<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER 001-14057
VENCOR, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 61-1323993
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3300 AEGON CENTER
400 WEST MARKET STREET
LOUISVILLE, KY 40202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(502) 596-7300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OF COMMON STOCK OUTSTANDING AT OCTOBER 31, 1998
--------------------- -------------------------------
Common stock, $.25 par value 69,796,706 shares
================================================================================
1 OF 31
<PAGE>
VENCOR, INC.
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Operations -- for
the quarter and nine months ended September 30,
1998 and 1997.................................................... 3
Condensed Consolidated Balance Sheet --
September 30, 1998 and December 31, 1997......................... 4
Condensed Consolidated Statement of Cash Flows -- for
the nine months ended September 30, 1998 and 1997................ 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 29
Item 6. Exhibits and Reports on Form 8-K.................................. 30
2
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues.................................................... $718,115 $844,740 $2,320,137 $2,303,731
-------- -------- ---------- ----------
Salaries, wages and benefits................................ 415,365 479,962 1,355,537 1,326,341
Supplies.................................................... 69,069 81,148 222,953 224,509
Rent........................................................ 75,063 23,954 158,274 64,685
Other operating expenses.................................... 108,097 131,977 399,755 360,698
Depreciation and amortization............................... 25,425 33,385 89,466 87,236
Interest expense............................................ 22,294 34,773 87,883 66,107
Investment income........................................... (990) (1,759) (3,300) (5,072)
-------- -------- ---------- ----------
714,323 783,440 2,310,568 2,124,504
-------- -------- ---------- ----------
Income before income taxes.................................. 3,792 61,300 9,569 179,227
Provision for income taxes.................................. (33,790) 24,398 (23,442) 71,333
-------- -------- ---------- ----------
Income from operations...................................... 37,582 36,902 33,011 107,894
Extraordinary loss on extinguishment of debt,
net of income tax benefit................................ - (346) (77,937) (4,195)
-------- -------- ---------- ----------
Net income (loss)............................... 37,582 36,556 (44,926) 103,699
Preferred stock dividend requirements....................... (266) - (443) -
-------- -------- ---------- ----------
Income (loss) available to common stockholders.. $ 37,316 $ 36,556 $ (45,369) $ 103,699
======== ======== ========== ==========
Earnings (loss) per common share:
Basic:
Income from operations................................ $ 0.55 $ 0.53 $ 0.48 $ 1.56
Extraordinary loss on extinguishment of debt.......... - - (1.15) (0.06)
-------- -------- ---------- ----------
Net income (loss)............................... $ 0.55 $ 0.53 $ (0.67) $ 1.50
======== ======== ========== ==========
Diluted:
Income from operations................................ $ 0.54 $ 0.52 $ 0.48 $ 1.52
Extraordinary loss on extinguishment of debt.......... - (0.01) (1.15) (0.06)
-------- -------- ---------- ----------
Net income (loss)............................... $ 0.54 $ 0.51 $ (0.67) $ 1.46
======== ======== ========== ==========
Shares used in computing earnings (loss) per
common share:
Basic................................................... 68,389 69,519 67,833 69,219
Diluted................................................. 68,554 71,266 68,103 70,857
</TABLE>
See accompanying notes.
3
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 102,176 $ 82,473
Accounts and notes receivable less allowance for loss of
$78,161 -- September 30 and $63,551 -- December 31.......................... 497,026 619,068
Inventories................................................................... 29,026 27,605
Income taxes.................................................................. 133,242 73,413
Other......................................................................... 43,925 55,589
---------- ----------
805,395 858,148
Property and equipment, at cost................................................ 905,116 1,996,030
Accumulated depreciation....................................................... (308,297) (488,212)
---------- ----------
596,819 1,507,818
Goodwill less accumulated amortization of $30,574 -- September 30
and $18,886 -- December 31.................................................... 670,525 659,311
Investments in affiliates...................................................... 91,676 178,301
Other.......................................................................... 80,753 131,161
---------- ----------
$2,245,168 $3,334,739
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 115,903 $ 106,019
Salaries, wages and other compensation........................................ 201,677 163,642
Other accrued liabilities..................................................... 129,388 115,933
Long-term debt due within one year............................................ 10,356 27,468
---------- ----------
457,324 413,062
Long-term debt................................................................. 793,033 1,919,624
Deferred credits and other liabilities......................................... 77,575 94,653
Minority interest in equity of consolidated entities........................... 2,877 2,050
Series A preferred stock....................................................... 1,770 -
Contingencies
Stockholders' equity:
Common stock, $0.25 par value; authorized 180,000 shares; issued
69,487 shares -- September 30 and 73,470 shares -- December 31............... 17,372 18,368
Capital in excess of par value................................................ 658,783 766,078
Retained earnings............................................................. 236,434 281,803
---------- ----------
912,589 1,066,249
Common treasury stock; 6,159 shares--December 31............................. - (160,899)
---------- ----------
912,589 905,350
---------- ----------
$2,245,168 $3,334,739
========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................ $ (44,926) $ 103,699
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................. 89,466 87,236
Provision for doubtful accounts........................................... 19,221 12,786
Gain on sale of investment in Atria Communities, Inc...................... (98,461) -
Unusual charges........................................................... 101,285 -
Extraordinary loss on extinguishment of debt.............................. 126,726 6,829
Deferred income taxes..................................................... (19,810) 14,028
Other..................................................................... (4,026) (9,553)
Changes in operating assets and liabilities:
Accounts and notes receivable.......................................... 108,230 (100,714)
Inventories and other assets........................................... (3,058) (3,462)
Accounts payable....................................................... 16,237 (10,395)
Income taxes........................................................... (37,380) 48,209
Other accrued liabilities.............................................. 23,367 9,552
--------- -----------
Net cash provided by operating activities........................... 276,871 158,215
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment........................................... (191,536) (202,145)
Acquisition of TheraTx, Incorporated......................................... - (357,149)
Acquisition of Transitional Hospitals Corporation............................ - (607,871)
Acquisition of other healthcare businesses and previously leased facilities.. (16,006) (36,630)
Proceeds from sale of investment in Atria Communities, Inc................... 177,500 -
Sale of assets............................................................... 32,834 44,613
Series A preferred stock loans............................................... (15,930) -
Net change in investments.................................................... 13,427 (4,595)
Other........................................................................ (4,901) (13,595)
--------- -----------
Net cash used in investing activities............................... (4,612) (1,177,372)
--------- -----------
Cash flows from financing activities:
Net change in borrowings under revolving lines of credit..................... (251,146) 388,500
Issuance of long-term debt................................................... 700,000 2,818
Net proceeds from senior subordinated notes offering......................... 294,000 731,812
Payment of senior subordinated notes......................................... (732,547) -
Repayment of long-term debt.................................................. (254,218) (129,444)
Payment of deferred financing costs.......................................... (8,872) (21,425)
Issuances of common stock.................................................... 227 8,631
Other........................................................................ - (206)
--------- -----------
Net cash provided by (used in) financing activities................. (252,556) 980,686
--------- -----------
Change in cash and cash equivalents............................................. 19,703 (38,471)
Cash and cash equivalents at beginning of period................................ 82,473 112,466
--------- -----------
Cash and cash equivalents at end of period...................................... $ 102,176 $ 73,995
========= ===========
Supplemental information:
Interest payments............................................................ $ 104,347 $ 50,499
Income tax payments (refunds)................................................ (14,519) 10,940
</TABLE>
See accompanying notes.
5
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--REPORTING ENTITY
Vencor, Inc. and its subsidiaries ("Vencor" or the "Company") operate an
integrated network of healthcare services in 46 states primarily focused on the
needs of the elderly. At September 30, 1998, the Company operated 58 long-term
acute care hospitals (5,051 licensed beds), 292 nursing centers (38,578 licensed
beds), and a contract services business ("Vencare") which provided respiratory
and rehabilitation therapies, medical services and pharmacy management services
under approximately 3,200 contracts to nursing centers and other healthcare
providers.
On April 30, 1998, Ventas, Inc. ("Ventas") completed the spin off of its
healthcare operations through the distribution of the common stock of Vencor to
stockholders of record as of April 27, 1998 (the "Reorganization Transactions").
The distribution was consummated on May 1, 1998 (the "Distribution Date"). For
accounting purposes, the consolidated historical financial statements of Ventas
became the historical financial statements of the Company after the Distribution
Date. Any discussion concerning events prior to the Distribution Date refers to
the Company's business as it was conducted prior to the Reorganization
Transactions.
On June 24, 1997, the Company acquired substantially all of the outstanding
common stock of Transitional Hospitals Corporation ("Transitional"), an operator
of 19 long-term acute care hospitals, pursuant to a cash tender offer. The
Company completed the merger of its wholly owned subsidiary with and into
Transitional on August 26, 1997 (the "Transitional Merger"). See Note 6.
On March 21, 1997, the Company completed the acquisition of TheraTx,
Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy
management services and operator of nursing centers (the "TheraTx Merger"),
pursuant to a cash tender offer. See Note 5.
NOTE 2--BASIS OF PRESENTATION
The TheraTx Merger and Transitional Merger have been accounted for by the
purchase method, which requires that the accounts and operations of acquired
entities be included with those of the Company since the acquisition of a
controlling interest. Accordingly, the accompanying unaudited condensed
consolidated financial statements include the operations of TheraTx and
Transitional since March 21, 1997 and June 24, 1997, respectively.
In September 1998, the Company sold approximately 88.1% of its investment
in its assisted living affiliate, Atria Communities, Inc. ("Atria") resulting
from the merger of Atria and Kapson Senior Quarters Corp. ("Kapson"). In
connection with the merger, the Company is retaining approximately 11.9% of the
outstanding capital stock of the surviving entity and will account for such
investment under the cost method of accounting. From July 1, 1997 to the date of
sale, the Company had accounted for Atria under the equity method of accounting.
Prior to July 1, 1997, such accounts were consolidated with those of the Company
and provisions related to minority interests in the earnings and equity of Atria
had been recorded since the consummation of the initial public offering in
August 1996. See Note 8.
Beginning in 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which established new rules for the reporting of
comprehensive income and its components. SFAS 130 requires, among other things,
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported as changes in common stockholders' equity, to be
disclosed as other comprehensive income. The adoption of SFAS 130 had no impact
on the Company's net income or common stockholders' equity for the nine months
ended September 30, 1998.
6
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--BASIS OF PRESENTATION (CONTINUED)
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information," which will become effective in December 1998 and will
require interim disclosures beginning in 1999. SFAS 131 requires public
companies to report certain information about operating segments, products and
services, the geographic areas in which they operate and major customers. The
operating segments are to be based on the structure of the enterprise's internal
organization whose operating results are reviewed regularly by senior
management. Management has not yet determined the effect, if any, of SFAS 131
on the consolidated financial statement disclosures.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities," which requires entities to expense start-up costs, including
organizational costs, as incurred. SOP 98-5 requires most entities to write off
as a cumulative effect of a change in accounting principle any previously
capitalized start-up or organizational costs. SOP 98-5 is effective for most
entities for fiscal years beginning after December 15, 1998. The Company plans
to adopt the provisions of SOP 98-5 in the first quarter of 1999. The amount of
such unamortized costs were $13.0 million at September 30, 1998.
In June 1998, the FASB issued SFAS No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. Management has not determined the
effect, if any, of SFAS 133 on the Company's consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements do
not include all of the disclosures normally required by generally accepted
accounting principles or those normally required in annual reports on Form 10-K.
Accordingly, these statements should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December 31,
1997 filed with the Securities and Exchange Commission on Form 10.
The accompanying condensed consolidated financial statements have been
prepared in accordance with the Company's customary accounting practices and
have not been audited. Management believes that the financial information
included herein reflects all adjustments necessary for a fair presentation of
interim results and, except for the costs described in Note 8, all such
adjustments are of a normal and recurring nature.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
NOTE 3--REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payers for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payers.
A summary of revenues by payer type follows (in thousands):
QUARTER NINE MONTHS
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
Medicare..................... $245,058 $304,291 $ 816,683 $ 783,558
Medicaid..................... 212,949 216,942 634,234 623,316
Private and other............ 296,374 341,890 958,271 945,782
-------- -------- ---------- ----------
754,381 863,123 2,409,188 2,352,656
Elimination.................. (36,266) (18,383) (89,051) (48,925)
-------- -------- ---------- ----------
$718,115 $844,740 $2,320,137 $2,303,731
======== ======== ========== ==========
7
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--EARNINGS PER SHARE
In 1997, the Company adopted the provisions of SFAS No. 128 ("SFAS 128"),
"Earnings Per Share," replacing the calculation of primary and fully diluted
earnings per common share with basic and diluted earnings per common share. The
computation of basic earnings per common share is based upon the weighted
average number of common shares outstanding, while the diluted computation also
includes the effect of common stock equivalents consisting primarily of stock
options. Earnings per common share for all prior periods have been restated to
conform to the requirements of SFAS 128. The impact of the restatement was not
significant.
A computation of earnings per common share for the quarter and nine months
ended September 30 follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
QUARTER NINE MONTHS
------------------ --------------------
1998 1997 1998 1997
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Income from operations.................................... $37,582 $36,902 $ 33,011 $107,894
Extraordinary loss on extinguishment of debt.............. - (346) (77,937) (4,195)
------- ------- -------- --------
Net income (loss)................................ 37,582 36,556 (44,926) 103,699
Preferred stock dividend requirements..................... (266) - (443) -
------- ------- -------- --------
Income (loss) available to common
stockholders.................................. $37,316 $36,556 $(45,369) $103,699
======= ======= ======== ========
Shares used in the computation:
Weighted average shares outstanding--basic
computation......................................... 68,389 69,519 67,833 69,219
Dilutive effect of outstanding stock options........... 165 1,747 270 1,638
------- ------- -------- --------
Adjusted weighted average shares
outstanding--diluted computation.............. 68,554 71,266 68,103 70,857
======= ======= ======== ========
Earnings (loss) per common share:
Basic:
Income from operations.............................. $ 0.55 $ 0.53 $ 0.48 $ 1.56
Extraordinary loss on extinguishment of debt........ - - (1.15) (0.06)
------- ------- -------- --------
Net income (loss)................................ $ 0.55 $ 0.53 $ (0.67) $ 1.50
======= ======= ======== ========
Diluted:
Income from operations.............................. $ 0.54 $ 0.52 $ 0.48 $ 1.52
Extraordinary loss on extinguishment of debt........ - (0.01) (1.15) (0.06)
------- ------- -------- --------
Net income (loss)................................ $ 0.54 $ 0.51 $ (0.67) $ 1.46
======= ======= ======== ========
</TABLE>
NOTE 5--THERATX MERGER
On March 21, 1997, the TheraTx Merger was consummated following a cash
tender offer in which the Company paid $17.10 for each outstanding share of
TheraTx common stock. A summary of the TheraTx Merger as of September 30, 1998
follows (in thousands):
Fair value of assets acquired................................. $ 633,793
Fair value of liabilities assumed............................. (259,439)
---------
Net assets acquired..................................... 374,354
Cash received from acquired entity............................ (14,915)
---------
Net cash paid........................................... $ 359,439
=========
The purchase price paid in excess of the fair value of identifiable net
assets acquired (to be amortized over 40 years by the straight-line method)
aggregated $315.2 million.
8
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--TRANSITIONAL MERGER
On June 24, 1997, the Company acquired approximately 95% of the outstanding
shares of common stock of Transitional through a cash tender offer in which the
Company paid $16.00 per common share. The Company completed the merger of its
wholly-owned subsidiary with and into Transitional on August 26, 1997. A
summary of the Transitional Merger as of September 30, 1998 follows (in
thousands):
Fair value of assets acquired................................. $713,336
Fair value of liabilities assumed............................. (44,842)
--------
Net assets acquired..................................... 668,494
Cash received from acquired entity............................ (52,874)
--------
Net cash paid........................................... $615,620
========
The purchase price paid in excess of the fair value of identifiable net
assets acquired (to be amortized over 40 years by the straight-line method)
aggregated $363.6 million.
NOTE 7--PRO FORMA INFORMATION
The pro forma effect of the TheraTx Merger and Transitional Merger assuming
that the transactions occurred on January 1, 1997 follows (in thousands, except
per share amounts):
NINE MONTHS
ENDED
SEPTEMBER 30,
1997
-------------
Revenues................................................ $2,552,001
Income from operations.................................. 71,212
Net income.............................................. 67,017
Earnings per common share:
Basic:
Income from operations............................ $ 1.03
Net income........................................ 0.97
Diluted:
Income from operations............................ $ 1.01
Net income........................................ 0.95
Pro forma income from operations includes $29.7 million of costs incurred
by both TheraTx and Transitional in connection with the acquisitions. Pro forma
financial data have been derived by combining the financial results of the
Company and TheraTx (based upon nine month reporting periods ending on September
30) and Transitional (based upon nine month reporting periods ending on August
31).
NOTE 8--UNUSUAL TRANSACTIONS
In September 1998, the Company sold its investment in Atria for $177.5
million in cash and an equity interest in the surviving corporation, resulting
in a gain of $98.5 million. During the third quarter of 1998, as a result of
substantial reductions in Medicare reimbursement to the Company's nursing center
and hospital businesses in connection with the provisions of the Balanced Budget
Act of 1997 (the "Budget Act"), management determined to suspend all acquisition
and development activities, terminate the construction of substantially all of
its development properties, and close two recently acquired hospitals.
Accordingly, the Company recorded pretax charges aggregating $56.8 million
related to the cancellation of construction projects and $17.4 million for the
planned closure of the hospitals. In September 1998, the Company also recorded
pretax charges of $9.6 million for uncollectible accounts receivable from
previously sold or closed nursing center, home health and hospice operations and
$8.5 million in connection with the write-down of an equity investment to its
net realizable value.
In connection with the third quarter construction termination charge, the
Company decided that it would not replace certain facilities that previously
were accounted for as assets intended for disposal. Accordingly, the $56.8
million charge discussed above includes a $10.0 million reversal of a valuation
allowance (the amount necessary to reduce the carrying value to fair value less
costs of disposal) related to such facilities.
9
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 8--UNUSUAL TRANSACTIONS (CONTINUED)
During the second quarter of 1998, the Company incurred $25.7 million of
professional and administrative expenses related to the Reorganization
Transactions, losses related to the planned disposal of the Company's home
health and hospice operations, and the write-off of capitalized amounts related
to the cancellation of a corporate headquarters construction project. During
the first quarter of 1998, the Company incurred $7.7 million of professional and
administrative expenses related to the Reorganization Transactions.
The unusual transactions described above are included in other operating
expenses for the respective periods in which they were recorded.
An extraordinary loss on extinguishment of debt of $77.9 million, net of
income taxes, was incurred in the second quarter of 1998 in connection with the
Reorganization Transactions. Extraordinary losses related to the refinancing of
long-term debt reduced 1997 net income by $346,000 in the third quarter and $4.2
million for the nine month period.
NOTE 9--INCOME TAXES
As a result of the Reorganization Transactions, the tax basis of the
Company's assets and liabilities will change. The Company has engaged third
parties to perform independent valuations of such assets and liabilities and
expects that deferred tax adjustments, if any, resulting from such valuations
will be recorded in the fourth quarter of 1998. Because the changes in the tax
basis of assets and liabilities was caused by transactions among shareholders,
the tax effects of all changes caused by the Reorganization Transactions will be
included in stockholders' equity.
At the time of the Reorganization Transactions, the Company recorded both a
deferred tax asset and a valuation allowance for identical amounts in connection
with the difference in book and tax basis, which resulted from the
Reorganization Transactions, of the Company's investment in Atria. The valuation
allowance was recorded due to the litigation and other uncertainties associated
with the realization of the deferred tax asset, based upon the available
evidence at the time of the Reorganization Transactions. During the third
quarter, upon favorable resolution of such litigation and completion of the
Atria sale, the Company adjusted the valuation allowance that had been recorded
in the second quarter of 1998. Accordingly, the provision for income taxes for
the third quarter of 1998 includes a benefit of approximately $38 million to
reflect the realization of the deferred tax asset.
The Company also recorded an additional provision for income taxes during
the third quarter of 1998 to increase its effective tax rate from 44% to 52% on
a year-to-date basis. The portion of the adjustment related to the first six
months of 1998 aggregated $3 million.
NOTE 10--LONG-TERM DEBT
In connection with the Reorganization Transactions, the Company consummated
the $1.0 billion Credit Agreement (the "Credit Agreement") which includes (i) a
five year $300 million Revolving Credit Facility (the "Revolving Credit
Facility"), (ii) a $250 million Term A Loan (the "Term A Loan") payable in
various installments over five years, (iii) a $250 million Term B Loan (the
"Term B Loan") payable in installments of 1% per year with the outstanding
balance due in seven years and (iv) a $200 million Bridge Loan (the "Bridge
Loan") which was repaid in the third quarter of 1998 primarily from the proceeds
of the sale of Atria common stock. Interest is payable, depending on certain
leverage ratios and the periods of borrowing at rates of LIBOR plus 3/4 to 3%
for the Revolving Credit Facility and Term A Loan. Interest is payable at LIBOR
plus 2 1/4 to 3 1/2% for the Term B Loan. On April 30, 1998, the Company
completed the private placement of $300 million aggregate principal amount of
9 7/8% Guaranteed Senior Subordinated Notes due 2005 (the "Notes"). The Notes
are not callable by the Company until 2002. On September 10, 1998, the Company
exchanged the Notes for publicly registered Notes having identical terms and
conditions.
The Credit Agreement contains customary covenants which require, among
other things, maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock. In October 1998, the Company
completed an amendment of its financial covenants included in the Credit
Agreement, retroactive to September 30, 1998. The Company was in compliance with
all such covenants at September 30, 1998.
The Company entered into interest rate swap agreements in May 1997 on $300
million of floating rate debt. These agreements expire in $100 million
increments in May 1999, November 1999 and May 2000, and provide for fixed rates
at 6.4% plus 3/4 to 3%. The fair value of the swap agreements are not
recognized in the condensed consolidated financial statements.
10
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--TRANSACTIONS WITH VENTAS
For the purpose of governing certain of the ongoing relationships between
the Company and Ventas after the Reorganization Transactions and to provide
mechanisms for an orderly transition, the Company and Ventas have entered into
various agreements. The Company believes that the agreements contain terms which
generally are comparable to those which would have been reached in arm's length
negotiations with unaffiliated parties. The most significant agreements are as
follows:
MASTER LEASE AGREEMENTS
Ventas retained substantially all of the real property, buildings and other
improvements (primarily long-term acute care hospitals and nursing centers) in
the Reorganization Transactions and leases them to the Company under four master
lease agreements which set forth the material terms governing each of the leased
properties (individually, a "Master Lease" and collectively, the "Master
Leases").
The leased properties include land, buildings, structures, easements,
improvements on the land and permanently affixed equipment, machinery and other
fixtures relating to the operation of the facilities.
There are multiple bundles of leased properties under each Master Lease
with each bundle containing seven to twelve leased properties. All leased
properties within a bundle have the same base terms, ranging from 10 to 15
years. At the option of the Company, 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 2% per annum if certain lessee
revenue parameters are obtained. At the option of the Company, all, but not less
than all, of the leased properties in a bundle may be extended for two
additional five-year renewal terms thereafter at the then fair market value
rental rate. The base and renewal terms of each leased property are subject to
termination upon default by either party and certain other conditions described
in the Master Leases.
The Master Leases are structured as triple-net leases. In addition to the
base annual rent of approximately $222.1 million, plus 2% per annum if certain
lessee revenue parameters are obtained, the Company is required to pay all
insurance, taxes, utilities and maintenance related to the leased properties.
DEVELOPMENT AGREEMENT
Under the terms of the Development Agreement, the Company, if it so
desires, will complete the construction of certain development properties
substantially in accordance with the existing plans and specifications for each
such property. Upon completion of each such development property, Ventas has 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
purchases the development property, the Company will lease the development
property from Ventas. The annual base rent under such a lease will be 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 will be substantially similar to those set forth in the Master Leases.
Since the Reorganization Transactions, the Company has sold one skilled nursing
center to Ventas under the Development Agreement for $6.2 million.
PARTICIPATION AGREEMENT
Under the terms and conditions of the Participation Agreement, the Company
has a right of first offer to become the lessee of any real property acquired or
developed by Ventas which is to be operated as a hospital, nursing center or
other healthcare facility, provided that the Company and Ventas negotiate a
mutually satisfactory lease arrangement.
11
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--TRANSACTIONS WITH VENTAS (CONTINUED)
PARTICIPATION AGREEMENT (CONTINUED)
The Participation Agreement also provides, subject to certain terms, that
the Company will provide Ventas with a right of first offer to purchase or
finance any healthcare related real property that the Company determines to sell
or mortgage to a third party, provided that the Company and Ventas negotiate
mutually satisfactory terms for such purchase or mortgage.
The Participation Agreement has a three year term. The Company and Ventas
each have the right to terminate the Participation Agreement in the event of a
change of control.
TRANSITION SERVICES AGREEMENT
The Transition Services Agreement provides that the Company will provide
Ventas with transitional administrative and support services, including but not
limited to finance and accounting, human resources, risk management, legal, and
information systems support through December 31, 1998. Ventas pays the Company
$200,000 per month for services provided under the Transition Services
Agreement.
TAX ALLOCATION AGREEMENT
The Tax Allocation Agreement provides that Ventas will be liable for taxes
of the Ventas consolidated group attributable to periods prior to the
Distribution Date with respect to the portion of such taxes attributable to the
property held by Ventas after the Distribution Date and the Company will be
liable for such pre-distribution taxes with respect to the portion of such taxes
attributable to the property held by the Company after the Distribution Date.
The Tax Allocation Agreement further provides that Ventas will be liable for any
taxes attributable to the Reorganization Transactions except that the Company
will be liable for any such taxes to the extent that the Company derives certain
future tax benefits as a result of the payment of such taxes. Ventas and its
subsidiaries are liable for taxes payable with respect to periods after the
Reorganization Transactions that are attributable to Ventas operations and the
Company and its subsidiaries are liable for taxes payable with respect to
periods after the Reorganization Transactions that are attributable to the
Company's operations. If, in connection with a tax audit or filing of an amended
return, a taxing authority adjusts the tax liability of either the Company or
Ventas with respect to taxes for which the other party was liable under the Tax
Allocation Agreement, such other party would be liable for the resulting tax
assessment or would be entitled to the resulting tax refund. Since the
Reorganization Transactions, the Company has received $6.7 million from Ventas
for a tax settlement under the Tax Allocation Agreement. This transaction had no
impact on earnings.
NOTE 12--RELATED PARTY TRANSACTIONS
As part of the Reorganization Transactions, the Company issued $17.7
million of its 6% Series A Non-Voting Convertible Preferred Stock (the
"Preferred Stock") to Ventas as part of the consideration for its healthcare
operations and assets. The Company subsequently loaned officers of the Company
approximately 90% of the funds required ($15.9 million) to purchase the
Preferred Stock from Ventas. In addition, the Company loaned approximately $1.8
million to certain officers of the Company to finance the income taxes payable
by them as a result of the Reorganization Transactions.
12
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13--LITIGATION
The Company is a party to certain legal actions and regulatory
investigations arising in the normal course of its business. Summary
descriptions of significant legal and regulatory activities follows:
On October 21, 1998, the Company was notified by the Health Care Financing
Administration ("HCFA") Administrator in Chicago, Illinois and the State of
Wisconsin that the Medicare and Medicaid certification for its 657-bed skilled
nursing facility known as Mt. Carmel Health & Rehabilitation Center in
Milwaukee, Wisconsin (the "Facility") would be terminated effective November 6,
1998. The State of Wisconsin Department of Health and Family Services also
informed the Company that the Facility's license will be terminated as of
February 13, 1999. The Facility has appealed that termination. These actions
resulted from the Facility's failure to attain substantial compliance with
Federal and state requirements by an October 12, 1998 deadline. On November 6,
1998, the Company filed an action against HCFA in Federal District Court in
Washington, D.C. and obtained an order enjoining HCFA and its agents, including
the State of Wisconsin, from terminating the Facility's certification and from
relocating any of the Facility's residents.
On April 7, 1998, the Circuit Court of the Thirteenth Judicial Circuit for
Hillsborough County, Florida, issued a temporary injunction order against the
Company's nursing center in Tampa, Florida which ordered the nursing center to
cease notifying and requiring the discharge of any resident. The Company
discontinued requiring the discharge of any resident from its Tampa nursing
center on April 7, 1998. Following the conduct of a complaint survey at the
facility, the State of Florida Agency for Health Care Administration ("AHCA")
imposed a fine of $270,000 for related regulatory violations. In addition,
HCFA imposed a fine of $113,000. The Company appealed both the AHCA and HCFA
fines and has settled both appeals. The Company submitted an acceptable plan of
correction at the Tampa nursing center and was informed by AHCA that "immediate
jeopardy" no longer existed. The threatened termination of the Tampa nursing
center's Medicare provider agreement was reversed.
The Tampa Prosecuting Attorney's office has indicated to the Company that
it is conducting an independent criminal investigation into the circumstances
surrounding the Tampa resident discharges. The Company is cooperating fully with
this investigation.
The Company received notice in June 1998 that the State of Georgia found
regulatory violations with respect to patient discharges, among other things, at
one of the Company's nursing centers in Savannah, Georgia. The state
recommended a Federal fine of approximately $510,000 for these violations which
HCFA has imposed. The Company has appealed this fine.
The HCFA Administrator of the Medicare and Medicaid programs indicated in
April 1998 that the Company's facilities in other states also are being
monitored.
On April 9, 1998, a class action lawsuit captioned Mongiovi et al. v.
Vencor, Inc., et al., Case No. 98-769-CIV-T24E, was filed in the United States
District Court for the Middle District of Florida on behalf of a purported class
consisting of certain residents of the Tampa nursing center and other residents
in the Company's nursing centers nationwide. The complaint alleges various
breaches of contract, and statutory and regulatory violations including
violations of Federal and state RICO statutes. The original complaint has been
amended to delineate several purported subclasses. The plaintiffs seek class
certification, unspecified damages, attorneys' fees and costs. The Company is
defending this action vigorously.
A class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., was
filed on December 24, 1997 in the United States District Court for the Western
District of Kentucky (Civil Action No. 3-97CV-8354). The class action claims
were brought by an alleged stockholder of the Company against the Company and
certain executive officers and directors of the Company. The complaint alleges
that the Company and certain current and former executive officers of the
Company during a specified time frame violated Sections 10(b) and 20(a) of the
Securities Exchange
13
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13--LITIGATION (CONTINUED)
Act of 1934, as amended (the "Exchange Act"), by, among other things, issuing to
the investing public a series of false and misleading statements concerning the
Company's current operations and the inherent value of the Company's common
stock. The complaint further alleges that as a result of these purported false
and misleading statements concerning the Company's revenues and successful
acquisitions, the price of the Company's common stock was artificially inflated.
In particular, the complaint alleges that the Company issued false and
misleading financial statements during the first, second and third calendar
quarters of 1997 which misrepresented and understated the impact that changes in
Medicare reimbursement policies would have on the Company's core services and
profitability. The complaint further alleges that the Company issued a series
of materially false statements concerning the purportedly successful integration
of its recent acquisitions and prospective earnings per share for 1997 and 1998
which the Company knew lacked any reasonable basis and were not being achieved.
The suit seeks damages in an amount to be proven at trial, pre-judgment and
post-judgment interest, reasonable attorneys' fees, expert witness fees and
other costs, and any extraordinary equitable and/or injunctive relief permitted
by law or equity to assure that the plaintiff has an effective remedy. The
Company believes that the allegations in the complaint are without merit and is
defending this action vigorously.
A shareholder derivative suit entitled Thomas G. White on behalf of Vencor,
Inc. and Ventas, Inc. v. W. Bruce Lunsford, et al., Case No. 98CI03669, was
filed in June 1998 in the Jefferson County, Kentucky, Circuit Court. The suit
was brought on behalf of the Company and Ventas against certain current and
former executive officers and directors of the Company and Ventas. The
complaint alleges that the defendants damaged the Company and Ventas by engaging
in violations of the securities laws, engaging in insider trading, fraud and
securities fraud and damaging the reputation of the Company and Ventas. The
plaintiff asserts that such actions were taken deliberately, in bad faith and
constitute breaches of the defendants' duties of loyalty and due care. The
complaint is based on substantially similar assertions to those made in the
class action lawsuit entitled A. Carl Helwig v. Vencor, Inc., et al., discussed
above. The suit seeks unspecified damages, interest, punitive damages,
reasonable attorneys' fees, expert witness fees and other costs, and any
extraordinary equitable and/or injunctive relief permitted by law or equity to
assure that the Company and Ventas have an effective remedy. The Company
believes that the allegations in the complaint are without merit and intends to
defend this action vigorously.
As previously reported in the Company's Form 10, a class action lawsuit was
filed on June 19, 1997 in the United States District Court for the District of
Nevada on behalf of a class consisting of all persons who sold shares of
Transitional common stock during the period from February 26, 1997 through May
4, 1997, inclusive. The complaint alleges that Transitional purchased shares of
its common stock from members of the investing public after it had received a
written offer to acquire all of Transitional's common stock and without making
the required disclosure that such an offer had been made. The complaint further
alleges that defendants disclosed that there were "expressions of interest" in
acquiring Transitional when, in fact, at that time, the negotiations had reached
an advanced stage with actual firm offers at substantial premiums to the trading
price of Transitional's stock having been made which were actively being
considered by Transitional's Board of Directors. The complaint asserts claims
pursuant to Sections 10(b), 14(e) and 20(a) of the Exchange Act, and common law
principles of negligent misrepresentation and names as defendants Transitional
as well as certain former senior executives and directors of Transitional. The
plaintiff seeks class certification, unspecified damages, attorneys' fees and
costs. On June 18, 1998, the court granted the Company's motion to dismiss with
leave to amend the Section 10(b) claim and the state law claims for
misrepresentation. The court denied the Company's motion to dismiss the Section
14(e) and Section 20(a) claims. The Company has filed a motion for
reconsideration and intends to defend vigorously this action.
The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant
in a qui tam lawsuit which was filed in the United States District Court for the
Eastern District of Arkansas and served on the Company on July 7, 1997. The
United States Department of Justice has intervened in the suit which was brought
under the Federal Civil
14
<PAGE>
VENCOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 13--LITIGATION (CONTINUED)
False Claims Act. AXR provided portable X-ray services to nursing facilities
(including those operated by the Company) and other healthcare providers. The
Company acquired an interest in AXR when The Hillhaven Corporation was merged
into the Company in September 1995 and purchased the remaining interest in AXR
in February 1996. The suit alleges that AXR submitted false claims to the
Medicare and Medicaid programs. The suit seeks damages in an amount of not less
than $1,000,000, treble damages and civil penalties. In conjunction with the
qui tam action, the United States Attorney's Office for the Eastern District of
Arkansas also is conducting a criminal investigation into the allegations
contained in the qui tam complaint and has indicted four former employees of
AXR. AXR has been informed that it is not a target of the investigation. The
Company is cooperating fully in the investigation.
On June 6, 1997, Transitional announced that it had been advised that it
was the target of a Federal grand jury investigation being conducted by the
United States Attorney's Office for the District of Massachusetts (the "USAO")
arising from activities of Transitional's formerly owned dialysis business. The
investigation involves an alleged illegal arrangement in the form of a
partnership which existed from June 1987 to June 1992 between Damon Corporation
and Transitional. Transitional spun off its dialysis business, now called Vivra
Incorporated, on September 1, 1989. In January 1998, the Company was informed
that no criminal charges would be filed against the Company. The Company has
been added as a defendant to a previously pending qui tam lawsuit against the
other partners related to the partnership's former Medicare billing practices.
The Company intends to defend vigorously the action.
The Company's subsidiary, TheraTx, is a defendant and counterclaimant in an
action pending in state court in Jacksonville, Florida entitled Highland Pines
Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al. The plaintiffs
claim that they are entitled to up to $40 million in earnout compensation from
TheraTx's purchase of several businesses from the plaintiffs in 1995 and to
damages from related tort claims. TheraTx has asserted fraud counterclaims
against the plaintiffs relating to the original purchase. The case is scheduled
for trial to begin in March 1999. The Company is defending the action
vigorously.
The Company has been informed by the U.S. Department of Justice that it is
the subject of ongoing investigations into various aspects of its Medicare
billing practices. The Company is cooperating fully in the investigations.
In connection with the Reorganization Transactions, liabilities arising
from various legal proceedings and other actions were assumed by the Company and
the Company agreed to indemnify Ventas against any losses, including any costs
or expenses, it may incur arising out of or in connection with such legal
proceedings and other actions. 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 the former healthcare operations of
Ventas. In connection with its indemnification obligation, the Company has
assumed the defense of various legal proceedings and other actions.
The Company is unable to predict the ultimate outcome of pending litigation
and regulatory investigations. In addition, there can be no assurance that HCFA
or other regulatory agencies will not initiate additional investigations related
to the Company's business in the future, nor can there be any assurance that the
resolution of any litigation or investigations, either individually or in the
aggregate, would not have a material adverse impact on the Company's liquidity,
financial position or results of operations.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BACKGROUND INFORMATION
The Company operates an integrated network of healthcare facilities in 46
states focused primarily on the needs of the elderly. At September 30, 1998, the
Company operated 58 long-term acute care hospitals (5,051 licensed beds), 292
nursing centers (38,578 licensed beds) and the Vencare contract services
business which provided respiratory and rehabilitation therapies, medical
services and pharmacy management services under approximately 3,200 contracts to
nursing centers and other healthcare providers.
On March 21, 1997, the TheraTx Merger was completed. TheraTx primarily
provided rehabilitation and respiratory therapy management services and operated
26 nursing centers with annualized revenues approximating $425 million. See
Note 5 of the Notes to Condensed Consolidated Financial Statements.
On June 24, 1997, the Company acquired a controlling interest in
Transitional and, on August 26, 1997, completed the Transitional Merger.
Transitional primarily operated 19 long-term acute care hospitals with
annualized revenues approximating $350 million. See Note 6 of the Notes to
Condensed Consolidated Financial Statements.
On April 30, 1998, Ventas completed the spin off of its healthcare
operations through the Reorganization Transactions. For accounting purposes, the
consolidated historical financial statements of Ventas became the historical
financial statements of the Company after the Distribution Date. Any discussion
concerning events prior to the Distribution Date refers to the Company's
business as it was conducted prior to the Reorganization Transactions.
In September 1998, the Company received $177.5 million from the sale of
approximately 88.1% of its ownership of Atria resulting from the merger of Atria
with Kapson. In connection with the merger, the Company is retaining
approximately 11.9% of the outstanding capital stock of the surviving entity and
will account for such investment under the cost method. Proceeds from the Atria
merger were used to liquidate completely the Bridge Loan. From July 1, 1997
until the sale, the Company accounted for Atria under the equity method. Prior
to July 1, 1997, such accounts were consolidated with those of the Company and
provisions related to minority interests in the earnings and equity of Atria had
been recorded since the consummation of the initial public offering of Atria in
August 1996.
RESULTS OF OPERATIONS
A summary of revenues follows (in thousands):
<TABLE>
<CAPTION>
QUARTER % NINE MONTHS %
-------------------- ------------------------
1998 1997 CHANGE 1998 1997 CHANGE
--------- --------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Hospitals.................................. $226,846 $233,993 (3.1) $ 712,523 $ 554,687 28.5
Nursing centers............................ 389,414 445,943 (12.7) 1,237,204 1,282,521 (3.5)
Vencare.................................... 138,121 183,187 (24.6) 459,461 484,249 (5.1)
Atria...................................... - - - 31,199
-------- -------- ---------- ----------
754,381 863,123 (12.6) 2,409,188 2,352,656 2.4
Elimination................................ (36,266) (18,383) (89,051) (48,925)
-------- -------- ---------- ----------
$718,115 $844,740 (15.0) $2,320,137 $2,303,731 0.7
======== ======== ========== ==========
</TABLE>
Despite a 4.1% increase in third quarter 1998 patient days compared to the
same quarter a year ago, hospital revenues declined 3.1% primarily as a result
of Medicare reimbursement changes associated with the Budget Act. Revenue growth
for the nine months ended September 30, 1998 compared to 1997 resulted
principally from the Transitional Merger in June 1997. Same facility total
patient days rose 3.3% in the third quarter of 1998 and 6.1% for the first nine
months compared to the respective periods of 1997.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
The provisions of the Budget Act reduced hospital profitability in 1998 by
approximately $8 million in the third quarter and $16 million for the nine month
period. In the third quarter of 1998, hospital profitability also was
negatively impacted by changes in the mix of patient days by payer type
(Medicare, Medicaid, private and other). Medicaid patient days (for which
payment rates are generally less than other payer types) comprised 13.4% of
total patient days compared to 11.1% last year, while private and other patient
days declined to 18.9% from 19.3%, respectively. See "Healthcare Legislation."
Nursing center revenues declined 12.7% in the third quarter and 3.5% for
the first nine months of 1998. Effective July 1, 1998, all of the Company's
nursing centers were converted to the new Medicare prospective payment system
("PPS") provided within the Budget Act. Under PPS, Medicare payments to nursing
centers for routine services, ancillary services and capital costs are subject
to fixed payments based on patient acuity levels. During the third quarter,
Medicare revenues declined to $103.0 million ($291 per patient day) from $146.8
million ($366 per patient day) last year. Same facility total patient days
declined 3.7% in the third quarter and 2.7% for the nine month period, and third
quarter overall average occupancy declined to 86.6% from 90.1% last year. In
addition, deterioration in the mix of patient days by payer type, particularly
the decline in Medicare census, adversely impacted third quarter nursing center
profitability compared to last year. See "Healthcare Legislation."
Vencare revenues declined 24.6% in the third quarter and 5.1% for the first
nine months of 1998. Approximately one-half of the third quarter decline
related to the divestiture of the occupational medicine, home health and hospice
businesses, all of which had been unprofitable. The remainder of the decline
related to respiratory therapy and pharmacy lines of business. Management
believes that the decline in its ancillary service revenues is primarily
attributable to reduced Medicare reimbursements to nursing centers under PPS.
Salary equivalency reimbursement rates, which became effective in April 1998,
also reduced third quarter Vencare revenues. Although the Company initiated
significant cost reduction actions during the third quarter, the impact of these
regulatory changes reduced Vencare profitability below last year's levels. See
"Healthcare Legislation."
In 1997, the Company initiated the marketing of its Vencare full service
ancillary services contracts to provide a full range of services to nursing
centers not operated by the Company. The change in the Company's marketing
strategy for selling ancillary services was developed in response to PPS
established under the Budget Act. The Company believes that by bundling
services through one provider, nursing centers can provide quality patient care
more efficiently with the added benefit of centralized patient medical records.
Under PPS, ancillary services provided by nursing centers are subject to fixed
payments. In this new environment, the Company believes that its full service
ancillary services contracts will enhance the ability of nursing center
operators to manage effectively the costs of providing quality patient care.
The majority of nursing centers in the United States will convert to PPS in the
first quarter of 1999. While client nursing center operators transition to PPS,
the Company is continuing to offer and retain single service contracts.
The number of Vencare contracts in effect at September 30, 1998 totaled
3,195, down from 4,160 at the end of the third quarter last year. The contract
count at September 30 of this year includes 112 full service ancillary
contracts. During 1997, the Company terminated approximately 700 contracts which
did not meet certain growth criteria and eliminated approximately 670 contracts
by combining previously separate pharmacy, enteral and infusion therapy
contracts. These transactions did not impact materially Vencare operating
results in 1997.
The third quarter 1998 income from operations totaled $37.6 million ($0.54
per share), compared to $36.9 million ($0.52 per share) for the same period in
1997. For the nine month period, income from operations was $33.0 million ($0.48
per share) compared to $107.9 million ($1.52 per share) in 1997. On a pro forma
basis, excluding the effect of unusual transactions and assuming the
Reorganization Transactions had occurred at the beginning of 1997, the Company
would have reported net operating income of $13.5 million, or $0.19 per share,
for the third quarter of 1997. The operating loss incurred in the third quarter
of 1998 (excluding the effect of unusual transactions) was primarily
attributable to reductions in hospital, nursing center and Vencare revenues, a
substantial portion of which
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
resulted from regulatory changes associated with the Budget Act. In addition,
the deterioration in hospital and nursing center patient mix by payer type and
overall decline in nursing center occupancy also contributed to the reduction in
earnings.
Operating results in 1998 include certain unusual transactions. In
September 1998, the Company sold its investment in Atria for $177.5 million in
cash and an equity interest in the surviving corporation, resulting in a gain of
$98.5 million or $1.43 per share. During the third quarter of 1998, as a result
of substantial reductions in Medicare reimbursement to the Company's nursing
center and hospital businesses in connection with the provisions of the Budget
Act, management determined to suspend all acquisition and development
activities, terminate the construction of substantially all of its development
properties, and close two recently acquired hospitals. Accordingly, the Company
recorded pretax charges aggregating $56.8 million related to the cancellation of
construction projects and $17.4 million for the planned closure of the
hospitals. In September 1998, the Company also recorded pretax charges of $9.6
million for uncollectible accounts receivable from previously sold or closed
nursing center, home health and hospice operations and $8.5 million in
connection with the write-down of an equity investment to its net realizable
value. These charges collectively reduced third quarter net income by $56.8
million or $0.83 per share.
During the second quarter of 1998, the Company incurred $25.7 million
($18.7 million net of tax or $0.28 per share) of professional and administrative
expenses related to the Reorganization Transactions, losses related to the
planned disposal of the Company's home health and hospice operations, and the
write-off of capitalized amounts related to the cancellation of a corporate
headquarters construction project. During the first quarter of 1998, the Company
incurred $7.7 million or $0.11 per share of professional and administrative
expenses related to the Reorganization Transactions.
The unusual transactions described above are included in other operating
expenses for the respective periods in which they were recorded.
The net loss for the first nine months of 1998 includes an extraordinary
loss on the extinguishment of debt of $77.9 million, or $1.15 per share,
incurred in connection with the Reorganization Transactions. Extraordinary
losses related to the refinancing of other long-term debt reduced 1997 net
income by $346,000, or $0.01 per share, in the third quarter and $4.2 million,
or $0.06 per share, for the nine month period.
See Notes 8 and 9 of the Notes to Condensed Consolidated Financial
Statements.
LIQUIDITY
Cash provided by operations totaled $276.9 million for the first nine
months of 1998 compared to $158.2 million for the same period of 1997. Days of
revenues in accounts receivable improved to 58 at September 30, 1998 compared to
67 at December 31, 1997.
In connection with the Reorganization Transactions, the Company consummated
the Credit Agreement which includes (i) a five year $300 million Revolving
Credit Facility, (ii) a $250 million Term A Loan payable in various installments
over five years, (iii) a $250 million Term B Loan payable in installments of 1%
per year with the outstanding balance due in seven years and (iv) a $200 million
Bridge Loan which was repaid in the third quarter of 1998 primarily from the
proceeds of the sale of Atria common stock. The Credit Agreement is
collateralized by substantially all of the assets and capital stock of the
Company's subsidiaries. On April 30, 1998, the Company completed the private
placement of $300 million aggregate principal amount of the Notes which are not
callable by the Company until 2002. On September 10, 1998, the Company
exchanged the Notes for publicly registered Notes having identical terms and
conditions.
The Credit Agreement contains customary covenants which require, among
other things, maintenance of certain financial ratios and limit amounts of
additional debt and repurchases of common stock. In October 1998, the Company
completed an amendment of its financial covenants included in the Credit
Agreement, retroactive to September 30, 1998. The Company was in compliance with
all such covenants at September 30, 1998.
The Company entered into interest rate swap agreements in May 1997 on $300
million of floating rate debt. These agreements expire in $100 million
increments in May 1999, November 1999 and May 2000, and provide for fixed rates
at 6.4% plus 3/4 to 3%. The fair value of the swap agreements are not
recognized in the condensed consolidated financial statements.
18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY (CONTINUED)
As part of the Reorganization Transactions, the Company issued $17.7
million of its Preferred Stock to Ventas as part of the consideration for its
healthcare operations and assets. The Company subsequently loaned officers of
the Company approximately 90% of the funds required ($15.9 million) to purchase
the Preferred Stock from Ventas.
Management believes that cash flows from operations and amounts available
under the Revolving Credit Facility are sufficient to meet the Company's future
expected liquidity needs. Working capital totaled $348.1 million at September
30, 1998 compared to $445.1 million at December 31, 1997. At September 30, 1998,
available borrowings under the Revolving Credit Facility approximated $279
million.
The Company has reduced outstanding borrowings by $281.5 million since the
Reorganization Transactions, primarily through proceeds of the sale of Atria
common stock and improved working capital liquidity. The Company's ratio of
debt to debt and equity improved to 46.8% at September 30, 1998 from 53.9% at
May 1, 1998. Management intends to further reduce the Company's leverage
through, among other things, the continued sale of non-strategic assets and, in
1999, a substantial reduction in capital expenditures.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $191.5 million for the
first nine months of 1998 compared to $202.1 million for the same period of
1997. Planned capital expenditures in 1998 (excluding acquisitions) are
expected to approximate $275 million to $285 million and include expenditures
related to nursing center renovations and improvements, information systems and
administrative facilities. Management believes that its capital expenditure
program is adequate to expand, improve and equip existing facilities. At
September 30, 1998, the estimated cost to complete and equip construction in
progress approximated $46 million.
In connection with its analysis of the Budget Act, management determined to
suspend all acquisition and development activities and terminate the
construction of substantially all of its development properties. Accordingly,
management believes that future sales of these properties to Ventas in
accordance with the Development Agreement will be limited.
During 1997, the Company expended approximately $359.4 million and $615.6
million in connection with the TheraTx Merger and the Transitional Merger,
respectively. These purchases were financed primarily through borrowings under
a prior credit facility. See Notes 5 and 6 of the Notes to Condensed
Consolidated Financial Statements for a discussion of these transactions.
The Company also expended $16.0 million for the acquisition of new
facilities (and related healthcare businesses) and previously leased nursing
centers in the first nine months of 1998 compared to $36.6 million for the same
period in 1997. The Company does not anticipate acquiring additional healthcare
facilities over the next 12 months.
Capital expenditures were financed primarily through internally generated
funds and, in 1997, from the issuance of long-term debt. The Company intends to
finance any future capital expenditures with internally generated funds and
long-term debt. Sources of capital include available borrowings under the
Revolving Credit Facility, public or private debt and equity.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
HEALTHCARE LEGISLATION
Healthcare is one of the largest industries in the United States and
continues to attract much legislative interest and public attention. The Budget
Act, enacted in August 1997, contains extensive changes to the Medicare and
Medicaid programs intended to reduce the projected amount of increase in
payments under those programs by $115 billion and $13 billion, respectively,
over the next five years. Under the Budget Act, annual growth rates for Medicare
will be reduced from over 10% to approximately 7.5% for the next five years
based on specific program baseline projections from the last five years.
Virtually all spending reductions will come from providers and changes in
program components. The Budget Act affects reimbursement systems for each of the
Company's lines of business.
The Budget Act reduced payments made to the Company's hospitals by reducing
incentive payments pursuant to the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"), allowable costs for capital expenditures and bad debts, and
payments for services to patients transferred from a PPS hospital. The
reductions in allowable costs for capital expenditures became effective October
1, 1997. The reductions in the TEFRA incentive payments and allowable costs for
bad debts became effective between May 1, 1998 and September 1, 1998 with
respect to the Company's hospitals. The reductions for payments for services to
patients transferred from a PPS hospital became effective October 1, 1998. The
Budget Act also established PPS for nursing centers for cost reporting periods
beginning on or after July 1, 1998. During the first three years, the per diem
rates for nursing centers will be based on a blend of facility-specific costs
and Federal costs. Thereafter, the per diem rates will be based solely on
Federal costs. The rates for such services were made available by HCFA on May
5, 1998. The payments received under PPS cover all services for Medicare
patients, including all ancillary services, such as respiratory therapy,
physical therapy, occupational therapy, speech therapy and certain covered
drugs.
The Budget Act is impacting adversely the Company's hospital business by
reducing the payments previously described. The TEFRA limits have not had a
material adverse effect on the Company's results of operations, and the Company
does not expect that the TEFRA limits will have a material adverse effect on its
results of operations in 1998. The reductions in the TEFRA incentive payments,
which became effective between May 1, 1998 and September 1, 1998 with respect to
the Company's hospitals, are having an adverse impact on hospital revenues and
may impact adversely the Company's ability to develop additional long-term care
hospitals.
Over the long term, management believes that PPS may benefit the Company's
nursing center operations because (i) management believes that the average
acuity levels of its patients will exceed the national average (which should
result in increased payments per patient day) and (ii) the Company expects to
benefit from its ability to reduce the cost of providing ancillary services to
patients in its facilities. As the nursing center industry adapts to the cost
containment measures inherent in PPS, management believes that the volume of
ancillary services provided per patient day to nursing center patients could
decline. In addition, as a result of these changes, many nursing centers may
elect to provide ancillary services to their patients through internal staff and
will no longer contract with outside parties for ancillary services. For these
reasons and others, since the enactment of the Budget Act, sales of new
contracts have declined and may continue to decline subject to the Company's
success in implementing its Vencare comprehensive, full service contracts sales
strategy.
In January 1998, HCFA issued rules changing Medicare reimbursement
guidelines for therapy services provided by the Company (including the
rehabilitation contract therapy business acquired as part of the TheraTx
Merger). Under the new rules, HCFA established salary equivalency limits for
speech and occupational therapy services and revised limits for physical and
respiratory therapy services. The limits are based on a blend of data from wage
rates for hospitals and nursing centers and include salary, fringe benefit and
expense factors. Rates are defined by specific geographic market areas, based
upon a modified version of the hospital wage index. The new limits are effective
for services provided on or after April 10, 1998 and are impacting negatively
Vencare operating
20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
HEALTHCARE LEGISLATION (CONTINUED)
results in 1998. The Company will continue to charge client nursing centers in
accordance with the revised guidelines until such nursing centers transition to
PPS. Under the new system, the reimbursement for these services provided to
nursing center patients is a component of the total reimbursement allowed per
nursing center patient and the salary equivalency guidelines are not applicable.
Most of the Company's client nursing centers are expected to transition to PPS
on or before January 1, 1999.
There also continues to be state legislative proposals that would impose
more limitations on government and private payments to providers of healthcare
services such as the Company. Many states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures and to
make certain changes to private healthcare insurance. Some states also are
considering regulatory changes that include a moratorium on the designation of
additional long-term care hospitals and changes in the Medicaid reimbursement
system applicable to the Company's hospitals. There are also a number of
legislative proposals including cost caps and the establishment of Medicaid
prospective payment systems for nursing centers. Moreover, by repealing the
Boren Amendment, the Budget Act eases existing impediments on the states'
ability to reduce their Medicaid reimbursement levels.
There can be no assurance that the Budget Act, new salary equivalency
rates, future healthcare legislation or other changes in the administration or
interpretation of governmental healthcare programs will not have a material
adverse effect on the Company's liquidity, financial condition or results of
operations.
Medicare revenues as a percentage of total revenues were 34% and 33% for
the nine months ended September 30, 1998 and 1997, respectively, while Medicaid
percentages of revenues approximated 26% and 27% for the respective periods.
YEAR 2000
The year 2000 ("Y2K") issue is a result of computer programs and embedded
computer chips using two digits rather than four digits to define the applicable
year. Without corrective action, computer programs and embedded chips could
potentially recognize the date ending in "00" as the year 1900 rather than 2000,
causing many computer applications to fail or to create erroneous results.
Certain of the Company's information technology systems ("IT") and non-IT
systems such as building infrastructure components (e.g. alarm systems, HVAC,
computer equipment and phone systems) and medical devices are affected by the
Y2K issue. The Company has developed a comprehensive compliance program to
manage the Y2K issue.
In response to the Y2K issue, the Company established five teams to
address Y2K issues in the following specific areas: (i) IT software and
hardware; (ii) third party relationships; (iii) facility components; (iv)
medical equipment; and (v) telephone systems. Each team is responsible for all
phases of the Company's Y2K compliance program for both IT and non-IT systems in
its designated area.
The Company's Y2K compliance program consists of five phases: (i) business
assessment; (ii) inventory and assessment; (iii) remediation and testing; (iv)
implementation and rollout; and (v) post-implementation. The business assessment
phase identified potential Y2K issues confronting the Company. The inventory and
assessment phase consists of a company-wide assessment of all facility systems
and components, medical devices, and IT software and hardware. During the
remediation and testing phase, the Company is repairing, upgrading or replacing
any non-compliant IT and non-IT systems. Additionally, the Company is performing
verification and validation testing of IT and non-IT systems that have been
remediated and those the Company believes are Y2K compliant. For IT and non-IT
systems that are internally developed, the Company verifies compliance status
directly with the
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
development staff and performs validation testing to confirm its status. For IT
and non-IT systems that are purchased from outside vendors, the Company is
requesting written assurances of compliance directly from the vendors. When
non-compliant systems are identified, the Company will either replace, upgrade
or remediate the system. The implementation and rollout phase involves the
installation of the new financial information and patient accounting systems and
any IT or non-IT systems that have been remediated and tested to the Company's
corporate office and its facilities. The final phase, post-implementation,
involves finalizing the documentation of the Y2K program and any corrective
efforts surrounding date issues associated with the year 2000 being a leap year.
The Company has employed and will continue to employ external consultants to
assist it through each of the phases.
All phases of the compliance program are on schedule to meet target
completion dates. The progress of each phase is being monitored by management
and periodically reported to the Audit and Compliance Committee of the Board of
Directors. The following chart depicts the Company's target completion dates and
the status of each phase as of September 30, 1998:
- --------------------------------------------------------------------------------
APPROXIMATE PERCENTAGE
PHASE TARGET COMPLETION DATE COMPLETED
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Business Assessment May 1998 100%
- --------------------------------------------------------------------------------
Inventory and Assessment December 1998 65%
- --------------------------------------------------------------------------------
Remediation and Testing June 1999 30%
- --------------------------------------------------------------------------------
Implementation and Rollout November 1999 20%
- --------------------------------------------------------------------------------
Post-implementation April 2000 0%
- --------------------------------------------------------------------------------
The implementation and rollout phase will involve the installation of the
new financial information and patient accounting systems beginning in the first
quarter of 1999. Substantially all of the current systems are being remediated
in the event of unanticipated delays in the implementation of the new systems.
The following chart depicts, by designated area, the percentage of the
Company's IT and non-IT systems that have been tested and verified Y2K compliant
as of September 30, 1998:
APPROXIMATE PERCENTAGES
DESIGNATED AREA TESTED Y2K COMPLIANT
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IT Software and Hardware 40%
- --------------------------------------------------------------------------------
Third Party Relationships Assessment in process
- --------------------------------------------------------------------------------
Facility Components Assessment in process
- --------------------------------------------------------------------------------
Medical Equipment 40%
- --------------------------------------------------------------------------------
Telephone Systems 75%
- --------------------------------------------------------------------------------
For Y2K issues involving third parties, the Company has separated these
issues between significant business partners (e.g. financial intermediaries and
insurance companies) and the Company's significant suppliers and vendors (e.g.
medical supplies, utilities, food, etc.). The Company anticipates that its
assessment of third party compliance will be completed by year end. The Company
also is developing guidelines for facilities to determine the Y2K compliance
status of local business partners and suppliers.
At this stage in the Company's compliance program, the Company has
identified three critical risks caused by the Y2K issue: (i) unanticipated
delays in the implementation and rollout of the new financial information and
patient accounting systems; (ii) unanticipated system failures by third party
reimbursement sources including government payers and intermediaries; and (iii)
unanticipated system failures by third party suppliers and vendors which could
affect patient care.
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
The failure by the Company to achieve the target completion dates of its
compliance program could cause a business interruption in its financial
information and other systems. As previously discussed, the Company instituted
a plan to replace substantially all of the Company's financial information and
patient accounting systems before the year 2000. This effort was initiated to
consolidate the Company's current systems and to respond to the changes created
by the Budget Act. The new systems configuration and development efforts are
scheduled to be completed during the first quarter of 1999. At that point, the
Company will begin installing the new systems in its facilities and plans to
complete the installation by November 1999. If the rollout of the new financial
information and patient accounting systems experience unanticipated delays, the
Company plans to deploy additional implementation teams to accelerate the
process through the use of internal and, if necessary, external personnel.
The Company derives a substantial portion of its revenues from the Medicare
and Medicaid programs. The Company relies on these entities for accurate and
timely reimbursement of claims, often through the use of electronic data
interfaces. The Company believes that while many commercial insurance carriers
will be Y2K compliant, Federal and state agencies are more likely to have system
failures caused by Y2K issues. The Company is contacting all of its significant
reimbursement sources to determine their Y2K compliance status in order to make
a determination of this potential risk. The Company has not received assurance
that systems used by Medicare and Medicaid will be Y2K compliant. The failure
of information systems of Federal and state governmental agencies and other
third party payers could have a material adverse effect on the Company's
liquidity and financial condition.
The Company also has initiated communications with its critical suppliers
and vendors. The Company is evaluating information provided by third party
vendors and is conducting independent testing of critical systems and
applications. In most cases, the Company is relying on information being
provided to it by such third parties. While the Company is attempting to
evaluate the information provided, there can be no assurance that in all
instances accurate information is being provided.
The Company is developing contingency plans to address the most critical
risks raised by the Y2K issue. These contingency plans will cover all IT and
non-IT systems for each of the five designated areas. Substantially all
critical financial information and patient accounting systems currently in place
are being remediated to be Y2K compliant in the event of an unanticipated delay
in the implementation of the Company's new systems. As the Company contacts
third party reimbursement sources, it is developing contingency plans to receive
temporary reimbursement in the event of system failures by these entities.
The Company's contingency plans also cover failures by suppliers and
vendors. The Company's data network employs a variety of techniques such as
alternative routing, redundant equipment and dual backup to avoid system
failures. Each of the Company's facilities has a facility-specific emergency
preparedness manual to handle emergency situations such as a loss of utility
services or supplies. Local emergency plans also are being updated as Y2K
related risks associated with the facility are identified.
Management is currently implementing a plan to replace substantially all of
the Company's financial information and patient accounting systems before the
year 2000 at a cost of approximately $45 million. A substantial portion of these
costs will be capitalized and amortized over seven years. Including the costs of
the new financial information and patient accounting systems, the total Y2K
program costs are currently estimated to be approximately $66 million, of which
the Company has expended approximately $10 million through September 30, 1998. A
majority of the costs related solely to Y2K compliance will be expensed as
incurred. The costs of the new financial information and patient accounting
systems and the additional Y2K costs are expected to be funded through operating
cash flows and available borrowings under the Revolving Credit Facility. The
Company does not expect to incur any material information system costs other
than the new financial information and patient accounting systems and Y2K
compliance program during the remainder of 1998 and 1999.
23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 (CONTINUED)
Management's analysis of the Y2K issues affecting the Company is based on
information currently available and information provided from third party
vendors and suppliers. Due to the inherent uncertainties related to Y2K
compliance, there can be no assurance that the Company has accurately or timely
assessed all Y2K issues or that the estimated costs to remediate the Y2K
issues will not be exceeded. As noted above, the Company has not yet
completed its assessment of all Y2K issues and its estimate of the costs it may
incur may change as it receives more complete information. The Company's
ability to identify and remediate critical Y2K issues and the availability and
cost of external resources will impact the Company's total Y2K costs and the
impact of Y2K on the Company's results of operations.
Although the Company is assessing the readiness of the Medicare and
Medicaid programs and other third party payers and preparing contingency plans,
there can be no guarantee that the failure of these third parties to remediate
their systems to be Y2K compliant will not have a material adverse effect on the
Company.
OTHER INFORMATION
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. Resolution of litigation and other loss
contingencies is not expected to have a material adverse effect on the Company's
liquidity, financial position or results of operations. See Note 13 of the
Notes to Condensed Consolidated Financial Statements.
As discussed in Note 4 of the Notes to Condensed Consolidated Financial
Statements, on December 31, 1997, the Company was required to change the method
of computing earnings per common share on a retroactive basis. The change in
calculation method did not have a material impact on previously reported
earnings per common share.
Certain statements contained in this Form 10-Q, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "will," "may," "might," and words of similar import, and
statements regarding business strategy and plans constitute forward-looking
statements within the meaning of the Private Securities Litigation Perform Act
of 1995. Such forward-looking statements are based on management's current
expectations and involve known and unknown risks, uncertainties and other
factors, many of which the Company is unable to predict or control, that may
cause the Company's actual results or performance to be materially different
from any future results or performance expressed or implied by such forward-
looking statements. Such factors include, among others, the following: general
economic and business conditions, both nationally, and in the regions in which
the Company operates; existing laws and governmental regulations and changes in,
or the failure to comply with, laws and governmental regulations; legislative
proposals for healthcare reform; changes in Medicare and Medicaid payment
levels; liability and other claims asserted against the Company; competition;
changes in business strategy or development plans; the ability to attract or
retain qualified personnel; the Company's significant indebtedness; the
availability and terms of capital to fund the expansion of the Company's
business; the impact of Y2K issues; and other factors referenced in the
Company's other filings made with the Securities and Exchange Commission. The
Company cautions investors that any forward-looking statements made by the
Company are not guarantees as future performance. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
24
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 QUARTERS
-----------------------------------
FIRST SECOND THIRD NINE MONTHS
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues.......................................... $ 823,316 $ 778,706 $ 718,115 $2,320,137
--------- --------- --------- ----------
Salaries, wages and benefits...................... 480,364 459,808 415,365 1,355,537
Supplies.......................................... 76,052 77,832 69,069 222,953
Rent.............................................. 24,135 59,076 75,063 158,274
Other operating expenses.......................... 134,922 156,736 108,097 399,755
Depreciation and amortization..................... 35,470 28,571 25,425 89,466
Interest expense.................................. 37,195 28,394 22,294 87,883
Investment income................................. (1,180) (1,130) (990) (3,300)
--------- --------- --------- ----------
786,958 809,287 714,323 2,310,568
--------- --------- --------- ----------
Income (loss) before income taxes................. 36,358 (30,581) 3,792 9,569
Provision for income taxes........................ 17,477 (7,129) (33,790) (23,442)
--------- --------- --------- ----------
Income (loss) from operations..................... 18,881 (23,452) 37,582 33,011
Extraordinary loss on extinguishment
of debt, net of income tax benefit............. - (77,937) - (77,937)
--------- --------- --------- ----------
Net income (loss)..................... 18,881 (101,389) 37,582 (44,926)
Preferred stock dividend requirements............. - (177) (266) (443)
--------- --------- --------- ----------
Income (loss) available to
common stockholders............... $ 18,881 $(101,566) $ 37,316 $ (45,369)
========= ========= ========= ==========
Earnings (loss) per common share:
Basic:
Income (loss) from operations............... $ 0.28 $ (0.35) $ 0.55 $ 0.48
Extraordinary loss on
extinguishment of debt................... - (1.15) - (1.15)
--------- --------- --------- ----------
Net income (loss)..................... $ 0.28 $ (1.50) $ 0.55 $ (0.67)
========= ========= ========= ==========
Diluted:
Income (loss) from operations............... $ 0.28 $ (0.35) $ 0.54 $ 0.48
Extraordinary loss on
extinguishment of debt................... - (1.15) - (1.15)
--------- --------- --------- ----------
Net income (loss)..................... $ 0.28 $ (1.50) $ 0.54 $ (0.67)
========= ========= ========= ==========
Shares used in computing earnings
(loss) per common share:
Basic....................................... 67,448 67,651 68,389 67,833
Diluted..................................... 67,857 67,651 68,554 68,103
</TABLE>
25
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 QUARTERS
------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $680,696 $778,295 $844,740 $812,273 $3,116,004
-------- -------- -------- -------- ----------
Salaries, wages and benefits..................... 396,573 449,806 479,962 461,712 1,788,053
Supplies......................................... 66,033 77,328 81,148 78,631 303,140
Rent............................................. 18,948 21,783 23,954 24,789 89,474
Other operating expenses......................... 109,786 118,935 131,977 129,629 490,327
Depreciation and amortization.................... 24,372 29,479 33,385 36,629 123,865
Interest expense................................. 10,660 20,674 34,773 36,629 102,736
Investment income................................ (1,567) (1,746) (1,759) (985) (6,057)
-------- -------- -------- -------- ----------
624,805 716,259 783,440 767,034 2,891,538
-------- -------- -------- -------- ----------
Income before income taxes....................... 55,891 62,036 61,300 45,239 224,466
Provision for income taxes....................... 21,909 25,026 24,398 18,005 89,338
-------- -------- -------- -------- ----------
Income from operations........................... 33,982 37,010 36,902 27,234 135,128
Extraordinary loss on extinguishment
of debt, net of income tax benefit............ (2,259) (1,590) (346) - (4,195)
-------- -------- -------- -------- ----------
Net income................................. $ 31,723 $ 35,420 $ 36,556 $ 27,234 $ 130,933
======== ======== ======== ======== ==========
Earnings per common share:
Basic:
Income from operations..................... $ 0.49 $ 0.53 $ 0.53 $ 0.40 $ 1.96
Extraordinary loss on
extinguishment of debt.................. (0.03) (0.02) - - (0.06)
-------- -------- -------- -------- ----------
Net income............................ $ 0.46 $ 0.51 $ 0.53 $ 0.40 $ 1.90
======== ======== ======== ======== ==========
Diluted:
Income from operations..................... $ 0.48 $ 0.52 $ 0.52 $ 0.40 $ 1.92
Extraordinary loss on
extinguishment of debt.................. (0.03) (0.02) (0.01) - (0.06)
-------- -------- -------- -------- ----------
Net income........................... $ 0.45 $ 0.50 $ 0.51 $ 0.40 $ 1.86
======== ======== ======== ======== ==========
Shares used in computing earnings
per common share:
Basic...................................... 68,929 69,194 69,519 68,048 68,938
Diluted.................................... 70,207 71,016 71,266 68,613 70,359
</TABLE>
26
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1998 QUARTERS
----------------------------------------
FIRST SECOND THIRD NINE MONTHS
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES (IN THOUSANDS):
Hospitals............................................. $ 246,365 $ 239,312 $ 226,846 $ 712,523
Nursing centers....................................... 434,190 413,600 389,414 1,237,204
Vencare............................................... 169,773 151,567 138,121 459,461
---------- ---------- ---------- ----------
850,328 804,479 754,381 2,409,188
Elimination........................................... (27,012) (25,773) (36,266) (89,051)
---------- ---------- ---------- ----------
$ 823,316 $ 778,706 $ 718,115 $2,320,137
========== ========== ========== ==========
HOSPITAL DATA:
End of period data:
Number of hospitals................................ 62 61 58
Number of licensed beds............................ 5,313 5,301 5,051
Revenue mix %:
Medicare........................................... 60 59 62 60
Medicaid........................................... 8 10 10 9
Private and other.................................. 32 31 28 31
Patient days:
Medicare........................................... 173,967 162,991 154,483 491,441
Medicaid........................................... 28,535 31,422 30,618 90,575
Private and other.................................. 45,747 43,974 43,100 132,821
---------- ---------- ---------- ----------
248,249 238,387 228,201 714,837
========== ========== ========== ==========
NURSING CENTER DATA:
End of period data:
Number of nursing centers.......................... 305 296 292
Number of licensed beds............................ 39,960 39,094 38,578
Revenue mix %:
Medicare........................................... 34 31 26 30
Medicaid........................................... 41 43 47 44
Private and other.................................. 25 26 27 26
Patient days:
Medicare........................................... 408,002 374,244 354,285 1,136,531
Medicaid........................................... 1,949,544 1,939,521 1,935,464 5,824,529
Private and other.................................. 692,932 677,607 666,407 2,036,946
---------- ---------- ---------- ----------
3,050,478 2,991,372 2,956,156 8,998,006
========== ========== ========== ==========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare single service contracts......... 3,639 3,513 3,083
Number of Vencare full service contracts........... 99 106 112
---------- ---------- ----------
3,738 3,619 3,195
========== ========== ==========
</TABLE>
27
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
OPERATING DATA
(UNAUDITED)
<TABLE>
<CAPTION>
1997 QUARTERS
--------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES (IN THOUSANDS):
Hospitals................................. $ 154,900 $ 165,794 $ 233,993 $ 231,142 $ 785,829
Nursing centers........................... 404,253 432,325 445,943 439,895 1,722,416
Vencare................................... 119,046 182,016 183,187 158,222 642,471
Atria..................................... 14,217 16,982 - - 31,199
---------- ---------- ---------- ---------- -----------
692,416 797,117 863,123 829,259 3,181,915
Elimination............................... (11,720) (18,822) (18,383) (16,986) (65,911)
---------- ---------- ---------- ---------- -----------
$ 680,696 $ 778,295 $ 844,740 $ 812,273 $ 3,116,004
========== ========== ========== ========== ===========
HOSPITAL DATA:
End of period data:
Number of hospitals.................... 38 58 60 60
Number of licensed beds................ 3,325 5,107 5,302 5,273
Revenue mix %:
Medicare............................... 64 61 65 62 63
Medicaid............................... 10 9 8 7 8
Private and other...................... 26 30 27 31 29
Patient days:
Medicare............................... 106,646 107,799 152,640 153,059 520,144
Medicaid............................... 21,705 23,170 24,339 27,276 96,490
Private and other...................... 31,502 32,358 42,265 45,051 151,176
---------- ---------- ---------- ---------- -----------
159,853 163,327 219,244 225,386 767,810
========== ========== ========== ========== ===========
NURSING CENTER DATA:
End of period data:
Number of nursing centers.............. 314 311 310 309
Number of licensed beds................ 40,942 40,869 40,608 40,383
Revenue mix %:
Medicare............................... 32 32 33 31 32
Medicaid............................... 43 42 42 44 43
Private and other...................... 25 26 25 25 25
Patient days:
Medicare............................... 406,642 417,336 400,798 385,694 1,610,470
Medicaid............................... 1,962,287 2,039,999 2,078,236 2,071,981 8,152,503
Private and other...................... 663,575 734,593 729,289 731,808 2,859,265
---------- ---------- ---------- ---------- -----------
3,032,504 3,191,928 3,208,323 3,189,483 12,622,238
========== ========== ========== ========== ===========
ANCILLARY SERVICES DATA:
End of period data:
Number of Vencare single
service contracts................... 4,946 4,524 4,160 3,846
Number of Vencare full
service contracts................... - - - 31
---------- ---------- ---------- ----------
4,946 4,524 4,160 3,877
========== ========== ========== ==========
</TABLE>
28
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 21, 1998, the Company was notified by the HCFA Administrator in
Chicago, Illinois and the State of Wisconsin that the Medicare and Medicaid
certification for Mt. Carmel Health & Rehabilitation Center (the "Facility")
would be terminated effective November 6, 1998. The State of Wisconsin
Department of Health and Family Services also informed the Company that the
Facility's license will be terminated as of February 13, 1999. The Facility has
appealed that termination. These actions resulted from the Facility's failure
to attain substantial compliance with Federal and state requirements by an
October 12, 1998 deadline. On November 6, 1998, the Company filed an action
against HCFA in Federal District Court in Washington, D.C. and obtained an order
enjoining HCFA and its agents, including the State of Wisconsin, from
terminating the Facility's certification and from relocating any of the
Facility's residents.
As previously reported, the Circuit Court of the Thirteenth Judicial
Circuit for Hillsborough County, Florida, issued a temporary injunction order on
April 7, 1998 against the Company's nursing center in Tampa, Florida which
ordered the nursing center to cease notifying and requiring the discharge of any
resident. The Company discontinued requiring the discharge of any resident from
its Tampa nursing center on April 7, 1998. Following the conduct of a complaint
survey at the facility, AHCA imposed a fine of $270,000 for related regulatory
violations. In addition, HCFA imposed a fine of $113,000. The Company appealed
both the AHCA and HCFA fines and has settled both appeals. The Company submitted
an acceptable plan of correction at the Tampa nursing center and was informed by
AHCA that "immediate jeopardy" no longer existed. The threatened termination of
the Tampa nursing center's Medicare provider agreement was reversed.
As previously reported, Transitional announced that it had been advised
that it was the target of a Federal grand jury investigation being conducted by
the USAO arising from activities of Transitional's formerly owned dialysis
business on June 6, 1997. The investigation involves an alleged illegal
arrangement in the form of a partnership which existed from June 1987 to June
1992 between Damon Corporation and Transitional. Transitional spun off its
dialysis business, now called Vivra Incorporated, on September 1, 1989. In
January 1998, the Company was informed that no criminal charges would be filed
against the Company. The Company has been added as a defendant to a previously
pending qui tam lawsuit against the other partners related to the partnership's
former Medicare billing practices. The Company intends to defend vigorously the
action.
The Company's subsidiary, TheraTx, is a defendant and counterclaimant in an
action pending in state court in Jacksonville, Florida entitled Highland Pines
Nursing Center, Inc., et al. v. TheraTx, Incorporated, et al. The plaintiffs
claim that they are entitled to up to $40 million in earnout compensation from
TheraTx's purchase of several businesses from the plaintiffs in 1995 and to
damages from related tort claims. TheraTx has asserted fraud counterclaims
against the plaintiffs relating to the original purchase. The case is scheduled
for trial to begin in March 1999. The Company is defending the action
vigorously.
The Company has been informed by the U.S. Department of Justice that it is
the subject of ongoing investigations into various aspects of its Medicare
billing practices. The Company is cooperating fully in the investigations.
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients and others in the ordinary course of its business.
In addition, the Company is subject regularly to various regulatory inquiries,
investigations and audits by Federal and state agencies that oversee various
healthcare regulations and laws.
29
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
The Company is unable to predict the ultimate outcome of pending litigation
and regulatory investigations. In addition, there can be no assurance that HCFA
or other regulatory agencies will not initiate additional investigations related
to the Company's business in the future, nor can there be any assurance that the
resolution of any litigation or investigations, either individually or in the
aggregate, would not have a material adverse impact on the Company's liquidity,
financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.1 TheraTx Retirement Savings Plan Amended and Restated effective
as of January 1, 1998.
10.2 THC Retirement Savings Plan Amended and Restated effective as
of January 1, 1998.
10.3 Amendment No. 2 to Vencor, Inc. 401(k) Master Trust Agreement
by and between the Company and Wachovia Bank of North Carolina,
N.A.
10.4 Employment Agreement dated as of July 28, 1998 between Vencor
Operating, Inc. and W. Bruce Lunsford.
10.5 Form of Employment Agreement dated as of July 28, 1998 between
Vencor Operating, Inc. and certain executive officers of Vencor
Operating, Inc.
10.6 Form of Non-Transferable Full Recourse Secured Promissory Note
dated as of September 28, 1998 made by certain executive
officers in favor of Vencor Operating, Inc.
27.1 Financial Data Schedule (included only in filings submitted
under the Electronic Data Gathering, Analysis, and Retrieval
system).
27.2 Restated Financial Data Schedule (included only in filings
submitted under the Electronic Data Gathering, Analysis, and
Retrieval system).
(b) REPORTS ON FORM 8-K:
The Company filed a Current Report on Form 8-K on September 8, 1998
reporting the appointment of Richard A. Schweinhart as Senior Vice President and
Chief Financial Officer. The Form 8-K also reported the resignation of W. Earl
Reed, III as Chief Financial Officer. The Company filed a Current Report on Form
8-K on September 16, 1998 announcing the receipt of $177.5 million from the sale
of approximately 88% of its ownership in Atria resulting from the merger of
Atria with Kapson Senior Quarters Corp. The Company also filed a Current Report
on Form 8-K on September 28, 1998 announcing the appointment of Edward L. Kuntz
as President and Chief Operating Officer and the resignation of Michael R. Barr
as Chief Operating Officer.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VENCOR, INC.
Date: November 16, 1998 /s/ W. BRUCE LUNSFORD
- ------------------------ -----------------------------------------
W. Bruce Lunsford
Chairman of the Board and
Chief Executive Officer
Date: November 16, 1998 /s/ RICHARD A. SCHWEINHART
- ------------------------ -----------------------------------------
Richard A. Schweinhart
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
31
<PAGE>
EXHIBIT 10.1
THERATX RETIREMENT SAVINGS PLAN
Amended and Restated Effective
as of
January 1, 1998
<PAGE>
TABLE OF CONTENTS
Page No.
--------
INTRODUCTION 1
DEFINITIONS 2
Section 1.1 ADJUSTMENT 2
Section 1.2 ANNUAL ADDITIONS 2
Section 1.3 BENEFICIARY 2
Section 1.4 BOARD 2
Section 1.5 BREAK(S) 2
Section 1.6 CODE 3
Section 1.7 COMMITTEE 3
Section 1.8 COMPANY 3
Section 1.9 COMPANY STOCK FUND 3
Section 1.10 COMPENSATION 3
Section 1.11 CONSTRUCTION 3
Section 1.12 DEFINED BENEFIT PLAN 3
Section 1.13 DEFINED CONTRIBUTION PLAN 3
Section 1.14 EFFECTIVE DATE 3
Section 1.15 EMPLOYEE 3
Section 1.16 EMPLOYER 3
Section 1.17 EMPLOYER CONTRIBUTIONS 4
Section 1.18 ENTRY DATE 4
Section 1.19 ERISA 4
Section 1.20 FIDUCIARY 4
Section 1.21 [INTENTIONALLY LEFT BLANK] 4
Section 1.22 HIGHLY COMPENSATED EMPLOYEE 4
Section 1.23 HOUR OF SERVICE 4
Section 1.24 INDIVIDUAL ACCOUNT 6
Section 1.25 INVESTMENT FUND 7
Section 1.26 KEY EMPLOYEE 7
Section 1.27 LIMITATION YEAR 7
Section 1.28 MATCHING CONTRIBUTION ACCOUNT 7
Section 1.29 MATCHING CONTRIBUTIONS 7
Section 1.30 NON-HIGHLY COMPENSATED EMPLOYEE 8
Section 1.31 NORMAL RETIREMENT DATE 8
Section 1.32 PARTICIPANT 8
Section 1.33 PERMISSIVE AGGREGATION GROUP 8
-i-
<PAGE>
Section 1.34 PLAN 8
Section 1.35 PLAN YEAR 8
Section 1.36 [INTENTIONALLY LEFT BLANK] 8
Section 1.37 [INTENTIONALLY LEFT BLANK] 8
Section 1.38 [INTENTIONALLY LEFT BLANK] 8
Section 1.39 PROFIT SHARING CONTRIBUTION ACCOUNT 8
Section 1.40 PROFIT SHARING CONTRIBUTIONS 8
Section 1.41 REQUIRED AGGREGATION GROUP 8
Section 1.42 SALARY REDIRECTION 9
Section 1.43 SALARY REDIRECTION ACCOUNT 9
Section 1.44 SERVICE 9
Section 1.45 TOP HEAVY PLAN 9
Section 1.46 [INTENTIONALLY LEFT BLANK] 10
Section 1.47 TRUST AGREEMENT 10
Section 1.48 TRUST FUND 10
Section 1.49 TRUSTEE 10
Section 1.50 VALUATION DATE 10
PARTICIPATION 11
Section 2.1 ELIGIBILITY REQUIREMENTS 11
Section 2.2 PLAN BINDING 11
Section 2.3 BENEFICIARY DESIGNATION 11
Section 2.4 NOTIFICATION OF INDIVIDUAL ACCOUNT BALANCE 11
CONTRIBUTIONS 12
Section 3.1 SALARY REDIRECTION 12
Section 3.2 MATCHING CONTRIBUTIONS 12
Section 3.3 PROFIT SHARING CONTRIBUTIONS 12
Section 3.4 NONDISCRIMINATION TEST FOR SALARY REDIRECTION 12
Section 3.5 NONDISCRIMINATION TEST FOR OTHER CONTRIBUTIONS 15
Section 3.6 MAXIMUM INDIVIDUAL DEFERRAL 18
Section 3.7 MISTAKE OF FACT 18
Section 3.8 QUALIFIED NONELECTIVE CONTRIBUTIONS 18
Section 3.9 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS
ACT OF 1994 ("USERRA") 19
ALLOCATION TO INDIVIDUAL ACCOUNTS 20
Section 4.1 INDIVIDUAL ACCOUNTS 20
Section 4.2 INVESTMENT OF ACCOUNTS 20
Section 4.3 VALUATION OF ACCOUNTS 21
-ii-
<PAGE>
Section 4.4 TRUSTEE AND COMMITTEE JUDGMENT CONTROLS 23
Section 4.5 MAXIMUM ADDITIONS 23
Section 4.6 CORRECTIVE ADJUSTMENTS 24
Section 4.7 DEFINED CONTRIBUTION AND DEFINED BENEFIT PLAN FRACTION 24
DISTRIBUTIONS 26
Section 5.1 NORMAL RETIREMENT 26
Section 5.2 LATE RETIREMENT 26
Section 5.3 DEATH 26
Section 5.4 [INTENTIONALLY LEFT BLANK] 26
Section 5.5 TERMINATION OF EMPLOYMENT 26
Section 5.6 COMMENCEMENT OF BENEFITS 27
Section 5.7 METHODS OF PAYMENT 28
Section 5.8 BENEFITS TO MINORS AND INCOMPETENTS 29
Section 5.9 UNCLAIMED BENEFITS 30
Section 5.10 PARTICIPANT DIRECTED ROLLOVERS 31
Section 5.11 JOINT AND SURVIVOR OPTIONS 31
WITHDRAWALS 37
Section 6.1 HARDSHIP WITHDRAWAL 37
Section 6.2 OTHER IN-SERVICE WITHDRAWALS 38
Section 6.3 PARTICIPANT LOANS 39
FUNDING 40
Section 7.1 CONTRIBUTIONS 40
Section 7.2 TRUSTEE 40
FIDUCIARIES 41
Section 8.1 GENERAL 41
Section 8.2 EMPLOYER 41
Section 8.3 TRUSTEE 42
Section 8.4 RETIREMENT COMMITTEE 42
Section 8.5 CLAIMS PROCEDURES 43
Section 8.6 RECORDS 44
AMENDMENT AND TERMINATION OF THE PLAN 46
Section 9.1 AMENDMENT OF THE PLAN 46
Section 9.2 TERMINATION OF THE PLAN 46
Section 9.3 RETURN OF CONTRIBUTIONS 46
-iii-
<PAGE>
MISCELLANEOUS 47
Section 10.1 GOVERNING LAW 47
Section 10.2 CONSTRUCTION 47
Section 10.3 ADMINISTRATION EXPENSES 47
Section 10.4 PARTICIPANT'S RIGHTS 47
Section 10.5 NONASSIGNABILITY 47
Section 10.6 MERGER, CONSOLIDATION OR TRANSFER 48
Section 10.7 COUNTERPARTS 48
Section 10.8 ADMINISTRATIVE MISTAKE 48
TOP HEAVY PLAN PROVISIONS 49
Section 11.1 GENERAL 49
Section 11.2 MINIMUM CONTRIBUTION 49
Section 11.3 SUPER TOP HEAVY PLAN 49
Section 11.4 [INTENTIONALLY LEFT BLANK] 50
Section 11.5 COMPENSATION 50
PROVISIONS RELATED TO EMPLOYERS INCLUDED IN THE PLAN 51
Section 12.1 GENERAL 51
Section 12.2 SINGLE PLAN 51
Section 12.3 VENCOR, INC. AS AGENT 51
Section 12.4 WITHDRAWAL OF EMPLOYER 51
Section 12.5 TERMINATION OF PARTICIPATION 52
-iv-
<PAGE>
INTRODUCTION
Effective April 1, 1992, TheraTx, Inc. and related companies, adopted a
401(k) plan and trust, which was later amended and restated effective January 1,
1996 and further amended various times ("Original Plan").
Effective January 1, 1998, except as otherwise provided, the Employer
desires to amend and restate the Original Plan in its entirety as the TheraTx
Retirement Savings Plan ("Plan"), and to fund such Plan via a Master Trust
Agreement with other plans sponsored by members of the Vencor, Inc. affiliated
companies as of October 6, 1998 (the insurance contract funding arrangement
created by the Original Plan is to remain in place until that date), as
hereinafter set forth, in order to provide benefits for certain of its eligible
employees.
Effective January 1, 1998 participation in the Plan was frozen, and all
contributions to the Plan ceased. The Plan is intended to correspond, as nearly
as possible, to other retirement plans maintained by Vencor, Inc. and its
related companies. a controlled group to which the Employers that participate in
this Plan now belongs.
It is intended that this Plan, together with the Trust Agreement, meet all
the pertinent requirements of the Internal Revenue Code of 1986, as amended
("Code") and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and shall be interpreted, wherever possible, to comply with the terms
of said laws, as amended, and all regulations and rulings issued thereunder. It
is also intended that this Plan shall be a profit sharing plan under Code
Section 401(a).
ARTICLE 1
DEFINITIONS
Section 1.1 ADJUSTMENT means the net increases and decreases in the market
value of the Trust Fund during a Plan Year or other period
exclusive of any contribution or distribution during such year or
other period. Such increases and decreases shall include such
items as realized or unrealized investment gains and losses and
investment income, and may include expenses of administering the
Trust Fund and the Plan.
-1-
<PAGE>
Section 1.2 ANNUAL ADDITIONS means for any Employee in any Plan Year, the sum
of Employer Contributions, Salary Redirection and forfeitures
allocated to the Employee's Individual Account. Amounts allocated
to an individual medical account, as defined in Section 415(1) of
the Code, which is part of a pension or annuity plan maintained by
the Company are treated as Annual Additions to a Defined
Contribution Plan. Also, amounts derived from contributions paid
or accrued which are attributable to post-retirement medical
benefits allocated to the separate account of a Key Employee as
required by Section 419(d) of the Code, maintained by the Company,
are treated as Annual Additions to a Defined Contribution Plan.
Section 1.3 BENEFICIARY means any person designated by a Participant to
receive such benefits as may become payable hereunder after the
death of such Participant, provided, however, that a married
Participant may not name as a Beneficiary someone other than the
Participant's spouse unless the spouse consents in writing to such
designation, which consent shall be acknowledged by a Plan
representative or by a notary public.
Section 1.4 BOARD means the Board of Directors of Vencor, Inc. except as
otherwise provided.
Section 1.5 BREAK(S) IN SERVICE means a Plan Year during which an Employee has
been credited with fewer than 501 Hours of Service due to
termination of employment. Solely to determine whether a Break in
Service has occurred, an Employee who is absent from work for
maternity or paternity reasons or on a military or Family and
Medical Leave Act leave of absence shall receive credit for the
Hours of Service which would otherwise have been credited to such
Employee but for such absence, or in any case in which Hours of
Service cannot be determined, eight Hours of Service per day of
such absence. In no event will the number of Hours of Service
credited to an Employee pursuant to the immediately preceding
sentence exceed 501. For purposes of this Section, an absence from
work for maternity or paternity reasons means an absence (1) by
reason of the pregnancy of the Employee, (2) by reason of the
birth of a child of the Employee, (3) by reason of the placement
of a child with the Employee in connection with the adoption of
such child by the Employee, or (4) for purposes of caring for such
child for a period beginning immediately following such birth or
placement. The Hours of Service credited under this paragraph
shall be credited (1) in the Plan Year or other applicable
computation period in which the absence begins if the crediting is
necessary to prevent a Break in Service in that period, or (2) in
all other cases, in the next following Plan Year or other
applicable computation period.
-2-
<PAGE>
Section 1.6 CODE means the Internal Revenue Code of 1986, as amended.
Section 1.7 COMMITTEE means the Retirement Committee provided for in Article
8.
Section 1.8 COMPANY means TheraTx, Inc. and all of the legal entities which
had Employees who made contributions to the Original Plan and
which were part of the controlled group or affiliated service
group with TheraTx, Inc. pursuant to the provisions of Code
Sections 414(b), (c), (m) or (o) prior to TheraTx, Inc.'s
acquisition by Vencor, Inc.
Section 1.9 COMPANY STOCK FUND means the Investment Fund defined in Section
4.2(a)(5).
Section 1.10 COMPENSATION shall not be relevant to operation of the Plan on or
after January 1, 1998, due to participation and contributions then
being frozen.
Section 1.11 CONSTRUCTION. The words and phrases defined in this Article when
used in this Plan with an initial capital letter shall have the
meanings specified in this Article, unless a different meaning is
clearly required by the context. Any words herein used in the
masculine shall be read and construed in the feminine where they
would so apply. Words in the singular shall be read and construed
as though used in the plural in all cases where they would so
apply.
Section 1.12 DEFINED BENEFIT PLAN means a plan established and qualified under
Section 401 of the Code, except to the extent it is, or is treated
as, a Defined Contribution Plan.
Section 1.13 DEFINED CONTRIBUTION PLAN means a plan which is established and
qualified under Section 401 of the Code, which provides for an
individual account for each participant therein and for benefits
based solely on the amount contributed to each participant's
account and any income, expenses, gains or losses (both realized
and unrealized) which may be allocated to such account.
Section 1.14 EFFECTIVE DATE means April 1, 1992, the original effective date of
the Plan. The effective date of this amended and restated Plan is
January 1, 1998, except as otherwise provided.
Section 1.15 EMPLOYEE has the same meaning as given in the Original Plan. An
Employee shall cease to be an Employee, and therefore be eligible
for a distribution from this Plan, only as allowed by Section
401(k) of the Code and regulations thereunder.
-3-
<PAGE>
Section 1.16 EMPLOYER means any Company whose employees became eligible to
participate in the Plan prior to January 1, 1998.
Section 1.17 EMPLOYER CONTRIBUTIONS means Matching Contributions and Profit
Sharing Contributions made to the Trust Fund by the Employer.
Salary Redirection shall not be included in the term Employer
Contribution when used in this Plan.
Section 1.18 ENTRY DATE has no meaning in this Plan on or after January 1,
1998.
Section 1.19 ERISA means the Employee Retirement Income Security Act of
1974, as amended.
Section 1.20 FIDUCIARY means the Employer, the Trustee, the Committee and any
individual, corporation, firm or other entity which assumes, in
accordance with Article 8, responsibilities of the Employer, the
Trustee or the Committee respecting management of the Plan or the
disposition of its assets.
Section 1.21 [INTENTIONALLY LEFT BLANK]
Section 1.22 HIGHLY COMPENSATED EMPLOYEE means any Employee of the Employer who
(i) was a five percent owner of the Company during the current
Plan Year or the preceding Plan Year, or (ii) during the preceding
Plan Year, received Compensation from the Company in excess of
$80,000 (as such amount may be adjusted from time to time by the
Secretary of the Treasury) and, if the Employer elects, was in the
top-paid group of employees for such Plan Year.
The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of
employees in the top-paid group and the Compensation that is
considered, shall be made in accordance with section 414(q) of the
Code and the regulations thereunder, taking into account, when
appropriate, Code Section 410(b)(6)(C)'s acquisition transition
rule which allows exclusion of certain Employees from
consideration.. The determination of Highly Compensated Employees
shall be determined on a Company-wide basis and shall not be
determined on an Employer by Employer or plan by plan basis.
Section 1.23 HOUR OF SERVICE means any hour for which an Employee is paid or
entitled to payment by the Company during the Plan Year or other
applicable computation period (1) for the performance of duties
for the Company; (2) on account of a period of time during which
no duties are performed (irrespective of whether the employment
relationship has terminated); and (3) as a result of a back pay
award which has been agreed to or made by the Company,
irrespective of mitigation of
-4-
<PAGE>
damages, to the extent that such hour has not been previously
credited under item (1) or item (2) preceding.
(a) The number of Hours of Service to be credited on account of
a period of time during which no duties are performed
(including hours resulting form a back pay award) shall be
determined as follows. If the payment which is made or due
is calculated on the basis of units of time, the number of
Hours of Service to be credited shall be the number of
regularly scheduled working hours included in the units of
time on the basis of which the payment is calculated; if an
Employee does not have a regular work schedule, the number
of Hours of Service to be credited shall be calculated on
the basis of an eight hour work day. If the payment which is
made or due is not calculated on the basis of units of time,
the number of Hours of Service to be credited shall be
calculated by dividing the amount of the payment by the
Employee's most recent hourly rate of compensation before
the period during which no duties were performed, determined
as follows:
(1) If the Employee's compensation is determined on the
basis of an hourly rate, such hourly rate shall be the
Employee's most recent hourly rate of compensation.
(2) If the Employee's compensation is determined on the
basis of a fixed rate for a specified period of time
other than hours, his hourly rate of compensation shall
be his most recent rate of compensation for the
specified period of time, divided by the number of
hours regularly scheduled for the performance of duties
during such period of time; if an Employee does not
have a regular work schedule, his hourly rate of
compensation shall be calculated on the basis of an
eight hour work day.
(3) If the Employee's compensation is not determined on the
basis of a fixed rate for a specified period of time,
his hourly rate of compensation shall be the lowest
hourly rate of compensation paid to Employees in his
job classification, or, if no Employees in his job
classification have an hourly rate of compensation, the
minimum wage in effect under Section 6(a)(1) of the
Fair Labor Standard Act of 1938, as amended.
(b) In no event shall the application of the terms of Section
1.23(a) result in crediting an Employee with a number of
Hours of Service during the
-5-
<PAGE>
period which is greater than the number of hours regularly
scheduled for the performance of duties. If an Employee has
no regular work schedule, the number of Hours of Service to
be credited to him shall not exceed the number which would
be credited calculated on the basis of an eight hour work
day.
(c) No Employee shall be credited with more than 501 Hours of
Service as a result of the application of Section 1.23(a)
for any single continuous period during which he performs no
duties, regardless of whether such period extends beyond one
Plan Year or other applicable computation period.
(d) The Plan Year or other applicable computation period to
which Hours of Service shall be credited shall be determined
as follows:
(1) Except as hereinafter provided, Hours of Service
credited in accordance with item (1) of the first
paragraph of this Section shall be credited in the Plan
Year or other applicable computation period in which
the duties were performed.
(2) Except as hereinafter provided, Hours of Service
credited in accordance with item (2) of the first
paragraph of this Section shall be credited: if
calculated on the basis of units of time, to the Plan
Year or Plan Years or other applicable computation
periods in which the period during which no duties are
performed occurs, beginning with the first unit of time
to which the payment relates; otherwise to the Plan
Year or other applicable computation period in which
the period during which no duties are performed occurs,
provided that if the period during which no duties are
performed extends beyond one (1) Plan Year or other
applicable computation period, such Hours of Service
shall be allocated between not more than the first two
(2) Plan Years or other applicable computation periods
on any reasonable basis consistently applied.
(3) Except as hereinafter provided, Hours of Service
credited in accordance with item (3) of the first
paragraph of this Section shall be credited to the Plan
Year or other applicable computation period to which
the award or agreement for back pay pertains rather
than to the Plan Year or other applicable computation
period in which the award, agreement, or payment is
made.
-6-
<PAGE>
(4) Hours of Service to be credited to an Employee in
connection with a period of no more than 31 days which
extends beyond one Plan Year or other applicable
computation period may be credited to the first or the
second Plan Year or other applicable computation
period, provided that such crediting is done on a
reasonable and nondiscriminatory basis.
(e) Nothing in this Section shall be construed to alter, amend,
modify, invalidate, impair or supersede any law of the
United States or any rule or regulation issued under any
such law, including but not limited to laws regarding
eligibility and benefit accrual during and after a military
leave of absence. The nature and extent of any credit for
Hours of Service under this Section shall be determined
under such law including Department of Labor regulation
Section 2530.200b-2.
Section 1.24 INDIVIDUAL ACCOUNT means the detailed record kept of the amounts
credited or charged to each Participant in accordance with the
terms hereof. Such Individual Account is comprised of the
following accounts if any contributions have been made to those
accounts: a Profit Sharing Contribution Account, a Salary
Redirection Account (formerly, Elective Account), a Rollover
Account, and a Matching Contribution Account. Rollover Account
shall have the meaning given that term in the Original Plan
Section 1.25 INVESTMENT FUND means an investment fund established pursuant
to Section 4.2.
Section 1.26 KEY EMPLOYEE shall mean any Employee, former Employee or
beneficiary thereof in an Internal Revenue Service qualified plan
adopted by the Company who at any time during the Plan Year or any
of the four preceding Plan Years is
(a) an officer of the Company having an annual compensation from
the Company during the Plan Year greater than 50% of the
amount in effect under Code Section 415(b)(1)(A) for the
calendar year in which such Plan Year ends;
(b) one of the 10 Employees having an annual compensation from
the Company for a Plan Year of more than the limitation in
effect under Code Section 415(c)(1)(A) for the calendar year
in which such Plan Year ends and owning (or considered as
owning within the meaning of Code Section 318) both more
than a 1/2% interest, and the largest interest in the
Company;
-7-
<PAGE>
(c) a five percent owner of the Company; or
(d) a one percent owner of the Company having an annual
compensation from the Company for a Plan Year of more than
$150,000.
(e) For purposes of this Section, compensation mean compensation
as defined in Code Section 415.
(f) This definition shall be interpreted consistent with Code
Section 415 and rules and regulations issued thereunder.
Further, such law and regulations shall be controlling in
all determinations under this definition, inclusive of any
provisions and requirements stated thereunder but
hereinabove absent.
Section 1.27 LIMITATION YEAR means the 12 month period beginning on January
1 and ending on December 31.
Section 1.28 MATCHING CONTRIBUTION ACCOUNT means that portion of a
Participant's Individual Account attributable to (i) Matching
Contributions allocated to such Participant prior to January 1,
1998 and (ii) the Participant's proportionate share, attributable
to his Matching Contribution Account, of the Adjustments, reduced
by any distributions from such Account.
Section 1.29 MATCHING CONTRIBUTIONS means contributions made to the Trust Fund
by the Employer to match Salary Redirection Contributions.
Section 1.30 NON-HIGHLY COMPENSATED EMPLOYEE means, for any Plan Year, a
Participant who is not a Highly Compensated Employee.
Section 1.31 NORMAL RETIREMENT DATE means the first day of the month coincident
with or next following the Participant's 65th birthday. The Normal
Retirement Age shall be age 65.
Section 1.32 PARTICIPANT means any Employee who became a Participant as
provided in the Original Plan and whose Individual Account has not
been distributed in full.
Section 1.33 PERMISSIVE AGGREGATION GROUP means the Required Aggregation Group
and each other plan or plans of the Company that are not required
to be included in the Required Aggregation Group, and which, if
treated as being part of such group, would not cause such group to
fail to meet the requirements of Code Sections 401(a) and 410.
-8-
<PAGE>
Section 1.34 PLAN means the TheraTx Retirement Savings Plan.
Section 1.35 PLAN YEAR means the 12 month period beginning on January 1 and
ending on December 31.
Section 1.36 [INTENTIONALLY LEFT BLANK]
Section 1.37 [INTENTIONALLY LEFT BLANK]
Section 1.38 [INTENTIONALLY LEFT BLANK]
Section 1.39 PROFIT SHARING CONTRIBUTION ACCOUNT means that portion of a
Participant's Individual Account attributable to (i) Profit
Sharing Contributions (if any) allocated to such Participant
pursuant to the Original Plan, and (ii) the Participant's
proportionate share attributable to his Profit Sharing
Contribution Account, of the Adjustments, reduced by any
distributions from such Account.
Section 1.40 PROFIT SHARING CONTRIBUTIONS mean contributions made to the
Trust Fund by the Employer pursuant to the Original Plan.
Section 1.41 REQUIRED AGGREGATION GROUP means
(1) each plan of the Company in which a Key Employee is a
participant; and
(2) each other plan of the Company which enables any plan in
subsection (1) to meet the requirements of Code Sections
401(a)(4) or 410, and
(3) each terminated plan maintained by the Company within the
last five years ending on the determination date for the
Plan Year in question and which, but for the fact that it
terminated, would be part of a Required Aggregation Group
for such Plan Year.
Section 1.42 SALARY REDIRECTION means contributions made to the Trust Fund
by the Employer pursuant to the Original Plan based on Participant
elections to defer.
Section 1.43 SALARY REDIRECTION ACCOUNT means that portion of a Participant's
Individual Account attributable to (i) Salary Redirection amounts
made on his behalf pursuant to the Original Plan, and (ii) the
Participant's proportionate share, attributable to his Salary
Redirection Account, of the Adjustments, reduced by any
distributions or withdrawals from such Account.
-9-
<PAGE>
Section 1.44 SERVICE has no meaning now that eligibility in the Plan is frozen
and all Participants as of December 31, 1998 are 100% in their
Individual Accounts, except with respect to a Participant who
received a distribution of the vested portion of his Individual
Account and is rehired within the time prescribed by Section
5.5(c), in which case the restoration provisions of that Section
shall control.
Section 1.45 TOP HEAVY PLAN means any plan under which, as of any determination
date (the last day of the preceding Plan Year), the present value
of the cumulative accrued benefits under the plan for Key
Employees exceeds 60% of the present value of cumulative accrued
benefits under the Plan for all Employees. For purposes of this
definition the following provisions shall apply:
(a) If such plan is a Defined Contribution Plan, the present
value of cumulative accrued benefits shall be deemed to be
the market value of all Employee accounts under the plan,
other than voluntary deductible Employee contributions. If
such plan is a Defined Benefit Plan, the present value of
cumulative accrued benefits shall be the lump sum present
value determined pursuant to the plan. Moreover, the present
value of the cumulative accrued benefits shall be increased
by the amount of all Plan distributions made with respect to
a current or former employee during the five year period
ending on the determination date, including distributions
under a terminated plan which, if it had not been
terminated, would have been required to be included in a
Required Aggregation Group.
(b) A plan shall be considered to be a Top Heavy Plan for any
Plan Year if, on the last day of the preceding Plan Year,
the above rules were met. For the first Plan Year that the
Plan shall be in effect, the determination of whether the
Plan is a Top Heavy Plan shall be made as of the last day of
such Plan Year.
(c) Each plan of the Company required to be included in a
Required Aggregation Group shall be treated as a Top Heavy
Plan if such group is a top heavy group.
(d) With regard to a Participant or former Participant who (i)
has not performed any service for the Company at any time
during the five year period ending on the determination
date, or (ii) was formerly a Key Employee, but who is not a
Key Employee on the determination date, the present value of
the cumulative Accrued Benefit for such Participant or
-10-
<PAGE>
former Participant shall not be taken into account for the
purposes of determining whether this Plan is a Top Heavy
Plan.
(e) This definition shall be interpreted consistent with Code
Section 416 and rules and regulations issued thereunder.
Further, such law and regulation shall be controlling in all
determinations under this definition inclusive of any
provisions and requirements stated thereunder but
hereinabove absent.
Section 1.46 [INTENTIONALLY LEFT BLANK]
Section 1.47 TRUST AGREEMENT means the agreement entered into between Vencor,
Inc. and the Master Trustee pursuant to Article 7 hereof.
Section 1.48 TRUST FUND means the trust fund created in accordance with
Article 7 hereof.
Section 1.49 TRUSTEE means such individual or corporation as shall be
designated in the Trust Agreement to hold in trust any assets of
the plan for the purpose of providing benefits under the Plan, and
shall include any successor trustee designated thereunder.
Section 1.50 VALUATION DATE means each date on which the U.S. securities
trading markets are open on or after October 6, 1998. As of each
Valuation Date the Trust Fund shall be valued at fair market
value.
-11-
<PAGE>
ARTICLE 2
PARTICIPATION
Section 2.1 ELIGIBILITY REQUIREMENTS
Effective January 1, 1998, no new Employees shall become eligible
to participate in this Plan.
Section 2.2 PLAN BINDING
A Participant shall be bound by the terms of this Plan and the
Trust Agreement, including all amendments to the Plan and the
Trust Agreement made in the manner herein authorized.
Section 2.3 BENEFICIARY DESIGNATION
Upon commencing participation, each Participant shall designate a
Beneficiary on forms furnished by the Committee. Such Participant
may then from time to time change his Beneficiary designation by
written notice to the Committee and, upon such change, the rights
of all previously designated Beneficiaries to receive any benefits
under this Plan shall cease. A married Participant may not name as
a Beneficiary someone other than the Participant's spouse unless
the spouse consents in writing to such other designation, which
consent shall be acknowledged by a Plan representative or by a
notary public. The consent of the spouse must be limited to a
specific Beneficiary and must be obtained each time the
Beneficiary is changed. If, at the time of a Participant's death
while benefits are still outstanding, his named Beneficiary does
not survive him, the benefits shall be paid to his named
contingent Beneficiary. If a deceased Participant is not survived
by either a named Beneficiary or contingent Beneficiary (or if no
Beneficiary was effectively named), the benefits shall be paid in
a single sum to the person or in equal parts to the persons in the
first of the following classes of successive preference
beneficiaries then surviving: the Participant's (i) surviving
spouse, unless the spouse disclaims the benefit, (ii) natural and
adopted children, (iii) parents, (iv) brothers and sisters, (v)
estate. If the Beneficiary or contingent Beneficiary is living at
the death of the Participant, but such person dies prior to
receiving the entire death benefit, the remaining portion of such
death benefits shall be paid in a single sum to the estate of such
deceased Beneficiary or contingent Beneficiary.
-12-
<PAGE>
Section 2.4 NOTIFICATION OF INDIVIDUAL ACCOUNT BALANCE
After the end of each calendar quarter, or more frequently as
determined by the Committee, the Committee shall notify each
Participant of the amount of his share in the Adjustments for the
period just completed, and the new balance of his Individual
Account.
-13-
<PAGE>
ARTICLE 3
CONTRIBUTIONS
Section 3.1 SALARY REDIRECTION
A Participant may have, prior to January 1, 1998, elected to have
Salary Redirection (formerly called Elective Contributions) made
on his behalf by agreeing to salary reduction contributions from
cash wages payable.
Section 3.2 MATCHING CONTRIBUTIONS
No Matching Contributions shall be made on or after January 1,
1998, except with respect to Salary Redirection deposited for
prior periods.
Section 3.3 PROFIT SHARING CONTRIBUTIONS
No Profit Sharing Contributions may be made for periods beginning
on or after January 1, 1998.
Section 3.4 NONDISCRIMINATION TEST FOR SALARY REDIRECTION
Effective January, 1997:
(a) Periodically as determined by the Committee, the Employer
shall check the actual deferral percentages against the
tests identified below.
(b) The term "eligible Participants," for purposes of this
Section shall mean all Participants under this Plan who are
eligible to make Salary Redirection contributions during the
Plan Year for which the tests are being made.
(c) The term "actual deferral percentage," means the average of
the percentages (calculated separately for each eligible
Participant) of Salary Redirection and Qualified Nonelective
Contributions on behalf of each eligible Participant divided
by the compensation of the eligible Participant.
(d) The term "compensation" for purposes of this Section shall
include Compensation is defined in Treasury Regulations
(S)1.414(s)-1T(c)(1) and (2) as modified by Treasury
Regulation (S)1.414(s)-1T(c)(4), applied
-14-
<PAGE>
uniformly to all employees for any Plan Year or portion
thereof during which they are eligible to participate.
Compensation for purposes of this Section shall be limited
pursuant to Code Section 401(a)(17).
(e) Only one of the following two tests need be satisfied not to
have a reduction in Salary Redirection.
Test I - The actual deferral percentage for the current
Plan Year of the group of Highly Compensated
Employees is not more than the actual deferral
percentage for the preceding Plan Year of all
Non-Highly Compensated Employees, multiplied
by 1.25.
Test II - The excess of the actual deferral percentage for
the current Plan Year of the group of Highly
Compensate Employees over the actual deferral
percentage for the preceding Plan Year of all
Non-Highly Compensated Employees is not more than
two percentage points, and the actual deferral
percentage for the current Plan Year of the group
of Highly Compensated Employees is not more than
the actual deferral percentage for the preceding
Plan Year of all Non-Highly Compensated
Employees, multiplied by two. If Test II in
Subsection 3.5(e) is used in testing other
contributions pursuant to that Section, Test II
under this Section shall be limited as provided
for in Code Section 401(m)(9) and the regulations
issued by the Secretary of the Treasury of
notices issued by the Internal Revenue Service.
If a multiple use of Test II occurs, such
multiple use shall be corrected by reducing
either the actual deferral percentage or actual
contribution percentage of the Highly Compensated
Employee in an amount calculated in the manner
provided in Section 3.4(f) or Section 3.5(f).
Notwithstanding the above, the Committee may elect to
perform the tests using the Average Actual Deferral
Percentage for the current Plan Year for Participants who
are Non-Highly Compensated Employees for the current Plan
Year rather than using prior Plan Year data, provided that
if such election is made for the 1998 or a later Plan Year,
the test must continue to be performed based on current Plan
Year data until the election is changed in a manner
prescribed by the Secretary of the Treasury. Unless the
Committee elects to use current Plan Year data, the
Participants taken into account in determining the prior
Plan Year's
-15-
<PAGE>
Average Actual Deferral Percentage for Non-Highly
Compensated Employees are those individuals who were Non-
Highly Compensated Employees during the preceding Plan Year,
without regard to the Participants' status during the
current Plan Year (i.e., a Participant who was a Non-Highly
Compensated Employee for the preceding Plan Year is included
in the calculation as a Non-Highly Compensated Employee even
if the Participant is no longer employed by the Employer or
has become a Highly Compensated Employee for the current
Plan Year). For the 1997 Plan Year, the determination of who
was a Non-Highly Compensated Employee for the 1996 Plan Year
shall be made using the definition of Non-Highly Compensated
Employee in effect prior to this restatement.
For purposes of these tests, the actual deferral percentage
for any Participant who is a Highly Compensated Employee for
the Plan Year and who is eligible to have Salary Redirection
allocated to his accounts under two or more arrangements
described in Code Section 401(k) that are maintained by the
Company, shall be determined as if such Salary Redirection
were made under a single arrangement.
(f) If neither Test I nor Test II is initially satisfied for any
Plan Year, the Plan shall nevertheless be deemed to comply
with the requirements of Section 401(k)(3)(A)(ii) of the
Code for such Plan Year if, before the last day of the
following Plan Year, the amount of any excess contribution
(and any income thereon) is distributed to Participants who
are Highly Compensated Employees. The amount to be returned
shall be determined as follows:
[i] Calculate the dollar amount that would be returned to
each Highly Compensated Employee if the Average
Deferral Percentage of Highly Compensated Employees
were reduced by returning Salary Redirection
contributions to such Participants, beginning with
those Highly Compensated Employees' with the highest
Actual Deferral Percentage and only to the extent
necessary to meet either test above.
[ii] Determine the total of the dollar amounts calculated in
Step [i], and return that amount to Highly Compensated
Employees in accordance with Steps [iii] and [iv] below
by distributing Salary Redirection contributions as
Excess Contributions. Excess Contributions, adjusted
for any income or loss allocable thereto, may be
distributed before the end of the following Plan Year
to
-16-
<PAGE>
Participants on whose behalf such Excess Contributions
were made for such preceding Plan Year. Excess
Contributions shall be adjusted for income or loss,
and the income or loss allocable to Excess
Contributions shall be determined by multiplying the
income or loss allocable to the Participant's Salary
Redirection contributions for the Plan Year by a
fraction, the numerator of which is the Excess
Contribution on behalf of the Participant for the
preceding Plan Year and the denominator of which is
the value of the Participant's Salary Redirection
Account on the last day of the preceding Plan Year.
[iii] Reduce the Salary Redirection contributions of the
Highly Compensated Employee with the highest dollar
amount of Salary Redirection contributions by the
amount required to cause that Highly Compensated
Employee's Salary Redirection contributions to equal
the dollar amount of the Salary Redirection
contributions of the Highly Compensated Employee with
the next highest dollar amount of Salary Redirection
Contributions. However, if a lesser reduction would
equal the total remaining excess contributions to be
distributed, the lesser reduction amount is
distributed.
[iv] If the total amount distributed is less than the total
excess contributions from Step [ii], Step [iii] is
repeated.
If it is necessary to reduce the matched Salary Redirection,
the Participant shall nevertheless receive from the Plan a
distribution equal to the vested portion of the Employer
Matching Contribution plus any income thereon that would
have been allocated to him had such reduction in
contribution not been necessary. Any remaining portion of
the Matching Contribution shall be forfeited in accordance
with the provisions of Section 5.5.
Section 3.5 NONDISCRIMINATION TEST FOR OTHER CONTRIBUTIONS
Effective January, 1997:
(a) Periodically as determined by the Committee, the Employer
shall check the actual contribution percentages against the
tests identified below.
(b) The term "eligible Participants," for purposes of this
Section, shall mean all Participants under this Plan who are
eligible to make Salary
-17-
<PAGE>
Redirection contributions, and receive Matching
Contributions during the Plan Year for which the tests are
being made.
(c) The term "actual contribution percentage," means the average
of the following percentages (calculated separately for each
eligible Participant): Matching Contributions (and Salary
Redirection to the extent elected by the Employer and
permitted by Regulations under Code Section 401(m)) on
behalf of each eligible Participant divided by compensation
of the eligible Participant.
(d) The term "compensation" for purposes of this Section shall
include compensation as defined in Treasury Regulations
(S)1.414(s)-1T(c)(1) and (2) as modified by Treasury
Regulation (S)1.414(s)-1T(c)(4), applied uniformly to all
employees for any plan year or portion thereof during which
they are eligible to participate. Compensation for purposes
of this Section shall be limited pursuant to Code Section
401(a)(17).
(e) Only one of the following two test need be satisfied not to
have a reduction in contribution tested pursuant to this
Section.
Test I - The actual contribution percentage for the
current Plan Year of the group of Highly
Compensated Employees is not more than the actual
contribution percentage for the preceding Plan
Year of all Non-Highly Compensated Employees,
multiplied by 1.25.
Test II - The excess of the actual contribution percentage
for the current Plan Year of the group of Highly
Compensated Employees over the actual
contribution percentage for the preceding Plan
Year of all Non-Highly Compensated Employees is
not more than two percentage points, and the
actual contribution percentage for the current
Plan Year of the group of Highly Compensated
Employees is not more than the actual
contribution percentage for the preceding Plan
Year of all Non-Highly Compensated Employees,
multiplied by two. If Test II in Subsection
3.4(e) is used in testing Salary Redirection
pursuant to that Section, Test II under this
Section shall be limited as provided for in Code
Section 401(m)(9) and the regulations issued by
the Secretary of the Treasury of notices issued
by the Internal Revenue Service. If a multiple
use of Test II occurs, such
-18-
<PAGE>
multiple use shall be corrected by reducing
either the actual deferral percentage or actual
contribution percentage of the Highly Compensated
Employee in an amount calculated in the manner
provided in Section 3.4(f) or Section 3.5(f).
Notwithstanding the above, the Committee may elect to
perform the tests using the Average Contribution Percentage
for the current Plan Year for Participants who are Non-
Highly Compensated Employees for the current Plan Year
rather than using prior Plan Year data, provided that if
such election is made for the 1998 or a later Plan Year, the
test must continue to be performed based on current Plan
Year data until the election is changed in a manner
prescribed by the Secretary of the Treasury. Unless the
Committee elects to use current Plan Year data, the
Participants taken into account in determining the prior
Plan Year's Average Contribution Percentage for Non-Highly
Compensated Employees are those individuals who were Non-
Highly Compensated Employees during the preceding Plan Year,
without regard to the Participants' status during the
current Plan Year (i.e., a Participant who was a Non-Highly
Compensated Employee for the preceding Plan Year is included
in the calculation as a Non-Highly Compensated Employee even
if the Participant is no longer employed by the Employer or
has become a Highly Compensated Employee for the current
Plan Year). For the 1997 Plan Year, the determination of who
was a Non-Highly Compensated Employee for the 1996 Plan Year
shall be made using the definition of Non-Highly Compensated
Employee in effect prior to this restatement.
For purposes of these tests, the actual contribution
percentage for any Participant who is a Highly Compensated
Employee for the Plan Year and who is eligible to have
Matching Contributions allocated to his accounts under two
or more arrangements described in Code Section 401(k) that
are maintained by the Company, shall be determined as if
such Matching Contributions were made under a single
arrangement.
(f) If neither Test I nor Test II is initially satisfied for any
Plan Year, the Plan shall nevertheless be deemed to comply
with the requirements of Section 401(m) of the Code for such
Plan Year if, before the last day of the following Plan
Year, the amount of any excess contribution (and any income
thereon) is distributed to Participants who are Highly
Compensated Employees or if forfeitable, is forfeited. The
amount to be reduced shall be determined as follows:
-19-
<PAGE>
[i] Calculate the dollar amount by which each Highly
Compensated Employee's Employer Matching contributions
must be reduced to pass wither test, beginning with
those Highly Compensated Employees with the highest
Contribution Percentage and only to the extent
necessary to meet either test above.
[ii] Determine the total of the dollar amounts calculated
in Step [i], and reduce Highly Compensated Employees'
Employer Matching contributions in accordance with
Steps [iii] and [iv] below.
[iii] Reduce the Employer Matching contributions of the
Highly Compensated Employee with the highest dollar
amount of Employer Matching contributions by the
amount required to cause that Highly Compensated
Employee's Employer Matching contributions to equal
the dollar amount of the Employer Matching
contributions of the Highly Compensated Employee with
the next highest dollar amount of Employer Matching
contributions. However, if a lesser reduction would
equal the total remaining excess contributions to be
distributed, the lesser reduction amount is
distributed.
[iv] If the total amount distributed is less than the total
excess contributions from Step [ii], Step [iii] is
repeated.
If it is necessary to reduce the Employer Matching
Contribution, the Participant shall nevertheless receive
from the Plan a distribution equal to the vested portion of
the Employer Matching Contribution plus any income thereon
that would have been allocated to him had such reduction in
contribution not been necessary. Any remaining portion of
the Matching Contribution shall be forfeited in accordance
with the provisions of Section 5.5.
(g) This Section shall be governed by Code Section 401(m) and
any rules or regulations issued pursuant thereto, which may
include coordination and/or combination with allocations
subject to Section 401(k) in accordance with Treasury
Regulation Section 1.401(m)-2.
Section 3.6 MAXIMUM INDIVIDUAL DEFERRAL
-20-
<PAGE>
A Participant shall not be permitted to have his Employer redirect
an amount in excess of $9,500 in any calendar year pursuant to the
provisions of Section 3.1, including contributions to any other
plan of the Company which are made pursuant to Code Section
402(a)(8). The $9,500 limitation shall be adjusted in accordance
with cost-of-living adjustments made by the Secretary of the
Treasury pursuant to Code Section 402(g)(5). If any amount is
redirected pursuant to Section 3.1 in excess of this limit (as
adjusted), or if a Participant notifies the Committee, in writing,
by March 1 following the close of the taxable year of the amount
contributed in excess of this limit (as adjusted) to all plans
pursuant to Code Section 402(a)(8), such amount shall be deemed an
"excess deferral" and the Committee shall direct the Trustee to
distribute to the Participant (not later than the April 15
following the calendar year in which the excess deferral was made)
the amount of the excess deferral plus any income allocable to
such amount.
Section 3.7 MISTAKE OF FACT
If due to a mistake of fact, Employer Contributions to the Trust
Fund for any Plan Year exceed the amount intended to be
contributed, notwithstanding any provision to the contrary, the
Employer, as soon as such mistake of fact is discovered, shall
notify the Trustee. The Employer shall direct that the Trustee
return such excess to the Employer, provided such return is made
within one year of the date on which the Employer made the
contribution.
Section 3.8 QUALIFIED NONELECTIVE CONTRIBUTIONS
The Employer may, as of the end of any calendar quarter, up to and
including the calendar quarter ending December 31, 1997, make a
Qualified Nonelective Contribution to the Trust Fund on behalf of
any Participant. Such Qualified Nonelective Contributions shall be
added to the Salary Redirection Accounts of those Participants and
shall be 100% vested when made, subject to the same distribution
rules as Salary Redirection Contributions, and shall be tested for
nondiscrimination as Salary Redirection Contributions in
accordance with the provisions of Section 3.4.
Section 3.9 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT OF 1994
("USERRA")
Effective December 12, 1994, notwithstanding any provision of this
Plan to the contrary, contributions, benefits and service credit
with respect to qualified military service will be provided in
accordance with Section 414(u) of the Code.
-21-
<PAGE>
Section 414(u) generally provides that an employer maintaining a
plan shall be treated as meeting the requirements of USERRA only
if an employee reemployed under USERRA is treated as not having
incurred a break in service because of the period of military
service, the employee's military service is treated as service
with the employer for vesting and benefit accrual purposes, the
employee is permitted to make additional elective deferrals and
employee contributions in an amount not exceeding the maximum
amount the employee would have been permitted or required to
contribute during the period of military service if the employee
had actually been employed by the employer during that period
("make-up contributions"), and the employee is entitled to any
accrued benefits that are contingent on employee contributions or
elective deferrals to the extent the employee pays the
contributions or elective deferrals to the plan. Make-up
contributions must be permitted during the period that begins on
the date of reemployment and continues for five years or, if less,
three times the period of military service. With respect to make-
up contributions, the employer must make matching contributions
that would have been required if the make-up contributions had
actually been made during the period of military service.
Section 414(u) provides that an employee is treated as receiving
compensation from the employer during the period of military
service equal to the compensation the employee otherwise would
have received from the employer during that period, or, if the
compensation the employee otherwise would have received is not
reasonably certain, the employee's average compensation from the
employer during the period immediately preceding the period of
military service. For purpose of (S) 414(u), USERRA is not treated
as requiring the crediting of earnings to an employee with respect
to any contribution before the contribution is actually made or
requiring any allocation of forfeitures to the employee for the
period of military service.
Section 414(u) generally provides that a contribution that is made
by an employer or employee to an individual account plan or by an
employee to a contributory defined benefit plan, and that is
required under USERRA, is taken into account for purposes of the
limitations of (S) 402(g), 402(h), 403(b), 404(a), 404(h), 408,
415 or 457 in the year to which the contribution relates, not the
year in which the contribution is made. In addition, (S) 414(u)
provides that a plan is not treated as failing to meet the
requirements of (S) 401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11),
401(k)(12), 401(m), 403(b)(12), 408(k)(3), 408(k)(6), 408(p),
410(b), or 416 because of the contribution (or the right to make
the contribution).
-22-
<PAGE>
ARTICLE 4
ALLOCATION TO INDIVIDUAL ACCOUNTS
Section 4.1 INDIVIDUAL ACCOUNTS
The Committee shall establish and maintain an Individual Account
in the name of each Participant to which the Committee shall
credit all amounts allocated to each such Participant pursuant to
Article 3 and the following Sections of this Article.
Section 4.2 INVESTMENT OF ACCOUNTS
(a) Effective October 6, 1998, there shall be established the
following Investment Funds within the Trust Fund:
(1) INTEREST INCOME - A fund generally invested in
investment contracts with banks and insurance companies
to generate interest income returns above the rates
earned by money market funds, while generally
maintaining a stable principal value. This fund may
also be referred to as the Stable Value Fund.
(2) BALANCED FUND - A fund consisting of both fixed income
obligations of the United States Government and its
agencies and of companies other than Vencor, Inc. to
provide protection of principal consistent with an
attractive rate of return, and equity investments other
than the common stock of Vencor, Inc.
(3) GROWTH FUND - A fund consisting primarily of common
stocks with an objective of capital growth over both
the intermediate and long-term.
(4) AGGRESSIVE GROWTH FUND - a fund consisting primarily of
common stocks of companies that are early in their life
cycle and which have the potential to grow
significantly, with the objective to provide long term
capital appreciation without regard to current income.
(5) COMPANY STOCK FUND - a fund consisting primarily of
shares of common stock of Vencor, Inc. and dividends
and distributions attributable to said common stock,
plus temporary investments
-23-
<PAGE>
held pending purchase of additional shares of common
stock of Vencor, Inc.
(b) Each Participant shall have the right to direct the
Committee to invest the cumulative balance in his Individual
Account attributable to Salary Redirection, Prior Plan
Salary Redirection Contributions, Prior Plan Employer
Contributions and current Salary Redirection in increments
of 10% (25% if elections made prior to January 1, 1997, in
which case they continue until a change is made by the
Participant) in the Investment Funds provided in Section
4.2(a). Such direction shall be effected as soon as
practicable after the end of the month, provided the
Participant gives the direction by identity-secured
telephonic instructions (or in writing if telephonic
instructions are impracticable) no later than the 15th day
of the month. Neither the Trustee nor any other Fiduciary
shall be responsible for investment losses resulting from a
Participant's exercise of investment discretion, in
accordance with ERISA Section 404(c).
(c) A Participant who does not make any election under this
Section shall have investments formerly in investment funds
which contain any stocks (other than solely Company Stock)
transferred to the Balanced Fund, and those formerly in
investment funds invested solely in bonds or other fixed
income securities or guaranteed certificate funds
transferred to the Interest Income Fund, subject to further
redirection by the Participant in accordance with the Plan.
Section 4.3 VALUATION OF ACCOUNTS
(a) INDIVIDUAL ACCOUNT. Effective October 6, 1998, as of each
Valuation Date, the Committee shall determine the fair
market value of the Individual Account of each Participant
for each Investment Fund in which the Individual Account is
invested as follows:
(1) The value of the Individual Account of each Participant
as of the last Valuation Date;
(2) Minus the amount of any withdrawals and distributions
made from such account since the last Valuation Date;
(3) Plus any contributions to the Participant's Salary
Redirection Account since the last Valuation Date;
-24-
<PAGE>
(4) Plus any allocation to the Participant's Matching
Contribution Account since the last Valuation Date;
(5) Plus any allocation to the Participant's Profit Sharing
Account since the last Valuation Date;
(6) Plus the Individual Account's proportionate share of
any investment earnings allocated to each Investment
Fund held within the Individual Account since the last
Valuation Date;
(7) Minus the Individual Account's proportionate share of
any investment losses allocated to each Investment Fund
held within the Individual Account since the last
Valuation Date.
(b) INVESTMENT EARNINGS OR LOSSES. The investment earnings (or
losses, if such computation is negative) from the Investment
Funds shall mean the difference between the unit price of
any Investment Fund (other than the Company Stock Fund) from
one business day to the next, and any net gain or loss on
non-mutual fund investments in an Investment Fund, as
reflected by interest payments, dividends, realized and
unrealized gains and losses on securities, other investment
transactions and expenses paid from the fund.
(c) ALLOCATION OF INVESTMENT EARNINGS OR LOSSES. Except as
provided in Section 4.3(e), the investment earnings or
losses from the Trust Fund shall be allocated to the
Individual Account of each Participant invested in the
respective Investment Fund in the ratio of "A" divided by
"B" where "A" is an amount determined pursuant to Section
4.3(d) for the portion of the Individual Account of each
Participant invested in the respective Investment Fund and
"B" is an amount determined pursuant to Section 4.3(d) for
the portion of the Individual Account of all Participants
invested in the respective Investment Fund.
(d) DETERMINATION OF RATIO. For purposes of determining the
ratio is Section 4.3(c), the amounts shall be determined as
follows:
(1) the value of the portion of such Individual Account(s)
in the Investment Fund as of the last Valuation Date;
-25-
<PAGE>
(2) Minus withdrawals and benefit payments to or on behalf of
Participants from the portion of such Individual
Account(s) in the Investment Fund since the last
Valuation Date.
(e) COMPANY STOCK FUND. As of each Valuation Date with respect to
the portion of a Participant's Individual Account invested in
the Company Stock Fund: (i) dividends paid since the preceding
Valuation Date on the number of shares of Vencor, Inc. common
stock held in the Participant's Individual Account invested in
the Company Stock Fund as of the preceding Valuation Date (as
adjusted for any distributions or withdrawals since that date)
shall be added to the portion of the Participant's Individual
Account invested in the Company Stock Fund in the ratio that
the number of said shares of stock held in each Participant's
Individual Accounts as of the preceding Valuation Date (as
adjusted for any distributions or withdrawals since that date)
bears to the total number of said shares of stock held in all
Participants' Individual Accounts as of the preceding
Valuation Date as so adjusted; (ii) any remaining dividends
and other earnings of the Company Stock Fund since the
preceding Valuation Date shall be added to the Individual
Accounts of each Participant in the Company Stock Fund in the
ratio that the non-stock balance held in each Participant's
Individual Account in the Company Stock Fund as of the
preceding Valuation Date (as adjusted for any distributions or
withdrawals since that date, one-half of the Matching
Contributions and one-half of any Salary Redirection
contributions added to such Individual Accounts in the Company
Stock Fund since the preceding Valuation Date) bears to the
total non-stock balance in all Participant's Individual
Accounts in the Company Stock Fund as of the preceding
Valuation Date as so adjusted; and (iii) the shares of Vencor,
Inc. common stock acquired with cash attributable to the
Company Stock Fund since the preceding Valuation Date shall be
added to each Participant's Individual Account in the Company
Stock Fund in the ratio that the non-stock balance held in
each Participant's Individual Account in the Company Stock
Fund as of the preceding Valuation Date (as adjusted for any
distributions, withdrawals, Matching Contributions, Salary
Redirection contributions and earnings and dividends as of the
current Valuation Date) bears to the total non-stock balance
of all Participant's Individual Accounts in the Company Stock
Fund as so adjusted and the cost of the shares so added shall
be subtracted from the non-stock portion of the Participant's
Individual Account held in the Company Stock Fund.
-26-
<PAGE>
Section 4.4 TRUSTEE AND COMMITTEE JUDGMENT CONTROLS
In determining the fair market value of the Trust Fund and of
Individual Accounts, the Trustee shall exercise its best judgment,
and all such determinations of value (in the absence of bad faith)
shall be binding upon all Participants and their beneficiaries.
Section 4.5 MAXIMUM ADDITIONS
Anything herein to the contrary notwithstanding, the total Annual
Additions of a Participant for any Limitation Year when combined
with any similar annual additions credited to the Participant for
the same period from another qualified Defined Contribution Plan
maintained by the Company, shall not exceed the lesser of the
amounts determined pursuant to Section 4.5(a) or (b).
(a) $30,000 or, if larger, 25% of the dollar limitation in effect
under Code Section 415(b)(1)(A) determined by the Commissioner
of Internal Revenue as of January 1 of each year to apply to
the Limitation Year ending with or within that calendar year;
or
(b) 25% of the Participant's compensation received from the
Company for such Limitation Year, as determined pursuant to
Section 415 of the Code.
(c) In the event a Participant is covered by one or more Defined
Contribution Plans maintained by the Company, the maximum
annual additions as noted above shall be decreased in the last
Defined Contribution Plan maintained by the Company in which
he participated to ensure that all such plans will remain
qualified under the Code.
Section 4.6 CORRECTIVE ADJUSTMENTS
In the event that corrective adjustments in the Annual Addition to
any Participant's Individual Account are required as the result of
a reasonable error in estimating a Participant's compensation, the
corrective adjustments shall be made pursuant to and in the order
of the subsections in this Section.
(a) The portion of the Participant's unmatched Salary Redirection
made pursuant to Subsection 3.1(a) shall be returned by
distribution to the Participant, with earnings thereon. Any
amount so returned shall be disregarded for purposes of the
tests in Sections 3.4 and 3.5.
-27-
<PAGE>
(b) The portion of the Participant's matched Salary Redirection
made pursuant to Subsection 3.1(a) and his Matching
Contributions shall be proportionally reduced to insure
compliance with Section 4.5. Any affected Salary Redirection
will be distributed to the Participant and shall not be
considered for purposes of the tests in Sections 3.4 and 3.5.
Any affected Matching Contributions shall be used to reduce
future Matching Contributions.
(c) The Participant's Profit Sharing Contribution shall be reduced
to insure compliance with Section 4.5. Any such amount reduced
shall be allocated as of the end of the next Plan Year among
the Profit Sharing Contribution Accounts of all other
Participants in the same manner as is indicated in Section
3.3.
Section 4.7 DEFINED CONTRIBUTION AND DEFINED BENEFIT PLAN FRACTION
If a Participant is a participant in a Defined Benefit Plan
maintained by the Company, the sum of his defined benefit plan
fraction and his defined contribution plan fraction for any
Limitation Year may not exceed 1.0.
(a) For purposes of this Section, the term "defined contribution
plan fraction" shall mean a fraction the numerator of which is
the sum of all of the Annual Additions of the Participant
under this Plan and any other Defined Contribution Plan
maintained by the Company as of the close of the Limitation
Year and the denominator of which is the sum of the lesser of
the following amounts determined for such Limitation Year and
for each prior Limitation Year of employment with the Company:
(1) the product of 1.25 multiplied by the dollar limitation
in effect under Section 415(c)(1)(A) of the Code; or
(2) the product of 1.4 multiplied by the amount which may be
taken into account under Code Section 415(c)(1)(B) with
respect to each individual under the Plan for such
Limitation Year.
(b) For purposes of this Section, the term "defined benefit plan
fraction" shall mean a fraction, the numerator of which is the
Participant's projected annual benefit (as defined in the
Defined Benefit Plan) determined as of the close of the
Limitation Year and the denominator of which is the lesser of:
-28-
<PAGE>
(1) the product of 1.25 multiplied by the dollar limitation
in effect pursuant to Section 415(b)(1)(A) of the Code
for such Limitation year; or
(2) the product of 1.4 multiplied by the amount which may be
taken into account pursuant to Section 415(b)(1)(B) of
the Code with respect to each individual under the Plan
for such Limitation year.
(c) The limitation on aggregate benefits from a Defined Benefit
Plan and a Defined Contribution Plan which is contained in
Section 2004 of ERISA, as amended, shall be complied with by a
reduction (if necessary) in the Participant's benefits under
the Defined Benefit Plan.
-29-
<PAGE>
ARTICLE 5
DISTRIBUTIONS
Section 5.1 NORMAL RETIREMENT
When a Participant lives to his Normal Retirement Date and retires,
he shall become entitled to the full value of his Individual
Account as soon as practicable after the distribution forms are
completed (or their time for completion has elapsed), at a value
determined as of the date the distribution check is prepared.
Section 5.2 LATE RETIREMENT
A Participant may continue his employment past his Normal
Retirement Date on a year to year basis. He shall continue to be an
active Participant under the Plan. Upon his actual retirement, he
shall become entitled to the full value of his Individual Account
as soon as practicable after the distribution forms are completed
(or their time for completion has elapsed), at a value determined
as of the date of distribution check is prepared.
Section 5.3 DEATH
If a Participant dies while an active Participant under the Plan,
his Beneficiary shall be entitled to the full value of his
Individual Account as soon as practicable after the distribution
forms are completed (or their time for completion has elapsed), at
a value determined as of the date of distribution check is
prepared.
Section 5.4 [INTENTIONALLY LEFT BLANK]
Section 5.5 TERMINATION OF EMPLOYMENT
(a) Any Participant with an Individual Account in the Plan as of
December 31, 1997 shall be 100% vested in the entire Account
as of that date, and upon termination of employment for any
reason a Participant shall be entitled to a benefit equal to
the balance of his Individual Account as soon as practicable
after the distribution forms are completed, at a value
determined as of the date of distribution check is prepared.
(b) A Participant shall always be 100% vested in the balance of
his Salary Redirection Account.
-30-
<PAGE>
(c) A Participant who terminated employment prior to December 31,
1997 with a zero percent vested percentage was deemed to have
received a distribution on the date he terminates employment
pursuant to the Original Plan. If a Participant received a
distribution of the vested portion of his Individual Account
prior to incurring five consecutive Breaks in Service (or said
Participant was zero percent vested in his Individual
Account), the non-vested balance of such terminated
Participant's Individual Account was forfeited as of the date
he received or was deemed to receive said distribution. If a
Participant who has received a distribution (or deemed
distribution) is later rehired before the period described in
subsection 5.5(d) below, the Participant need not repay the
distributed amount, but his Account shall automatically have
the forfeited amount restored at the earlier of (1) the last
day of the Plan Year in which the Participant is rehired, or
(2) the date of a subsequent termination of employment.
Restoration of a forfeiture will come from a special Employer
Contribution.
(d) A terminated Participant who is reemployed and again becomes a
Participant after incurring five or more consecutive Breaks in
Service shall not have any amount forfeited pursuant to this
Section restored to his Individual Account.
(e) Notwithstanding anything to the contrary in this Section 5.5
or in Section 5.6(a), no portion of a Participant's Individual
Account shall be distributed to him until the participant has
separated from service within the meaning of Code Section
401(k)(2)(B), unless the distribution is in connection with an
event described in Code Section 401(k)(10) and the Treasury
Regulations under that Section.
-31-
<PAGE>
Section 5.6 COMMENCEMENT OF BENEFITS
(a) Any benefits payable under this Article shall be paid as soon
as reasonably possible following the actual date of severance,
at the value determined as of the Valuation Date coincident
with or immediately preceding receipt of properly completed
distribution forms from the Participant, subject to the
Participant's consent if his actual date of severance is prior
to Normal Retirement Age and subject to Subsection 5.7(a). In
no event, however, shall payment begin beyond 60 days after
the last day of the Plan Year in which occurs the latest of
(i) the Participant's reaching Normal Retirement Age; (ii) the
10th anniversary of the date the Employee became a
Participant; or (iii) termination of the Participant's
employment. Notwithstanding anything in the Plan to the
contrary and notwithstanding the Participant's lack of
consent, benefits under this Plan shall be paid as soon as
reasonably possible following the later of the Participant's
actual date of severance or his Normal Retirement Date.
(b) Except as required in this Section for a Participant who has
an Individual Account to which Section 5.7(b) or Section
5.6(c) applies, a Participant may defer distribution to a
subsequent date. If the Participant does not consent to a
distribution as provided above, such distribution shall be
made based on the value of the Individual Account as of the
date the check for the distribution is prepared and shall be
delivered as soon as reasonably practical after notice to the
Committee of the election to receive a distribution.
(c) Notwithstanding any other provisions of the Plan, the payment
of a Participant's benefits hereunder shall begin no later
than the April 1 following the calendar year in which the
Participant has both attained age 70 1/2 and has retired,
provided that for 5% owners as defined in Section 416 of the
Code, distribution must begin by April 1 following the
calendar year in which the Participant attains age 70 1/2,
regardless of whether the Participant has retired; and further
provided that, if the Internal Revenue Service in regulations
or other pronouncements provides that eliminating the
automatic distribution from this Plan beginning after age 70
1/2 for a non-5% owner who has not yet separated from service
is a prohibited cut-back of benefits, then a Participant shall
have the option to take a lump sum distribution even while
employed, at the April 1 following attainment of age 70 1/2,
if the Participant so elects in writing, and, if so elected,
shall receive a distribution on or before
-32-
<PAGE>
December 31 of the year after attainment of age 70 1/2, and
again each year thereafter while still employed, shall receive
a similar distribution of all amounts accrued in Accounts of
the Participant since the last such distribution.
(d) Notwithstanding anything in the Plan to the contrary, any
benefit payable to an alternate payee pursuant to a qualified
domestic relations order, as defined in Section 414(p) of the
Code, shall be paid as soon as administratively possible
following the determination that the order meets the
requirements of Section 414(p) of the Code.
(e) Notwithstanding anything in the Plan to the contrary, in the
event a Participant terminates employment for any reason and
recommences employment prior to distribution of his entire
vested account in the Plan, the undistributed portion of his
vested account shall remain in the Plan until his account
again becomes distributable due to a subsequent termination.
Section 5.7 METHODS OF PAYMENT
(a) Subject to Sections 5.11 and 5.12, a Participant or
Beneficiary shall elect a distribution of the Individual
Account in (i) a single lump sum payment in cash, or (ii) in
monthly, quarterly, semiannual or annual cash installments for
a period elected by the Participant which may not exceed the
life expectancy of the Participant and his designated
Beneficiary, or (iii) by purchase of an annuity providing for
payments which extend over the life (or life expectancy) of
the Participant (and the Participant's designated Beneficiary,
if the Participant so elects). Notwithstanding the preceding
sentence, a Participant who elects a lump sum distribution may
request that the Company Stock Fund be distributed in kind
provided that the Participant has at least 100 shares of
Vencor, Inc. common stock in his Individual Account at the
date of distribution. Any non-stock balance in his Company
Stock Fund will be paid in cash and fractional shares will be
paid in cash based on the fair market value of such fractional
shares as of the day those shares liquidated or valued for
distribution. In the event a Participant elects to receive his
Company Stock Fund in cash, the shares of Vencor, Inc. stock
as of the date of the distribution check is prepared will be
converted to cash based on the fair market value of such
shares as of such date. Except as provided in Section 5.7(c)
or Section 5.11, no other manner of distribution shall be
provided. The request by the Participant or the Beneficiary
shall be in writing and shall be filed with
-33-
<PAGE>
the Committee. The Committee may not require a distribution
without the consent of the Participant prior to his reaching
Normal Retirement Age or, if the Participant is deceased,
without the consent of his spouse, if the spouse is living and
if the spouse is his Beneficiary, unless the vested value of
the Individual Account is $3,500 or less. If the vested value
of the Participant's Individual Account is $3,500 or less, the
benefits payable will be paid as soon as reasonably possible
following the actual date of severance, notwithstanding lack
of consent. If the vested value of the Participant's
Individual Account has been more than $3,500 at the time of
any distribution, the value the Participant's Individual
Account will be deemed to be more than $3,500 at the time of
any subsequent distribution for purposes of the consent
requirements of this Section.
(b) If the Participant dies before distribution occurs, the
Participant's entire interest will be distributed no later
than five years after the Participant's death, except, if the
designated Beneficiary is the Participant's surviving spouse,
the distribution must begin no later than the date on which
the Participant would have attained age 65.
Section 5.8 BENEFITS TO MINORS AND INCOMPETENTS
If any person entitled to receive payment under the Plan shall be a
minor, the Committee, in its discretion, may dispose of such amount
in any one or more of the ways specified in Subsections (a) through
(c) of this Section.
(a) By payment thereof directly to such minor;
(b) By application thereof for benefit of such minor;
(c) By payment thereof to either parent of such minor or to any
adult person with whom such minor may at the time be living or
to any person who shall be legally qualified and shall be
acting as guardian of the person or the property of such
minor; provided only that the parent or adult person to whom
any amount shall be paid shall have advised the Committee in
writing that he will hold or use such amount for the benefit
of such minor.
In the event that it shall be found that person entitled to receive
payment under the Plan is physically or mentally incapable of
personally receiving and giving a valid receipt for any payment due
(unless prior claim therefor shall have been made by a duly
qualified committee or other legal representative), such payment
may be made to the spouse, son, daughter, parent, brother, sister
or other person deemed
-34-
<PAGE>
by the Committee to have incurred expense for such person otherwise
entitled to payment.
Section 5.9 UNCLAIMED BENEFITS
(a) The Plan does not require either the Trustee or the Committee
to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Committee, by certified mail
addressed to his last known address of record with the
Committee or the Employer, shall notify any Participant, or
Beneficiary, that he is entitled to a distribution under this
Plan. If the Participant, or Beneficiary, fails to claim his
distributive share or make his whereabouts known in writing to
the Committee within six months from the date of mailing of
the notice, or before the termination or discontinuance of
this Plan, whichever should first occur, the Committee shall
thereafter treat the Participant's or Beneficiary's unclaimed
payable Account as a Forfeiture. A Forfeiture under this
Section shall occur when the Committee determines that the
Participant or Beneficiary cannot be located, but not earlier
than the end of the notice period, or if later, the earliest
date applicable Treasury regulations would permit the
Forfeiture.
(b) If a Participant or Beneficiary who has incurred a forfeiture
of his Account under this Section makes a claim, at any time,
for his forfeited Account, the Committee shall restore the
Participant's or Beneficiary's forfeited Account to the same
dollar amount as the dollar amount of the Account forfeited,
unadjusted for any gains or losses occurring subsequent to the
date of the forfeiture. The Committee shall make the
restoration during the Plan Year in which the Participant or
Beneficiary makes the claim, first from the amount, if any, of
forfeitures the Administrator otherwise would allocate for the
Plan Year, then from the amount, if any, of the Trust net
income or gain for the Plan Year and then from the amount, or
additional amount, the Employer shall contribute to enable the
Committee to make the required restoration. The Committee
shall direct the Trustee to distribute the Participant's or
Beneficiary's restored Account to him not later than 60 days
after the close of the Plan Year in which the Committee
restores the forfeited Account. The forfeiture provisions of
this Section shall apply solely to the Participant's or to the
Beneficiary's Account derived from Employer contributions.
-35-
<PAGE>
Section 5.10 PARTICIPANT DIRECTED ROLLOVERS
(a) This Section applies to distributions made on or after January
1, 1993. Notwithstanding any provision of the plan to the
contrary that would otherwise limit a distributee's election
under this Section, a distributee may elect, at the time and
in the manner prescribed by the Committee, to have any portion
of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a
direct rollover.
(b) For purposes of this Section, an eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified
period of 10 years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the
Code; and the portion of any distribution that is not
includible in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
employer securities).
(c) For purposes of this Section, an eligible retirement plan is
an individual retirement account described in Section 408(a)
of the Code, an individual retirement annuity described in
Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in
Section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account
or individual retirement annuity.
For purposes of this Section, a distributee includes an Employee or
former Employee. In addition, the Employee's or former Employee's
surviving spouse and the Employee's or former Employee's spouse or
former spouse who is the alternate payee under a qualified domestic
relations order, as defined in Section 414(p) of the Code, are
distributees with regard to the interest of the spouse or former
spouse.
(d) A direct rollover is a payment by the plan to the eligible
retirement plan specified by the distributee.
-36-
<PAGE>
Section 5.11 JOINT AND SURVIVOR OPTIONS
(a) QUALIFIED JOINT AND SURVIVOR ANNUITY. Except as otherwise
provided below, unless an optional form of benefit is selected
pursuant to a qualified election within the 90 day period
ending on the date benefit payments would commence, a
Participant's vested Individual Account will be paid in the
form of a qualified joint and survivor annuity, and an
unmarried Participant's benefit shall be paid in the form of a
life annuity unless otherwise elected by the Participant. A
qualified joint survivor annuity will not be applicable and
this Section shall not apply if the following conditions are
met:
(1) The Participant's vested Individual Account is payable in
full, on the death of the Participant, to the
Participant's surviving spouse, or if there is no
surviving spouse, or if the surviving spouse has
previously consented to the designation of a non-spouse
Beneficiary in the manner prescribed under this Section,
and
(2) Such Participant does not elect a payment of benefits in
the form of a life annuity, and
(3) With respect to such Participant, such Plan is not a
direct or indirect transfer of a plan which is described
in clause (i) or (ii) of Code Section 401(a)(11)(B), or
(4) If the distribution is subject to the terms and
conditions contained in Section 5.7 concerning the
distribution of vested Individual Accounts of $3,500 or
less.
(b) QUALIFIED PRERETIREMENT SURVIVOR ANNUITY. Except as otherwise
provided in this Subsection, unless an optional form of
benefit has been selected within the election period pursuant
to a qualified election, if a Participant dies before benefits
have commenced, then the Participant's vested Individual
Account shall be applied toward the purchase of an annuity for
the life of the surviving spouse. Benefits will not be
required to be paid in the form of a PreRetirement survivor
annuity if the following conditions are met:
(1) The Participant's vested Individual Account is payable in
full, on the death of the Participant, to the
Participant's surviving spouse, or
-37-
<PAGE>
if there is no surviving spouse, or if the surviving
spouse has previously consented to the designation of a
non-spouse Beneficiary in the manner prescribed under
this Section, and
(2) Such Participant does not elect a payment of benefits in
the form of a life annuity, and
(3) With respect to such Participant, such Plan is not a
direct or indirect transfer of a plan which is described
in clause (i) or (ii) of Section 401(a)(11)(b) of the
Code, and
(4) If the distribution is subject to the terms and
conditions contained in Section 5.7 concerning the
distribution of vested Individual Accounts of $3,500 or
less.
(c) ELECTION PERIOD shall mean, for purposes of this Section, the
period which begins on the first day of the Plan Year in which
the Participant attains age 35 and ends on the date of the
Participant's death. If a Participant separates from service
prior to the first day of the Plan Year in which age 35 is
attained, with respect to the Individual Account as of the
date of separation, the election period shall begin on the
date of separation.
(d) EARLY RETIREMENT AGE shall mean, for purposes of this Section,
the earliest date on which, under the Plan, the Participant
could elect to receive retirement benefits.
(e) QUALIFIED ELECTION shall mean, for purposes of this Section,
an election pursuant to this Subsection. A waiver of a
qualified joint and survivor annuity or a qualified
PreRetirement survivor annuity is permitted. The waiver must
be in writing, must be executed by the Participant, must
specify the Beneficiary and the optional form of benefit and
must be consented to by the Participant's spouse. The spouse's
consent to a waiver must be witnessed by a Plan representative
or a notary public. Notwithstanding this consent requirement,
if the Participant establishes to the satisfaction of a Plan
representative that such written consent may not be obtained
because there is no spouse or the spouse cannot be located, a
waiver will be deemed a qualified election. Any consent
necessary under this provision will be valid only with respect
to the spouse who signs the consent, or in the event of a
deemed qualified election, the designated spouse. Additionally
a revocation of a prior waiver may be made by a
-38-
<PAGE>
Participant without the consent of the spouse at any time
before the commencement of benefits. The number of revocations
shall not be limited.
(f) QUALIFIED JOINT AND SURVIVOR ANNUITY shall mean, for purposes
of this Section, an annuity for the life of the Participant
with a survivor annuity for the life of the spouse which is
not less than 50% and not more than 100% of the amount of the
annuity which is payable during the joint lives of the
Participant and the spouse and which is the amount of benefit
which can be purchased with the Participant's vested
Individual Account.
(g) QUALIFIED PRERETIREMENT SURVIVOR ANNUITY shall mean, for
purposes of this Section, a survivor annuity for the life of
the surviving spouse, the actuarial equivalent of which is not
less than 50% of the Individual Account of the Participant as
of the date of death, which may become payable as a result of
the Participant's death prior to his Normal Retirement Date.
(h) NOTICE REQUIREMENTS.
(1) In the case of a qualified joint and survivor annuity the
Committee shall provide each Participant no less than 30
days and no more than 90 day prior to the annuity
starting date (or such other time as provided by
regulations or other pronouncements), a written
explanation of (i) the terms and conditions of a
qualified joint and survivor annuity; (ii) the
Participant's right to make and the effect of an election
to waive the qualified joint and survivor annuity form of
benefit; (iii) the rights of a Participant's spouse; and
(iv) the right to make and the effect of a revocation of
a previous election to waive the qualified joint and
survivor annuity.
(2) In the case of a qualified PreRetirement survivor annuity
the Committee shall provide each Participant within the
period beginning on the first day of the Plan Year in
which the Participant attains age 32 and ending with the
close of the Plan Year preceding the Plan Year in which
the Participant attains age 35, a written explanation of
the qualified PreRetirement survivor annuity in such
terms and in such manner as would be comparable to the
explanation provided for meeting the requirement of a
qualified joint and survivor annuity. If a Participant
enters the Plan after the first day of the Plan Year in
which the Participant attained age 32,
-39-
<PAGE>
the Committee shall provide notice no later than the
close of the third Plan Year succeeding the entry of the
Participant in the Plan.
(3) Notwithstanding the other requirements of this Section,
the respective notices prescribed by this Section need
not be given to a Participant if the Plan "fully
subsidizes" the costs of a qualified joint and survivor
annuity or qualified PreRetirement survivor annuity, and
the Participant cannot elect another form of benefit. For
purposes of this Section, the Plan fully subsidizes the
costs of a benefit if under the Plan the failure to waive
such benefit by a Participant would not result in a
decrease in any plan benefits with respect to such
Participant and would not result in increased
contributions from the Participant.
-40-
<PAGE>
5.12 MINIMUM DISTRIBUTION REQUIREMENTS.
(a) The Committee may not direct the Trustee to distribute the
Participant's Individual Account, nor may the Participant
elect to have the Trustee distribute his Individual Account,
under a method of payment which, as of the "Required Beginning
Date" (the date as determined under Section 5.6(c)) does not
satisfy the minimum distribution requirements under Code
Section 401(a)(9) and the applicable Treasury regulations. The
minimum distribution for a calendar year equals the
Participant's Individual Account as of the latest Valuation
Date preceding the beginning of the calendar year divided by
the Participant's life expectancy or, if applicable, the joint
and last survivor expectancy of the Participant and his
designated Beneficiary (as determined subject to the Code
Section 401(a)(9) regulations). The Committee shall decrease
the Participant's Individual Account, as determined on the
relevant Valuation Date, by distributions made after the
Valuation Date and by December 31 of the valuation calendar
year. For purposes of this valuation, the Committee shall
treat any portion of the minimum distribution for the first
distribution calendar year made after the close of that year
as a distribution occurring in that first distribution
calendar year. In computing a minimum distribution, the
Administrator shall use the unisex life expectancy multiples
under Treasury Regulation Section 1.72-9. The Committee, only
upon the Participant's written request, shall compute the
minimum distribution for a calendar year subsequent to the
first calendar year for which the Plan requires a minimum
distribution by redetermining the applicable life expectancy.
However, the Committee may not redetermine the joint life and
last survivor expectancy of the Participant and a nonspouse
designated Beneficiary in a manner which takes into account
any adjustment to a life expectancy other than the
Participant's life expectancy.
(b) If the Participant's spouse is not his designated Beneficiary,
a method of payment to the Participant (whether by Participant
election or by Committee direction) may not provide more than
incidental benefits to the Beneficiary. For Plan Years
beginning after December 31, 1988, the Plan must satisfy the
minimum distribution incidental benefit ("MDIB") requirement
in the Treasury Regulations issued under Code Section
401(a)(9) for distributions made on or after the Participant's
Required Beginning Date and before the Participant's death. To
satisfy the MDIB requirement, the Committee shall compute the
minimum distribution
-41-
<PAGE>
required by this Section 5.12 by substituting the applicable
MDIB divisor for the applicable life expectancy factor, if the
MDIB divisor is a lesser number. Following the Participant's
death, the Committee shall compute the minimum distribution
required by this Section 5.12 solely on the basis of the
applicable life expectancy factor and shall disregard the MDIB
factor. For Plan Years beginning prior to January 1, 1989, the
Plan satisfies the incidental benefits requirement if the
distributions to the Participant satisfied the MDIB
requirement or if the present value of the retirement benefits
payable solely to the Participant is greater than 50% of the
present value of the total benefits payable to the Participant
and his Beneficiaries. The Committee shall determine whether
benefits to the Beneficiary are incidental as of the date the
Trustee is to commence payment of the retirement benefits to
the Participant, or as of any date the Trustee redetermines
the payment period to the Participant.
(c) The minimum distribution for the first distribution calendar
year is due by the Participant's Required Beginning Date. The
minimum distribution for each subsequent distribution calendar
year, including the calendar year in which the Participant's
Required Beginning Date falls, is due by December 31 of that
year. If the Participant receives distribution in the form of
a nontransferable annuity contract, the distribution satisfies
this Section 5.12 if the contract complies with the
requirements of Code Section 401(a)(9) and the applicable
Treasury Regulations.
(d) The method of distribution to the Participant's Beneficiary
must satisfy Code Section 401(a)(9) and the applicable
Treasury Regulations. If the Participant's death occurs after
his Required Beginning Date or, if earlier, the date the
Participant commences an irrevocable annuity pursuant to
Section 5.7, the method of payment to the Beneficiary shall
provide for completion of payment over a period which does not
exceed the payment period which had commenced for the
Participant. If the Participant's death occurs prior to his
Required Beginning Date, and the Participant had not commenced
an irrevocable annuity pursuant to Section 5.7, the method of
payment to the Beneficiary, subject to Section 5.11, shall
provide for completion of payment to the Beneficiary over a
period not exceeding: (1) 5 years after the date of the
Participant's death; or (2) if the Beneficiary is a designated
Beneficiary, the designated Beneficiary's life expectancy. The
Administrator may not direct payment of the Participant's
Individual Account over a period described in clause (2)
unless the Trustee will commence payment to the designated
Beneficiary no later than the December 31 following the close
of the calendar year in
-42-
<PAGE>
which the Participant's death occurred or, if later, and the
designated Beneficiary is the Participant's surviving spouse,
December 31 of the calendar year in which the Participant
would have attained age 70 1/2. If the Trustee will make
distribution in accordance with clause (2), the minimum
distribution for a calendar year equals the Participant's
Individual Account as of the latest Valuation Date preceding
the beginning of the calendar year divided by the designated
Beneficiary's life expectancy. The Committee shall use the
unisex life expectancy multiples under Treasury Regulation
Section 1.72-9 for purposes of applying this subsection. The
Committee, only upon the written request of the Participant or
of the Participant's surviving spouse, shall recalculate the
life expectancy of the Participant's surviving spouse not more
frequently than annually, but may not recalculate the life
expectancy of a nonspouse Beneficiary after the Trustee
commences payment to the Beneficiary. The Committee shall
apply this subsection by treating any amount paid to the
Participant's child, which becomes payable to the
Participant's surviving spouse upon the child's attaining the
age of majority, as paid to the Participant's surviving
spouse. Upon the Beneficiary's written request, the Committee
shall direct the Trustee to accelerate payment of all, or any
portion, of the Participant's unpaid Individual Account, as
soon as administratively practicable following the effective
date of that request.
-43-
<PAGE>
ARTICLE 6
WITHDRAWALS
Section 6.1 HARDSHIP WITHDRAWAL
(a) Except as otherwise provided in this Section, and upon proper
written application of a Participant made at least 30 days in
advance of the withdrawal date, in such form as the Committee
may specify, the Committee in its sole discretion may permit
the Participant to withdraw a portion or all of the balance of
his Salary Redirection Account and Prior Plan Salary
Redirection Account, provided that earnings allocated to said
account may not be withdrawn. Such withdrawal shall be based
on the Valuation Date coincident with or immediately preceding
the date of distribution and may not be less than $500.00, or
if the amount of hardship exceeds $500.00 but the amount
available for distribution is lower, the total amount
available for distribution as a hardship withdrawal.
(b) The reason for a withdrawal pursuant to this Section must be
to enable the Participant to meet unusual or special
situations in his financial affairs resulting in immediate and
heavy financial needs of the Participant. Such situations
shall be limited to:
(1) uninsured medical expenses (described in Code Section
213(d)) incurred by or needed to procure services for the
Participant, the Participant's spouse or any dependents
of the Participant (as defined in Code Section 152);
(2) purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) payment of tuition for the next 12 months of post-
secondary education for the Participant, his or her
spouse, children, or dependents;
(4) the need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage of
the Participant's principal residence; or
-44-
<PAGE>
(5) any additional items which may be added to the list of
deemed immediate and heavy financial needs by the
Commissioner of Internal Revenue through the publication
of revenue rulings, notices, and other documents of
general applicability.
Any withdrawal hereunder may not exceed the amount required to
meet the immediate financial need created, and provided
further that such amount must not be reasonably available from
other resources of the Participant.
(c) The Committee may shorten the notice period if it finds it is
administratively feasible. In granting or refusing any request
for withdrawal or in shortening the notice period, the
Committee shall apply uniform standards consistently and such
discretionary power shall not be applied so as to discriminate
in favor of Highly Compensated Employees.
(d) The withdrawals under this Section shall in no way affect said
Participant's continued participation in this Plan except by
the reduction in account balances caused by such withdrawal.
(e) A Participant shall present evidence to the Committee that the
requested withdrawal is not in excess of the amount necessary
to relieve the financial need of the Participant and that the
need can not be satisfied from other resources that are
reasonably available to the Participant. The determination by
the Committee that the distribution will be necessary to
satisfy an immediate and heavy financial need will be made on
the basis of all relevant facts and circumstances. A
distribution generally will be treated as necessary to satisfy
a financial need if the Committee relies, without actual
knowledge to the contrary, on the Participant's representation
that the need cannot be relieved:
1. through reimbursement of compensation by insurance or
otherwise;
2. by reasonable liquidation of the Participant's assets, to
the extent such liquidation would not itself cause an
immediate and heavy financial need;
3. by cessation of Salary Redirection under the Plan; or
4. by other distributions or non-taxable loans from the plans
maintained by the Employer or by any other employer, or by
-45-
<PAGE>
borrowing from commercial sources on reasonable commercial
terms.
For purposes of this Subsection, the Participant's resources shall
be deemed to include those of his spouse and minor children that
are reasonably available to the Participant.
Section 6.2 OTHER IN-SERVICE WITHDRAWALS
Subject to sections 5.11 and 5.12, upon proper written application
in such manner and in such form as the Committee may specify, a
Participant shall be permitted while employed to withdraw all or a
portion of Individual Account, determined as of the Valuation Date
coincident with or immediately preceding the date of application.
Section 6.3 PARTICIPANT LOANS
No Participant loans are permitted under this Plan. However, to the
extent that the Original Plan has loans outstanding, the
outstanding loan balance and accrued interest shall be segregated
in the Participant's Individual Account until repaid. The loan
shall be repaid and subject to the terms of the loan agreement,
including the provisions of the Original Plan.
-46-
<PAGE>
ARTICLE 7
FUNDING
Section 7.1 CONTRIBUTIONS
Contributions by the Employer and by the Participants as provided
for in Article 3 shall be paid over to the Trustee. All
contributions by the Employer shall be irrevocable, except as
herein provided, and may be used only for the exclusive benefit of
the Participants and their Beneficiaries.
Section 7.2 TRUSTEE
Vencor, Inc. has entered into an agreement dated as of October 6,
1998, with the Trustee whereunder the Trustee will receive, invest
and administer trust fund contributions made under this Plan in
accordance with the Trust Agreement, as a Master Trust with other
plans maintained by Vencor, Inc.
Such Trust Agreement is incorporated by reference as a part of the
Plan, and the rights of all persons hereunder are subject to the
terms of the Trust Agreement. The Trust Agreement specifically
provides, among other things, for the investment and reinvestment
of the Fund and the income thereof, the management of the Trust
Fund, the responsibilities and immunities of the Trustee, removal
of the Trustee and appointment of a successor, accounting by the
Trustee and the disbursement of the Trust Fund.
The Trustee shall, in accordance with the terms of such Trust
Agreement, accept and receive all sums of money paid to it from
time to time by the Employer, and shall hold, invest, reinvest,
manage and administer such moneys and the increment, increase,
earnings and income thereof as a trust fund for the exclusive
benefit of the Participants and their Beneficiaries or the payment
of reasonable expenses of administering the Plan.
In the event that affiliated or subsidiary Employers become
signatory hereto, completely independent records, allocations, and
contributions shall be maintained for each Employer. The Trustee
may invest all funds without segregating assets between or among
signatory Employers.
-47-
<PAGE>
ARTICLE 8
FIDUCIARIES
Section 8.1 GENERAL
(a) Each Fiduciary who is allocated specific duties or
responsibilities under the Plan or any Fiduciary who assumes
such a position with the Plan shall discharge his duties
solely in the interest of the Participants and Beneficiaries
and for the exclusive purpose of providing such benefits as
stipulated herein to such Participants and Beneficiaries, or
defraying reasonable expenses of administering the Plan. Each
Fiduciary, in carrying out such duties and responsibilities,
shall act with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in
a like capacity and familiar with such matters would use in
exercising such authority or duties.
(b) A Fiduciary may serve in more than one Fiduciary capacity and
may employ one or more persons to render advice with regard to
his Fiduciary responsibilities. If the Fiduciary is serving as
such without compensation, all expenses reasonably incurred by
such Fiduciary shall be paid from the Trust Fund or by the
Employer.
(c) A Fiduciary may allocate any of his responsibilities for the
operation and administration of the Plan. In limitation of
this right, a Fiduciary may not allocate any responsibilities
as contained herein relating to the management or control of
the Trust Fund except through the employment of an investment
manager as provided in Section 8.3 of this Article and in the
Trust Agreement relating to the Fund.
Section 8.2 EMPLOYER
(a) TheraTx, Inc. and related companies established and maintained
the Plan for the benefit of their Employees and later became a
member of the controlled group of Vencor, Inc. Vencor, Inc.
now controls operation and administration of the Plan. Vencor,
Inc., in accordance with specific provisions of the Plan, has
delegated certain of these rights and obligations to the
Trustee, and the Committee and these parties shall be solely
responsible for these, and only these, delegated rights and
obligations.
-48-
<PAGE>
(b) The Employer shall supply such full and timely information for
all matters relating to the Plan as (a) the Committee, (b) the
Trustee, and (c) the accountant engaged on behalf of the Plan
by Vencor, Inc. may require for the effective discharge of
their respective duties.
Section 8.3 TRUSTEE
The Trustee, in accordance with the Trust Agreement, shall be a
directed Trustee with respect to Trust Fund, except that the
Committee may in its discretion employ the Trustee any time and
from time to time as an investment manager (as defined in Section
3(38) of ERISA) with respect to all or a designated portion of the
assets comprising the Trust Fund. The Committee or an investment
manager so appointed shall have the exclusive authority or
discretion to manage the Trust Fund.
Section 8.4 RETIREMENT COMMITTEE
(a) The Board of Vencor, Inc. has appointed a Retirement Committee
for all of the retirement plans of members of its controlled
and affiliated group, such committee to be known as the
Retirement Committee or Committee for purposes of this Plan.
No compensation shall be paid members of the Committee from
the Trust Fund for service on such Committee. The Committee
shall choose from among its members a chairman and a
secretary. Any action of the Committee shall be determined by
the vote of a majority of its members. Either the chairman or
the secretary may execute any certificate or written direction
on behalf of the Committee.
(b) Every decision and action of the Committee shall be valid if
concurrence is by a majority of the members then in office,
which concurrence may be had without a formal meeting.
(c) In accordance with the provisions hereof, the Committee has
been delegated certain administrative functions relating to
the Plan with all powers necessary to enable it to properly
carry out such duties. The Committee shall have no power in
any way to modify, alter, add to or subtract from, any
provisions of the Plan. The Committee shall have the power and
authority in its sole, absolute and uncontrolled discretion to
control and manage the operation and administration of the
Plan and its investment and shall have all powers necessary to
accomplish these purposes, and to make factual determinations
regarding Participants and their accounts. The responsibility
and authority of the Committee shall
-49-
<PAGE>
include, but shall not be limited to, (i) determining all
questions relating to the eligibility of employees to
participate; (ii) determining the amount and kind of benefits
payable to any Participant, spouse or Beneficiary; (iii)
establishing and reducing to writing and distributing to any
Participant or Beneficiary a claims procedure and
administering that procedure, including the processing and
determination of all appeals thereunder and (iv) interpreting
the provisions of the Plan including the publication of rules
for the regulation of the Plan as in its sole, absolute and
uncontrolled discretion are deemed necessary or advisable and
which are not inconsistent with the express terms hereto the
Code or ERISA, as amended. All disbursements by the Trustee,
except for the ordinary expenses of administration of the
Trust Fund or the reimbursement of reasonable expenses at the
direction of Vencor, Inc., as provided herein, shall be made
upon, and in accordance with, the written directions of the
Committee. When the Committee is required in the performance
of its duties hereunder to administer or construe, or to reach
a determination, under any of the provisions of the Plan, it
shall do so on a uniform, equitable and nondiscriminatory
basis.
(d) The Committee shall establish rules and procedures to be
followed by the Participants and Beneficiaries in filing
applications for benefits and for furnishing and verifying
proofs necessary to establish age, service, and any other
matters required in order to establish their rights to
benefits in accordance with the Plan. Additionally, the
Committee shall establish accounting procedures for the
purpose of making all allocations, valuations and adjustments
to Participants' accounts. Should the Committee determine that
the strict application of its accounting procedures will not
result in an equitable and nondiscriminatory allocation among
the accounts of Participants, it may modify its procedures for
the purpose of achieving an equitable and non-discriminatory
allocation in accordance with the general concepts of the
Plan, provided however that such adjustments to achieve equity
shall not reduce the vested portion of a Participant's
interest.
(e) The Committee may employ such counsel, accountants, and other
agents as it shall deem advisable. The Employer shall pay, or
cause to be paid from the Trust Fund, the compensation of such
counsel, accountants, and other agents and any other expenses
incurred by the Committee in the administration of the Plan
and Trust.
Section 8.5 CLAIMS PROCEDURES
-50-
<PAGE>
The Committee has delegated to the Human Resources Department (the
"Claims Coordinator") the processing of all applications for
benefits. Upon receipt by the Claims Coordinator of such an
application, it shall determine all facts which are necessary to
establish the right of an applicant to benefits under the
provisions of the Plan and the amount thereof as herein provided.
Upon request, the Claims Coordinator will afford the applicant the
right of a hearing with respect to any finding of fact or
determination. The applicant shall be notified in writing of any
adverse decision with respect to his claim within 90 days after its
submission. The notice shall be written in a manner calculated to
be understood by the applicant and shall include the items
specified in Section 8.5(a) through (d).
(a) The specific reason or reasons for the denial;
(b) Specific references to the pertinent Plan provisions on which
the denial is based;
(c) A description of any additional material or information
necessary for the applicant to perfect the claim and an
explanation why such material or information is necessary; and
(d) An explanation of the Plan's claim review procedures.
(e) If special circumstances require an extension of time for
processing the initial claim, a written notice of the
extension and the reason therefor shall be furnished to the
claimant before the end of the initial 90 day period. In no
event shall such extension exceed 90 days.
(f) In the event a claim for benefits is denied or if the
applicant has had no response to such claim within 90 days of
its submission (in which case the claim for benefits shall be
deemed to have been denied), the applicant or his duly
authorized representative, at the applicant's sole expense,
may appeal the denial to the Committee within 60 days of the
receipt of written notice of denial or 60 days from the date
such claim is deemed to be denied. In pursuing such appeal the
applicant or his duly authorized representative:
(1) May request in writing that the Committee review the
denial;
(2) May review pertinent documents; and
(3) May submit issues and comments in writing.
-51-
<PAGE>
(g) The decision on review shall be made within 60 days of receipt
of the request for review, unless special circumstances
require an extension of time for processing, in which case a
decision shall be rendered as soon as possible, but not later
than 120 days after receipt of a request for review. If such
an extension of time is required, written notice of the
extension shall be furnished to the claimant before the end of
the original 60 day period. The decision on review shall be
made in writing, shall be written in a manner calculated to be
understood by the claimant, and shall include specific
references to the provisions of the Plan on which such denial
is based. If the decision on review is not furnished within
the time specified above, the claim shall be deemed denied on
review.
Section 8.6 RECORDS
All acts and determinations of the Claims Coordinator or the
Committee shall be duly recorded by the Claims Coordinator or the
secretary of the Committee thereof and all such records together
with such other documents as may be necessary in exercising their
duties under the Plan shall be preserved in the custody of such
secretary. Such records and documents shall at all times be open
for inspection and for the purpose of making copies by any person
designated by Vencor, Inc. The Committee shall provide such timely
information, resulting from the application of its responsibilities
under the Plan, as needed by the Trustee and the accountant engaged
on behalf of the Plan by Vencor, Inc., for the effective discharge
of their respective duties.
-52-
<PAGE>
ARTICLE 9
AMENDMENT AND TERMINATION OF THE PLAN
Section 9.1 AMENDMENT OF THE PLAN
The Committee shall have the right at any time by action of the
Board to modify, alter or amend the Plan in whole or in part;
provided, however, that the duties, powers and liability of the
Trustee hereunder shall not be increased without its written
consent; and provided, further, that the amount of benefits which,
at the time of any such modification, alteration or amendment,
shall have accrued for any Participant, Former Participant or
Beneficiary hereunder shall not be adversely affected thereby; and
provided, further, that no such amendments shall have the effect of
reverting to the Employer any part of the principal or income of
the Trust Fund. No amendment to the Plan shall decrease the balance
of a Participant's Individual Account or eliminate an optional form
of distribution.
Section 9.2 TERMINATION OF THE PLAN
The Employer expects to continue the Plan as a funding mechanism
for past contributions indefinitely, but continuance is not assumed
as a contractual obligation and Vencor, Inc. reserves the right at
any time by action of the Board to terminate the Plan. Because
future contributions to the Plan ceased as of January 1, 1998, each
Participant affected thereby was then vested in the amount
allocated to his Individual Account.
Section 9.3 RETURN OF CONTRIBUTIONS
It is intended that this Plan shall be approved and qualified under
the Code and Regulations issued thereunder with respect to
employees' plans and trusts (1) so as to permit the Employers to
deduct for federal income tax purposes the amounts of contributions
to the Trust; (2) so that contributions so made and the income of
the Trust Fund will not be taxable to Participants as income until
received; (3) so that the income of the Trust Fund shall be exempt
from federal income tax. In the event the Commissioner of Internal
Revenue or his delegate rules that the deduction for all or a part
of any Employer Contribution (or Salary Redirection) is not
allowed, the Employers reserve the right to recover that portion or
all of their contributions for which no deduction is allowed,
provided such recovery is made within one year of the disallowance.
-53-
<PAGE>
ARTICLE 10
MISCELLANEOUS
Section 10.1 GOVERNING LAW
The Plan shall be construed, regulated and administered according
to the laws of the Commonwealth of Kentucky, except in those areas
preempted by the laws of the United States of America.
Section 10.2 CONSTRUCTION
The headings and subheadings in the Plan have been inserted for
convenience of reference only and shall not affect the construction
of the provisions hereof. In any necessary construction the
masculine shall include the feminine and the singular the plural,
and vice versa.
Section 10.3 ADMINISTRATION EXPENSES
The expenses of administering the Trust Fund and the Plan shall be
paid from the Trust Fund, unless they are paid by the Employer.
Section 10.4 PARTICIPANT'S RIGHTS
No Participant in the Plan shall acquire any right to be retained
in the Employer's employ by virtue of the Plan, nor, upon his
dismissal, or upon his voluntary termination of employment, shall
he have any right or interest in and to the Trust Fund other than
as specifically provided herein. The Employer shall not be liable
for the payment of any benefit provided for herein; all benefits
hereunder shall be payable only from the Trust Fund.
Section 10.5 NONASSIGNABILITY
(a) The benefit or interest under the Plan and Trust of any person
shall not be assignable or alienable by that person and shall
not be subject to alienation by operation of law or legal
process. The preceding sentence shall apply to the creation,
assignment or recognition of any right to any benefit payable
with respect to a Participant pursuant to a domestic relations
order, unless such order is determined to be a qualified
domestic relations order, as defined in Section 414(p) of the
Code. A domestic relations order entered before January 1,
1985, shall be treated as a
-54-
<PAGE>
qualified domestic relations order if payment of benefits
pursuant to the order has commenced as of such date, and may
be treated as a qualified domestic relations order if payment
of benefits is not commenced as of such date, even though the
order does not satisfy the requirements of Section 414(p) of
the Code.
(b) This Plan specifically permits a distribution to an alternate
payee under a qualified domestic relations order at any time,
irrespective of whether the Participant has attained his
earliest retirement age (as defined under Code Section 414(p))
under the Plan. A distribution to an alternate payee prior to
the Participant's attainment of earliest retirement age is
available only if: (a) the order specifies distribution at
that time or permits an agreement between the Plan and the
alternate payee to authorize an earlier distribution; and (b)
if the present value of the alternate payee's benefits under
the Plan exceeds $3,500, and the order requires, the alternate
payee consents to any distribution occurring prior to the
Participant's attainment of earliest retirement age. Nothing
in this Section 10.5 gives a Participant a right to receive
distribution at a time otherwise not permitted under the Plan
nor does it permit the alternate payee to receive a form of
payment not permitted under the Plan.
Section 10.6 MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with
another plan or transfer of assets or liabilities from the Plan to
another plan, each then Participant or Beneficiary shall not, as a
result of such event, be entitled on the day following such merger,
consolidation or transfer under the termination of the Plan
provisions to a lesser benefit than the benefit he was entitled to
on the date prior to the merger, consolidation or transfer if the
Plan had then terminated.
Section 10.7 COUNTERPARTS
The Plan and the Trust Agreement may be executed in any number of
counterparts, each of which shall constitute but one and the same
instrument and may be sufficiently evidenced by any one
counterpart.
Section 10.8 ADMINISTRATIVE MISTAKE
If the Committee discovers that a mistake has been made in
crediting Salary Redirection Contributions or Employer
Contributions, withholding Salary Redirection Contributions from a
Participant's compensation, or crediting earnings to the account of
any Participant, the Committee shall take any administrative
-55-
<PAGE>
action which it deems necessary or appropriate to remedy the
mistake in question, and may request the Employer to make a special
contribution to the account of the Participant where appropriate.
If the Committee discovers that a mistake has been made in
calculating the amount of any excess Salary Redirection or other
contribution under Sections 3.4, 3.5 or 4.6, or earnings on such
excess amount, which amount is required to be distributed to a
Participant, the Committee shall take such administrative action as
it deems necessary or appropriate to remedy the mistake in
question.
-56-
<PAGE>
ARTICLE 11
TOP HEAVY PLAN PROVISIONS
Section 11.1 GENERAL
Notwithstanding anything in the Plan to the contrary, if this Plan
when combined with all other plans required to be aggregated
pursuant to Code Section 416(g) is deemed to be a top-heavy plan
for any Plan Year, the provisions of this Article shall apply to
such Plan Year.
Section 11.2 MINIMUM CONTRIBUTION
Regardless of hours worked, each active Participant who is not a
Key Employee shall be entitled to a minimum allocation of
contributions and forfeitures equal to the lesser of (i) three
percent (3%) of the Participant's Compensation for the Plan Year;
and (ii) provided that the Plan is not part of a Required
Aggregation Group with a Defined Benefit Plan because the Plan
enables the Defined Benefit Plan to meet the requirements of Code
Section 401(a)(4) or 410, the highest percentage of Compensation
contributed on behalf of, plus forfeitures allocated to, a Key
Employee. In the case of a Participant who is also a participant in
a defined benefit plan maintained by the Employer, the minimum
accrued benefit provided in the defined benefit plan pursuant to
Code Section 416(c)(1) equal to two percent of the Participant's
average monthly compensation for the five consecutive years when
his aggregate compensation was highest multiplied by his years of
credited service up to ten years for each plan year in which the
Plan is top heavy, shall be the only minimum benefit for both that
plan and this Plan, and the minimum allocation described above
shall not apply.
Section 11.3 SUPER TOP HEAVY PLAN
The multiplier of 1.25 in Section 4.7 shall be reduced to 1.0
unless (i) all plans of the Required Aggregation Group or the
Permissive Aggregation Group, when aggregated, are 90% or less top
heavy, and (ii) the minimum accrued benefit referenced in clause
(i) of Section 11.2 is modified by substituting three percent with
four percent. In the case of each Participant who is also a
participant in a defined benefit plan maintained by the Employer,
the minimum accrued benefit provided in the defined benefit plan
pursuant to Code Sections 416(c)(1) and 416(h) equal to three
percent of the Participant's average monthly compensation for the
five highest consecutive years when his aggregate compensation was
highest multiplied by his years of credited service up to ten years
for each plan
-57-
<PAGE>
year in which the Plan is top heavy shall be the only minimum
benefit for both that plan and this Plan, and the minimum
allocation described above shall not apply.
Section 11.4 [INTENTIONALLY LEFT BLANK]
Section 11.5 COMPENSATION
For purposes of this Article, compensation shall have the same
meaning as assigned to it by Code Section 415 and shall be limited
to such amount as required by Code Section 401(a)(17).
-58-
<PAGE>
ARTICLE 12
PROVISIONS RELATED TO EMPLOYERS INCLUDED IN THE PLAN
Section 12.1 GENERAL. Any Employer that adopted the Original Plan shall be a
"Participating Employer." Each Participating Employer shall be
subject to the terms and conditions of this Plan as in effect at
the effective date of adoption by the Participating Employer and as
subsequently amended from time to time by Vencor, Inc. Unless the
context of the Plan clearly indicates to the contrary, the terms
"Company" and "Employer" shall be deemed to include each
Participating Employer as relates to its adoption of the Plan. When
an entity ceases to be an "Employer" because it is no longer part
of the Company, the entity shall cease to be a Participating
Employer. Section 12.4 shall not apply to such cessation.
Section 12.2 SINGLE PLAN. This Plan shall be deemed to be a single plan of all
Employers that have adopted this Plan. Employer contributions shall
not be accounted for separately, and all Plan assets shall be
available to pay benefits to all Participants and their
Beneficiaries. Employees may be transferred among Participating
Employer or employed simultaneously by more than one Participating
Employer, and no such transfer or simultaneous employment shall
effect a termination of employment.
Section 12.3 VENCOR, INC. AS AGENT. Each Participating Employer shall be deemed
to have designated irrevocably Vencor, Inc. as its sole agent (1)
for all purposes under Section 8 (including fixing the number of
members of, and the appointment and removal of, the Committee); and
(2) with respect to all its relations with the Trustee (including
the Trustee's appointment and removal, and fixing the number of
Trustees). The Committee shall make any and all rules and
regulations which it shall deem necessary or appropriate to
effectuate the purpose of this Article 12, and such rules and
regulations shall be binding upon the Participating Employers, the
Participants and Beneficiaries.
Section 12.4 WITHDRAWAL OF EMPLOYER. Any Participating Employer may withdraw its
participation in the Plan by giving written notice to the
Administrator stating that it has adopted a separate plan. The
notice shall be given at least six months prior to a designated
Valuation Date, unless the Committee shall accept a shorter period
of notification. Upon request of the withdrawing Participating
Employer, the Committee may, but shall not be obligated to,
instruct the Trustee to transfer the withdrawing Participating
Employer's interest in the Fund to the Participating Employer's
separate plan in accordance with the following rules: Promptly
after the Valuation Date as of which the transfer is to occur, the
Committee, shall
-59-
<PAGE>
establish the withdrawing Participating Employer's interest in the
Trust Fund, after a reduction for fees and other expenses related
to the Participating Employer's withdrawal. The Trustee shall then,
in accordance with the Committee's instructions, transfer the
withdrawing Participating Employer's interest in the Fund to the
trustee or other funding agent of the Participating Employer's
separate plan. Neither the Trustee nor the Committee shall be
obligated to transfer or direct the transfer of assets under this
Article until they are satisfied as to all matters pertaining to
the transfer, including, but not limited to, the tax qualification
of the plan into which the transfer will be made. The Committee and
the Trustee may rely fully on the representations and instructions
of the withdrawing Participating Employer and shall be fully
protected and discharged with respect to any transfer made in
accordance with such representations or instructions. Any transfer
of assets in accordance with this Article shall constitute a
complete discharge of responsibility of other Employers, Vencor,
Inc. and the Trustee without any responsibility on their part
collectively or individually to see to the application thereof. The
Committee in its sole discretion shall have the right to transfer
the withdrawing Participating Employer's interest in the Fund to
the new plan in the form of installments, in cash, or in cash and
kind and over a period of time not to exceed one year following the
designated Valuation Date as of which the transfer is to occur. Any
assets which are invested in accordance with an investment contract
or agreement which by its terms precludes the realization upon and
distribution of such assets for a stated period of time shall
continue to be held by the Trustee under the terms and conditions
of this Plan until the expiration of such period, subject to the
Committee's instructions. The Committee may in its sole discretion
direct the Trustee to segregate the Accounts of all affected
Participants into a separate fund to facilitate transfer, and the
Committee may in its sole discretion direct the Trustee to invest
the separate fund only in cash equivalent investments.
Section 12.5 TERMINATION OF PARTICIPATION. The Board of Directors of a
Participating Employer may at any time terminate this Plan with
respect to its Employees by adopting a resolution to that effect
and delivering a certified copy to the Committee. The continuation
of the Plan by the Participating Employers shall not be affected.
The termination of the Plan with respect to a Participating
Employer's Employees shall not effect a termination with respect to
an Employee of another Participating Employer if such Employee was
not employed by the terminating Participating Employer on the
effective date of the termination, even though he may have been
employed by the terminating Participating Employer at an earlier
date, and shall not entitle a Participant to a distribution until
an actual separation from service with the meaning prescribed under
Code Section 401(k)(2)(B) has occurred, unless the distribution
follows an event in Code
-60-
<PAGE>
Section 401(k)(10) and the Treasury Regulations thereunder. Any
fees and other expenses related to a Participating Employer's
termination shall be charged against the individual Accounts of the
affected Participants, if not paid by the terminating Participating
Employer.
-61-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, THE EMPLOYER HAS CAUSED THIS PLAN TO BE EXECUTED THIS
_____ DAY OF _______________, 1998, BUT EFFECTIVE JANUARY 1, 1998.
VENCOR, INC.
BY
-------------------------------------
TITLE:
---------------------------------
-62-
<PAGE>
EXHIBIT 10.2
THC RETIREMENT SAVINGS PLAN
Amended and Restated Effective
as of
January 1, 1998
<PAGE>
TABLE OF CONTENTS
Page No.
--------
INTRODUCTION 1
DEFINITIONS 2
Section 1.1 ADJUSTMENT 2
Section 1.2 ANNUAL ADDITIONS 2
Section 1.3 BENEFICIARY 2
Section 1.4 BOARD 2
Section 1.5 BREAK(S) 2
Section 1.6 CODE 3
Section 1.7 COMMITTEE 3
Section 1.8 COMPANY 3
Section 1.9 COMPANY STOCK FUND 3
Section 1.10 COMPENSATION 3
Section 1.11 CONSTRUCTION 3
Section 1.12 DEFINED BENEFIT PLAN 3
Section 1.13 DEFINED CONTRIBUTION PLAN 3
Section 1.14 EFFECTIVE DATE 3
Section 1.15 EMPLOYEE 3
Section 1.16 EMPLOYER 3
Section 1.17 EMPLOYER CONTRIBUTIONS 4
Section 1.18 ENTRY DATE 4
Section 1.19 ERISA 4
Section 1.20 FIDUCIARY 4
Section 1.21 [INTENTIONALLY LEFT BLANK] 4
Section 1.22 HIGHLY COMPENSATED EMPLOYEE 4
Section 1.23 HOUR OF SERVICE 4
Section 1.24 INDIVIDUAL ACCOUNT 6
Section 1.25 INVESTMENT FUND 7
Section 1.26 KEY EMPLOYEE 7
Section 1.27 LIMITATION YEAR 7
Section 1.28 MATCHING CONTRIBUTION ACCOUNT 7
Section 1.29 MATCHING CONTRIBUTIONS 7
Section 1.30 NON-HIGHLY COMPENSATED EMPLOYEE 8
Section 1.31 NORMAL RETIREMENT DATE 8
Section 1.32 PARTICIPANT 8
Section 1.33 PERMISSIVE AGGREGATION GROUP 8
-i-
<PAGE>
Section 1.34 PLAN 8
Section 1.35 PLAN YEAR 8
Section 1.36 [INTENTIONALLY LEFT BLANK] 8
Section 1.37 [INTENTIONALLY LEFT BLANK] 8
Section 1.38 [INTENTIONALLY LEFT BLANK] 8
Section 1.39 PROFIT SHARING CONTRIBUTION ACCOUNT 8
Section 1.40 PROFIT SHARING CONTRIBUTIONS 8
Section 1.41 REQUIRED AGGREGATION GROUP 8
Section 1.42 SALARY REDIRECTION 9
Section 1.43 SALARY REDIRECTION ACCOUNT 9
Section 1.44 SERVICE 9
Section 1.45 TOP HEAVY PLAN 9
Section 1.46 [INTENTIONALLY LEFT BLANK] 10
Section 1.47 TRUST AGREEMENT 10
Section 1.48 TRUST FUND 10
Section 1.49 TRUSTEE 10
Section 1.50 VALUATION DATE 10
PARTICIPATION 11
Section 2.1 ELIGIBILITY REQUIREMENTS 11
Section 2.2 PLAN BINDING 11
Section 2.3 BENEFICIARY DESIGNATION 11
Section 2.4 NOTIFICATION OF INDIVIDUAL ACCOUNT BALANCE 11
CONTRIBUTIONS 12
Section 3.1 PRE-TAX CONTRIBUTIONS 12
Section 3.2 MATCHING CONTRIBUTIONS 12
Section 3.3 PROFIT SHARING CONTRIBUTIONS 12
Section 3.4 NONDISCRIMINATION TEST FOR SALARY REDIRECTION 12
Section 3.5 NONDISCRIMINATION TEST FOR OTHER CONTRIBUTIONS 15
Section 3.6 MAXIMUM INDIVIDUAL DEFERRAL 18
Section 3.7 MISTAKE OF FACT 18
Section 3.8 QUALIFIED NONELECTIVE CONTRIBUTIONS 18
Section 3.9 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT
of 1994 ("USERRA") 19
ALLOCATION TO INDIVIDUAL ACCOUNTS 20
Section 4.1 INDIVIDUAL ACCOUNTS 20
Section 4.2 INVESTMENT OF ACCOUNTS 20
Section 4.3 VALUATION OF ACCOUNTS 21
-ii-
<PAGE>
Section 4.4 TRUSTEE AND COMMITTEE JUDGMENT CONTROLS 23
Section 4.5 MAXIMUM ADDITIONS 23
Section 4.6 CORRECTIVE ADJUSTMENTS 24
Section 4.7 DEFINED CONTRIBUTION AND DEFINED BENEFIT PLAN FRACTION 24
DISTRIBUTIONS 26
Section 5.1 NORMAL RETIREMENT 26
Section 5.2 LATE RETIREMENT 26
Section 5.3 DEATH 26
Section 5.4 [INTENTIONALLY LEFT BLANK] 26
Section 5.5 TERMINATION OF EMPLOYMENT 26
Section 5.6 COMMENCEMENT OF BENEFITS 27
Section 5.7 METHODS OF PAYMENT 28
Section 5.8 BENEFITS TO MINORS AND INCOMPETENTS 29
Section 5.9 UNCLAIMED BENEFITS 30
Section 5.10 PARTICIPANT DIRECTED ROLLOVERS 31
Section 5.11 JOINT AND SURVIVOR OPTIONS 31
WITHDRAWALS 37
Section 6.1 HARDSHIP WITHDRAWAL 37
Section 6.2 OTHER IN-SERVICE WITHDRAWALS 38
Section 6.3 PARTICIPANT LOANS 39
FUNDING 40
Section 7.1 CONTRIBUTIONS 40
Section 7.2 TRUSTEE 40
FIDUCIARIES 41
Section 8.1 GENERAL 41
Section 8.2 EMPLOYER 41
Section 8.3 TRUSTEE 42
Section 8.4 RETIREMENT COMMITTEE 42
Section 8.5 CLAIMS PROCEDURES 43
Section 8.6 RECORDS 44
AMENDMENT AND TERMINATION OF THE PLAN 46
Section 9.1 AMENDMENT OF THE PLAN 46
Section 9.2 TERMINATION OF THE PLAN 46
Section 9.3 RETURN OF CONTRIBUTIONS 46
-iii-
<PAGE>
MISCELLANEOUS 47
Section 10.1 GOVERNING LAW 47
Section 10.2 CONSTRUCTION 47
Section 10.3 ADMINISTRATION EXPENSES 47
Section 10.4 PARTICIPANT'S RIGHTS 47
Section 10.5 NONASSIGNABILITY 47
Section 10.6 MERGER, CONSOLIDATION OR TRANSFER 48
Section 10.7 COUNTERPARTS 48
Section 10.8 ADMINISTRATIVE MISTAKE 48
TOP HEAVY PLAN PROVISIONS 49
Section 11.1 GENERAL 49
Section 11.2 MINIMUM CONTRIBUTION 49
Section 11.3 SUPER TOP HEAVY PLAN 49
Section 11.4 [INTENTIONALLY LEFT BLANK] 50
Section 11.5 COMPENSATION 50
PROVISIONS RELATED TO EMPLOYERS INCLUDED IN THE PLAN 51
Section 12.1 GENERAL 51
Section 12.2 SINGLE PLAN 51
Section 12.3 VENCOR, INC. AS AGENT 51
Section 12.4 WITHDRAWAL OF EMPLOYER 51
Section 12.5 TERMINATION OF PARTICIPATION 52
-iv-
<PAGE>
04458.101486
F:\USERS\093\VENCOR\THC.RST
11/03/98 2:38PM
INTRODUCTION
Effective December 1, 1976, Community Psychiatric Centers and related
companies, adopted a 401(k) plan and trust, which was later renamed the
Transitional Hospitals Corporation Savings Plan and amended and restated
effective December 1, 1992 and further amended various times ("Original Plan").
Effective January 1, 1998, except as otherwise provided, the Employer
desires to amend and restate the Original Plan in its entirety as the THC
Retirement Savings Plan ("Plan"), and to fund such Plan via a Master Trust
Agreement with other plans sponsored by members of the Vencor, Inc. affiliated
companies as of October 6, 1998 (the trust created by the Original Plan is to
remain in place until that date), as hereinafter set forth, in order to provide
benefits for certain of its eligible employees.
Effective January 1, 1998 participation in the Plan was frozen, and all
contributions to the Plan ceased. The Plan is intended to correspond, as nearly
as possible, to other retirement plans maintained by Vencor, Inc. and its
related companies. a controlled group to which the Employers that participate in
this Plan now belong.
It is intended that this Plan, together with the Trust Agreement, meet all
the pertinent requirements of the Internal Revenue Code of 1986, as amended
("Code") and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and shall be interpreted, wherever possible, to comply with the terms
of said laws, as amended, and all regulations and rulings issued thereunder. It
is also intended that this Plan shall be a profit sharing plan under Code
Section 401(a).
ARTICLE 1
DEFINITIONS
Section 1.1 ADJUSTMENT means the net increases and decreases in the market
value of the Trust Fund during a Plan Year or other period
exclusive of any contribution or distribution during such year or
other period. Such increases and decreases shall include such
items as realized or unrealized investment gains and losses and
investment income, and may include expenses of administering the
Trust Fund and the Plan.
-1-
<PAGE>
Section 1.2 ANNUAL ADDITIONS means for any Employee in any Plan Year, the sum
of Employer Contributions, Salary Redirection and forfeitures
allocated to the Employee's Individual Account. Amounts allocated
to an individual medical account, as defined in Section 415(1) of
the Code, which is part of a pension or annuity plan maintained
by the Company are treated as Annual Additions to a Defined
Contribution Plan. Also, amounts derived from contributions paid
or accrued which are attributable to post-retirement medical
benefits allocated to the separate account of a Key Employee as
required by Section 419(d) of the Code, maintained by the
Company, are treated as Annual Additions to a Defined
Contribution Plan.
Section 1.3 BENEFICIARY means any person designated by a Participant to
receive such benefits as may become payable hereunder after the
death of such Participant, provided, however, that a married
Participant may not name as a Beneficiary someone other than the
Participant's spouse unless the spouse consents in writing to
such designation, which consent shall be acknowledged by a Plan
representative or by a notary public.
Section 1.4 BOARD means the Board of Directors of Vencor, Inc. except as
otherwise provided.
Section 1.5 BREAK(S) IN SERVICE means a Plan Year during which an Employee
has been credited with fewer than 501 Hours of Service due to
termination of employment. Solely to determine whether a Break in
Service has occurred, an Employee who is absent from work for
maternity or paternity reasons or on a military or Family and
Medical Leave Act leave of absence shall receive credit for the
Hours of Service which would otherwise have been credited to such
Employee but for such absence, or in any case in which Hours of
Service cannot be determined, eight Hours of Service per day of
such absence. In no event will the number of Hours of Service
credited to an Employee pursuant to the immediately preceding
sentence exceed 501. For purposes of this Section, an absence
from work for maternity or paternity reasons means an absence (1)
by reason of the pregnancy of the Employee, (2) by reason of the
birth of a child of the Employee, (3) by reason of the placement
of a child with the Employee in connection with the adoption of
such child by the Employee, or (4) for purposes of caring for
such child for a period beginning immediately following such
birth or placement. The Hours of Service credited under this
paragraph shall be credited (1) in the Plan Year or other
applicable computation period in which the absence begins if the
crediting is necessary to prevent a Break in Service in that
period, or (2) in all other cases, in the next following Plan
Year or other applicable computation period.
-2-
<PAGE>
Section 1.6 CODE means the Internal Revenue Code of 1986, as amended.
Section 1.7 COMMITTEE means the Retirement Committee provided for in Article
8.
Section 1.8 COMPANY means Transitional Hospital Corporation and all of the
legal entities which had Employees who made contributions to the
Original Plan and which were part of the controlled group or
affiliated service group with Transitional Hospital Corporation
pursuant to the provisions of Code Sections 414(b), (c), (m) or
(o) prior to Transitional Hospital Corporation's acquisition by
Vencor, Inc.
Section 1.9 COMPANY STOCK FUND means the Investment Fund defined in Section
4.2(a)(5).
Section 1.10 COMPENSATION shall not be relevant to operation of the Plan on or
after January 1, 1998, due to participation and contributions
then being frozen.
Section 1.11 CONSTRUCTION . The words and phrases defined in this Article when
used in this Plan with an initial capital letter shall have the
meanings specified in this Article, unless a different meaning is
clearly required by the context. Any words herein used in the
masculine shall be read and construed in the feminine where they
would so apply. Words in the singular shall be read and construed
as though used in the plural in all cases where they would so
apply.
Section 1.12 DEFINED BENEFIT PLAN means a plan established and qualified under
Section 401 of the Code, except to the extent it is, or is
treated as, a Defined Contribution Plan.
Section 1.13 DEFINED CONTRIBUTION PLAN means a plan which is established and
qualified under Section 401 of the Code, which provides for an
individual account for each participant therein and for benefits
based solely on the amount contributed to each participant's
account and any income, expenses, gains or losses (both realized
and unrealized) which may be allocated to such account.
Section 1.14 EFFECTIVE DATE means December 1, 1976, the original effective
date of the Plan. The effective date of this amended and restated
Plan is January 1, 1998, except as otherwise provided.
Section 1.15 EMPLOYEE has the same meaning as given in the Original Plan. An
Employee shall cease to be an Employee, and therefore be eligible
for a distribution from this Plan, only as allowed by Section
401(k) of the Code and regulations thereunder.
-3-
<PAGE>
Section 1.16 EMPLOYER means any Company whose employees became eligible to
participate in the Plan prior to January 1, 1998.
Section 1.17 EMPLOYER CONTRIBUTIONS means Matching Contributions and Profit
Sharing Contributions made to the Trust Fund by the Employer.
Salary Redirection shall not be included in the term Employer
Contribution when used in this Plan.
Section 1.18 ENTRY DATE has no meaning in this Plan on or after January 1,
1998.
Section 1.19 ERISA means the Employee Retirement Income Security Act of 1974,
as amended.
Section 1.20 FIDUCIARY means the Employer, the Trustee, the Committee and any
individual, corporation, firm or other entity which assumes, in
accordance with Article 8, responsibilities of the Employer, the
Trustee or the Committee respecting management of the Plan or the
disposition of its assets.
Section 1.21 [INTENTIONALLY LEFT BLANK]
Section 1.22 HIGHLY COMPENSATED EMPLOYEE means any Employee of the Employer
who (i) was a five percent owner of the Company during the
current Plan Year or the preceding Plan Year, or (ii) during the
preceding Plan Year, received Compensation from the Company in
excess of $80,000 (as such amount may be adjusted from time to
time by the Secretary of the Treasury) and, if the Employer
elects, was in the top-paid group of employees for such Plan
Year.
The determination of who is a Highly Compensated Employee,
including the determinations of the number and identity of
employees in the top-paid group and the Compensation that is
considered, shall be made in accordance with section 414(q) of
the Code and the regulations thereunder, taking into account,
when appropriate, Code Section 410(b)(6)(C)'s acquisition
transition rule which allows exclusion of certain Employees from
consideration. The determination of Highly Compensated Employees
shall be determined on a Company-wide basis and shall not be
determined on an Employer by Employer or plan by plan basis.
Section 1.23 HOUR OF SERVICE means any hour for which an Employee is paid or
entitled to payment by the Company during the Plan Year or other
applicable computation period (1) for the performance of duties
for the Company; (2) on account of a period of time during which
no duties are performed (irrespective of whether the employment
relationship has terminated); and (3) as a result of a back pay
award
-4-
<PAGE>
which has been agreed to or made by the Company, irrespective of
mitigation of damages, to the extent that such hour has not been
previously credited under item (1) or item (2) preceding.
(a) The number of Hours of Service to be credited on account of
a period of time during which no duties are performed
(including hours resulting form a back pay award) shall be
determined as follows. If the payment which is made or due
is calculated on the basis of units of time, the number of
Hours of Service to be credited shall be the number of
regularly scheduled working hours included in the units of
time on the basis of which the payment is calculated; if an
Employee does not have a regular work schedule, the number
of Hours of Service to be credited shall be calculated on
the basis of an eight hour work day. If the payment which is
made or due is not calculated on the basis of units of time,
the number of Hours of Service to be credited shall be
calculated by dividing the amount of the payment by the
Employee's most recent hourly rate of compensation before
the period during which no duties were performed, determined
as follows:
(1) If the Employee's compensation is determined on the
basis of an hourly rate, such hourly rate shall be the
Employee's most recent hourly rate of compensation.
(2) If the Employee's compensation is determined on the
basis of a fixed rate for a specified period of time
other than hours, his hourly rate of compensation shall
be his most recent rate of compensation for the
specified period of time, divided by the number of
hours regularly scheduled for the performance of duties
during such period of time; if an Employee does not
have a regular work schedule, his hourly rate of
compensation shall be calculated on the basis of an
eight hour work day.
(3) If the Employee's compensation is not determined on the
basis of a fixed rate for a specified period of time,
his hourly rate of compensation shall be the lowest
hourly rate of compensation paid to Employees in his
job classification, or, if no Employees in his job
classification have an hourly rate of compensation, the
minimum wage in effect under Section 6(a)(1) of the
Fair Labor Standard Act of 1938, as amended.
-5-
<PAGE>
(b) In no event shall the application of the terms of Section
1.23(a) result in crediting an Employee with a number of
Hours of Service during the period which is greater than the
number of hours regularly scheduled for the performance of
duties. If an Employee has no regular work schedule, the
number of Hours of Service to be credited to him shall not
exceed the number which would be credited calculated on the
basis of an eight hour work day.
(c) No Employee shall be credited with more than 501 Hours of
Service as a result of the application of Section 1.23(a)
for any single continuous period during which he performs no
duties, regardless of whether such period extends beyond one
Plan Year or other applicable computation period.
(d) The Plan Year or other applicable computation period to
which Hours of Service shall be credited shall be determined
as follows:
(1) Except as hereinafter provided, Hours of Service
credited in accordance with item (1) of the first
paragraph of this Section shall be credited in the Plan
Year or other applicable computation period in which
the duties were performed.
(2) Except as hereinafter provided, Hours of Service
credited in accordance with item (2) of the first
paragraph of this Section shall be credited: if
calculated on the basis of units of time, to the Plan
Year or Plan Years or other applicable computation
periods in which the period during which no duties are
performed occurs, beginning with the first unit of time
to which the payment relates; otherwise to the Plan
Year or other applicable computation period in which
the period during which no duties are performed occurs,
provided that if the period during which no duties are
performed extends beyond one (1) Plan Year or other
applicable computation period, such Hours of Service
shall be allocated between not more than the first two
(2) Plan Years or other applicable computation periods
on any reasonable basis consistently applied.
(3) Except as hereinafter provided, Hours of Service
credited in accordance with item (3) of the first
paragraph of this Section shall be credited to the Plan
Year or other applicable computation period to which
the award or agreement for back pay pertains rather
than to the Plan Year or other applicable computation
period in which the award, agreement, or payment is
made.
-6-
<PAGE>
(4) Hours of Service to be credited to an Employee in
connection with a period of no more than 31 days which
extends beyond one Plan Year or other applicable
computation period may be credited to the first or the
second Plan Year or other applicable computation
period, provided that such crediting is done on a
reasonable and nondiscriminatory basis.
(e) Nothing in this Section shall be construed to alter, amend,
modify, invalidate, impair or supersede any law of the
United States or any rule or regulation issued under any
such law, including but not limited to laws regarding
eligibility and benefit accrual during and after a military
leave of absence. The nature and extent of any credit for
Hours of Service under this Section shall be determined
under such law including Department of Labor regulation
Section 2530.200b-2.
Section 1.24 INDIVIDUAL ACCOUNT means the detailed record kept of the amounts
credited or charged to each Participant in accordance with the
terms hereof. Such Individual Account is comprised of the
following accounts if any contributions have been made to those
accounts: a Profit Sharing Contribution Account, a Salary
Redirection Account (formerly, Pre-tax Account), an After-tax
Account, a Rollover Account, and a Matching Contribution Account.
After-Tax Account and Rollover Account shall have the meanings
given those terms in the Original Plan
Section 1.25 INVESTMENT FUND means an investment fund established pursuant to
Section 4.2.
Section 1.26 KEY EMPLOYEE shall mean any Employee, former Employee or
beneficiary thereof in an Internal Revenue Service qualified plan
adopted by the Company who at any time during the Plan Year or
any of the four preceding Plan Years is
(a) an officer of the Company having an annual compensation from
the Company during the Plan Year greater than 50% of the
amount in effect under Code Section 415(b)(1)(A) for the
calendar year in which such Plan Year ends;
(b) one of the 10 Employees having an annual compensation from
the Company for a Plan Year of more than the limitation in
effect under Code Section 415(c)(1)(A) for the calendar year
in which such Plan Year ends and owning (or considered as
owning within the meaning of Code Section 318) both more
than a 1/2% interest, and the largest interest in the
Company;
-7-
<PAGE>
(c) a five percent owner of the Company; or
(d) a one percent owner of the Company having an annual
compensation from the Company for a Plan Year of more than
$150,000.
(e) For purposes of this Section, compensation mean compensation
as defined in Code Section 415.
(f) This definition shall be interpreted consistent with Code
Section 415 and rules and regulations issued thereunder.
Further, such law and regulations shall be controlling in
all determinations under this definition, inclusive of any
provisions and requirements stated thereunder but
hereinabove absent.
Section 1.27 LIMITATION YEAR means the 12 month period beginning on January 1
and ending on December 31.
Section 1.28 MATCHING CONTRIBUTION ACCOUNT means that portion of a
Participant's Individual Account attributable to (i) Matching
Contributions allocated to such Participant prior to January 1,
1998 and (ii) the Participant's proportionate share, attributable
to his Matching Contribution Account, of the Adjustments, reduced
by any distributions from such Account.
Section 1.29 MATCHING CONTRIBUTIONS means contributions made to the Trust Fund
by the Employer to match Salary Redirection Contributions.
Section 1.30 NON-HIGHLY COMPENSATED EMPLOYEE means, for any Plan Year, a
Participant who is not a Highly Compensated Employee.
Section 1.31 NORMAL RETIREMENT DATE means the first day of the month
coincident with or next following the Participant's attainment of
age 59 1/2. The Normal Retirement Age shall be age 59 1/2.
Section 1.32 PARTICIPANT means any Employee who became a Participant as
provided in the Original Plan and whose Individual Account has
not been distributed in full.
Section 1.33 PERMISSIVE AGGREGATION GROUP means the Required Aggregation Group
and each other plan or plans of the Company that are not required
to be included in the Required Aggregation Group, and which, if
treated as being part of such group,
-8-
<PAGE>
would not cause such group to fail to meet the requirements of
Code Sections 401(a) and 410.
Section 1.34 PLAN means the THC Retirement Savings Plan.
Section 1.35 PLAN YEAR means the 12 month period beginning on January 1 and
ending on December 31.
Section 1.36 [INTENTIONALLY LEFT BLANK]
Section 1.37 [INTENTIONALLY LEFT BLANK]
Section 1.38 [INTENTIONALLY LEFT BLANK]
Section 1.39 PROFIT SHARING CONTRIBUTION ACCOUNT means that portion of a
Participant's Individual Account attributable to (i) Profit
Sharing Contributions (if any) allocated to such Participant
pursuant to the Original Plan, and (ii) the Participant's
proportionate share attributable to his Profit Sharing
Contribution Account, of the Adjustments, reduced by any
distributions from such Account.
Section 1.40 PROFIT SHARING CONTRIBUTIONS mean contributions made to the Trust
Fund by the Employer pursuant to the Original Plan.
Section 1.41 REQUIRED AGGREGATION GROUP means
(1) each plan of the Company in which a Key Employee is a
participant; and
(2) each other plan of the Company which enables any plan in
subsection (1) to meet the requirements of Code Sections
401(a)(4) or 410, and
(3) each terminated plan maintained by the Company within the
last five years ending on the determination date for the
Plan Year in question and which, but for the fact that it
terminated, would be part of a Required Aggregation Group
for such Plan Year.
Section 1.42 SALARY REDIRECTION means contributions made to the Trust Fund by
the Employer pursuant to the Original Plan based on Participant
elections to defer.
Section 1.43 SALARY REDIRECTION ACCOUNT means that portion of a Participant's
Individual Account attributable to (i) Salary Redirection amounts
made on his behalf pursuant to the Original Plan, and (ii) the
Participant's proportionate share,
-9-
<PAGE>
attributable to his Salary Redirection Account, of the
Adjustments, reduced by any distributions or withdrawals from
such Account.
Section 1.44 SERVICE has no meaning now that eligibility in the Plan is frozen
and all Participants as of December 31, 1998 are 100% in their
Individual Accounts, except with respect to a Participant who
received a distribution of the vested portion of his Individual
Account and is rehired within the time prescribed by Section
5.5(c), in which case the restoration provisions of that Section
shall control.
Section 1.45 TOP HEAVY PLAN means any plan under which, as of any
determination date (the last day of the preceding Plan Year), the
present value of the cumulative accrued benefits under the plan
for Key Employees exceeds 60% of the present value of cumulative
accrued benefits under the Plan for all Employees. For purposes
of this definition the following provisions shall apply:
(a) If such plan is a Defined Contribution Plan, the present
value of cumulative accrued benefits shall be deemed to be
the market value of all Employee accounts under the plan,
other than voluntary deductible Employee contributions. If
such plan is a Defined Benefit Plan, the present value of
cumulative accrued benefits shall be the lump sum present
value determined pursuant to the plan. Moreover, the present
value of the cumulative accrued benefits shall be increased
by the amount of all Plan distributions made with respect to
a current or former employee during the five year period
ending on the determination date, including distributions
under a terminated plan which, if it had not been
terminated, would have been required to be included in a
Required Aggregation Group.
(b) A plan shall be considered to be a Top Heavy Plan for any
Plan Year if, on the last day of the preceding Plan Year,
the above rules were met. For the first Plan Year that the
Plan shall be in effect, the determination of whether the
Plan is a Top Heavy Plan shall be made as of the last day of
such Plan Year.
(c) Each plan of the Company required to be included in a
Required Aggregation Group shall be treated as a Top Heavy
Plan if such group is a top heavy group.
(d) With regard to a Participant or former Participant who (i)
has not performed any service for the Company at any time
during the five year period ending on the determination
date, or (ii) was formerly a Key
-10-
<PAGE>
Employee, but who is not a Key Employee on the determination
date, the present value of the cumulative Accrued Benefit
for such Participant or former Participant shall not be
taken into account for the purposes of determining whether
this Plan is a Top Heavy Plan.
(e) This definition shall be interpreted consistent with Code
Section 416 and rules and regulations issued thereunder.
Further, such law and regulation shall be controlling in all
determinations under this definition inclusive of any
provisions and requirements stated thereunder but
hereinabove absent.
Section 1.46 [INTENTIONALLY LEFT BLANK]
Section 1.47 TRUST AGREEMENT means the agreement entered into between Vencor,
Inc. and the Master Trustee pursuant to Article 7 hereof.
Section 1.48 TRUST FUND means the trust fund created in accordance with
Article 7 hereof.
Section 1.49 TRUSTEE means such individual or corporation as shall be
designated in the Trust Agreement to hold in trust any assets of
the plan for the purpose of providing benefits under the Plan,
and shall include any successor trustee designated thereunder.
Section 1.50 VALUATION DATE means each date on which the U.S. securities
trading markets are open on or after October 6, 1998. As of each
Valuation Date the Trust Fund shall be valued at fair market
value.
-11-
<PAGE>
ARTICLE 2
PARTICIPATION
Section 2.1 ELIGIBILITY REQUIREMENTS
Effective January 1, 1998, no new Employees shall become eligible
to participate in this Plan.
Section 2.2 PLAN BINDING
A Participant shall be bound by the terms of this Plan and the
Trust Agreement, including all amendments to the Plan and the
Trust Agreement made in the manner herein authorized.
Section 2.3 BENEFICIARY DESIGNATION
Upon commencing participation, each Participant shall designate a
Beneficiary on forms furnished by the Committee. Such Participant
may then from time to time change his Beneficiary designation by
written notice to the Committee and, upon such change, the rights
of all previously designated Beneficiaries to receive any
benefits under this Plan shall cease. A married Participant may
not name as a Beneficiary someone other than the Participant's
spouse unless the spouse consents in writing to such other
designation, which consent shall be acknowledged by a Plan
representative or by a notary public. The consent of the spouse
must be limited to a specific Beneficiary and must be obtained
each time the Beneficiary is changed. If, at the time of a
Participant's death while benefits are still outstanding, his
named Beneficiary does not survive him, the benefits shall be
paid to his named contingent Beneficiary. If a deceased
Participant is not survived by either a named Beneficiary or
contingent Beneficiary (or if no Beneficiary was effectively
named), the benefits shall be paid in a single sum to the person
or in equal parts to the persons in the first of the following
classes of successive preference beneficiaries then surviving:
the Participant's (i) surviving spouse, unless the spouse
disclaims the benefit, (ii) natural and adopted children, (iii)
parents, (iv) brothers and sisters, (v) estate. If the
Beneficiary or contingent Beneficiary is living at the death of
the Participant, but such person dies prior to receiving the
entire death benefit, the remaining portion of such death
benefits shall be paid in a single sum to the estate of such
deceased Beneficiary or contingent Beneficiary.
-12-
<PAGE>
Section 2.4 NOTIFICATION OF INDIVIDUAL ACCOUNT BALANCE
After the end of each calendar quarter, or more frequently as
determined by the Committee, the Committee shall notify each
Participant of the amount of his share in the Adjustments for the
period just completed, and the new balance of his Individual
Account.
-13-
<PAGE>
ARTICLE 3
CONTRIBUTIONS
Section 3.1 PRE-TAX CONTRIBUTIONS
A Participant may have, prior to January 1, 1998, elected to have
Salary Redirection (formerly called Pre-Tax Contributions) made
on his behalf by agreeing to salary reduction contributions from
cash wages payable. After-tax contributions have not been allowed
since prior to December 1, 1992.
Section 3.2 MATCHING CONTRIBUTIONS
No Matching Contributions shall be made on or after January 1,
1998, except with respect to Salary Redirection deposited for
prior periods.
Section 3.3 PROFIT SHARING CONTRIBUTIONS
No Profit Sharing Contributions may be made for periods beginning
on or after January 1, 1998.
Section 3.4 NONDISCRIMINATION TEST FOR SALARY REDIRECTION
Effective January, 1997:
(a) Periodically as determined by the Committee, the Employer
shall check the actual deferral percentages against the
tests identified below.
(b) The term "eligible Participants," for purposes of this
Section shall mean all Participants under this Plan who are
eligible to make Salary Redirection contributions during the
Plan Year for which the tests are being made.
(c) The term "actual deferral percentage," means the average of
the percentages (calculated separately for each eligible
Participant) of Salary Redirection and Qualified Nonelective
Contributions on behalf of each eligible Participant divided
by the compensation of the eligible Participant.
(d) The term "compensation" for purposes of this Section shall
include Compensation is defined in Treasury Regulations
(S)1.414(s)-1T(c)(1) and
-14-
<PAGE>
(2) as modified by Treasury Regulation (S)1.414(s)-1T(c)(4),
applied uniformly to all employees for any Plan Year or
portion thereof during which they are eligible to
participate. Compensation for purposes of this Section shall
be limited pursuant to Code Section 401(a)(17).
(e) Only one of the following two tests need be satisfied not to
have a reduction in Salary Redirection.
Test I - The actual deferral percentage for the current
Plan Year of the group of Highly Compensated
Employees is not more than the actual deferral
percentage for the preceding Plan Year of all
Non-Highly Compensated Employees, multiplied by
1.25.
Test II - The excess of the actual deferral percentage for
the current Plan Year of the group of Highly
Compensate Employees over the actual deferral
percentage for the preceding Plan Year of all
Non-Highly Compensated Employees is not more
than two percentage points, and the actual
deferral percentage for the current Plan Year of
the group of Highly Compensated Employees is not
more than the actual deferral percentage for the
preceding Plan Year of all Non-Highly
Compensated Employees, multiplied by two. If
Test II in Subsection 3.5(e) is used in testing
other contributions pursuant to that Section,
Test II under this Section shall be limited as
provided for in Code Section 401(m)(9) and the
regulations issued by the Secretary of the
Treasury of notices issued by the Internal
Revenue Service. If a multiple use of Test II
occurs, such multiple use shall be corrected by
reducing either the actual deferral percentage
or actual contribution percentage of the Highly
Compensated Employee in an amount calculated in
the manner provided in Section 3.4(f) or Section
3.5(f).
Notwithstanding the above, the Committee may elect to
perform the tests using the Average Actual Deferral
Percentage for the current Plan Year for Participants who
are Non-Highly Compensated Employees for the current Plan
Year rather than using prior Plan Year data, provided that
if such election is made for the 1998 or a later Plan Year,
the test must continue to be performed based on current Plan
Year data until the election is changed in a manner
prescribed by the Secretary of the
-15-
<PAGE>
Treasury. Unless the Committee elects to use current Plan
Year data, the Participants taken into account in
determining the prior Plan Year's Average Actual Deferral
Percentage for Non-Highly Compensated Employees are those
individuals who were Non-Highly Compensated Employees during
the preceding Plan Year, without regard to the Participants'
status during the current Plan Year (i.e., a Participant who
was a Non-Highly Compensated Employee for the preceding Plan
Year is included in the calculation as a Non-Highly
Compensated Employee even if the Participant is no longer
employed by the Employer or has become a Highly Compensated
Employee for the current Plan Year). For the 1997 Plan Year,
the determination of who was a Non-Highly Compensated
Employee for the 1996 Plan Year shall be made using the
definition of Non-Highly Compensated Employee in effect
prior to this restatement.
For purposes of these tests, the actual deferral percentage
for any Participant who is a Highly Compensated Employee for
the Plan Year and who is eligible to have Salary Redirection
allocated to his accounts under two or more arrangements
described in Code Section 401(k) that are maintained by the
Company, shall be determined as if such Salary Redirection
were made under a single arrangement.
(f) If neither Test I nor Test II is initially satisfied for any
Plan Year, the Plan shall nevertheless be deemed to comply
with the requirements of Section 401(k)(3)(A)(ii) of the
Code for such Plan Year if, before the last day of the
following Plan Year, the amount of any excess contribution
(and any income thereon) is distributed to Participants who
are Highly Compensated Employees. The amount to be returned
shall be determined as follows:
[i] Calculate the dollar amount that would be returned
to each Highly Compensated Employee if the Average
Deferral Percentage of Highly Compensated Employees
were reduced by returning Salary Redirection
contributions to such Participants, beginning with
those Highly Compensated Employees' with the highest
Actual Deferral Percentage and only to the extent
necessary to meet either test above.
[ii] Determine the total of the dollar amounts calculated
in Step [i], and return that amount to Highly
Compensated Employees in accordance with Steps [iii]
and [iv] below by distributing Salary Redirection
contributions as Excess Contributions. Excess
-16-
<PAGE>
Contributions, adjusted for any income or loss
allocable thereto, may be distributed before the end
of the following Plan Year to Participants on whose
behalf such Excess Contributions were made for such
preceding Plan Year. Excess Contributions shall be
adjusted for income or loss, and the income or loss
allocable to Excess Contributions shall be
determined by multiplying the income or loss
allocable to the Participant's Salary Redirection
contributions for the Plan Year by a fraction, the
numerator of which is the Excess Contribution on
behalf of the Participant for the preceding Plan
Year and the denominator of which is the value of
the Participant's Salary Redirection Account on the
last day of the preceding Plan Year.
[iii] Reduce the Salary Redirection contributions of the
Highly Compensated Employee with the highest dollar
amount of Salary Redirection contributions by the
amount required to cause that Highly Compensated
Employee's Salary Redirection contributions to equal
the dollar amount of the Salary Redirection
contributions of the Highly Compensated Employee
with the next highest dollar amount of Salary
Redirection Contributions. However, if a lesser
reduction would equal the total remaining excess
contributions to be distributed, the lesser
reduction amount is distributed.
[iv] If the total amount distributed is less than the
total excess contributions from Step [ii], Step
[iii] is repeated.
If it is necessary to reduce the matched Salary Redirection,
the Participant shall nevertheless receive from the Plan a
distribution equal to the vested portion of the Employer
Matching Contribution plus any income thereon that would
have been allocated to him had such reduction in
contribution not been necessary. Any remaining portion of
the Matching Contribution shall be forfeited in accordance
with the provisions of Section 5.5.
Section 3.5 NONDISCRIMINATION TEST FOR OTHER CONTRIBUTIONS
Effective January, 1997:
(a) Periodically as determined by the Committee, the Employer
shall check the actual contribution percentages against the
tests identified below.
-17-
<PAGE>
(b) The term "eligible Participants," for purposes of this
Section, shall mean all Participants under this Plan who are
eligible to make Salary Redirection contributions, and
receive Matching Contributions during the Plan Year for
which the tests are being made.
(c) The term "actual contribution percentage," means the average
of the following percentages (calculated separately for each
eligible Participant): Matching Contributions (and Salary
Redirection to the extent elected by the Employer and
permitted by Regulations under Code Section 401(m)) on
behalf of each eligible Participant divided by compensation
of the eligible Participant.
(d) The term "compensation" for purposes of this Section shall
include compensation as defined in Treasury Regulations
(S)1.414(s)-1T(c)(1) and (2) as modified by Treasury
Regulation (S)1.414(s)-1T(c)(4), applied uniformly to all
employees for any plan year or portion thereof during which
they are eligible to participate. Compensation for purposes
of this Section shall be limited pursuant to Code Section
401(a)(17).
(e) Only one of the following two test need be satisfied not to
have a reduction in contribution tested pursuant to this
Section.
Test I - The actual contribution percentage for the
current Plan Year of the group of Highly
Compensated Employees is not more than the
actual contribution percentage for the preceding
Plan Year of all Non-Highly Compensated
Employees, multiplied by 1.25.
Test II - The excess of the actual contribution percentage
for the current Plan Year of the group of Highly
Compensated Employees over the actual
contribution percentage for the preceding Plan
Year of all Non-Highly Compensated Employees is
not more than two percentage points, and the
actual contribution percentage for the current
Plan Year of the group of Highly Compensated
Employees is not more than the actual
contribution percentage for the preceding Plan
Year of all Non-Highly Compensated Employees,
multiplied by two. If Test II in Subsection
3.4(e) is used in testing Salary Redirection
pursuant to that Section, Test II under this
Section shall be limited as provided for in Code
Section 401(m)(9) and the regulations issued by
the
-18-
<PAGE>
Secretary of the Treasury of notices issued by
the Internal Revenue Service. If a multiple use
of Test II occurs, such multiple use shall be
corrected by reducing either the actual deferral
percentage or actual contribution percentage of
the Highly Compensated Employee in an amount
calculated in the manner provided in Section
3.4(f) or Section 3.5(f).
Notwithstanding the above, the Committee may elect to
perform the tests using the Average Contribution Percentage
for the current Plan Year for Participants who are Non-
Highly Compensated Employees for the current Plan Year
rather than using prior Plan Year data, provided that if
such election is made for the 1998 or a later Plan Year, the
test must continue to be performed based on current Plan
Year data until the election is changed in a manner
prescribed by the Secretary of the Treasury. Unless the
Committee elects to use current Plan Year data, the
Participants taken into account in determining the prior
Plan Year's Average Contribution Percentage for Non-Highly
Compensated Employees are those individuals who were Non-
Highly Compensated Employees during the preceding Plan Year,
without regard to the Participants' status during the
current Plan Year (i.e., a Participant who was a Non-Highly
Compensated Employee for the preceding Plan Year is included
in the calculation as a Non-Highly Compensated Employee even
if the Participant is no longer employed by the Employer or
has become a Highly Compensated Employee for the current
Plan Year). For the 1997 Plan Year, the determination of who
was a Non-Highly Compensated Employee for the 1996 Plan Year
shall be made using the definition of Non-Highly Compensated
Employee in effect prior to this restatement.
For purposes of these tests, the actual contribution
percentage for any Participant who is a Highly Compensated
Employee for the Plan Year and who is eligible to have
Matching Contributions allocated to his accounts under two
or more arrangements described in Code Section 401(k) that
are maintained by the Company, shall be determined as if
such Matching Contributions were made under a single
arrangement.
(f) If neither Test I nor Test II is initially satisfied for any
Plan Year, the Plan shall nevertheless be deemed to comply
with the requirements of Section 401(m) of the Code for such
Plan Year if, before the last day of the following Plan
Year, the amount of any excess contribution (and any income
thereon) is distributed to Participants who are Highly
-19-
<PAGE>
Compensated Employees or if forfeitable, is forfeited. The
amount to be reduced shall be determined as follows:
[i] Calculate the dollar amount by which each Highly
Compensated Employee's Employer Matching
contributions must be reduced to pass wither test,
beginning with those Highly Compensated Employees
with the highest Contribution Percentage and only to
the extent necessary to meet either test above.
[ii] Determine the total of the dollar amounts calculated
in Step [i], and reduce Highly Compensated
Employees' Employer Matching contributions in
accordance with Steps [iii] and [iv] below.
[iii] Reduce the Employer Matching contributions of the
Highly Compensated Employee with the highest dollar
amount of Employer Matching contributions by the
amount required to cause that Highly Compensated
Employee's Employer Matching contributions to equal
the dollar amount of the Employer Matching
contributions of the Highly Compensated Employee
with the next highest dollar amount of Employer
Matching contributions. However, if a lesser
reduction would equal the total remaining excess
contributions to be distributed, the lesser
reduction amount is distributed.
[iv] If the total amount distributed is less than the
total excess contributions from Step [ii], Step
[iii] is repeated.
If it is necessary to reduce the Employer Matching
Contribution, the Participant shall nevertheless receive
from the Plan a distribution equal to the vested portion of
the Employer Matching Contribution plus any income thereon
that would have been allocated to him had such reduction in
contribution not been necessary. Any remaining portion of
the Matching Contribution shall be forfeited in accordance
with the provisions of Section 5.5.
(g) This Section shall be governed by Code Section 401(m) and
any rules or regulations issued pursuant thereto, which may
include coordination and/or combination with allocations
subject to Section 401(k) in accordance with Treasury
Regulation Section 1.401(m)-2.
-20-
<PAGE>
Section 3.6 MAXIMUM INDIVIDUAL DEFERRAL
A Participant shall not be permitted to have his Employer
redirect an amount in excess of $9,500 in any calendar year
pursuant to the provisions of Section 3.1, including
contributions to any other plan of the Company which are made
pursuant to Code Section 402(a)(8). The $9,500 limitation shall
be adjusted in accordance with cost-of-living adjustments made by
the Secretary of the Treasury pursuant to Code Section 402(g)(5).
If any amount is redirected pursuant to Section 3.1 in excess of
this limit (as adjusted), or if a Participant notifies the
Committee, in writing, by March 1 following the close of the
taxable year of the amount contributed in excess of this limit
(as adjusted) to all plans pursuant to Code Section 402(a)(8),
such amount shall be deemed an "excess deferral" and the
Committee shall direct the Trustee to distribute to the
Participant (not later than the April 15 following the calendar
year in which the excess deferral was made) the amount of the
excess deferral plus any income allocable to such amount.
Section 3.7 MISTAKE OF FACT
If due to a mistake of fact, Employer Contributions to the Trust
Fund for any Plan Year exceed the amount intended to be
contributed, notwithstanding any provision to the contrary, the
Employer, as soon as such mistake of fact is discovered, shall
notify the Trustee. The Employer shall direct that the Trustee
return such excess to the Employer, provided such return is made
within one year of the date on which the Employer made the
contribution.
Section 3.8 QUALIFIED NONELECTIVE CONTRIBUTIONS
The Employer may, as of the end of any calendar quarter, up to
and including the calendar quarter ending December 31, 1997, make
a Qualified Nonelective Contribution to the Trust Fund on behalf
of any Participant. Such Qualified Nonelective Contributions
shall be added to the Salary Redirection Accounts of those
Participants and shall be 100% vested when made, subject to the
same distribution rules as Salary Redirection Contributions, and
shall be tested for nondiscrimination as Salary Redirection
Contributions in accordance with the provisions of Section 3.4.
-21-
<PAGE>
Section 3.9 UNIFORMED SERVICES EMPLOYMENT AND REEMPLOYMENT RIGHTS ACT OF 1994
("USERRA")
Effective December 12, 1994, notwithstanding any provision of
this Plan to the contrary, contributions, benefits and service
credit with respect to qualified military service will be
provided in accordance with Section 414(u) of the Code.
Section 414(u) generally provides that an employer maintaining a
plan shall be treated as meeting the requirements of USERRA only
if an employee reemployed under USERRA is treated as not having
incurred a break in service because of the period of military
service, the employee's military service is treated as service
with the employer for vesting and benefit accrual purposes, the
employee is permitted to make additional elective deferrals and
employee contributions in an amount not exceeding the maximum
amount the employee would have been permitted or required to
contribute during the period of military service if the employee
had actually been employed by the employer during that period
("make-up contributions"), and the employee is entitled to any
accrued benefits that are contingent on employee contributions or
elective deferrals to the extent the employee pays the
contributions or elective deferrals to the plan. Make-up
contributions must be permitted during the period that begins on
the date of reemployment and continues for five years or, if
less, three times the period of military service. With respect to
make-up contributions, the employer must make matching
contributions that would have been required if the make-up
contributions had actually been made during the period of
military service.
Section 414(u) provides that an employee is treated as receiving
compensation from the employer during the period of military
service equal to the compensation the employee otherwise would
have received from the employer during that period, or, if the
compensation the employee otherwise would have received is not
reasonably certain, the employee's average compensation from the
employer during the period immediately preceding the period of
military service. For purpose of (S) 414(u), USERRA is not
treated as requiring the crediting of earnings to an employee
with respect to any contribution before the contribution is
actually made or requiring any allocation of forfeitures to the
employee for the period of military service.
Section 414(u) generally provides that a contribution that is
made by an employer or employee to an individual account plan or
by an employee to a contributory defined benefit plan, and that
is required under USERRA, is taken into account for purposes of
the limitations of (S) 402(g), 402(h), 403(b), 404(a), 404(h),
408, 415 or 457 in the year to which the contribution relates,
not the year in which the
-22-
<PAGE>
contribution is made. In addition, (S) 414(u) provides that a
plan is not treated as failing to meet the requirements of (S)
401(a)(4), 401(a)(26), 401(k)(3), 401(k)(11), 401(k)(12), 401(m),
403(b)(12), 408(k)(3), 408(k)(6), 408(p), 410(b), or 416 because
of the contribution (or the right to make the contribution).
-23-
<PAGE>
ARTICLE 4
ALLOCATION TO INDIVIDUAL ACCOUNTS
Section 4.1 INDIVIDUAL ACCOUNTS
The Committee shall establish and maintain an Individual Account
in the name of each Participant to which the Committee shall
credit all amounts allocated to each such Participant pursuant to
Article 3 and the following Sections of this Article.
Section 4.2 INVESTMENT OF ACCOUNTS
(a) Effective October 6, 1998, there shall be established the
following Investment Funds within the Trust Fund:
(1) INTEREST INCOME - A fund generally invested in
investment contracts with banks and insurance companies
to generate interest income returns above the rates
earned by money market funds, while generally
maintaining a stable principal value. This fund may
also be referred to as the Stable Value Fund.
(2) BALANCED FUND - A fund consisting of both fixed income
obligations of the United States Government and its
agencies and of companies other than Vencor, Inc. to
provide protection of principal consistent with an
attractive rate of return, and equity investments other
than the common stock of Vencor, Inc.
(3) GROWTH FUND - A fund consisting primarily of common
stocks with an objective of capital growth over both
the intermediate and long-term.
(4) AGGRESSIVE GROWTH FUND - a fund consisting primarily of
common stocks of companies that are early in their life
cycle and which have the potential to grow
significantly, with the objective to provide long term
capital appreciation without regard to current income.
(5) COMPANY STOCK FUND - a fund consisting primarily of
shares of common stock of Vencor, Inc. and dividends
and distributions attributable to said common stock,
plus temporary investments
-24-
<PAGE>
held pending purchase of additional shares of common
stock of Vencor, Inc.
(b) Each Participant shall have the right to direct the
Committee to invest the cumulative balance in his Individual
Account attributable to Salary Redirection, Prior Plan
Salary Redirection Contributions, Prior Plan Employer
Contributions and current Salary Redirection in increments
of 10% (25% if elections made prior to January 1, 1997, in
which case they continue until a change is made by the
Participant) in the Investment Funds provided in Section
4.2(a). Such direction shall be effected as soon as
practicable after the end of the month, provided the
Participant gives the direction by identity-secured
telephonic instructions (or in writing if telephonic
instructions are impracticable) no later than the 15th day
of the month. Neither the Trustee nor any other Fiduciary
shall be responsible for investment losses resulting from a
Participant's exercise of investment discretion, in
accordance with ERISA Section 404(c).
(c) A Participant who does not make any election under this
Section shall have investments formerly in investment funds
which contain any stocks (other than solely Company Stock)
transferred to the Balanced Fund, and those formerly in
investment funds invested solely in bonds or other fixed
income securities or guaranteed certificate funds
transferred to the Interest Income Fund, subject to further
redirection by the Participant in accordance with the Plan.
Section 4.3 VALUATION OF ACCOUNTS
(a) INDIVIDUAL ACCOUNT. Effective October 6, 1998, as of each
Valuation Date, the Committee shall determine the fair
market value of the Individual Account of each Participant
for each Investment Fund in which the Individual Account is
invested as follows:
(1) The value of the Individual Account of each Participant
as of the last Valuation Date;
(2) Minus the amount of any withdrawals and distributions
made from such account since the last Valuation Date;
(3) Plus any contributions to the Participant's Salary
Redirection Account since the last Valuation Date;
-25-
<PAGE>
(4) Plus any allocation to the Participant's Matching
Contribution Account since the last Valuation Date;
(5) Plus any allocation to the Participant's Profit Sharing
Account since the last Valuation Date;
(6) Plus the Individual Account's proportionate share of
any investment earnings allocated to each Investment
Fund held within the Individual Account since the last
Valuation Date;
(7) Minus the Individual Account's proportionate share of
any investment losses allocated to each Investment Fund
held within the Individual Account since the last
Valuation Date.
(b) INVESTMENT EARNINGS OR LOSSES. The investment earnings (or
losses, if such computation is negative) from the Investment
Funds shall mean the difference between the unit price of
any Investment Fund (other than the Company Stock Fund) from
one business day to the next, and any net gain or loss on
non-mutual fund investments in an Investment Fund, as
reflected by interest payments, dividends, realized and
unrealized gains and losses on securities, other investment
transactions and expenses paid from the fund.
(c) ALLOCATION OF INVESTMENT EARNINGS OR LOSSES. Except as
provided in Section 4.3(e), the investment earnings or
losses from the Trust Fund shall be allocated to the
Individual Account of each Participant invested in the
respective Investment Fund in the ratio of "A" divided by
"B" where "A" is an amount determined pursuant to Section
4.3(d) for the portion of the Individual Account of each
Participant invested in the respective Investment Fund and
"B" is an amount determined pursuant to Section 4.3(d) for
the portion of the Individual Account of all Participants
invested in the respective Investment Fund.
(d) DETERMINATION OF RATIO. For purposes of determining the
ratio is Section 4.3(c), the amounts shall be determined as
follows:
(1) the value of the portion of such Individual Account(s)
in the Investment Fund as of the last Valuation Date;
-26-
<PAGE>
(2) Minus withdrawals and benefit payments to or on behalf
of Participants from the portion of such Individual
Account(s) in the Investment Fund since the last
Valuation Date.
(e) COMPANY STOCK FUND. As of each Valuation Date with respect
to the portion of a Participant's Individual Account
invested in the Company Stock Fund: (i) dividends paid since
the preceding Valuation Date on the number of shares of
Vencor, Inc. common stock held in the Participant's
Individual Account invested in the Company Stock Fund as of
the preceding Valuation Date (as adjusted for any
distributions or withdrawals since that date) shall be added
to the portion of the Participant's Individual Account
invested in the Company Stock Fund in the ratio that the
number of said shares of stock held in each Participant's
Individual Accounts as of the preceding Valuation Date (as
adjusted for any distributions or withdrawals since that
date) bears to the total number of said shares of stock held
in all Participants' Individual Accounts as of the preceding
Valuation Date as so adjusted; (ii) any remaining dividends
and other earnings of the Company Stock Fund since the
preceding Valuation Date shall be added to the Individual
Accounts of each Participant in the Company Stock Fund in
the ratio that the non-stock balance held in each
Participant's Individual Account in the Company Stock Fund
as of the preceding Valuation Date (as adjusted for any
distributions or withdrawals since that date, one-half of
the Matching Contributions and one-half of any Salary
Redirection contributions added to such Individual Accounts
in the Company Stock Fund since the preceding Valuation
Date) bears to the total non-stock balance in all
Participant's Individual Accounts in the Company Stock Fund
as of the preceding Valuation Date as so adjusted; and (iii)
the shares of Vencor, Inc. common stock acquired with cash
attributable to the Company Stock Fund since the preceding
Valuation Date shall be added to each Participant's
Individual Account in the Company Stock Fund in the ratio
that the non-stock balance held in each Participant's
Individual Account in the Company Stock Fund as of the
preceding Valuation Date (as adjusted for any distributions,
withdrawals, Matching Contributions, Salary Redirection
contributions and earnings and dividends as of the current
Valuation Date) bears to the total non-stock balance of all
Participant's Individual Accounts in the Company Stock Fund
as so adjusted and the cost of the shares so added shall be
subtracted from the non-stock portion of the Participant's
Individual Account held in the Company Stock Fund.
-27-
<PAGE>
Section 4.4 TRUSTEE AND COMMITTEE JUDGMENT CONTROLS
In determining the fair market value of the Trust Fund and of
Individual Accounts, the Trustee shall exercise its best
judgment, and all such determinations of value (in the absence of
bad faith) shall be binding upon all Participants and their
beneficiaries.
Section 4.5 MAXIMUM ADDITIONS
Anything herein to the contrary notwithstanding, the total Annual
Additions of a Participant for any Limitation Year when combined
with any similar annual additions credited to the Participant for
the same period from another qualified Defined Contribution Plan
maintained by the Company, shall not exceed the lesser of the
amounts determined pursuant to Section 4.5(a) or (b).
(a) $30,000 or, if larger, 25% of the dollar limitation in
effect under Code Section 415(b)(1)(A) determined by the
Commissioner of Internal Revenue as of January 1 of each
year to apply to the Limitation Year ending with or within
that calendar year; or
(b) 25% of the Participant's compensation received from the
Company for such Limitation Year, as determined pursuant to
Section 415 of the Code.
(c) In the event a Participant is covered by one or more Defined
Contribution Plans maintained by the Company, the maximum
annual additions as noted above shall be decreased in the
last Defined Contribution Plan maintained by the Company in
which he participated to ensure that all such plans will
remain qualified under the Code.
Section 4.6 CORRECTIVE ADJUSTMENTS
In the event that corrective adjustments in the Annual Addition
to any Participant's Individual Account are required as the
result of a reasonable error in estimating a Participant's
compensation, the corrective adjustments shall be made pursuant
to and in the order of the subsections in this Section.
(a) The portion of the Participant's unmatched Salary
Redirection made pursuant to Subsection 3.1(a) shall be
returned by distribution to the Participant, with earnings
thereon. Any amount so returned shall be disregarded for
purposes of the tests in Sections 3.4 and 3.5.
-28-
<PAGE>
(b) The portion of the Participant's matched Salary Redirection
made pursuant to Subsection 3.1(a) and his Matching
Contributions shall be proportionally reduced to insure
compliance with Section 4.5. Any affected Salary Redirection
will be distributed to the Participant and shall not be
considered for purposes of the tests in Sections 3.4 and 3.5.
Any affected Matching Contributions shall be used to reduce
future Matching Contributions.
(c) The Participant's Profit Sharing Contribution shall be reduced
to insure compliance with Section 4.5. Any such amount reduced
shall be allocated as of the end of the next Plan Year among
the Profit Sharing Contribution Accounts of all other
Participants in the same manner as is indicated in Section 3.3.
Section 4.7 DEFINED CONTRIBUTION AND DEFINED BENEFIT PLAN FRACTION
If a Participant is a participant in a Defined Benefit Plan
maintained by the Company, the sum of his defined benefit plan
fraction and his defined contribution plan fraction for any
Limitation Year may not exceed 1.0.
(a) For purposes of this Section, the term "defined contribution
plan fraction" shall mean a fraction the numerator of which is
the sum of all of the Annual Additions of the Participant under
this Plan and any other Defined Contribution Plan maintained by
the Company as of the close of the Limitation Year and the
denominator of which is the sum of the lesser of the following
amounts determined for such Limitation Year and for each prior
Limitation Year of employment with the Company:
(1) the product of 1.25 multiplied by the dollar limitation in
effect under Section 415(c)(1)(A) of the Code; or
(2) the product of 1.4 multiplied by the amount which may be
taken into account under Code Section 415(c)(1)(B) with
respect to each individual under the Plan for such
Limitation Year.
(b) For purposes of this Section, the term "defined benefit plan
fraction" shall mean a fraction, the numerator of which is the
Participant's projected annual benefit (as defined in the
Defined Benefit Plan) determined as of the close of the
Limitation Year and the denominator of which is the lesser of:
-29-
<PAGE>
(1) the product of 1.25 multiplied by the dollar limitation in
effect pursuant to Section 415(b)(1)(A) of the Code for such
Limitation year; or
(2) the product of 1.4 multiplied by the amount which may be
taken into account pursuant to Section 415(b)(1)(B) of the
Code with respect to each individual under the Plan for such
Limitation year.
(c) The limitation on aggregate benefits from a Defined Benefit Plan
and a Defined Contribution Plan which is contained in Section
2004 of ERISA, as amended, shall be complied with by a reduction
(if necessary) in the Participant's benefits under the Defined
Benefit Plan.
-30-
<PAGE>
ARTICLE 5
DISTRIBUTIONS
Section 5.1 NORMAL RETIREMENT
When a Participant lives to his Normal Retirement Date and retires,
he shall become entitled to the full value of his Individual
Account as soon as practicable after the distribution forms are
completed (or their time for completion has elapsed), at a value
determined as of the date the distribution check is prepared.
Section 5.2 LATE RETIREMENT
A Participant may continue his employment past his Normal
Retirement Date on a year to year basis. He shall continue to be an
active Participant under the Plan. Upon his actual retirement, he
shall become entitled to the full value of his Individual Account
as soon as practicable after the distribution forms are completed
(or their time for completion has elapsed), at a value determined
as of the date of distribution check is prepared.
Section 5.3 DEATH
If a Participant dies while an active Participant under the Plan,
his Beneficiary shall be entitled to the full value of his
Individual Account as soon as practicable after the distribution
forms are completed (or their time for completion has elapsed), at
a value determined as of the date of distribution check is
prepared.
Section 5.4 [INTENTIONALLY LEFT BLANK]
Section 5.5 TERMINATION OF EMPLOYMENT
(a) Any Participant with an Individual Account in the Plan as of
December 31, 1997 shall be 100% vested in the entire Account as
of that date, and upon termination of employment for any reason
a Participant shall be entitled to a benefit equal to the
balance of his Individual Account as soon as practicable after
the distribution forms are completed, at a value determined as
of the date of distribution check is prepared.
(b) A Participant shall always be 100% vested in the balance of his
Salary Redirection Account.
-31-
<PAGE>
(c) A Participant who terminated employment prior to December 31,
1997 with a zero percent vested percentage was deemed to have
received a distribution on the date he terminates employment
pursuant to the Original Plan. If a Participant received a
distribution of the vested portion of his Individual Account
prior to incurring five consecutive Breaks in Service (or said
Participant was zero percent vested in his Individual Account),
the non-vested balance of such terminated Participant's
Individual Account was forfeited as of the date he received or
was deemed to receive said distribution. If a Participant who
has received a distribution (or deemed distribution) is later
rehired before the period described in subsection 5.5(d) below,
the Participant need not repay the distributed amount, but his
Account shall automatically have the forfeited amount restored
at the earlier of (1) the last day of the Plan Year in which the
Participant is rehired, or (2) the date of a subsequent
termination of employment. Restoration of a forfeiture will
come from a special Employer Contribution.
(d) A terminated Participant who is reemployed and again becomes a
Participant after incurring five or more consecutive Breaks in
Service shall not have any amount forfeited pursuant to this
Section restored to his Individual Account.
(e) Notwithstanding anything to the contrary in this Section 5.5 or
in Section 5.6(a), no portion of a Participant's Individual
Account shall be distributed to him until the participant has
separated from service within the meaning of Code Section
401(k)(2)(B), unless the distribution is in connection with an
event described in Code Section 401(k)(10) and the Treasury
Regulations under that Section.
-32-
<PAGE>
Section 5.6 COMMENCEMENT OF BENEFITS
(a) Any benefits payable under this Article shall be paid as soon
as reasonably possible following the actual date of severance,
at the value determined as of the Valuation Date coincident
with or immediately preceding receipt of properly completed
distribution forms from the Participant, subject to the
Participant's consent if his actual date of severance is prior
to Normal Retirement Age and subject to Subsection 5.7(a). In
no event, however, shall payment begin beyond 60 days after the
last day of the Plan Year in which occurs the latest of (i) the
Participant's reaching Normal Retirement Age; (ii) the 10th
anniversary of the date the Employee became a Participant; or
(iii) termination of the Participant's employment.
Notwithstanding anything in the Plan to the contrary and
notwithstanding the Participant's lack of consent, benefits
under this Plan shall be paid as soon as reasonably possible
following the later of the Participant's actual date of
severance or his Normal Retirement Date.
(b) Except as required in this Section for a Participant who has an
Individual Account to which Section 5.7(b) or Section 5.6(c)
applies, a Participant may defer distribution to a subsequent
date. If the Participant does not consent to a distribution as
provided above, such distribution shall be made based on the
value of the Individual Account as of the date the check for
the distribution is prepared and shall be delivered as soon as
reasonably practical after notice to the Committee of the
election to receive a distribution.
(c) Notwithstanding any other provisions of the Plan, the payment
of a Participant's benefits hereunder shall begin no later than
the April 1 following the calendar year in which the
Participant has both attained age 70 1/2 and has retired,
provided that for 5% owners as defined in Section 416 of the
Code, distribution must begin by April 1 following the calendar
year in which the Participant attains age 70 1/2, regardless of
whether the Participant has retired; and further provided that,
if the Internal Revenue Service in regulations or other
pronouncements provides that eliminating the automatic
distribution from this Plan beginning after age 70 1/2 for a
non-5% owner who has not yet separated from service is a
prohibited cut-back of benefits, then a Participant shall have
the option to take a lump sum distribution even while employed,
at the April 1 following attainment of age 70 1/2, if the
Participant so elects in writing, and, if so elected, shall
receive a distribution on or before
-33-
<PAGE>
December 31 of the year after attainment of age 70 1/2, and
again each year thereafter while still employed, shall receive
a similar distribution of all amounts accrued in Accounts of
the Participant since the last such distribution.
(d) Notwithstanding anything in the Plan to the contrary, any
benefit payable to an alternate payee pursuant to a qualified
domestic relations order, as defined in Section 414(p) of the
Code, shall be paid as soon as administratively possible
following the determination that the order meets the
requirements of Section 414(p) of the Code.
(e) Notwithstanding anything in the Plan to the contrary, in the
event a Participant terminates employment for any reason and
recommences employment prior to distribution of his entire
vested account in the Plan, the undistributed portion of his
vested account shall remain in the Plan until his account again
becomes distributable due to a subsequent termination.
Section 5.7 METHODS OF PAYMENT
(a) Subject to Sections 5.11 and 5.12, a Participant or Beneficiary
shall elect a distribution of the Individual Account in (i) a
single lump sum payment in cash, or (ii) in monthly, quarterly
or annual cash installments for a period elected by the
Participant which may not exceed the life expectancy of the
Participant and his designated Beneficiary, or (iii) by
purchase of an annuity providing for payments which extend over
the life (or life expectancy) of the Participant (and the
Participant's designated Beneficiary, if the Participant so
elects). Notwithstanding the preceding sentence, a Participant
who elects a lump sum distribution may request that the Company
Stock Fund be distributed in kind provided that the Participant
has at least 100 shares of Vencor, Inc. common stock in his
Individual Account at the date of distribution. Any non-stock
balance in his Company Stock Fund will be paid in cash and
fractional shares will be paid in cash based on the fair market
value of such fractional shares as of the day those shares
liquidated or valued for distribution. In the event a
Participant elects to receive his Company Stock Fund in cash,
the shares of Vencor, Inc. stock as of the date of the
distribution check is prepared will be converted to cash based
on the fair market value of such shares as of such date. Except
as provided in Section 5.7(c) or Section 5.11, no other manner
of distribution shall be provided. The request by the
Participant or the Beneficiary shall be in writing and shall be
filed with
-34-
<PAGE>
the Committee. The Committee may not require a distribution
without the consent of the Participant prior to his reaching
Normal Retirement Age or, if the Participant is deceased,
without the consent of his spouse, if the spouse is living and
if the spouse is his Beneficiary, unless the vested value of
the Individual Account is $3,500 or less. If the vested value
of the Participant's Individual Account is $3,500 or less, the
benefits payable will be paid as soon as reasonably possible
following the actual date of severance, notwithstanding lack of
consent. If the vested value of the Participant's Individual
Account has been more than $3,500 at the time of any
distribution, the value the Participant's Individual Account
will be deemed to be more than $3,500 at the time of any
subsequent distribution for purposes of the consent
requirements of this Section.
(b) If the Participant dies before distribution occurs, the
Participant's entire interest will be distributed no later than
five years after the Participant's death, except, if the
designated Beneficiary is the Participant's surviving spouse,
the distribution must begin no later than the date on which the
Participant would have attained age 65.
Section 5.8 BENEFITS TO MINORS AND INCOMPETENTS
If any person entitled to receive payment under the Plan shall be a
minor, the Committee, in its discretion, may dispose of such amount
in any one or more of the ways specified in Subsections (a) through
(c) of this Section.
(a) By payment thereof directly to such minor;
(b) By application thereof for benefit of such minor;
(c) By payment thereof to either parent of such minor or to any
adult person with whom such minor may at the time be living
or to any person who shall be legally qualified and shall be
acting as guardian of the person or the property of such
minor; provided only that the parent or adult person to whom
any amount shall be paid shall have advised the Committee in
writing that he will hold or use such amount for the benefit
of such minor.
In the event that it shall be found that person entitled to receive
payment under the Plan is physically or mentally incapable of
personally receiving and giving a valid receipt for any payment due
(unless prior claim therefor shall have been made by a duly
qualified committee or other legal representative), such payment
may be made to the spouse, son, daughter, parent, brother, sister
or other person deemed
-35-
<PAGE>
by the Committee to have incurred expense for such person otherwise
entitled to payment.
Section 5.9 UNCLAIMED BENEFITS
(a) The Plan does not require either the Trustee or the Committee
to search for, or ascertain the whereabouts of, any Participant
or Beneficiary. The Committee, by certified mail addressed to
his last known address of record with the Committee or the
Employer, shall notify any Participant, or Beneficiary, that he
is entitled to a distribution under this Plan. If the
Participant, or Beneficiary, fails to claim his distributive
share or make his whereabouts known in writing to the Committee
within six months from the date of mailing of the notice, or
before the termination or discontinuance of this Plan,
whichever should first occur, the Committee shall thereafter
treat the Participant's or Beneficiary's unclaimed payable
Account as a Forfeiture. A Forfeiture under this Section shall
occur when the Committee determines that the Participant or
Beneficiary cannot be located, but not earlier than the end of
the notice period, or if later, the earliest date applicable
Treasury regulations would permit the Forfeiture.
(b) If a Participant or Beneficiary who has incurred a forfeiture
of his Account under this Section makes a claim, at any time,
for his forfeited Account, the Committee shall restore the
Participant's or Beneficiary's forfeited Account to the same
dollar amount as the dollar amount of the Account forfeited,
unadjusted for any gains or losses occurring subsequent to the
date of the forfeiture. The Committee shall make the
restoration during the Plan Year in which the Participant or
Beneficiary makes the claim, first from the amount, if any, of
forfeitures the Administrator otherwise would allocate for the
Plan Year, then from the amount, if any, of the Trust net
income or gain for the Plan Year and then from the amount, or
additional amount, the Employer shall contribute to enable the
Committee to make the required restoration. The Committee shall
direct the Trustee to distribute the Participant's or
Beneficiary's restored Account to him not later than 60 days
after the close of the Plan Year in which the Committee
restores the forfeited Account. The forfeiture provisions of
this Section shall apply solely to the Participant's or to the
Beneficiary's Account derived from Employer contributions.
-36-
<PAGE>
Section 5.10 PARTICIPANT DIRECTED ROLLOVERS
(a) This Section applies to distributions made on or after January
1, 1993. Notwithstanding any provision of the plan to the
contrary that would otherwise limit a distributee's election
under this Section, a distributee may elect, at the time and
in the manner prescribed by the Committee, to have any portion
of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a
direct rollover.
(b) For purposes of this Section, an eligible rollover
distribution is any distribution of all or any portion of the
balance to the credit of the distributee, except that an
eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the distributee or the joint
lives (or joint life expectancies) of the distributee and the
distributee's designated beneficiary, or for a specified
period of 10 years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the
Code; and the portion of any distribution that is not
includible in gross income (determined without regard to the
exclusion for net unrealized appreciation with respect to
employer securities).
(c) For purposes of this Section, an eligible retirement plan is
an individual retirement account described in Section 408(a)
of the Code, an individual retirement annuity described in
Section 408(b) of the Code, an annuity plan described in
Section 403(a) of the Code, or a qualified trust described in
Section 401(a) of the Code, that accepts the distributee's
eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an
eligible retirement plan is an individual retirement account
or individual retirement annuity.
For purposes of this Section, a distributee includes an Employee
or former Employee. In addition, the Employee's or former
Employee's surviving spouse and the Employee's or former
Employee's spouse or former spouse who is the alternate payee
under a qualified domestic relations order, as defined in Section
414(p) of the Code, are distributees with regard to the interest
of the spouse or former spouse.
(d) A direct rollover is a payment by the plan to the eligible
retirement plan specified by the distributee.
-37-
<PAGE>
Section 5.11 JOINT AND SURVIVOR OPTIONS
(a) QUALIFIED JOINT AND SURVIVOR ANNUITY. Except as otherwise
provided below, unless an optional form of benefit is selected
pursuant to a qualified election within the 90 day period
ending on the date benefit payments would commence, a
Participant's vested Individual Account will be paid in the
form of a qualified joint and survivor annuity, and an
unmarried Participant's benefit shall be paid in the form of a
life annuity unless otherwise elected by the Participant. A
qualified joint survivor annuity will not be applicable and
this Section shall not apply if the following conditions are
met:
(1) The Participant's vested Individual Account is payable in
full, on the death of the Participant, to the
Participant's surviving spouse, or if there is no
surviving spouse, or if the surviving spouse has
previously consented to the designation of a non-spouse
Beneficiary in the manner prescribed under this Section,
and
(2) Such Participant does not elect a payment of benefits in
the form of a life annuity, and
(3) With respect to such Participant, such Plan is not a
direct or indirect transfer of a plan which is described
in clause (i) or (ii) of Code Section 401(a)(11)(B), or
(4) If the distribution is subject to the terms and conditions
contained in Section 5.7 concerning the distribution of
vested Individual Accounts of $3,500 or less.
(b) QUALIFIED PRERETIREMENT SURVIVOR ANNUITY. Except as otherwise
provided in this Subsection, unless an optional form of
benefit has been selected within the election period pursuant
to a qualified election, if a Participant dies before benefits
have commenced, then the Participant's vested Individual
Account shall be applied toward the purchase of an annuity for
the life of the surviving spouse. Benefits will not be
required to be paid in the form of a PreRetirement survivor
annuity if the following conditions are met:
(1) The Participant's vested Individual Account is payable in
full, on the death of the Participant, to the
Participant's surviving spouse, or
-38-
<PAGE>
if there is no surviving spouse, or if the surviving
spouse has previously consented to the designation of a
non-spouse Beneficiary in the manner prescribed under this
Section, and
(2) Such Participant does not elect a payment of benefits in
the form of a life annuity, and
(3) With respect to such Participant, such Plan is not a
direct or indirect transfer of a plan which is described
in clause (i) or (ii) of Section 401(a)(11)(b) of the
Code, and
(4) If the distribution is subject to the terms and conditions
contained in Section 5.7 concerning the distribution of
vested Individual Accounts of $3,500 or less.
(c) ELECTION PERIOD shall mean, for purposes of this Section, the
period which begins on the first day of the Plan Year in which
the Participant attains age 35 and ends on the date of the
Participant's death. If a Participant separates from service
prior to the first day of the Plan Year in which age 35 is
attained, with respect to the Individual Account as of the
date of separation, the election period shall begin on the
date of separation.
(d) EARLY RETIREMENT AGE shall mean, for purposes of this Section,
the earliest date on which, under the Plan, the Participant
could elect to receive retirement benefits.
(e) QUALIFIED ELECTION shall mean, for purposes of this Section,
an election pursuant to this Subsection. A waiver of a
qualified joint and survivor annuity or a qualified
PreRetirement survivor annuity is permitted. The waiver must
be in writing, must be executed by the Participant, must
specify the Beneficiary and the optional form of benefit and
must be consented to by the Participant's spouse. The spouse's
consent to a waiver must be witnessed by a Plan representative
or a notary public. Notwithstanding this consent requirement,
if the Participant establishes to the satisfaction of a Plan
representative that such written consent may not be obtained
because there is no spouse or the spouse cannot be located, a
waiver will be deemed a qualified election. Any consent
necessary under this provision will be valid only with respect
to the spouse who signs the consent, or in the event of a
deemed qualified election, the designated spouse. Additionally
a revocation of a prior waiver may be made by a
-39-
<PAGE>
Participant without the consent of the spouse at any time
before the commencement of benefits. The number of revocations
shall not be limited.
(f) QUALIFIED JOINT AND SURVIVOR ANNUITY shall mean, for purposes
of this Section, an annuity for the life of the Participant
with a survivor annuity for the life of the spouse which is
50% of the amount of the annuity which is payable during the
joint lives of the Participant and the spouse and which is the
amount of benefit which can be purchased with the
Participant's vested Individual Account.
(g) QUALIFIED PRERETIREMENT SURVIVOR ANNUITY shall mean, for
purposes of this Section, a survivor annuity for the life of
the surviving spouse, the actuarial equivalent of which is not
less than 50% of the Individual Account of the Participant as
of the date of death, which may become payable as a result of
the Participant's death prior to his Normal Retirement Date.
(h) NOTICE REQUIREMENTS.
(1) In the case of a qualified joint and survivor annuity the
Committee shall provide each Participant no less than 30
days and no more than 90 day prior to the annuity starting
date (or such other time as provided by regulations or
other pronouncements), a written explanation of (i) the
terms and conditions of a qualified joint and survivor
annuity; (ii) the Participant's right to make and the
effect of an election to waive the qualified joint and
survivor annuity form of benefit; (iii) the rights of a
Participant's spouse; and (iv) the right to make and the
effect of a revocation of a previous election to waive the
qualified joint and survivor annuity.
(2) In the case of a qualified PreRetirement survivor annuity
the Committee shall provide each Participant within the
period beginning on the first day of the Plan Year in
which the Participant attains age 32 and ending with the
close of the Plan Year preceding the Plan Year in which
the Participant attains age 35, a written explanation of
the qualified PreRetirement survivor annuity in such terms
and in such manner as would be comparable to the
explanation provided for meeting the requirement of a
qualified joint and survivor annuity. If a Participant
enters the Plan after the first day of the Plan Year in
which the Participant attained age 32,
-40-
<PAGE>
the Committee shall provide notice no later than the close
of the third Plan Year succeeding the entry of the
Participant in the Plan.
(3) Notwithstanding the other requirements of this Section,
the respective notices prescribed by this Section need not
be given to a Participant if the Plan "fully subsidizes"
the costs of a qualified joint and survivor annuity or
qualified PreRetirement survivor annuity, and the
Participant cannot elect another form of benefit. For
purposes of this Section, the Plan fully subsidizes the
costs of a benefit if under the Plan the failure to waive
such benefit by a Participant would not result in a
decrease in any plan benefits with respect to such
Participant and would not result in increased
contributions from the Participant.
-41-
<PAGE>
5.12 MINIMUM DISTRIBUTION REQUIREMENTS.
(a) The Committee may not direct the Trustee to distribute the
Participant's Individual Account, nor may the Participant elect
to have the Trustee distribute his Individual Account, under a
method of payment which, as of the "Required Beginning Date"
(the date as determined under Section 5.6(c)) does not satisfy
the minimum distribution requirements under Code Section
401(a)(9) and the applicable Treasury regulations. The minimum
distribution for a calendar year equals the Participant's
Individual Account as of the latest Valuation Date preceding the
beginning of the calendar year divided by the Participant's life
expectancy or, if applicable, the joint and last survivor
expectancy of the Participant and his designated Beneficiary (as
determined subject to the Code Section 401(a)(9) regulations).
The Committee shall decrease the Participant's Individual
Account, as determined on the relevant Valuation Date, by
distributions made after the Valuation Date and by December 31
of the valuation calendar year. For purposes of this valuation,
the Committee shall treat any portion of the minimum
distribution for the first distribution calendar year made after
the close of that year as a distribution occurring in that first
distribution calendar year. In computing a minimum
distribution, the Administrator shall use the unisex life
expectancy multiples under Treasury Regulation Section 1.72-9.
The Committee, only upon the Participant's written request,
shall compute the minimum distribution for a calendar year
subsequent to the first calendar year for which the Plan
requires a minimum distribution by redetermining the applicable
life expectancy. However, the Committee may not redetermine the
joint life and last survivor expectancy of the Participant and a
nonspouse designated Beneficiary in a manner which takes into
account any adjustment to a life expectancy other than the
Participant's life expectancy.
(b) If the Participant's spouse is not his designated Beneficiary, a
method of payment to the Participant (whether by Participant
election or by Committee direction) may not provide more than
incidental benefits to the Beneficiary. For Plan Years beginning
after December 31, 1988, the Plan must satisfy the minimum
distribution incidental benefit ("MDIB") requirement in the
Treasury Regulations issued under Code Section 401(a)(9) for
distributions made on or after the Participant's Required
Beginning Date and before the Participant's death. To satisfy
the MDIB requirement, the Committee shall compute the minimum
distribution
-42-
<PAGE>
required by this Section 5.12 by substituting the applicable
MDIB divisor for the applicable life expectancy factor, if the
MDIB divisor is a lesser number. Following the Participant's
death, the Committee shall compute the minimum distribution
required by this Section 5.12 solely on the basis of the
applicable life expectancy factor and shall disregard the MDIB
factor. For Plan Years beginning prior to January 1, 1989, the
Plan satisfies the incidental benefits requirement if the
distributions to the Participant satisfied the MDIB requirement
or if the present value of the retirement benefits payable
solely to the Participant is greater than 50% of the present
value of the total benefits payable to the Participant and his
Beneficiaries. The Committee shall determine whether benefits to
the Beneficiary are incidental as of the date the Trustee is to
commence payment of the retirement benefits to the Participant,
or as of any date the Trustee redetermines the payment period to
the Participant.
(c) The minimum distribution for the first distribution calendar
year is due by the Participant's Required Beginning Date. The
minimum distribution for each subsequent distribution calendar
year, including the calendar year in which the Participant's
Required Beginning Date falls, is due by December 31 of that
year. If the Participant receives distribution in the form of a
nontransferable annuity contract, the distribution satisfies
this Section 5.12 if the contract complies with the requirements
of Code Section 401(a)(9) and the applicable Treasury
Regulations.
(d) The method of distribution to the Participant's Beneficiary must
satisfy Code Section 401(a)(9) and the applicable Treasury
Regulations. If the Participant's death occurs after his
Required Beginning Date or, if earlier, the date the Participant
commences an irrevocable annuity pursuant to Section 5.7, the
method of payment to the Beneficiary shall provide for
completion of payment over a period which does not exceed the
payment period which had commenced for the Participant. If the
Participant's death occurs prior to his Required Beginning Date,
and the Participant had not commenced an irrevocable annuity
pursuant to Section 5.7, the method of payment to the
Beneficiary, subject to Section 5.11, shall provide for
completion of payment to the Beneficiary over a period not
exceeding: (1) 5 years after the date of the Participant's
death; or (2) if the Beneficiary is a designated Beneficiary,
the designated Beneficiary's life expectancy. The Administrator
may not direct payment of the Participant's Individual Account
over a period described in clause (2) unless the Trustee will
commence payment to the designated Beneficiary no later than the
December 31 following the close of the calendar year in
-43-
<PAGE>
which the Participant's death occurred or, if later, and the
designated Beneficiary is the Participant's surviving spouse,
December 31 of the calendar year in which the Participant would
have attained age 70 1/2. If the Trustee will make distribution in
accordance with clause (2), the minimum distribution for a
calendar year equals the Participant's Individual Account as of
the latest Valuation Date preceding the beginning of the calendar
year divided by the designated Beneficiary's life expectancy. The
Committee shall use the unisex life expectancy multiples under
Treasury Regulation Section 1.72-9 for purposes of applying this
subsection. The Committee, only upon the written request of the
Participant or of the Participant's surviving spouse, shall
recalculate the life expectancy of the Participant's surviving
spouse not more frequently than annually, but may not recalculate
the life expectancy of a nonspouse Beneficiary after the Trustee
commences payment to the Beneficiary. The Committee shall apply
this subsection by treating any amount paid to the Participant's
child, which becomes payable to the Participant's surviving spouse
upon the child's attaining the age of majority, as paid to the
Participant's surviving spouse. Upon the Beneficiary's written
request, the Committee shall direct the Trustee to accelerate
payment of all, or any portion, of the Participant's unpaid
Individual Account, as soon as administratively practicable
following the effective date of that request.
-44-
<PAGE>
ARTICLE 6
WITHDRAWALS
Section 6.1 HARDSHIP WITHDRAWAL
(a) Except as otherwise provided in this Section, and upon proper
written application of a Participant made at least 30 days in
advance of the withdrawal date, in such form as the Committee
may specify, the Committee in its sole discretion may permit
the Participant to withdraw a portion or all of the balance of
his Salary Redirection Account and Prior Plan Salary
Redirection Account, provided that earnings allocated to said
account may not be withdrawn. Such withdrawal shall be based on
the Valuation Date coincident with or immediately preceding the
date of distribution and may not be less than $500.00, or if
the amount of hardship exceeds $500.00 but the amount available
for distribution is lower, the total amount available for
distribution as a hardship withdrawal.
(b) The reason for a withdrawal pursuant to this Section must be to
enable the Participant to meet unusual or special situations in
his financial affairs resulting in immediate and heavy
financial needs of the Participant. Such situations shall be
limited to:
(1) uninsured medical expenses (described in Code Section
213(d)) incurred by or needed to procure services for the
Participant, the Participant's spouse or any dependents of
the Participant (as defined in Code Section 152);
(2) purchase (excluding mortgage payments) of a principal
residence for the Participant;
(3) payment of tuition for the next 12 months of post-secondary
education for the Participant, his or her spouse, children,
or dependents;
(4) the need to prevent the eviction of the Participant from
his principal residence or foreclosure on the mortgage of
the Participant's principal residence; or
-45-
<PAGE>
(5) any additional items which may be added to the list of
deemed immediate and heavy financial needs by the
Commissioner of Internal Revenue through the publication of
revenue rulings, notices, and other documents of general
applicability.
Any withdrawal hereunder may not exceed the amount required to
meet the immediate financial need created, and provided further
that such amount must not be reasonably available from other
resources of the Participant.
(c) The Committee may shorten the notice period if it finds it is
administratively feasible. In granting or refusing any request
for withdrawal or in shortening the notice period, the Committee
shall apply uniform standards consistently and such
discretionary power shall not be applied so as to discriminate
in favor of Highly Compensated Employees.
(d) The withdrawals under this Section shall in no way affect said
Participant's continued participation in this Plan except by the
reduction in account balances caused by such withdrawal.
(e) A Participant shall present evidence to the Committee that the
requested withdrawal is not in excess of the amount necessary to
relieve the financial need of the Participant and that the need
can not be satisfied from other resources that are reasonably
available to the Participant. The determination by the
Committee that the distribution will be necessary to satisfy an
immediate and heavy financial need will be made on the basis of
all relevant facts and circumstances. A distribution generally
will be treated as necessary to satisfy a financial need if the
Committee relies, without actual knowledge to the contrary, on
the Participant's representation that the need cannot be
relieved:
1. through reimbursement of compensation by insurance or
otherwise;
2. by reasonable liquidation of the Participant's assets, to
the extent such liquidation would not itself cause an
immediate and heavy financial need;
3. by cessation of Salary Redirection under the Plan; or
4. by other distributions or non-taxable loans from the plans
maintained by the Employer or by any other employer, or by
-46-
<PAGE>
borrowing from commercial sources on reasonable commercial
terms.
For purposes of this Subsection, the Participant's resources shall
be deemed to include those of his spouse and minor children that
are reasonably available to the Participant.
Section 6.2 OTHER IN-SERVICE WITHDRAWALS
Subject to sections 5.7, 5.11 and 5.12, upon proper written
application in such manner and in such form as the Committee may
specify, a Participant who has completed 10 years of participation
in this Plan shall be permitted one time to withdraw up to 50% of
the balance of his Profit Sharing and After-Tax Accounts (in the
order provided in the original Plan) while employed, determined as
of the Valuation Date coincident with or immediately preceding the
date of application. Subject to Sections 5.7, 5.11 and 5.12, a
Participant who has attained age 59 1/2, or any Participant with
respect only to the After-tax Account, even if still employed, may
elect to withdraw all or any part of his Individual Account once
each Plan Year, determined as of the Valuation Date coincident with
or immediately preceding the date of application.
Section 6.3 PARTICIPANT LOANS
No Participant loans are permitted under this Plan. However, to the
extent that the Original Plan has loans outstanding, the
outstanding loan balance and accrued interest shall be segregated
in the Participant's Individual Account until repaid. The loan
shall be repaid and subject to the terms of the loan agreement,
including the provisions of the Original Plan.
-47-
<PAGE>
ARTICLE 7
FUNDING
Section 7.1 CONTRIBUTIONS
Contributions by the Employer and by the Participants as provided
for in Article 3 shall be paid over to the Trustee. All
contributions by the Employer shall be irrevocable, except as
herein provided, and may be used only for the exclusive benefit of
the Participants and their Beneficiaries.
Section 7.2 TRUSTEE
Vencor, Inc. has entered into an agreement dated as of October 6,
1998, with the Trustee whereunder the Trustee will receive, invest
and administer trust fund contributions made under this Plan in
accordance with the Trust Agreement, as a Master Trust with other
plans maintained by Vencor, Inc.
Such Trust Agreement is incorporated by reference as a part of the
Plan, and the rights of all persons hereunder are subject to the
terms of the Trust Agreement. The Trust Agreement specifically
provides, among other things, for the investment and reinvestment
of the Fund and the income thereof, the management of the Trust
Fund, the responsibilities and immunities of the Trustee, removal
of the Trustee and appointment of a successor, accounting by the
Trustee and the disbursement of the Trust Fund.
The Trustee shall, in accordance with the terms of such Trust
Agreement, accept and receive all sums of money paid to it from
time to time by the Employer, and shall hold, invest, reinvest,
manage and administer such moneys and the increment, increase,
earnings and income thereof as a trust fund for the exclusive
benefit of the Participants and their Beneficiaries or the payment
of reasonable expenses of administering the Plan.
In the event that affiliated or subsidiary Employers become
signatory hereto, completely independent records, allocations, and
contributions shall be maintained for each Employer. The Trustee
may invest all funds without segregating assets between or among
signatory Employers.
-48-
<PAGE>
ARTICLE 8
FIDUCIARIES
Section 8.1 GENERAL
(a) Each Fiduciary who is allocated specific duties or
responsibilities under the Plan or any Fiduciary who assumes
such a position with the Plan shall discharge his duties
solely in the interest of the Participants and Beneficiaries
and for the exclusive purpose of providing such benefits as
stipulated herein to such Participants and Beneficiaries, or
defraying reasonable expenses of administering the Plan. Each
Fiduciary, in carrying out such duties and responsibilities,
shall act with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in
a like capacity and familiar with such matters would use in
exercising such authority or duties.
(b) A Fiduciary may serve in more than one Fiduciary capacity and
may employ one or more persons to render advice with regard to
his Fiduciary responsibilities. If the Fiduciary is serving as
such without compensation, all expenses reasonably incurred by
such Fiduciary shall be paid from the Trust Fund or by the
Employer.
(c) A Fiduciary may allocate any of his responsibilities for the
operation and administration of the Plan. In limitation of
this right, a Fiduciary may not allocate any responsibilities
as contained herein relating to the management or control of
the Trust Fund except through the employment of an investment
manager as provided in Section 8.3 of this Article and in the
Trust Agreement relating to the Fund.
Section 8.2 EMPLOYER
(a) Transitional Hospitals Corporation and related companies
established and maintained the Plan for the benefit of their
Employees and later became a member of the controlled group of
Vencor, Inc. Vencor, Inc. now controls operation and
administration of the Plan. Vencor, Inc., in accordance with
specific provisions of the Plan, has delegated certain of
these rights and obligations to the Trustee, and the Committee
and these parties shall be solely responsible for these, and
only these, delegated rights and obligations.
-49-
<PAGE>
(b) The Employer shall supply such full and timely information for
all matters relating to the Plan as (a) the Committee, (b) the
Trustee, and (c) the accountant engaged on behalf of the Plan
by Vencor, Inc. may require for the effective discharge of
their respective duties.
Section 8.3 TRUSTEE
The Trustee, in accordance with the Trust Agreement, shall be a
directed Trustee with respect to Trust Fund, except that the
Committee may in its discretion employ the Trustee any time and
from time to time as an investment manager (as defined in Section
3(38) of ERISA) with respect to all or a designated portion of the
assets comprising the Trust Fund. The Committee or an investment
manager so appointed shall have the exclusive authority or
discretion to manage the Trust Fund.
Section 8.4 RETIREMENT COMMITTEE
(a) The Board of Vencor, Inc. has appointed a Retirement Committee
for all of the retirement plans of members of its controlled
and affiliated group, such committee to be known as the
Retirement Committee or Committee for purposes of this Plan. No
compensation shall be paid members of the Committee from the
Trust Fund for service on such Committee. The Committee shall
choose from among its members a chairman and a secretary. Any
action of the Committee shall be determined by the vote of a
majority of its members. Either the chairman or the secretary
may execute any certificate or written direction on behalf of
the Committee.
(b) Every decision and action of the Committee shall be valid if
concurrence is by a majority of the members then in office,
which concurrence may be had without a formal meeting.
(c) In accordance with the provisions hereof, the Committee has
been delegated certain administrative functions relating to the
Plan with all powers necessary to enable it to properly carry
out such duties. The Committee shall have no power in any way
to modify, alter, add to or subtract from, any provisions of
the Plan. The Committee shall have the power and authority in
its sole, absolute and uncontrolled discretion to control and
manage the operation and administration of the Plan and its
investment and shall have all powers necessary to accomplish
these purposes, and to make factual determinations regarding
Participants and their accounts. The responsibility and
authority of the Committee shall
-50-
<PAGE>
include, but shall not be limited to, (i) determining all
questions relating to the eligibility of employees to
participate; (ii) determining the amount and kind of benefits
payable to any Participant, spouse or Beneficiary; (iii)
establishing and reducing to writing and distributing to any
Participant or Beneficiary a claims procedure and administering
that procedure, including the processing and determination of
all appeals thereunder and (iv) interpreting the provisions of
the Plan including the publication of rules for the regulation
of the Plan as in its sole, absolute and uncontrolled
discretion are deemed necessary or advisable and which are not
inconsistent with the express terms hereto the Code or ERISA,
as amended. All disbursements by the Trustee, except for the
ordinary expenses of administration of the Trust Fund or the
reimbursement of reasonable expenses at the direction of
Vencor, Inc., as provided herein, shall be made upon, and in
accordance with, the written directions of the Committee. When
the Committee is required in the performance of its duties
hereunder to administer or construe, or to reach a
determination, under any of the provisions of the Plan, it
shall do so on a uniform, equitable and nondiscriminatory
basis.
(d) The Committee shall establish rules and procedures to be
followed by the Participants and Beneficiaries in filing
applications for benefits and for furnishing and verifying
proofs necessary to establish age, service, and any other
matters required in order to establish their rights to benefits
in accordance with the Plan. Additionally, the Committee shall
establish accounting procedures for the purpose of making all
allocations, valuations and adjustments to Participants'
accounts. Should the Committee determine that the strict
application of its accounting procedures will not result in an
equitable and nondiscriminatory allocation among the accounts
of Participants, it may modify its procedures for the purpose
of achieving an equitable and non-discriminatory allocation in
accordance with the general concepts of the Plan, provided
however that such adjustments to achieve equity shall not
reduce the vested portion of a Participant's interest.
(e) The Committee may employ such counsel, accountants, and other
agents as it shall deem advisable. The Employer shall pay, or
cause to be paid from the Trust Fund, the compensation of such
counsel, accountants, and other agents and any other expenses
incurred by the Committee in the administration of the Plan and
Trust.
Section 8.5 CLAIMS PROCEDURES
-51-
<PAGE>
The Committee has delegated to the Human Resources Department (the
"Claims Coordinator") the processing of all applications for benefits.
Upon receipt by the Claims Coordinator of such an application, it
shall determine all facts which are necessary to establish the right
of an applicant to benefits under the provisions of the Plan and the
amount thereof as herein provided. Upon request, the Claims
Coordinator will afford the applicant the right of a hearing with
respect to any finding of fact or determination. The applicant shall
be notified in writing of any adverse decision with respect to his
claim within 90 days after its submission. The notice shall be
written in a manner calculated to be understood by the applicant and
shall include the items specified in Section 8.5(a) through (d).
(a) The specific reason or reasons for the denial;
(b) Specific references to the pertinent Plan provisions on which
the denial is based;
(c) A description of any additional material or information
necessary for the applicant to perfect the claim and an
explanation why such material or information is necessary; and
(d) An explanation of the Plan's claim review procedures.
(e) If special circumstances require an extension of time for
processing the initial claim, a written notice of the extension
and the reason therefor shall be furnished to the claimant
before the end of the initial 90 day period. In no event shall
such extension exceed 90 days.
(f) In the event a claim for benefits is denied or if the applicant
has had no response to such claim within 90 days of its
submission (in which case the claim for benefits shall be deemed
to have been denied), the applicant or his duly authorized
representative, at the applicant's sole expense, may appeal the
denial to the Committee within 60 days of the receipt of written
notice of denial or 60 days from the date such claim is deemed
to be denied. In pursuing such appeal the applicant or his duly
authorized representative:
(1) May request in writing that the Committee review the denial;
(2) May review pertinent documents; and
(3) May submit issues and comments in writing.
-52-
<PAGE>
(g) The decision on review shall be made within 60 days of receipt
of the request for review, unless special circumstances require
an extension of time for processing, in which case a decision
shall be rendered as soon as possible, but not later than 120
days after receipt of a request for review. If such an
extension of time is required, written notice of the extension
shall be furnished to the claimant before the end of the
original 60 day period. The decision on review shall be made in
writing, shall be written in a manner calculated to be
understood by the claimant, and shall include specific
references to the provisions of the Plan on which such denial
is based. If the decision on review is not furnished within the
time specified above, the claim shall be deemed denied on
review.
Section 8.6 RECORDS
All acts and determinations of the Claims Coordinator or the
Committee shall be duly recorded by the Claims Coordinator or the
secretary of the Committee thereof and all such records together
with such other documents as may be necessary in exercising their
duties under the Plan shall be preserved in the custody of such
secretary. Such records and documents shall at all times be open
for inspection and for the purpose of making copies by any person
designated by Vencor, Inc. The Committee shall provide such timely
information, resulting from the application of its responsibilities
under the Plan, as needed by the Trustee and the accountant engaged
on behalf of the Plan by Vencor, Inc., for the effective discharge
of their respective duties.
-53-
<PAGE>
ARTICLE 9
AMENDMENT AND TERMINATION OF THE PLAN
Section 9.1 AMENDMENT OF THE PLAN
The Committee shall have the right at any time by action of the
Board to modify, alter or amend the Plan in whole or in part;
provided, however, that the duties, powers and liability of the
Trustee hereunder shall not be increased without its written
consent; and provided, further, that the amount of benefits which,
at the time of any such modification, alteration or amendment,
shall have accrued for any Participant, Former Participant or
Beneficiary hereunder shall not be adversely affected thereby; and
provided, further, that no such amendments shall have the effect of
reverting to the Employer any part of the principal or income of
the Trust Fund. No amendment to the Plan shall decrease the balance
of a Participant's Individual Account or eliminate an optional form
of distribution.
Section 9.2 TERMINATION OF THE PLAN
The Employer expects to continue the Plan as a funding mechanism
for past contributions indefinitely, but continuance is not assumed
as a contractual obligation and Vencor, Inc. reserves the right at
any time by action of the Board to terminate the Plan. Because
future contributions to the Plan ceased as of January 1, 1998, each
Participant affected thereby was then vested in the amount
allocated to his Individual Account.
Section 9.3 RETURN OF CONTRIBUTIONS
It is intended that this Plan shall be approved and qualified under
the Code and Regulations issued thereunder with respect to
employees' plans and trusts (1) so as to permit the Employers to
deduct for federal income tax purposes the amounts of contributions
to the Trust; (2) so that contributions so made and the income of
the Trust Fund will not be taxable to Participants as income until
received; (3) so that the income of the Trust Fund shall be exempt
from federal income tax. In the event the Commissioner of Internal
Revenue or his delegate rules that the deduction for all or a part
of any Employer Contribution (or Salary Redirection) is not
allowed, the Employers reserve the right to recover that portion or
all of their contributions for which no deduction is allowed,
provided such recovery is made within one year of the disallowance.
-54-
<PAGE>
ARTICLE 10
MISCELLANEOUS
Section 10.1 GOVERNING LAW
The Plan shall be construed, regulated and administered according
to the laws of the Commonwealth of Kentucky, except in those areas
preempted by the laws of the United States of America.
Section 10.2 CONSTRUCTION
The headings and subheadings in the Plan have been inserted for
convenience of reference only and shall not affect the
construction of the provisions hereof. In any necessary
construction the masculine shall include the feminine and the
singular the plural, and vice versa.
Section 10.3 ADMINISTRATION EXPENSES
The expenses of administering the Trust Fund and the Plan shall be
paid from the Trust Fund, unless they are paid by the Employer.
Section 10.4 PARTICIPANT'S RIGHTS
No Participant in the Plan shall acquire any right to be retained
in the Employer's employ by virtue of the Plan, nor, upon his
dismissal, or upon his voluntary termination of employment, shall
he have any right or interest in and to the Trust Fund other than
as specifically provided herein. The Employer shall not be liable
for the payment of any benefit provided for herein; all benefits
hereunder shall be payable only from the Trust Fund.
Section 10.5 NONASSIGNABILITY
(a) The benefit or interest under the Plan and Trust of any person
shall not be assignable or alienable by that person and shall
not be subject to alienation by operation of law or legal
process. The preceding sentence shall apply to the creation,
assignment or recognition of any right to any benefit payable
with respect to a Participant pursuant to a domestic relations
order, unless such order is determined to be a qualified
domestic relations order, as defined in Section 414(p) of the
Code. A domestic relations order entered before January 1,
1985, shall be treated as a
-55-
<PAGE>
qualified domestic relations order if payment of benefits pursuant
to the order has commenced as of such date, and may be treated as
a qualified domestic relations order if payment of benefits is not
commenced as of such date, even though the order does not satisfy
the requirements of Section 414(p) of the Code.
(b) This Plan specifically permits a distribution to an alternate
payee under a qualified domestic relations order at any time,
irrespective of whether the Participant has attained his earliest
retirement age (as defined under Code Section 414(p)) under the
Plan. A distribution to an alternate payee prior to the
Participant's attainment of earliest retirement age is available
only if: (a) the order specifies distribution at that time or
permits an agreement between the Plan and the alternate payee to
authorize an earlier distribution; and (b) if the present value of
the alternate payee's benefits under the Plan exceeds $3,500, and
the order requires, the alternate payee consents to any
distribution occurring prior to the Participant's attainment of
earliest retirement age. Nothing in this Section 10.5 gives a
Participant a right to receive distribution at a time otherwise
not permitted under the Plan nor does it permit the alternate
payee to receive a form of payment not permitted under the Plan.
Section 10.6 MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with
another plan or transfer of assets or liabilities from the Plan to
another plan, each then Participant or Beneficiary shall not, as a
result of such event, be entitled on the day following such
merger, consolidation or transfer under the termination of the
Plan provisions to a lesser benefit than the benefit he was
entitled to on the date prior to the merger, consolidation or
transfer if the Plan had then terminated.
Section 10.7 COUNTERPARTS
The Plan and the Trust Agreement may be executed in any number of
counterparts, each of which shall constitute but one and the same
instrument and may be sufficiently evidenced by any one
counterpart.
Section 10.8 ADMINISTRATIVE MISTAKE
If the Committee discovers that a mistake has been made in
crediting Salary Redirection Contributions or Employer
Contributions, withholding Salary Redirection Contributions from a
Participant's compensation, or crediting earnings to the account
of any Participant, the Committee shall take any administrative
-56-
<PAGE>
action which it deems necessary or appropriate to remedy the
mistake in question, and may request the Employer to make a
special contribution to the account of the Participant where
appropriate. If the Committee discovers that a mistake has been
made in calculating the amount of any excess Salary Redirection or
other contribution under Sections 3.4, 3.5 or 4.6, or earnings on
such excess amount, which amount is required to be distributed to
a Participant, the Committee shall take such administrative action
as it deems necessary or appropriate to remedy the mistake in
question.
-57-
<PAGE>
ARTICLE 11
TOP HEAVY PLAN PROVISIONS
Section 11.1 GENERAL
Notwithstanding anything in the Plan to the contrary, if this Plan
when combined with all other plans required to be aggregated
pursuant to Code Section 416(g) is deemed to be a top-heavy plan
for any Plan Year, the provisions of this Article shall apply to
such Plan Year.
Section 11.2 MINIMUM CONTRIBUTION
Regardless of hours worked, each active Participant who is not a
Key Employee shall be entitled to a minimum allocation of
contributions and forfeitures equal to the lesser of (i) three
percent (3%) of the Participant's Compensation for the Plan Year;
and (ii) provided that the Plan is not part of a Required
Aggregation Group with a Defined Benefit Plan because the Plan
enables the Defined Benefit Plan to meet the requirements of Code
Section 401(a)(4) or 410, the highest percentage of Compensation
contributed on behalf of, plus forfeitures allocated to, a Key
Employee. In the case of a Participant who is also a participant
in a defined benefit plan maintained by the Employer, the minimum
accrued benefit provided in the defined benefit plan pursuant to
Code Section 416(c)(1) equal to two percent of the Participant's
average monthly compensation for the five consecutive years when
his aggregate compensation was highest multiplied by his years of
credited service up to ten years for each plan year in which the
Plan is top heavy, shall be the only minimum benefit for both that
plan and this Plan, and the minimum allocation described above
shall not apply.
Section 11.3 SUPER TOP HEAVY PLAN
The multiplier of 1.25 in Section 4.7 shall be reduced to 1.0
unless (i) all plans of the Required Aggregation Group or the
Permissive Aggregation Group, when aggregated, are 90% or less top
heavy, and (ii) the minimum accrued benefit referenced in clause
(i) of Section 11.2 is modified by substituting three percent with
four percent. In the case of each Participant who is also a
participant in a defined benefit plan maintained by the Employer,
the minimum accrued benefit provided in the defined benefit plan
pursuant to Code Sections 416(c)(1) and 416(h) equal to three
percent of the Participant's average monthly compensation for the
five highest consecutive years when his aggregate compensation was
highest multiplied by his years of credited service up to ten
years for each plan
-58-
<PAGE>
year in which the Plan is top heavy shall be the only minimum
benefit for both that plan and this Plan, and the minimum
allocation described above shall not apply.
Section 11.4 [INTENTIONALLY LEFT BLANK]
Section 11.5 COMPENSATION
For purposes of this Article, compensation shall have the same
meaning as assigned to it by Code Section 415 and shall be limited
to such amount as required by Code Section 401(a)(17).
-59-
<PAGE>
ARTICLE 12
PROVISIONS RELATED TO EMPLOYERS INCLUDED IN THE PLAN
Section 12.1 GENERAL. Any Employer that adopted the Original Plan shall be a
"Participating Employer." Each Participating Employer shall be
subject to the terms and conditions of this Plan as in effect at
the effective date of adoption by the Participating Employer and
as subsequently amended from time to time by Vencor, Inc. Unless
the context of the Plan clearly indicates to the contrary, the
terms "Company" and "Employer" shall be deemed to include each
Participating Employer as relates to its adoption of the Plan.
When an entity ceases to be an "Employer" because it is no longer
part of the Company, the entity shall cease to be a Participating
Employer. Section 12.4 shall not apply to such cessation.
Section 12.2 SINGLE PLAN. This Plan shall be deemed to be a single plan of all
Employers that have adopted this Plan. Employer contributions
shall not be accounted for separately, and all Plan assets shall
be available to pay benefits to all Participants and their
Beneficiaries. Employees may be transferred among Participating
Employer or employed simultaneously by more than one Participating
Employer, and no such transfer or simultaneous employment shall
effect a termination of employment.
Section 12.3 VENCOR, INC. AS AGENT. Each Participating Employer shall be
deemed to have designated irrevocably Vencor, Inc. as its sole
agent (1) for all purposes under Section 8 (including fixing the
number of members of, and the appointment and removal of, the
Committee); and (2) with respect to all its relations with the
Trustee (including the Trustee's appointment and removal, and
fixing the number of Trustees). The Committee shall make any and
all rules and regulations which it shall deem necessary or
appropriate to effectuate the purpose of this Article 12, and such
rules and regulations shall be binding upon the Participating
Employers, the Participants and Beneficiaries.
Section 12.4 WITHDRAWAL OF EMPLOYER. Any Participating Employer may withdraw
its participation in the Plan by giving written notice to the
Administrator stating that it has adopted a separate plan. The
notice shall be given at least six months prior to a designated
Valuation Date, unless the Committee shall accept a shorter period
of notification. Upon request of the withdrawing Participating
Employer, the Committee may, but shall not be obligated to,
instruct the Trustee to transfer the withdrawing Participating
Employer's interest in the Fund to the Participating Employer's
separate plan in accordance with the following rules: Promptly
after the Valuation Date as of which the transfer is to occur, the
Committee, shall
-60-
<PAGE>
establish the withdrawing Participating Employer's interest in the
Trust Fund, after a reduction for fees and other expenses related
to the Participating Employer's withdrawal. The Trustee shall
then, in accordance with the Committee's instructions, transfer
the withdrawing Participating Employer's interest in the Fund to
the trustee or other funding agent of the Participating Employer's
separate plan. Neither the Trustee nor the Committee shall be
obligated to transfer or direct the transfer of assets under this
Article until they are satisfied as to all matters pertaining to
the transfer, including, but not limited to, the tax qualification
of the plan into which the transfer will be made. The Committee
and the Trustee may rely fully on the representations and
instructions of the withdrawing Participating Employer and shall
be fully protected and discharged with respect to any transfer
made in accordance with such representations or instructions. Any
transfer of assets in accordance with this Article shall
constitute a complete discharge of responsibility of other
Employers, Vencor, Inc. and the Trustee without any responsibility
on their part collectively or individually to see to the
application thereof. The Committee in its sole discretion shall
have the right to transfer the withdrawing Participating
Employer's interest in the Fund to the new plan in the form of
installments, in cash, or in cash and kind and over a period of
time not to exceed one year following the designated Valuation
Date as of which the transfer is to occur. Any assets which are
invested in accordance with an investment contract or agreement
which by its terms precludes the realization upon and distribution
of such assets for a stated period of time shall continue to be
held by the Trustee under the terms and conditions of this Plan
until the expiration of such period, subject to the Committee's
instructions. The Committee may in its sole discretion direct the
Trustee to segregate the Accounts of all affected Participants
into a separate fund to facilitate transfer, and the Committee may
in its sole discretion direct the Trustee to invest the separate
fund only in cash equivalent investments.
Section 12.5 TERMINATION OF PARTICIPATION. The Board of Directors of a
Participating Employer may at any time terminate this Plan with
respect to its Employees by adopting a resolution to that effect
and delivering a certified copy to the Committee. The continuation
of the Plan by the Participating Employers shall not be affected.
The termination of the Plan with respect to a Participating
Employer's Employees shall not effect a termination with respect
to an Employee of another Participating Employer if such Employee
was not employed by the terminating Participating Employer on the
effective date of the termination, even though he may have been
employed by the terminating Participating Employer at an earlier
date, and shall not entitle a Participant to a distribution until
an actual separation from service with the meaning prescribed
under Code Section 401(k)(2)(B) has occurred, unless the
distribution follows an event in Code
-61-
<PAGE>
Section 401(k)(10) and the Treasury Regulations thereunder. Any
fees and other expenses related to a Participating Employer's
termination shall be charged against the individual Accounts of
the affected Participants, if not paid by the terminating
Participating Employer.
-62-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, THE EMPLOYER HAS CAUSED THIS PLAN TO BE EXECUTED THIS
_____ DAY OF _______________, 1998, BUT EFFECTIVE JANUARY 1, 1998.
VENCOR, INC.
BY
---------------------------------------
Title:
-----------------------------------
-63-
<PAGE>
EXHIBIT 10.3
AMENDMENT NO. 2
TO THE
VENCOR, INC. 401(K)
MASTER TRUST AGREEMENT
This is Amendment No. 2 ("Amendment") to the Vencor, Inc. Master Trust
Agreement which was effective January 1, 1997 with Wachovia Bank, N.A. (The
"Trust Agreement").
RECITAL
The parties wish to amend the Trust Agreement to add additional plans to
the master funding mechanism established thereby.
AMENDMENT
1. This Amendment shall be effective as of October 6, 1998
2. All capitalized terms used herein and not otherwise defined shall have
the meaning given in the Trust Agreement.
3. The Trust Agreement is hereby amended to define the term "Plans" to
include: The Vencor Retirement Savings Plan, the Retirement Savings Plan for
Certain Employees of Vencor and Its Affiliates (formerly sponsored by The
Hillhaven Corporation), The TheraTx Retirement Savings Plan, as most recently
amended and restated January 1, 1998, and the THC Retirement Savings Plan, as
most recently amended and restated January 1, 1998.
IN WITNESS WHEREOF, this Amendment has been executed as of the dates set forth
below.
VENCOR, INC.
By__________________________________________
Title:______________________________________
Date:_______________________________________
WACHOVIA BANK, N.A.
By _________________________________________
Title:______________________________________
Date:_______________________________________
<PAGE>
Exhibit 10.4
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and W. Bruce Lunsford (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Executive is employed by the Company, a wholly owned
subsidiary of Vencor, Inc. ("Parent"), and the parties hereto desire to provide
for Executive's continued employment by the Company; and
WHEREAS, the Board of Directors of Parent (the "Board") have
determined that it is in the best interests of the Company to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Company and Executive agree as follows:
1. Employment. The Company hereby agrees to employ Executive and
----------
Executive hereby agrees to be employed by the Company on the terms and
conditions herein set forth. The initial term of this Agreement shall be for a
one-year period commencing on the Effective Date. The Term shall be
automatically extended by one additional day for each day beyond the Effective
Date that the Executive remains employed by the Company until such time as the
Company elects to cease such extension by giving written notice of such election
to the Executive. In such event, the Agreement shall terminate on the first
anniversary of the effective date of such election notice.
2. Duties. Executive is engaged by the Company in an executive
------
capacity.
3. Extent of Services. Executive, subject to the direction and
------------------
control of the Board, shall have the power and authority commensurate with his
executive status and necessary to perform his duties hereunder. During the
term, Executive shall devote his working time, attention, labor,
-1-
<PAGE>
skill and energies to the business of the Company, and shall not, without the
consent of the Company, be actively engaged in any other business activity,
whether or not such business activity is pursued for gain, profit or other
pecuniary advantage, except for Executive's responsibilities as CEO of Ventas,
Inc.
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than $550,000 per year
payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or incentive compensation as the Board may approve from
time to time.
5. Benefits.
--------
(a) Executive shall be entitled to participate in any and all
Executive pension benefit, welfare benefit (including, without limitation,
medical, dental, disability and group life insurance coverages) and fringe
benefit plans from time to time in effect for Executives of the Company and
its affiliates.
(b) Executive shall be entitled to participate in such bonus, stock
option, or other incentive compensation plans of the Company and its
affiliates in effect from time to time for executives of the Company.
(c) Executive shall be entitled to four weeks of paid vacation each
year. The Executive shall schedule the timing of such vacations in a
reasonable manner. The Executive may also be entitled to such other leave,
with or without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The
-2-
<PAGE>
Company shall reimburse Executive for all such reasonable expenses in
accordance with the Company's reimbursement policies and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, Executive shall not have returned to
full-time performance of Executive's duties. For purposes of this
Agreement, "Disability" shall mean Executive's absence from his full-time
duties hereunder for a period of 90 days.
(b) Cause. The Company may terminate Executive's employment during
-----
the Term for Cause. For purposes of this Agreement, "Cause" shall mean the
Executive's (i) conviction of or plea of nolo contendere to a crime
---- ----------
involving moral turpitude; or (ii) willful and material breach by Executive
of his duties and responsibilities, which is committed in bad faith or
without reasonable belief that such breaching conduct is in the best
interests of the Company and its affiliates, but with respect to (ii) only
if the Board adopts a resolution by a vote of at least 75% of its members
so finding after giving the Executive and his attorney an opportunity to be
heard by the Board. Any act, or failure to act, based upon authority given
pursuant to a resolution duly adopted by the Board or based upon advice of
counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by Executive in good faith and in the best interests of
the Company.
(c) Good Reason. Executive's employment may be terminated by
-----------
Executive for Good Reason. "Good Reason" shall exist upon the occurrence,
without Executive's
-3-
<PAGE>
express written consent, of any of the following events:
(i) the Company shall assign to Executive duties of a
substantially nonexecutive or nonmanagerial nature;
(ii) an adverse change in Executive's status or position as an
executive officer of the Company, including, without limitation, an
adverse change in Executive's status or position as a result of a
diminution in Executive's duties and responsibilities (other than any
such change directly attributable to the fact that the Company is no
longer publicly owned);
(iii) the Company shall (A) materially reduce the Base Salary or
bonus opportunity of Executive, or (B) materially reduce his benefits
and perquisites (other than pursuant to a uniform reduction applicable
to all similarly situated executives of the Company);
(iv) the Company shall require Executive to relocate
Executive's principal business office more than 30 miles from its
location on the Effective Date; or
(v) the failure of the Company to obtain the assumption of
this Agreement as contemplated by Section 9(c).
For purposes of this Agreement, "Good Reason" shall not exist until after
Executive has given the Company notice of the applicable event within 90
days of such event and which is not remedied within 30 days after receipt
of written notice from Executive specifically delineating such claimed
event and setting forth Executive's intention to terminate employment if
not remedied; provided, that if the specified event cannot reasonably be
--------
remedied within such 30-day period and the Company commences reasonable
steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is effected, such event
shall not constitute "Good Reason"
-4-
<PAGE>
provided that such event is remedied within 60 days after receipt of such
written notice.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by Executive for Good Reason, shall be communicated by Notice of
Termination given in accordance with this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the
provision so indicated and (iii) specifies the intended termination date
(which date, in the case of a termination for Good Reason, shall be not
more than 30 days after the giving of such notice). The failure by
Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of Executive or the Company, respectively,
hereunder or preclude Executive or the Company, respectively, from
asserting such fact or circumstance in enforcing Executive's or the
Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
-------------------
Executive's employment is terminated by the Company for Cause, or by
Executive for Good Reason, the later of the date specified in the Notice of
Termination or the date that is one day after the last day of any
applicable cure period, (ii) if Executive's employment is terminated by the
Company other than for Cause or Disability, or Executive resigns without
Good Reason, the Date of Termination shall be the date on which the Company
or Executive notified Executive or the Company, respectively, of such
termination and (iii) if Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of
Executive or the Disability Effective Date, as the case may be.
7. Obligations of the Company Upon Termination. Following any
-------------------------------------------
termination of Executive's employment hereunder, the Company shall pay Executive
his Base Salary through the Date of Termination and any amounts owed to
Executive pursuant to the terms and conditions of the
-5-
<PAGE>
Executive benefit plans and programs of the Company at the time such payments
are due. In addition, subject to Executive's execution of a general release of
claims in form satisfactory to the Company, Executive shall be entitled to the
following additional payments:
(a) Death or Disability. If, during the Term, Executive's employment
-------------------
shall terminate by reason of Executive's death or Disability, the Company
shall pay to Executive (or his designated beneficiary or estate, as the
case may be) the prorated portion of any Target Bonus (as defined below)
Executive would have received for the year of termination of employment.
Such amount shall be paid within 30 days of the date when such amounts
would otherwise have been payable to the Executive if Executive's
employment had not terminated.
(b) Good Reason; Other than for Cause. If, during the Term, the
---------------------------------
Company shall terminate Executive's employment other than for Cause (but
not for Disability), or the Executive shall terminate his employment for
Good Reason:
(1) Within 14 days of Executive's Date of Termination, the
Company shall pay to Executive (i) the prorated portion of the Target
Bonus and Performance Share Award for Executive for the year in which
the Date of Termination occurs, and (ii) an amount equal to three
times the sum of (x) the Executive's Base Salary and Target Bonus as
of the Date of Termination, and (y) the number of performance shares
awarded to the Executive pursuant to the Vencor, Inc. 1998 Incentive
Compensation Plan (the "1998 Plan") (including assumed awards granted
under the Vencor, Inc. 1987 Incentive Compensation Program (the "1987
Program") and the Vencor, Inc. 1997 Incentive Compensation Plan (the
"1997 Plan")) in respect of the year in which such Date of Termination
occurs (without regard to any acceleration of the award for such
year), assuming for such purpose that all performance criteria
applicable to such award with respect to the year in which such Date
of Termination occurs were deemed to be satisfied (the "Performance
Share Award").
-6-
<PAGE>
For purposes of this Agreement: "fair market value" shall have the
meaning ascribed to such term under the 1998 Plan; and "Target Bonus"
shall mean the full amount of bonuses and/or performance compensation
(other than Base Salary and awards under the 1998 Plan (including
assumed awards granted under the 1987 Program and the 1997 Plan)) that
would be payable to the Executive, assuming all performance criteria
on which such bonus and/or performance compensation are based were
deemed to be satisfied, in respect of services for the calendar year
in which the date in question occurs.
(2) For a period of three years following the Date of
Termination, the Executive shall be treated as if he or she had
continued to be an Executive for all purposes under the Parent's
Health Insurance Plan and Dental Insurance Plan; or if the Executive
is prohibited from participating in such plan, the Company or Parent
shall otherwise provide such benefits. Following this continuation
period, the Executive shall be entitled to receive continuation
coverage under Part 6 of Title I or ERISA ("COBRA Benefits") treating
the end of this period as a termination of the Executive's employment
if allowed by law.
(3) For a period of three years following the Date of
Termination, Parent shall maintain in force, at its expense, the
Executive's life insurance in effect under the Vencor, Inc. Voluntary
Life Insurance Benefit Plan as of the Date of Termination.
(4) For a period of three years following the Executive's Date of
Termination, the Company or Parent shall provide short-term and long-
term disability insurance benefits to Executive equivalent to the
coverage that the Executive would have had he remained employed under
the disability insurance plans applicable to Executive on the Date of
Termination. Should Executive become disabled during such period,
Executive shall be entitled to receive such benefits, and
-7-
<PAGE>
for such duration, as the applicable plan provides.
(5) To the extent not already vested pursuant to the terms of
such plan, the Executive's interests under the Vencor Retirement
Savings Plan shall be automatically fully (i.e., 100%) vested, without
regard to otherwise applicable percentages for the vesting of employer
matching contributions based upon the Executive's years of service
with the Company.
(6) Parent shall adopt such amendments to its Executive benefit
plans, if any, as are necessary to effectuate the provisions of this
Agreement.
(7) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of $4,088,700 (the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior to any interest payment
date is less than $8.00, such interest payment shall be forgiven and
(z) during the five-day period following the expiration of the fifth
anniversary of the Date of Termination, the Executive shall have the
right to put the preferred stock underlying the Preferred Stock Loan
to the Company at par.
(8) Executive shall be credited with an additional three years of
vesting for purposes of all outstanding stock option awards and
Executive will have an additional three years in which to exercise
such stock options.
(9) Following the Executive's Date of Termination, the Executive
shall receive the computer which Executive is utilizing as of the
-8-
<PAGE>
Date of Termination. In addition, the Executive shall have the right
to purchase the furniture in Executive's office suite as of the Date
of Termination, at the book value thereof. In addition, for a period
of three years following the Executive's Date of Termination, the
Company shall provide the Executive with an office suite and
administrative assistant, in each substantially comparable to the
office suite and administrative assistant that were furnished to the
Executive as of the date of the Executive's Date of Termination.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement shall, at the election and upon written demand of
either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall pay
all costs of the arbitration and all reasonable attorneys' and accountants' fees
of the Executive in connection therewith, including any litigation to enforce
any arbitration award.
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall
-9-
<PAGE>
not be assignable by Executive otherwise than by will or the laws of
descent and distribution. This Agreement shall inure to the benefit of and
be enforceable by Executive's legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, or any
business of the Company for which Executive's services are principally
performed, to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor
to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
10. Other Severance Benefits. Executive hereby agrees that in
------------------------
consideration for the payments to be received under this Agreement, Executive
waives any and all rights to any payments or benefits under any plans, programs,
contracts or arrangements of the Company or their respective affiliates that
provide for severance payments or benefits upon a termination of employment,
other than the Change in Control Severance Agreement between the Company and
Executive dated as of May 1, 1998 (the "Severance Agreement"); provided that any
--------
payments payable to Executive hereunder shall be offset by any payments payable
under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the
-10-
<PAGE>
Company's and Parent's obligations to make any payments hereunder shall not be
subject to or affected by any setoff, counterclaims or defenses which the
Company or Parent may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
If to Executive:
---------------
W. Bruce Lunsford
_____________________
Louisville, KY _____
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: General Counsel
14. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
15. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
-11-
<PAGE>
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By:/s/ Michael R. Barr
Solely for the purpose
of Section 7
VENCOR, INC.
By:/s/ Michael R. Barr
W. BRUCE LUNSFORD
/s/ W. Bruce Lunsford
-12-
<PAGE>
Exhibit 10.5
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is made as of the 28th day of July, 1998
(the "Effective Date"), by and between Vencor Operating, Inc., a Delaware
corporation (the "Company"), and __________________ (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Executive is employed by the Company, a wholly owned
subsidiary of Vencor, Inc. ("Parent"), and the parties hereto desire to provide
for Executive's continued employment by the Company; and
WHEREAS, the Board of Directors of Parent (the "Board") have
determined that it is in the best interests of the Company to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements contained herein, and intending to be legally bound
hereby, the Company and Executive agree as follows:
1. Employment. The Company hereby agrees to employ Executive and
----------
Executive hereby agrees to be employed by the Company on the terms and
conditions herein set forth. The initial term of this Agreement shall be for a
one-year period commencing on the Effective Date. The Term shall be
automatically extended by one additional day for each day beyond the Effective
Date that the Executive remains employed by the Company until such time as the
Company elects to cease such extension by giving written notice of such election
to the Executive. In such event, the Agreement shall terminate on the first
anniversary of the effective date of such election notice.
2. Duties. Executive is engaged by the Company in an executive
------
capacity.
-1-
<PAGE>
3. Extent of Services. Executive, subject to the direction and
------------------
control of the Board, shall have the power and authority commensurate with his
executive status and necessary to perform his duties hereunder. During the
term, Executive shall devote his working time, attention, labor, skill and
energies to the business of the Company, and shall not, without the consent of
the Company, be actively engaged in any other business activity, whether or not
such business activity is pursued for gain, profit or other pecuniary advantage.
4. Compensation. As compensation for services hereunder rendered,
------------
Executive shall receive during the Term:
(a) A base salary ("Base Salary") of not less than [See Annex A] per
year payable in equal installments in accordance with the Company's normal
payroll procedures. Executive may receive increases in his Base Salary
from time to time, as approved by the Board.
(b) In addition to Base Salary, Executive may be eligible to receive
such other bonuses or incentive compensation as the Board may approve from
time to time.
5. Benefits.
--------
(a) Executive shall be entitled to participate in any and all
Executive pension benefit, welfare benefit (including, without limitation,
medical, dental, disability and group life insurance coverages) and fringe
benefit plans from time to time in effect for Executives of the Company and
its affiliates.
(b) Executive shall be entitled to participate in such bonus, stock
option, or other incentive compensation plans of the Company and its
affiliates in effect from time to time for executives of the Company.
-2-
<PAGE>
(c) Executive shall be entitled to four weeks of paid vacation each
year. The Executive shall schedule the timing of such vacations in a
reasonable manner. The Executive may also be entitled to such other leave,
with or without compensation as shall be mutually agreed by the Company and
Executive.
(d) Executive may incur reasonable expenses for promoting the
Company's business, including expenses for entertainment, travel and
similar items. The Company shall reimburse Executive for all such
reasonable expenses in accordance with the Company's reimbursement policies
and procedures.
6. Termination of Employment.
-------------------------
(a) Death or Disability. Executive's employment shall terminate
-------------------
automatically upon Executive's death during the Term. If the Company
determines in good faith that the Disability of Executive has occurred
during the Term (pursuant to the definition of Disability set forth below)
it may give to Executive written notice of its intention to terminate
Executive's employment. In such event, Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such
notice by Executive (the "Disability Effective Date"), provided that,
within the 30 days after such receipt, Executive shall not have returned to
full-time performance of Executive's duties. For purposes of this
Agreement, "Disability" shall mean Executive's absence from his full-time
duties hereunder for a period of 90 days.
(b) Cause. The Company may terminate Executive's employment during
-----
the Term for Cause. For purposes of this Agreement, "Cause" shall mean the
Executive's (i) conviction of or plea of nolo contendere to a crime
---- ----------
involving moral turpitude; or (ii) willful and material breach by Executive
of his duties and responsibilities, which is committed in bad faith or
without reasonable belief that such breaching conduct is in the best
interests of the Company and its affiliates, but with
-3-
<PAGE>
respect to (ii) only if the Board adopts a resolution by a vote of at least
75% of its members so finding after giving the Executive and his attorney
an opportunity to be heard by the Board. Any act, or failure to act, based
upon authority given pursuant to a resolution duly adopted by the Board or
based upon advice of counsel for the Company shall be conclusively presumed
to be done, or omitted to be done, by Executive in good faith and in the
best interests of the Company.
(c) Good Reason. Executive's employment may be terminated by
-----------
Executive for Good Reason. "Good Reason" shall exist upon the occurrence,
without Executive's express written consent, of any of the following
events:
(i) the Company shall assign to Executive duties of a
substantially nonexecutive or nonmanagerial nature;
(ii) an adverse change in Executive's status or position as an
executive officer of the Company, including, without limitation, an
adverse change in Executive's status or position as a result of a
diminution in Executive's duties and responsibilities (other than any
such change directly attributable to the fact that the Company is no
longer publicly owned);
(iii) the Company shall (A) materially reduce the Base Salary or
bonus opportunity of Executive (provided, however, that a temporary
reduction in Base Salary during the period beginning July 1, 1998 and
ending December 31, 1998 (the "Temporary Reduction Period") shall not
constitute Good Reason), or (B) materially reduce his benefits and
perquisites (other than pursuant to a uniform reduction applicable to
all similarly situated executives of the Company);
-4-
<PAGE>
(iv) the Company shall require Executive to relocate Executive's
principal business office more than 30 miles from its location on the
Effective Date; or
(v) the failure of the Company to obtain the assumption of this
Agreement as contemplated by Section 9(c).
For purposes of this Agreement, "Good Reason" shall not exist until after
Executive has given the Company notice of the applicable event within 90
days of such event and which is not remedied within 30 days after receipt
of written notice from Executive specifically delineating such claimed
event and setting forth Executive's intention to terminate employment if
not remedied; provided, that if the specified event cannot reasonably be
--------
remedied within such 30-day period and the Company commences reasonable
steps within such 30-day period to remedy such event and diligently
continues such steps thereafter until a remedy is effected, such event
shall not constitute "Good Reason" provided that such event is remedied
within 60 days after receipt of such written notice.
(d) Notice of Termination. Any termination by the Company for Cause,
---------------------
or by Executive for Good Reason, shall be communicated by Notice of
Termination given in accordance with this Agreement. For purposes of this
Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon,
(ii) sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the
provision so indicated and (iii) specifies the intended termination date
(which date, in the case of a termination for Good Reason, shall be not
more than 30 days after the giving of such notice). The failure by
Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause
shall not waive any right of
-5-
<PAGE>
Executive or the Company, respectively, hereunder or preclude Executive or
the Company, respectively, from asserting such fact or circumstance in
enforcing Executive's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if
-------------------
Executive's employment is terminated by the Company for Cause, or by
Executive for Good Reason, the later of the date specified in the Notice of
Termination or the date that is one day after the last day of any
applicable cure period, (ii) if Executive's employment is terminated by the
Company other than for Cause or Disability, or Executive resigns without
Good Reason, the Date of Termination shall be the date on which the Company
or Executive notified Executive or the Company, respectively, of such
termination and (iii) if Executive's employment is terminated by reason of
death or Disability, the Date of Termination shall be the date of death of
Executive or the Disability Effective Date, as the case may be.
7. Obligations of the Company Upon Termination. Following any
termination of Executive's employment hereunder, the Company shall pay Executive
his Base Salary through the Date of Termination and any amounts owed to
Executive pursuant to the terms and conditions of the Executive benefit plans
and programs of the Company at the time such payments are due. In the event
that Executive's employment terminates during the Temporary Reduction Period,
Executive's Base Salary shall be deemed to be $333,000 for purposes of this
Section 7. In addition, subject to Executive's execution of a general release
of claims in form satisfactory to the Company, Executive shall be entitled to
the following additional payments:
(a) Death or Disability. If, during the Term, Executive's employment
-------------------
shall terminate by reason of Executive's death or Disability, the Company
shall pay to Executive (or his designated beneficiary or estate, as the
case may be) the prorated portion of any Target Bonus (as defined below)
Executive would have received for the year of termination of employment.
Such amount
-6-
<PAGE>
shall be paid within 30 days of the date when such amounts would otherwise
have been payable to the Executive if Executive's employment had not
terminated.
(b) Good Reason; Other than for Cause. If, during the Term, the
---------------------------------
Company shall terminate Executive's employment other than for Cause (but
not for Disability), or the Executive shall terminate his employment for
Good Reason:
(1) Within 14 days of Executive's Date of Termination, the
Company shall pay to Executive (i) the prorated portion of the Target
Bonus and Performance Share Award for Executive for the year in which
the Date of Termination occurs, and (ii) an amount equal to 1.5 times
the sum of (x) the Executive's Base Salary and Target Bonus as of the
Date of Termination, and (y) the number of performance shares awarded
to the Executive pursuant to the Vencor, Inc. 1998 Incentive
Compensation Plan (the "1998 Plan") (including assumed awards granted
under the Vencor, Inc. 1987 Incentive Compensation Program (the "1987
Program") and the Vencor, Inc. 1997 Incentive Compensation Plan (the
"1997 Plan")) in respect of the year in which such Date of Termination
occurs (without regard to any acceleration of the award for such
year), assuming for such purpose that all performance criteria
applicable to such award with respect to the year in which such Date
of Termination occurs were deemed to be satisfied (the "Performance
Share Award").
For purposes of this Agreement: "fair market value" shall have the
meaning ascribed to such term under the 1998 Plan; and "Target Bonus"
shall mean the full amount of bonuses and/or performance compensation
(other than Base Salary and awards under the 1998 Plan (including
assumed awards granted under the 1987 Program and the 1997 Plan)) that
would be payable to the Executive, assuming all performance criteria
on which such bonus
-7-
<PAGE>
and/or performance compensation are based were deemed to be satisfied,
in respect of services for the calendar year in which the date in
question occurs.
(2) For a period of 18 months following the Date of Termination,
the Executive shall be treated as if he or she had continued to be an
Executive for all purposes under the Parent's Health Insurance Plan
and Dental Insurance Plan; or if the Executive is prohibited from
participating in such plan, the Company or Parent shall otherwise
provide such benefits. Following this continuation period, the
Executive shall be entitled to receive continuation coverage under
Part 6 of Title I or ERISA ("COBRA Benefits") treating the end of this
period as a termination of the Executive's employment if allowed by
law.
(3) For a period of 18 months following the Date of Termination,
Parent shall maintain in force, at its expense, the Executive's life
insurance in effect under the Vencor, Inc. Voluntary Life Insurance
Benefit Plan as of the Date of Termination.
(4) For a period of 18 months following the Executive's Date of
Termination, the Company or Parent shall provide short-term and long-
term disability insurance benefits to Executive equivalent to the
coverage that the Executive would have had he remained employed under
the disability insurance plans applicable to Executive on the Date of
Termination. Should Executive become disabled during such period,
Executive shall be entitled to receive such benefits, and for such
duration, as the applicable plan provides.
(5) To the extent not already vested pursuant to the terms of
such plan, the
-8-
<PAGE>
Executive's interests under the Vencor Retirement Savings Plan shall
be automatically fully (i.e., 100%) vested, without regard to
otherwise applicable percentages for the vesting of employer matching
contributions based upon the Executive's years of service with the
Company.
(6) Parent shall adopt such amendments to its Executive benefit
plans, if any, as are necessary to effectuate the provisions of this
Agreement.
(7) The Company shall take such action as is required to cause
the promissory note (the "Tax Loan") entered into in respect of the
loan to Executive, dated June 15, 1998 in an original principal amount
of [See Annex A](the "Tax Loan") to be amended to provide that the Tax
Loan and any payments scheduled to be made in respect thereof shall
not be due and payable prior to the fifth anniversary of the Date of
Termination or, at the option of the company cause to be forgiven 50%
of the outstanding principal balance (and any accrued interest with
respect thereto) of the Tax Loan; provided, that any such forgiveness
--------
under this paragraph (7) shall offset the amount of any payments
otherwise payable under paragraph (1) of this Section 7(b).
(8) The Company shall take such action as is required to cause
the promissory note or other agreement (the "Preferred Stock Loan
Agreement") entered into in respect of the loan to Executive, dated
April 30, 1998 in an original principal amount of [See Annex A](the
"Preferred Stock Loan") to be amended to provide that (x) the
Preferred Stock Loan and any payments scheduled to be made in respect
thereof shall not be due and payable prior to the fifth anniversary of
the Date of Termination, (y) if the average closing price of the
Company's common stock for the 90 days prior to any interest payment
date is less than
-9-
<PAGE>
$8.00, such interest payment shall be forgiven and (z) during the
five-day period following the expiration of the fifth anniversary of
the Date of Termination, the Executive shall have the right to put the
preferred stock underlying the Preferred Stock Loan to the Company at
par.
(9) Executive shall be credited with an additional 18 months of
vesting for purposes of all outstanding stock option awards and
restricted stock awards and Executive will have an additional 18
months in which to exercise such stock options.
(10) Following the Executive's Date of Termination, the
Executive shall receive the computer which Executive is utilizing as
of the Date of Termination.
(c) Cause; Other than for Good Reason. If Executive's employment
---------------------------------
shall be terminated for Cause or Executive terminates employment without
Good Reason (and other than due to such Executive's death) during the Term,
this Agreement shall terminate without further additional obligations to
Executive under this Agreement.
(d) Death after Termination. In the event of the death of Executive
-----------------------
during the period Executive is receiving payments pursuant to this
Agreement, Executive's designated beneficiary shall be entitled to receive
the balance of the payments; or in the event of no designated beneficiary,
the remaining payments shall be made to Executive's estate.
8. Disputes. Any dispute or controversy arising under, out of, or in
--------
connection with this Agreement shall, at the election and upon written demand of
either party, be finally determined and settled by binding arbitration in the
City of Louisville, Kentucky, in accordance with the Labor Arbitration rules and
procedures of the American Arbitration Association, and judgment upon the award
may be entered in any court having jurisdiction thereof. The Company shall
-10-
<PAGE>
pay all costs of the arbitration and all reasonable attorneys' and accountants'
fees of the Executive in connection therewith, including any litigation to
enforce any arbitration award.
9. Successors.
----------
(a) This Agreement is personal to Executive and without the prior
written consent of the Company shall not be assignable by Executive
otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, or any
business of the Company for which Executive's services are principally
performed, to assume expressly and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to
perform it if no such succession had taken place. As used this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor
to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law, or otherwise.
10. Other Severance Benefits. Executive hereby agrees that in
------------------------
consideration for the payments to be received under this Agreement, Executive
waives any and all rights to any payments or benefits under any plans, programs,
contracts or arrangements of the Company or their respective affiliates that
provide for severance payments or benefits upon a termination of employment,
other than the Change in Control Severance Agreement between the Company and
Executive dated as of May 1, 1998 (the "Severance
-11-
<PAGE>
Agreement"); provided that any payments payable to Executive hereunder shall be
--------
offset by any payments payable under the Severance Agreement.
11. Withholding. All payments to be made to Executive hereunder will
-----------
be subject to all applicable required withholding of taxes.
12. No Mitigation. Executive shall have no duty to mitigate his
-------------
damages by seeking other employment and, should Executive actually receive
compensation from any such other employment, the payments required hereunder
shall not be reduced or offset by any such compensation. Further, the Company's
and Parent's obligations to make any payments hereunder shall not be subject to
or affected by any setoff, counterclaims or defenses which the Company or Parent
may have against Executive or others.
13. Notices. Any notice required or permitted to be given under this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or sent by telephone facsimile transmission, personal or overnight
couriers, or registered mail with confirmation or receipt, addressed as follows:
If to Executive:
---------------
_____________________
_____________________
_____________________
If to Company:
-------------
Vencor Operating, Inc.
400 West Market Street
Suite 3300
Louisville, KY 40202
Attn: General Counsel
-12-
<PAGE>
14. Waiver of Breach and Severability. The waiver by either party of
---------------------------------
a breach of any provision of this Agreement by the other party shall not operate
or be construed as a waiver of any subsequent breach by either party. In the
event any provision of this Agreement is found to be invalid or unenforceable,
it may be severed from the Agreement and the remaining provisions of the
Agreement shall continue to be binding and effective.
15. Entire Agreement; Amendment. This instrument contains the entire
---------------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, promises, covenants, arrangements,
communications, representations and warranties between them, whether written or
oral with respect to the subject matter hereof. No provisions of this Agreement
may be modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Executive and such officer of the
Company specifically designated by the Board.
16. Governing Law. This Agreement shall be construed in accordance
-------------
with and governed by the laws of the State of Delaware.
17. Headings. The headings in this Agreement are for convenience
--------
only and shall not be used to interpret or construe its provisions.
18. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
-13-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
VENCOR OPERATING, INC.
By:___________________
Solely for the purpose
of Section 7
VENCOR, INC.
By:___________________
Executive
______________________
-14-
<PAGE>
Annex A
<TABLE>
<CAPTION>
Base Salary Tax Note Preferred Note
<S> <C> <C> <C>
Michael Barr $330,000 $1,025,000 $1,296,000
Richard Chapman $260,000 $ 15,800 $ 324,000
Jill Force $167,500 $ 60,100 $ 486,000
James Gillenwater $146,000 $ 9,500 $ 459,000
Earl Reed $333,000 $ 623,500 $ 990,000
Richard Schweinhart* $200,000 -0- -0-
</TABLE>
* Agreement entered into on September 28, 1998.
-15-
<PAGE>
Exhibit 10.6
NON-TRANSFERABLE FULL RECOURSE SECURED PROMISSORY NOTE
U.S. $[See Annex A] Louisville, Kentucky
September 28, 1998
FOR VALUE RECEIVED, the undersigned (the "Debtor"), promises to pay to the
order of VENCOR OPERATING, INC., a Delaware corporation and wholly owned
subsidiary of Vencor, Inc. (the "Company"), the principal sum of [See Annex
A]($__________) in lawful currency of the United States on or before April 30,
2008 (the "Maturity Date"), plus interest on any unpaid balance of the principal
amount, payable annually on April 30 of each year commencing on April 30, 1999
and ending on the Maturity Date (each an "Interest Payment Date"), at a rate per
annum, equal to 5.74 percent (5.74%), calculated on the basis of a 365 day year
and actual days elapsed, commencing on the date hereof. This Promissory Note
constitutes a renewal of, and supersedes and replaces, the Non-Transferable Full
Recourse Secured Promissory Note dated April 30, 1998, made by Debtor to the
order of the Company in the face principal amount of [See Annex A](the "Former
Note"). This Promissory Note is not intended to be and shall not be construed
as a novation of the indebtedness which formerly was evidenced by the Former
Note, and this Promissory Note shall be entitled to all of the benefits of the
Collateral (as defined herein) which secured the Former Note, and in the same
relative priority, to the maximum extent permitted by law. Upon execution and
delivery of this Promissory Note, the Former Note shall be cancelled except that
all accrued interest under the Former Note shall be due and owing under this
Promissory Note on the first Interest Payment Date. The Debtor may prepay
amounts due under this Promissory Note, or any portion thereof, at any time,
without premium or penalty.
The Debtor agrees as follows:
1. The Debtor represents and warrants to the Company that this
Promissory Note has been duly executed and delivered by the Debtor and
constitutes the legal, valid and binding obligation of the Debtor, enforceable
against the Debtor in accordance with its terms. The Debtor further represents
and warrants that it will not sell, assign, transfer, encumber, hypothecate or
otherwise dispose of the Collateral, or any interest therein, nor contract to do
so, without the written consent of the Company, nor will it take any action with
respect to the Collateral which is inconsistent with the provisions or the
purpose of this Promissory Note or which would adversely affect the rights of
the Company hereunder; provided however, that the Debtor may, with the written
consent of the Company, substitute as collateral assets of a similar nature
having an equal or greater value to that of the Collateral.
2. If any of the following events of default shall occur (the "Events
of Default"), the entire unpaid balance of this Promissory Note shall become
immediately due and
<PAGE>
payable: (i) the Debtor shall fail to pay when due the principal of or any
installment of interest on this Promissory Note (whether at maturity, by
acceleration or otherwise) and such failure shall continue for sixty (60)
consecutive days; or (ii) any representation or warranty made by Debtor in this
Promissory Note shall prove to have been incorrect when made and such error
shall have a material adverse effect on the Debtor's obligations under this
Promissory Note.
3. Payments of interest in respect of this Promissory Note (including
without limitation the interest payment due on the Maturity Date) shall be made
by check or wire transfer of immediately available funds to an account
designated by the Company two business days prior to the date on which interest
is to be paid. Payment of the principal amount of this Promissory Note shall be
made only upon presentation and surrender of this Promissory Note. Subject to
the preceding sentence, payment of the principal amount on the Maturity Date (or
any other date prior to the Maturity Date on which the Debtor pays any principal
amount due hereunder) shall be made by check or wire transfer of immediately
available funds to an account designated by the Company two business days prior
to the Maturity Date (or such other date). In the event that any Interest
Payment Date or the Maturity Date is not a business day, such Interest Payment
Date or the Maturity Date shall be the first following day that is a business
day.
4. Debtor hereby pledges, assigns and grants a first priority security
interest to the Company in all of the following as security for the due and
punctual payment of this Promissory Note and the performance of all of Debtor's
obligations hereunder: (i) _____________________ (___) shares of 6% Series A
Non-Voting Convertible Preferred Stock, par value $1.00 per share (the "Series A
Preferred Stock"), of Vencor, Inc., a Delaware corporation, together with a
stock power duly executed in blank by Debtor for such certificate (the "Pledged
Shares"); and (ii) all securities and stock powers delivered to the Company in
substitution for or in addition to any of the foregoing, all certificates and
instruments representing or evidencing such securities, and all stock and other
non-cash dividends, distributed in respect of or in exchange for any or all
thereof; and in the event Debtor receives any such property, Debtor will
immediately deliver it to the Company to be held hereunder. The foregoing being
referred to as the "Collateral."
5. So long as no Event of Default has occurred and is continuing
hereunder and subject to compliance with the representations and warranties
hereof, Debtor shall be entitled to exercise, or permit others to exercise, any
voting powers incident to the Pledged Shares. Upon the occurrence and
continuation of an Event of Default hereunder, Debtor's right to exercise, or
permit others to exercise, such voting rights shall immediately cease and
terminate.
6. If any Event of Default hereunder shall have occurred and be
continuing, the Company may exercise any and all rights of collection,
conversion or exchange, and any and all other rights, privileges, options or
powers of the Debtor pertaining or relating to the Collateral (the Debtor hereby
irrevocably appointing the Company its proxy and attorney-in-fact with full
power of substitution so do to), including without limitation the right to
transfer or cause the transfer of the ownership of all or any part of the
Collateral to its own name and record such transfer on the books of the Company,
although the Company shall not have any duty to exercise any such rights,
privileges, options or powers or to sell or to otherwise realize upon any of the
<PAGE>
collateral or to preserve the same, and the Company shall not be responsible for
any failure to do so or delay in so doing. The Company shall not be bound to
exhaust its recourse or to take any action against the Debtor or others or on
any Collateral the Company may hold before being entitled to exercise its rights
hereunder, but it may make such demands and take such actions as it deems
advisable.
7. In the event the holder of this Promissory Note takes any action to
enforce or collect this Promissory Note, the Debtor agrees to pay the costs
thereof, including, without limitation, reasonable attorneys' fees, including
any on appeal, and whether or not suit is instituted.
8. No delay or failure on the part of the Company in exercising any
right, power or privilege hereunder shall operate as a waiver thereof. Time
shall be of the essence in the payment of all accrued interest and principal on
this Note and the performance of Debtor's other obligations under this Note.
9. This Promissory Note may not be amended, modified, waived,
discharged, terminated, transferred or assigned nor may any of the Collateral be
released except by an instrument in writing duly signed by the Company.
10. This Promissory Note shall be construed and enforced in accordance
with the laws of the Commonwealth of Kentucky.
__________________________________________
<PAGE>
Annex A
Principal Amount Former Note Principal Amount
W. Bruce Lunsford $4,088,700 $4,088,700
Michael R. Barr $1,296,000 $1,296,000
W. Earl Reed $ 990,000 $ 990,000
Richard A. Chapman $ 324,000 $ 324,000
Jill L. Force $ 486,000 $ 486,000
James H. Gillenwater $ 459,000 $ 459,000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR, INC.'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 102,176
<SECURITIES> 0
<RECEIVABLES> 497,026
<ALLOWANCES> (78,161)
<INVENTORY> 29,026
<CURRENT-ASSETS> 805,395
<PP&E> 905,116
<DEPRECIATION> (308,297)
<TOTAL-ASSETS> 2,245,168
<CURRENT-LIABILITIES> 457,324
<BONDS> 793,033
1,770
0
<COMMON> 17,372
<OTHER-SE> 895,217
<TOTAL-LIABILITY-AND-EQUITY> 2,245,168
<SALES> 0
<TOTAL-REVENUES> 2,320,137
<CGS> 0
<TOTAL-COSTS> 1,736,764
<OTHER-EXPENSES> 380,534
<LOSS-PROVISION> 19,221
<INTEREST-EXPENSE> 87,883
<INCOME-PRETAX> 9,569
<INCOME-TAX> (23,442)
<INCOME-CONTINUING> 33,011
<DISCONTINUED> 0
<EXTRAORDINARY> (77,937)
<CHANGES> 0
<NET-INCOME> (44,926)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS RESTATED SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM VENCOR,
INC.'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 73,995
<SECURITIES> 0
<RECEIVABLES> 664,857
<ALLOWANCES> (46,850)
<INVENTORY> 35,731
<CURRENT-ASSETS> 928,354
<PP&E> 1,910,212
<DEPRECIATION> (459,616)
<TOTAL-ASSETS> 3,348,207
<CURRENT-LIABILITIES> 428,000
<BONDS> 1,890,279
0
0
<COMMON> 18,292
<OTHER-SE> 930,619
<TOTAL-LIABILITY-AND-EQUITY> 3,348,207
<SALES> 0
<TOTAL-REVENUES> 2,303,731
<CGS> 0
<TOTAL-COSTS> 1,615,535
<OTHER-EXPENSES> 347,912
<LOSS-PROVISION> 12,786
<INTEREST-EXPENSE> 66,107
<INCOME-PRETAX> 179,227
<INCOME-TAX> 71,333
<INCOME-CONTINUING> 107,894
<DISCONTINUED> 0
<EXTRAORDINARY> (4,195)
<CHANGES> 0
<NET-INCOME> 103,699
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.46
</TABLE>
