999 and certain transportation related benefits of $42,899, $32,692
and $34,908 for 2001, 2000 and 1999, respectively.
7
(3) In addition to certain amounts noted below, the amounts in this column
include contributions for the benefit of the Named Executive Officers to
the Company's Retirement Savings Plan ("RSP"), Deferred Compensation Plan
("DCP"), and for 1999, amounts funded and distributed from the Company's
former Supplemental Executive Retirement Plan ("SERP") as follows:
2001 2000 1999
--------------------- --------------------- -------------------------------
RSP DCP Total RSP DCP Total RSP DCP SERP Total
------ ------ ------- ------ ------ ------- ------ ------ -------- --------
Mr. Kuntz...... $5,100 -- $ 5,100 $5,100 -- $ 5,100 $4,800 -- -- $ 4,800
Mr. Schweinhart 5,100 -- 5,100 5,100 -- 5,100 4,800 -- -- 4,800
Mr. Finney..... 5,100 -- 5,100 3,966 -- 3,966 -- -- -- --
Mr. Battafarano 5,100 $7,963 13,063 5,100 $7,383 12,483 4,800 $5,902 $149,057 159,759
Mr. Chapman.... 5,100 -- 5,100 5,100 -- 5,100 4,800 -- -- 4,800
The amounts also include Retention Bonuses (as defined) paid to the Named
Executive Officers as follows:
Year Mr. Kuntz Mr. Schweinhart Mr. Finney Mr. Battafarano Mr. Chapman
---- --------- --------------- ---------- --------------- -----------
2001 $625,000 $229,167 $229,167 $179,167 $229,167
2000 -- -- -- -- --
1999 312,500 114,583 114,583 89,583 114,583
In addition, the amounts for 2001 for Mr. Kuntz and Mr. Schweinhart include
Performance Bonuses (as defined below) of $2,000,000 and $500,000,
respectively, for the successful completion of the Plan of Reorganization.
See "--Management Retention Plan." In addition, the amounts include certain
transportation related benefits for the following years:
Year Mr. Schweinhart Mr. Battafarano Mr. Chapman
---- --------------- --------------- -----------
2001 $4,612 $10,475 $1,629
2000 8,225 4,303 --
1999 2,993 4,295 --
(4) These amounts represent the fair market value on the date of grant of
shares of restricted stock granted on May 21, 2001 to the Named Executive
Officers as follows: Mr. Kuntz--135,000 shares; Mr. Schweinhart--38,500
shares; Mr. Finney--38,500 shares; Mr. Battafarano--33,900 shares; and Mr.
Chapman--38,500 shares. One-third of these shares vested on the date of
grant and the remaining two-thirds will vest as follows: 15% on each of the
first and second anniversaries of the grant date; 20% on the third
anniversary of the grant date and 50% on the fourth anniversary of the
grant date. Based on the closing price reported on the NASDAQ of $52.00 for
the Common Stock on December 31, 2001, these awards would have been valued
at the following amounts: Mr. Kuntz--$7,020,000; Mr.
Schweinhart--$2,002,000; Mr. Finney--$2,002,000; Mr.
Battafarano--$1,762,800; and Mr. Chapman--$2,002,000. The Company does not
pay dividends on its Common Stock, but the holder of restricted stock is
entitled to dividends if paid.
(5) This amount represents the fair market value on the date of grant of
200,000 restricted shares of the Company's former common stock granted on
February 12, 1999. These shares were scheduled to vest on January 1, 2000
but Mr. Kuntz voluntarily forfeited the restricted shares prior to the
vesting date.
8
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options to purchase
shares of Common Stock granted to the Named Executive Officers in 2001:
Potential Realizable Value at
Number of % of Total Market Assumed Annual Rates of Stock
Securities Options Price on Price Appreciation for
Underlying Granted to the Date Option Term(4)
Options Employees Exercise Price of Expiration ------------------------------
Name Granted (1) in 2001 Per Share(2) Grant(3) Date 0% 5% 10%
---- ----------- ---------- -------------- -------- ---------- -------- ---------- ----------
Edward L. Kuntz....... 135,000 13.5% $32.00 $38.50 5/21/06 $877,500 $2,313,473 $4,050,626
Richard A. Schweinhart 38,500 3.9% $32.00 $38.50 5/21/06 $250,250 $ 659,768 $1,155,178
Donald D. Finney...... 38,500 3.9% $32.00 $38.50 5/21/06 $250,250 $ 659,768 $1,155,178
Frank J. Battafarano.. 33,900 3.4% $32.00 $38.50 5/21/06 $220,350 $ 580,939 $1,017,157
Richard E. Chapman.... 38,500 3.9% $32.00 $38.50 5/21/06 $250,250 $ 659,768 $1,155,178
(1) All options shown in the above table become exercisable in three equal
annual installments, beginning on the first anniversary of the date of
grant, and have a five-year term. All options become fully exercisable upon
a change in control of the Company (as defined in the Company's 2000 Stock
Option Plan).
(2) The exercise price and any tax withholding obligations related to exercise
may be paid, at the discretion of the Executive Compensation Committee, in
cash, in shares of Common Stock or in any other reasonable consideration
deemed appropriate.
(3) The Executive Compensation Committee set an exercise price of $32.00 per
share based on its determination of the fair market value of the Common
Stock on the date of grant. The Executive Compensation Committee determined
that the minimal trading volume in the Common Stock between the date of the
Company's emergence from bankruptcy and the grant date did not represent a
fair trading value. Accordingly, the Executive Compensation Committee
established the exercise price based on the weighted average purchase price
of the Series A and Series B warrants issued in connection with the Plan of
Reorganization.
(4) The dollar amounts in this table represent the potential realizable value
of the stock options granted, assuming that the market price of the Common
Stock appreciates in value from the date of grant to the end of the option
term at annualized rates of 0%, 5% and 10% but before taxes associated with
exercise. Therefore, these amounts are not the actual value of the options
granted and are not intended to forecast possible future appreciation, if
any, in the price of the Common Stock. No assurance can be given that the
price of the Common Stock will appreciate at these rates or experience any
appreciation.
9
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of
options during 2001 and unexercised options held as of December 31, 2001 by the
Named Executive Officers.
Aggregate Option Exercises in 2001
and Year-end Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at 12/31/01 12/31/01(1)
Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Edward L. Kuntz....... -- -- -- 135,000 -- $2,700,000
Richard A. Schweinhart -- -- -- 38,500 -- $ 770,000
Donald D. Finney...... -- -- -- 38,500 -- $ 770,000
Frank J. Battafarano.. -- -- -- 33,900 -- $ 678,000
Richard E. Chapman.... -- -- -- 38,500 -- $ 770,000
--------
(1) The value of unexercised options was calculated by subtracting the exercise
price from the market value of the underlying Common Stock as of December
31, 2001. The market value of the Common Stock was $52.00 per share as of
December 31, 2001, based on the closing price per share on the NASDAQ.
Long-Term Incentive Plan
During 2000, the Executive Compensation Committee adopted the Company's 2000
Long-Term Incentive Plan, subject to consummation of the Plan of
Reorganization. This plan provides for the payment of cash bonus awards to key
employees of the Company upon attainment by the Company of specified
performance goals. For each performance period, the Executive Compensation
Committee selects plan participants who are in a position to contribute
materially to the success of the Company and establishes the performance goal
or goals to be measured under the plan. The performance periods under the plan
cover one year. The plan currently includes in excess of 600 employees,
including hospital and nursing center administrators.
Participants are eligible to receive cash bonuses based upon a percentage of
base salary and vary depending upon the participant's position within the
Company and the extent to which the performance goals established by the
Executive Compensation Committee are attained. The maximum awards eligible
under the plan as a percentage of base salary are 100% for the Chief Executive
Officer and 90% for the other Named Executive Officers. No awards are granted
under the plan until certain minimum levels of performance are reached. Awards
are generally payable in equal annual installments on or about each of the
first, second and third anniversaries of the end of the relevant performance
period, provided that the participant is employed by the Company at the time
payments are due.
Based upon the goals established by the Executive Compensation Committee for
the 2001 performance period, the Company achieved the maximum award under the
plan. These awards will be paid in three equal annual installments beginning on
or about December 31, 2002.
Management Retention Plan
In November 1999, the Company received approval from the bankruptcy court to
implement a management retention plan (the "Retention Plan") to enhance the
ability of the Company to retain key management employees during the
reorganization period. The Retention Plan provided for the payment of up to an
aggregate of $11 million in bonuses to various key employees of the Company.
The Retention Plan consisted of two parts: (1) the payment of up to an
aggregate of $7.3 million to key employees as retention bonuses ("Retention
Bonuses") and (2) the payment of up to an aggregate of $3.7 million to certain
employees who contributed significantly to the successful completion of the
Plan of Reorganization ("Performance Bonuses"). The Retention Plan provided that
10
the Retention Bonuses would be paid in three equal installments upon: (a) the
bankruptcy court's approval of the Retention Plan, (b) the effective date of
the Plan of Reorganization and (c) three months following the effective date of
the Plan of Reorganization. The Performance Bonuses were paid on the effective
date of the Plan of Reorganization.
Supplemental Executive Retirement Plan
In 1998, the Executive Compensation Committee adopted the Supplemental
Executive Retirement Plan which provided certain of the Named Executive
Officers and certain other officers of the Company with supplemental deferred
benefits in the form of retirement payments. Effective December 31, 1999, the
SERP was amended to freeze accumulated benefits under the SERP and eliminate
the accrual of any benefits thereafter. In February 2001, the SERP was further
amended to eliminate any change in control provisions. Following this
amendment, the SERP was terminated. The termination of the SERP will have no
effect on the future payment of vested benefits under the SERP.
In January 1999, the Executive Compensation Committee approved a partial
funding and distribution of individual annuity contracts to participants with
five or more years of service with the Company to settle approximately
one-third of the obligations under the SERP relating to such participants. In
addition, the eligible participants received a tax payment to cover their
estimated taxes associated with this distribution. Mr. Battafarano received an
annuity contract and a tax payment totaling $149,057 in 1999. No other Named
Executive Officer received any benefits under the SERP.
Employment and Other Agreements
In July 1998, the Company entered into employment agreements with its
officers, including certain of the Named Executive Officers. In February 1999,
the Company entered into a new employment agreement with Mr. Kuntz in
connection with his appointment as Chairman of the Board, Chief Executive
Officer and President. The Company also entered into an employment agreement
with Mr. Finney in connection with his employment in January 1999 as President,
Health Services Division. In November 1999, the Company also amended existing
employment agreements with Mr. Battafarano and Mr. Finney to provide consistent
benefits among the Company's executive officers. In December 2001, the Company
further amended the employment agreements of the executive officers, other than
Mr. Kuntz, to provide certain limited benefits for a voluntary termination
following the employment of a new president and chief operating officer by the
Company.
The agreements for the Named Executive Officers generally contain standard
terms except as noted below. These agreements have a one year term but are
extended automatically unless the Company notifies the Named Executive Officer.
Upon such notification, the employment agreements will terminate in one year.
The employment agreements provide a base salary and the ability of the Named
Executive Officer to be eligible for bonuses and to participate in the
Company's incentive and other employee benefit plans. Mr. Kuntz's agreement
also provides that the Company will pay $6,750 per month (which includes a
gross-up for applicable taxes), for travel and living expenses incurred by Mr.
Kuntz. The base salaries for 2001 for the Named Executive Officers under the
employment agreements were as follows: Mr. Kuntz--$795,700; Mr.
Schweinhart--$291,760; Mr. Finney--$291,760; Mr. Battafarano--$257,500; and Mr.
Chapman--$291,760. The Named Executive Officers may receive increases in their
base salaries as approved by the Executive Compensation Committee.
Under certain circumstances, the employment agreements also provide for
severance payments if the Named Executive Officer's employment is terminated.
If employment is terminated by reason of death or disability, the Named
Executive Officer is entitled to a prorated portion of his target bonus. If the
Named Executive Officer's employment is terminated for cause, no additional
payments are made under the employment agreements. If the Named Executive
Officer's employment is terminated for good reason (as defined in the
employment agreements) or other than for cause (collectively, an "Involuntary
Termination"), certain levels of severance payments are provided under the
employment agreements.
11
Upon an Involuntary Termination, Mr. Kuntz's agreement provides for a cash
payment equal to the prorated portion of his target bonus in the year of
termination and three times his base salary and target bonus in the year of
termination. In addition, Mr. Kuntz would be entitled to coverage under the
Company's employee benefit plans for three years, three years of additional
vesting of restricted stock awards and stock options, and an additional three
years in which to exercise the options. Mr. Kuntz's agreement also requires the
Company to provide substantially similar office space and the services of an
administrative assistant for three years.
Upon the Involuntary Termination of the other Named Executive Officers,
their agreements provide for a cash payment equal to the prorated portion of
their target bonus in the year of termination and one and one-half times their
base salary and target bonus in the year of termination. In addition, they
would be entitled to coverage under the Company's employee benefit plans for 18
months, 18 months of additional vesting of restricted stock awards and stock
options, and an additional 18 months in which to exercise such options. The
employment agreements for the Named Executive Officers, other than Mr. Kuntz,
also provide for one year of additional vesting for all options if the
executive voluntarily leaves the Company's employment within a 180 day period
beginning on the six month anniversary of the first day of employment of the
Company's new president and chief operating officer.
The Company also has entered into Change in Control Severance Agreements
with certain of its key employees, including the Named Executive Officers.
These agreements provide for the payment of severance benefits under certain
circumstances. These benefits become payable at any time within two years after
a change in control of the Company if: (a) the Company terminates the
executive's employment without cause or (b) the executive terminates employment
with the Company for good reason (as defined in the agreement) or within either
of two 30-day periods commencing 30 days after the change in control and one
year after the change in control, respectively. The benefits to be afforded the
Named Executive Officers include: (a) a cash payment equal to three times base
salary and target bonus as of the termination of employment; (b) continuation
of health, life and disability insurance coverage for three years; (c) full
vesting under the Company's retirement savings plan; and (d) an additional
payment for any excise taxes the Named Executive Officer may incur as a result
of the change in control payments.
Compensation Committee Interlocks and Insider Participation
Between January 1, 2001 and the Company's emergence from bankruptcy, the
following persons served on the Executive Compensation Committee of the Board
of Directors: Mr. Stanley C. Gault (Chairman), Mr. Ulysses L. Bridgeman, Jr.,
Ms. Donna R. Ecton and Mr. William H. Lomicka. Beginning April 20, 2001, the
new members of the Executive Compensation Committee were John H. Klein
(Chairman), Jeff Altman, Garry N. Garrison and David A. Tepper. Mr. Altman
resigned from the Board of Directors effective June 19, 2001. None of the
persons who served on the Executive Compensation Committee during 2001 were
employees of the Company. Mr. Tepper engaged in certain transactions with the
Company during 2001. See "Certain Relationships and Related Transactions."
12
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
The Executive Compensation Committee of the Board of Directors is composed
entirely of independent directors. The Executive Compensation Committee is
responsible for establishing and administering the policies and programs that
govern both annual compensation and stock-based incentive compensation plans
for the executive officers of the Company. The Company's executive compensation
policy is based upon principles designed to motivate and retain executive
officers and to establish an appropriate relationship between executive pay and
short-term and long-term performance. The key components of the Company's
compensation program are base salary, annual incentive awards and equity
participation. These components are administered to provide total compensation
that is competitive in the marketplace, rewards successful short-term and
long-term financial and non-financial performance and aligns executive
officers' interests with those of shareholders.
The Executive Compensation Committee reviews each component of executive
compensation on an annual basis with the assistance of an independent
consultant and the use of executive compensation surveys from comparable
healthcare and service companies. The companies surveyed include some, but not
all, of the companies covered in the indices included in the Performance Graph.
The Company's policy is to target total executive compensation between the
50/th/ and 75/th/ percentile of the marketplace as defined above.
The Company experienced certain extraordinary events in 2001, which
influenced the Executive Compensation Committee's decisions relating to
executive compensation in 2001. These events included: (a) the Company's
successful reorganization and emergence from bankruptcy, (b) the cancellation
of the previous equity securities of the Company, and (c) the cancellation of
all equity-based incentive agreements previously provided to executive officers.
As part of its Plan of Reorganization, the Company adopted the 2000 Stock
Option Plan, the 2000 Restricted Share Plan and the 2000 Long-Term Incentive
Plan for the purpose of providing long-term incentive compensation awards to
key employees of the Company following the consummation of the reorganization.
In November 1999, the Company received approval from the bankruptcy court to
implement the Retention Plan to enhance the ability of the Company to retain
key management employees during the reorganization period. The Retention Plan
was established by the Company's former executive compensation committee. The
Retention Plan provided for the payment of up to an aggregate of $11 million in
bonuses to various key employees of the Company. The Retention Plan consisted
of two parts: (1) the payment of up to an aggregate of $7.3 million to key
employees as Retention Bonuses and (2) the payment of up to an aggregate of
$3.7 million to certain employees who contributed significantly to the
successful completion of the Plan of Reorganization.
Base Salary
Base salary for executive officers is determined by an assessment of overall
Company performance, the individual executive officer's performance, changes in
executive officer responsibility and relevant industry survey findings. While
certain aspects of performance can be measured in financial terms, the
Executive Compensation Committee also evaluates executives in areas of
performance that are more subjective. These areas include the success of the
executive officer in developing and executing the Company's strategic plans,
addressing the significant changes affecting the healthcare industry,
developing key employees and exercising leadership. The Company's policy is to
target executive base salaries at the 50/th/ percentile of the marketplace as
defined above.
Annual Incentive
The Executive Compensation Committee believes that a significant portion of
total cash compensation for executive officers should be subject to the
attainment of specific Company financial and quality criteria. This approach
creates a direct incentive for executive officers to achieve desired
performance goals and places a
13
significant percentage of each executive officer's compensation at risk. The
Company's incentive compensation plans are designed to reward officers and
other designated key employees for the attainment of financial and quality
performance objectives approved annually by the Executive Compensation
Committee. Incentive compensation objectives are constructed to encourage
responsible and profitable growth while taking into account non-routine factors
that may be integral to the success of the Company.
The Company maintains a short-term incentive compensation plan for executive
officers and other key employees of the Company. The Executive Compensation
Committee establishes performance goals upon which the annual bonuses are
based. Typically, these goals are based upon financial performance, accounts
receivable collections and individual performance goals for each eligible
employee. Annual bonuses are based upon a percentage of the employee's salary.
Target bonuses for 2001 were 60% for the Named Executive Officers. The annual
incentive plan also provides additional compensation beyond the target bonuses
for performance exceeding the targeted goals. Based on the achievement of the
established goals, the Executive Compensation Committee awarded bonuses to the
executive officers equal to 75% of their base salaries. For 2001, the
short-term incentive bonuses earned by the Named Executive Officers were as
follows: Mr. Kuntz--$596,775; Mr. Schweinhart--$218,820; Mr. Finney--$218,820;
Mr. Battafarano--$193,125; and Mr. Chapman--$218,820.
The Long-Term Incentive Plan provides for the payment of cash bonus awards
to key employees of the Company upon attainment by the Company of specified
performance goals. For each performance period, the Executive Compensation
Committee selects plan participants who are in a position to contribute
materially to the success of the Company and establishes the performance goal
or goals to be measured under the plan. The performance periods under the plan
cover one year. Participants are eligible to receive cash bonuses based upon a
percentage of salary and vary depending on the participant's position within
the Company and the extent to which the performance goals established by the
Executive Compensation Committee are attained. The maximum awards eligible
under the plan as a percentage of base salary are 100% for the Chief Executive
Officer and 90% for the other Named Executive Officers. No awards are granted
under the plan until certain minimum levels of performance are reached. Cash
awards are payable in equal annual installments on or about each of the first,
second and third anniversaries of the end of the relevant performance period,
provided that the participant is employed by the Company at the time payments
are due. Based upon the goals established by the Executive Compensation
Committee for the 2001 performance period, the Company achieved the maximum
award under the plan.
Equity Participation
The Executive Compensation Committee believes that equity participation is a
key component of its executive compensation program. The use of such awards
provides a long-term link between the results achieved for the Company's
shareholders and the rewards provided to executive officers. Stock options and
other stock-based compensation are granted to executive officers primarily
based on the executive officer's actual and potential contribution to the
Company's growth, long-term performance and the practices of companies in the
long-term care industry. Stock-based compensation is designed to retain
executive officers and motivate them to enhance shareholder value by aligning
the financial interests of executive officers with those of the Company's
shareholders. Stock-based compensation also provides an effective incentive for
management to create shareholder value over the long term since the full
benefit of the compensation package cannot be realized unless an appreciation
in the price of the Common Stock occurs over a number of years.
Following the consummation of the Plan of Reorganization, the Executive
Compensation Committee granted a total of 600,000 restricted stock awards
pursuant to the 2000 Restricted Share Plan and 592,700 stock options to the
officers of the Company pursuant to the 2000 Stock Option Plan. The restricted
stock and stock option awards, respectively, granted to the Named Executive
Officers in 2001 were as follows: Edward L. Kuntz--135,000 shares and 135,000
options; Richard A. Schweinhart--38,500 shares and 38,500 options; Donald D.
Finney--38,500 shares and 38,500 options; Frank J. Battafarano--33,900 shares
and 33,900 options; and Richard E. Chapman--38,500 shares and 38,500 options.
14
The Executive Compensation Committee granted the stock options and
restricted stock described above based upon its judgment that the number and
terms were appropriate and desirable considering each executive officer's
actual and potential contribution to the Company, including contributions to
the completion of the Plan of Reorganization. The assessment of actual and
potential contribution was based on the Executive Compensation Committee's
subjective evaluation of each executive officer's ability, skills, efforts and
leadership.
Retention Payments
In accordance with the Retention Plan, each Named Executive Officer received
the final two installments of the Retention Bonuses in 2001 following the
successful completion of the Plan of Reorganization. In addition, Mr. Kuntz and
Mr. Schweinhart were awarded Performance Bonuses of $2,000,000 and $500,000,
respectively, for their substantial efforts toward the successful
reorganization of the Company. The amounts of these awards were established
when the Retention Plan was adopted in 1999.
Compensation of the Chief Executive Officer
Consistent with the executive compensation policy and components described
above, the Executive Compensation Committee determined the compensation
received by Edward L. Kuntz, Chairman of the Board and Chief Executive Officer
of the Company, for services rendered in 2001. Under Mr. Kuntz's guidance, the
Company (a) successfully emerged from bankruptcy, (b) implemented its corporate
integrity agreement, (c) improved its financial results and (d) completed an
equity offering that established a public trading market for the Company's
Common Stock. Based upon these accomplishments and upon executive compensation
surveys, the Executive Compensation Committee believes that the base salary,
incentive bonuses, restricted share award and option grant to Mr. Kuntz were
fair and competitive. The assessment of actual and potential contribution was
based on the Executive Compensation Committee's subjective evaluation of
Mr. Kuntz's abilities, skills, efforts and leadership.
Executive Compensation Tax Deductibility
The Omnibus Budget Reconciliation Act of 1993 amended the Internal Revenue
Code (the ''Code'') to provide generally that the compensation paid by publicly
held corporations to the chief executive officer and the four most highly paid
senior executive officers in excess of $1,000,000 per executive will be
deductible by the Company only if paid pursuant to qualifying performance-based
compensation plans approved by shareholders of the Company. Compensation as
defined by the Code includes, among other things, base salary, incentive
compensation and gains on stock options and restricted stock. It is the
Executive Compensation Committee's policy to maximize the effectiveness of the
Company's executive compensation plans. In that regard, the Executive
Compensation Committee intends to maintain flexibility to take actions which
are deemed to be in the best interests of the Company and its shareholders.
Such actions may not always qualify for tax deductibility under the Code.
All members of the Executive Compensation Committee of the Company listed
below submit the foregoing report.
EXECUTIVE COMPENSATION COMMITTEE
John H. Klein, Chairman
Garry N. Garrison
David A. Tepper
15
AUDIT AND COMPLIANCE COMMITTEE REPORT
The Audit and Compliance Committee (the "Audit Committee") of the Company is
currently comprised of four directors. Each member is independent and
financially literate as defined in the NASDAQ listing standards. The Board of
Directors has adopted a written charter for the Audit Committee that is
included as Appendix A to this Proxy Statement.
The Audit Committee reviews the Company's financial reporting processes on
behalf of the Board of Directors. In fulfilling its responsibilities, the Audit
Committee has reviewed and discussed the audited consolidated financial
statements contained in the Annual Report on Form 10-K for the year ended
December 31, 2001 with the Company's management and its independent auditors,
PricewaterhouseCoopers LLP ("PwC"). Management is responsible for the financial
statements and the underlying financial reporting processes, including the
system of internal accounting controls. PwC is responsible for expressing an
opinion on the conformity of the consolidated financial statements with
accounting principles generally accepted in the United States of America.
Management has represented to PwC and the Audit Committee that the Company's
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America.
The Audit Committee held five meetings during 2001. The Audit Committee
discussed with PwC the matters required to be discussed by Statement on
Auditing Standards No. 61, Communication with Audit Committees, as amended. In
addition, the Audit Committee has discussed with PwC the auditors' independence
from the Company and its management including the matters in the written
disclosures required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees. In connection with this
discussion, the Audit Committee also reviewed the fees paid by the Company to
PwC for the year ended December 31, 2001. During 2001, the Company paid PwC a
total of $2,199,000, consisting of $800,000 relating to audit fees and
$1,399,000 relating to all other fees. No amounts were paid for financial
systems design or implementation.
The Audit Committee also discussed with the Company's internal auditors and
with PwC the overall scope and plans for their respective audits. The Audit
Committee meets periodically with the Company's internal auditors and with PwC,
with and without management present, to discuss the results of their
examinations, the evaluation of the Company's internal controls and the overall
quality of the Company's financial reporting.
In reliance upon the reviews and discussions referenced above and the report
of the independent auditors included in the independent auditors opinion with
respect to the audited financial statements, the Audit Committee recommended to
the Board of Directors, and the Board has approved, that the audited
consolidated financial statements be included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 filed with the SEC.
All members of the Audit and Compliance Committee of the Company listed
below submit the foregoing report:
AUDIT AND COMPLIANCE COMMITTEE
Isaac Kaufman, Co-Chairman
John H. Klein, Co-Chairman
James Bolin
Garry N. Garrison
16
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to the Plan of Reorganization, the Company issued to certain
claimholders in exchange for their claims: an aggregate of (1) $300 million of
senior secured notes, bearing interest at the London Interbank Offered Rate (as
defined in the agreement) plus 4 1/2%, which began accruing interest
approximately two quarters after the Effective Date (the "Senior Secured
Notes"), (2) 15,000,000 shares of Common Stock, (3) 2,000,000 Series A
warrants, and (4) 5,000,000 Series B warrants. Each of the Series A warrants
and the Series B warrants have a five-year term with an exercise price of
$30.00 and $33.33 per share, respectively. As a result of the exchange
described above, the holders of certain claims acquired control of the Company
and the holders of the Company's former common stock relinquished control.
Certain of the Company's existing shareholders were claimholders in the
bankruptcy and accordingly, participated in the distributions under the Plan of
Reorganization. To the knowledge of the Company, the holders of more than five
percent of the Company's Common Stock listed below received the following
distributions under the Plan of Reorganization: Appaloosa Management L.P.,
Appaloosa Partners, Inc. and David A. Tepper received 2,975,428 shares of
Common Stock, 720,398 Series A warrants, 1,800,996 Series B warrants and
approximately $44.6 million of the Senior Secured Notes; Stephen Feinberg and
certain related entities received 1,181,451 shares of Common Stock and
approximately $30.1 million of the Senior Secured Notes; Franklin Mutual
Advisers, LLC received 3,462,336 shares of Common Stock, 560,242 Series A
warrants, 1,400,603 Series B warrants and approximately $66.3 million of the
Senior Secured Notes; Goldman, Sachs & Co. and The Goldman Sachs Group, Inc.
received 1,416,412 shares of Common Stock, 170,594 Series A warrants, 426,484
Series B warrants and approximately $30.7 million of the Senior Secured Notes;
Van Kampen Prime Rate Income Trust received 1,064,604 shares of Common Stock
and approximately $32.5 million of the Senior Secured Notes; and Ventas
received 1,498,500 shares of Common Stock. Mr. David A. Tepper, a director of
the Company, is the sole stockholder and President of Appaloosa Partners, Inc.
Mr. James Bolin, a director of the Company, is Vice President and Secretary of
Appaloosa Partners, Inc. Mr. Tepper also is the general partner of Appaloosa
Management L.P. Mr. Michael J. Embler, a director of the Company, is a Vice
President of Franklin Mutual Advisers, LLC.
In connection with the Plan of Reorganization, the Company also entered into
a registration rights agreement with Appaloosa Management L.P., Franklin Mutual
Advisers, LLC, Goldman, Sachs & Co. and Ventas Realty, Limited Partnership (the
"Registration Rights Agreement"). The Registration Rights Agreement requires
the Company to use its reasonable best efforts to file, cause to be declared
effective and keep effective for at least two years or until all of their
shares of Common Stock or warrants are sold, a "shelf" registration statement
covering sales of such security holders' shares of Common Stock and warrants
or, in the case of Ventas, the distribution of some or all of the shares of the
Common Stock that it owns to the Ventas stockholders. The Company filed the
shelf registration statement on Form S-3 with the SEC on September 19, 2001.
The shelf registration statement became effective on November 7, 2001.
The Registration Rights Agreement also provides that, subject to certain
limitations, each security holder party thereto has the right to demand that
the Company register all or a part of the Common Stock and warrants acquired by
that security holder pursuant to the Plan of Reorganization, provided that the
estimated market value of the Common Stock and warrants to be registered is at
least $10 million in the aggregate or not less than 5% of the Common Stock and
warrants. The Company is required to use its reasonable best efforts to effect
any such registration. Such registrations will be at the Company's expense,
subject to certain exceptions.
In addition, under the Registration Rights Agreement, the security holders
party thereto have certain rights to require the Company to include in any
registration statement that it files with respect to any offering of equity
securities (whether for the Company's own account or for the account of any
holders of the Company's securities) such amount of Common Stock and warrants
as are requested by the security holder to be included in the registration
statement, subject to certain exceptions. Such registrations will be at the
Company's expense, subject to certain exceptions.
17
Pursuant to Amendment No. 1 to the Registration Rights Agreement dated as of
August 13, 2001, the parties to the Registration Rights Agreement agreed to
extend the deadline for the Company to file a "shelf" registration statement
from 120 days to 150 days after the Effective Date. As noted above, the Company
filed a shelf registration statement with the SEC on September 19, 2001 and the
shelf registration statement was declared effective on November 7, 2001.
Pursuant to Amendment No. 2 to the Registration Rights Agreement dated as of
October 22, 2001, the parties to the Registration Rights Agreement agreed to an
exception to certain restrictions in the Registration Rights Agreement to allow
Ventas to distribute up to 350,000 shares of Common Stock to its stockholders
on or after December 24, 2001.
In the fourth quarter of 2001, the Company completed a public offering of
approximately 3.57 million shares of Common Stock priced at $46.00 per share.
In the offering, the Company sold approximately 2.08 million newly issued
shares and certain of the holders of five percent or more of the Common Stock
participated in the offering as selling shareholders. The parties that
participated and the number of shares sold in the offering were as follows:
Appaloosa Management L.P., Appaloosa Partners, Inc. and David A.
Tepper--500,000 shares; Franklin Mutual Advisers, LLC--400,000 shares; Goldman,
Sachs & Co. and The Goldman Sachs Group, Inc.--250,000 shares; Van Kampen Prime
Rate Income Trust--86,100 shares; and Ventas--83,300 shares.
In addition, Goldman, Sachs & Co. ("Goldman") acted as co-lead manager in
the public offering. In accordance with the underwriting agreement entered into
between various parties, including the Company and Goldman, the Company paid
Goldman approximately $2,863,000 in underwriting commissions.
In connection with the Plan of Reorganization, the Company also entered into
and assumed several agreements with Ventas. In addition to the Common Stock
received by Ventas, the Company amended and restated its master lease
agreements with Ventas and paid Ventas a $4.5 million cash payment as
additional future rent. The Company also assumed and agreed to continue to
perform its obligations under various agreements (the "Spin-off Agreements")
entered into at the time of the Spin-off. Descriptions of these agreements with
Ventas are summarized below.
Master Lease Agreements
Under the Plan of Reorganization, the Company assumed the original master
lease agreements with Ventas and its affiliates and simultaneously amended and
restated the agreements into four new master leases (collectively, the "Master
Lease Agreements"). The following summary description of the Master Lease
Agreements is qualified in its entirety by reference to the Master Lease
Agreements, as filed by the Company with the SEC.
Term and Renewals
Each Master Lease Agreement includes land, buildings, structures and other
improvements on the land, easements and similar appurtenances to the land and
improvements, and permanently affixed equipment, machinery and other fixtures
relating to the operation of the leased properties. There are several bundles
of leased properties under each Master Lease Agreement, with each bundle
containing approximately 7 to 12 leased properties. Each bundle contains both
nursing centers and hospitals. All leased properties within a bundle have base
terms ranging from 10 to 15 years beginning from May 1, 1998, subject to
certain exceptions.
At the Company's option, all, but not less than all, of the leased
properties in a bundle may be extended for one five-year renewal term beyond
the base term at the then existing rental rate plus the then existing
escalation amount per annum. The Company may further extend for two additional
five-year renewal terms beyond the first renewal term at the greater of the
then existing rental rate plus the then existing escalation amount per annum or
the then fair market value rental rate. The rental rate during the first
renewal term and any additional renewal
18
term in which rent due is based on the then existing rental rate will escalate
each year during such term(s) at the applicable escalation rate.
The Company may not extend the Master Lease Agreements beyond the base term
or any previously exercised renewal term if, at the time the Company seeks such
extension and at the time such extension takes effect, (1) an event of default
has occurred and is continuing or (2) a Medicare/Medicaid event of default (as
described below) and/or a licensed bed event of default (as described below)
has occurred and is continuing with respect to three or more leased properties
subject to a particular Master Lease Agreement. The base term and renewal term
of each Master Lease Agreement are subject to termination upon default by the
Company (subject to certain exceptions) and certain other conditions described
in the Master Lease Agreements.
Rental Amounts and Escalators
Each Master Lease Agreement is commonly known as a triple-net lease or an
absolute-net lease. Accordingly, in addition to rent, the Company is required
to pay the following: (1) all insurance required in connection with the leased
properties and the business conducted on the leased properties, (2) all taxes
levied on or with respect to the leased properties (other than taxes on the net
income of Ventas) and (3) all utilities and other services necessary or
appropriate for the leased properties and the business conducted on the leased
properties.
Under each Master Lease Agreement, the aggregate annual rent is referred to
as base rent. Base rent equals the sum of current rent and accrued rent. The
Company is obligated to pay the portion of base rent that is current rent, and
unpaid accrued rent will be paid as set forth below.
From the effective date of the Master Lease Agreements through April 30,
2004, base rent will equal the current rent. Under the Master Lease Agreements,
the annual aggregate base rent owed by the Company currently is $180.7 million.
For the period from May 1, 2001 through April 30, 2004, annual aggregate base
rent payable in cash will escalate at an annual rate of 3 1/2% over the prior
period base rent if certain revenue parameters are obtained. During the year
ended December 31, 2001, the Company paid Ventas approximately $181.0 million
in rent.
Each Master Lease Agreement also provides that beginning May 1, 2004, the
annual aggregate base rent payable in cash will escalate at an annual rate of
2% (plus, upon the occurrence of certain events, an additional annual accrued
escalator amount of 1 1/2% of the prior period base rent) which will accrete
from year to year including an interest accrual at the London Interbank Offered
Rate plus 4 1/2% to be added to the annual accreted amount. This interest will
not be added to the aggregate base rent in subsequent years.
The unpaid accrued rent will become payable upon the refinancing of the
Company's existing debt or the termination or expiration of the applicable
Master Lease Agreement.
Reset Rights
During the one-year period commencing in July 2006, Ventas will have a one
time option to reset the base rent, current rent and accrued rent under each
Master Lease Agreement to the then fair market rental of the leased properties.
Upon exercising this reset right, Ventas will pay the Company a fee equal to a
prorated portion of $5 million based upon the proportion of base rent payable
under the Master Lease Agreement(s) with respect to which rent is reset to the
total base rent payable under all of the Master Lease Agreements. The
determination of the fair market rental will be effectuated through the
appraisal procedures in the Master Lease Agreements.
Use of the Leased Property
The Master Lease Agreements require that the Company utilize the leased
properties solely for the provision of healthcare services and related uses and
as Ventas may otherwise consent. The Company is responsible for
19
maintaining or causing to be maintained all licenses, certificates and permits
necessary for the leased properties to comply with various healthcare
regulations. The Company also is obligated to operate continuously each leased
property as a provider of healthcare services.
Events of Default
Under each Master Lease Agreement, an "Event of Default" will be deemed to
occur if, among other things:
. the Company fails to pay rent or other amounts within five days after
notice,
. the Company fails to comply with covenants, which failure continues for 30
days or, so long as diligent efforts to cure such failure are being made,
such longer period (not over 180 days) as is necessary to cure such
failure,
. certain bankruptcy or insolvency events occur, including filing a petition
of bankruptcy or a petition for reorganization under the bankruptcy code,
. an event of default arising from the Company's failure to pay principal or
interest on the Senior Secured Notes or any other indebtedness exceeding
$50 million,
. the maturity of the Senior Secured Notes or any other indebtedness
exceeding $50 million is accelerated,
. the Company ceases to operate any leased property as a provider of
healthcare services for a period of 30 days,
. a default occurs under any guaranty of any lease or the indemnity
agreements with Ventas,
. the Company or its subtenant loses any required healthcare license, permit
or approval or fails to comply with any legal requirements as determined
by a final unappealable determination,
. the Company fails to maintain insurance,
. the Company creates or allows to remain certain liens,
. the Company breaches any material representation or warranty,
. a reduction occurs in the number of licensed beds in a facility, generally
in excess of 10% (or less than 10% if the Company has voluntarily "banked"
licensed beds) of the number of licensed beds in the applicable facility
on the commencement date (a "licensed bed event of default"),
. Medicare or Medicaid certification with respect to a participating
facility is revoked and re-certification does not occur for 120 days (plus
an additional 60 days in certain circumstances) (a "Medicare/Medicaid
event of default"),
. the Company becomes subject to regulatory sanctions as determined by a
final unappealable determination and fails to cure such regulatory
sanctions within its specified cure period for any facility, the Company
fails to cure a breach of any permitted encumbrance within the applicable
cure period and, as a result, a real property interest or other beneficial
property right of Ventas is at material risk of being terminated, or
. the Company fails to cure the breach of any of the obligations of Ventas
as lessee under any existing ground lease within the applicable cure
period and, if such breach is a non-monetary, non-material breach, such
existing ground lease is at material risk of being terminated.
Remedies for an Event of Default
Except as noted below, upon an Event of Default under one of the Master
Lease Agreements, Ventas may, at its option, exercise the following remedies:
(1) after not less than ten days' notice to the Company, terminate the
Master Lease Agreement to which such Event of Default relates, repossess any
leased property, relet any leased property to a third party and require
20
that the Company pay to Ventas, as liquidated damages, the net present value of
the rent for the balance of the term, discounted at the prime rate,
(2) without terminating the Master Lease Agreement to which such Event of
Default relates, repossess the leased property and relet the leased property
with the Company remaining liable under such Master Lease Agreement for all
obligations to be performed by the Company thereunder, including the
difference, if any, between the rent under such Master Lease Agreement and the
rent payable as a result of the reletting of the leased property, and
(3) seek any and all other rights and remedies available under law or in
equity.
In addition to the remedies noted above, under the Master Lease Agreements,
in the case of a facility-specific event of default Ventas may terminate a
Master Lease Agreement as to the leased property to which the Event of Default
relates, and may, but need not, terminate the entire Master Lease Agreement.
Each of the Master Lease Agreements includes special rules relative to
Medicare/Medicaid events of default and licensed bed events of default. In the
event a Medicare/Medicaid event of default and/or a licensed bed event of
default occurs and is continuing (a) with respect to not more than two
properties at the same time under a Master Lease Agreement that covers 41 or
more properties and (b) with respect to not more than one property at the same
time under a Master Lease Agreement that covers 21 to and including 40
properties, Ventas may not exercise termination or dispossession remedies
against any property other than the property or properties to which the event
of default relates. Thus, in the event Medicare/Medicaid events of default and
licensed bed events of default would occur and be continuing (a) with respect
to one property under a Master Lease Agreement that covers less than 20
properties, (b) with respect to two or more properties at the same time under a
Master Lease Agreement that covers 21 to and including 40 properties, or (c)
with respect to three or more properties at the same time under a Master Lease
Agreement that covers 41 or more properties, then Ventas would be entitled to
exercise all rights and remedies available to it under the Master Lease
Agreements.
Assignment and Subletting
Except as noted below, the Master Lease Agreements provide that the Company
may not assign, sublease or otherwise transfer any leased property or any
portion of a leased property as a whole (or in substantial part), including by
virtue of a change of control, without the consent of Ventas, which may not be
unreasonably withheld if the proposed assignee (1) is a creditworthy entity
with sufficient financial stability to satisfy its obligations under the
related Master Lease Agreement, (2) has not less than four years experience in
operating healthcare facilities, (3) has a favorable business and operational
reputation and character and (4) has all licenses, permits, approvals and
authorizations to operate the facility and agrees to comply with the use
restrictions in the related Master Lease Agreement. The obligation of Ventas to
consent to a subletting or assignment is subject to the reasonable approval
rights of any mortgagee and/or the lenders under its credit agreement. The
Company may sublease up to 20% of each leased property for restaurants, gift
shops and other stores or services customarily found in hospitals or nursing
centers without the consent of Ventas, subject, however, to there being no
material alteration in the character of the leased property or in the nature of
the business conducted on such leased property.
In addition, each Master Lease Agreement allows the Company to assign or
sublease (a) without the consent of Ventas, 10% of the nursing center
facilities in each Master Lease Agreement and (b) with Ventas' consent (which
consent will not be unreasonably withheld, delayed or conditioned), two
hospitals in each Master Lease Agreement, if either (i) the applicable
regulatory authorities have threatened to revoke an authorization necessary to
operate such leased property or (ii) the Company cannot profitably operate such
leased property. Any such proposed assignee/sublessee must satisfy the
requirements listed above and it must have all licenses, permits, approvals and
other authorizations required to operate the leased properties in accordance
with the applicable permitted use. With respect to any assignment or sublease
made under this provision, Ventas agrees to execute a nondisturbance and
attornment agreement with such proposed assignee or subtenant. Upon any
assignment or subletting, the Company will not be released from its obligations
under the applicable Master Lease Agreement.
21
Subject to certain exclusions, the Company must pay to Ventas 80% of any
consideration received by the Company on account of an assignment and 80% (50%
in the case of existing subleases) of sublease rent payments (roughly equal to
revenue net of specified allowed expenses attributable to a sublease, and
specifically defined in the Master Lease Agreements), provided that Ventas'
right to such payments will be subordinate to that of the Company's lenders.
Ventas will have the right to approve the purchaser at a foreclosure of one
or more of the Company's leasehold mortgages by the Company's lenders. Such
approval will not be unreasonably withheld so long as such purchaser is
creditworthy, reputable and has four years experience in operating healthcare
facilities. Any dispute regarding whether Ventas has unreasonably withheld its
consent to such purchaser will be subject to expedited arbitration.
Under the Master Lease Agreements, Ventas has a right to sever properties
from the existing leases in order to create additional leases, a device adopted
to facilitate its financing flexibility. In such circumstances, the Company's
aggregate lease obligations remain unchanged. Ventas exercised this severance
right with respect to Master Lease Agreement No. 1 to create a new lease of 40
nursing centers (the "CMBS Lease") and mortgaged these properties in connection
with a securitized mortgage financing. The CMBS Lease is in substantially the
same form as the other Master Lease Agreements with certain modifications
requested by Ventas' lender and required to be made by the Company pursuant to
the Master Lease Agreements. The transaction closed on December 12, 2001.
Spin-off Agreements and Other Arrangements Under the Plan of Reorganization
In order to govern certain of the relationships between the Company and
Ventas after the Spin-off and to provide mechanisms for an orderly transition,
the Company and Ventas entered into the Spin-off Agreements. Except as noted
below, the following agreements between Ventas and the Company were assumed by
the Company and certain of these agreements were simultaneously amended in
accordance with the terms of the Plan of Reorganization.
Tax Allocation Agreement and Tax Refund Escrow Agreement
The Tax Allocation Agreement, entered into at the time of the Spin-off and
described in more detail below, was assumed by the Company under the Plan of
Reorganization and then amended and supplemented by the Tax Refund Escrow
Agreement, also described below.
The Tax Allocation Agreement provides that the Company will be liable for,
and will hold Ventas harmless from and against, (1) any taxes of the Company
and its then subsidiaries (the "Kindred Group") for periods after the Spin-off,
(2) any taxes of Ventas and its then subsidiaries (the "Ventas Group") or the
Kindred Group for periods prior to the Spin-off (other than taxes associated
with the Spin-off) with respect to the portion of such taxes attributable to
assets owned by the Kindred Group immediately after completion of the Spin-off
and (3) any taxes attributable to the Spin-off to the extent that the Company
derives certain tax benefits as a result of the payment of such taxes. Under
the Tax Allocation Agreement, the Company would be entitled to any refund or
credit in respect of taxes owed or paid by the Company under (1), (2) or (3)
above. The Company's liability for taxes for purposes of the Tax Allocation
Agreement would be measured by Ventas' actual liability for taxes after
applying certain tax benefits otherwise available to Ventas other than tax
benefits that Ventas in good faith determines would actually offset tax
liabilities of Ventas in other taxable years or periods. Any right to a refund
for purposes of the Tax Allocation Agreement would be measured by the actual
refund or credit attributable to the adjustment without regard to offsetting
tax attributes of Ventas.
Under the Tax Allocation Agreement, Ventas would be liable for, and would
hold the Company harmless against, any taxes imposed on the Ventas Group or the
Kindred Group other than taxes for which the Kindred Group is liable as
described in the above paragraph. Ventas would be entitled to any refund or
credit for taxes owed or paid by Ventas as described in this paragraph. Ventas'
liability for taxes for purposes of the Tax
22
Allocation Agreement would be measured by the Kindred Group's actual liability
for taxes after applying certain tax benefits otherwise available to the
Kindred Group other than tax benefits that the Kindred Group in good faith
determines would actually offset tax liabilities of the Kindred Group in other
taxable years or periods. Any right to a refund would be measured by the actual
refund or credit attributable to the adjustment without regard to offsetting
tax attributes of the Kindred Group.
On the Effective Date, Ventas and the Company entered into the Tax Refund
Escrow Agreement and First Amendment of the Tax Allocation Agreement (the "Tax
Refund Escrow Agreement") governing their relative entitlement to certain tax
refunds received on or after September 13, 1999 by Ventas or the Company for
the tax periods prior to and including the Spin-off that each has received or
may receive in the future. The Tax Refund Escrow Agreement amends and
supplements the Tax Allocation Agreement. Under the terms of the Tax Refund
Escrow Agreement, refunds ("Subject Refunds") received on or after September
13, 1999 by either Ventas or the Company with respect to federal, state or
local income, gross receipts, windfall profits, transfer, duty, value-added,
property, franchise, license, excise, sales and use, capital, employment,
withholding, payroll, occupational or similar business taxes (including
interest, penalties and additions to tax, but excluding certain refunds), for
taxable periods ending on or prior to May 1, 1998, or including May 1, 1998
("Subject Taxes") were deposited into an escrow account with a third-party
escrow agent on the Effective Date.
The Tax Refund Escrow Agreement provides that each party shall notify the
other of any asserted Subject Tax liability of which it becomes aware, that
either party may request that asserted liabilities for Subject Taxes be
contested, that neither party may settle such a contest without the consent of
the other, that each party shall have a right to participate in any such
contest, and that the parties generally shall cooperate with regard to Subject
Taxes and Subject Refunds and shall mutually and jointly control any audit or
review process related thereto. The funds in the escrow account (the "Escrow
Funds") may be released from the escrow account to pay Subject Taxes and as
otherwise provided therein.
The Tax Refund Escrow Agreement provides generally that Ventas and the
Company waive their rights under the Tax Allocation Agreement to make claims
against each other with respect to Subject Taxes satisfied by the Escrow Funds,
notwithstanding the indemnification provisions of the Tax Allocation Agreement.
To the extent that the Escrow Funds are insufficient to satisfy all liabilities
for Subject Taxes that are finally determined to be due (such excess amount,
"Excess Taxes"), the relative liability of Ventas and the Company to pay such
Excess Taxes shall be determined as provided in the Tax Refund Escrow
Agreement. Disputes under the Tax Refund Escrow Agreement, and the
determination of the relative liability of Ventas and the Company to pay Excess
Taxes, if any, are governed by the arbitration provision of the Tax Allocation
Agreement.
Interest earned on the Escrow Funds or included in refund amounts received
from governmental authorities will be distributed equally to each of Ventas and
the Company on an annual basis. For the year ended December 31, 2001, the
Company has recorded approximately $368,000 of interest income related to the
Escrow Funds. Any Escrow Funds remaining in the escrow account after no further
claims may be made by governmental authorities with respect to Subject Taxes or
Subject Refunds (because of the expiration of statutes of limitation or
otherwise) will be distributed equally between Ventas and the Company.
Agreement of Indemnity-Third Party Leases
In connection with the Spin-off, Ventas assigned its former third party
lease obligations (i.e., leases under which an unrelated third party is the
landlord) as a tenant or as a guarantor of tenant to the Company (the "Third
Party Leases"). The lessors of these properties may claim that Ventas remains
liable on the Third Party Leases assigned to the Company. Under the terms of
the Agreement of Indemnity-Third Party Leases, the Company has agreed to
indemnify and hold Ventas harmless from and against all claims against Ventas
arising out of the Third Party Leases. Under the Plan of Reorganization, the
Company assumed and has agreed to fulfill its obligations under the Agreement
of Indemnity-Third Party Leases.
23
Agreement of Indemnity-Third Party Contracts
In connection with the Spin-off, Ventas assigned its former third party
guaranty agreements to the Company (the "Third Party Guarantees"). Ventas may
remain liable on the Third Party Guarantees assigned to the Company. Under the
terms of the Agreement of Indemnity-Third Party Contracts, the Company has
agreed to indemnify and hold Ventas harmless from and against all claims
against Ventas arising out of the Third Party Guarantees assigned to the
Company. The Third Party Guarantees were entered into in connection with
certain acquisitions and financing transactions that occurred prior to the
Spin-off. Under the Plan of Reorganization, the Company assumed and has agreed
to fulfill its obligations under the Agreement of Indemnity-Third Party
Contracts.
Assumption of Other Liabilities
In connection with the Spin-off, the Company agreed to assume and to
indemnify Ventas for any and all liabilities that may arise out of the
ownership or operation of the healthcare operations either before or after the
date of the Spin-off. The indemnification provided by the Company also covers
losses, including costs and expenses, which may arise from any future claims
asserted against Ventas based on these healthcare operations. In addition, at
the time of the Spin-off, the Company agreed to assume the defense, on behalf
of Ventas, of any claims that were pending at the time of the Spin-off, and
which arose out of the ownership or operation of the healthcare operations. The
Company also agreed to defend, on behalf of Ventas, any claims asserted after
the Spin-off which arise out of the ownership and operation of the healthcare
operations. Under the Plan of Reorganization, the Company assumed and agreed to
perform its obligations under these indemnifications.
In connection with the Spin-off, the Company and Ventas entered into a
Development Agreement and a Participation Agreement. Under the terms of the
Development Agreement, the Company agreed that upon completion of each
development property, Ventas would have the option to purchase the development
property from the Company at a purchase price equal to the amount of the
Company's actual costs in acquiring, developing and improving such development
property prior to the purchase date. If Ventas purchased the development
property, the Company would lease the development property from Ventas. The
annual base rent under such a lease would have been ten percent of the actual
costs incurred by the Company in acquiring and developing the development
property. The other terms of the lease for the development property would have
been substantially similar to those set forth in the original master lease
agreements.
Under the terms of the Participation Agreement, the Company had a right of
first offer to become the lessee of any real property acquired or developed by
Ventas which was to be operated as a hospital, nursing center or other
healthcare facility, provided that the Company and Ventas negotiated a mutually
satisfactory lease arrangement. The Participation Agreement also provided,
subject to certain terms, that the Company would provide Ventas with a right of
first offer to purchase or finance any healthcare related real property that
the Company determined to sell or mortgage to a third party, provided that the
Company and Ventas negotiated mutually satisfactory terms for such purchase or
mortgage.
The Participation Agreement and the Development Agreement were terminated on
the Effective Date. The Company and Ventas are deemed to have waived any and
all damages, claims, liabilities, obligations, and causes of action related to
or arising out of these agreements.
Terminated Arrangements with Ventas
The Company and Ventas also entered into certain agreements and stipulations
and orders both prior to and during the pendency of the Company's bankruptcy
proceedings governing certain aspects of the business relationships between the
Company and Ventas prior to the Effective Date. In March 1999, the Company
served Ventas with a demand for mediation seeking a reduction in rent and other
concessions under its former master lease agreements with Ventas. Shortly
thereafter, the Company and Ventas entered into a series of standstill and
tolling agreements which provided that both companies would postpone any claims
either may have against the
24
other and extend any applicable statutes of limitation. As a result of the
Company's failure to pay rent, Ventas served the Company with notices of
nonpayment under the original master lease agreements. Subsequently, the
Company and Ventas entered into further amendments to the second standstill and
the tolling agreements to extend the time during which no remedies may be
pursued by either party and to extend the date by which the Company may cure
its failure to pay rent.
In connection with the bankruptcy, the Company and Ventas entered into a
stipulation (the "Stipulation") that provided for the payment by the Company of
a reduced aggregate monthly rent of approximately $15.1 million. The bankruptcy
court approved the Stipulation. The Stipulation also continued to toll any
statutes of limitations for claims that might have been asserted by the Company
against Ventas and provided that the Company would continue to fulfill its
indemnification obligations arising from the Spin-off. The Stipulation
automatically renewed for one-month periods unless either party provided a
14-day notice of termination.
In May 2000, the bankruptcy court approved a tax stipulation agreement
between the Company and Ventas (the "Tax Stipulation"). The Tax Stipulation
provided that certain refunds of federal, state and local taxes received by
either party on or after September 13, 1999 would be held by the recipient of
such refunds in segregated interest bearing accounts. The Tax Stipulation
required notification before either party could withdraw funds from the
segregated accounts.
The Stipulation and Tax Stipulation were each terminated on the Effective
Date and are of no further force or effect.
Other Related Party Transactions
In connection with the Spin-off, the Company issued 17,700 shares of its
former preferred stock to Ventas as part of the consideration for the assets
transferred from Ventas to the Company. On April 30, 1998, Ventas offered and
sold the preferred stock at $1,000 per share to certain officers of the Company
for an aggregate consideration of $17.7 million. The following executive
officers purchased the number of shares of the former preferred stock
indicated: Mr. Frank J. Battafarano, President, Hospital Division--330 shares;
Mr. Richard E. Chapman, Chief Administrative and Information Officer and Senior
Vice President--360 shares; Mr. James H. Gillenwater, Jr., Senior Vice
President, Planning and Development--510 shares; Mr. Richard A. Lechleiter,
Vice President, Finance, Corporate Controller and Treasurer--350 shares; and
Ms. M. Suzanne Riedman, Senior Vice President and General Counsel--315 shares.
After April 30, 2002, each share of the former preferred stock was to be
convertible, at the option of the holder, in whole or in part, into such number
of shares of the Company's former common stock as was equal to the aggregate
principal amount of the shares of the former preferred stock being converted
divided by the conversion price. The conversion price was $12.50, which was
equal to 118% of the average of the high and low sales price of the former
common stock immediately following the Spin-off.
In connection with the purchases of the former preferred stock, the Company
loaned certain officers, including certain Named Executive Officers, 90% of the
purchase price of the former preferred stock (the "Preferred Stock Loans").
Each Preferred Stock Loan was evidenced by a promissory note, which had a
ten-year term and bore interest at 5.74%, payable annually. No principal
payments were due under the promissory notes until their maturity. The
promissory notes were secured by a first priority security interest in the
former preferred stock purchased by each such officer. The following executive
officers were loaned the indicated amounts: Mr. Battafarano--$297,000; Mr.
Chapman--$324,000; Mr. Gillenwater--$459,000; Mr. Lechleiter--$315,000; and Ms.
Riedman--$283,500.
In August 1999, the Company entered into agreements with certain officers,
including certain Named Executive Officers, which permitted each officer to put
the former preferred stock to the Company for an amount equal to the
outstanding principal and interest on the officer's Preferred Stock Loan
("Preferred Stock Agreements"). The officer could put the former preferred
stock to the Company after January 1, 2000. During the pendency of the
Company's bankruptcy, the Company could not honor the terms of the Preferred
Stock Agreements. The Preferred Stock Agreements were entered into with each
officer employed by the Company in
25
August 1999 who owned the former preferred stock, including Mr. Battafarano,
Mr. Chapman, Mr. Gillenwater, Mr. Lechleiter and Ms. Riedman.
Under the terms of the Plan of Reorganization, the Preferred Stock
Agreements were canceled in exchange for the cancellation of the Preferred
Stock Loans. In addition, the former preferred stock was canceled without any
consideration.
PERFORMANCE GRAPH
The following graph summarizes the cumulative total return to stockholders
of the Company's Common Stock from April 26, 2001, the first day of its trading
on the OTC Bulletin Board to December 31, 2001, compared to the cumulative
total return on the Standard & Poor's 500 Stock Index ("S&P 500 Index") and the
Standard & Poor's Super Health Care Facilities Index (the "S&P Super Health
Care Facilities Index"). The graph assumes an investment of $100 in each of the
Company's Common Stock, the S&P 500 Index, and the S&P Super Health Care
Facilities Index on April 26, 2001, and also assumes the reinvestment of all
dividends.
[CHART]
Kindred S&P Super Health Care
Healthcare, Inc. S&P 500 Facilities Index
---------------- ------- ---------------------
4/26/01 $100 $100 $100
12/31/01 168 94 103
4/26/01 12/31/01
------- --------
Kindred Healthcare, Inc............... $100 $168
S&P 500 Index......................... 100 94
S&P Super Health Care Facilities Index 100 103
PROPOSALS 2 THROUGH 5
The next four proposals relate to compensation and incentive plans with
respect to which the Company is seeking the approval of its shareholders. As
outlined in the "Report of the Executive Compensation Committee" set forth
above, the Company currently maintains two performance-based cash plans and
three equity incentive plans.
The two cash plans are a short-term (annual) incentive plan in which
employees are eligible to receive cash bonuses based on corporate performance
and their individual performance over a one-year period, and a long-term
incentive plan in which corporate performance is measured over a one-year
period but awards are paid over three years from the end of that performance
period. Taken together, these plans provide a combination of short-term and
long-term cash incentives to encourage employees on an ongoing basis to
contribute to the success of
26
the Company and to remain in the Company's employ. The long-term incentive plan
was approved during the Company's reorganization process. The Company is
seeking shareholder approval or ratification of both plans.
The three equity plans are the Restricted Share Plan, the 2000 Stock Option
Plan, and the 2001 Stock Option Plan. The Company adopted the Restricted Share
Plan and the 2000 Stock Option Plan during its reorganization to provide
incentives for key employees to assist in its emergence from bankruptcy and to
remain in the Company's employ, by participating in the reallocation of equity
upon emergence from bankruptcy. Both of these plans were approved during the
reorganization process, and, consistent with the purposes of these plans,
options and restricted shares were granted shortly after the Company emerged
from bankruptcy. Substantially all of the shares of Common Stock available for
grant under these plans were awarded.
The Company adopted the 2001 Stock Option Plan (the "2001 Option Plan")
shortly after it emerged from bankruptcy. The 2001 Option Plan was intended to
be a program of stock option grants for a broad group of employees, recognizing
that equity incentives tie the incentives of employees most directly to the
value realized by shareholders. The 2001 Option Plan is being restated and
submitted for approval as the 2001 Stock Incentive Plan, an equity plan that
provides for, in addition to stock options, other types of incentive awards,
including stock appreciation rights, performance units, restricted stock and
stock bonuses. The Board of Directors believes that this flexible program of
equity incentives is needed to allow the Board and senior management to attract
and retain quality employees.
The Board of Directors and the Executive Compensation Committee believe that
these incentive plans create a compensation program that is well-designed to
provide a full range of incentives that will attract new employees, retain
existing employees, and tie incentive compensation directly to the Company's
growth and shareholder returns.
2. PROPOSAL TO RATIFY THE KINDRED HEALTHCARE, INC. 2000 STOCK OPTION PLAN
The Kindred Healthcare, Inc. 2000 Stock Option Plan (the "2000 Option Plan")
was established on September 26, 2000 (originally as the Vencor 2000 Stock
Option Plan) to promote the interests of the Company and its shareholders by
providing key employees and consultants of the Company and its affiliates,
including the Named Executive Officers, with an appropriate incentive to
continue in the employ of the Company or its affiliates and to improve the
growth and profitability of the Company. The 2000 Option Plan provides for the
grant to key employees of the Company of non-qualified and incentive stock
options (collectively, "2000 Options"). The 2000 Option Plan was approved in
the Plan of Reorganization, and the Company submits it now to the Company's
current shareholders for ratification.
The following summary of the 2000 Option Plan is qualified in its entirety
by the specific language of the 2000 Option Plan, which is attached as Appendix
B.
Awards
The maximum number of shares of Common Stock of the Company that may be
issued under the 2000 Option Plan is 600,000 shares. Shares of Common Stock
issued under the 2000 Option Plan may be either newly issued shares or treasury
shares.
The 2000 Option Plan is administered by the Executive Compensation Committee
or such other committee as the Board of Directors shall appoint from time to
time. The Chief Executive Officer of the Company recommends the key employees
of the Company who may be granted 2000 Options (as defined below), the number
of 2000 Options to be granted and the type of grant, all subject to approval by
the Executive Compensation Committee. Approximately 600 employees are eligible
to participate in the 2000 Option Plan.
27
2000 Options generally become exercisable over a period of three years, with
one-third becoming exercisable on each of the first, second and third
anniversaries of the date of grant, unless otherwise determined by the
Executive Compensation Committee and set forth in the option agreement
governing the award.
Each 2000 Option will entitle the holder to purchase a specified number of
shares of Common Stock. No participant may be granted a 2000 Option to purchase
more than 150,000 shares of Common Stock in any calendar year. The exercise
price of each 2000 Option will be determined by the Executive Compensation
Committee on the date of grant of such 2000 Option. The exercise price will be
paid in cash or in shares of Common Stock valued at their fair market value on
the date of exercise in accordance with the terms of the 2000 Option Plan. Each
2000 Option will be exercisable for a term of five years.
Benefits
Set forth below is a table showing the number of shares subject to 2000
Options granted during fiscal year 2001 to the Named Executive Officers and
certain other individuals under the 2000 Option Plan. The closing trading price
of the Common Stock as reported on the NASDAQ on March , 2002 was $
per share. Because the 2000 Options granted under the 2000 Option Plan are
discretionary, no data can be provided regarding planned grants.
2000 Option Plan
Name and Position Number of Shares
----------------- ----------------
Edward L. Kuntz, Chairman of the Board and Chief Executive Officer...................... 135,000
Richard A. Schweinhart, Senior Vice President and Chief Financial Officer............... 38,500
Donald D. Finney, President, Health Services Division................................... 38,500
Frank J. Battafarano, President, Hospital Division...................................... 33,900
Richard E. Chapman, Chief Administrative and Information Officer and Senior Vice
President............................................................................. 38,500
All current executive officers as a group............................................... 382,100
All employees, including all current officers who are not executive officers, as a group 210,600
Termination of Employment
In the event that the employment of a participant terminates (1) for any
reason other than Disability, Cause (as such terms are defined in the 2000
Option Plan) or death, 2000 Options granted to such participant, to the extent
that they were exercisable at the time of termination, will remain exercisable
for ninety days after such termination, and those not exercisable at such time
will expire at such time; (2) on account of the Disability or death of the
participant, such participant or his designated beneficiary, respectively, will
be entitled to exercise, until the first anniversary of such termination, 2000
Options which were exercisable at the time of such termination, and all other
2000 Options will expire at such time; and (3) for Cause, all outstanding 2000
Options granted to such participant will expire at the commencement of business
on the date of such termination. However, no 2000 Option may be exercised after
the expiration of its term.
Company Change in Control
Upon the occurrence of a Change in Control of the Company (as defined in the
2000 Option Plan), each 2000 Option granted under the 2000 Option Plan and
outstanding at such time will become fully and immediately exercisable.
General Plan Provisions
In the event that any outstanding 2000 Option expires, terminates or is
canceled for any reason, the shares of Common Stock subject to the unexercised
portion of such 2000 Option will again be available for award pursuant to the
2000 Option Plan.
28
The 2000 Option Plan provides for an adjustment in the number of shares of
Common Stock available to be issued under the 2000 Option Plan, upon a change
in the capitalization of the Company, a stock dividend or split, a merger or
combination of shares and certain other similar events.
During the lifetime of a participant, each 2000 Option granted to a
participant is exercisable only by the participant. No Option is transferable
or assignable other than by will or the laws of descent and distribution.
Amendment or Termination of the 2000 Option Plan
With certain exceptions, the Board of Directors of the Company may amend the
provisions of the 2000 Option Plan at any time and from time to time.
Principal Federal Income Tax Consequences of the 2000 Option Plan to
Participants and the Company
The following is a summary of the principal United States federal income tax
consequences generally applicable to the Company and to participants of the
grant and exercise of incentive stock options ("ISOs") and non-qualified stock
options ("NQSOs") under the 2000 Option Plan under the now applicable
provisions of the Code and the regulations thereunder.
Incentive Stock Options. A participant is not deemed to have received
taxable income upon grant or exercise of any ISO so long as the participant
does not dispose of the shares received upon exercise within one year after the
date of exercise and two years after the date of grant (the "ISO Holding
Period"). Upon exercise of an ISO, the spread between the fair market value of
the shares received and the exercise price will be an item of adjustment for
purposes of the alternative minimum tax, unless the participant disposes of the
shares in the same tax year as the ISO is exercised. If a participant does
dispose of such shares within the ISO Holding Period (such disposition, a
"Disqualifying Disposition"), any gain on such Disqualifying Disposition, up to
the amount of the spread on exercise, will be ordinary income, with the balance
being capital gain. All other gains upon dispositions of shares received upon
exercise of an ISO will be capital gains in amounts equal to the excess of the
proceeds received over the exercise price.
If the participant surrenders previously-owned shares acquired upon the
exercise of an ISO which have not satisfied the ISO Holding Period in payment
of any or all of the exercise price of an ISO, such surrender is a
Disqualifying Disposition of the surrendered shares that will result in the
recognition of ordinary income (although not of capital gain) as described in
the immediately preceding paragraph. The number of shares received upon
exercise of the ISO equal in number to the previously-owned shares so
surrendered would have the tax basis, increased by the amount of ordinary
income recognized upon the Disqualifying Disposition, and capital gain holding
period applicable to such surrendered shares. The additional shares received
upon exercise of the ISO would have a tax basis equal to the cash paid on
exercise (if any) and a new capital gain holding period commencing on the date
following the date of exercise. The ISO Holding Period with respect to all the
shares acquired pursuant to the ISO would start on the date of exercise.
If the participant surrenders previously-owned shares (other than any shares
acquired upon the exercise of an ISO which have not satisfied the ISO Holding
Period) in payment of any or all of the exercise price of an ISO, the shares
received upon exercise of the ISO equal in number to the previously-owned
shares so surrendered would have the tax basis and capital gain holding period
applicable to such surrendered shares. The additional shares received upon
exercise of the ISO would have a tax basis equal to the cash paid on exercise
(if any) and a new capital gain holding period commencing on the date following
the date of exercise. The ISO Holding Period with respect to all the shares
acquired pursuant to the ISO would start on the date of exercise.
Non-Qualified Stock Options. A participant is not taxed upon grant of a
non-qualified stock option (an "NQSO"). A participant will have ordinary income
upon exercise of an NQSO in an amount equal to the excess of the fair market
value on the date of exercise of the shares purchased over the exercise price
paid upon exercise.
29
If the participant surrenders previously-owned shares in payment of any or
all of the exercise price of an NQSO, the shares received upon exercise of such
NQSO equal in number to the previously-owned shares so surrendered would have
the tax basis and capital gain holding period applicable to such surrendered
shares. The additional shares received upon exercise would have a tax basis
equal to the amount taxable as ordinary income upon such exercise (as described
in the immediately preceding paragraph) plus the cash paid on exercise (if any)
and a new capital gain holding period commencing on the date following the date
of exercise.
In addition, according to proposed regulations issued by the U.S. Treasury
Department, the surrender of previously-owned shares or shares acquired upon
the exercise of an ISO which have not satisfied the ISO Holding Period in
payment of any or all of the exercise price of an NQSO would not be a
Disqualifying Disposition of the surrendered shares that would result in the
recognition of ordinary income. Rather, if the participant surrenders
previously-owned shares acquired upon the exercise of an ISO in payment of any
or all of the exercise price of an NQSO, a number of shares received upon
exercise of the NQSO equal to the number of previously-owned shares surrendered
would be treated as shares received upon the exercise of the ISO and only the
additional shares received upon exercise of the NQSO would be treated as such.
Tax Consequences to the Company. The Company or an affiliate that employs a
participant generally will be entitled to a federal income tax deduction in an
amount equal to the amount of compensation income, taxable as ordinary income,
recognized by the participant as a result of the exercise of an option in the
year of recognition by the participant.
The Board of Directors recommends a vote "FOR" Proposal No. 2.
3. PROPOSAL TO APPROVE THE KINDRED HEALTHCARE, INC. 2001 STOCK INCENTIVE PLAN
As described above, the Board of Directors has determined that it is in the
Company's best interest to adopt a flexible program of equity incentive awards
in order to allow the Board of Directors and senior management to address these
issues in the most effective manner. The Kindred Healthcare, Inc. 2001 Stock
Incentive Plan (the "Incentive Plan") is designed to provide such flexibility,
while tying such incentives to the actual growth realized by the Company's
shareholders.
The Incentive Plan was originally adopted by the Board of Directors as the
2001 Stock Option Plan, and was amended and restated as of February 12, 2002.
The following summary of the Incentive Plan is qualified in its entirety by the
specific language of the Incentive Plan, which is attached as Appendix C.
In General
The Incentive Plan provides for the grant of several types of stock-based
awards to the Company's employees and to employees of its affiliates: incentive
stock options ("ISOs") and NQSOs (NQSOs, and together with ISOs, "Options");
tandem stock appreciation rights ("tandem SARs"), stand-alone stock
appreciation rights ("stand-alone SARs"), performance units, restricted shares,
and stock bonuses, each of which is described in detail below.
The Incentive Plan is administered by a committee of the Board of Directors
comprised of two or more outside directors (i.e., the Executive Compensation
Committee). The Executive Compensation Committee identifies the employees who
may be granted incentive awards ("participants"), the number and type(s) of
such awards granted, and all other relevant factors, as described in more
detail below. Approximately 600 employees are eligible to participate in the
Incentive Plan.
30
Awards may be granted with respect to no more than 2,000,000 shares of
Common Stock in the aggregate. In any calendar year, each participant may be
granted Options with respect to no more than 150,000 shares in the aggregate,
tandem SARs and stand-alone SARs (collectively) with respect to no more than
100,000 shares in the aggregate, performance units with respect to no more than
100,000 shares in the aggregate, restricted stock with respect to no more than
100,000 shares in the aggregate, and stock bonuses of no more than 25,000
shares in the aggregate. Shares of Common Stock issued under the Incentive Plan
may be either newly issued shares or treasury shares.
Options
Each Option will entitle the holder to purchase a specified number of shares
of Common Stock. The exercise price and vesting schedule of each Option will be
determined by the Executive Compensation Committee on the date of grant of such
Option and set forth in an option grant agreement. The exercise price will not
be less than the fair market value of a share on the date of grant. The
exercise price will be paid in cash or in shares of Common Stock valued at
their fair market value on the date of exercise. Each Option will be
exercisable for a term of ten years.
In the event that the employment of a participant terminates (1) for any
reason other than Disability, Retirement, Cause (as such terms are defined in
the Incentive Plan) or death, Options granted to such participant, to the
extent that they were exercisable at the time of termination, will remain
exercisable for ninety days after such termination, and those not exercisable
at such time will expire at such time; (2) on account of the Retirement of the
participant, Options granted to such participant, to the extent that they were
exercisable at the time of termination, will remain exercisable for two years
from termination (in the case of NQSOs) or for 90 days after termination (in
the case of ISOs), and those not exercisable at such time will expire at such
time; (3) on account of the Disability or death of the participant, Options
granted to such participant will become immediately exercisable and such
participant or his designated beneficiary, respectively, will be entitled to
exercise such Options for two years from termination (in the case of NQSOs) or
for one year after termination (in the case of ISOs); and (4) for Cause, all
outstanding Options granted to such participant will expire at the commencement
of business on the date of such termination. However, no Option may be
exercised after the expiration of its term.
Upon the occurrence of a Change in Control of the Company (as defined in the
Incentive Plan), each Option granted under the Incentive Plan and outstanding
at such time will become fully and immediately exercisable. Furthermore, the
Executive Compensation Committee may specify at the time of grant that a
participant will have the right to sell each Option back to the Company for the
excess of the fair market value of a share on the date of such Change in
Control over the exercise price of such Option.
Tandem SARs
Tandem SARs may be granted by the Executive Compensation Committee in
connection with any Option granted under the Incentive Plan (either at the same
time as the grant of such Options or at a later time), and may be granted with
respect to the same number or fewer shares as the underlying Option. The terms
of tandem SARs granted to a participant will be set forth in an agreement at
the time of grant. Tandem SARs will be exercisable at the same time and to the
same extent (on a proportional basis) as its related Option. The exercise of a
tandem SAR will cause the cancellation of its related Option with respect to
the number of shares exercised, and the exercise or cancellation of an Option
will cause the cancellation of related tandem SARs with respect to the same
number of shares.
Upon the exercise of a tandem SAR, the Executive Compensation Committee will
determine whether the participant will receive, with respect to each share
underlying the tandem SAR, (i) a cash payment equal to the excess of the fair
market value of a share of stock on the date of exercise over the exercise
price of such tandem SAR, (ii) a number of shares which on the date of exercise
have a fair market value equal to such excess, or (iii) a combination of cash
and shares.
31
The exercise of a tandem SAR upon or after the occurrence of a Change in
Control will entitle a participant to a cash payment for each underlying share
exercised equal to the greater of (i) the excess of the highest price paid for
a share of stock in connection with the Change in Control over the exercise
price and (ii) the excess of the fair market value of a share of stock on the
date of exercise over the exercise price.
Stand-Alone SARs
Each stand-alone SAR will entitle the holder to purchase a specified number
of shares of Common Stock. The vesting schedule of each stand-alone SAR will be
determined by the Executive Compensation Committee on the date of grant and set
forth in a grant agreement. Each stand-alone SAR will be exercisable for a term
of ten years.
Upon the exercise of a stand-alone SAR, the Executive Compensation Committee
will determine whether the participant will receive, with respect to each share
underlying the stand-alone SAR, (i) a cash payment equal to the excess of the
fair market value of a share of stock on the date of exercise over the exercise
price of such stand-alone SAR, (ii) a number of shares which on the date of
exercise have a fair market value equal to such excess, or (iii) a combination
of cash and shares.
In the event that the employment of a participant terminates (1) for any
reason other than Disability, Retirement, Cause (as such terms are defined in
the Incentive Plan) or death, stand-alone SARs granted to such participant, to
the extent that they were exercisable at the time of termination, will remain
exercisable for ninety days after such termination, and those not exercisable
at such time will expire at such time; (2) on account of the Retirement of the
participant, stand-alone SARs granted to such participant, to the extent that
they were exercisable at the time of termination, will remain exercisable for
two years from termination, and those not exercisable at such time will expire
at such time; (3) on account of the Disability or death of the participant,
stand-alone SARs granted to such participant will become fully exercisable and
will remain exercisable by such participant or his designated beneficiary,
respectively, for two years from termination; and (4) for Cause, all
outstanding stand-alone SARs granted to such participant will expire at the
commencement of business on the date of such termination. However, no
stand-alone SAR may be exercised after the expiration of its term.
Upon the occurrence of a Change in Control of the Company, each stand-alone
SAR granted under the Incentive Plan and outstanding at such time will become
fully and immediately exercisable. Furthermore, the exercise of a stand-alone
SAR upon or after the occurrence of a Change in Control will entitle a
participant to a cash payment for each underlying share exercised equal to the
greater of (1) the excess of the highest price paid for a share of stock in
connection with the Change in Control over the exercise price and (2) the
excess of the fair market value of a share of stock on the date of exercise
over the exercise price.
Performance Units
Performance units are based on the achievement of performance goals over a
specified performance period, the terms of which will be specified by the
Executive Compensation Committee in a grant agreement at the time of grant.
Performance periods, established by the Executive Compensation Committee from
time to time, may be for any duration between six months and five years.
Performance goals with respect to each performance period, which are to be
established by the Executive Compensation Committee within the first ninety
days of the performance period (or before 25% of a performance period of a
shorter duration than one year has elapsed), may be expressed in terms of (1)
earnings per share of Common Stock, (2) share price of Common Stock, (3)
pre-tax profit, (4) net earnings, (5) return on equity or assets, (6) revenues,
(7) account receivable collection days, (8) earnings before interest, tax,
depreciation, amortization and rent, (9) individual management, performance or
quality objectives, (10) any combination of the foregoing, or (11) such other
goals as the Executive Compensation Committee may determine, and any components
of performance goals may be based, in whole or in part, on the performance of
an affiliate of Kindred.
32
After the end of a performance period, the Executive Compensation Committee
will determine the extent to which performance goals for such period have been
achieved, if at all. If achieved in full, each applicable participant will be
allocated shares equal to the number of Performance Units initially awarded to
such participant for such period; if partially achieved, the Executive
Compensation Committee may provide for the allocation of fewer shares. Payment
may be, in the discretion of the Executive Compensation Committee, in cash
(equal to the fair market value of a share multiplied by the number of shares
being allocated), in shares or in a combination of cash and shares.
If the employment of a participant terminates prior to the expiration of a
performance period for any reason other than death or Disability, the
performance units then held by such participant will terminate. If the
employment of a participant terminates by reason of death or Disability prior
to the expiration of a performance period, all outstanding performance units
held by such participant with respect to such performance period will be paid
to the participant or the participant's estate, as the case may be, as if all
applicable performance goals had been fully achieved, provided that such
payment will be prorated to reflect the portion of the performance period
during which such participant was employed.
Upon a Change in Control, all outstanding performance units under any
performance period will become fully vested and immediately payable as if
performance goals were fully achieved, without proration, in which case the
payment will be in cash equal to the product of the number of outstanding
performance units and the greater of (i) the fair market value of a share on
the date of such Change in Control and (ii) the highest price per share paid in
connection with such Change in Control.
Restricted Shares
Restricted shares granted by the Executive Compensation Committee under the
Incentive Plan will not be transferred, pledged, assigned or otherwise
encumbered by the participant and will be subject to forfeiture until they vest
and become fully transferable without restriction according to the vesting
schedule set forth in an agreement evidencing such restricted shares.
If a participant's employment terminates prior to the scheduled vesting
dates of any restricted shares for any reason other than death or Disability,
all restricted shares awarded to such participant that have not yet vested will
be forfeited on the date of termination without payment of any consideration
therefor. In the event that the employment of a participant terminates by
reason of death or Disability prior to the expiration of any vesting period,
all restricted shares awarded to such participant will immediately vest.
Upon a Change in Control, all outstanding restricted shares will immediately
vest and become fully transferable.
Stock Bonuses
The Executive Compensation Committee may grant stock bonuses to participants
from time to time. Stock bonuses may be paid at such time and subject to such
conditions as the Executive Compensation Committee may determine at the time of
grant.
33
Benefits
Since the incentive awards granted under the Incentive Plan are
discretionary, no data can be provided regarding planned grants. Set forth
below is a table showing the number of shares subject to awards granted during
fiscal year 2001 to the Named Executive Officers and certain other individuals
under the Incentive Plan. The closing trading price of the Common Stock as
reported on the NASDAQ on March , 2002 was $ per share.
Incentive Plan
Number of Shares Underlying Awards
---------------------------------------------------------
Tandem Stand-Alone Performance Restricted Stock
Name and Position Options SARs SARs Units Shares Bonuses
----------------- ------- ------ ----------- ----------- ---------- -------
Edward L. Kuntz, Chairman of the Board
and Chief Executive Officer............. -- -- -- -- -- --
Richard A. Schweinhart, Senior Vice
President and Chief Financial Officer... -- -- -- -- -- --
Donald D. Finney, President, Health
Services Division....................... -- -- -- -- -- --
Frank J. Battafarano, President, Hospital
Division................................ -- -- -- -- -- --
Richard E. Chapman, Chief Administrative
and Information Officer and Senior Vice
President............................... -- -- -- -- -- --
All current executive officers as a group. -- -- -- -- -- --
All employees, including all current
officers who are not executive officers,
as a group.............................. 404,200 -- -- -- -- --
General Plan Provisions
In the event that any outstanding award under the Incentive Plan expires,
terminates or is canceled for any reason, the shares of Common Stock subject to
the unexercised, unvested or unpaid portion of such award will again be
available for award pursuant to the Incentive Plan.
The Incentive Plan provides for an adjustment in the number of shares of
Common Stock available to be issued under the Incentive Plan, upon a change in
the capitalization of Kindred, a stock dividend or split, a merger or
combination of shares and certain other similar events.
During the lifetime of a participant, each incentive award granted to a
participant is only exercisable by or payable to the participant. No award is
transferable or assignable other than by will or the laws of descent and
distribution.
Amendment or Termination of the Incentive Plan
With certain exceptions, the Board of Directors may amend the provisions of
the Incentive Plan at any time and from time to time.
Principal Federal Income Tax Consequences of Options Granted Under the
Incentive Plan to Participants and the Company
The following is a summary of the principal U.S. federal income tax
consequences generally applicable to the Company and to participants of the
grant and exercise of ISOs and NQSOs under the Incentive Plan under the now
applicable provisions of the Code and the regulations thereunder.
34
Incentive Stock Options. A participant is not deemed to have received
taxable income upon grant or exercise of any ISO so long as the participant
does not dispose of the shares received upon exercise within one year after the
date of exercise and two years after the date of grant (the "ISO Holding
Period"). Upon exercise of an ISO, the spread between the fair market value of
the shares received and the exercise price will be an item of adjustment for
purposes of the alternative minimum tax, unless the participant disposes of the
shares in the same tax year as the ISO is exercised. If a participant does
dispose of such shares within the ISO Holding Period (such disposition, a
"Disqualifying Disposition"), any gain on such Disqualifying Disposition, up to
the amount of the spread on exercise, will be ordinary income, with the balance
being capital gain. All other gains upon dispositions of shares received upon
exercise of an ISO will be capital gain in an amount equal to the excess of the
proceeds received over the exercise price.
If the participant surrenders previously-owned shares acquired upon the
exercise of an ISO which have not satisfied the ISO Holding Period in payment
of any or all of the exercise price of an ISO, such surrender is a
Disqualifying Disposition of the surrendered shares that will result in the
recognition of ordinary income (although not of capital gain) as described in
the immediately preceding paragraph. The number of shares received upon
exercise of the ISO equal in number to the previously-owned shares so
surrendered would have the tax basis, increased by the amount of ordinary
income recognized upon the Disqualifying Disposition, and capital gain holding
period applicable to such surrendered shares. The additional shares received
upon exercise of the ISO would have a tax basis equal to the cash paid on
exercise (if any) and a new capital gain holding period commencing on the date
following the date of exercise. The ISO Holding Period with respect to all the
shares acquired pursuant to the ISO would start on the date of exercise.
If the participant surrenders previously-owned shares (other than any shares
acquired upon the exercise of an ISO which have not satisfied the ISO Holding
Period) in payment of any or all of the exercise price of an ISO, the shares
received upon exercise of the ISO equal in number to the previously-owned
shares so surrendered would have the tax basis and capital gain holding period
applicable to such surrendered shares. The additional shares received upon
exercise of the ISO would have a tax basis equal to the cash paid on exercise
(if any) and a new capital gain holding period commencing on the date following
the date of exercise. The ISO Holding Period with respect to all the shares
acquired pursuant to the ISO would start on the date of exercise.
Non-Qualified Stock Options. A participant is not taxed upon grant of an
NQSO. A participant will have ordinary income upon exercise of an NQSO in an
amount equal to the excess of the fair market value on the date of exercise of
the shares purchased over the exercise price paid upon exercise.
If the participant surrenders previously-owned shares in payment of any or
all of the exercise price of an NQSO, the shares received upon exercise of such
NQSO equal in number to the previously-owned shares so surrendered would have
the tax basis and capital gain holding period applicable to such surrendered
shares. The additional shares received upon exercise would have a tax basis
equal to the amount taxable as ordinary income upon such exercise (as described
in the immediately preceding paragraph) plus the cash paid on exercise (if any)
and a new capital gain holding period commencing on the date following the date
of exercise.
In addition, according to proposed regulations issued by the U.S. Treasury
Department, the surrender of previously-owned shares or shares acquired upon
the exercise of an ISO which have not satisfied the ISO Holding Period in
payment of any or all of the exercise price of an NQSO would not be a
Disqualifying Disposition of the surrendered shares that would result in the
recognition of ordinary income. Rather, if the participant surrenders
previously-owned shares acquired upon the exercise of an ISO in payment of any
or all of the exercise price of an NQSO, a number of shares received upon
exercise of the NQSO equal to the number of previously-owned shares surrendered
would be treated as shares received upon the exercise of the ISO and only the
additional shares received upon exercise of the NQSO would be treated as such.
Tax Consequences to the Company. The Company or affiliate that employs a
participant generally will be entitled to a federal income tax deduction in an
amount equal to the amount of compensation income, taxable as ordinary income,
recognized by the participant as a result of the exercise of an option in the
year of recognition by the participant.
The Board of Directors recommends a vote "FOR" Proposal No. 3.
35
4. PROPOSAL TO RATIFY THE KINDRED HEALTHCARE, INC. 2000 LONG-TERM INCENTIVE
PLAN
The Kindred Healthcare, Inc. 2000 Long-Term Incentive Plan (the "LTIP") was
established on September 26, 2000 (originally as the Vencor 2000 Long-Term
Incentive Plan), and as subsequently amended, to promote the success of the
Company and the interests of its shareholders by attracting, motivating and
retaining key employees of the Company and rewarding them for assisting the
Company and its affiliates to emerge from bankruptcy and to provide
participants in the LTIP with incentives to contribute toward the improvement
and growth of the Company. The LTIP was approved in the Plan of Reorganization,
and the Company submits it now to the Company's current shareholders for
ratification.
The following summary of the LTIP is qualified in its entirety by the
specific language of the LTIP, which is attached as Appendix D.
Awards
The LTIP provides for performance-based awards payable to officers and other
key employees, including the Named Executive Officers, based upon a
participant's position in the Company and the achievement of specified
performance goals. The Executive Compensation Committee, which administers the
plan, identifies officers and other employees who shall be eligible to
participate in the LTIP based on their ability to contribute to the success of
the Company. Approximately 610 employees are eligible to be selected for
participation in the LTIP, including the Chief Executive Officer, the other
nine members of the Company's executive committee, 32 vice presidents,
approximately 240 senior corporate managers, and approximately 330 other key
employees.
The Executive Compensation Committee sets performance periods of one year
during which the Company's performance will be measured against performance
targets which are specified by the Executive Compensation Committee within 90
days after the start of each performance period. The maximum award for each
participant is a percentage of base salary based on employment level, as
follows:
Position/Level Percentage of Base Salary
-------------- -------------------------
Chief Executive Officer......... 100%
Members of Executive Committee.. 90%
Vice Presidents................. 40%
Senior Corporate Managers....... 25%
Other participants.............. 15%
Following the end of each performance period, the Executive Compensation
Committee determines the extent to which the Company-wide performance targets
were achieved and establishes an "award percentage" based on that
determination. Each participant's award equals the product of (a) the award
percentage, (b) the participant's maximum award, and (c) the participant's
annual base salary on the last day of the relevant performance period. No
individual award will exceed $1.5 million. Awards are generally payable in
equal installments on or about each of the first, second, and third
anniversaries of the end of the relevant performance period.
Benefits
Set forth below is a table of maximum LTIP awards that are planned for grant
to the Named Executive Officers and other select employees. Because the awards
that may be granted under the LTIP are discretionary, however, this information
is subject to change. In addition, due to the performance-based nature of the
awards, the exact amount that will be payable under each award is not
determinable at this time. LTIP awards earned during the 2001 and 2000 fiscal
years are set forth above in "Summary Compensation Table."
36
Long-Term Incentive Plan
Name and Position Percentage of Base Salary
----------------- -------------------------
Edward L. Kuntz, Chairman of the Board and Chief Executive Officer.............. 100%
Richard A. Schweinhart, Senior Vice President and Chief Financial Officer....... 90%
Donald D. Finney, President, Health Services Division........................... 90%
Frank J. Battafarano, President, Hospital Division.............................. 90%
Richard E. Chapman, Chief Administrative and Information Officer
and Senior Vice President..................................................... 90%
All current executive officers as a group....................................... 90% to 100%
All employees, including all current officers who are not executive officers, as
a group....................................................................... 15% to 40%
Termination of Employment
If a participant terminates employment voluntarily for any reason or the
Company terminates his or her employment for Cause (as defined in the LTIP),
that participant will not receive any unpaid portions of any awards.
If a participant voluntarily resigns after attaining the age of 55 or a
participant's employment is terminated by the Company without Cause at any
time, that participant will be entitled to receive any unpaid portions of
awards from previous performance periods and a prorated award for the current
year based upon the number of full months elapsed in the performance period
before such participant's departure from the Company.
In the event of a participant's death or termination of employment because
of disability, the participant or his or her beneficiary will receive a
prorated award based upon the award that would have been payable to the
participant if the award percentage had been 50%. The award will be prorated
according to the number of full months that elapsed in the performance period
before the participant's death or disability and will be paid in a lump sum in
cash no later than 15 days after the date of employment termination, as will
any unpaid award amounts from previous performance periods.
Adjustments to Performance Targets
If an event occurs that would reasonably be expected to have a substantial
impact on the performance targets for the Company, the Executive Compensation
Committee will review, in good faith, the possible effects on the targets. The
Executive Compensation Committee has full discretion to adjust the performance
targets and award percentages after a good-faith review of the circumstances
and consultation with Company management. Transactions or events that would
trigger such a review and possible adjustments include but are not limited to a
merger or consolidation of the Company or acquisition or disposition by the
Company of any substantial business unit.
Company Change of Control
In the event of a Change of Control of the Company (as defined in the LTIP),
the Company will pay each participant, within 15 days after the Change in
Control, a lump-sum cash amount equal to the sum of: (a) any unpaid portion of
an award from a previous performance period and (b) such participant's maximum
award for the performance period in which the Change of Control occurs (without
proration).
Amendment or Termination of the LTIP
The Company has the right to amend, modify or terminate the LTIP at any
time, provided that such action will not affect the determination or payment of
awards for a performance period that has already begun, except that the Company
may accelerate the payment of awards.
The Board of Directors recommends a vote "FOR" the approval of Proposal No. 4.
37
5. PROPOSAL TO APPROVE THE KINDRED HEALTHCARE, INC. SHORT-TERM INCENTIVE PLAN
The Kindred Healthcare, Inc. Short-Term Incentive Plan (the "STIP") was
approved by the Board on February 12, 2002 to promote the Company's interests
and the interests of its shareholders by providing key employees and key
employees of its affiliates, who are largely responsible for the management,
growth and/or success of Kindred and its affiliates, with incentives and
rewards based on defined Company operating and individual management goals. The
STIP formally implements a program of annual cash bonuses that the Company has
utilized for the past several years.
The following summary of the STIP is qualified in its entirety by the
specific language of the STIP, which is attached as Appendix E.
Awards
The STIP provides for performance-based cash bonuses payable to officers and
other key employees, including the Named Executive Officers, based upon a
participant's position and the achievement of corporate and individual
performance goals during a fiscal year period. The Executive Compensation
Committee, which administers the plan, identifies officers and other classes of
employees who are eligible to participate in the STIP based upon their ability
to contribute to the Company's success. Approximately 3,000 employees are
eligible to be selected for participation in the STIP.
Within 90 days after the start of each calendar year, the Executive
Compensation Committee determines who will participate in the STIP for that
year, determines the range of possible awards that may be payable to each
participant according to his or her position, and establishes performance goals
for the year. Awards are based on a percentage of a participant's annual base
salary. No individual award under the STIP may exceed $1 million.
Performance goals may be expressed in terms of (1) earnings per share of
Common Stock, (2) share price of Common Stock, (3) pre-tax profit, (4) net
earnings, (5) return on equity or assets, (6) revenues, (7) account receivable
collection days, (8) earnings before interest, tax, depreciation, amortization
and rent, (9) individual management or performance objectives, (10) quality
objectives, (11) any combination of the foregoing, or (12) such other goals as
the Executive Compensation Committee may determine. Any components of
performance goals may be based, in whole or in part, on the performance of one
of the Company's affiliates.
Both the potential awards that may be payable to participants and
performance goals are expressed in terms of ranges, allowing for varying levels
of attainment of such goals and corresponding payment of awards. Both ranges
have minimum, target and maximum levels, and achievement of goals and payment
of awards may fall anywhere between the minimum and maximum levels.
Payment of Benefits
Within 90 days after the end of the year (or within five days after the
Company receives its audited financial statements from the auditors, if later),
the Executive Compensation Committee determines whether, and to what extent,
the performance goals for the year were achieved. On that basis, the Executive
Compensation Committee will determine each participant's actual award by
determining the percentage to be applied to each participant's annual base
salary based on the range of awards applicable to such participant, and
multiplying that percentage by the participant's base salary. If minimum levels
of performance goals are not achieved, a participant will not be paid any bonus
under the STIP for that year. Awards earned generally are paid in cash within
30 days after the determination of the amounts by the Executive Compensation
Committee.
38
Benefits
Set forth below is a table of STIP awards that are planned for grant to the
Named Executive Officers and other specified employees. Because the awards that
may be granted under the STIP are discretionary, however, this information is
subject to change. In addition, due to the performance-based nature of the
awards, the exact amount that will be payable under each award is not
determinable at this time.
Short-Term Incentive Plan
Percentage of Base Salary
- ---------------------------
Name Minimum Target Maximum
---- ------- ------- -----------
Edward L. Kuntz, Chairman of the Board and Chief Executive
Officer.......................................................... 30% 60% 75%
Richard A. Schweinhart, Senior Vice President and Chief
Financial Officer................................................ 30% 60% 75%
Donald D. Finney, President, Health Services Division.............. 30% 60% 75%
Frank J. Battafarano, President, Hospital Division................. 30% 60% 75%
Richard E. Chapman, Chief Administrative and Information
Officer and Senior Vice President................................ 30% 60% 75%
All current executive officers as a group.......................... 30% 60% 75%
All employees, including all current officers who are not executive
officers, as a group............................................. 5%-25% 10%-50% 12.5%-62.5%
Termination of Employment
Unless otherwise provided in an applicable employment or other agreement
with a participant, in the event a participant's employment is terminated for
any reason prior to the date of payment of an award under the STIP, such
participant will not be entitled to any bonus under the STIP.
Adjustments to Performance Targets
If an event occurs that would reasonably be expected to have a substantial
impact on the Company-wide performance goals, the Executive Compensation
Committee will review, in good faith, the possible effects on the goals. The
Executive Compensation Committee has full discretion to adjust the performance
goals and award ranges after a good-faith review of the circumstances and
consultation with management. Transactions or events that would trigger such a
review and possible adjustments include but are not limited to a merger or
consolidation of the Company or acquisition or disposition by the Company of
any substantial business unit.
Company Change of Control
In the event of a Change of Control of the Company (as defined in the STIP),
each participant who remains employed on the date of such Change in Control or
whose employment is terminated in contemplation of a Change in Control, within
15 days after the Change in Control, will receive a bonus under the STIP
calculated as if the calendar year in which such Change in Control occurred
were fully completed and as if performance goals were achieved at the target
level, without proration.
Amendment or Termination of the STIP
The Company has the right to amend, modify or terminate the STIP at any
time. Upon a termination or partial termination of the STIP, affected
participants will receive (unless the Executive Compensation Committee
determines otherwise) a bonus, prorated based upon the number of full months
elapsed in the year in which such termination or partial termination occurs,
and calculated as if performance goals were achieved at the target level.
The Board of Directors recommends a vote "FOR" the approval of Proposal No. 5.
39
6. PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION TO INCREASE THE NUMBER OF SHARES
OF COMMON STOCK THAT THE COMPANY IS AUTHORIZED TO ISSUE
The Company's Amended and Restated Certificate of Incorporation currently
authorizes the Company to issue 39,000,000 shares of Common Stock and 1,000,000
shares of preferred stock. On January 31, 2002, there were 17,682,917 shares of
Common Stock outstanding, 1,600,000 shares of Common Stock reserved for
issuance upon the exercise of stock options, 6,994,118 shares of Common Stock
reserved for issuance upon the exercise of warrants and no shares of preferred
stock outstanding. The Board of Directors believes that it is desirable for the
shareholders to consider and act upon a proposal to amend the Company's Amended
and Restated Certificate of Incorporation to increase the number of shares
authorized. The proposed amendment provides that the Company's authorized
capital would consist of 175,000,000 shares of Common Stock. No shares of
preferred stock are presently issued or outstanding, the Company has no present
plans to issue any shares of preferred stock, and the proposed amendment in no
way affects provisions of its Amended and Restated Certificate of Incorporation
relating to preferred stock. The Board of Directors believes it would be
advisable for the Company to have additional shares authorized that it can use
for structuring future financings and acquisitions and for meeting other
corporate needs that may arise. Having additional authorized shares will allow
the Company the flexibility to issue shares of Common Stock without the expense
and delay of a special shareholder's meeting. The authorized shares of Common
Stock, as well as shares of the Company's preferred stock, will be available
for issuance without further action by shareholders, unless such action is
required by applicable law or the rules of any stock exchange on which the
Company's securities may be listed.
The Company's Board of Directors could, however, issue Common Stock that
could, subject to certain limitations imposed by the securities laws and NASDAQ
rules, impede the completion of a merger, tender offer or other takeover
attempt. For instance, the Board of Directors could issue a large block of
Common Stock to a third party to impede a business combination that would
enable such holder to block such transaction. The Board of Directors will make
any determination to issue such shares based on its judgment as to the best
interests of the Company and its then existing shareholders. The authorized and
unissued Company Stock, as well as the authorized and unissued preferred stock,
would be available for the above purposes.
Authorizing the Company to issue more shares of Common Stock than are
currently authorized by the Amended and Restated Certificate of Incorporation
will not affect materially any substantive rights, powers or privileges of
holders of outstanding Common Stock. Other than increasing the number of
authorized shares of Common Stock from 39,000,000 to 175,000,000, the proposed
amendment does not make any changes in the Company's Amended and Restated
Certificate of Incorporation.
Pursuant to this Proposal No. 6, Article FOURTH of the Amended and Restated
Certificate of Incorporation would be amended to read, in part, as follows:
FOURTH. (a) The total number of shares of capital stock which the
Corporation is authorized to issue is 176,000,000, consisting of
175,000,000 shares of Common Stock, par value $0.25 per share, and
1,000,000 shares of Preferred Stock, par value $0.25 per share.
The Board of Directors has adopted resolutions setting forth the proposed
amendment, declaring its advisability and directing that the proposed amendment
be submitted to the shareholders for their approval at the Annual Meeting. If
adopted by the shareholders, the amendment will become effective upon filing as
required by the General Corporation Law of Delaware.
The Board of Directors recommends a vote "FOR" the approval of Proposal No. 6.
40
INDEPENDENT AUDITORS
The firm of PricewaterhouseCoopers LLP, Louisville, Kentucky, has been
retained by the Company as independent auditors to audit the financial
statements of the Company. Representatives of PwC will be present at
the Annual Meeting and will be afforded the opportunity to make a statement if
they desire to do so and to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be presented at the next annual meeting
of shareholders must be received by the Company by November 11, 2002 in order
to be considered for inclusion in the Company's proxy materials for such
meeting.
In connection with the annual meeting of shareholders of the Company to be
held in 2003, if the proponent of a shareholder proposal fails to notify the
Company of such proposal, in conformity with the requirements of the Company's
bylaws, before 60, but no earlier than 90 days before such meeting, then
management proxies will be allowed to use their discretionary voting authority
on the proposal if raised at the annual meeting even if there is no discussion
of the proposal in the proxy statement.
OTHER MATTERS
The only matters to be considered at the Annual Meeting or any adjournment
thereof, so far as known to the Board of Directors, are those set forth in the
Notice of Meeting and routine matters incident to the conduct of the Annual
Meeting. However, if any other matters should properly come before the Annual
Meeting or any adjournment thereof, it is the intention of the persons named in
the accompanying form of proxy, or their substitutes, to vote the proxy in
accordance with their judgment in such matters.
ADDITIONAL INFORMATION
Copies of the exhibits to the Company's Annual Report on Form 10-K will be
provided to any requesting shareholder, provided that such shareholder agrees
to reimburse the Company for reasonable fees related to providing such exhibits.
By Order of the Board of Directors
/s/ Edward L. Kuntz
Edward L. Kuntz
Chairman of the Board and
Chief Executive Officer
41
APPENDIX A
CHARTER
AUDIT AND COMPLIANCE COMMITTEE OF THE BOARD OF DIRECTORS
KINDRED HEALTHCARE, INC.
Mission Statement
The Committee is appointed to assist the Board of Directors in monitoring
(i) the adequacy of the Company's system of internal controls, accounting
policies, financial reporting practices, and the quality and integrity of the
Company's financial reporting; and (ii) the Company's compliance with
applicable laws, regulations, and policies.
Organization
The Audit and Compliance Committee of the Board of Directors shall be
comprised of at least three directors who are independent of the management and
the Company and free of any relationship that would interfere with their
exercise of independent judgment. All Audit and Compliance Committee members
will be competent in understanding financial statements, and at least one
member will have accounting or related financial management expertise. The
Committee shall meet at least four times annually and shall report to the Board
of Directors on its findings and matters within the scope of its
responsibility. The Committee shall maintain minutes of all its meetings to
document its activities and recommendations. The Committee shall obtain the
full Board of Directors' approval of this Charter and review and reassess this
Charter as conditions dictate (at least annually) and recommend changes it
considers appropriate to the Board.
Roles And Responsibilities
Engagement and Relationships with Auditors
. Review and then, recommend to the directors engagement of the independent
auditors to be selected to audit the financial statements of the Company
and its subsidiaries.
. Communicate to the independent auditors that they are ultimately
accountable to the Board of Directors and the Audit and Compliance
Committee, as the shareholders' representatives, who have the ultimate
authority in deciding to engage, evaluate, and if appropriate, terminate
their services.
. Meet with the independent auditors and financial management of the Company
to review the scope of the proposed audit and timely quarterly reviews for
the current year and the procedures to be utilized, review such audit or
review, including any comments or recommendations of the independent
auditors, and review the independent auditors' compensation.
. Review with the independent auditors, the Company's internal auditor, and
financial and accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the Company, and elicit any
recommendations for the improvement of such internal control procedures or
particular areas where new or more detailed controls or procedures are
desirable. The Committee should review whether recommendations made have
been implemented by management.
. Inquire of management, the internal auditor, and the independent auditors
about significant financial risks or exposures and assess the steps
management has taken to control such risks or exposure.
. Review and, concur with or reject, management's appointment, termination,
or replacement of the Director of Internal Audit.
. Review the internal audit function of the Company including the
independence and authority of the internal audit function's reporting
obligations, the proposed internal audit plans for the coming year, and
the coordination of such plans with the independent auditors.
A-1
. Review the significant reports from completed internal audits as well as
management's responses.
. Receive prior to each meeting, a progress report on the proposed internal
audit plan, with explanations for any deviations from the original plan.
Financial Reporting
. Review the quarterly financial statements with financial management and
the independent auditors prior to the filing of the Form 10-Q (or prior to
the press release of results, if possible) to determine that the
independent auditors do not take exception to the disclosure and content
of the financial statements, and discuss any other matters required to be
communicated to the Committee by the auditors. The chair and another
member of the Committee may represent the entire Committee for purposes of
this review.
. Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine
that the independent auditors are satisfied with the disclosure and
content of the financial statements to be presented to the shareholders.
Any changes in accounting principles should be reviewed.
. Discuss with financial management and the independent auditors the quality
of the accounting principles and judgments used in preparing the financial
statements.
. Discuss with the independent auditors the matters required to be discussed
by Statement of Auditing Standards No. 61, as amended from time to time,
relating to the conduct of the audit.
. Obtain from the independent auditors their report on compliance with
Section 10A of the Securities Act of 1933, as amended.
. Review with the Company's General Counsel legal matters that may have a
material impact on the Company's financial statements, compliance issues,
and any material inquiries or reports from regulators or governmental
agencies.
. Review with financial management and the independent auditors the results
of their timely analysis of significant financial reporting issues and
practices, including changes in, or new adoptions of, accounting
principles and disclosure practices and discuss any other matters required
to be communicated to the Committee by the auditors.
. Provide sufficient opportunity for the internal and independent auditors
to meet with the members of the Audit and Compliance Committee without
members of management present. Among the items to be discussed in these
meetings are the independent auditors' evaluation of the Company's
financial, accounting, and auditing personnel, and the cooperation that
the independent and internal auditors received during the course of their
audits.
. On an annual basis, obtain from the independent auditors a written
communication delineating all their relationships and professional
services as required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees. In addition, review with
the independent auditors the nature and scope of any disclosed
relationships or professional services and take, or recommend that the
Board of Directors take, appropriate action to ensure the continuing
independence of the auditors.
. Prepare a report of the Audit and Compliance Committee as required to be
included in the Company's proxy statement.
. Report the results of the annual audit to the Board of Directors. If the
Committee considers it advisable or if requested by the Board of
Directors, invite the independent auditors to attend the full Board of
Directors meeting to assist in reporting the results of the annual audit
or to answer other directors' questions (alternatively, the other
directors, particularly the other independent directors, may be invited to
attend the Audit and Compliance Committee meeting during which the results
of the annual audit are reviewed).
A-2
. Include a copy of this Charter in the annual report to shareholders or the
proxy statement at least triennially or the year after any significant
amendment to the Charter.
Corporate Compliance
. Review and, concur with or reject, management's appointment, termination,
or replacement of the Corporate Compliance Officer.
. Review the adequacy of the Company's system of internal controls,
accounting policies, financial reporting practices, and the quality and
integrity of financial reporting to Federal health care programs.
. Ensure that the Company adopts and implements policies and procedures
designed to ensure compliance with all applicable statutes, regulations,
policies and the Corporate Integrity Agreement.
. Ensure that the Company has a system in place to respond to Federal,
state, internal, and external reports of quality of care issues and that
such system functions adequately.
. Ensure that the Company adopts and implements policies and procedures that
are designed to ensure that each individual cared for in the Company's
facilities receives the level of care required by law.
. Be available to the Compliance Officer, the External Monitors and the
Independent Review Organization to respond to any issues or questions that
might arise under the Corporate Integrity Agreement.
. Review with the Compliance Officer the steps the Company is taking to
educate its employees regarding its Standards of Conduct and compliance
issues.
. Review with the Compliance Officer the types of issues reported to the
Company through its compliance hotline and the results of any internal
investigations initiated by the Company in response to compliance issues
reported through the hotline or otherwise brought to the Company's
attention.
. Investigate, or ask the General Counsel to investigate, any matter brought
to the attention of the Committee within the scope of its duties, and
obtain legal advice for this purpose, if, in its judgment, that is
appropriate.
Reporting Responsibilities
. Submit the minutes of all meetings of the Audit and Compliance Committee
to, or discuss the matters discussed at each committee meeting with, the
Board of Directors.
Approved by the Audit and Compliance Committee and the Board of Directors on
September 25, 2001.
A-3
APPENDIX B
2000 STOCK OPTION PLAN
1. Purpose of the Plan
The purpose of the 2000 Stock Option Plan (the "Plan") is to promote the
interests of the Company and its stockholders by providing the key employees
and consultants of the Company and its Affiliates with an appropriate incentive
to encourage them to continue in the employ of the Company or Affiliate and to
improve the growth and profitability of the Company.
2. Definitions
As used in this Plan, the following capitalized terms shall have the
following meanings:
(a) "Affiliate" shall mean any of Vencor, Inc.'s direct or indirect
subsidiaries within the meaning of Section 424 of the Code.
(b) "Board" shall mean the Board of Directors of the Company or any duly
elected Committee thereof.
(c) "Cause", when used in connection with the termination of a
Participant's employment with the Company, shall mean (i) dishonesty; (ii)
deliberate and continual refusal to perform employment duties on
substantially a full-time basis; (iii) failure to act in accordance with any
specific lawful instructions given to the Participant in connection with the
performance of his duties for the Company or any of its subsidiaries or
affiliates, unless the Participant has an existing Permanent Disability;
(iv) deliberate misconduct that is reasonably likely to be materially
damaging to the Company without a reasonable good faith belief by the
Participant that such conduct was in the best interests of the Company; or
(v) conviction of or plea of nolo contendere to a crime involving moral
turpitude.
(d) "Change in Control" shall mean any one of the following events:
(i) any Person (as this term is used in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act, but excluding any person described in and
satisfying the conditions of Rule 13d-1(b)(i) thereunder) (an "Acquiring
Person") becomes the "beneficial owner" (as such term is defined in Rule
13d-3 promulgated under the Exchange Act (a "Beneficial Owner"),
directly or indirectly, of securities of Vencor, Inc. representing 50%
or more of the combined voting power of Vencor, Inc.'s then outstanding
securities, other than beneficial ownership by a Participant, the
Company, any employee benefit plan of the Company or any Person
organized, appointed or established pursuant to the terms of any such
benefit plan;
(ii) Vencor, Inc.'s stockholders approve an agreement to merge or
consolidate Vencor, Inc. with another corporation, or an agreement
providing for the sale of substantially all of the assets of Vencor,
Inc. to one or more Persons, in any case other than with or to an entity
50% or more of which is controlled by, or is under common control with,
Vencor, Inc.;
(iii) during any two-year period, commencing after the Effective
Date, individuals who at the date on which the period commences
constitute a majority of the Board of Directors (the "Incumbent
Directors") cease to constitute a majority thereof for any reason;
provided, however, that a director who was not an Incumbent Director
shall be deemed to be an Incumbent Director if such director was elected
by, or on the recommendation of, at least two-thirds of the Incumbent
Directors (either actually or by prior operation of this provision),
other than any director who is so approved in connection with any actual
or threatened contest for election to positions on the Board of
Directors; or
(iv) the Company is merged, combined, consolidated, recapitalized or
otherwise organized with one or more other entities that are not
Affiliates, as a result of which less than 50% of the outstanding voting
securities of the surviving or resulting entity immediately after the
reorganization are, or will be, owned, directly or indirectly, by
shareholders of the Company, determined on the basis of record
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ownership as of the date of determination of holders entitled to vote on
the transaction (or in the absence of a vote, the day immediately prior
to the event).
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(f) "Commission" shall mean the U.S. Securities and Exchange Commission.
(g) "Committee" shall mean the Executive Compensation Committee of the
Board or such other committee as the Board shall appoint from time to time.
(h) "Common Stock" shall mean the common stock of Vencor, Inc., par value
$ 0.25 per share.
(i) "Company" shall mean Vencor, Inc. and any of its Affiliates.
(j) "Disability" shall mean a physical or mental condition that entitles
the Participant to benefits under the Company's long-term disability plan.
For purposes of this Plan, a Participant's employment shall be deemed to
have terminated as a result of Disability on the date as of which he is
first entitled to receive disability benefits under such policy.
(k) "Effective Date" shall mean the date on which the Company's
bankruptcy plan is confirmed by the United States Bankruptcy Court for the
District of Columbia.
(l) "Eligible Employee" shall mean (i) any Employee (whether or not a
director) who is a key executive of the Company, or (ii) certain other
Employees, advisors or consultants who, in the judgment of the Committee,
should be eligible to participate in the Plan due to the services they
perform on behalf of the Company; provided such persons render or have
rendered bona fide services (other than services in connection with the
offering or sale of securities of the Company in a capital raising
transaction or as a market maker or promoter of the Company's securities) to
the Company. An advisor or consultant may be selected as an Eligible
Employee only if such person's participation in this Plan would not
adversely affect (a) the Company's eligibility to use Form S-8 to register
under the Securities Act the offering of shares issuable under this Plan by
the Company, or (b) the Company's compliance with any other applicable laws.
(m) "Employment" shall mean employment with the Company and shall include
the provision of services as a consultant for the Company. "Employee" and
"Employed" shall have correlative meanings.
(n) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(o) "Exercise Date" shall have the meaning set forth in Section 4.10
herein.
(p) "Exercise Notice" shall have the meaning set forth in Section 4.10
herein.
(q) "Exercise Price" shall mean the price that the Participant must pay
under the Option for each share of Common Stock as determined by the
Committee for each Grant and specified in the Stock Option Grant Agreement.
(r) "Fair Market Value" shall mean, as of any date, (A) the average of
the high and low sales prices on such day of a share of Common Stock as
reported on the principal securities exchange on which shares of Common
Stock are then listed or admitted to trading or (B) if not so reported, the
average of the closing bid and ask prices on such day as reported on the
National Association of Securities Dealers Automated Quotation System, or in
the over-the-counter market or (C) if not so reported, as furnished by any
member of the National Association of Securities Dealers, Inc. ("NASD")
selected by the Committee. The Fair Market Value of a share of Common Stock
as of any such date on which the applicable exchange or inter-dealer
quotation system through which trading in the Common Stock regularly occurs
is closed shall be the Fair Market Value determined pursuant to the
preceding sentence as of the immediately preceding date on which the Common
Stock is traded, a bid and ask price is reported or a trading price is
reported by any member of NASD selected by the Committee. In the event that
the price of a share of Common Stock shall not be so reported or furnished,
the Fair Market Value shall be determined by the Committee in good faith to
reflect the fair market value of a share of Common Stock.
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(s) "Financing Restriction" shall mean a restriction contained in any
guarantee, financing or security agreement or document entered into by the
Company or its Affiliates that restricts or prohibits the redemption of the
Option(s).
(t) "Grant" shall mean a grant of an Option under the Plan evidenced by a
Stock Option Grant Agreement.
(u) "Grant Date" shall mean the Grant Date as defined in Section 4.3
herein.
(v) "Incentive Stock Option" shall mean an Option that is intended to
qualify as an "incentive stock option" within the meaning of Section 422 of
the Code.
(w) "Non-Qualified Stock Option" shall mean an Option that is not an
"incentive stock option" within the meaning of Section 422 of the Code.
(x) "Option" shall mean the option to purchase Common Stock granted to
any Participant under the Plan. Each Option granted hereunder shall be
identified as an Incentive Stock Option or a Non-Qualified Stock Option, as
the case may be, in the Stock Option Grant Agreement by which it is
evidenced.
(y) "Option Spread" shall mean, with respect to an Option, the excess, if
any, of the Fair Market Value of a share of Common Stock as of the
applicable Valuation Date over the Exercise Price.
(z) "Participant" shall mean an Eligible Employee to whom a Grant of an
Option under the Plan has been made, and, where applicable, shall include
Permitted Transferees.
(aa) "Permitted Transferee" shall have the meaning set forth in Section
4.6.
(bb) "Person" shall mean an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
(cc) "Securities Act" shall mean the Securities Act of 1933, as amended.
(dd) "Stock Option Grant Agreement" shall mean an agreement entered into
by each Participant and the Company evidencing the Grant of each Option
pursuant to the Plan (a form of which is attached hereto as Exhibit A).
(ee) "Transfer" shall mean any transfer, sale, assignment, gift,
testamentary transfer, pledge, hypothecation or other disposition of any
interest. "Transferee" and "Transferor" shall have correlative meanings.
(ff) "Trading Day" shall mean any day on which the New York Stock
Exchange is open for trading.
(gg) "Valuation Date" shall mean (i) prior to the existence of a Public
Market for the Common Stock, the last day of each calendar quarter, or (ii)
on or after the existence of a Public Market for the Common Stock, the
trading date immediately preceding the date of the relevant transaction.
(hh) "Vesting Date" shall mean the date an Option becomes exercisable as
defined in Section 4.4 herein.
3. Administration of the Plan
The Committee shall administer the Plan. No member of the Committee shall
participate in any decision that specifically affects such member's interest in
the Plan.
3.1 Powers of the Committee. In addition to the other powers granted to the
Committee under the Plan, the Committee shall have the power: (a) to determine
to which of the Eligible Employees Grants shall be made; (b) to determine the
time or times when Grants shall be made and to determine the number of shares
of Common Stock subject to each such Grant; (c) to prescribe the form of any
instrument evidencing a Grant; (d) to adopt, amend and rescind such rules and
regulations as, in its opinion, may be advisable for the administration of the
B-3
Plan; (e) to construe and interpret the Plan, such rules and regulations and
the instruments evidencing Grants; and (f) to make all other determinations
necessary or advisable for the administration of the Plan.
3.2 Determinations of the Committee. Any Grant, determination, prescription
or other act of the Committee made in good faith shall be final and
conclusively binding upon all persons.
3.3 Indemnification of the Committee. No member of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Grant. To the full extent permitted by law, the Company shall
indemnify and hold harmless each person made or threatened to be made a party
to any civil or criminal action or proceeding by reason of the fact that such
person, or such person's testator or intestate, is or was a member of the
Committee to the extent such criminal or civil action or proceeding relates to
the Plan.
3.4 Compliance with Applicable Law. Notwithstanding anything herein to the
contrary, the Company shall not be required to issue or deliver any
certificates evidencing shares of Common Stock pursuant to the exercise of any
Options, unless and until the Committee has determined, with advice of counsel,
that the issuance and delivery of such certificates is in compliance with all
applicable laws, regulations of governmental authorities and, if applicable,
the requirements of any exchange on which the shares of Common Stock are listed
or traded. The Company shall use its reasonable efforts to comply with any such
law, regulation or requirement with respect to the issuance and delivery of
such certificates. In addition to the terms and conditions provided herein, the
Committee may require that a Participant make such reasonable covenants,
agreements and representations as the Committee, in its sole discretion, deems
advisable in order to comply with any such laws, regulations or requirements.
3.5 Inconsistent Terms. In the event of a conflict between the terms of the
Plan and the terms of any Stock Option Grant Agreement, the terms of the Stock
Option Grant Agreement shall govern.
3.6 Reliance on Experts. In making any determination or in taking or not
taking any action under this Plan, the Committee or the Board, as the case may
be, may obtain and may rely upon the advice of experts, including employees of
and professional advisors to the Company.
3.7 Delegation. The Committee may delegate ministerial, non-discretionary
functions to individuals who are officers or employees of the Company.
4. Options
Subject to adjustment as provided in Section 4.13 hereof, the Committee may
grant to Participants Options to purchase shares of Common Stock of the Company
which, in the aggregate, do not exceed 600,000 shares of Common Stock (the
"Share Limit"); and which, with respect to each Participant, do not exceed an
aggregate of 150,000 shares of Common Stock granted in any calendar year. The
Participants to whom Options shall be granted and the number of shares of
Common Stock subject to each Option shall be recommended by the Chief Executive
Officer of Vencor, Inc. for approval by the Committee. Shares of Common Stock
subject to outstanding Options shall be reserved for issuance. No Option may be
granted under this Plan unless, on the date of grant, the sum of (a) the
maximum number of shares of Common Stock issuable at any time pursuant to such
Option, plus (b) the number of shares of Common Stock that have previously been
issued pursuant to Options granted under this Plan, other than reacquired
shares available for reissue consistent with any applicable legal limitations,
plus (c) the maximum number of shares of Common Stock that may be issued at any
time after such date of grant pursuant to Options that are outstanding on such
date, does not exceed the Share Limit. Shares of Common Stock that are subject
to or underlie Options that expire or for any reason are canceled or
terminated, are forfeited, fail to vest, or for any other reason are not paid
or delivered under this Plan, as well as reacquired shares, will again, except
to the extent prohibited by law or the terms of this Plan, be available for
subsequent Option grants under this Plan. Accordingly, shares of Common Stock
issued pursuant to the terms hereof (including shares of Common Stock offset in
satisfaction of applicable withholding taxes or the exercise price of
B-4
an Option) in respect of an Option shall reduce on a share-for-share basis the
number of shares of Common Stock remaining available under this Plan and the
number of shares remaining subject to the Option.
The Committee shall grant Options with respect to all 600,000 shares
available for grant under the Plan on or prior to the 31/st/ Trading Day
following the Effective Date.
4.1 Identification of Options. The Options granted under the Plan shall be
clearly identified in the Stock Option Grant Agreement as Incentive Stock
Options or Non-Qualified Stock Options, as the case may be.
4.2 Exercise Price. The Exercise Price of Options granted under the Plan
shall be such price as is determined by the Committee; provided that such
Exercise Price may not be less than the minimum price required by law. The
Exercise Price of Options granted on or prior to the 31/st/ Trading Day
following the Effective Date shall be the Fair Market Value of Common Stock on
the Grant Date.
4.3 Grant Date. The Grant Date of the Options shall be the date designated
by the Committee and specified in the Stock Option Grant Agreement as of the
date the Option is granted.
4.4 Vesting Date of Options. Each Option shall vest and become exercisable
in equal annual portions over three years or as otherwise determined by the
Committee and set forth in the Participant's Stock Option Grant Agreement.
Notwithstanding the foregoing, in the event of a Change in Control, each Option
shall immediately become fully exercisable.
4.5 Expiration of Options. With respect to each Participant, such
Participant's Option(s), or portion thereof, which have not become exercisable
shall expire on the date such Participant's Employment is terminated for any
reason. With respect to each Participant, each Participant's Option(s), or any
portion thereof, which have become exercisable on the date such Participant's
Employment is terminated shall expire on the earlier of (i) the commencement of
business on the date the Participant's Employment is terminated for Cause; (ii)
ninety (90) days after the date the Participant's Employment is terminated for
any reason other than for Cause or on account of death or Disability; (iii) one
year after the date the Participant's Employment is terminated by reason of
death or Disability; or (iv) the 5th anniversary of the Grant Date for such
Option(s).
4.6 Limitation on Transfer. Unless otherwise provided in the Stock Option
Grant Agreement, during the lifetime of a Participant, each Option shall be
exercisable only by such Participant and are non-transferable and will not be
subject in any manner to sale, transfer, anticipation, alienation, pledge,
encumbrance or charge. Upon the death of the Participant, such Participant's
Option(s) shall be transferrable to his beneficiaries or his estate (a
"Permitted Transferee"). Notwithstanding anything to the contrary herein,
Incentive Stock Options will be subject to any and all transfer restrictions
under the Code applicable to such awards as necessary to maintain the intended
tax consequences of such Incentive Stock Options.
4.7 Condition Precedent to Transfer of Any Option. It shall be a condition
precedent to any Transfer of any Option by any Participant that the Transferee,
if not already a Participant in the Plan, shall agree prior to the Transfer in
writing with the Company to be bound by the terms of the Plan and the Stock
Option Grant Agreement as if he had been an original signatory thereto.
4.8 Effect of Void Transfers. In the event of any purported Transfer of any
Options in violation of the provisions of the Plan, such purported Transfer
shall, to the extent permitted by applicable law, be void and of no effect.
4.9 Exercise of Options. A Participant may exercise any or all of his
vested Options by serving an Exercise Notice on the Company as provided in
Section 4.10 hereto.
B-5
4.10 Method of Exercise. The Option shall be exercised by delivery of
written notice to the Company's principal office (the "Exercise Notice"), to
the attention of its Secretary, no less than three (3) business days in advance
of the effective date of the proposed exercise (the "Exercise Date"). Such
notice shall (a) specify the number of shares of Common Stock with respect to
which the Option is being exercised, the Grant Date of such Option and the
Exercise Date, (b) be signed by the Participant, and (c) if the Option is being
exercised by the Participant's Permitted Transferee(s), such Permitted
Transferee(s) shall indicate in writing that they agree to and shall be bound
by the Plan and Stock Option Grant Agreement as if they had been original
signatories thereto. The Exercise Notice shall include (i) payment in cash (or
cash equivalents) for an amount equal to the Exercise Price multiplied by the
number of shares of Common Stock specified in such Exercise Notice, (ii) a
certificate representing the number of shares of Common Stock with a Fair
Market Value equal to the Exercise Price (provided the Participant has owned
such shares at least six months prior to the Exercise Date) multiplied by the
number of shares of Common Stock specified in such Exercise Notice, or (iii) a
combination of (i) and (ii) or any method otherwise approved by the Committee.
In addition, the Exercise Notice shall include payment in cash in an amount
equal to the applicable withholding taxes, if any (for example, no withholding
may be due if the Option is an Incentive Stock Option), based on the Option
Spread for each share of Common Stock specified in the Exercise Notice as of
the most recent Valuation Date unless the Participant requests, in writing,
that the Company withhold a portion of the shares that are to be distributed to
the Participant to satisfy the applicable federal, state and local withholding
taxes incurred in connection with the exercise of the Option (the "Withholding
Request"). The Committee, in its sole discretion, will either grant or deny the
Withholding Request and shall notify the Participant of its determination prior
to the Exercise Date. If the Withholding Request is denied, the Participant
shall pay an amount equal to the applicable withholding taxes, if any, based on
the Option Spread for each share of Common Stock specified in the Exercise
Notice as of the most recent Valuation Date on or before such Exercise Date.
The Committee may, in its discretion, permit Participants to make the
above-described payments in forms other than cash. The partial exercise of the
Option, alone, shall not cause the expiration, termination or cancellation of
the remaining Options.
4.11 Certificates of Shares. Upon the exercise of the Options in accordance
with Section 4.10, certificates of shares of Common Stock shall be issued in
the name of the Participant and delivered to such Participant or the ownership
of such shares shall be otherwise recorded in a book-entry or similar system
utilized by the Company as soon as practicable following the Exercise Date.
Such certificates may include such legends as the Committee may determine are
appropriate in light of applicable Federal or state securities laws or the
requirements of any exchange.
4.12 Administration of Options.
(a) Termination of the Options. The Committee may, at any time, in its
absolute discretion, without amendment to the Plan or any relevant Stock Option
Grant Agreement, terminate the Options then outstanding, whether or not
exercisable, provided, however, that the Company, in full consideration of such
termination, shall pay with respect to any Option, or portion thereof, then
outstanding, an amount equal to the Black-Scholes value of such Option, or
portion thereof, determined based on the assumptions used for purposes of the
Company's then most recent proxy statement or, if not so used based on
assumptions determined by the Committee. Such payment shall be made as soon as
practicable after the payment amounts are determined.
(b) Amendment of Terms of Options. The Committee may, in its absolute
discretion, amend the Plan or terms of any Option, provided, however, that any
such amendment shall not materially adversely affect any Participants' rights
under the Plan or such Option without such Participant's written consent.
4.13 Adjustment Upon Changes in Company Stock.
(a) Increase or Decrease in Issued Shares Without Consideration. Subject to
any required action by the stockholders of the Company, in the event of any
increase or decrease in the number of issued shares of Common Stock resulting
from a subdivision or consolidation of shares of Common Stock or the payment of
a stock dividend (but only on the shares of Common Stock), or any other
increase or decrease in the number of such
B-6
shares effected without receipt of consideration by the Company, the Committee
shall, in its absolute discretion, make such adjustments with respect to the
number of shares of Common Stock subject to the Options and the exercise price
per share of Common Stock, as the Committee may consider appropriate to prevent
the enlargement or dilution of rights.
(b) Certain Mergers. Subject to any required action by the stockholders of
the Company, in the event that the Company shall be the surviving corporation
in any merger or consolidation (except a merger or consolidation as a result of
which the holders of shares of Common Stock receive securities of another
corporation), the Options outstanding on the date of such merger or
consolidation shall pertain to and apply to the securities that a holder of the
number of shares of Common Stock subject to any such Option would have received
in such merger or consolidation (it being understood that if, in connection
with such transaction, the stockholders of the Company retain their shares of
Common Stock and are not entitled to any additional or other consideration, the
Options shall not be affected by such transaction).
(c) Certain Other Transactions. In the event of (i) a dissolution or
liquidation of the Company, (ii) a sale of all or substantially all of the
Company's assets, (iii) a merger or consolidation involving the Company in
which the Company is not the surviving corporation or (iv) a merger or
consolidation involving the Company in which the Company is the surviving
corporation but the holders of shares of Common Stock receive securities of
another corporation and/or other property, including cash, the Committee shall
provide for the exchange of each Option outstanding immediately prior to such
event (whether or not then exercisable) for an option on or stock appreciation
right with respect to, as appropriate, some or all of the property for which
the stock underlying such Options are exchanged and, incident thereto, make an
equitable adjustment, as determined by the Committee, in the exercise price of
the options or stock appreciation rights, or the number of shares or amount of
property subject to the options or stock appreciation rights or, if
appropriate, provide for a cash payment to the Participants in partial
consideration for the exchange of the Options as the Committee may consider
appropriate to prevent dilution or enlargement of rights.
(d) Other Changes. In the event of any change in the capitalization of the
Company or a corporate change other than those specifically referred to in
Sections 4.13(a), (b) or (c) hereof, the Committee shall, in its absolute
discretion, make such adjustments in the number and class of shares subject to
Options outstanding on the date on which such change occurs and in the Exercise
Price of each such Option as the Committee may consider appropriate to prevent
dilution or enlargement of rights.
(e) No Other Rights. Except as expressly provided in the Plan or the Stock
Option Grant Agreements evidencing the Options, the Participants shall not have
any rights by reason of (i) any subdivision or consolidation of shares of
Common Stock or shares of stock of any class, (ii) the payment of any dividend,
any increase or decrease in the number of shares of Common Stock, or (iii)
shares of stock of any class or any dissolution, liquidation, merger or
consolidation of the Company or any other corporation. Except as expressly
provided in the Plan or the Stock Option Grant Agreements evidencing the
Options, no issuance by the Company of shares of Common Stock or shares of
stock of any class, or securities convertible into shares of Common Stock or
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number of shares of Common Stock subject to
the Options or the exercise price of such Options.
5. Miscellaneous
5.1 Rights as Stockholders. The Participants shall not have any rights as
stockholders with respect to any shares of Common Stock covered by or relating
to the Options granted pursuant to the Plan until the date the Participants
become the registered owners of such shares. Except as otherwise expressly
provided in Sections 4.12 and 4.13 hereof, no adjustment to the Options shall
be made for dividends or other rights for which the record date occurs prior to
the date such stock certificate is issued.
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5.2 No Special Employment Rights. Nothing contained in the Plan shall
confer upon the Participants any right with respect to the continuation of
their Employment or interfere in any way with the right of the Company or an
Affiliate, subject to the terms of any separate Employment agreements to the
contrary, at any time to terminate such Employment or to increase or decrease
the compensation of the Participants from the rate in existence at the time of
the grant of any Option.
5.3 No Obligation to Exercise. The Grant to the Participants of the Options
shall impose no obligation upon the Participants to exercise such Options.
5.4 Notices. Each notice and other communication hereunder shall be in
writing and shall be given and shall be deemed to have been duly given on the
date it is delivered in person, on the next business day if delivered by
overnight mail or other reputable overnight courier, or the third business day
if sent by registered mail, return receipt requested, to the parties as follows:
If to the Participant:
To the address shown on the Stock Option Grant Agreement.
If to the Company:
Vencor, Inc.
One Vencor Place
680 South Fourth Avenue
Louisville, KY 40202
Attention: Secretary
or to such other address as any party may have furnished to the other in
writing in accordance herewith.
5.5 Descriptive Headings. The headings in the Plan are for convenience of
reference only and shall not limit or otherwise affect the meaning of the terms
contained herein.
5.6 Documents. Descriptive material relating to the Plan shall not be
considered a part of the Plan, and in the event of any conflict between such
descriptive material and the Plan, the text of the Plan shall govern.
5.7 Severability. In the event that any one or more of the provisions,
subdivisions, words, clauses, phrases or sentences contained herein, or the
application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision, subdivision, word, clause, phrase or
sentence in every other respect and of the remaining provisions, subdivisions,
words, clauses, phrases or sentences hereof shall not in any way be impaired,
it being intended that all rights, powers and privileges of the Company and
Participants shall be enforceable to the fullest extent permitted by law.
5.8 Governing Law. The Plan shall be governed by, and construed and
enforced in accordance with, the laws of the State of Delaware, without
reference to principles of conflicts of law that would require the application
of the laws of another jurisdiction.
B-8
Exhibit "A"
STOCK OPTION GRANT AGREEMENT
THIS AGREEMENT, made as of this th day of 2000 between Vencor,
Inc. (the "Company") and (the "Participant").
WHEREAS, the Company has adopted and maintains the Vencor 2000 Stock Option
Plan (the "Plan") to promote the interests of the Company and its Affiliates
and stockholders by providing the Company's key employees and others with an
appropriate incentive to encourage them to continue in the employ of the
Company or its affiliates and to improve the growth and profitability of the
Company;
WHEREAS, the Plan provides for the Grant to Participants in the Plan of
Incentive Stock Options or Non-Qualified Stock Options to purchase shares of
Common Stock of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter set forth, the parties hereto hereby agree as follows:
1. Grant of Options. Pursuant to, and subject to, the terms and
conditions set forth herein and in the Plan, the Company hereby grants to
the Participant [an INCENTIVE STOCK OPTION] [a NON-QUALIFIED STOCK OPTION]
(the "Option") with respect to shares of Common Stock of the Company.
2. Grant Date. The Grant Date of the Option hereby granted is ,
.
3. Incorporation of Plan. All terms, conditions and restrictions of the
Plan are incorporated herein and made part hereof as if stated herein. If
there is any conflict between the terms and conditions of the Plan and this
Agreement, the terms and conditions of this Agreement, as interpreted by the
Board, shall govern. All capitalized terms used and not defined herein shall
have the meanings given to such terms in the Plan.
4. Exercise Price. The exercise price of each share underlying the Option
hereby granted is $ .
5. Vesting Date. The Option shall become exercisable as follows:
Approximately one-third of the Option shall become exercisable on each of
the first, second and third anniversaries of the Grant Date; provided that,
the number of shares to become exercisable on any Vesting Date shall be
rounded up to the nearest share, but in no event shall more than 33.34
percent of the shares underlying the Option become exercisable in any year,
nor shall more than the total number of shares underlying the Option become
exercisable in the aggregate. Notwithstanding the foregoing, in the event of
a Change in Control, the Option shall immediately become fully exercisable.
6. Expiration Date. Subject to the provisions of the Plan, with respect
to the Option or any portion thereof which has not become exercisable, the
Option shall expire on the date the Participant's Employment is terminated
for any reason, and with respect to any Option or any portion thereof which
has become exercisable, the Option shall expire on the earlier of (i) the
commencement of business on the date the Participant's Employment is
terminated for Cause; (ii) ninety (90) days after the date the Participant's
Employment is terminated for any reason other than for Cause or on account
of death or Disability; (iii) one year after the date the Participant's
Employment is terminated by reason of death or Disability; or (iv) the 5th
anniversary of the Grant Date.
7. Construction of Agreement. Any provision of this Agreement (or portion
thereof) which is deemed invalid, illegal or unenforceable in any
jurisdiction shall, as to that jurisdiction and subject to this section, be
ineffective to the extent of such invalidity, illegality or
unenforceability, without affecting in any way the remaining provisions
thereof in such jurisdiction or rendering that or any other provisions of
this Agreement invalid, illegal, or unenforceable in any other jurisdiction.
No waiver of any provision or violation of this Agreement by the Company
shall be implied by the Company's forbearance or failure to take action.
B-9
8. Delays or Omissions. No delay or omission to exercise any right, power
or remedy accruing to any party hereto upon any breach or default of any
party under this Agreement, shall impair any such right, power or remedy of
such party nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party or any provisions or
conditions of this Agreement, shall be in writing and shall be effective
only to the extent specifically set forth in such writing.
9. Limitation on Transfer. During the lifetime of the Participant, the
Option shall be exercisable only by the Participant. The Option shall not be
assignable or transferable other than by will or by the laws of descent and
distribution.
10. Integration. This Agreement, and the other documents referred to
herein or delivered pursuant hereto which form a part hereof contain the
entire understanding of the parties with respect to its subject matter.
There are no restrictions, agreements, promises, representations,
warranties, covenants or undertakings with respect to the subject matter
hereof other than those expressly set forth herein and in the Plan. This
Agreement, including without limitation the Plan, supersedes all prior
agreements and understandings between the parties with respect to its
subject matter.
11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
12. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware without regard
to the provisions governing conflict of laws.
13. Participant Acknowledgment. The Participant hereby acknowledges
receipt of a copy of the Plan. The Participant hereby acknowledges that all
decisions, determinations and interpretations of the Board in respect of the
Plan, this Agreement and the Option shall be final and conclusive.
* * * * *
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed by its duly authorized officer and said Participant has hereunto
signed this Agreement on his own behalf, thereby representing that he has
carefully read and understands this Agreement and the Plan as of the day and
year first written above.
Vencor, Inc.
--------------------------------------
By:
Title:
--------------------------------------
[Participant's name]
B-10
APPENDIX C
KINDRED HEALTHCARE, INC. 2001 STOCK INCENTIVE PLAN
Amended and Restated as of February 12, 2002
1. Purpose of the Plan
This Amended and Restated Kindred Healthcare, Inc. 2001 Stock Incentive Plan
(the "Plan"), originally adopted as the Kindred Healthcare, Inc. 2001 Stock
Option Plan, is intended to promote the interests of the Company by providing
the employees of the Company, who are largely responsible for the management,
growth and protection of the business of the Company, with incentives and
rewards to encourage them to continue in the employ of the Company.
2. Definitions
As used in the Plan, the following definitions apply to the terms indicated
below:
(a) "Affiliates" shall mean with respect to any person, any other person
that, directly or indirectly through one or more intermediaries, controls,
is controlled by, or is under common control with the first person.
(b) "Board of Directors" shall mean the Board of Directors of Kindred.
(c) "Cause," when used in connection with the termination of a
Participant's employment, shall mean (i) dishonesty; (ii) deliberate and
continual refusal to perform employment duties on substantially a full-time
basis; (iii) failure to act in accordance with any specific lawful
instructions given to the Participant in connection with the performance of
his duties for the Company, unless the Participant has an existing
Disability; (iv) deliberate misconduct that is reasonably likely to be
materially damaging to the Company without a reasonable good faith belief by
the Participant that such conduct was in the best interests of the Company;
or (v) conviction of or plea of nolo contendere to a crime involving moral
turpitude.
(d) "Change in Control" shall mean any one of the following events:
(i) any Person (as this term is used in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act, but excluding any person described in and
satisfying the conditions of Rule 13d-1(b)(1)(i) thereunder) (an
"Acquiring Person") becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the Exchange Act (a "Beneficial
Owner"), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's
then outstanding securities, other than beneficial ownership by a
Participant, the Company, any employee benefit plan of the Company or
any Person organized, appointed or established pursuant to the terms of
any such benefit plan;
(ii) The Company's stockholders approve an agreement to merge or
consolidate the Company with another corporation, or an agreement
providing for the sale of substantially all of the assets of the Company
to one or more Persons, in any case other than with or to an entity 50%
or more of which is controlled by, or is under common control with, the
Company;
(iii) during any two-year period, individuals who at the date on
which the period commences constitute a majority of the Board of
Directors (the "Incumbent Directors") cease to constitute a majority
thereof for any reason; provided, however, that a director who was not
an Incumbent Director shall be deemed to be an Incumbent Director if
such director was elected by, or on the recommendation of, at least
two-thirds of the Incumbent Directors (either actually or by prior
operation of this provision), other than any director who is so approved
in connection with any actual or threatened contest for election to
positions on the Board of Directors; or
(iv) the Company is merged, combined, consolidated, recapitalized or
otherwise organized with one or more other entities that are not
affiliates of the Company, as a result of which less than 50% of
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the outstanding voting securities of the surviving or resulting entity
immediately after such event are, or will be, owned, directly or
indirectly, by shareholders of the Company, determined on the basis of
record ownership as of the date of determination of holders entitled to
vote on the transaction (or in the absence of a vote, the day
immediately prior to the event).
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" shall have the meaning given to such term in Section 4.
(g) "Common Stock" shall mean the Company's common stock, $.25 par value
per share.
(h) "Company" shall mean Kindred together with its Affiliates.
(i) "Disability" shall mean a physical or mental condition that entitles
the Participant to benefits under the Company's long-term disability plan.
For purposes of this Plan, a Participant's employment shall be deemed to
have terminated as a result of Disability on the date as of which he is
first entitled to receive disability benefits under such policy.
(j) "EBITDAR" shall mean the consolidated earnings of Kindred and its
subsidiaries before interest, taxes, depreciation, amortization and rent.
(k) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(l) the "Fair Market Value" of a Share with respect to any day shall be
(i) the average of the high and low sales prices on such day of a Share as
reported on the principal securities exchange on which Shares are then
listed or admitted to trading or (ii) if not so reported, the average of the
closing bid and ask prices on such day as reported on the National
Association of Securities Dealers Automated Quotation System or (iii) if not
so reported, as furnished by any member of the National Association of
Securities Dealers, Inc. selected by the Committee. In the event that the
price of a Share shall not be so reported, the Fair Market Value of a Share
shall be determined by the Committee in its absolute discretion.
(m) "Incentive Award" shall mean an Option, Tandem SAR, Stand-Alone SAR,
Performance Unit, Restricted Share or Stock Bonus granted pursuant to the
terms of the Plan.
(n) "Incentive Stock Option" shall mean an Option which is an "incentive
stock option" within the meaning of Section 422 of the Code and which is
identified as an Incentive Stock Option in the agreement by which it is
evidenced.
(o) "Kindred" shall mean Kindred Healthcare, Inc., a Delaware
corporation, and its successors.
(p) "Non-Qualified Stock Option" shall mean an Option which is not an
Incentive Stock Option and which is identified as a Non-Qualified Stock
Option in the agreement by which it is evidenced.
(q) "Option" shall mean an option to purchase Shares granted pursuant to
Section 6 hereof. Each Option shall be identified as either an Incentive
Stock Option or a Non-Qualified Stock Option in the agreement by which it is
evidenced.
(r) "Participant" shall mean an employee of the Company to whom an
Incentive Award is granted pursuant to the Plan, and upon his death, his
successors, heirs, executors and administrators, as the case may be.
(s) "Performance Goals" shall have the meaning given such term in Section
9(b).
(t) "Performance Period" shall have the meaning given such term in
Section 9(a).
(u) "Performance Unit" shall mean the right, granted to a Participant
pursuant to Section 9, to receive a Share upon the achievement of specified
Performance Goals.
(v) "Person" shall mean a "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act.
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(w) "Plan" shall mean this Kindred Healthcare, Inc. 2001 Stock Incentive
Plan, as it may be amended from time to time.
(x) "Restricted Share" shall mean a Share of restricted stock granted
pursuant to Section 10 hereof.
(y) "Retirement" shall mean the termination of the employment of a
Participant with the Company on or after (i) the first date on which the
Participant has both attained age 55 and completed 5 years of service with
the Company or (ii) the date on which the Participant attains age 65.
(z) "Securities Act" shall mean the Securities Act of 1933, as amended.
(aa) "Share" shall mean a share of Common Stock.
(bb) "Spread" shall mean, with respect to an Option, Tandem SAR or
Stand-Alone SAR, the excess, if any, of (i) the Fair Market Value of a Share
as of the applicable valuation date (e.g., the date such Incentive Award is
exercised) over (ii) in the case of an Option, the exercise price of such
Option, or in the case of a Tandem SAR, the exercise price of the related
Option, or in the case of a Stand-Alone SAR, the exercise price of such
Stand-Alone SAR.
(cc) "Stand-Alone SAR" shall mean a stock appreciation right granted
pursuant to Section 8 hereof which is not related to any Option.
(dd) "Stock Bonus" shall mean a grant of a bonus payable in Shares
pursuant to Section 11 hereof.
(ee) "Tandem SAR" shall mean a stock appreciation right granted pursuant
to Section 7 hereof which is related to an Option. Each Tandem SAR shall be
exercisable only to the extent its related Option is exercisable and only in
the alternative to the exercise of its related Option.
3. Stock Subject to the Plan
Under the Plan, the Committee may grant to Participants (i) Options, (ii)
Tandem SARs, (iii) Stand-Alone SARs, (iv) Performance Units, (v) Restricted
Shares and (vi) Stock Bonuses.
Subject to adjustment as provided in Section 12 hereof, the Committee may
grant Incentive Awards with respect to a number of Shares that in the aggregate
does not exceed 2,000,000 Shares; provided that no Participant may be granted
(a) Options with respect to more than 150,000 Shares in the aggregate in any
calendar year; (b) Tandem SARs or Stand-Alone SARs (collectively) with respect
to more than 100,000 Shares in the aggregate in any calendar year; (c)
Performance Units with respect to more than 100,000 Shares in the aggregate in
any calendar year; (d) Restricted Shares with respect to more than 100,000
Shares in the aggregate in any calendar year; or (e) Stock Bonuses with respect
to more than 25,000 Shares in the aggregate in any calendar year.
In the event that any outstanding Option, Stand-Alone SAR, Restricted Share
or Performance Unit expires, terminates or is cancelled for any reason (other
than pursuant to Section 7(b)(iii) hereof), the Shares subject to the
unexercised portion of such Option, Stand-Alone SAR, Restricted Share or
Performance Unit shall again be available for grants under the Plan. In the
event that an outstanding Option is cancelled pursuant to Section 7(b)(iii)
hereof by reason of the exercise of a Tandem SAR, the Shares subject to the
cancelled portion of such Option shall not again be available for grant under
the Plan. To the extent that Incentive Awards terminate, expire or are
cancelled without having been exercised, vested or paid, the Shares covered
thereby shall continue to count against the annual maximum number of Shares
with respect to which each type of Incentive Award may be granted to a
Participant.
Shares issued under the Plan may be either newly issued shares or treasury
shares, at the discretion of the Committee.
C-3
4. Administration of the Plan
The Plan shall be administered by a committee of the Board (the "Committee")
consisting of two or more persons, each of whom shall be a "non-employee
director" within the meaning of Rule 16b-3 promulgated under Section 16 of the
Exchange Act and an "outside director" within the meaning of Treasury
Regulation section 1.162-27(e)(3) promulgated under Section 162(m) of the Code.
The Committee shall from time to time designate the employees of the Company
who shall be granted Incentive Awards.
The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and the terms of
any Incentive Award issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.
The Committee may, in its absolute discretion, accelerate the date on which
any Option or Stand-Alone SAR granted under the Plan becomes exercisable or on
which a Restricted Share granted under the plan vests or, subject to Sections
6(c)(i) and 8(c)(i) hereof, extend the term of any Option or Stand-Alone SAR
granted under the Plan. In addition, the Committee may, in its absolute
discretion, grant Incentive Awards to Participants on the condition that such
Participants surrender to the Committee for cancellation such other Incentive
Awards (including, without limitation, Incentive Awards with higher exercise
prices) as the Committee specifies. Notwithstanding Section 3 herein, prior to
the surrender of such other Incentive Awards, Incentive Awards granted pursuant
to the preceding sentence of this Section 4 shall not count against the limits
set forth in such Section 3. In addition, the Committee may modify, with the
consent of the Participant, any Incentive Award to make it consistent with
other agreements approved by the Committee.
Whether an authorized leave of absence, or absence in military or government
service, shall constitute termination of employment shall be determined by the
Committee.
Neither the Committee nor any member of the Committee shall be liable for
any action, omission, or determination relating to the Plan, and the Company
shall indemnify and hold harmless each member of the Committee and each other
director or employee of the Company to whom any duty or power relating to the
administration or interpretation of the Plan has been delegated against any
cost or expense (including counsel fees) or liability (including any sum paid
in settlement of a claim with the approval of the Committee) arising out of any
action, omission or determination relating to the Plan, unless, in either case,
such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.
5. Eligibility
The persons who shall be eligible to receive Incentive Awards pursuant to
the Plan shall be such employees of the Company who are largely responsible for
the management, growth and protection of the business of the Company (including
officers of the Company, whether or not they are directors of the Company) as
the Committee shall select from time to time.
6. Options
The Committee may grant Options pursuant to the Plan which Options shall be
evidenced by agreements in such form as the Committee shall from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:
(a) Identification of Options
All Options granted under the Plan shall be clearly identified in the
agreement evidencing such Options as either Incentive Stock Options or
Non-Qualified Stock Options.
C-4
(b) Exercise Price
The exercise price of any Option granted under the Plan shall be not less
than 100% of the Fair Market Value of a Share on the date on which such
Option is granted.
(c) Term and Exercise of Options
(i) Each Option shall be exercisable on such date or dates, during
such period and for such number of Shares as shall be determined by the
Committee on the day on which such Option is granted and set forth in
the agreement evidencing such Option; provided, however, that no Option
shall be exercisable after the expiration of ten years from the date
such Option was granted; and, provided, further, that each Option shall
be subject to earlier termination, expiration or cancellation as
provided in the Plan or in the agreement evidencing such Option.
(ii) Each Option shall be exercisable in whole or in part. The
partial exercise of an Option shall not cause the expiration,
termination or cancellation of the remaining portion thereof.
(iii) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Corporate Secretary,
no less than three business days in advance of the effective date of the
proposed exercise. Such notice shall specify the number of Shares with
respect to which the Option is being exercised and the effective date of
the proposed exercise and shall be signed by the Participant. The
Participant may withdraw such notice at any time prior to the close of
business on the business day immediately preceding the effective date of
the proposed exercise. Payment for Shares purchased upon the exercise of
an Option shall be made on the effective date of such exercise either
(i) in cash, by certified check, bank cashier's check or wire transfer
or (ii) in Shares previously owned by the Participant for at least six
months and valued at their Fair Market Value on the effective date of
such exercise, or partly in Shares with the balance in cash, by
certified check, bank cashier's check or wire transfer. Any payment in
Shares shall be effected by the delivery of such Shares to the Corporate
Secretary of the Company, duly endorsed in blank or accompanied by stock
powers duly executed in blank, together with any other documents and
evidences as the Corporate Secretary of the Company shall require from
time to time.
(iv) Certificates for Shares purchased upon the exercise of an Option
shall be issued in the name of the Participant and delivered to the
Participant as soon as practicable following the effective date on which
the Option is exercised.
(v) During the lifetime of a Participant, each Option granted to him
shall be exercisable only by him. No Option shall be assignable or
transferable otherwise than by will or by the laws of descent and
distribution.
(d) Limitations on Grant of Incentive Stock Options
(i) The aggregate Fair Market Value of Shares with respect to which
"incentive stock options" (within the meaning of Section 422 of the
Code) are exercisable for the first time by a Participant during any
calendar year under the Plan and any other stock option plan of the
Company (or any "subsidiary" of the Company as such term is defined in
Section 424(f) of the Code) shall not exceed $100,000. Such Fair Market
Value shall be determined as of the date on which each such incentive
stock option is granted. In the event that the aggregate Fair Market
Value of Shares with respect to such incentive stock options exceeds
$100,000, then Incentive Stock Options granted hereunder to such
Participant shall, to the extent and in the order required by
regulations promulgated under the Code (or any other authority having
the force of regulations), automatically be deemed to be Non-Qualified
Stock Options, but all other terms and provisions of such Incentive
Stock Options shall remain unchanged. In the absence of such regulations
(and authority), or in the event such regulations (or authority) require
or permit a designation of the options which shall cease to constitute
incentive stock options, Incentive Stock Options shall, to the extent of
such excess and in the order in which they were granted, automatically
be deemed to be Non-Qualified Stock Options, but all other terms and
provisions of such Incentive Stock Options shall remain unchanged.
C-5
(ii) No Incentive Stock Option may be granted to an individual if, at
the time of the proposed grant, such individual owns stock possessing
more than ten percent of the total combined voting power of all classes
of stock of the Company or any of its "subsidiaries" (within the meaning
of Section 424(f) of the Code), unless (i) the exercise price per Share
of such Incentive Stock Option is at least one hundred and ten percent
of the Fair Market Value of a Share at the time such Incentive Stock
Option is granted and (ii) such Incentive Stock Option is not
exercisable after the expiration of five years from the date such
Incentive Stock Option is granted.
(e) Effect of Termination of Employment
(i) In the event that the employment of a Participant with the
Company shall terminate for any reason other than Disability,
Retirement, Cause or death (A) Options granted to such Participant, to
the extent that they were exercisable at the time of such termination,
shall remain exercisable for 90 days after such termination, at which
time they shall expire, and (B) Options granted to such Participant, to
the extent that they were not exercisable at the time of such
termination, shall expire at the commencement of business on the date of
such termination; provided, however, that no Option shall be exercisable
after the expiration of its term.
(ii) In the event that the employment of a Participant with the
Company shall terminate on account of the Retirement of the Participant,
(A) such Participant shall be entitled to exercise Options granted to
him hereunder to the extent that such Options were exercisable at the
time of such termination (x) in the case of Non-Qualified Stock Options,
for two years after the date of Retirement and (y) in the case of
Incentive Stock Options, for 90 days after Retirement, and (B) Options
granted to such Participant, to the extent that they were not
exercisable at the time of such termination, shall expire at the
commencement of business on the date of such termination; provided,
however, that no Option shall be exercisable after the expiration of its
term.
(iii) In the event that the employment of a Participant with the
Company shall terminate on account of the Disability or death of the
Participant, all then outstanding Options of such Participant shall
become immediately exercisable and such Participant shall be entitled to
exercise Options granted to him hereunder (x) in the case of
Non-Qualified Stock Options, at any time within two years after the date
of death or the determination of Disability, and (y) in the case of
Incentive Stock Options, at any time within one year after the date of
death or determination of Disability; provided, however, that no Option
shall be exercisable after the expiration of its term.
(iv) In the event of the termination of a Participant's employment
for Cause, all outstanding Options granted to such Participant shall
expire at the commencement of business on the date of such termination.
(f) Consequences of a Change in Control
Upon the occurrence of a Change in Control, each Option granted under the
Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination
or cancellation pursuant to the terms of the Plan. Furthermore, the
Committee may specify in the agreement evidencing an Option that the
Participant receiving such Option shall, following a Change in Control, have
the right to sell the Option back to the Company for an amount equal to the
Spread.
7. Tandem Stock Appreciation Rights
The Committee may grant in connection with any Option granted hereunder one
or more Tandem SARs relating to a number of Shares less than or equal to the
number of Shares subject to the related Option. A Tandem SAR may be granted at
the same time as, or subsequent to the time that, its related Option is
granted. Each Tandem SAR shall be evidenced by an agreement in such form as the
Committee shall from time to time approve. Tandem SARs shall comply with and be
subject to the following terms and conditions:
C-6
(a) Benefit Upon Exercise
Subject to Section 7(c) hereof, the exercise of a Tandem SAR with respect
to any number of Shares prior to the occurrence of a Change in Control shall
entitle a Participant to (i) a cash payment, for each such Share, equal to
the Spread, (ii) the issuance or transfer to the Participant of a number of
Shares which on the date of the exercise of the Tandem SAR have a Fair
Market Value equal to such Spread or (iii) a combination of cash and Shares
in amounts equal to such Spread, all as determined by the Committee in its
discretion. Such payment, transfer or issuance shall occur as soon as
practical, but in no event later than the expiration of five business days,
after the effective date of such exercise.
(b) Term and Exercise of Tandem SAR
(i) A Tandem SAR shall be exercisable at the same time and to the
same extent (on a proportional basis, with any fractional amount being
rounded down to the immediately preceding whole number) as its related
Option.
(ii) The exercise of a Tandem SAR with respect to a number of Shares
shall cause the immediate and automatic cancellation of its related
Option with respect to an equal number of Shares. The exercise of an
Option, or the cancellation, termination or expiration of an Option
(other than pursuant to this subsection (ii)), with respect to a number
of Shares shall cause the automatic and immediate cancellation of its
related Tandem SARs to the extent that the number of Shares subject to
such Option after such exercise, cancellation, termination or expiration
is less than the number of Shares subject to such Tandem SARs. Such
Tandem SARs shall be cancelled in the order in which they became
exercisable.
(iii) Each Tandem SAR shall be exercisable in whole or in part;
provided, that no partial exercise of a Tandem SAR shall be for an
aggregate exercise price of less than $1,000. The partial exercise of a
Tandem SAR shall not cause the expiration, termination or cancellation
of the remaining portion thereof.
(iv) During the lifetime of a Participant, each Tandem SAR granted to
him shall be exercisable only by him. No Tandem SAR shall be assignable
or transferable otherwise than by will or by the laws of descent and
distribution and otherwise than together with its related Option.
(v) A Tandem SAR shall be exercised by delivering notice to the
Company's principal office, to the attention of its Corporate Secretary,
no less than three business days in advance of the effective date of the
proposed exercise. Such notice shall specify the number of Shares with
respect to which the Tandem SAR is being exercised and the effective
date of the proposed exercise and shall be signed by the Participant.
The Participant may withdraw such notice at any time prior to the close
of business on the business day immediately preceding the effective date
of the proposed exercise.
(c) Consequences of a Change in Control
The exercise of a Tandem SAR with respect to any number of Shares upon or
after the occurrence of a Change in Control shall entitle a Participant to a
cash payment, for each such Share, equal to the greater of (i) the excess of
the highest price per Share paid in connection with such Change in Control
over the exercise price of such Tandem SAR and (ii) the Spread.
8. Stand-Alone Stock Appreciation Rights
The Committee may grant Stand-Alone SARs pursuant to the Plan, which
Stand-Alone SARs shall be evidenced by agreements in such form as the Committee
shall from time to time approve. Stand-Alone SARs shall comply with and be
subject to the following terms and conditions:
(a) Exercise Price
The exercise price of any Stand-Alone SAR granted under the Plan shall be
determined by the Committee at the time of the grant of such Stand-Alone SAR.
C-7
(b) Benefit Upon Exercise
Subject to Section 8(e) hereof, the exercise of a Stand-Alone SAR with
respect to any number of Shares prior to the occurrence of a Change in
Control shall entitle a Participant to (i) a cash payment, for each such
Share, equal to the Spread, (ii) the issuance or transfer to the Participant
of a number of Shares which on the date of the exercise of the Stand-Alone
SAR have a Fair Market Value equal to such Spread or (iii) a combination of
cash and Shares in amounts equal to such Spread, all as determined by the
Committee in its absolute discretion. Such payment, transfer or issuance
shall occur as soon as practical, but in no event later than five business
days, after the effective date of the exercise.
(c) Term and Exercise of Stand-Alone SARs
(i) Each Stand-Alone SAR shall be exercisable on such date or dates,
during such period and for such number of Shares as shall be determined
by the Committee and set forth in the agreement with respect to such
Stand-Alone SAR; provided, however, that no Stand-Alone SAR shall be
exercisable after the expiration of ten years from the date such
Stand-Alone SAR was granted; and, provided, further, that each
Stand-Alone SAR shall be subject to earlier termination, expiration or
cancellation as provided in the Plan or in the agreement evidencing such
Stand-Alone SAR.
(ii) Each Stand-Alone SAR may be exercised in whole or in part;
provided, that no partial exercise of a Stand-Alone SAR shall be for an
aggregate exercise price of less than $1,000. The partial exercise of a
Stand-Alone SAR shall not cause the expiration, termination or
cancellation of the remaining portion thereof.
(iii) A Stand-Alone SAR shall be exercised by delivering notice to
the Company's principal office, to the attention of its Corporate
Secretary, no less than three business days in advance of the effective
date of the proposed exercise. Such notice shall specify the number of
Shares with respect to which the Stand-Alone SAR is being exercised and
the effective date of the proposed exercise and shall be signed by the
Participant. The Participant may withdraw such notice at any time prior
to the close of business on the business day immediately preceding the
effective date of the proposed exercise.
(iv) During the lifetime of a Participant, each Stand-Alone SAR
granted to him shall be exercisable only by him. No Stand-Alone SAR
shall be assignable or transferable otherwise than by will or by the
laws of descent and distribution.
(d) Effect of Termination of Employment
(i) In the event that the employment of a Participant with the
Company shall terminate for any reason other than Disability,
Retirement, Cause or death (A) Stand-Alone SARs granted to such
Participant, to the extent that they were exercisable at the time of
such termination, shall remain exercisable for 90 days after such
termination, at which time they shall expire, and (B) Stand-Alone SARs
granted to such Participant, to the extent that they were not
exercisable at the time of such termination, shall expire at the
commencement of business on the date of such termination; provided,
however, that no Stand-Alone SAR shall be exercisable after the
expiration of its term.
(ii) In the event that the employment of a Participant with the
Company terminates on account of the Retirement of the Participant, (A)
such Participant shall be entitled to exercise Stand-Alone SARs granted
to him hereunder, to the extent that such Stand-Alone SARs were
exercisable at the time of such termination, for two years after the
date of Retirement, and (B) Stand-Alone SARs granted to such
Participant, to the extent that they were not exercisable at the time of
such termination, shall expire at the commencement of business on the
date of such termination; provided, however, that no Stand-Alone SAR
shall be exercisable after the expiration of its term.
(iii) In the event that the employment of a Participant with the
Company shall terminate on account of the death or Disability of the
Participant, all then outstanding Stand-Alone SARs of such Participant
shall become immediately exercisable and such Participant shall be
entitled to exercise Stand-Alone SARs granted to him hereunder within
two years after the date of death or the
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determination of Disability; provided, however, that no Stand-Alone SAR
shall be exercisable after the expiration of its term.
(iv) In the event of the termination of a Participant's employment
for Cause, all outstanding Stand-Alone SARs granted to such Participant
shall expire at the commencement of business on the date of such
termination.
(e) Consequences of a Change in Control
Upon the occurrence of a Change in Control, any Stand-Alone SAR granted
under the Plan and outstanding at such time shall become fully and
immediately exercisable and shall remain exercisable until its expiration,
termination or cancellation pursuant to the terms of the Plan. The exercise
of a Stand-Alone SAR with respect to any number of Shares upon or after the
occurrence of a Change in Control shall entitle a Participant to a cash
payment, for each such Share, equal to the greater of (i) the excess of the
highest price per Share paid in connection with such Change in Control over
the exercise price of such Stand-Alone SAR and (ii) the Spread.
9. Performance Units
The Committee may grant Performance Units pursuant to the Plan, which
Performance Units shall be evidenced by agreements in such form as the
Committee shall from time to time approve. Performance Units shall be based
upon the achievement of Performance Goals over a specified Performance Period
and shall comply with and be subject to the following terms and conditions:
(a) Performance Period
The Committee shall determine the period of performance ("Performance
Period"), with respect to each Performance Unit, during which the
Performance Goals will be measured. The Performance Period shall not be less
than six months nor more than five years.
(b) Performance Goals
The goals ("Performance Goals") that are to be achieved with respect to
each Performance Unit shall be those objectives established by the Committee
as it deems appropriate, and which may be expressed in terms of (i) earnings
per Share, (ii) Share price, (iii) pre-tax profit, (iv) net income, (v)
return on equity or assets, (vi) revenues, (vii) account receivable
collection days, (viii) EBITDAR, (ix) individual management, performance or
quality objectives, (x) any combination of the foregoing, or (xi) such other
goals as the Committee may determine. Performance Goals may be in respect of
the performance of Kindred and its subsidiaries (which may be on a
consolidated basis) or a subsidiary, division or other operating unit of the
Company. Performance Goals may be absolute or relative and may be expressed
in terms of a progression within a specified range. The Committee shall
establish Performance Goals applicable to a particular Performance Period
within 90 days of the commencement of such Performance Period (or, in the
case of a Performance Period that is less than 12 months in duration, before
25% of such Performance Period has elapsed), provided that the outcome of
the Performance Goal is substantially uncertain at the time of its adoption.
The Performance Goals with respect to a Performance Period shall be
established by the Committee in order to comply with Section 162(m) of the
Code, as applicable. The Committee shall determine the target levels of
performance that must be achieved with respect to each criteria that is
identified in a Performance Goal in order for a Performance Goal to be
treated as attained in whole or in part. In the event that the Performance
Goals are based on more than one business criteria, the Committee may
determine to make a grant of a Performance Unit upon attainment of the
Performance Goal relating to any one or more of such criteria.
(c) Benefit Upon Achievement of Performance Goals
As soon as practicable after the end of a Performance Period, the
Committee shall determine the extent to which the Performance Goals for such
Performance Period were achieved, if at all. If the Performance Goals are
achieved in full, and the Participant remains employed with the Company as
of the end of the
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relevant Performance Period, the Participant will be allocated Shares equal
to the number of Performance Units initially awarded to the Participant for
the relevant Performance Period. Each award of Performance Units may provide
for the allocation of fewer Performance Units in the event of partial
fulfillment of Performance Goals. The Committee may determine at the time of
payment whether such payment shall be made (a) in cash (equal to the Fair
Market Value of a Share multiplied by the number of Performance Units being
allocated), (b) in Shares or (c) in a combination of cash and Shares.
(d) No Transferability
No Performance Unit shall be assignable or transferable otherwise than by
will or the laws of descent and distribution.
(e) Effect of Termination of Employment
(i) If the employment of a Participant shall terminate with the
Company prior to the expiration of a Performance Period for any reason
other than for death or Disability, the Performance Units then held by
the Participant shall terminate.
(ii) In the event that the employment of a Participant with the
Company shall terminate on account of the Disability or death of the
Participant prior to the expiration of a Performance Period with respect
to which such Participant has Performance Units outstanding, all such
outstanding Performance Units shall be paid to the Participant or the
Participant's estate, as the case may be, as if all applicable
Performance Goals had been fully achieved; provided that such payment
shall be prorated to reflect the portion of the Performance Period
during which such Participant was employed.
(f) Consequences Upon Change in Control
Upon a Change in Control, any and all outstanding Performance Units which
are potentially available under any outstanding award shall become fully
vested and immediately payable as if the Performance Goals were fully
achieved, without any proration, in which case payment shall be in cash
equal to the product of the number of outstanding Performance Units and the
greater of (i) the Fair Market Value of a Share on the date of such Change
in Control and (ii) the highest price per Share paid in connection with such
Change in Control.
10. Restricted Shares
The Committee may grant Restricted Shares pursuant to the Plan, which
Restricted Shares shall be evidenced by agreements in such form as the
Committee shall from time to time approve. Restricted Shares shall comply with
and be subject to the following terms and conditions:
(a) Vesting
Subject to the provisions of Section 10(b) hereof, the Restricted Shares
granted to a Participant shall not be transferred, pledged, assigned or
otherwise encumbered and shall be subject to forfeiture until such
Restricted Shares vest and become fully transferable without restriction
according to the vesting schedule set forth in the agreement evidencing such
Restricted Shares.
(b) Effect of Termination of Employment
(i) If the employment of a Participant with the Company shall
terminate prior to the scheduled vesting dates of any Restricted Shares
for any reason other than death or Disability, all Restricted Shares
awarded to such Participant that have not vested shall be forfeited on
the date of such termination without payment of any consideration
therefor.
(ii) In the event that the employment of a Participant with the
Company shall terminate on account of the Disability or death of the
Participant prior to the expiration of any vesting period, all
Restricted Shares awarded to such Participant shall immediately vest.
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(c) Consequences of a Change in Control
Upon a Change in Control, any Restricted Share granted under the Plan and
outstanding at such time shall vest and become fully transferable.
11. Stock Bonuses
The Committee may grant Stock Bonuses in such amounts as it shall determine
from time to time. A Stock Bonus shall be paid at such time and subject to such
conditions as the Committee shall determine at the time of the grant of such
Stock Bonus. Certificates for Shares granted as a Stock Bonus shall be issued
in the name of the Participant to whom such grant was made and delivered to
such Participant as soon as practicable after the date on which such Stock
Bonus is required to be paid.
12. Adjustment Upon Changes in Common Stock
(a) Shares Available for Grants
In the event of any change in the number of Shares outstanding by reason
of any stock dividend or split, recapitalization, merger, consolidation,
combination or exchange of shares or similar corporate change, the maximum
aggregate number of Shares with respect to which the Committee may grant
Incentive Awards shall be appropriately adjusted by the Committee. In the
event of any change in the number of Shares outstanding by reason of any
other event or transaction, the Committee may, but need not, make such
adjustments in the number and class of Shares with respect to which
Incentive Awards may be granted as the Committee may deem appropriate.
(b) Adjustments to Outstanding Incentive Awards
(i) In the event of any change in the capitalization of the Company
or other corporate change or transaction involving the Company or its
securities, the Committee may make such adjustments as the Committee
may, in its absolute discretion, deem appropriate in the number and
class of shares subject to Options (including any Tandem SARs related
thereto), Stand-Alone SARs, Restricted Shares and Performance Units
outstanding on the date on which such change occurs and in the exercise
price of any such Option, Tandem SAR or Stand-Alone SAR. In the event of
the occurrence of any transaction or event that could reasonably be
expected to have a substantial impact on the achievement of Performance
Goals, the Committee may adjust any such Performance Goals with respect
to any then-current Performance Period as the Committee, in its absolute
discretion, determines to be appropriate in light of the circumstances.
(ii) In the event of (w) a dissolution or liquidation of the Company,
(x) a sale of all or substantially all of the Company's assets, (y) a
merger or consolidation involving the Company in which the Company is
not the surviving corporation or (z) a merger or consolidation involving
the Company in which the Company is the surviving corporation but the
holders of Shares receive securities of another corporation and/or other
property, including cash, the Committee shall, in its absolute
discretion, have the power to:
(A) cancel each Option (including each Tandem SAR related
thereto), Stand-Alone SAR, Performance Unit and Restricted Share
outstanding immediately prior to such event (whether or not then
exercisable), and, in full consideration of such cancellation, pay to
the Participant to whom such Option, Stand-Alone SAR, Performance
Unit or Restricted Share was granted an amount in cash, for each
Share subject to (x) an Option or Stand-Alone SAR, respectively,
equal to the excess of (A) the value, as determined by the Committee
in its absolute discretion, of the property (including cash) received
by the holder of a Share as a result of such event over (B) the
exercise price of such Option or Stand-Alone SAR, or (y) a Restricted
Share or Performance Unit equal to the value, as determined by the
Committee in its absolute discretion, of the property (including
cash) received by the holder of a Share; or
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(B) provide for the exchange of each Option (including any
related Tandem SAR), Stand-Alone SAR, Performance Unit and Restricted
Share outstanding immediately prior to such event (whether or not
then vested or exercisable) for an option, a stock appreciation right
or a share of restricted stock with respect to, as appropriate, some
or all of the property which a holder of the number of Shares subject
to such Option, Stand-Alone SAR, Performance Unit or Restricted Share
would have received in such transaction and, incident thereto, make
an equitable adjustment as determined by the Committee in its
absolute discretion in the exercise price of the option or stock
appreciation right, or the number of shares or amount of property
subject to the option, stock appreciation right or share of
restricted stock, or, if appropriate, provide for a cash payment to
the Participant to whom such Option, Stand-Alone SAR, Performance
Unit or Restricted Share was granted in partial consideration for the
exchange of the Option, Stand-Alone SAR, Performance Unit or
Restricted Share.
(c) No Other Rights
Except as expressly provided in the Plan, no Participant shall have any
rights by reason of any subdivision or consolidation of shares of stock of
any class, the payment of any dividend, any increase or decrease in the
number of shares of stock of any class or any dissolution, liquidation,
merger or consolidation of the Company or any other corporation. Except as
expressly provided in the Plan, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number of Shares subject to an Incentive Award or the
exercise price of any Option, Tandem SAR or Stand-Alone SAR.
13. Rights as a Stockholder
No person shall have any rights as a stockholder with respect to any Shares
covered by or relating to any Incentive Award granted pursuant to this Plan
until the date of the issuance of a stock certificate with respect to such
shares. Except as otherwise expressly provided in Section 12 hereof, no
adjustment to any Incentive Award shall be made for dividends or other rights
for which the record date occurs prior to the date such stock certificate is
issued.
14. No Special Employment Rights; No Right to Incentive Award; Sale of a
Division or Affiliate
(a) Nothing contained in the Plan or any Incentive Award shall confer
upon any Participant any right with respect to the continuation of his
employment by the Company or interfere in any way with the right of the
Company, subject to the terms of any separate employment or other agreement
to the contrary, at any time to terminate such employment or to increase or
decrease the compensation of the Participant from the rate in existence at
the time of the grant of an Incentive Award.
(b) No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee's granting of an Incentive Award to a Participant
at any time shall neither require the Committee to grant an Incentive Award
to such Participant or any other Participant or other person at any time nor
preclude the Committee from making subsequent grants to such Participant or
any other Participant or other person.
(c) For all purposes of this Plan, the employment of a Participant with
the Company shall be deemed to have terminated without Cause upon a sale or
other disposition by Kindred, directly or indirectly, of an Affiliate or any
division or business unit of the Company to which such Participant is
allocated by the Committee, unless the Committee, in its sole discretion,
determines otherwise.
15. Securities Matters
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any Shares to be issued hereunder or to
effect similar compliance under any state laws. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to cause to be
issued or delivered any certificates evidencing Shares pursuant to the Plan
unless and until the Company is advised by its counsel
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that the issuance and delivery of such certificates is in compliance with
all applicable laws, regulations of governmental authority and the
requirements of any securities exchange on which Shares are traded. The
Committee may require, as a condition of the issuance and delivery of
certificates evidencing Shares pursuant to the terms hereof, that the
recipient of such shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the
Committee, in its sole discretion, deems necessary or desirable.
(b) The exercise of any Option (including any Tandem SAR related thereto)
or Stand-Alone SAR granted hereunder shall only be effective at such time as
counsel to the Company shall have determined that the issuance and delivery
of Shares pursuant to such exercise is in compliance with all applicable
laws, regulations of governmental authority and the requirements of any
securities exchange on which Shares are traded. The Company may, in its sole
discretion, defer the effectiveness of any exercise of an Option (including
any Tandem SAR related thereto) or Stand-Alone SAR granted hereunder in
order to allow the issuance of Shares pursuant thereto to be made pursuant
to registration or an exemption from registration or other methods for
compliance available under federal or state securities laws. The Company
shall inform the Participant in writing of its decision to defer the
effectiveness of the exercise of an Option, Tandem SAR or Stand-Alone SAR
granted hereunder. During the period that the effectiveness of the exercise
of an Option, Tandem SAR or Stand-Alone SAR has been deferred, the
Participant may, by written notice, withdraw such exercise and obtain the
refund of any amount paid with respect thereto.
16. Withholding Taxes
(a) Cash Remittance
Whenever Shares are to be issued upon the exercise of an Option, the
vesting of a Restricted Share, the payment of a Performance Unit or the
grant of a Stock Bonus, the Company shall have the right to require the
Participant to remit to the Company in cash an amount sufficient to satisfy
federal, state and local withholding tax requirements, if any, attributable
to such exercise, vesting, payment or grant prior to the delivery of any
certificate or certificates for such shares. In addition, upon the exercise
of a Tandem SAR or Stand-Alone SAR or the payment of a Performance Unit, the
Company shall have the right to withhold from any cash payment required to
be made pursuant thereto an amount sufficient to satisfy the federal, state
and local withholding tax requirements, if any, attributable to such
exercise or payment.
(b) Stock Remittance
At the election of the Participant, when Shares are to be issued upon the
exercise of an Option, the vesting of a Restricted Share, the payment of a
Performance Unit or the grant of a Stock Bonus, the Participant may tender
to the Company a number of Shares previously held by such Participant for at
least six months determined by such Participant, the Fair Market Value of
which at the tender date the Company determines to be sufficient to satisfy
the federal, state and local withholding tax requirements, if any,
attributable to such exercise, vesting, payment or grant and not greater
than the Participant's required federal, state and local tax obligations
associated with such exercise, vesting, payment or grant. Such election
shall satisfy the Participant's obligations under Paragraph 16(a) hereof, if
any.
(c) Stock Withholding
At the election of the Participant, when Shares are to be issued upon the
exercise of an Option, the vesting of a Restricted Share, the payment of a
Performance Unit or the grant of a Stock Bonus, the Company shall withhold a
number of such shares determined by such Participant, the Fair Market Value
of which at the exercise, vesting, payment or grant date the Company
determines to be sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise,
vesting, payment or grant and is not greater than the Participant's required
federal, state and local tax obligations associated with such exercise or
grant. Such election shall satisfy the Participant's obligations under
Paragraph 16(a) hereof, if any.
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17. Amendment of the Plan
The Board of Directors may at any time suspend or discontinue the Plan or
revise or amend it in any respect whatsoever; provided, however, that without
approval of the shareholders no revision or amendment shall adversely affect
(a) the favorable tax treatment of an Incentive Stock Option, or (b) the
deductibility of any income to any Participant by reason of Section 162(m) of
the Code.
18. No Obligation to Exercise
The grant to a Participant of an Option, Tandem SAR or Stand-Alone SAR,
shall impose no obligation upon such Participant to exercise such Option,
Tandem SAR or Stand-Alone SAR.
19. Transfers Upon Death
Upon the death of a Participant, outstanding Incentive Awards granted to
such Participant may be exercised or paid only by the executors or
administrators of the Participant's estate or by any person or persons who
shall have acquired such right to exercise by will or by the laws of descent
and distribution. No transfer by will or the laws of descent and distribution
of any Incentive Award, or the right to exercise any Incentive Award, shall be
effective to bind the Company unless the Committee shall have been furnished
with (a) written notice thereof and with a copy of the will and/or such
evidence as the Committee may deem necessary to establish the validity of the
transfer and (b) an agreement by the transferee to comply with all the terms
and conditions of the Incentive Award that are or would have been applicable to
the Participant and to be bound by the acknowledgements made by the Participant
in connection with the grant of the Incentive Award.
20. Expenses and Receipts
The expenses of the Plan shall be paid by the Company. Any proceeds received
by the Company in connection with any Incentive Award will be used for general
corporate purposes.
21. Failure to Comply
In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant to comply with any of the terms and conditions of the
Plan or the agreement executed by such Participant evidencing an Incentive
Award, unless such failure is remedied by such Participant within ten days
after having been notified of such failure by the Committee, shall be grounds
for the cancellation and forfeiture of such Incentive Award, in whole or in
part, as the Committee, in its absolute discretion, may determine.
22. Effective Date and Term of Plan
The Plan was adopted by the Board of Directors on February 12, 2002; no
grants may be made under the Plan after the tenth anniversary of such date. No
grant of an Option, Tandem SAR, Stand-Alone SAR or Performance Unit shall be
effective until approval of the Plan by the Company's shareholders.
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APPENDIX D
KINDRED HEALTHCARE, INC. 2000 LONG-TERM INCENTIVE PLAN
1. Purpose of the Plan
The purpose of the Vencor, Inc. 2000 Long-Term Incentive Plan, dated
effective as of January 1, 2000 (the "Plan"), is to promote the success of the
Company and the interests of its shareholders by attracting, motivating,
retaining and rewarding key employees of the Company for assisting the Company
and its Affiliates to emerge from bankruptcy and to provide them with
incentives to induce Participants to contribute toward the improvement and
growth of the Company.
2. Definitions
As used in this Plan, the following capitalized terms shall have the
following meanings:
(a) "Affiliate" shall mean any of Vencor, Inc.'s direct or indirect
subsidiaries within the meaning of Section 424 of the Code.
(b) "Award" shall mean a cash bonus payable pursuant to the terms and
conditions of this Plan.
(c) "Award Percentage" shall mean, with respect to each Performance
Period, a percentage corresponding to the achievement of the Performance
Targets for such Performance Period. The Award Percentage shall represent
the portion of the Maximum Award that each Participant is entitled to
receive with respect to each Performance Period.
(d) "Base Salary" shall mean, with respect to each Participant, such
Participant's annual base compensation, exclusive of any bonuses (whether
under this Plan or otherwise), stock option benefits, or other compensatory
or fringe benefits.
(e) "Beneficiary" shall mean either (i) the person designated in the
manner specified in Section 11(f) by a Participant to receive any amounts
payable to him pursuant to this Plan following his death, or (ii), in the
event of the failure of a Participant to so designate a Participant, the
Participant's estate.
(f) "Board" shall mean the Board of Directors of Vencor, Inc.
(g) "Cause", when used in connection with the termination of a
Participant's employment with the Company, shall mean (i) dishonesty; (ii)
deliberate and continual refusal to perform employment duties on
substantially a full-time basis; (iii) failure to act in accordance with any
specific lawful instructions given to the Participant in connection with the
performance of his duties for the Company or any of its subsidiaries or
affiliates, unless the Participant has an existing permanent Disability;
(iv) deliberate misconduct that is reasonably likely to be materially
damaging to the Company without a reasonable good faith belief by the
Participant that such conduct was in the best interests of the Company; or
(v) conviction of or plea of nolo contendere to a crime involving moral
turpitude.
(h) "Change of Control" shall mean any one of the following events:
(i) any Person (as this term is used in Sections 3(a)(9) and 13(d)(3)
of the Exchange Act, but excluding any person described in and
satisfying the conditions of Rule 13d-1(b)(i) thereunder) (an "Acquiring
Person") becomes the "beneficial owner" (as such term is defined in Rule
13d-3 promulgated under the Exchange Act (a "Beneficial Owner"),
directly or indirectly, of securities of Vencor, Inc. representing 50%
or more of the combined voting power of Vencor, Inc.'s then outstanding
securities, other than beneficial ownership by a Participant, the
Company, any employee benefit plan of the Company or any Person
organized, appointed or established pursuant to the terms of any such
benefit plan;
(ii) Vencor, Inc.'s stockholders approve an agreement to merge or
consolidate Vencor, Inc. with another corporation, or an agreement
providing for the sale of substantially all of the assets of Vencor,
D-1
Inc. to one or more Persons, in any case other than with or to an entity
50% or more of which is controlled by, or is under common control with,
Vencor, Inc.;
(iii) during any two-year period, commencing after the Effective
Date, individuals who at the date on which the period commences
constitute a majority of the Board of Directors (the "Incumbent
Directors") cease to constitute a majority thereof for any reason;
provided, however, that a director who was not an Incumbent Director
shall be deemed to be an Incumbent Director if such director was elected
by, or on the recommendation of, at least two-thirds of the Incumbent
Directors (either actually or by prior operation of this provision),
other than any director who is so approved in connection with any actual
or threatened contest for election to positions on the Board of
Directors; or
(iv) the Company is merged, combined, consolidated, recapitalized or
otherwise organized with one or more other entities that are not
Affiliates, as a result of which less than 50% of the outstanding voting
securities of the surviving or resulting entity immediately after the
reorganization are, or will be, owned, directly or indirectly, by
shareholders of the Company, determined on the basis of record ownership
as of the date of determination of holders entitled to vote on the
transaction (or in the absence of a vote, the day immediately prior to
the event).
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(j) "Committee" shall mean the Compensation Committee of the Board or
such other committee as the Board may designate from time to time.
(k) "Common Stock" shall mean the common stock of Vencor, Inc., par value
$ 0.25 per share.
(l) "Company" shall mean Vencor, Inc. and its Affiliates.
(m) "Disability" shall mean a physical or mental condition entitling a
Participant to benefits under the long-term disability policy maintained by
the Company and applicable to him. For purposes of this Plan, a
Participant's employment shall be deemed to have terminated as a result of
Disability on the date as of which he is first entitled to receive
disability benefits under such policy.
(n) "Effective Date" shall mean the date on which the Company's
bankruptcy plan is confirmed by the United States Bankruptcy Court for the
District of Columbia.
(o) "Maximum Award" shall mean the highest amount that may be awarded to
Participants in certain positions or employment levels of the Company,
expressed as percentages of such Participants' Base Salary, as follows:
Position/Level: Percentage of Base Salary:
--------------- --------------------------
Chief Executive Officer....... 100%
Members of Executive Committee 90%
Vice Presidents............... 40%
Senior Corporate Managers..... 25%
Other Key Employees........... 15%
(p) "Participant" shall mean an officer or key employee of the Company
who is in a position to contribute materially to the success of the Company,
as selected for participation in the Plan by the Committee in its sole
discretion.
(q) "Performance Period" shall mean any period of one or more years
during which the Company's performance against the Performance Targets is
measured for the purpose of determining whether and at what level Awards
under this Plan shall be granted.
(r) "Performance Targets" shall mean the performance targets for the
Company that the Committee shall establish in its discretion for each
Performance Period to be used in determining Participants' Awards.
(s) "Person" shall mean an individual, partnership, corporation, limited
liability company, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
D-2
(t) "Plan" shall mean this Vencor, Inc. 2000 Long-Term Cash Incentive
Compensation Plan.
(u) "Retirement" shall mean the termination of the employment of a
Participant on or after the Participant's attainment of fifty-five (55)
years of age.
3. Administration
This Plan shall be administered by the Committee. The Committee shall have
full authority to interpret and construe any provision of the Plan, to adopt
such rules and regulations and make any decisions necessary for the
administration of the Plan, and to determine the eligibility of Participants
under the Plan. Determinations of the Committee shall be conclusively binding
and final upon all parties. The Committee shall not be liable to any
Participant or other person for any action, omission or determination relating
to the Plan.
4. Eligibility
The Committee may, in its sole discretion, select to participate in the Plan
those officers and other key employees of the Company who are in a position to
contribute materially to the success of the Company.
5. Determination of Awards
The Award payable to each Participant for each Performance Period shall be
determined as follows:
(a) Not later than ninety (90) days after the commencement of each
Performance Period, the Committee shall identify (i) the Participants in the
Plan for such Performance Period, (ii) the Maximum Award for each such
Participant (based on positions or employment levels in the Company) as
provided in Section 2(o) hereof, and (iii) the Award Percentages applicable
to the Performance Targets established for such Performance Period.
(b) Not later than ninety (90) days after the commencement of each
Performance Period, the Committee shall establish Performance Targets for
such Performance Period.
(c) As soon as practicable, but not later than ninety (90) days,
following the end of each Performance Period, the Committee shall (i)
determine the level at which the Performance Targets for such Performance
Period were reached, if at all and (ii) calculate the amount of the Award
payable to each Participant with respect to such Performance Period, which
shall be the product of (A) the Participant's Maximum Award for such
Performance Period, (B) the Award Percentage for such Performance Period,
and (C) such Participant's Base Salary in effect on the last day of the
applicable Performance Period, but which shall not exceed $1.5 million per
year in such Performance Period.
6. Payment of Awards
Except as otherwise provided herein, the Award, as calculated pursuant to
Section 5(c) hereof, shall be payable to each Participant with respect to any
Performance Period, in a lump sum in cash as follows: one-third ( 1/3) shall be
payable on or about each of the first, second and third anniversaries of the
termination of the applicable Performance Period.
7. Effect of Termination of Employment
(a) In the event of the termination of the employment of a Participant by
the Company for Cause or by the Participant for any reason prior to the
payment to him of any portion of the Award related to any Performance
Period, the Participant shall not be entitled to such unpaid portion.
(b) In the event of the termination of the employment of a Participant as
a result of the Participant's Retirement, or by the Company other than for
Cause, during a Performance Period, the Participant shall be entitled to
receive a prorated Award for such Performance Period based on the number of
full months elapsed in such Performance Period before the date of such
termination of employment. Such prorated
D-3
Award shall be paid following the end of such Performance Period at the time
and in the manner specified in Section 6 hereof. In addition, in the event
of the termination of the employment of a Participant as a result of the
Participant's Retirement, or by the Company other than for Cause, following
the termination of a Performance Period and prior to the payment to the
Participant of any portion of the Award with respect to such Performance
Period, such unpaid portion shall continue to be paid at the time and in the
manner specified in Section 6 hereof.
(c) In the event of a Participant's death or Disability during a
Performance Period, the Participant (or in the event of his death, his
Beneficiary) shall be entitled to receive a prorated Award for such
Performance Period equal to the Award that would be payable to him if the
Award Percentage would have been fifty percent (50%) based on the number of
full months elapsed in such Performance Period before the date of the
Participant's death or Disability. Such Award shall be paid no later than
fifteen (15) days after the date of the Participant's death or Disability,
in a lump sum in cash. In addition, in the event of a Participant's death or
Disability following the termination of a Performance Period and prior to
the payment to the Participant of any portion of the Award with respect to
such Performance Period, such unpaid portion shall be paid no later than
fifteen (15) days after the date of the Participant's death or Disability,
in a lump sum in cash.
(d) The provisions of this Section 7 shall be subject to the terms of any
separate written employment or similar agreement between the Company and a
Participant in effect at the time of his termination of employment.
8. Certain Adjustments
(a) In the event of the merger or consolidation of the Company, or the
acquisition or disposition by the Company of any substantial business unit,
or the occurrence of any other transaction or event, which could reasonably
be expected to have a substantial impact on the Performance Targets, the
Committee will review, in good faith, the effect of such occurrence on the
operation of this Plan and will adjust the Performance Targets and Award
Percentages for such Performance Period as the Committee, in its absolute
discretion, exercised in good faith, determines to be appropriate in light
of the circumstances. The Committee shall consult with management of the
Company concerning the magnitude of any such adjustment prior to coming to a
final decision with respect thereto.
(b) The Committee may, in its absolute discretion, designate an
individual who commences employment with the Company more than ninety (90)
days following the beginning of a Performance Period as a Participant for
such Performance Period, in which case the Committee shall simultaneously
determine the Maximum Award for such Participant for such Performance Period
in accordance with Section 2(o), and the Committee may specify that the
Award otherwise payable to such Participant for such Performance Period
shall be prorated to reflect the Participant's performance of services for
less than the entire Performance Period. In the event that a Participant is
a promoted or demoted during a Performance Period, the Committee may, in its
absolute discretion, adjust the Maximum Award for such Participant for such
Performance Period to reflect such change.
9. Change of Control
No later than fifteen (15) days after a Change of Control, the Company shall
pay, in lump sum in cash, to each Participant an amount equal to the sum of (i)
the upaid portion of any Award relating to a Performance Period that ends prior
to the occurrence of such Change of Control and (ii) the amount of the Maximum
Award for such Participant for the Performance Period during which such Change
in Control occurs (determined, for purposes of clarity, without proration and
as if the highest applicable Performance Target had been reached.
10. Amendment, Modification and Termination
The Company reserves the right to amend, modify or terminate the Plan at any
time; provided that no such amendment, modification or termination shall affect
the determination or payment of Awards for any
D-4
Performance Period that commences prior to such amendment, modification or
termination, except that the Committee may at any time determine to accelerate
the payment of Awards.
11. Miscellaneous
(a) Awards shall not be assigned, transferred, pledged or encumbered, and
any purported assignment, transfer, pledge or encumbrance shall be null and
void.
(b) This Plan and all rights under the Plan shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware
without regard to the provisions governing conflict of laws.
(c) All payments required to be paid hereunder shall be subject to any
required governmental withholdings or deductions as determined by the
Company.
(d) Nothing contained in the Plan shall confer upon any Participant any
right with respect to the continuation of such Participant's employment by
the Company or prohibit the Company at any time from terminating such
employment or increasing or decreasing the base salary or other compensation
of any Participant.
(e) This Plan shall be unfunded. Awards shall be paid from the general
assets of the Company and Participants in this Plan shall be general
unsecured creditors of the Company. No Participant shall have any right,
title, claim or interest in or with respect to any specific assets of the
Company in connection with his participation in this Plan.
(f) Each Participant shall be entitled to designate a Beneficiary by
filing a written notice with the Committee in the form prescribed by the
Committee from time to time. A Beneficiary designation filed with the
Committee by a Participant may be withdrawn at any time or may be changed at
any time by the Participant filing with Committee a subsequent Beneficiary
designation in the form prescribed by the Committee from time to time.
(g) In addition to the remedies of the Company elsewhere provided for
herein, if a Participant is terminated for Cause, the Committee may cancel
and cause the Participant to forfeit any Award to which such Participant
would have otherwise been entitled, in whole or in part.
(h) Headings and captions are given to the sections of this Plan solely
as a convenience to facilitate reference, and shall not be deemed in any way
material or relevant to the construction or interpretation of this Plan or
any provision thereof. All references herein to the masculine gender shall
include the feminine.
D-5
AMENDMENT NO. ONE TO LONG-TERM INCENTIVE PLAN
THIS AMENDMENT NO. ONE ("Amendment") to the Vencor, Inc. Long-Term Incentive
Plan (the "LTIP") is adopted on the 21st day of June, 2001.
Reason for Amendment. This Amendment is intended to (i) reflect the name
change of the company to Kindred Healthcare, Inc. and (ii) allow for awards
under the LTIP, in the discretion of the Chief Executive Officer of the
Company, to employees who join the Company after the start of a performance
period, effective as of the date hereof.
Amendments.
(a) The name of the LTIP is hereby amended, effective as of the date
hereof, to read "Kindred Healthcare, Inc. 2000 Long-Term Incentive Plan";
the first sentence of Section 1 of the LTIP is hereby replaced with the
following: "The purpose of the Kindred Healthcare, Inc. 2000 Long-Term
Incentive Plan, dated effective as of January 1, 2000 (the "Plan"), is to
promote the success of the Company and the interests of its shareholders by
attracting, motivating, retaining and rewarding key employees of the Company
for assisting the Company and its Affiliates to emerge from bankruptcy and
to provide Participants with incentives to contribute toward the improvement
and growth of the Company."; and Section 2(t) of the LTIP is hereby replaced
with the following: "'Plan' shall mean this Kindred Healthcare, Inc. 2000
Long-Term Incentive Plan."
(b) The first sentence of Section 8(b) of the Plan shall be replaced in
its entirety with the following:
The Chief Executive Officer of the Company (the "Chief Executive
Officer") may, in his sole discretion, designate an individual who
commences employment with the Company following the beginning of a
Performance Period as a Participant for such Performance Period, in
which case the Chief Executive Officer shall simultaneously determine
the Maximum Award for such Participant for such Performance Period in
accordance with Section 2(o), and the Chief Executive Officer may
specify that the Award otherwise payable to such Participant for such
Performance Period shall be prorated to reflect the Participant's
performance of services for less than the entire Performance Period.
IN WITNESS WHEREOF, Kindred Healthcare, Inc. has executed this instrument on
the date first above written.
KINDRED HEALTHCARE, INC.
By: /s/ Edward L. Kuntz
-----------------------------------
Edward L. Kuntz, Chairman, Chief
Executive Officer and President
D-6
APPENDIX E
KINDRED HEALTHCARE, INC. SHORT-TERM INCENTIVE PLAN
1. Purpose of the Plan.
This Kindred Healthcare, Inc. Short-Term Incentive Plan is intended to
promote the interests of the Company and its shareholders by providing key
employees of the Company and its Affiliates, who are largely responsible for
the management, growth and/or success of the Company and its Affiliates, with
incentives and rewards based on defined company operating and individual
management goals.
2. Definitions.
As used in the Plan, the following definitions apply to the terms indicated
below:
(a) "Affiliates" shall mean with respect to any person, any other person
that, directly or indirectly through one or more intermediaries, controls,
is controlled by, or is under common control with the first person.
(b) "Award Period" shall mean each consecutive calendar-year period
commencing on January 1, 2002 and each January 1 thereafter while this Plan
is in effect.
(c) "Award Range" shall mean the range of awards that may be awarded to
Participants based on their positions or employment levels within the
Company or its Affiliates, expressed as percentages of such Participants'
Base Salary, pursuant to Section 4(a)(i) hereof.
(d) "Base Salary" shall mean, with respect to each Participant, such
Participant's annual base compensation, exclusive of any bonuses (whether
under this Plan or otherwise), stock option benefits, or other compensatory
or fringe benefits. If the Participant's annual base compensation shall
fluctuate during an Award Period as a result of a promotion, the Base Salary
shall be the weighted average of the annual base compensation for such
period. If the Participant's annual base compensation shall fluctuate during
an Award Period for any other reason, the Base Salary shall be the annual
base compensation on February 1 of the relevant Award Period.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Change in Control" shall mean any one of the following events:
(i) any Person (as this term is used in Sections 3(a)(9) and 13(d)(3)
of the Securities Exchange Act of 1934, as amended, but excluding any
person described in and satisfying the conditions of Rule 13d-1(b)(1)(i)
thereunder) (an "Acquiring Person") becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 promulgated under the Exchange Act (a
"Beneficial Owner"), directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the
Company's then outstanding securities, other than beneficial ownership
by a Participant, the Company, any employee benefit plan of the Company
or any Person organized, appointed or established pursuant to the terms
of any such benefit plan;
(ii) the Company's stockholders approve an agreement to merge or
consolidate the Company with another corporation, or an agreement
providing for the sale of substantially all of the assets of the Company
to one or more Persons, in any case other than with or to an entity 50%
or more of which is controlled by, or is under common control with, the
Company;
(iii) during any two-year period, individuals who at the date on
which the period commences constitute a majority of the Board of
Directors (the "Incumbent Directors") cease to constitute a majority
thereof for any reason; provided, however, that a director who was not
an Incumbent Director shall be deemed to be an Incumbent Director if
such director was elected by, or on the recommendation of, at least
two-thirds of the Incumbent Directors (either actually or by prior
operation of this
E-1
provision), other than any director who is so approved in connection
with any actual or threatened contest for election to positions on the
Board of Directors; or
(iv) the Company is merged, combined, consolidated, recapitalized or
otherwise organized with one or more other entities that are not
affiliates of the Company, as a result of which less than 50% of the
outstanding voting securities of the surviving or resulting entity
immediately after the reorganization are, or will be, owned, directly or
indirectly, by shareholders of the Company, determined on the basis of
record ownership as of the date of determination of holders entitled to
vote on the transaction (or in the absence of a vote, the day
immediately prior to the event).
(g) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(h) "Committee" shall mean the committee designated by the Board to
administer the Plan pursuant to Section 3, which shall be comprised solely
of two or more "outside" directors within the meaning of Treasury Regulation
section 1.162-27(e)(3) promulgated under Section 162(m) of the Code.
(i) "Company" shall mean Kindred Healthcare, Inc.
(j) "Covered Participant" shall mean, with respect to an Award Period, a
Participant who the Committee determines is or may be a "covered employee"
within the meaning of Treasury Regulation (S) 1.162-27(c)(2) promulgated
under Section 162(m) of the Code.
(k) "Participant" shall mean an employee of the Company whose position is
approved by the Committee to participate in this Plan for an Award Period,
and upon his death, his successors, heirs, executors and administrators, as
the case may be.
(l) "Performance Award" shall mean an opportunity to receive a cash bonus
awarded pursuant to the Plan, based on the achievement of Performance Goals,
calculated pursuant to Section 4(b) hereof.
(m) "Performance Goals" shall mean the Performance Goals established in
writing by the Committee pursuant to Section 4(a)(ii) hereof.
(n) "Plan" shall mean this Kindred Healthcare, Inc. Short-Term Incentive
Plan.
3. Administration of the Plan.
The Plan shall be administered by the Committee. The Committee shall have
full authority to administer the Plan, including authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary and to determine the
Performance Award with respect to each Participant for an Award Period.
Decisions of the Committee shall be final and binding on all parties. Neither
the Committee nor any member of the Committee shall be liable to any
Participant for any action, omission, or determination relating to the Plan.
Whether an authorized leave of absence, or absence in military or government
service, shall constitute termination of employment shall be determined by the
Committee in its absolute discretion.
Notwithstanding the foregoing, and without otherwise limiting the discretion
of the Committee, the Committee shall not have the authority to increase any
Performance Award payable to a Covered Participant beyond the Performance Award
calculated pursuant to Section 4(b) hereof.
Performance Awards to Covered Participants are subject to shareholder
approval of the Plan.
4. Determination and Payment of Award Amounts.
(a) No later than 90 days after the start of each Award Period, the
Committee shall (i) designate Participants for such Award Period; (ii)
determine the Award Ranges applicable to Participants in the Plan according
to their position or employment level; and (iii) establish, in writing,
Performance Goals for such Award Period.
E-2
(i) Award Ranges for each position or level within the Company shall
be expressed as a minimum level, a target level, and a maximum level,
which levels shall correspond with minimum, target and maximum levels of
achievement of Performance Goals respectively.
(ii) Performance Goals may be expressed in terms of (i) earnings per
share of the Company's common stock, (ii) share price of the Company's
common stock, (iii) pre-tax profit, (iv) net earnings, (v) return on
equity or assets, (vi) revenues, (vii) account receivable collection
days, (viii) earnings, before interest, tax, depreciation, amortization
and rent, (ix) individual management or performance objectives, (x)
quality objectives, (xi) any combination of the foregoing, or (xii) such
other goals as the Committee may determine, and any components of
Performance Goals may be based, in whole or in part, on the performance
of an Affiliate of the Company. Performance Goals shall be expressed in
ranges, with minimum, target and maximum levels of achievement for such
goals.
(iii) With respect to both Award Ranges and Performance Goals, the
minimum, target and maximum levels represent points in a range of awards
and goals, not absolute amounts, such that, e.g., if Performance Goals
are achieved to a level that falls between the "target" and "maximum"
levels, the corresponding award level will also fall between the
"target" and "maximum" levels in the Award Range.
(b) With respect to each Award Period, not later than ninety (90) days
after the end of such Award Period or five days after receipt by the Company
of audited financial statements for the Company or any applicable Affiliate
for such Award Period, whichever is later, the Committee shall determine
whether, and to what extent, the Performance Goals were achieved during such
Award Period, basing such decision on all relevant criteria, including the
Company's final audited financial statements as of the end of the Award
Period. Based on such determination, the Committee shall determine the
dollar amount of each Participant's Performance Award, if any, by (i)
determining the percentage of base salary to be applied to each Participant
within the percentages determined in the Award Range and (ii) multiplying
such percentage with such Participant's Base Salary. If the minimum levels
of the Performance Goals are not achieved by any Participant or group of
Participants in an Award Period, such Participant(s) shall not receive a
cash payment under the Plan for such Award Period. No Performance Award
payable to a Participant may exceed $1,000,000.
(c) Subject to Section 6 hereof, not later than thirty (30) days
following determination of the Performance Awards as provided in Section
4(b) hereof, the Company shall pay to each Participant his respective
Performance Award for such period in a lump sum in cash.
(d) Notwithstanding anything in this Section 4 to the contrary, payment
of a Participant's Performance Award is contingent on such Participant's
compliance with the Company's policies and with satisfactory delivery of
quality services throughout the period. Departures from such compliance or
delivery of services that the Committee determines in its sole discretion to
be material to the Company may result in loss of eligibility or forfeiture
of the Performance Award.
5. Partial Year Employment
(a) The chief executive officer of the Company from time to time (the
"CEO") may, in his sole discretion, designate an individual who commences
employment with the Company more than ninety (90) days following the
beginning of an Award Period as a Participant for such Award Period, in
which case the CEO shall simultaneously determine the Award Range applicable
to such Participant based on his position with the Company and, to the
extent that Performance Goals for such Award Period incorporate individual
management or performance objectives, establish such Participant's
individual Performance Goals. The CEO may further specify that the
Performance Award that may become payable to such Participant for such
Performance Period shall be prorated to reflect the Participant's
performance of services for less than the entire Performance Period.
E-3
(b) Notwithstanding the foregoing, in the event such new Participant is a
Covered Participant, all such decisions by the CEO must be ratified in
writing by the Committee before 25% of the remaining Award Period has
elapsed.
6. Effect of Termination of Employment or Change in Control.
(a) In the event of the termination of the employment of a Participant
for any reason prior to the date of payment, the Participant shall not be
entitled to any Performance Award with respect to such Award Period unless
such provision contradicts with other agreements entered into by the Company
or state law.
(b) In the event of a Change in Control, each Participant who is employed
with the Company on the date of such Change in Control or whose employment
is terminated in contemplation of a Change in Control (as determined by the
Committee in effect immediately prior to such Change in Control, in its sole
discretion) shall be entitled to receive a Performance Award with respect to
the Award Period in which such Change in Control occurs, which shall be
calculated as if the Award Period were fully completed and as if Performance
Goals were achieved at the target level, without any proration, and which
shall be paid within fifteen (15) days after such Change in Control.
Notwithstanding Section 6(a) hereof, continued employment on the date of
payment of a Performance Award following the Change in Control shall not be
required.
7. Miscellaneous.
(a) Certain Adjustments. In the event of a merger, consolidation or other
corporate event involving the Company, or the acquisition or disposition by
any entity forming part of the Company, or the occurrence of any other
transaction or event which could reasonably be expected to have a
substantial impact on the achievement of Performance Goals, the Committee
will review the effect of such occurrence on the operation of the Plan and
may adjust such Performance Goals with respect to each Award Period as the
Committee, in its absolute discretion, determines to be appropriate in light
of the circumstances.
(b) Non-Assignability. The right of a Participant or of any other person
to any payment under the Plan shall not be assigned, transferred, pledged or
encumbered, and any purported assignment, transfer, pledge or encumbrance
shall be null and void.
(c) Applicable Law. The Plan and all rights under the Plan shall be
governed by, and shall be interpreted in accordance with, the laws of the
State of New York without reference to its principles of conflicts of law.
(d) Applicable Withholdings. All payments required to be paid under the
Plan shall be subject to any required Federal, state, local and other
applicable withholdings or deductions as determined by the Company.
(e) No Contract of Employment. Nothing contained in the Plan shall confer
upon any Participant any right with respect to the continuation of such
Participant's employment by the Company or interfere in any way with the
right of the Company at any time to terminate such employment or to increase
or decrease the base salary or other compensation of the Participant.
(f) No Right to Participate. No person shall have any claim or right to
participate in the Plan. The selection of an employee to participate in the
Plan with respect to any Award Period shall not give such employee any right
to participate in the Plan in any subsequent Award Period.
(g) Right to Amend; Suspend or Terminate. The Committee may amend or
suspend the Plan at any time in its absolute discretion. The Committee may
terminate the Plan at any time, in whole or in part, with respect to some or
all Participants or with respect to the Company or some or all of its
Affiliates, in its absolute discretion. Upon termination or partial
termination of the Plan, each Participant affected thereby (as determined by
the Committee), unless otherwise determined by the Committee, shall be
entitled to receive a Performance Award prorated based on the number of full
months elapsed between the commencement of
E-4
such Award Period and the date of such termination. Such prorated
Performance Award shall be calculated as if the "target" level in the Award
Range were achieved and shall be paid no later than ninety (90) days
following such termination.
(h) Plan Unfunded. The Plan shall be unfunded. Payments under the Plan
shall be made from the general assets of the Company and to the extent any
Participants have any right to payments hereunder, such Participants shall
be general unsecured creditors of the Company. No Participant shall have any
right, title, claim or interest in or with respect to any specific assets of
the Company or any of its subsidiaries or affiliates in connection with the
Participant's participation in the Plan.
(i) Gender and Number. All references herein to the masculine gender
shall include the feminine; and all references to the plural shall include
the singular and vice versa.
E-5
PROXY
[KINDRED HEALTHCARE LOGO]
KINDRED HEALTHCARE, INC.
680 SOUTH FOURTH STREET, LOUISVILLE, KENTUCKY 40202-2412
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS ON APRIL 16, 2002
The undersigned hereby appoints Richard A. Lechleiter, Vice President Finance,
Corporate Controller and Treasurer and Richard E. Chapman, Chief Administrative
and Information Officer, and Senior Vice President, or either of them, with
power of substitution, attorneys and proxies to vote, as indicated on the
reverse hereof, all shares of Common Stock of Kindred Healthcare, Inc., a
Delaware corporation (the "Company"), which the undersigned is entitled to vote
at the annual meeting of shareholders to be held at the Company's offices, 680
South Fourth Street, Louisville, Kentucky 40202-2412, on Tuesday, April 16,
2002, at 10:00 a.m., local time, or at any adjournments thereof, with all the
powers the undersigned would possess if then and there personally present, upon
the matters described in the notice of annual meeting of shareholders and proxy
statement, dated March , 2002, receipt of which is hereby acknowledged, and upon
any other business that may come before the meeting or any such adjournment. All
of the proposals set forth below are proposed by the Company. Approval of any
one proposal set forth below is not conditioned upon or related to approval of
any of the other proposals set forth below.
--------------------------------------------------------------------------------
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BELOW
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE PROPOSALS BELOW.
The Board of Directors recommends a vote FOR the following proposals:
1. ELECTION OF DIRECTORS
FOR [ ] the election of Edward L. Kuntz, James Bolin, Michael J. Embler, Garry
N. Garrison, Isaac Kaufman, John H. Klein and David A. Tepper or WITHHOLD
AUTHORITY [ ] to vote for all nominees in such election.
INSTRUCTION: To withhold authority to vote for any individual nominee strike a
line through the nominee's name above.
2. PROPOSAL TO RATIFY THE KINDRED HEALTHCARE, INC. 2000 STOCK OPTION PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO APPROVE THE KINDRED HEALTHCARE, INC. 2001 STOCK INCENTIVE PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. PROPOSAL TO RATIFY THE KINDRED HEALTHCARE, INC. 2000 LONG-TERM INCENTIVE
PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
PLEASE MARK, SIGN AND DATE ON REVERSE SIDE AND RETURN IN THE ACCOMPANYING
ENVELOPE.
SEE REVERSE SIDE.
5. PROPOSAL TO APPROVE THE KINDRED HEALTHCARE, INC. SHORT-TERM INCENTIVE PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
6. PROPOSAL TO AMEND THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF SHARES OF COMMON STOCK THE COMPANY IS AUTHORIZED TO
ISSUE.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
[ ] MARK HERE FOR ADDRESS CHANGE AND NOTE AT RIGHT:
[ ] MARK HERE IF YOU PLAN TO ATTEND THE MEETING
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
Please sign exactly as your name appears. When shares are held by joint
tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If
a corporation, please sign in full corporate name by President or other
authorized officer. If a partnership, please sign in partnership name
by authorized person.
SIGNATURE: ___________________________ DATE: ________________