<PAGE>
SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
REG. (S) 240.14a-101.
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[X] Definitive Proxy Statement RULE 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
VENCOR, INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: _________
(2) Aggregate number of securities to which transaction applies: ____________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
__________________________________________________________________________
(4) Proposed maximum aggregate value of transaction: ________________________
(5) Total fee paid: _________________________________________________________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: _________________________________________________
(2) Form, Schedule or Registration Statement No.: ___________________________
(3) Filing Party: ___________________________________________________________
(4) Date Filed: _____________________________________________________________
Notes: ________________________________________________________________________
<PAGE>
LOGO
VENCOR, INC.
3300 Providian Center
400 West Market Street
Louisville, Kentucky 40202
March 28, 1997
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders to be
held at 9:00 a.m. on Thursday, May 15, 1997, at the Hyatt Regency, 320 West
Jefferson Street, Louisville, Kentucky.
The Board of Directors appreciates your interest in the Company. Regardless
of whether you plan to attend the meeting, it is important that your shares be
represented. Please sign, date and mail the enclosed proxy in the envelope
provided at your earliest convenience.
Sincerely,
LOGO
W. Bruce Lunsford
Chairman of the Board,
President and Chief Executive
Officer
<PAGE>
VENCOR, INC.
3300 PROVIDIAN CENTER
400 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 1997
To the Stockholders of VENCOR, INC.:
The Annual Meeting of Stockholders of Vencor, Inc. will be held on Thursday,
May 15, 1997 at the Hyatt Regency, 320 West Jefferson Street, Louisville,
Kentucky, at 9:00 a.m. (EDT), for the following purposes:
(1) To fix the number of directors at ten and to elect a board of ten
directors;
(2) To consider and approve the 1997 Stock Option Plan for Non-Employee
Directors;
(3) To consider and approve the 1997 Incentive Compensation Plan; and
(4) To transact such other business as may properly come before the meeting.
Only stockholders of record at the close of business on March 20, 1997, will
be entitled to vote at the meeting and any adjournments thereof.
IT IS IMPORTANT THAT YOU VOTE YOUR SHARES. PLEASE SIGN AND DATE YOUR PROXY
AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
W. Bruce Lunsford
Chairman of the Board,
President and Chief Executive
Officer
<PAGE>
VENCOR, INC.
3300 PROVIDIAN CENTER
400 WEST MARKET STREET
LOUISVILLE, KENTUCKY 40202
(502) 596-7300
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
MAY 15, 1997
GENERAL INFORMATION
The Annual Meeting of Stockholders (the "Annual Meeting") of Vencor, Inc.
(the "Company") will be held at 9:00 a.m., EDT on Thursday, May 15, 1997, at
the Hyatt Regency, 320 West Jefferson Street, Louisville, Kentucky. This Proxy
Statement is being furnished in connection with the solicitation of proxies by
the Board of Directors of the Company to be used at the Annual Meeting and at
any adjournments thereof.
Only stockholders of record at the close of business on March 20, 1997, are
entitled to vote at the meeting or any adjournments thereof. A list of all
stockholders entitled to vote at the Annual Meeting will be available for
inspection by any stockholder for any purpose reasonably related to the Annual
Meeting during ordinary business hours for a period of ten days prior to the
Annual Meeting at the Company's principal executive offices at 3300 Providian
Center, 400 West Market Street, Louisville, Kentucky. At the record date,
68,943,192 shares of the Company's common stock, par value $.25 per share
("Common Stock") were outstanding. Each share of Common Stock entitles the
owner to one vote. A majority of the outstanding shares present in person or
by proxy is required to constitute a quorum to transact business at the
meeting. Abstentions and broker non-votes will be counted as present for
purposes of determining whether a quorum exists, but as not voted for purposes
of determining the approval of any matter submitted to the stockholders for a
vote.
The Company intends to first distribute this Proxy Statement and the
materials accompanying it on or about March 28, 1997. The Annual Report of the
Company for the year ended December 31, 1996 accompanies this Proxy Statement.
The consolidated financial statements of the Company for the year ended
December 31, 1996 are included as Exhibit A to this Proxy Statement.
If the proxy is properly signed, returned to the Company and not revoked, it
will be voted in accordance with the instructions contained therein. Unless
contrary instructions are given, the proxy will be voted (1) in favor of the
nominees for director named in the Proxy Statement, (2) in favor of approving
the Company's 1997 Stock Option Plan for Non-Employee Directors, (3) in favor
of approving the Company's 1997 Incentive Compensation Plan, and (4) in the
discretion of the proxy holders on such other business as may properly come
before the Annual Meeting. An admission ticket will be required in order to
attend the Annual Meeting. The enclosed proxy specifies the manner in which an
admission ticket for the Annual Meeting may be obtained.
A person giving the enclosed proxy has the power to revoke it at any time
before it is exercised. However, such revocation must be made in writing and
received by the General Counsel of the Company at the Company's principal
executive offices at 3300 Providian Center, 400 West Market Street,
Louisville, Kentucky 40202 at or before the time and date of the Annual
Meeting. A stockholder may also attend the Annual Meeting and vote in person,
in which event any prior proxy given by the stockholder will be automatically
revoked.
The cost of soliciting proxies by the Board of Directors will be borne by
the Company. Such solicitation will be made by mail and in addition may be
made personally or by telephone by directors, officers and
<PAGE>
employees of the Company, none of whom will receive additional compensation
for these services. The Company's regularly retained investor relations firm,
Corporate Communications, Inc., may also solicit proxies by telephone and
mail. Forms of proxies and proxy materials will also be distributed through
brokers, custodians and other like parties to the beneficial owners of Common
Stock. The Company will reimburse such parties for their reasonable out-of-
pocket expenses incurred in connection with the distribution.
ELECTION OF DIRECTORS
Management recommends that the number of directors be set at ten and that
ten directors be elected at the Annual Meeting. Each director elected at the
Annual Meeting will serve, subject to the provisions of the Bylaws, until his
or her successor is duly elected and qualified. The names of the nominees
proposed for election as directors, all of whom are presently directors of the
Company except for Mr. Bridgeman and Ms. Chao, together with certain
information concerning the nominees, are set forth below:
NOMINEES FOR DIRECTORS
MICHAEL R. BARR (age 47), a founder of the Company, physical therapist and
certified respiratory therapist, has served as Chief Operating Officer and
Executive Vice President of the Company since February 1996. From November
1995 to February 1996, he was Executive Vice President of the Company and
Chief Executive Officer of the Company's Hospital Division. Mr. Barr served as
Vice President, Operations from 1985 to November 1995. He has been a director
of the Company since 1985. Mr. Barr is a director of Colorado MEDtech, Inc., a
medical products and equipment company.
WALTER F. BERAN (age 70) has served as a director of the Company since
September 1995. Since September 1986, Mr. Beran has served as Chairman of the
Pacific Alliance Group, a merger and acquisition services firm. Previously,
Mr. Beran served as Vice Chairman and Western Regional Managing Partner of the
accounting firm of Ernst & Whinney (now Ernst & Young LLP) from 1971 until his
retirement in September 1986. Mr. Beran also serves as a director of Arco
Chemical Company, Pacific Scientific Company and Fleetwood Enterprises, Inc.
(1)
ULYSSES L. BRIDGEMAN, JR. (age 43) has been President of Bridgeman Foods,
Inc., a franchisee of 51 Wendy's Old Fashioned Hamburger Restaurants, since
1988.
ELAINE L. CHAO (age 43) is a Distinguished Fellow of The Heritage Foundation
in Washington, D.C. From 1992 to 1996, Ms. Chao was President and Chief
Executive Officer of the United Way of America. From 1991 to 1992, she served
as the Director of the Peace Corps. Ms. Chao is a director of Dole Food
Company, Inc. and NASD, Inc.
DONNA R. ECTON (age 49) has served as a director of the Company since 1992.
Since December, 1996, Ms. Ecton has been Chief Operating Officer of PETsMART,
Inc., a pet supplies retailer. From 1995 to 1996, she was Chairman, President
and Chief Executive Officer of Business Mail Express, Inc., an expedited print
and mail services company. From 1991 to 1994, she was President and Chief
Executive Officer of Van Houten North America, Inc. and Andes Candies Inc.,
confectionery products businesses. Ms. Ecton is a director of Barnes Group,
Inc., a diversified manufacturing, aerospace and distribution company,
PETsMART, Inc., and H&R Block, Inc. (1)
GREG D. HUDSON (age 48) has served as a director of the Company since 1991.
He has been President of Hudson Chevrolet-Oldsmobile, Inc. since 1988. (2)
WILLIAM H. LOMICKA (age 59) has served as a director of the Company since
1987. Since 1989, he has served as President of Mayfair Capital, Inc., a
private investment firm. Mr. Lomicka serves as a director of Regal Cinemas,
Inc., a regional motion picture exhibitor, and Sabratek Corporation, a company
which designs, produces and markets medical products for the alternative site
healthcare marketplace. (1)(3)
2
<PAGE>
W. BRUCE LUNSFORD (age 49), a founder of the Company, certified public
accountant and attorney, has served as Chairman of the Board, President and
Chief Executive Officer of the Company since the Company commenced operations
in 1985. Mr. Lunsford is the Chairman of the Board of Atria Communities, Inc.
and a director of National City Corporation, a bank holding company, Churchill
Downs Incorporated, and Res-Care, Inc., a provider of residential training and
support services for persons with developmental disabilities and certain
vocational training services. (3)
W. EARL REED, III (age 45), a certified public accountant, has served as a
director of the Company since 1987. He has been Chief Financial Officer and
Executive Vice President of the Company since November 1995. From 1987 to
November 1995, Mr. Reed served as Vice President, Finance and Development of
the Company.
R. GENE SMITH (age 62), a founder of the Company, has served as a director
of the Company since 1985 and Vice Chairman of the Board since 1987. From 1987
to 1995, Mr. Smith was President of New Jersey Blockbuster, Ltd., which held
the Blockbuster Video franchise for northern New Jersey. Since 1988, Mr. Smith
has been Chairman of the Board of Taco Tico, Inc., an operator of Mexican
fast-food restaurants. Since 1993, Mr. Smith has been Managing General Partner
of Direct Program Services, a provider of direct broadcast satellite
television services. Mr. Smith is also a director of Atria Communities, Inc.
(2)(3)
The information given in this Proxy Statement concerning the nominees is
based upon statements made or confirmed to the Company by or on behalf of such
nominees, except to the extent certain information appears in its records.
Directors' ages are given as of January 1, 1997.
- --------
(1) Member of the Audit Committee, of which William H. Lomicka is Chairman.
William C. Ballard Jr., whose term of office expires at the Annual
Meeting, is also a member of the Audit Committee.
(2) Member of the Executive Compensation Committee, of which R. Gene Smith is
Chairman. Jack O. Vance, whose term of office expires at the Annual
Meeting, is also a member of the Executive Compensation Committee.
(3) Member of the Executive Committee, of which W. Bruce Lunsford is Chairman.
William C. Ballard Jr. is also a member of the Executive Committee.
SHARES OF COMMON STOCK OF THE COMPANY COVERED BY PROXIES EXECUTED AND
RECEIVED IN THE ACCOMPANYING FORM WILL BE VOTED FOR THE ELECTION AS DIRECTORS
OF ALL OF THE NOMINEES, UNLESS OTHERWISE SPECIFIED ON THE PROXY. The Board of
Directors does not contemplate that any of the nominees will be unable to
accept election as a director. However, in the event that one or more nominees
are unable or unwilling to accept or are unavailable to serve, the persons
named in the proxies or their substitutes will have authority, according to
their judgment, to vote or refrain from voting for other individuals as
directors.
CERTAIN INFORMATION CONCERNING THE BOARD OF DIRECTORS
During 1996, the Board of Directors of the Company held six regular
meetings. The Company has an Executive Compensation Committee and an Audit
Committee. The Company does not have a nominating or similar committee.
The Executive Compensation Committee held one meeting in 1996. The functions
of the Executive Compensation Committee are to establish annual salary levels,
approve fringe benefits and administer any special compensation plans or
programs for executive officers of the Company.
The Audit Committee held three meetings during 1996. The Audit Committee
reviews the adequacy of the Company's system of internal controls and
accounting practices. In addition, the Audit Committee reviews the scope of
the annual audit of the Company's auditors, Ernst & Young LLP, prior to its
commencement, and reviews the types of services for which the Company retains
Ernst & Young LLP.
3
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock by (a) each person known to
the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (b) each director or nominee for director of the
Company, (c) each of the five most highly compensated executive officers of
the Company and (d) all of the Company's directors or nominees for director
and executive officers as of January 15, 1997, as a group.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL OR COMMON STOCK PERCENT
NUMBER IN GROUP BENEFICIALLY OWNED/1/,/2/ OF CLASS
--------------------- ------------------------- --------
<S> <C> <C>
William C. Ballard Jr. ..................... 31,720/3/ *
Michael R. Barr............................. 445,804/4/ *
Walter F. Beran............................. 12,674/5/ *
Ulysses L. Bridgeman, Jr. .................. - *
Elaine L. Chao.............................. - *
Donna R. Ecton.............................. 7,181/6/ *
Jill L. Force............................... 66,028/7/ *
Greg D. Hudson.............................. 196,314/8/ *
Thomas T. Ladt.............................. 113,265/9/ *
William H. Lomicka.......................... 58,207 *
W. Bruce Lunsford........................... 2,386,618/10/ 3.5%
W. Earl Reed, III........................... 354,815 *
R. Gene Smith............................... 1,539,930/11/ 2.2%
Jack O. Vance............................... 3,219/12/ *
All executive officers, directors and
nominees as a group (16 persons)........... 5,259,136 7.6%
Firstar Corporation......................... 5,343,279/13/ 7.7%
Firstar Investment Research & Management
Company.................................... 5,340,879/14/ 7.7%
Tenet Healthcare Corporation................ 8,301,067/15/ 12.1%
Wellington Management Company, LLP.......... 3,750,802/16/ 5.4%
</TABLE>
- --------
(*) Less than 1%
(1) Beneficial ownership of shares, for purposes of this Proxy Statement, as
determined in accordance with applicable Securities and Exchange
Commission rules, includes shares as to which a person has or shares
voting power and/or investment power. Beneficial ownership is given as of
January 15, 1997, except as otherwise noted below.
(2) Except as set forth in the accompanying footnotes, the named persons have
sole voting power and sole investment power over the shares beneficially
owned by them. The number of shares shown does not include the interest of
certain persons in shares held by family members in their own right, or in
shares held for their benefit in the Company's 401(k) Plan. The numbers
shown include the shares which may be acquired by them through the
exercise of options, which are exercisable as of, or within 60 days after,
January 15, 1997, under the Company's stock option plans as follows: Mr.
Ballard--26,720 shares; Mr. Barr--97,392 shares; Mr. Beran--703 shares;
Ms. Ecton--7,031 shares; Ms. Force--40,001 shares; Mr. Hudson--3,516
shares; Mr. Ladt--53,738 shares; Mr. Lomicka--26,720 shares; Mr.
Lunsford--335,097 shares; Mr. Reed--109,627 shares; Mr. Smith--26,720
shares; and Mr. Vance--703 shares. The number of shares shown does not
include shares which may be issued to executive officers upon the
satisfaction of performance goals. See "Long-Term Incentive Awards."
(3) Includes an aggregate of 3,000 shares held by charitable remainder trusts
for the benefit of family members.
(4) Excludes 44,744 shares held in trust for his minor children and 3,750
shares held in trust for other family members.
(5) Excludes 609 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
4
<PAGE>
(6) Excludes 1,153 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(7) Includes 5,625 shares held by Ms. Force jointly with her spouse. Also
includes 2,812 shares held in her spouse's individual retirement account
and 1,400 shares held by her spouse as custodian for their children. Ms.
Force shares voting and investment power with her spouse with regard to
these shares.
(8) Includes 176,921 shares with respect to which Mr. Hudson shares voting and
investment power with his spouse, 562 shares held by a trust of which Mr.
Hudson is a co-trustee, 13,392 shares held by his gift trust, and 1,923
shares held by a trust for the benefit of Mr. Hudson and his siblings.
Excludes 2,209 phantom stock units held under the Company's Non-Employee
Directors Deferred Compensation Plan.
(9) Includes 7,029 shares held by his spouse as custodian for his children and
20,058 shares held by his spouse. With respect to these 27,087 shares, Mr.
Ladt shares voting and investment power with his spouse.
(10) Includes 71,412 shares held by a private foundation with respect to which
Mr. Lunsford has sole voting power and shared investment power. Excludes
16,365 shares held in trust for the benefit of his children.
(11) Includes 36,250 shares held by a private foundation with respect to which
Mr. Smith shares voting and investment power and 140,625 shares held by a
limited partnership with respect to which he has sole voting and
investment power.
(12) Includes 2,450 shares held in the Vance Family Trust of which Mr. Vance
is the trustee and 66 shares held by Mr. Vance as custodian for his
grandchildren. Excludes 574 phantom stock units held under the Company's
Non-Employee Directors Deferred Compensation Plan.
(13) The ownership given for Firstar Corporation is based on information
contained in the Schedule 13G dated February 14, 1997, filed by Firstar
Corporation with the Securities and Exchange Commission. The address of
Firstar Corporation is 777 East Wisconsin Avenue, Milwaukee, Wisconsin
53202.
(14) The ownership given for Firstar Investment Research & Management Company
is based on information contained in the Schedule 13G dated February 14,
1997, filed by Firstar Investment Research & Management Company with the
Securities and Exchange Commission. The address of Firstar Investment
Research & Management Company is 777 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202. Firstar Investment Research & Management Company is a
subsidiary of Firstar Corporation.
(15) The ownership given for Tenet Healthcare Corporation is based on
information contained in the Schedule 13G dated January 10, 1996, filed
by Tenet Healthcare Corporation and certain subsidiaries with the
Securities and Exchange Commission. The address of Tenet Healthcare
Corporation and such subsidiaries is 3820 State Street, Santa Barbara,
California 93105.
(16) The ownership given for Wellington Management Company, LLP is based on
information contained in the Schedule 13G dated February 13, 1997, filed
by Wellington Management Company, LLP with the Securities and Exchange
Commission. The address of Wellington Management Company, LLP is 75 State
Street, Boston, Massachusetts 02109.
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
EXECUTIVE COMPENSATION PHILOSOPHY
The Executive Compensation Committee of the Board of Directors is composed
entirely of outside directors. The Committee is responsible for setting and
administering the policies and programs that govern both annual compensation
and stock ownership programs for the executive officers of the Company. The
Company's executive compensation policy is based on principles designed to
ensure that an appropriate relationship exists between executive pay and
corporate performance, while at the same time motivating and retaining
executive officers.
EXECUTIVE COMPENSATION COMPONENTS
The key components of the Company's compensation program are base salary, an
annual incentive award and equity participation. These components are
administered with the goal of providing total compensation that is competitive
in the marketplace, rewards successful financial performance and aligns
executive officers' interests with those of stockholders. The Executive
Compensation Committee reviews each component of executive compensation on an
annual basis.
5
<PAGE>
BASE SALARY. Base salaries for executive officers are set near the minimum
levels believed by the Executive Compensation Committee to be sufficient to
attract and retain qualified executive officers. Base pay increases are
provided to executive officers based on an evaluation of each executive's
performance, as well as the performance of the Company as a whole. While the
Committee does not establish a specific formula or target to determine base
salaries, the Committee considers the financial performance of the Company as
compared to companies included in the Standard & Poor's Hospital Management
Composite Index ("Hospital Index"). In this regard, the Committee primarily
considers earnings growth and to a lesser degree asset growth. The Committee
also considers the success of the executive officers in developing and
executing the Company's strategic plans, developing management employees and
exercising leadership. The Executive Compensation Committee believes that
executive officer base salaries for 1996 were lower than the average base
salaries paid by companies included in the Hospital Index.
ANNUAL INCENTIVE. The Executive Compensation Committee believes that a
significant proportion of total cash compensation for executive officers
should be subject to attainment of specific Company earnings criteria. This
approach creates a direct incentive for executive officers to achieve desired
performance goals and places a significant percentage of each executive
officer's compensation at risk. Consequently, at the beginning of each year,
the Executive Compensation Committee establishes potential bonuses for
executive officers based on the Company's achievement of certain earnings per
share goals within the ranges established by the Executive Compensation
Committee. The Executive Compensation Committee established the annual bonus
targets for 1996 up to 50% of base salaries contingent upon the Company's
achievement of a range of the predetermined earnings per share goals. The
Committee established the potential bonuses and earnings per share criteria
based on the Committee's judgment as to desirable financial results for the
Company and the appropriate percentage of compensation which should be based
on the attainment of such results. For 1996, the Executive Compensation
Committee awarded bonuses equal to 30% of base salary based on the achievement
of predetermined earnings per share goals.
EQUITY PARTICIPATION THROUGH OPTIONS AND PERFORMANCE SHARES. The Executive
Compensation Committee believes that equity participation is a key component
of its executive compensation program. The use of such awards provides a long-
term link between the results achieved for the Company's stockholders and the
reward provided to executive officers. Stock options are granted to executive
officers primarily based on the officer's actual and potential contribution to
the Company's growth and profitability and the practices of companies such as
those included in the Hospital Index. Option grants are designed to retain
executive officers and motivate them to enhance stockholder value by aligning
the financial interests of executive officers with those of the Company's
stockholders. Stock options also provide an effective incentive for management
to create stockholder value over the long term since the full benefit of the
compensation package cannot be realized unless an appreciation in the price of
the Company's Common Stock occurs over a number of years.
Options to purchase 300,000 shares of the Company's Common Stock were
granted to the Company's five most highly compensated executive officers,
including Mr. Lunsford, in 1996 with an exercise price equal to the fair
market value of the underlying Common Stock at the date of grant ($25.50). To
encourage long-term performance, these options vest cumulatively in four
annual installments of 25% and expire ten years from the date of grant. The
Committee granted this number of options based on its judgment that this
number is appropriate and desirable considering these executive officers'
actual and potential contribution to the Company. The assessment of actual and
potential contribution was based on the Committee's subjective evaluation of
each executive officer's ability, skills, efforts and leadership.
In November 1995, the Committee authorized performance share agreements with
its five most highly compensated executive officers providing for the
potential issuance, over a period of five years in annual installments, of a
maximum of 300,000 shares of the Company's Common Stock. The second
performance period expired on December 31, 1996. The Committee determined on
March 10, 1997 that certain performance goals (based on earnings per share)
had been met for this period and the five most highly compensated executive
officers of the Company were allocated a total of 40,000 of a potential 60,000
shares of the Company's Common
6
<PAGE>
Stock available under the performance share agreements for 1996. Any future
entitlement to performance shares is contingent upon the satisfaction of
performance goals, as set forth in the performance share agreements.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Consistent with the executive compensation policy and components described
above, the Executive Compensation Committee determined the salary, bonus and
stock options received by W. Bruce Lunsford, Chairman of the Board, President
and Chief Executive Officer of the Company, for services rendered in 1996. Mr.
Lunsford received a base salary of $650,000 for 1996. The Committee believes
that this base salary was below average base salaries paid to chief executive
officers of companies included in the Hospital Index. Mr. Lunsford earned a
$195,000 bonus under the Company's 1987 Incentive Compensation Program.
Mr. Lunsford received the bonus for the Company surpassing certain earnings
per share goals specified in advance by the Executive Compensation Committee.
Mr. Lunsford also received options to purchase 160,000 shares of the Company's
Common Stock in 1996. The Committee determined the number of options granted
to Mr. Lunsford based on its judgment that this number was appropriate and
desirable in light of his actual and potential contribution to the Company and
his vision and leadership in connection with the successful assimilation with
the Company of the businesses acquired in the merger with The Hillhaven
Corporation. The assessment of actual and potential contribution was based on
the Committee's subjective evaluation of Mr. Lunsford's abilities, skills,
efforts and leadership.
In 1995, the Committee authorized an agreement with Mr. Lunsford providing
for the issuance of a maximum of 160,000 performance shares over a period of
five years in five annual installments, contingent upon the satisfaction of
annual performance standards. The Committee continues to believe it is in the
best interests of the Company to tie a significant additional amount of Mr.
Lunsford's potential compensation to the Company's long-term performance. On
March 10, 1997, the Committee determined that certain performance goals for
1996 had been met and 21,333 of a potential 32,000 performance shares
available under the performance agreement were allocated to Mr. Lunsford. The
actual delivery of the shares will be deferred to preserve the Company's
ability under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), to deduct compensation paid to Mr. Lunsford.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
Under the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), publicly held
companies may not deduct compensation paid to certain executive officers to
the extent that such compensation exceeds $1 million in any year for each such
officer. The Company will continue its efforts to preserve tax deductibility
of compensation where it is reasonable and feasible to do so.
EXECUTIVE COMPENSATION COMMITTEE
R. Gene Smith, Chairman
Greg D. Hudson
Jack O. Vance
7
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table sets forth the compensation paid by the Company to each
of the Company's five most highly compensated executive officers, including
the Chairman of the Board, President and Chief Executive Officer:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ------------
BONUS
----------------------- OPTIONS
NAME AND PERFORMANCE (NO. OF ALL OTHER
PRINCIPAL POSITION YEAR SALARY CASH/1/ SHARES/2/ SHARES)/3/ COMPENSATION/4/
------------------ ---- -------- -------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
W. Bruce Lunsford 1996 $650,000 $195,000 $ 766,655 280,000/5/ $ 4,500
Chairman of the Board, 1995 500,000 250,000 1,088,000 230,000 4,500
President and Chief 1994 368,000 684,000/6/ - 60,000/7/ 4,500
Executive Officer
Michael R. Barr 1996 $300,000 $ 90,000 $ 191,655 80,000/5/ $12,648
Chief Operating Officer 1995 225,000 112,500 272,000 65,000 4,500
and Executive Vice 1994 189,000 144,500/6/ - 22,500/7/ 4,500
President
W. Earl Reed, III 1996 $300,000 $ 90,000 $ 191,655 80,000/5/ $ 4,500
Chief Financial Officer and 1995 225,000 112,500 272,000 65,000 4,500
Executive Vice President 1994 189,000 144,500/6/ - 22,500/7/ 4,500
Thomas T. Ladt 1996 $240,000 $ 72,000 $ 167,720 53,000/5/ $ 4,500
Executive Vice President 1995 150,000 75,000 238,000 52,500 4,500
Operations 1994 120,000 60,000 - 10,500/7/ 1,800
Jill L. Force/8/ 1996 $145,000 $ 43,500 $ 119,780 35,000/5/ $ 5,828
Senior Vice President, 1995 125,000 62,500 170,000 37,000 3,984
General Counsel and Secretary 1994 105,000 24,000 - 7,500/7/ 3,879
</TABLE>
- --------
(1) Except as otherwise specified below, the amounts shown represent cash
bonuses awarded under the Company's 1987 Incentive Compensation Program
which were based on the Company's profitability.
(2) Amounts in this column represent the fair market value, on the date of
allocation, of performance shares awarded to the named persons upon
satisfaction of certain performance goals for 1996 and 1995. The table
below provides the number of performance shares allocated to each
recipient for 1996 and 1995. See "Long-Term Incentive Awards."
<TABLE>
<CAPTION>
MR. LUNSFORD MR. BARR MR. REED MR. LADT MS. FORCE
------------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1996....................... 21,333 5,333 5,333 4,667 3,333
1995....................... 32,000 8,000 8,000 7,000 5,000
</TABLE>
(3) The 1994 amounts have been adjusted to reflect the Company's 3-for-2 stock
split distributed on October 25, 1994.
(4) Except for 1996, the amounts in this column represent contributions by the
Company for the benefit of the named persons pursuant to the Company's
Retirement Savings Plan. For 1996, the amounts in this column represent
contributions for the benefit of the named persons to the Company's
Retirement Savings Plan and Deferred Compensation Plan as follows:
<TABLE>
<CAPTION>
MR. LUNSFORD MR. BARR MR. REED MR. LADT MS. FORCE
------------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Retirement Savings Plan... $4,500 $ 4,500 $4,500 $4,500 $4,500
Deferred Compensation
Plan..................... - 8,148 - - 1,328
------ ------- ------ ------ ------
Total..................... $4,500 $12,648 $4,500 $4,500 $5,828
====== ======= ====== ====== ======
</TABLE>
8
<PAGE>
(5) Includes options issued in exchange for options to purchase shares of a
wholly-owned subsidiary of the Company, Ventech Systems, Inc., previously
awarded to the named persons in the following amounts: Mr. Lunsford--
120,000 shares; Mr. Barr--40,000 shares; Mr. Reed--40,000 shares; Mr.
Ladt--18,000 shares; and Ms. Force--10,000 shares. See footnote 7.
(6) Includes a special bonus paid as follows in recognition of management's
completion of a self-tender offer in the last quarter of 1993: Mr.
Lunsford--$500,000; Mr. Barr--$50,000; and Mr. Reed--$50,000.
(7) In addition, options were granted to purchase shares of a wholly-owned
subsidiary, Ventech Systems, Inc., as follows: Mr. Lunsford--120,000
shares; Mr. Barr--40,000 shares; Mr. Reed--40,000 shares; Mr. Ladt--18,000
shares; and Ms. Force--10,000 shares. See footnote 5.
(8) Ms. Force first became an executive officer of the Company in November
1995.
On November 15, 1995, the Company entered into change-in-control severance
agreements with certain of its key employees, including its five most highly
compensated executive officers. These agreements provide for the payment of
severance benefits under certain circumstances. These benefits become payable
at any time within two years of a change in control of the Company if: (1) the
Company terminates the employee without cause; (2) the employee terminates
employment with the Company for good reason (as defined in the agreement) or
within either of two 30-day periods commencing 30 days after the change in
control and one year after the change in control, respectively. The benefits
to be afforded the Company's five most highly compensated executive officers
include: (1) a cash payment equal to two times base salary and bonus and (2)
continuation of health, life and disability insurance coverage for two years.
COMPENSATION OF DIRECTORS
During 1996, directors not employed by the Company received $2,000 for each
board meeting they attended. Non-employee directors also received $1,000 for
each committee meeting they attended. In addition, non-employee directors
received a $2,500 retainer for each calendar quarter that they served as a
director.
Pursuant to the Company's Non-Employee Directors Deferred Compensation Plan,
a non-employee director may defer in stock or cash the receipt of fees which
would otherwise be paid to the director for services on the board and its
committees. Directors who choose to defer fees may elect to have the deferred
amounts invested 100% in shares of the Company's Common Stock ("Share
Election") or to accumulate and earn interest ("Cash Election"). If a Share
Election is made, the director's deferral account is credited with 110% of the
compensation otherwise payable to the director. As of the end of each calendar
quarter, such deferred amounts are converted into share equivalents of the
Company's Common Stock based on the fair market value of the Common Stock on
that date. If a Cash Election is made, the deferred amounts earn interest at a
floating rate of interest, compounded annually.
During 1996, directors not employed by the Company received options pursuant
to the Company's Stock Option Plan for Non-Employee Directors (the "Former
Directors Plan"). Under the Former Directors Plan, the Company issued, on each
January 1, to each of the Company's non-employee directors an option to
purchase 2,813 shares of Common Stock with an exercise price equal to the fair
market value of Common Stock on the date the option was granted. Accordingly,
in 1996, the Company issued options with respect to an aggregate of 19,691
shares to the seven persons who were non-employee directors on January 1,
1996. All options become exercisable in four equal annual installments,
beginning on the first anniversary of the date of grant. In December, 1996,
the Board of Directors approved the Company's 1997 Stock Option Plan for Non-
Employee Directors (the "Directors Plan"). Under the Directors Plan, each non-
employee director will be granted an option to purchase 3,000 shares of Common
Stock on each January 1, with an exercise price equal to the fair market value
of the Common Stock on the date the option is granted. The Directors Plan is
intended to succeed the Former Directors Plan. For more information on the
Directors Plan, see "Proposal to Adopt 1997 Stock Option Plan for Non-Employee
Directors" contained elsewhere in this Proxy Statement.
9
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options to purchase
shares of the Company's Common Stock granted in 1996 to the Company's five
most highly compensated executive officers, including the Chairman of the
Board, President and Chief Executive Officer:
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION DATE PRESENT
NAME GRANTED/1/ IN 1996 PER SHARE/2/ DATE VALUE/3/
- ---- ---------- ---------- ----------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
W. Bruce Lunsford....... 280,000 19.1% 160,000 at $25.50 160,000 on 7/22/06 $1,716,800
120,000 at $25.50/4/ 120,000 on 7/22/06 1,287,600
Michael R. Barr......... 80,000 5.5% 40,000 at $25.50 40,000 on 7/22/06 429,200
40,000 at $25.50/4/ 40,000 on 7/22/06 429,200
W. Earl Reed, III....... 80,000 5.5% 40,000 at $25.50 40,000 on 7/22/06 429,200
40,000 at $25.50/4/ 40,000 on 7/22/06 429,200
Thomas T. Ladt.......... 53,000 3.6% 35,000 at $25.50 35,000 on 7/22/06 375,550
18,000 at $25.50/4/ 18,000 on 7/22/06 193,140
Jill L. Force........... 35,000 2.4% 25,000 at $25.50 25,000 on 7/22/06 268,250
10,000 at $25.50/4/ 10,000 on 7/22/06 107,300
</TABLE>
- --------
(1) Except as disclosed in footnote 4 below, all options shown in the above
table become exercisable in four equal annual installments, beginning on
the first anniversary of the date of grant. All options become fully
exercisable upon a change in control of the Company.
(2) All options were granted at fair market value (closing price on the New
York Stock Exchange on the date of grant). The exercise price and any tax
withholding obligations related to exercise may be paid by delivery of
shares of Common Stock.
(3) The Company used the Black-Scholes model of option valuation to determine
grant date present value. The present value calculation for the options
granted on July 22, 1996 is based on, among other things, the following
assumptions: (a) a .24 expected volatility factor, (b) a 6.33% risk-free
interest rate, (c) no dividend yield, and (d) expected term of seven
years. The Company does not advocate or necessarily agree that the Black-
Scholes model can properly determine the value of an option. There is no
assurance that the value, if any, realized by the option holder will be at
or near the value estimated under the Black-Scholes model.
(4) These options were issued in exchange for options to purchase shares of a
wholly-owned subsidiary of the Company, Ventech Systems, Inc.
Substantially all of the operations of Ventech System, Inc. were
consolidated into the Company during 1996. These options are exercisable
as follows: 60% on January 22, 1997, an additional 20% on January 22,
1998, and are fully exercisable on January 22, 1999.
10
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Company's
five most highly compensated executive officers (including the Chairman of the
Board, President and Chief Executive Officer) concerning the exercise of
options during 1996 and unexercised options held as of December 31, 1996:
AGGREGATE OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED OPTIONS AT 12/31/96 AT 12/31/96/2/
ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED/1/ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. Bruce Lunsford....... 17,813 $ 279,664 263,097 497,498 $3,371,902 $3,019,716
Michael R. Barr......... 20,000 552,947 73,392 145,623 758,958 905,076
W. Earl Reed, III....... 237,188 5,754,340 85,627 145,623 969,929 905,076
Thomas T. Ladt.......... - - 42,938 99,125 560,575 570,559
Jill L. Force........... 5,250 144,953 34,001 67,625 481,130 389,805
</TABLE>
- --------
(1) These amounts represent the market value of the underlying Common Stock on
the date of exercise less the applicable exercise price.
(2) These amounts were calculated by subtracting the exercise price from the
market value of the underlying Common Stock as of year-end. The market
value of the Common Stock was $31.625 per share as of December 31, 1996
based on the closing price per share on the New York Stock Exchange.
LONG-TERM INCENTIVE AWARDS
In 1995, the Company entered into agreements ("Performance Agreements")
whereby the Company may issue shares for each year of a five-year period,
which began in 1995, to its five most highly compensated executive officers.
The receipt of shares is contingent upon the satisfaction of performance goals
established by the Executive Compensation Committee. However, upon a change in
control of the Company, as defined in the Performance Agreements, the
performance periods will lapse and all unearned performance shares will become
fully vested and issuable. Upon the satisfaction of performance goals for 1996
established by the Committee, the five most highly compensated executive
officers received 66.7% of the potential performance shares available under
the Performance Agreements for 1996. For 1997, the Committee has established
four levels of performance goals. Upon the attainment of the various target
performance goals for 1997, the Company's five most highly compensated
executive officers would each receive 33.3%, 66.7%, 100% or 130% of the number
of shares established as the annual goals under the Performance Agreements as
follows: W. Bruce Lunsford--32,000 shares; Michael R. Barr--8,000 shares; W.
Earl Reed, III--8,000 shares; Thomas T. Ladt--7,000 shares; and Jill L.
Force--5,000 shares. The shares shown in the following chart represent the
maximum number of shares which may be issued for the remaining three annual
performance periods under the Performance Agreements:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERFORMANCE PERIODS
---- ---------------- -------------------
<S> <C> <C>
W. Bruce Lunsford.......................... 106,667 1997-1999
Michael R. Barr............................ 26,667 1997-1999
W. Earl Reed, III.......................... 26,667 1997-1999
Thomas T. Ladt............................. 23,333 1997-1999
Jill L. Force.............................. 16,667 1997-1999
</TABLE>
11
<PAGE>
PERFORMANCE GRAPH
The following graph summarizes the cumulative total return to holders of the
Company's Common Stock from December 31, 1991 to December 31, 1996, compared
to the cumulative total return on the Standard & Poor's 500 Stock Index and
the Standard & Poor's Hospital Management Composite Index.
LOGO
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG VENCOR, INC., S&P 500 INDEX AND S&P
HOSPITAL MANAGEMENT
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
S&P
Measurement Period VENCOR, S&P HOSPITAL
(Fiscal Year Covered) INC. 500 INDEX MANAGEMENT
- --------------------- --------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-12/31/1991 $100 $100 $100
FYE 12/31/1992 $100 $108 $ 78
FYE 12/31/1993 $ 83 $118 $117
FYE 12/31/1994 $116 $120 $125
FYE 12/31/1995 $135 $165 $174
FYE 12/31/1996 $131 $203 $204
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As of December 31, 1996, the following persons served on the Executive
Compensation Committee of the Company's Board of Directors: R. Gene Smith,
Greg D. Hudson and Jack O. Vance. Although R. Gene Smith serves as Vice
Chairman of the Board, none of the Executive Compensation Committee members
are employees of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1989, the Company adopted a policy which provides that any transaction
between the Company and any of its officers, directors or their affiliates
must be approved by the disinterested members of the Company's Board of
Directors and must be on terms no less favorable to the Company than those
available from unaffiliated parties.
On September 28, 1995, the Company consummated its merger with The Hillhaven
Corporation (the "Merger"). Following the Merger, Walter F. Beran and Jack O.
Vance became directors of the Company. Mr. Beran is currently a nominee for
election to the Board of Directors and Mr. Vance's term as a director will
expire at the Annual Meeting. In connection with the Merger, the Company
agreed to fulfill Hillhaven's obligations under Hillhaven's Directors'
Retirement Plan with respect to each of Hillhaven's outside directors,
including Mr. Beran and Mr. Vance. Under the Directors' Retirement Plan, each
Hillhaven outside director will receive an annual retirement payment of
$25,440 for a period of ten years following the Merger.
12
<PAGE>
The Company currently manages seven nursing centers owned by Tenet
Healthcare Corporation, a more than five percent stockholder of the Company.
Under the management agreements for these nursing centers, the Company
provides all necessary management functions in return for approximately five
and one-half percent of the monthly net revenues generated at such nursing
centers. The Company may also be entitled to certain incentive fees if actual
results exceed budgeted amounts. During 1996, the Company earned approximately
$2.7 million in revenues from the management of these seven nursing centers.
PROPOSAL TO ADOPT 1997 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
The Board of Directors has adopted, and recommends that stockholders
approve, the Company's 1997 Stock Option Plan for Non-Employee Directors (the
"Directors Plan"). The Directors Plan is similar to and is intended to succeed
the Company's 1987 Stock Option Plan for Non-Employee Directors. The Company
does not intend to make additional grants under the 1987 Stock Option Plan for
Non-Employee Directors. The purpose of the Directors Plan is to attract and
retain highly qualified non-employee directors by permitting them to obtain or
increase their proprietary interest in the Company. Currently, the Company has
seven non-employee directors.
The Directors Plan became effective upon adoption by the Board of Directors
but the Directors Plan will be rescinded and all awards granted thereunder
will be null and void unless the Directors Plan is approved by the
stockholders at the Annual Meeting.
The Directors Plan provides for annual awards of options to each of the
Company's non-employee directors. The principal provisions of the Directors
Plan are summarized below. This summary, however, does not purport to be
complete and is qualified in its entirety by reference to the provisions of
the Directors Plan, a copy of which is included with this Proxy Statement as
Exhibit B. Terms not defined herein shall have the same meanings as set forth
in the Directors Plan.
PLAN ADMINISTRATION
The Directors Plan is designed to operate automatically and not require any
significant administration. To the extent administration is required, the
Directors Plan will be administered by a committee appointed by the Board of
Directors which will include two or more directors of the Company or the
entire Board. No discretion concerning decisions under the Directors Plan will
be afforded to a person who is not a "disinterested person."
SHARES AVAILABLE FOR ISSUANCE
The Directors Plan provides that 200,000 shares of Common Stock will be
available for the granting of awards. The Common Stock subject to the
Directors Plan will be authorized but unissued shares or previously acquired
shares. Pursuant to the Directors Plan, the number and kind of shares to which
awards are subject will be appropriately adjusted in the event of certain
changes in capitalization of the Company, including stock dividends and
splits, reclassifications, recapitalizations, reorganizations, mergers,
consolidations, spin-offs, split-ups, combinations or exchanges of shares, and
certain distributions and repurchases of shares.
STOCK OPTIONS
On January 1 of each year during the term of the Directors Plan, each non-
employee director who is elected a director at the preceding annual meeting of
stockholders and who is acting as a director on January 1, will receive a
grant of an option to purchase 3,000 shares of Common Stock. The exercise
price of each option will be equal to the "Fair Market Value" as defined below
of the shares on the date of grant. The "Fair Market Value" of the shares
means the closing sale price of the shares on the New York Stock Exchange or
any national or regional stock exchange on which the shares are traded on the
date the Fair Market Value is to be determined. Upon exercise, the exercise
price may be paid in cash or, in lieu of all or part of the cash, the optionee
may provide the Company with shares owned by the optionee having a Fair Market
Value equal to the exercise price.
13
<PAGE>
Under the Directors Plan, all options are exercisable in four equal annual
installments, with the first installment becoming exercisable following the
first anniversary of the date of grant of the option. Upon a Change in Control
(as defined in the Directors Plan) or the retirement of the director, the
optionee will have the right to exercise the option in full as to all shares
subject to the option. The exercise period for any stock option will be ten
years from the date of grant unless sooner terminated.
If the optionee ceases to be a director of the Company for any reason other
than death, disability, retirement, or removal for cause, the option will
terminate on the earlier of three months after the optionee ceases to be a
director or on the option's expiration date. During the three month period,
such option will be exercisable only with respect to the number of shares
which the optionee was entitled to purchase on the day preceding the day on
which the optionee ceased to be a director. If the optionee ceases to be a
director because of removal for cause, the option will terminate on the date
of the optionee's removal. In the event of the optionee's death, disability,
or retirement while a director or the optionee's death within three months
after the optionee ceases to be a director (other than by reason of removal
for cause), the option will terminate upon the earlier of (i) 12 months after
the date of the optionee's death, disability, or retirement or (ii) the
option's expiration date. During such period, the option will be exercisable
for the number of shares as to which the option would have been exercisable on
the date preceding the optionee's death or disability. In the event of the
retirement of the director, the option will be fully exercisable during such
period.
Generally, options granted under the Directors Plan are not transferable by
an optionee except by bequest or the laws of descent and distribution, and
during the optionee's lifetime, the option may be exercised only by the
optionee. However, an optionee may transfer options, subject to Section 16(b)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
other appropriate restrictions, to the optionee's spouse, lineal descendants,
or a trust or other entity exclusively for the benefit of the optionee and
such persons.
AMENDMENTS AND TERMINATION
The Board may amend or terminate the Directors Plan at any time. However, to
the extent required to meet (i) conditions for exemption from Section 16(b) of
the Exchange Act; (ii) the requirements of any national securities exchange or
system on which the shares are then listed or reported; or (iii) the
requirements of a regulatory agency having jurisdiction with respect to the
Directors Plan, stockholder approval will be necessary for any amendment that
would (a) materially increase the total number of shares which may be issued
under the Directors Plan, (b) materially modify the eligibility requirements
to receive an option under the Directors Plan or (c) materially increase the
benefits accruing to non-employee directors.
DURATION
The Directors Plan became effective upon adoption by the Board. The
Directors Plan will terminate on the earliest to occur of (i) the date when
all of the shares available under the Directors Plan have been acquired
through the exercise of options, (ii) December 31, 2006, or (iii) such other
date as the Board may determine.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax consequence to
non-employee directors who may receive awards under the Directors Plan. The
discussion is based upon interpretations of the Internal Revenue Code of 1986,
as amended (the "Code"), in effect as of January 1, 1997 and regulations
promulgated thereunder as of such date.
The options granted under the Directors Plan are non-qualified stock
options. The granting of a non-qualified stock option does not produce taxable
income to the optionee or a tax deduction to the Company. Taxable ordinary
income generally will be recognized by the optionee at the time of exercise in
an amount equal to the excess of the fair market value of the shares purchased
at the time of such exercise over the aggregate exercise price. In the case of
an optionee who is subject to Section 16(b) of the Exchange Act ("Section
16(b)"),
14
<PAGE>
if the optionee has made an unrelated purchase of shares within the six-month
period preceding the exercise of the option, it is possible, although unclear
as of this date, that the excess of the fair market value of the shares
acquired upon the exercise of the option six months after the date of the
unrelated purchase would be taxable as ordinary income unless an election is
made under Section 83(b) ("Section 83(b) election") of the Code, in which case
the results are the same as if the optionee were not subject to Section 16(b).
The Company will be entitled to a corresponding Federal income tax deduction
at the time the optionee recognizes income. Upon a subsequent taxable
disposition of the shares, the optionee will generally recognize a taxable
capital gain or loss based upon the difference between the per share market
value at the time of exercise and the per share selling price. To the extent
the optionee pays all or part of the exercise price by tendering shares of
Common Stock, the tax consequences described above apply except that the
number of shares received upon such exercise which is equal to the number of
shares surrendered in payment of the option price will have the same basis and
tax holding period as the shares surrendered.
NEW PLAN BENEFITS
On January 1, 1997, each of the Company's seven non-employee directors was
granted an option to purchase 3,000 shares of Common Stock at the exercise
price of $31.625 per share under the Directors Plan. Consistent with the
Directors Plan, each of these options has a ten year term and will become
exercisable in four equal installments beginning on January 1, 1998. These
options will become null and void unless the Directors Plan is approved by the
stockholders at the Annual Meeting. Future awards of options will be made in
subsequent years to non-employee directors if and when they are re-elected and
serving as of January 1. The closing price per share on the New York Stock
Exchange of the Common Stock on March 3, 1997, as reported in The Wall Street
Journal, was $34.375.
Employees of the Company are not eligible to participate in the Directors
Plan. A discussion of the Company's 1997 Incentive Compensation Plan follows
this proposal.
Approval of the Directors Plan requires the affirmative vote of the holders
of the majority of the shares represented at the Annual Meeting, in person or
by proxy, and entitled to vote. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE DIRECTORS PLAN. SHARES OF COMMON STOCK COVERED BY PROXIES
EXECUTED AND RECEIVED IN THE ACCOMPANYING FORM WILL BE VOTED IN FAVOR OF THE
DIRECTORS PLAN, UNLESS OTHERWISE SPECIFIED ON THE PROXY.
PROPOSAL TO ADOPT 1997 INCENTIVE COMPENSATION PLAN
The Board of Directors has adopted, and recommends that stockholders
approve, the Company's 1997 Incentive Compensation Plan (the "Incentive
Plan"). The Incentive Plan is similar to and is intended to succeed the
Company's 1987 Incentive Compensation Program. The Board has determined that
if the Incentive Plan is approved by the stockholders, no further awards will
be granted under the 1987 Incentive Compensation Program after such approval.
The Incentive Plan became effective upon adoption by the Board of Directors
but the Incentive Plan will be rescinded unless the Incentive Plan is approved
by the stockholders at the Annual Meeting.
The purpose of the Incentive Plan is to advance the interests of the Company
and its stockholders by attracting, retaining, and motivating employees who
will be responsible for the long term success and development of the Company.
The Incentive Plan provides for the award of a variety of economic incentives
to the Company's employees, including stock awards, performance units,
restricted stock, cash awards, stock options, and stock appreciation rights
("SARs"). The principal provisions of the Incentive Plan are summarized below.
This summary, however, does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Incentive Plan, a copy of which
is included with this Proxy Statement as Exhibit C. Terms not defined herein
shall have the same meanings as set forth in the Incentive Plan.
15
<PAGE>
PLAN ADMINISTRATION AND ELIGIBILITY
The Incentive Plan will be administered by a committee (the "Committee")
composed of three or more "outside directors" within the meaning of Section
162(m) of the Code. In administering the Incentive Plan, the Committee will
determine, among other things: (i) individuals to whom grants of awards will
be made; (ii) the type and size of awards; and (iii) the terms of an award
including, but not limited to, a vesting schedule, exercise price, restriction
or performance criteria, and the length of any relevant performance
restriction or option. The Committee may also construe, interpret and correct
defects, omissions and inconsistencies in the Incentive Plan.
All full-time employees of the Company, or any subsidiary, partnership or
limited liability company in which the Company owns a majority interest, are
eligible to receive awards under the Incentive Plan when designated by the
Committee. At December 31, 1996, the Company had approximately 48,300 full-
time employees. In selecting employees to receive awards under the Incentive
Plan, the Committee must take into consideration such factors as it deems
relevant in promoting the purposes of the Incentive Plan, including the duties
of the employees, their present or potential contribution to the success of
the Company and their anticipated number of years of active service as
employees.
SHARES AVAILABLE FOR ISSUANCE
The Incentive Plan provides that 3,400,000 shares of Common Stock will be
available for the granting of awards. The total number of shares of Common
Stock with respect to which stock options may be granted to any individual
during any calendar year may not exceed 250,000 shares. The maximum number of
SARs or performance units which may be awarded to an employee during any
calendar year may not exceed 100,000. The maximum amount of a cash award which
may be granted to an employee during any calendar year will not be greater
than $500,000. The Common Stock subject to the Incentive Plan will be
authorized but unissued shares or previously acquired shares. Pursuant to the
Incentive Plan, the number and kind of shares to which awards are subject may
be appropriately adjusted in the event of certain changes in capitalization of
the Company, including stock dividends and splits, reclassifications,
recapitalizations, reorganizations, mergers, consolidations, spin-offs, split-
ups, combinations or exchanges of shares, and certain distributions, and
repurchases, of shares.
STOCK OPTIONS
The Committee may grant stock options to eligible individuals in the form of
incentive stock options or non-qualified stock options. All incentive stock
options are intended to qualify under Section 422 of the Code. The exercise
period for any stock option will be determined by the Committee at the time of
grant but may not exceed ten years from the date of grant (five years in the
case of an incentive stock option granted to a "Ten-Percent Shareholder" as
defined in the Incentive Plan). The exercise price per share of the Common
Stock covered by a stock option may not be less than 100% of the fair market
value of a share of Common Stock on the date of grant (110% in the case of an
incentive stock option granted to a Ten-Percent Shareholder). The exercise
price is payable, at the Committee's discretion, in cash, in shares of already
owned Common Stock, or in any other reasonable consideration that the
Committee may deem appropriate. Stock options will be exercisable in
installments as determined by the Committee and as set forth in the employee's
option agreement. Each option grant may be exercised in whole, at any time, or
in part, from time to time, after the grant becomes exercisable. The Committee
may, in its discretion and with appropriate restrictions, authorize any non-
qualified stock option to be transferable to the employee's spouse, lineal
descendants, a trust or other entity exclusively for the benefit of the
employee and such persons.
If any employee's employment terminates by reason of death or disability,
any outstanding stock option will vest fully and be exercisable at any time
within two years following the date of death or disability for a non-
qualifying stock option and one year following the date of death or disability
for an incentive stock option (but in no event beyond the stated term of the
option). Upon an employee's retirement, a stock option will be exercisable at
any time prior to the end of the stated term of the stock option or two years
following the retirement date in the case of a non-qualified stock option and
90 days after retirement, in the case of an incentive
16
<PAGE>
stock option, whichever is the shorter period, but only to the extent the
stock option is exercisable at retirement. Upon termination for any reason
other than for cause, any previously vested stock option will be exercisable
for the lesser of 90 days or the balance of the stock option's stated term. In
the event of termination for cause, all options, whether or not exercisable,
will terminate.
RESTRICTED STOCK
Subject to the limitations of the Incentive Plan, the Committee may grant
restricted stock to eligible employees. Generally, employees receiving
restricted stock are not required to pay the Company for the restricted stock
(except for applicable tax withholding). Restricted stock awards are shares of
Common Stock that are subject to restrictions on transfer or other incidence
of ownership where the restrictions lapse based solely on continued employment
with the Company for specified periods or based on the achievement of
specified performance standards, in either case, as determined by the
Committee. The Committee also will determine all terms and conditions pursuant
to which such restrictions will lapse. At the discretion of the Committee,
certificates representing shares of restricted stock will be deposited with
the Company until the restriction period ends. Grantees of restricted stock
will have all the rights of a stockholder with respect to the restricted stock
and may receive dividends, unless the Committee determines otherwise.
Dividends may, at the discretion of the Committee, be deferred until the
restriction period ends and may bear interest if the Committee so determines.
If an employee's employment terminates by reason of death or disability
prior to the expiration of the restriction period applicable to any shares of
restricted stock then held by the employee, all restrictions pertaining to
such shares immediately lapse. Upon termination for any other reason, all
restricted shares are forfeited, provided, however, the Committee may provide
that the restrictions on some or all of the shares held by an employee shall
lapse upon the employee's retirement or other termination of employment other
than for cause.
PERFORMANCE UNITS
The Committee may grant performance units to eligible employees. Each
performance unit will specify the performance goals, performance period and
the number of performance units granted. The performance period will not be
less than six months, nor more than five years, as determined by the
Committee. Performance goals are those objectives established by the Committee
which may be expressed in terms of earnings per share, price of the Common
Stock, pre-tax profit, net earnings, return on equity or assets, revenues, any
combination of the foregoing, or such other goals as the Committee may
determine. Performance goals may relate to the performance of the Company, a
subsidiary, a division or other operating unit of the Company. The Committee
must establish performance goals within 90 days of the commencement of the
applicable fiscal year. Performance goals may be established as a range of
goals if the Committee so desires. If the Committee determines that the
performance goals have been met, the employee will be entitled to the
appropriate payment with respect thereto. At the option of the Committee,
payment may be made solely in shares of Common Stock, solely in cash, or a
combination of cash and shares of Common Stock. The award of performance units
does not create any rights in such employee as a stockholder of the Company.
If the employee's employment terminates by reason of death or disability
prior to the expiration of the performance period applicable to any
performance unit then held by such employee, all restrictions pertaining to
such performance units shall lapse and the employee will be entitled to the
full amount of any award of performance units. Upon termination for any other
reason, all performance units are terminated.
STOCK APPRECIATION RIGHTS AND STOCK AND CASH AWARDS
The Committee may grant SARs to eligible individuals. SARs constitute a
right to receive, without payment to the Company, a number of shares of Common
Stock, cash or any combination thereof, with the value equal to the
appreciation of the shares to which the SAR relates, determined in accordance
with the Incentive Plan. The term of each SAR shall be determined by the
Committee, but will not exceed ten years from the date of its grant. The
Committee will determine all terms and conditions relating to any award of an
SAR.
17
<PAGE>
The Committee may also award stock and cash awards under the Incentive Plan.
Stock and cash awards may be subject to terms and conditions, which may vary
from time to time and among employees, as the Committee deems appropriate.
Each award of stock or cash may provide for a lesser payment in the event of
partial fulfillment of performance goals.
CHANGE IN CONTROL
Generally, in the event of a Change in Control (as defined in the Incentive
Plan) of the Company, all outstanding stock options become fully vested and
immediately exercisable in their entirety. In addition, if provided in an
employee's option agreement, the employee will be permitted to sell the option
to the Company generally for an amount equal to the excess of (a) the fair
market value of the shares subject to the options over (b) the per share
exercise price for such shares. In addition, upon a Change in Control, all
restrictions on restricted stock lapse and outstanding performance units
become fully vested and immediately payable.
AMENDMENTS AND TERMINATION
The Board may at any time, terminate, and from time to time, may amend or
modify the Incentive Plan. Any such action of the Board may be taken without
the approval of the Company's stockholders, but only to the extent that such
stockholder approval is not required by applicable law or regulation. The
Incentive Plan will terminate ten years from its effective date.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the Federal income tax consequence to
employees who may receive awards under the Incentive Plan. The discussion is
based upon interpretations of the Code in effect as of January 1, 1997 and
regulations promulgated thereunder as of such date.
Non-Qualified Stock Options. The granting of non-qualified stock options
does not produce taxable income to the recipient or a tax deduction to the
Company. Taxable ordinary income will generally be recognized by the optionee
at the time of exercise in an amount equal to the excess of the fair market
value of the Common Stock purchased at the time of such exercise over the
aggregate exercise price. The Company will be entitled to a corresponding
Federal income tax deduction. Upon a subsequent taxable disposition of the
Common Stock, the optionee will generally recognize a taxable capital gain or
loss based upon the difference between the per share market value at the time
of exercise and the per share selling price. To the extent an optionee pays
all or part of the exercise price by tendering shares of Common Stock, (other
than shares acquired pursuant to the exercise of any incentive stock option
where the holding period has not yet been met) the tax consequences described
above apply except that the number of shares received upon such exercise which
is equal to the number of shares surrendered in payment of the exercise price
will have the same basis and tax holding period as the shares surrendered.
Special rules may apply to an optionee who is subject to Section 16(b) of the
Exchange Act ("Section 16(b)").
Incentive Stock Options. In the case of an incentive stock option, an
optionee will not recognize any taxable income at the time of grant and the
Company will not be entitled to an income tax deduction. No ordinary income
will be recognized by the holder of an incentive stock option at the time of
exercise. However, the excess of the fair market value of the Common Stock at
the time of exercise over the aggregate exercise price will be an adjustment
to alternative minimum taxable income for purposes of the Federal "alternative
minimum tax" at the date of exercise.
If the optionee holds the shares acquired upon exercise of the incentive
stock option for the greater of two years after the date the option was
granted or one year after the acquisition of the Common Stock, the difference
between the aggregate exercise price and the amount realized upon disposition
of the Common Stock will constitute a long-term capital gain or loss, as the
case may be, and the Company will not be entitled to a Federal income tax
deduction. If the Common Stock is disposed of in a sale, exchange or other
"disqualifying
18
<PAGE>
disposition" within two years after the date of grant or within one year after
the date of exercise: (i) the optionee would realize taxable ordinary income
in an amount equal to the excess of the fair market value of the Common Stock
at the time of exercise or the sales price, whichever is less, over the
aggregate exercise price; (ii) the Company would be entitled to a deduction
for such year in the amount of the ordinary income so realized; and (iii) the
optionee would realize capital gain in an amount equal to the difference
between (a) the amount realized upon the sale of the Common Stock and (b) the
exercise price plus the amount of ordinary income, if any, realized upon the
disposition. Under proposed Treasury regulations, however, it would appear
that where Common Stock which is subject to a substantial risk of forfeiture
is disposed of in a disqualifying disposition, the relevant date for
determining the amount of ordinary income would be the date the restriction
lapses, but in no event may such amount be greater than the sales price.
Furthermore, under the proposed Treasury regulations, the Company would not be
entitled to a deduction upon a disqualifying disposition unless it withheld
Federal income tax. Because the regulations are only in proposed form, the
results remain unclear. Special rules may apply to an optionee who is subject
to Section 16(b).
Restricted Stock. In the absence of an election under Section 83(b) of the
Code ("Section 83(b) election"), an employee who receives restricted stock
will recognize no income at the time of issuance. When the restriction period
expires with respect to shares of restricted stock, an employee will recognize
ordinary income equal to the fair market value of the Common Stock as of the
date the restrictions expire over the amount paid for such Common Stock (if
any). The employee's basis for the Common Stock is equal to the amount
included in income on the expiration of the restriction period plus the amount
paid (if any), and the holding period begins just after the restriction period
ends. Any disposition of the Common Stock will result in a long-term or short-
term capital gain or loss (depending upon the time the shares are held after
the end of the restriction period). Dividends received by an employee on
restricted stock constitute ordinary income in the year received. The Company
will be entitled to a deduction equal to the amount of ordinary income
recognized by an employee at the time such income is included in the
employee's income, and also is entitled to a deduction for dividends paid to
the employee on shares of Common Stock which remain subject to restrictions.
If a Section 83(b) election is made within 30 days of the initial award of
restricted stock, the restricted stock is treated, for tax purposes, as though
the restriction period did not apply. Thus, the employee must include the
excess of the fair market value of the Common Stock (computed without regard
to the restrictions) on the date of the issuance over the amount paid for the
Common Stock, if any, as ordinary income and the holding period begins just
after such award date. The Company is entitled to a corresponding deduction
for the grant, but dividends on the restricted stock would not be deductible.
Any subsequent disposition of the Common Stock by the employee, other than by
forfeiture, would result in capital gain or loss, which would be long-term or
short-term depending upon the holding period. No deduction is permitted to a
employee who has made the Section 83(b) election and who subsequently forfeits
the restricted stock, other than a deduction for the amount (if any) the
employee paid for the restricted stock, which is treated as a long-term or
short-term capital loss, depending upon the holding period. In such case, the
Company would be required to include as ordinary income the amount of the
deduction it claimed with respect to the restricted stock.
Performance Units. Generally, performance units granted to an employee will
be taxable to the employee in the amount of cash and the fair market value of
Common Stock received (unless the sale of the Common Stock could subject the
employee to suit under Section 16(b) and the employee does not make a Section
83(b) election, in which case the fair market value of the Common Stock on the
date the Common Stock is no longer subject to such restriction (but not later
than six months from the date the Common Stock is received) will be the amount
recognized). The Company will be entitled to a deduction for such amount at
the time it is includable in the income of the employee.
Stock Appreciation Rights and Stock and Cash Awards. No income is recognized
by an employee upon the grant of an SAR. Upon exercise of the SAR, the
employee will have ordinary income in an amount equal to the cash received
plus the fair market value of any Common Stock received. The Company will be
entitled to a deduction for such amount at the time it is includable in the
income of the employee. Special rules may apply to an employee who is subject
to Section 16(b).
19
<PAGE>
Upon the payment of a stock or cash award, the fair market value of the
Common Stock or the amount of cash received will be ordinary income to the
employee. The Company will be entitled to a deduction for such amount at the
time it is includable in the income of the employee. In the case of stock
awards, special rules may apply to an employee who is subject to Section
16(b).
Limitations on Company Deductions. Under Section 162(m) of the Code, the
Company is prohibited from deducting compensation paid to the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company in excess of $1,000,000 per person. However, compensation that is
performance-based will be excluded for purposes of calculating the amount of
compensation subject to the $1,000,000 limit. The Company has structured the
Incentive Plan so that any compensation for which the Company may claim a
deduction in connection with options, performance units, and SARs may be
"performance-based compensation" within the meaning of Section 162(m) of the
Code. The only awards under the Incentive Plan which are not performance-based
are stock awards, cash awards and awards of restricted stock which are not
subject to performance restrictions, and therefore, any amounts for which the
Company may claim a deduction in connection therewith will be subject to the
limitations on deductibility in Section 162(m) of the Code.
Under certain circumstances, the acceleration of the exercisability of
options, the early lapse of restrictions on restricted stock or performance
units, or the making of a cash payment in connection with a Change in Control
might be deemed to be an "excess parachute payment" for purposes of the golden
parachute tax provisions of Sections 280G and 4999 of the Code. To the extent
it is so considered, the employee may be subject to a 20% excise tax, and the
Company may be denied a tax deduction.
NEW PLAN BENEFITS
As described above, the selection of employees who will receive awards under
the Incentive Plan, upon approval of the Incentive Plan by the stockholders,
and the size and type of awards are generally to be determined by the
Committee in its discretion. No awards have been made or granted under the
Incentive Plan, nor are any such awards now determinable. Thus, it is not
possible to predict the benefits or amounts that will be received by or
allocated to particular individuals or groups of employees in 1997.
Approval of the Incentive Plan requires the affirmative vote of the holders
of the majority of the shares represented at the Annual Meeting, in person or
by proxy, and entitled to vote. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
APPROVAL OF THE INCENTIVE PLAN. SHARES OF COMMON STOCK COVERED BY PROXIES
EXECUTED AND RECEIVED IN THE ACCOMPANYING FORM WILL BE VOTED IN FAVOR OF THE
INCENTIVE PLAN, UNLESS OTHERWISE SPECIFIED ON THE PROXY.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers and persons who own more than 10% of the
Company's Common Stock to file initial stock ownership reports and reports of
changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Based on a review of these reports and on written
representations from the reporting persons that no other reports were
required, the Company believes that applicable Section 16(a) reporting
requirements were complied with for all transactions which occurred in 1996.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, Louisville, Kentucky, has been retained by
the Company as independent auditors to audit the financial statements of the
Company. Representatives of Ernst & Young LLP will be present at the Annual
Meeting and will be afforded the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
20
<PAGE>
STOCKHOLDER PROPOSALS
Any stockholder proposal intended to be presented at the next Annual Meeting
of Stockholders must be received by the Company by November 28, 1997 in order
to be considered for inclusion in the Company's proxy material for such
meeting.
OTHER MATTERS
The only matters to be considered at the Annual Meeting or any adjournment
thereof, so far as known to the Board of Directors, are those set forth in the
Notice of Meeting and routine matters incident to the conduct of the Annual
Meeting. However, if any other matters should properly come before the Annual
Meeting or any adjournment thereof, it is the intention of the persons named
in the accompanying form of proxy, or their substitutes, to vote the proxy in
accordance with their judgment in such matters.
By Order of the Board of
Directors,
LOGO
W. Bruce Lunsford
Chairman of the Board,
President and Chief
Executive Officer
Louisville, Kentucky
March 28, 1997
21
<PAGE>
EXHIBIT A
VENCOR, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Selected Financial Data................................................... F-2
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... F-3
Report of Independent Auditors............................................ F-7
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1996, 1995 and 1994.................................................... F-8
Consolidated Balance Sheet, December 31, 1996 and 1995.................. F-9
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996,
1995 and 1994.......................................................... F-10
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994.................................................... F-11
Notes to Consolidated Financial Statements.............................. F-12
Quarterly Consolidated Financial Information (Unaudited)................ F-25
Financial Statement Schedules (a):
Schedule II--Valuation and Qualifying Accounts for the years ended
December 31, 1996,
1995 and 1994.......................................................... F-26
</TABLE>
- --------
(a) All other schedules have been omitted because the required information is
not present or not present in material amounts.
F-1
<PAGE>
VENCOR, INC.
SELECTED FINANCIAL DATA
AS OF AND FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICS)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Revenues................ $2,577,783 $2,323,956 $2,032,827 $1,727,436 $1,575,225
---------- ---------- ---------- ---------- ----------
Salaries, wages and 1,490,938 1,360,018 1,167,181 985,163 921,508
benefits...............
Supplies................ 218,083 188,754 162,053 126,473 117,940
Rent.................... 77,795 79,476 79,371 74,323 85,942
Other operating 449,335 416,969 366,621 330,014 299,813
expenses...............
Depreciation and 99,533 89,478 79,519 69,126 56,408
amortization...........
Interest expense........ 45,922 60,918 62,828 73,559 62,532
Investment income....... (12,203) (13,444) (13,126) (16,056) (12,820)
Non-recurring 125,200 109,423 (4,540) 5,769 113,265
transactions...........
---------- ---------- ---------- ---------- ----------
2,494,603 2,291,592 1,899,907 1,648,371 1,644,588
---------- ---------- ---------- ---------- ----------
Income (loss) from 83,180 32,364 132,920 79,065 (69,363)
operations before
income taxes...........
Provision for income 35,175 24,001 46,781 10,089 12,051
taxes..................
---------- ---------- ---------- ---------- ----------
Income (loss) from 48,005 8,363 86,139 68,976 (81,414)
operations.............
Reinstatement of - - - - 24,743
discontinued
operations.............
Extraordinary gain
(loss) on
extinguishment of debt,
net of income taxes.... - (23,252) (241) (2,217) 380
Cumulative effect on
prior years of a change
in accounting for
income taxes........... - - - (1,103) -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 48,005 $ (14,889) $ 85,898 $ 65,656 $ (56,291)
========== ========== ========== ========== ==========
Earnings (loss) per
common and common
equivalent share:
Primary:
Income (loss) from $ 0.68 $ 0.21 $ 1.37 $ 1.22 $ (1.57)
operations............
Reinstatement of - - - - 0.47
discontinued
operations............
Extraordinary gain - (0.37) - (0.04) 0.01
(loss) on
extinguishment of
debt..................
Cumulative effect on
prior years of a
change
in accounting for
income taxes.......... - - - (0.02) -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 0.68 $ (0.16) $ 1.37 $ 1.16 $ (1.09)
========== ========== ========== ========== ==========
Fully diluted:
Income (loss) from $ 0.68 $ 0.29 $ 1.28 $ 1.22 $ (1.57)
operations............
Reinstatement of - - - - 0.47
discontinued
operations............
Extraordinary gain - (0.32) - (0.04) 0.01
(loss) on
extinguishment of
debt..................
Cumulative effect on
prior years of a
change
in accounting for
income taxes.......... - - - (0.02) -
---------- ---------- ---------- ---------- ----------
Net income (loss).... $ 0.68 $ (0.03) $ 1.28 $ 1.16 $ (1.09)
========== ========== ========== ========== ==========
Shares used in
computing earnings
(loss) per common
and common equivalent
share:
Primary................ 70,702 62,318 57,037 54,555 52,820
Fully diluted.......... 70,702 71,967 69,014 60,640 52,820
FINANCIAL POSITION:
Working capital......... $ 320,123 $ 239,666 $ 129,079 $ 114,339 $ 114,695
Assets.................. 1,968,856 1,912,454 1,656,205 1,563,350 1,515,812
Long-term debt.......... 710,507 778,100 746,212 784,801 988,998
Stockholders' equity.... 797,091 772,064 596,454 485,550 283,791
OPERATING DATA:
Number of hospitals..... 38 36 33 26 18
Number of hospital 3,325 3,263 2,511 2,198 1,717
licensed beds..........
Number of hospital 586,144 489,612 403,623 293,367 223,483
patient days...........
Number of nursing 313 311 310 325 369
centers................
Number of nursing center 39,619 39,480 39,423 40,759 45,419
licensed beds..........
Number of nursing center 12,566,763 12,569,600 12,654,016 12,770,435 13,709,222
patient days...........
Number of Vencare 2,205 2,008 948 128 -
contracts..............
Number of pharmacy 46 55 60 88 131
outlets................
Number of Atria 21 22 21 21 22
communities............
Number of Atria units... 2,942 3,022 2,950 2,993 3,153
</TABLE>
F-2
<PAGE>
VENCOR, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Selected Financial Data on page F-2 and the consolidated financial
statements included herein set forth certain data with respect to the
financial position, results of operations and cash flows of Vencor, Inc.
("Vencor" or "the Company") which should be read in conjunction with the
following discussion and analysis.
BACKGROUND INFORMATION
The merger with the Hillhaven Corporation ("Hillhaven") (the "Hillhaven
Merger") was consummated on September 28, 1995. At the time of the Hillhaven
Merger, Hillhaven operated 311 nursing centers, 56 retail and institutional
pharmacies and 23 assisted and independent living communities with 3,122
units. Annualized revenues approximated $1.7 billion. See Note 2 of the Notes
to Consolidated Financial Statements for a description of the Hillhaven
Merger.
Prior to its merger with Vencor, Hillhaven completed a merger with
Nationwide Care, Inc. ("Nationwide") (the "Nationwide Merger") on June 30,
1995. At the time of the Nationwide Merger, Nationwide operated 23 nursing
centers containing 3,257 licensed beds and four assisted and independent
living communities with 442 units. Annualized revenues approximated $125
million. See Note 3 of the Notes to Consolidated Financial Statements for a
description of the Nationwide Merger.
As discussed in the Notes to Consolidated Financial Statements, the
Hillhaven Merger and Nationwide Merger have been accounted for by the pooling-
of-interests method. Accordingly, the accompanying consolidated financial
statements and financial and operating data included herein give retroactive
effect to these transactions and include the combined operations of Vencor,
Hillhaven and Nationwide for all periods presented.
In the third quarter of 1996, Vencor completed the initial public offering
of 5,750,000 shares of its assisted and independent living business, Atria
Communities, Inc. ("Atria") (the "IPO"). At December 31, 1996, Vencor owned
10,000,000 shares, or 63.2%, of Atria's outstanding common stock. For
accounting purposes, the accounts of Atria continue to be consolidated with
those of Vencor and the Company has recorded minority interests in the
earnings and equity of Atria since consummation of the IPO. See Note 4 of the
Notes to Consolidated Financial Statements for a description of the IPO.
RESULTS OF OPERATIONS
A summary of revenues follows (dollars in thousands--prior period revenues
have been reclassified to conform with the 1996 presentation):
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------- 1994
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Hospitals................ $ 551,268 20.8 $ 456,486 26.4 $ 361,111
---------- ---------- ----------
Nursing centers.......... 1,627,479 5.2 1,546,832 11.2 1,390,731
Non-recurring
transactions............ - (24,500) -
---------- ---------- ----------
1,627,479 6.9 1,522,332 9.5 1,390,731
---------- ---------- ----------
Vencare.................. 386,730 26.1 306,601 26.9 241,601
Atria.................... 51,846 8.1 47,976 20.7 39,758
---------- ---------- ----------
2,617,323 12.2 2,333,395 14.8 2,033,201
Elimination.............. (39,540) (9,439) (374)
---------- ---------- ----------
$2,577,783 10.9 $2,323,956 14.3 $2,032,827
========== ========== ==========
</TABLE>
Hospital revenues increased in both 1996 and 1995 from the acquisition of
facilities and growth in same-store patient days. Hospital patient days rose
20% to 586,144 in 1996 and 21% to 489,612 in 1995. Price increases in both
years were not significant.
F-3
<PAGE>
Excluding the effect of non-recurring transactions, nursing center revenue
increases resulted primarily from growth in the volume of Medicare patients,
who typically require higher levels of medical care. Medicare patient days
grew 3% to 1,562,600 in 1996 and 11% to 1,511,300 in 1995. Nursing center
revenue growth was adversely impacted by a decline in private pay patient days
to 2,812,700 in 1996 from 2,911,500 in 1995 and 3,052,000 in 1994. In an
effort to attract increased volumes of Medicare and private pay patients, the
Company has adopted a plan to expend approximately $200 million over the next
two years to improve existing facilities and expand the range of services
provided to accomodate higher acuity patients.
Vencare, the Company's ancillary services division organized in 1993,
provides primarily respiratory and rehabilitation therapy and pharmacy
management services to nursing centers and other healthcare providers. Growth
in ancillary services revenues in both 1996 and 1995 was primarily
attributable to the expansion of the Vencare contract services business. The
number of Vencare contracts (most of which relate to respiratory therapy) grew
from 948 at the end of 1994 to 2,008 and 2,205 at December 31, 1995 and 1996,
respectively.
Revenues from Vencor's assisted and independent living business, Atria,
increased in both years as a result of price increases, growth in occupancy,
expansion of ancillary services and, in 1995, the purchase of controlling
interest in two communities previously accounted for under the equity method
and the effect of two newly constructed communities.
In the fourth quarter of 1996, Vencor recorded pretax charges aggregating
$125.2 million ($79.9 million net of tax) primarily to complete the
integration of Hillhaven. In November 1996, Vencor executed a definitive
agreement to sell 34 underperforming or non-strategic nursing centers in early
1997. A charge of $65.3 million was recorded in connection with the
disposition. In addition, Vencor's previously independent institutional
pharmacy business, acquired as part of the Hillhaven Merger, was integrated
into Vencare, resulting in a charge of $39.6 million related primarily to
costs associated with employee severance and benefit costs (approximately 500
employees), facility close-down expenses and the writeoff of certain deferred
costs for services to be discontinued. A provision for loss totaling $20.3
million related to the planned replacement of one hospital and three nursing
centers was also recorded in the fourth quarter.
In the third quarter of 1995, Vencor recorded pretax charges aggregating
$128.4 million ($89.9 million net of tax) primarily in connection with the
consummation of the Hillhaven Merger. The charges included (i) $23.2 million
of investment advisory and professional fees, (ii) $53.8 million of employee
benefit plan and severance costs (approximately 500 employees), (iii) $26.9
million of losses associated with the planned disposition of certain nursing
center properties and (iv) $24.5 million of charges to reflect Vencor's change
in estimates of accrued revenues recorded in connection with certain prior-
year nursing center third-party reimbursement issues. During 1996, activities
related to the elimination of duplicative corporate and operational functions
was substantially completed, and management expects that the dispositions of
certain nursing center properties will be concluded in 1997. Operating results
for 1995 also include pretax charges of $5.5 million ($3.7 million net of tax)
recorded in the second quarter related primarily to the Nationwide Merger.
Non-recurring transactions related primarily to sales of assets and nursing
center restructuring activities increased pretax income by $4.5 million ($2.7
million net of tax) in 1994.
Income from operations for 1996 totaled $48.0 million, compared to $8.3
million and $86.1 million for 1995 and 1994, respectively. Excluding the
effect of non-recurring transactions, 1996 income from operations increased
25% to $127.9 million ($1.81 per share--fully diluted) and 22% to $101.9
million ($1.45 per share--fully diluted) in 1995. The growth in both periods
resulted primarily from increased hospital volumes and growth in higher margin
ancillary services in both Vencare and the nursing center business and, in
1996, realization of substantial synergies resulting from the Hillhaven
Merger. Management believes that additional revenues resulting from patient
cross-referrals within the healthcare network created by the Hillhaven Merger
aggregated approximately $80 million in 1996. In addition, cost reductions
from elimination of duplicative functions, increased cost efficiencies and
refinancing of long-term debt increased 1996 pretax income by approximately
$20 million.
For more information concerning the provision for income taxes as well as
information regarding differences between effective income tax rates and
statutory rates, see Note 7 of the Notes to Consolidated Financial Statements.
F-4
<PAGE>
LIQUIDITY
Cash provided by operations totaled $183.5 million for 1996 compared to
$113.6 million for 1995 and $133.0 million for 1994. Cash payments in 1996 and
1995 related to non-recurring transactions reduced cash flows from operations
by approximately $22 million and $32 million, respectively.
During each of the past three years, cash flows from operations have been
adversely impacted by growth in the outstanding days of revenues in accounts
receivable. Growth in accounts receivable has been primarily related to the
integration of acquired hospital facilities, delays in payments from certain
state Medicaid programs and managed care plans and, in 1996, the restructuring
of Vencor's pharmacy operations. Management believes that these factors may
have an adverse effect on cash flows from operations in 1997.
Concurrent with the consummation of the Hillhaven Merger, Vencor established
a $1 billion bank credit facility (the "Vencor $1 Billion Credit Facility") to
finance the redemption of Hillhaven preferred stock, repay certain Hillhaven
higher rate debt and borrowings under prior revolving credit agreements, and
provide sufficient credit for future expansion. At December 31, 1996,
available borrowings under the Vencor $1 Billion Credit Facility approximated
$224 million. Following completion of the IPO, Atria consummated a $200
million bank credit facility (the "Atria Credit Facility") to finance its
expansion and development program. At December 31, 1996, amounts available
under the Atria Credit Facility aggregated $107 million.
On March 21, 1997, Vencor completed its acquisition of TheraTx, Incorporated
("TheraTx"), a provider of rehabilitation and respiratory therapy management
services and nursing center operator (the "TheraTx Merger"). In connection
therewith, Vencor consummated a new bank credit facility on March 18, 1997
aggregating $1.6 billion (the "Vencor $1.6 Billion Credit Facility"),
replacing the Vencor $1 Billion Credit Facility.
Working capital totaled $320.1 million at December 31, 1996 compared to
$239.7 million at December 31, 1995. Cash and cash equivalents at December 31,
1996 includes $65.2 million related to Atria, a substantial portion of which
will be used to finance Atria's development and expansion program. Management
believes that cash flows from operations and amounts available under the
Vencor $1.6 Billion Credit Facility are sufficient to meet future expected
liquidity needs.
CAPITAL RESOURCES
Excluding acquisitions, capital expenditures totaled $135.0 million for 1996
compared to $136.9 million for 1995 and $111.5 million for 1994. Planned
capital expenditures in 1997 (excluding acquisitions) are expected to
approximate $200 million to $250 million and include significant expenditures
related to nursing center improvements and the expansion of Atria's assisted
and independent living business. Management believes that its capital
expenditure program is adequate to expand, improve and equip existing
facilities.
Vencor also expended $26.2 million, $59.3 million and $36.4 million for
acquisitions of new facilities (and related healthcare businesses) and
previously leased nursing centers during 1996, 1995 and 1994, respectively, of
which $5.2 million, $44.2 million and $32.4 million related to additional
hospital facilities. Management intends to acquire additional hospitals,
nursing centers and ancillary service businesses in the future.
Capital expenditures during the last three years were financed primarily
through internally generated funds and, in 1996, from the collection of notes
receivable aggregating $78.2 million. In addition, capital expenditures in
1995 were financed through the public offering of 2.2 million shares of common
stock, the proceeds from which totaled $66.5 million. Vencor intends to
finance a substantial portion of its capital expenditures with internally
generated funds, additional long-term debt and, with respect to Atria,
proceeds from the IPO. Sources of capital include available borrowings under
the Vencor $1.6 Billion Credit Facility, the Atria Credit Facility, public or
private debt and equity.
During 1996, Vencor repurchased 1,950,000 shares of common stock at an
aggregate cost of $55.3 million.
As discussed in Note 9 of the Notes to Consolidated Financial Statements,
Vencor called for redemption all of its outstanding convertible debt
securities in the fourth quarter of 1995, resulting in the issuance of
F-5
<PAGE>
approximately 7,259,000 shares of common stock. Approximately $34.4 million of
the convertible securities were redeemed in exchange for cash equal to 104.2%
of face value plus accrued interest. These transactions had no material effect
on earnings per common and common equivalent share.
As discussed in Note 9 of the Notes to Consolidated Financial Statements,
Vencor entered into certain interest rate swap agreements in the fourth
quarter of 1995 to eliminate the impact of changes in interest rates on $400
million of floating rate debt outstanding. The agreements expire in April 1997
($100 million), October 1997 ($200 million) and April 1998 ($100 million) and
provide for fixed rates at 5.7% plus 1/2% to 1 1/4%.
HEALTH CARE LEGISLATION
Congress is currently considering various proposals which could reduce
expenditures under certain government health and welfare programs, including
Medicare and Medicaid. Management cannot predict whether such proposals will
be adopted, or if adopted, what effect, if any, such proposals would have on
its business.
Medicare revenues as a percentage of total revenues were 31%, 30% and 27%
for 1996, 1995 and 1994, respectively, while Medicaid percentages of revenues
approximated 31%, 33% and 36% for the respective periods.
OTHER INFORMATION
Various lawsuits and claims arising in the ordinary course of business are
pending against Vencor. Resolution of litigation and other loss contingencies
is not expected to have a material adverse effect on Vencor's liquidity,
financial position or results of operations.
The Vencor $1 Billion Credit Facility and the Atria Credit Facility contain
customary covenants which require maintenance of certain financial ratios and
limit amounts of additional debt and repurchases of common stock. Vencor was
in compliance with all such covenants at December 31, 1996.
During 1996, Vencor adopted Financial Accounting Standards Board Statements
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" and No. 123, "Accounting for Stock-Based
Compensation." See Notes 5 and 12 of the Notes to Consolidated Financial
Statements.
On March 21, 1997, the Company consummated the TheraTx Merger, which will be
accounted for using the purchase method. The TheraTx Merger was structured as
a cash tender offer in which the Company paid $17.10 for each outstanding
share of TheraTx common stock. Following the completion of the tender offer,
the Company merged its acquisition subsidiary with and into TheraTx and
TheraTx became a wholly-owned subsidiary of the Company. Upon consummation of
the TheraTx Merger, each share of TheraTx common stock not purchased through
the tender offer was converted into the right to receive $17.10 in cash. See
Note 18 of the Notes to Consolidated Financial Statements.
F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders Vencor, Inc.
We have audited the accompanying consolidated balance sheet of Vencor, Inc.
as of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the index to Item 14(a) of Form 10-K. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Vencor, Inc. at December 31, 1996 and 1995, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
LOGO
Louisville, Kentucky
February 17, 1997
F-7
<PAGE>
VENCOR, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................... $2,577,783 $2,323,956 $2,032,827
---------- ---------- ----------
Salaries, wages and benefits............... 1,490,938 1,360,018 1,167,181
Supplies................................... 218,083 188,754 162,053
Rent....................................... 77,795 79,476 79,371
Other operating expenses................... 449,335 416,969 366,621
Depreciation and amortization.............. 99,533 89,478 79,519
Interest expense........................... 45,922 60,918 62,828
Investment income.......................... (12,203) (13,444) (13,126)
Non-recurring transactions................. 125,200 109,423 (4,540)
---------- ---------- ----------
2,494,603 2,291,592 1,899,907
---------- ---------- ----------
Income from operations before income taxes. 83,180 32,364 132,920
Provision for income taxes................. 35,175 24,001 46,781
---------- ---------- ----------
Income from operations..................... 48,005 8,363 86,139
Extraordinary loss on extinguishment of
debt, net of income
tax benefit of $14,839 in 1995 and $125 in
1994...................................... - (23,252) (241)
---------- ---------- ----------
Net income (loss)...................... 48,005 (14,889) 85,898
Preferred stock dividend requirements and
other items............................... - (5,280) (7,753)
Gain on redemption of preferred stock...... - 10,176 -
---------- ---------- ----------
Income (loss) available to common
stockholders.............................. $ 48,005 $ (9,993) $ 78,145
========== ========== ==========
Earnings (loss) per common and common
equivalent share:
Primary:
Income from operations................... $ 0.68 $ 0.21 $ 1.37
Extraordinary loss on extinguishment of
debt...................................... - (0.37) -
---------- ---------- ----------
Net income (loss)...................... $ 0.68 $ (0.16) $ 1.37
========== ========== ==========
Fully diluted:
Income from operations................... $ 0.68 $ 0.29 $ 1.28
Extraordinary loss on extinguishment of
debt...................................... - (0.32) -
---------- ---------- ----------
Net income (loss)...................... $ 0.68 $ (0.03) $ 1.28
========== ========== ==========
Shares used in computing earnings (loss)
per common
and common equivalent share:
Primary.................................. 70,702 62,318 57,037
Fully diluted............................ 70,702 71,967 69,014
</TABLE>
See accompanying notes.
F-8
<PAGE>
VENCOR, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 AND 1995 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
ASSETS ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 112,466 $ 35,182
Accounts and notes receivable less allowance for loss
of $23,915--1996 and $16,785--1995................... 420,758 360,147
Inventories........................................... 24,939 24,862
Income taxes.......................................... 67,808 77,997
Other................................................. 35,162 26,491
---------- ----------
661,133 524,679
Property and equipment, at cost:
Land.................................................. 113,749 111,232
Buildings............................................. 975,399 992,992
Equipment............................................. 435,787 403,338
Construction in progress (estimated cost to complete
and equip after December 31, 1996--$50,000).......... 84,835 44,731
---------- ----------
1,609,770 1,552,293
Accumulated depreciation.............................. (416,608) (362,199)
---------- ----------
1,193,162 1,190,094
Notes receivable less allowance for loss of $15,305--
1995.................................................. - 78,090
Intangible assets less accumulated amortization of
$25,218--1996
and $22,149--1995..................................... 31,608 42,580
Other.................................................. 82,953 77,011
---------- ----------
$1,968,856 $1,912,454
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 103,518 $ 99,887
Salaries, wages and other compensation................ 111,366 99,937
Other accrued liabilities............................. 71,434 75,617
Long-term debt due within one year.................... 54,692 9,572
---------- ----------
341,010 285,013
Long-term debt......................................... 710,507 778,100
Deferred credits and other liabilities................. 84,053 75,573
Minority interests in equity of consolidated entities.. 36,195 1,704
Contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 1,000
shares; none issued and outstanding.................. - -
Common stock, $0.25 par value; authorized 180,000
shares;
issued 72,615 shares--1996 and 72,158 shares--1995... 18,154 18,040
Capital in excess of par value........................ 713,527 684,377
Retained earnings..................................... 150,870 102,865
---------- ----------
882,551 805,282
Common treasury stock; 3,730 shares--1996 and 2,025
shares--1995......................................... (85,460) (33,218)
---------- ----------
797,091 772,064
---------- ----------
$1,968,856 $1,912,454
========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE>
VENCOR, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SHARES
--------------------------
PAR VALUE
COMMON ----------------- CAPITAL IN COMMON
PREFERRED COMMON TREASURY PREFERRED COMMON EXCESS OF RETAINED TREASURY
STOCK STOCK STOCK STOCK STOCK PAR VALUE EARNINGS STOCK TOTAL
--------- ------ -------- --------- ------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1993................... 157 53,208 (2,993) $ 23 $13,302 $451,027 $ 58,911 $(37,713) $485,550
Net income............. 85,898 85,898
Cash dividends on
preferred stock
($82.50 per share) and
provision for
redemption value...... (3,066) (3,066)
In-kind dividend on
preferred stock....... 4 2 4,506 (4,508) -
Issuance of common
stock in connection
with employee benefit
plans................. 360 121 89 5,458 1,518 7,065
Issuance of common
stock in connection
with acquisitions..... 698 9,089 8,565 17,654
Exercise of common
stock purchase
warrants.............. 5,610 1,403 61,897 63,300
Tender of preferred
stock in connection
with exercise of
common stock purchase
warrants.............. (63) (10) (63,290) (63,300)
Other.................. 3,974 (621) 3,353
---- ------ ------ ---- ------- -------- -------- -------- --------
Balances, December 31,
1994................... 98 59,178 (2,174) 15 14,794 472,661 136,614 (27,630) 596,454
Net loss............... (14,889) (14,889)
Cash dividends on
preferred stock
($67.98 per share) and
provision for
redemption value...... (2,380) (2,380)
In-kind dividend on
preferred stock....... 3 2,900 (2,900) -
Issuance of common
stock in connection
with employee benefit
plans................. 664 (150) 166 24,111 (11,098) 13,179
Issuance of common
stock in connection
with acquisitions..... 439 (3,227) 5,498 2,271
Increase in value of
common stock purchase
warrants of acquired
entities.............. 9,810 (9,810) -
Public offering of
common stock.......... 2,200 550 65,944 66,494
Conversion of long-term
debt.................. 7,260 1,815 149,645 151,460
Issuance of common
stock to grantor
trust................. 3,927 (3,927) 982 87,297 (88,279) -
Hillhaven Merger:
Issuance of common
stock and related
income tax benefits... 2,732 683 51,561 52,244
Termination of grantor
trust................. (3,786) 3,786 (946) (87,146) 88,279 187
Redemption of preferred
stock................. (101) (15) (91,253) (91,268)
Other.................. (17) 1 (4) 2,074 (3,770) 12 (1,688)
---- ------ ------ ---- ------- -------- -------- -------- --------
Balances, December 31,
1995................... - 72,158 (2,025) - 18,040 684,377 102,865 (33,218) 772,064
Net income............. 48,005 48,005
Increase in equity
resulting from initial
public offering of
Atria Communities,
Inc. common stock..... 19,828 19,828
Issuance of common
stock in connection
with employee benefit
plans................. 457 246 114 9,223 3,083 12,420
Repurchase of common
stock................. (1,950) (55,305) (55,305)
Other.................. (1) 99 (20) 79
---- ------ ------ ---- ------- -------- -------- -------- --------
Balances, December 31,
1996................... - 72,615 (3,730) $ - $18,154 $713,527 $150,870 $(85,460) $797,091
==== ====== ====== ==== ======= ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-10
<PAGE>
VENCOR, INC. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994 (IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................ $ 48,005 $ (14,889) $ 85,898
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Depreciation and amortization............... 99,533 89,478 79,519
Deferred income taxes....................... (34,814) (23,570) 5,526
Extraordinary loss on extinguishment of
debt....................................... - 38,091 366
Non-recurring transactions.................. 121,789 102,166 2,500
Other....................................... 5,685 14,809 (1,575)
Change in operating assets and liabilities:
Accounts and notes receivable.............. (64,304) (107,761) (63,247)
Inventories and other assets............... 1,284 (3,478) 12,385
Accounts payable........................... 2,165 22,157 4,718
Other accrued liabilities.................. 4,196 (3,366) 6,946
--------- --------- ---------
Net cash provided by operating
activities.............................. 183,539 113,637 133,036
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........... (135,027) (136,893) (111,486)
Acquisition of healthcare businesses and
previously leased facilities................ (26,236) (59,343) (36,391)
Sale of assets............................... 9,147 899 6,530
Collection of notes receivable............... 78,151 4,715 8,965
Net change in investments.................... (445) (12,779) 14,046
Other........................................ (6,576) (8,241) 3,032
--------- --------- ---------
Net cash used in investing activities.... (80,986) (211,642) (115,304)
--------- --------- ---------
Cash flows from financing activities:
Net change in borrowings under revolving
lines of credit............................. (1,500) 161,600 21,000
Issuance of long-term debt................... 10,495 438,052 18,599
Repayment of long-term debt.................. (31,586) (474,896) (75,124)
Public offering of common stock.............. 52,247 66,494 -
Other issuances of common stock.............. 2,242 6,520 1,289
Repurchase of common stock................... (55,305) - -
Redemption of preferred stock................ - (91,268) -
Payment of dividends......................... - (2,779) (3,070)
Other........................................ (1,862) (9,554) (2,338)
--------- --------- ---------
Net cash provided by (used in) financing
activities.............................. (25,269) 94,169 (39,644)
--------- --------- ---------
Change in cash and cash equivalents........... 77,284 (3,836) (21,912)
Cash and cash equivalents at beginning of
period....................................... 35,182 39,018 60,930
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 112,466 $ 35,182 $ 39,018
========= ========= =========
Supplemental information:
Interest payments............................ $ 46,527 $ 69,916 $ 59,733
Income tax payments.......................... 55,303 42,218 37,332
</TABLE>
See accompanying notes.
F-11
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ACCOUNTING POLICIES
REPORTING ENTITY
Vencor, Inc. ("Vencor" or "the Company") operates an integrated network of
healthcare services in forty-one states primarily focused on the needs of the
elderly. At December 31, 1996, Vencor operated 38 hospitals (3,325 licensed
beds), 313 nursing centers (39,619 licensed beds), a contract services
business ("Vencare") which provides respiratory therapy, rehabilitation
therapy, subacute medical services and pharmacy management services to nursing
centers and other healthcare providers and 21 assisted and independent living
communities with 2,942 units.
On September 28, 1995, Vencor consummated a merger with The Hillhaven
Corporation ("Hillhaven") in a tax-free, stock-for-stock transaction (the
"Hillhaven Merger"). See Note 2.
Prior to its merger with Vencor, Hillhaven consummated a merger with
Nationwide Care, Inc. ("Nationwide") on June 30, 1995 in a tax-free, stock-
for-stock transaction (the "Nationwide Merger"). See Note 3.
In the third quarter of 1996, Vencor completed an initial public offering
related to its assisted and independent living business through the issuance
of 5,750,000 common shares of Atria Communities, Inc. ("Atria") (the "IPO").
See Note 4.
BASIS OF PRESENTATION
The consolidated financial statements include all subsidiaries. Significant
intercompany transactions have been eliminated.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include amounts
based upon the estimates and judgments of management. Actual amounts may
differ from these estimates.
The Hillhaven Merger and the Nationwide Merger have been accounted for by
the pooling-of-interests method. Accordingly, the consolidated financial
statements included herein give retroactive effect to these transactions and
include the combined operations of Vencor, Hillhaven and Nationwide for all
periods presented.
In connection with the IPO, Vencor retained a controlling interest in Atria.
Accordingly, the accounts of Atria continue to be consolidated with those of
Vencor, and the Company has recorded minority interests in the earnings and
equity of Atria since consummation of the IPO.
REVENUES
Revenues are recorded based upon estimated amounts due from patients and
third-party payors for healthcare services provided, including anticipated
settlements under reimbursement agreements with Medicare, Medicaid and other
third-party payors.
F-12
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
REVENUES (CONTINUED)
A summary of revenues by payor type follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Medicare.................................... $ 822,589 $ 691,297 $ 554,443
Medicaid.................................... 821,828 776,278 731,491
Commercial and other........................ 972,906 865,820 747,267
---------- ---------- ----------
2,617,323 2,333,395 2,033,201
Elimination................................. (39,540) (9,439) (374)
---------- ---------- ----------
$2,577,783 $2,323,956 $2,032,827
========== ========== ==========
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with an original
maturity of three months or less. Carrying values of cash and cash equivalents
approximate fair value due to the short-term nature of these instruments.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies and individual patients.
INVENTORIES
Inventories consist primarily of medical supplies and are stated at the
lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Depreciation expense, computed by the straight-line method, was $91.6
million in 1996, $79.7 million in 1995, and $71.6 million in 1994.
Depreciation rates for buildings range generally from 20 to 45 years.
Estimated useful lives of equipment vary from 5 to 15 years.
During 1996, Vencor adopted Financial Accounting Standards Board Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." See Note 5.
INTANGIBLE ASSETS
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities and are amortized using the
straight-line method over periods ranging from 10 to 25 years. Noncompete
agreements and debt issuance costs are amortized based upon the lives of the
respective contracts or loans.
PROFESSIONAL LIABILITY RISKS
Provisions for loss for professional liability risks are based upon
actuarially determined estimates. To the extent that subsequent claims
information varies from management's estimates, earnings are charged or
credited.
F-13
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER COMMON SHARE
Share and per share amounts have been retroactively restated to reflect a 3-
for-2 stock split distributed in October 1994.
The computation of earnings per common and common equivalent share give
retroactive effect to the Hillhaven Merger and the Nationwide Merger and is
based upon the weighted average number of common shares outstanding and the
dilutive effect of common stock equivalents consisting primarily of stock
options. In addition, the 1995 and 1994 computations also include the dilutive
effect of convertible debt securities.
During 1995, all convertible debt securities were redeemed in exchange for
cash or converted into Vencor common stock. Accordingly, the computation of
fully diluted earnings per common share assumes that the equivalent number of
common shares underlying such debt securities were outstanding during the
entire year even though the result thereof is antidilutive.
In connection with the Hillhaven Merger, Vencor realized a gain of
approximately $10.2 million upon the cash redemption of Hillhaven preferred
stock. Although the gain had no effect on net income, fully diluted earnings
per common and common equivalent share were increased by $0.14.
NOTE 2--HILLHAVEN MERGER
On September 27, 1995, the stockholders of both Vencor and Hillhaven
approved the Hillhaven Merger, effective September 28, 1995. In connection
with the Hillhaven Merger, Vencor issued approximately 31,651,000 shares of
common stock in exchange for all of the outstanding common stock of Hillhaven
(an exchange ratio of 0.935 of a share of Vencor common stock for each share
of Hillhaven common stock).
The Hillhaven Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Hillhaven Merger and include the combined operations of Vencor and
Hillhaven for all periods presented. The following is a summary of the results
of operations of the separate entities for periods prior to the Hillhaven
Merger (dollars in thousands):
<TABLE>
<CAPTION>
NON-RECURRING
VENCOR HILLHAVEN TRANSACTIONS ELIMINATION CONSOLIDATED
-------- ---------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30,
1995 (unaudited):
Revenues.............. $411,233 $1,322,873 $(24,500) $(3,775) $1,705,831
Income (loss) from
operations............. 31,566 41,367 (93,561) - (20,628)
Net income (loss)..... 30,711 20,235 (93,561) - (42,615)
1994:
Revenues.............. $400,018 $1,633,183 $ - $ (374) $2,032,827
Income from
operations............. 31,416 51,976 2,747 - 86,139
Net income............ 31,416 51,735 2,747 - 85,898
</TABLE>
F-14
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--NATIONWIDE MERGER
Prior to its merger with Vencor, Hillhaven completed the Nationwide Merger
on June 30, 1995. In connection therewith, 4,675,000 shares of common stock
(effected for the Hillhaven Merger exchange ratio) were issued in exchange for
all of the outstanding shares of Nationwide.
The Nationwide Merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Nationwide Merger and include the combined operations of Hillhaven and
Nationwide for all periods presented. The following is a summary of the
results of operations of the separate entities for periods prior to the
Nationwide Merger (dollars in thousands):
<TABLE>
<CAPTION>
NON-RECURRING
HILLHAVEN NATIONWIDE TRANSACTIONS CONSOLIDATED
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Six months ended June 30,
1995 (unaudited):
Revenues................... $ 803,793 $ 66,800 $ - $ 870,593
Income from operations..... 23,837 2,147 (3,686) 22,298
Net income................. 23,459 (266) (3,686) 19,507
1994:
Revenues................... $1,509,729 $123,454 $ - $1,633,183
Income from operations..... 47,178 4,798 2,747 54,723
Net income................. 46,937 4,798 2,747 54,482
</TABLE>
NOTE 4--INITIAL PUBLIC OFFERING OF ATRIA
In the third quarter of 1996, Vencor completed the IPO, the net proceeds
from which aggregated approximately $52.2 million. At December 31, 1996,
Vencor owned 10,000,000 shares, or 63.2%, of Atria's outstanding common stock.
Significant agreements related to the IPO are discussed below.
Credit Facility
Concurrently with the consummation of the IPO, Atria entered into a bank
credit facility (the "Atria Credit Facility"), which matures in four years and
may be extended at the option of the banks for an additional year. The Atria
Credit Facility aggregates up to $200 million, including a letter of credit
option not to exceed $70 million. Loans under the Atria Credit Facility bear
interest, at Atria's option, at either (i) a base rate based on PNC Bank's
prime rate or the daily federal funds rate or (ii) a LIBOR rate, plus an
additional percentage based on certain leverage ratios. The obligations under
the Atria Credit Facility are secured by substantially all of Atria's
property, the capital stock of Atria's present and future principal
subsidiaries and all intercompany indebtedness owned to Atria by its
subsidiaries. The Atria Credit Facility is conditioned upon, among other
things, Vencor's ownership of at least 30% of Atria's common stock.
Agreements with Atria
Atria and Vencor or its subsidiaries have entered into certain arrangements
which are intended to facilitate an orderly transition of Atria from a
division of Vencor to a separate publicly held entity which will be minimally
disruptive to both Atria and Vencor. In addition to various agreements related
to administrative support, shared services and real estate leases, significant
agreements with Atria include:
Guarantees--Vencor will guarantee for four years certain borrowings by
Atria under the Atria Credit Facility in amounts up to $100 million in the
first year following the IPO, declining to $75 million, $50 million and $25
million in each respective year thereafter.
F-15
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INITIAL PUBLIC OFFERING OF ATRIA (CONTINUED)
Income Taxes--A tax sharing agreement provides for risk-sharing
arrangements in connection with various income tax related issues.
Registration Rights--Atria has granted demand and piggyback registration
rights to Vencor with respect to registration under the Securities Act of
1933 of Atria common stock owned by Vencor. Four demand registrations are
permitted. Atria will pay the fees and expenses of two demand registrations
and the piggyback registrations, while Vencor will pay all underwriting
discounts and commissions. The registration rights expire five years from
the completion of the IPO and are subject to certain conditions and
limitations, including the right of underwriters of an offering to limit
the number of shares owned by Vencor included in such registration.
Liabilities and Indemnifications--Atria has agreed to assume all
contractual liabilities relating to the assets transferred by Vencor to
Atria.
NOTE 5--NON-RECURRING TRANSACTIONS
1996
In the fourth quarter of 1996, Vencor recorded pretax charges aggregating
$125.2 million primarily to complete the integration of Hillhaven. In November
1996, Vencor executed a definitive agreement to sell 34 underperforming or
non-strategic nursing centers in early 1997. A charge of $65.3 million was
recorded in connection with the disposition. In addition, Vencor's previously
independent institutional pharmacy business, acquired as part of the Hillhaven
Merger, was integrated into Vencare, resulting in a charge of $39.6 million
related primarily to costs associated with employee severance and benefit
costs (approximately 500 employees), facility close-down expenses and the
writeoff of certain deferred costs for services to be discontinued. A
provision for loss totaling $20.3 million related to the planned replacement
of one hospital and three nursing centers was also recorded in the fourth
quarter.
1995
In the third quarter of 1995, Vencor recorded pretax charges aggregating
$128.4 million primarily in connection with the consummation of the Hillhaven
Merger. The charges included (i) $23.2 million of investment advisory and
professional fees, (ii) $53.8 million of employee benefit plan and severance
costs (approximately 500 employees), (iii) $26.9 million of losses associated
with the planned disposition of certain nursing center properties and (iv)
$24.5 million of charges to reflect Vencor's change in estimates of accrued
revenues recorded in connection with certain prior-year nursing center third-
party reimbursement issues (recorded as a reduction of revenues). During 1996,
activities related to the elimination of duplicative corporate and operational
functions was substantially completed, and management expects that the
disposition of certain nursing center properties will be concluded in 1997.
Pretax charges aggregating $5.5 million were recorded in the second quarter
primarily in connection with the Nationwide Merger.
1994
In the first quarter of 1994, Vencor recorded a pretax charge of $2.5
million in connection with the prior disposition of certain nursing centers.
Operating results in the fourth quarter of 1994 include a pretax gain of $7
million on the sale of assets.
F-16
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--BUSINESS COMBINATIONS OTHER THAN HILLHAVEN AND NATIONWIDE
Vencor has acquired a number of healthcare facilities (including certain
previously leased facilities) and other related businesses, substantially all
of which have been accounted for by the purchase method. Accordingly, the
aggregate purchase price of these transactions has been allocated to tangible
and identifiable intangible assets acquired and liabilities assumed based upon
their respective fair values. The consolidated financial statements include
the operations of acquired entities since the respective acquisition dates.
The pro forma effect of these acquisitions on Vencor's results of operations
prior to consummation was not significant.
The following is a summary of acquisitions consummated during the last three
years under the purchase method of accounting (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fair value of assets acquired.................... $ 26,621 $ 78,893 $ 54,045
Fair value of liabilities assumed................ (385) (16,475) -
-------- -------- --------
Net assets acquired............................ 26,236 62,418 54,045
Cash received from acquired entities............. - (804) -
Issuance of common stock......................... - (2,271) (17,654)
-------- -------- --------
Net cash paid for acquisitions................. $ 26,236 $ 59,343 $ 36,391
======== ======== ========
The purchase price paid in excess of the fair value of identifiable net
assets of acquired entities aggregated $4.8 million in 1996, $9.7 million in
1995 and $8.3 million in 1994.
NOTE 7--INCOME TAXES
Provision for income taxes consists of the following (dollars in thousands):
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ 59,470 $ 40,008 $ 34,697
State........................................... 10,519 7,563 6,558
-------- -------- --------
69,989 47,571 41,255
Deferred......................................... (34,814) (23,570) 5,526
-------- -------- --------
$ 35,175 $ 24,001 $ 46,781
======== ======== ========
Reconciliation of federal statutory rate to effective income tax rate
follows:
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate........................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit......................................... 3.6 4.3 4.0
Merger and restructuring costs................... 3.5 34.6 -
Targeted jobs tax credits........................ - - (4.5)
Other items, net................................. 0.2 0.3 0.7
-------- -------- --------
Effective income tax rate...................... 42.3% 74.2% 35.2%
======== ======== ========
</TABLE>
F-17
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
A summary of deferred income taxes by source included in the consolidated
balance sheet at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Depreciation........................... $ - $47,256 $ - $40,912
Insurance.............................. 12,058 - 10,269 -
Doubtful accounts...................... 37,989 - 26,723 -
Property............................... 34,767 - 10,148 -
Compensation........................... 17,030 - 19,133 -
Other.................................. 33,120 19,990 16,127 8,584
-------- ------- ------- -------
$134,964 $67,246 $82,400 $49,496
======== ======= ======= =======
</TABLE>
Management believes that the deferred tax assets in the table above will
ultimately be realized. Management's conclusion is based primarily on the
existence of sufficient taxable income within the allowable carryback periods
to realize the tax benefits of deductible temporary differences recorded at
December 31, 1996.
Deferred income taxes totaling $62.4 million and $54.7 million at December
31, 1996 and 1995, respectively, are included in other current assets.
Noncurrent deferred income taxes, included in other long-term assets, totaled
$5.3 million at December 31, 1996. Noncurrent deferred income taxes at
December 31, 1995 totaling $21.8 million are included principally in deferred
credits and other liabilities.
NOTE 8--PROFESSIONAL LIABILITY RISKS
Vencor has insured a substantial portion of its professional liability risks
through a wholly owned insurance subsidiary since June 1, 1994. Provisions for
such risks underwritten by the subsidiary were $10.4 million for 1996, and
$11.1 million for 1995, and $6.9 million for 1994.
Amounts funded for the payment of claims and expenses incident thereto,
included principally in cash and cash equivalents and other assets, aggregated
$20.7 million and $17.5 million at December 31, 1996 and 1995, respectively.
Allowances for professional liability risks, included principally in deferred
credits and other liabilities, were $21.6 million and $15.9 million at
December 31, 1996 and 1995, respectively.
NOTE 9--LONG-TERM DEBT
CAPITALIZATION
A summary of long-term debt at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Senior collateralized debt, 4.4% to 12% (rates generally
floating) payable in periodic installments through 2019... $119,634 $140,813
Non-interest bearing residential mortgage bonds, payable in
periodic installments through 2040........................ 33,917 33,344
Bank revolving credit agreements due 2001 (floating rates
averaging 6.3%)........................................... 333,100 205,600
Bank term loans (floating rates averaging 6.3%) payable in
periodic installments
through 2001.............................................. 271,000 400,000
10 1/8% Senior Subordinated Notes due 2001................. 3,291 3,289
Other...................................................... 4,257 4,626
-------- --------
Total debt, average life of seven years (rates averaging
5.9%)..................................................... 765,199 787,672
Amounts due within one year................................ (54,692) (9,572)
-------- --------
Long-term debt........................................... $710,507 $778,100
======== ========
</TABLE>
F-18
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--LONG-TERM DEBT (CONTINUED)
CREDIT FACILITY
Concurrent with the consummation of the Hillhaven Merger, Vencor entered
into a five and one-half year $1 billion bank credit facility (the "Vencor $1
Billion Credit Facility") comprising a $400 million term loan and a $600
million revolving credit facility. The Vencor $1 Billion Credit Facility was
established to finance the redemption of Hillhaven preferred stock, repay
certain higher rate debt and borrowings under prior revolving credit
agreements discussed below, and provide sufficient credit for future
expansion. Interest is payable at rates up to either (i) the prime rate plus
1/4% or the daily federal funds rate plus 3/4%, (ii) LIBOR plus 1 1/4% or
(iii) the bank certificate of deposit rate plus 1 3/8%. Outstanding borrowings
under the $400 million term loan are payable in various installments beginning
in 1997. The Vencor $1 Billion Credit Facility is collateralized by the
capital stock of certain subsidiaries and contains covenants which require
maintenance of certain financial ratios and limit amounts of additional debt
and repurchases of common stock.
REFINANCING ACTIVITIES
During 1995, Vencor recorded $23.3 million of after-tax losses from
refinancing of long-term debt, substantially all of which was incurred in
connection with the Hillhaven Merger. Amounts refinanced in 1995 included $171
million of 10 1/8% Senior Subordinated Notes due 2001 (the "10 1/8% Notes"),
$112 million of outstanding borrowings under prior revolving credit
agreements, and $173 million of other senior debt.
In the fourth quarter of 1995, Vencor called for redemption its $115 million
of 6% Convertible Subordinated Notes due 2002 (the "6% Notes") and $75 million
of 7 3/4% Convertible Subordinated Debentures due 2002 (the "7 3/4%
Debentures") which were convertible into Vencor common stock at the rate of
$26.00 and $17.96 per share, respectively. Approximately $80.6 million
principal amount of the 6% Notes were converted into approximately 3,098,000
shares of common stock and the remainder were redeemed in exchange for cash
equal to 104.2% of face value plus accrued interest. All outstanding 7 3/4%
Debentures were converted into approximately 4,161,000 shares of common stock.
These transactions had no material effect on earnings per common and common
equivalent share.
OTHER INFORMATION
On October 30, 1995, Vencor entered into certain interest rate swap
agreements to eliminate the impact of changes in interest rates on $400
million of floating rate debt outstanding. The agreements expire in April 1997
($100 million), October 1997 ($200 million) and April 1998 ($100 million) and
provide for fixed rates at 5.7% plus 1/2% to 1 1/4%.
Maturities of long-term debt in years 1998 through 2001 are $66 million, $82
million, $111 million and $313 million, respectively.
The estimated fair value of Vencor's long-term debt was $752 million and
$777 million at December 31, 1996 and 1995, respectively, compared to carrying
amounts aggregating $765 million and $788 million. The estimate of fair value
includes the effect of the interest rate swap agreement and is based upon the
quoted market prices for the same or similar issues of long-term debt, or on
rates available to Vencor for debt of the same remaining maturities.
F-19
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--LEASES
Vencor leases real estate and equipment under cancelable and non-cancelable
arrangements. Future minimum payments and related sublease income under non-
cancelable operating leases are as follows (dollars in thousands):
<TABLE>
<CAPTION>
MINIMUM SUBLEASE
PAYMENTS INCOME
-------- --------
<S> <C> <C>
1997.......................................................... $48,341 $ 8,519
1998.......................................................... 42,265 7,335
1999.......................................................... 36,681 6,317
2000.......................................................... 32,655 6,116
2001.......................................................... 23,011 4,962
Thereafter.................................................... 61,414 17,608
</TABLE>
Sublease income aggregated $8.8 million, $13.7 million and $13.2 million for
1996, 1995 and 1994, respectively.
NOTE 11--CONTINGENCIES
Management continually evaluates contingencies based upon the best available
evidence. In addition, allowances for loss are provided currently for disputed
items that have continuing significance, such as certain third-party
reimbursements and deductions that continue to be claimed in current cost
reports and tax returns.
Management believes that allowances for losses have been provided to the
extent necessary and that its assessment of contingencies is reasonable.
Management believes that resolution of contingencies will not materially
affect Vencor's liquidity, financial position or results of operations.
Principal contingencies are described below:
Revenues--Certain third-party payments are subject to examination by
agencies administering the programs. Vencor is contesting certain issues
raised in audits of prior year cost reports.
Professional liability risks--Vencor has provided for loss for professional
liability risks based upon actuarially determined estimates. Actual
settlements may differ from the provisions for loss.
Interest rate swap agreements--Vencor is a party to certain agreements which
reduce the impact of changes in interest rates on $400 million of its floating
rate long-term debt. In the event of nonperformance by other parties to these
agreements, Vencor may incur a loss to the extent that market rates exceed
contract rates.
Guarantees of indebtedness--Letters of credit and guarantees of indebtedness
aggregated $29 million at December 31, 1996.
Income taxes--Vencor is contesting adjustments proposed by the Internal
Revenue Service for years 1990, 1991 and 1992.
Litigation--Various suits and claims arising in the ordinary course of
business are pending against Vencor.
F-20
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--CAPITAL STOCK
PLAN DESCRIPTIONS
In September 1995, Vencor common stockholders voted to increase the number
of authorized shares of common stock from 60 million to 180 million and
increase the number of common shares issuable under certain employee benefit
plans from approximately 3.2 million to 6.9 million. At December 31, 1996,
approximately 5.6 million shares of common stock were reserved for issuance
under Vencor's stock compensation plans.
Vencor has plans under which options to purchase common stock may be granted
to officers, employees and certain directors. Options have been granted at not
less than market price on the date of grant. Exercise provisions vary, but
most options are exercisable in whole or in part beginning one to four years
after grant and ending ten years after grant. Activity in the plans is
summarized below:
<TABLE>
<CAPTION>
SHARES WEIGHTED
UNDER OPTION PRICE AVERAGE
OPTION PER SHARE EXERCISE PRICE
--------- ---------------- --------------
<S> <C> <C> <C>
Balances, December 31, 1993.......... 1,660,826 $ 0.53 to $24.25
Granted............................ 536,239 11.53 to 22.75
Exercised.......................... (102,230) 0.53 to 22.09
Canceled or expired................ (48,185) 5.35 to 22.09
---------
Balances, December 31, 1994.......... 2,046,650 0.53 to 24.25
Granted............................ 1,537,820 11.50 to 32.50
Exercised.......................... (593,918) 0.53 to 29.14
Canceled or expired................ (51,151) 5.35 to 28.50
---------
Balances, December 31, 1995.......... 2,939,401 0.53 to 32.50
Granted............................ 1,467,451 25.50 to 38.38 $26.02
Exercised.......................... (368,758) 0.53 to 28.50 6.10
Canceled or expired................ (351,271) 14.17 to 32.63 26.65
---------
Balances, December 31, 1996.......... 3,686,823 $ 0.53 to $38.38 $23.54
=========
</TABLE>
A summary of stock options outstanding at December 31, 1996 follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
NUMBER NUMBER
OUTSTANDING WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1996 LIFE PRICE 1996 PRICE
--------------- ------------ ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$0.53 to $5.95....... 219,032 1 to 4 years $ 2.87 219,032 $ 2.87
$14.17 to $24.25..... 821,635 5 to 7 years 19.08 629,517 18.99
$25.50 to $38.38..... 2,646,156 8 to 10 years 26.63 294,139 27.49
--------- ---------
3,686,823 $23.54 1,142,688 $18.09
========= =========
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1996 approximated eight years. Shares of common stock available
for future grants were 1,387,396 at December 31, 1996 and 2,470,066 at
December 31, 1995.
In 1995, Vencor issued long-term incentive agreements to certain officers
and key employees whereby the Company may annually issue shares of common
stock to such individuals in satisfaction of predetermined performance goals.
Share awards aggregated 80,913 for 1996 and 92,500 for 1995.
F-21
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--CAPITAL STOCK (CONTINUED)
PLAN DESCRIPTIONS (CONTINUED)
In 1993, Vencor adopted a Shareholder Rights Plan under which common
stockholders have the right to purchase Series A Preferred Stock in the event
of accumulation of or tender offer for 15% or more of Vencor's common stock.
The rights will expire in 2003 unless redeemed earlier by Vencor.
STATEMENT NO. 123 DATA
Vencor has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123"), requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
Vencor's employee stock options is equal to the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if Vencor has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value of such options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 6.33% for 1996 and 1995; no dividend
yield; expected term of seven years and volatility factors of the expected
market price of the Company's common stock of .24 for 1996 and .25 for 1995.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because Vencor's employee stock options have characteristics significantly
different from those of traded options, and because the changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the respective vesting period. The
weighted average fair values of options granted during 1996 and 1995 under the
Black-Scholes model were $10.95 and $11.74, respectively. Pro forma
information follows (in thousands except per share amounts):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Pro forma income (loss) available to common stockholders.... $42,530 $(10,842)
Pro forma earnings (loss) per common and common equivalent
share:
Primary.................................................... 0.61 (0.17)
Fully diluted.............................................. 0.61 (0.05)
</TABLE>
Because Statement No. 123 is applicable only to options granted subsequent
to December 31, 1994, its pro forma effect will not be fully reflected until
1999.
F-22
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--EMPLOYEE BENEFIT PLANS
Vencor maintains defined contribution retirement plans covering employees
who meet certain minimum eligibility requirements. Benefits are determined as
a percentage of a participant's contributions and are generally vested based
upon length of service. Retirement plan expense was $8.8 million for 1996,
$9.7 million for 1995 and $7.0 million for 1994. Amounts equal to retirement
plan expense are funded annually.
NOTE 14--ACCRUED LIABILITIES
A summary of other accrued liabilities at December 31 follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Interest....................................................... $ 3,502 $ 3,582
Taxes other than income........................................ 20,238 22,000
Patient accounts............................................... 17,919 13,319
Merger related costs........................................... 16,640 19,071
Other.......................................................... 13,135 17,645
------- -------
$71,434 $75,617
======= =======
</TABLE>
NOTE 15--SPIN-OFF AND RELATED TRANSACTIONS
Hillhaven became an independent public company in January 1990 as a result
of a spin-off transaction with Tenet Healthcare Corporation (formerly National
Medical Enterprises, Inc.) ("Tenet"). The following is a summary of
significant transactions with Tenet:
Debt guarantees--Tenet and Vencor are parties to a guarantee agreement under
which Vencor pays a fee to Tenet in consideration for Tenet's guarantee of
certain Vencor obligations. Such fees totaled $3.0 million in 1996, $3.8
million in 1995, and $5.0 million in 1994.
Insurance--Prior to June 1, 1994, substantially all of the professional and
general liability risks of Hillhaven were insured by a subsidiary of Tenet.
Provisions for loss were $3.1 million in 1994.
Leases--Vencor leases certain nursing centers from a joint venture in which
Tenet has a minority interest. Lease payments to the joint venture aggregated
$10.3 million, $9.9 million and $9.3 million for 1996, 1995 and 1994,
respectively.
Equity ownership--At December 31, 1996, Tenet owned 8,301,067 shares of
Vencor common stock. Prior to the Hillhaven Merger, Tenet also owned all of
Hillhaven's outstanding Series C and Series D Preferred Stock.
Management agreements--Fees paid by Tenet for management, consulting and
advisory services in connection with the operation of seven nursing centers
owned or leased by Tenet aggregated $2.7 million in both 1996 and 1995 and
$2.5 million in 1994.
NOTE 16--FAIR VALUE DATA
A summary of fair value data at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $112,466 $112,466 $ 35,182 $ 35,182
Notes receivable........................... - - 88,729 89,992
Long-term debt, including amounts due
within one year........................... 765,199 751,843 787,672 777,090
</TABLE>
F-23
<PAGE>
VENCOR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--STOCK REPURCHASE PROGRAM
In June 1996, the Board of Directors authorized the repurchase of up to
2,000,000 shares of Vencor common stock. As of December 31, 1996, Vencor had
repurchased 1,950,000 shares at an aggregate cost of approximately $55.3
million.
NOTE 18--EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF
INDEPENDENT AUDITORS
On March 21, 1997, Vencor completed the acquisition of TheraTx, Incorporated
("TheraTx"), a provider of rehabilitation and respiratory therapy management
services and nursing center operator (the "TheraTx Merger"). Under the terms
of the merger agreement, Vencor paid $17.10 cash for each outstanding share of
TheraTx common stock, which aggregated approximately 20.6 million shares at
December 31, 1996. The TheraTx Merger will be recorded using the purchase
method of accounting.
In connection with the TheraTx Merger, Vencor entered into a new five-year
bank credit facility aggregating $1.6 billion on March 18, 1997, replacing the
Vencor $1 Billion Credit Facility.
F-24
<PAGE>
VENCOR, INC. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues....................... $626,337 $634,554 $650,551 $666,341
Net income (loss)(a)........... 27,610 30,865 33,558 (44,028)
Per common share:
Primary earnings (loss)....... 0.39 0.43 0.48 (0.64)
Fully diluted earnings (loss). 0.39 0.43 0.48 (0.64)
Market prices (b):
High......................... 39 7/8 35 34 1/2 33 1/4
Low.......................... 31 1/2 28 1/8 25 1/2 27 1/2
</TABLE>
<TABLE>
<CAPTION>
1995
--------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues....................... $552,178 $578,314 $575,339 $618,125
Net income (loss):
Income (loss) from operations
(c)........................... 21,172 21,087 (62,887) 28,991
Extraordinary loss on
extinguishment of debt........ (66) (2,725) (19,196) (1,265)
Net income (loss)............ 21,106 18,362 (82,083) 27,726
Per common share:
Primary earnings (loss):
Income (loss) from operations
(c)........................... 0.33 0.32 (0.91) 0.43
Extraordinary loss on
extinguishment of debt........ - (0.05) (0.32) (0.02)
Net income (loss)........... 0.33 0.27 (1.23) 0.41
Fully diluted earnings (loss):
Income (loss) from operations
(c)........................... 0.31 0.30 (0.91) 0.41
Extraordinary loss on
extinguishment of debt........ - (0.04) (0.32) (0.02)
Net income (loss)........... 0.31 0.26 (1.23) 0.39
Market prices (b):
High......................... 37 38 36 1/8 33 3/4
Low.......................... 27 1/8 28 1/2 28 1/4 26
</TABLE>
- --------
(a) Fourth quarter results includes $79.9 million ($1.16 per share) of costs
in connection with the sale of 34 nursing centers, the restructuring of
the pharmacy operations and the planned replacement of certain facilities.
See Note 5 of the Notes to Consolidated Financial Statements.
(b) Vencor common stock is traded on the New York Stock Exchange (ticker
symbol--VC).
(c) Second quarter results include $3.7 million ($0.05 per share) of costs
related to the Nationwide Merger. Third quarter loss includes $89.9
million ($1.50 per share) of costs related to the Hillhaven Merger. See
Note 5 of the Notes to Consolidated Financial Statements.
F-25
<PAGE>
VENCOR, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER DEDUCTIONS AT END
OF PERIOD EXPENSES ACCOUNTS OR PAYMENTS OF PERIOD
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowances for loss on
accounts and
notes receivable:
Year ended December
31, 1994............... $21,316 $ 9,055 $ (344)(a) $ (1,762) $28,265
Year ended December
31, 1995............... 28,265 7,851 - (4,026) 32,090
Year ended December
31, 1996............... 32,090 15,001 - (23,176) 23,915
Allowances for loss on
assets held
for disposition:
Year ended December
31, 1994............... $56,646 $ - $(56,646)(a)(b) $ - $ -
Year ended December
31, 1995............... - 26,900(c) - - 26,900
Year ended December
31, 1996............... 26,900 64,000(d) - (22,812) 68,088
</TABLE>
- --------
(a) Adjustment to reflect change in fiscal year of acquired entities.
(b) Includes $54.6 million related to reinstatement of assets previously held
for disposition.
(c) Reflects provision for loss associated with the planned disposition of
certain nursing center properties recorded in connection with the
Hillhaven Merger.
(d) Reflects provision for loss associated with the sale of 34 nursing centers
and the planned replacement of one hospital and three nursing centers.
F-26
<PAGE>
EXHIBIT 11
VENCOR, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
PRIMARY EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Earnings (loss):
Income from operations............................. $48,005 $ 8,363 $86,139
Preferred stock dividend requirements.............. - (5,280) (7,574)
Gain on preferred stock redemption................. - 10,176 -
Other.............................................. - - (179)
------- -------- -------
Income from operations available to common
stockholders...................................... 48,005 13,259 78,386
Extraordinary loss on extinguishment of debt, net
of income tax benefit............................. - (23,252) (241)
------- -------- -------
Income (loss) available to common stockholders... $48,005 $ (9,993) $78,145
======= ======== =======
Shares used in the computation:
Weighted average common shares outstanding......... 69,704 61,196 55,522
Dilutive effect of common stock equivalents........ 998 1,122 1,515
------- -------- -------
Shares used in computing earnings (loss) per
common and common equivalent share.............. 70,702 62,318 57,037
======= ======== =======
Primary earnings (loss) per common and common
equivalent share:
Income from operations............................. $ 0.68 $ 0.21 $ 1.37
Extraordinary loss on extinguishment of debt....... - (0.37) -
------- -------- -------
Net income (loss)................................ $ 0.68 $ (0.16) $ 1.37
======= ======== =======
</TABLE>
<PAGE>
EXHIBIT 11
VENCOR, INC.
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
FULLY DILUTED EARNINGS (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE:
Earnings (loss):
Income from operations available to common
stockholders...................................... $48,005 $ 13,259 $78,386
Interest addback on convertible securities, net of
income taxes...................................... - 7,380 10,127
------- -------- -------
Adjusted income from operations available to common
stockholders...................................... 48,005 20,639 88,513
Extraordinary loss on extinguishment of debt, net
of income tax benefit............................. - (23,252) (241)
------- -------- -------
Income (loss) available to common stockholders.... $48,005 $ (2,613) $88,272
======= ======== =======
Shares used in the computation:
Weighted average common shares outstanding......... 69,704 61,196 55,522
Dilutive effect of common stock equivalents and
other dilutive securities (a)..................... 998 10,771 13,492
------- -------- -------
Shares used in computing earnings (loss) per
common
and common equivalent share...................... 70,702 71,967 69,014
======= ======== =======
Fully diluted earnings (loss) per common and common
equivalent share:
Income from operations............................. $ 0.68 $ 0.29 $ 1.28
Extraordinary loss on extinguishment of debt....... - (0.32) -
------- -------- -------
Net income (loss)................................. $ 0.68 $ (0.03) $ 1.28
======= ======== =======
</TABLE>
- --------
(a) During 1995 all convertible debt securities were redeemed in exchange for
cash or converted into Vencor common stock. Accordingly, the computation
of fully diluted earnings per common share assumes that the equivalent
number of common shares underlying such debt securities were outstanding
during the entire year even though the result thereof is antidilutive.
<PAGE>
EXHIBIT B
VENCOR, INC.
1997 STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS
ARTICLE 1. PURPOSE
The purpose of this 1997 Stock Option Plan for Non-Employee Directors is to
promote the interests of Vencor, Inc., its subsidiaries and stockholders, by
allowing the Company to attract and retain highly qualified non-employee
directors by permitting them to obtain or increase their proprietary interest
in the Company.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. As used in the Plan, terms defined parenthetically
immediately after their use shall have the respective meanings provided by
such definitions, and the terms set forth below shall have the following
meanings (in either case, such terms shall apply equally to both the singular
and plural forms of the terms defined):
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Cause" shall mean, unless otherwise defined in an Option Agreement, a
felony conviction of a Non-Employee Director or the failure of a Non-Employee
Director to contest prosecution for a felony, or a Non-Employee Director's
willful misconduct or dishonesty, any of which is determined by the Committee
to be directly and materially harmful to the business or reputation of the
Company or its Subsidiaries.
(c) "Change in Control" shall mean any of the following events:
(1) An acquisition (other than directly from the Company) of any voting
securities of the Company ("Voting Securities") by any Person immediately
after which such Person has beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) ("Beneficial Ownership and/or
Beneficially Owned") of 20% or more of the combined voting power of the
Company's then outstanding Voting Securities; provided, however, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a Non-Control Acquisition (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A Non-Control
Acquisition shall mean an acquisition by (i) the Company or any Subsidiary,
(ii) an employee benefit plan (or a trust forming a part thereof) maintained
by the Company or any Subsidiary, or (iii) any Person in connection with a
Non-Control Transaction (as hereinafter defined);
(2) The individuals who, as of December 31, 1996, are members of the Board
("Incumbent Board") cease for any reason to constitute at least a majority of
the Board; provided, however, that if the election, or nomination for election
by the Company's stockholders, of any new director was approved by a vote of
at least a majority of the Incumbent Board, such new director shall, for
purposes of the Plan, be considered as a member of the Incumbent Board;
provided, further, however, that no individual shall be considered a member of
the Incumbent Board if such individual initially assumed office as a result of
either an actual or threatened election contest (as described in Rule 14a-11
promulgated under the Exchange Act) ("Election Contest") or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board ("Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest; or
(3) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization involving the Company,
unless such is a Non-Control Transaction. For purposes of the Plan, the term
"Non-Control Transaction" shall mean a merger, consolidation or reorganization
of the Company in which:
1
<PAGE>
(i) the stockholders of the Company, immediately before such merger,
consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least a majority of
the combined voting power of the voting securities of the corporation
resulting from such merger or consolidation or reorganization ("Surviving
Corporation") over which any Person has Beneficial Ownership in substantially
the same proportion as their ownership of the Voting Securities immediately
before such merger, consolidation or reorganization;
(ii) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least a majority of the members
of the board of directors of the Surviving Corporation; and
(iii) no Person (other than the Company, any Subsidiary, any employee
benefit plan (or any trust forming a part thereof) maintained by the Company,
the Surviving Corporation, or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership of 20% or
more of the then outstanding Voting Securities) has Beneficial Ownership of
20% or more of the combined voting power of the Surviving Corporation's then
outstanding voting securities;
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a Subsidiary).
(4) Any other event that the Committee shall determine constitutes an
effective Change in Control of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person ("Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person;
provided, however, that if a Change in Control would occur (but for the
operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such share acquisition by the Company,
the Subject Person becomes the Beneficial Owner of any additional Voting
Securities which increases the percentage of the then outstanding Voting
Securities Beneficially Owned by the Subject Person, then a Change in Control
shall occur.
(d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(e) "Committee" shall mean the Committee provided for in Section 5.1.
(f) "Company" shall mean Vencor, Inc., a Delaware corporation.
(g) "Disability" shall mean the total disability as determined by the
Committee in accordance with standards and procedures similar to those under
the Company's long-term disability plan, or, if none, a physical or mental
infirmity which the Committee determines impairs the Participant's ability to
perform substantially his or her duties for a period of 180 consecutive days.
(h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(i) "Fair Market Value" of the Shares shall mean, as of any applicable date,
the closing sale price of the Shares on the New York Stock Exchange or any
national or regional stock exchange in which the Shares are traded, or if no
such reported sale of the Shares shall have occurred on such date, on the next
preceding date on which there was such a reported sale. If there shall be any
material alteration in the present system of reporting
2
<PAGE>
sale prices of the Shares, or if the Shares shall no longer be listed on the
New York Stock Exchange or a national or regional stock exchange, the fair
market value of the Shares as of a particular date shall be determined by such
method as shall be determined by the Committee.
(j) "Non-Employee Director" shall mean a member of the Board who is not an
employee of the Company or any Subsidiary.
(k) "Option" shall mean an option granted to an Optionee pursuant to the
Plan.
(l) "Option Agreement" shall mean a written agreement between the Company
and an Optionee evidencing the granting of an Option and containing terms and
conditions concerning the exercise of the Option.
(m) "Optionee" shall mean a Non-Employee Director who has been granted an
Option or the personal representative, heir or legatee of an Optionee who has
the right to exercise the Option upon the death of the Optionee.
(n) "Person" shall have the meaning ascribed to such term in Section 3(a)(9)
of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including
a "group" as defined in Section 13(d).
(o) "Plan" shall mean this 1997 Stock Option Plan for Non-Employee
Directors, as the same may be amended from time to time.
(p) "Shares" shall mean the shares of the Company's common stock, par value
$.25 per share.
(q) "Subsidiary" shall mean, with respect to any company, any corporation or
other Person of which a majority of its voting power, equity securities or
equity interest is owned directly or indirectly by such company.
2.2 Gender and Number. Except where otherwise indicated by the context,
reference to the masculine gender shall include the feminine gender, the
plural shall include the singular and the singular shall include the plural.
2.3 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
ARTICLE 3. SHARES SUBJECT TO THE PLAN
The stock to be offered under the Plan shall be the Shares, which Shares may
be unissued Shares or treasury Shares. Subject to the adjustments provided for
in Section 6, the aggregate number of Shares to be delivered upon exercise of
all Options granted under the Plan shall not exceed 200,000 Shares. Shares
subject to, but not delivered under, an Option terminating or expiring for any
reason prior to its exercise in full shall be deemed available for Options to
be granted thereafter during the term of the Plan.
ARTICLE 4. TERMS AND CONDITIONS OF OPTIONS
4.1 Non-Discretionary Grants. On January 1 of each year during the term of
the Plan, each Non-Employee Director who is elected a director at the
preceding annual meeting of shareholders and who is acting as a director on
January 1, shall receive a grant of an Option for 3,000 Shares having the
following terms and conditions:
(a) The exercise price of the Option shall be equal to 100% of the Fair
Market Value of the Shares on the date the Option is granted.
(b) The term of the Option shall be ten years from the date of grant unless
sooner terminated as provided herein.
3
<PAGE>
(c) The Option shall be exercisable in four equal annual installments, with
the first installment becoming exercisable on the first anniversary of the
date of grant of the Option. Notwithstanding the provisions of this Section
4.1, upon a Change in Control or the retirement of the director, the Optionee
shall have the right to exercise the Option in full as to all Shares subject
to the Option.
4.2 Termination of Option.
(a) If the Optionee ceases to be a director of the Company for any reason
other than death, Disability, retirement or removal for Cause, the Option
shall terminate three months after the Optionee ceases to be a director of the
Company (unless the Optionee dies during such period), or on the Option's
expiration date, if earlier, and shall be exercisable during such period after
the Optionee ceases to be a director of the Company only with respect to the
number of Shares which the Optionee was entitled to purchase on the day
preceding the day on which the Optionee ceased to be a director.
(b) If the Optionee ceases to be a director of the Company because of
removal for Cause, the Option shall terminate on the date of the Optionee's
removal.
(c) In the event of the Optionee's death, Disability or retirement while a
director of the Company, or the Optionee's death within three months after the
Optionee ceases to be a director (other than by reason of removal for Cause),
the Option shall terminate upon the earlier to occur of (A) 12 months after
the date of the Optionee's death, Disability or retirement, or (B) the
Option's expiration date. The Option shall be exercisable during such period
after the Optionee's death or Disability with respect to the number of Shares
as to which the Option shall have been exercisable on the date preceding the
Optionee's death or Disability, as the case may be. In the event of the
retirement of the director, the Option shall be fully exercisable during such
period.
4.3 Restrictions on Transferability of Option. The Option shall not be
transferable by the Optionee otherwise than by bequest or the laws of descent
and distribution, and shall be exercisable during the Optionee's lifetime only
by the Optionee; provided, however, that the Optionee may, subject to any
restrictions under Section 16(b) of the Exchange Act, transfer the Options to
(i) the Optionee's spouse or lineal descendants ("Immediate Family Members"),
(ii) trusts for the exclusive benefit of such Optionee and/or his Immediate
Family Members, or (iii) a partnership or limited liability company in which
such Optionee and/or his Immediate Family Members are the only partners or
members, as applicable; provided that (a) there may be no consideration for
any such transfer and (b) subsequent transfers of any transferred Option shall
be prohibited other than by bequest or the laws of descent and distribution.
Following transfer, any such Option shall continue to be subject to the same
terms and conditions as were applicable immediately prior to transfer,
provided that for purposes of the Plan (excluding Section 4.2) the term
"Optionee" shall be deemed to refer to the transferee. Notwithstanding the
above, the provisions of Section 4.2 concerning the termination of an Option
shall continue to be applied with respect to the original Optionee. Any
transferred Option shall be exercisable by the transferee only to the extent,
and for the periods, specified in the Option Agreement.
4.4 Payment of Exercise Price. The exercise price shall be paid in cash at
the time of exercise, except that in lieu of all or part of the cash, the
Optionee may tender to the Company Shares already owned by the Optionee having
a Fair Market Value equal to the exercise price, less any cash paid. The Fair
Market Value of such tendered Shares shall be determined as of the close of
the business day immediately preceding the day on which the Option is
exercised.
4.5 Option Agreement. Each Option shall be evidenced by an Option Agreement
which shall set forth the number of Shares for which the Option was granted,
the provisions set forth in this Article 4 relating to the Option and such
other terms and conditions consistent with the Plan.
ARTICLE 5. ADMINISTRATION
5.1 The Committee. The Plan is designed to operate automatically and not
require any significant administration. To the extent administration is
required, the Plan shall be administered by a Committee appointed
4
<PAGE>
by the Board which shall include two or more directors of the Company or the
entire Board. The Committee shall meet at such times and places as it
determines and may meet through a telephone conference call. A majority of its
members shall constitute a quorum, and the decision of the majority of those
present at any meeting at which a quorum is present shall constitute the
decision of the Committee. Any decision reduced to writing and signed by a
majority of the members of the Committee shall be fully effective as if it had
been made by a majority at a meeting duly held. No discretion concerning
decisions under the Plan shall be afforded to a person who is not a
"disinterested person." All decisions, determinations and selections made by
the Committee pursuant to the provisions of the Plan shall be final. To the
extent required by law and Rule 16b-3 promulgated under the Exchange Act, the
Committee may delegate its authority hereunder.
5.2 Section 16 Compliance. It is the intention of the Company that the Plan
and the administration of the Plan comply in all respects with Section 16(b)
of the Exchange Act and the rules and regulations promulgated thereunder. If
any Plan provision, or any aspect of the administration of the Plan, is found
not to be in compliance with Section 16(b) of the Exchange Act, the provision
or administration shall be deemed null and void, and in all events the Plan
shall be construed in favor of its meeting the requirements of Rule 16b-3
promulgated under the Exchange Act.
ARTICLE 6. ADJUSTMENTS UPON CHANGE IN CAPITALIZATION
Notwithstanding the limitations set forth in Article 3, in the event of a
merger, reorganization, consolidation, recapitalization, reclassification,
split-up, spin-off, separation, liquidation, stock dividend, stock split,
reverse stock split, property dividend, share repurchase, share combination,
share exchange, issuance of warrants, rights or debentures or other change in
corporate structure of the Company affecting the Shares, the Committee shall
make an appropriate and equitable adjustment in the maximum number of Shares
available under the Plan or to any one individual and in the number, kind and
exercise price of Shares subject to Options granted under the Plan to prevent
dilution or enlargement of the rights of Non-Employee Directors under the Plan
and outstanding Options.
ARTICLE 7. AMENDMENTS AND DISCONTINUANCE
7.1 In General. Except as provided in Section 7.2, the Board may
discontinue, amend, modify or terminate the Plan at any time.
7.2 Section 16(b) Compliance. To the extent required to meet the conditions
for exemption from Section 16(b) of the Exchange Act or the requirements of
any national securities exchange or system on which the Shares are then listed
or reported or a regulatory body having jurisdiction with respect thereto,
without the approval of the stockholders of the Company, no amendment,
modification or termination may:
(a) materially increase the benefits accruing to Non-Employee Directors
under the Plan;
(b) increase the total number of Shares which may be issued under the Plan,
except as provided in Article 6; or
(c) materially modify the eligibility requirements to receive an Option
under the Plan.
Furthermore, to the extent required to meet the conditions for exemption
from Section 16(b) of the Exchange Act, no amendment which would change the
amount, price or timing of Option grants, other than to comply with changes in
the Code or the Employee Retirement Income Security Act of 1974, as amended
(to which the Plan is not currently subject), or the rules and regulations
promulgated thereunder, shall be made more than once every six months.
7.3 No Effect on Outstanding Options. Any Option which is outstanding under
the Plan at the time of the Plan's amendment or termination shall remain in
effect in accordance with its terms and conditions and those of the Plan as in
effect when the Option was granted.
5
<PAGE>
ARTICLE 8. MERGER, CONSOLIDATION, ETC.
8.1 Conversion on Certain Mergers. In the event the Company merges or
consolidates with another corporation, or all or substantially all of the
Company's capital stock or assets are acquired by another corporation, and the
surviving or acquiring corporation issues shares of its stock to the Company's
stockholders in connection with the merger, consolidation or acquisition, the
surviving or acquiring corporation shall adopt the Plan. Following such
adoption, the Optionee shall, at no additional cost (other than the exercise
price), be entitled to receive upon the exercise of an Option, in lieu of the
number of Shares to which such Option is then exercisable, the number and
class of stock or other securities to which the Optionee would have been
entitled pursuant to the terms of the merger, consolidation or acquisition if
immediately prior thereto the Optionee had been the holder of record of a
number of Shares equal to the number of Shares as to which the Option shall
then be exercisable.
8.2 No Conversion on Other Mergers. In the event that the Company merges or
consolidates with another corporation, or all or substantially all of the
Company's capital stock or assets are acquired by another corporation, and the
surviving or acquiring corporation does not issue shares of its stock to the
Company's stockholders in connection with the merger, consolidation or
acquisition, then, notwithstanding any other provision of the Plan to the
contrary, no Option may be exercised after the effective date of the merger,
consolidation or acquisition.
ARTICLE 9. EFFECTIVE DATE AND TERMINATION OF THE PLAN
9.1 Effective Date. The Plan shall become effective upon adoption by the
Board. The Plan shall be rescinded and all Options granted hereunder shall be
null and void unless within 12 months from the date of the adoption of the
Plan by the Board it shall have been approved by the holders of a majority of
the outstanding Shares present or represented and entitled to vote on the Plan
at a stockholders' meeting.
9.2 Termination Date. The Plan shall terminate on the earliest to occur of
(i) the date when all of the Shares available under the Plan shall have been
acquired through the exercise of Options granted under the Plan; (ii) 10 years
after the date of adoption of the Plan by the Board; or (iii) such earlier
date as the Board may determine.
ARTICLE 10. NO RIGHT TO RE-ELECTION
Neither the Plan, nor any action taken under the Plan, shall be construed as
conferring upon a Non-Employee Director any right to continue as a director of
the Company, to be renominated by the Board or re-elected by the stockholders
of the Company.
ARTICLE 11. INDEMNIFICATION
No member of the Board or the Committee, nor any officer or employee acting
on behalf of the Board or the Committee, shall be personally liable for any
action, determination or interpretation taken or made with respect to the
Plan, and all members of the Board, the Committee and each officer or employee
of the Company acting on their behalf shall, to the extent permitted by law,
be fully indemnified and protected by the Company with respect to any such
action, determination or interpretation.
ARTICLE 12. GOVERNING LAW
The provisions of the Plan shall be construed, administered and enforced
according to the laws of the State of Delaware without regard to its conflict
of laws rules.
6
<PAGE>
IN WITNESS WHEREOF, this 1997 Stock Option Plan for Non-Employee Directors
has been executed by the Company as of the 31st day of December, 1996, being
the date the Plan was adopted by the Board.
VENCOR, INC.
By: /s/ W. Bruce Lunsford
-----------------------------------
Title: Chairman of the Board,
President and Chief Executive
Officer
7
<PAGE>
EXHIBIT C
VENCOR, INC.
1997 INCENTIVE COMPENSATION PLAN
ARTICLE 1. PURPOSE
The purpose of this 1997 Incentive Compensation Plan ("Plan") is to advance
the interest of Vencor, Inc., a Delaware corporation ("Company"), and its
stockholders by encouraging employees who will largely be responsible for the
long-term success and development of the Company. The Plan is also intended to
provide flexibility to the Company in attracting, retaining and motivating
employees and promoting their efforts on behalf of the Company.
ARTICLE 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. As used in the Plan, terms defined parenthetically
immediately after their use shall have the respective meanings provided by
such definitions, and the terms set forth below shall have the following
meanings (in either case, such terms shall apply equally to both the singular
and plural forms of the terms defined):
(a) "Award" shall mean, individually or collectively, a grant under the Plan
of Options, Restricted Stock, SARs, Performance Units, stock awards and cash
awards.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean, unless otherwise defined in an agreement evidencing
an Award, a felony conviction of a Participant or the failure of a Participant
to contest prosecution for a felony, or a Participant's willful misconduct or
dishonesty, any of which is determined by the Committee to be directly and
materially harmful to the business or reputation of the Company or its
Subsidiaries.
(d) A "Change in Control" shall mean any of the following events:
(1) An acquisition (other than directly from the Company) of any voting
securities of the Company ("Voting Securities") by any Person immediately
after which such Person has beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Exchange Act) ("Beneficial Ownership and/or
Beneficially Owned") of 20% or more of the combined voting power of the
Company's then outstanding Voting Securities; provided, however, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a Non-Control Acquisition (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A Non-Control
Acquisition shall mean an acquisition by (i) the Company or any Subsidiary,
(ii) an employee benefit plan (or a trust forming a part thereof) maintained
by the Company or any Subsidiary, or (iii) any Person in connection with a
Non-Control Transaction (as hereinafter defined);
(2) The individuals who, as of December 31, 1996, are members of the Board
("Incumbent Board") cease for any reason to constitute at least a majority of
the Board; provided, however, that if the election, or nomination for election
by the Company's stockholders, of any new director was approved by a vote of
at least a majority of the Incumbent Board, such new director shall, for
purposes of the Plan, be considered as a member of the Incumbent Board;
provided, further, however, that no individual shall be considered a member of
the Incumbent Board if such individual initially assumed office as a result of
either an actual or threatened election contest (as described in Rule 14a-11
promulgated under the Exchange Act) ("Election Contest") or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board ("Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest; or
1
<PAGE>
(3) Approval by stockholders of the Company of:
(A) A merger, consolidation or reorganization involving the Company,
unless such is a Non-Control Transaction. For purposes of the Plan, the term
"Non-Control Transaction" shall mean a merger, consolidation or reorganization
of the Company in which:
(i) the stockholders of the Company, immediately before such merger,
consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least a majority of
the combined voting power of the voting securities of the corporation
resulting from such merger or consolidation or reorganization ("Surviving
Corporation") over which any Person has Beneficial Ownership in substantially
the same proportion as their ownership of the Voting Securities immediately
before such merger, consolidation or reorganization;
(ii) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger,
consolidation or reorganization constitute at least a majority of the members
of the board of directors of the Surviving Corporation; and
(iii) no Person (other than the Company, any Subsidiary, any employee
benefit plan (or any trust forming a part thereof) maintained by the Company,
the Surviving Corporation, or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial Ownership of 20% or
more of the then outstanding Voting Securities) has Beneficial Ownership of
20% or more of the combined voting power of the Surviving Corporation's then
outstanding voting securities;
(B) A complete liquidation or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than a
transfer to a Subsidiary).
(4) Any other event that the Committee shall determine constitutes an
effective Change in Control of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person ("Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person;
provided, however, that if a Change in Control would occur (but for the
operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such share acquisition by the Company,
the Subject Person becomes the Beneficial Owner of any additional Voting
Securities which increases the percentage of the then outstanding Voting
Securities Beneficially Owned by the Subject Person, then a Change in Control
shall occur.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto.
(f) "Committee" shall mean the committee described in Section 3.1.
(g) "Disability" shall mean the total disability as determined by the
Committee in accordance with standards and procedures similar to those under
the Company's long-term disability plan, or, if none, a physical or mental
infirmity which the Committee determines impairs the Participant's ability to
perform substantially his or her duties for a period of 180 consecutive days.
(h) "Employee" shall mean an individual who is a full-time employee of the
Company, a Subsidiary or a partnership or limited liability company in which
the Company or its Subsidiaries own a majority interest.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
2
<PAGE>
(j) "Fair Market Value" of the Shares shall mean, as of any applicable date,
the closing sale price of the Shares on the New York Stock Exchange or any
national or regional stock exchange in which the Shares are traded, or if no
such reported sale of the Shares shall have occurred on such date, on the next
preceding date on which there was such a reported sale. If there shall be any
material alteration in the present system of reporting sale prices of the
Shares, or if the Shares shall no longer be listed on the New York Stock
Exchange or a national or regional stock exchange, the fair market value of
the Shares as of a particular date shall be determined by such method as shall
be determined by the Committee.
(k) "ISOs" shall have the meaning given such term in Section 6.1.
(1) "NQSOs" shall have the meaning given such term in Section 6.1.
(m) "Option" shall mean an option to purchase Shares granted pursuant to
Article 6.
(n) "Option Agreement" shall mean an agreement evidencing the grant of an
Option as described in Section 6.2.
(o) "Option Exercise Price" shall mean the purchase price per Share subject
to an Option, which shall not be less than the Fair Market Value of the Share
on the date of grant (110% of Fair Market Value in the case of an ISO granted
to a Ten Percent Shareholder).
(p) "Participant" shall mean any Employee selected by the Committee to
receive an Award under the Plan.
(q) "Performance Goals" shall have the meaning given such term in Section
8.4.
(r)" Performance Period" shall have the meaning given such term in Section
8.3.
(s) "Performance Unit" shall mean the right to receive a payment from the
Company upon the achievement of specified Performance Goals as set forth in a
Performance Unit Agreement.
(t) "Performance Unit Agreement" shall mean an agreement evidencing a
Performance Unit Award, as described in Section 8.2.
(u) "Person" shall have the meaning ascribed to such term in Section 3(a)(9)
of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including
a "group" as defined in Section 13(d).
(v) "Plan" shall mean this Vencor, Inc. 1997 Incentive Compensation Plan as
the same may be amended from time to time.
(w) "Restriction Period" shall mean the period determined by the Committee
during which the transfer of Shares is limited in some way or Shares are
otherwise restricted or subject to forfeiture as provided in Article 7.
(x)"Restricted Stock" shall mean Shares granted pursuant to Article 7 as to
which the restrictions have not expired.
(y) "Restricted Stock Agreement" shall mean an agreement evidencing a
Restricted Stock Award, as described in Section 7.2.
(z) "Retirement" shall mean retirement by a Participant in accordance with
the terms of the Company's retirement or pension plans.
(aa) "Shares" shall mean the shares of the Company's common stock, par value
$.25 per share.
(ab) "Subsidiary" shall mean, with respect to any company, any corporation
or other Person of which a majority of its voting power, equity securities, or
equity interest is owned directly or indirectly by such company but excluding
Atria Communities, Inc.
3
<PAGE>
(ac) "Ten Percent Shareholder" shall mean an Employee who, at the time an
ISO is granted, owns (within the meaning of Section 422(b)(6) of the Code)
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company.
2.2 Gender and Number. Except where otherwise indicated by the context,
reference to the masculine gender shall include the feminine gender, the
plural shall include the singular and the singular shall include the plural.
2.3 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by a Committee appointed
by the Board consisting of three or more directors of the Company or the
entire Board of the Company. Members of the Committee shall be "outside
directors" within the meaning of Section 162(m) of the Code (or any successor
provision thereto). The Committee shall meet at such times and places as it
determines and may meet through a telephone conference call. The members of
the Committee shall be appointed from time to time by, and shall serve at the
discretion of, the Board.
3.2 Authority of the Committee. Subject to the provisions of the Plan, the
Committee shall have full authority to:
(a) select Participants to whom Awards are granted;
(b) determine the size, types and frequency of Awards granted under the
Plan;
(c) determine the terms and conditions of Awards, including any restrictions
or conditions to the Award, which need not be identical;
(d) cancel or modify, with the consent of the Participant, outstanding
Awards and to grant new Awards in substitution therefor;
(e) accelerate the exercisability of any Award, for any reason;
(f) construe and interpret the Plan and any agreement or instrument entered
into under the Plan;
(g) establish, amend and rescind rules and regulations for the Plan's
administration; and
(h) amend the terms and conditions of any outstanding Award to the extent
such terms and conditions are within the discretion of the Committee as
provided in the Plan.
The Committee shall make all other determinations which may be necessary or
advisable for the administration of the Plan. The Committee may delegate its
authority as identified hereunder; provided, however, that such delegation is
permitted by law and Rule 16b-3 promulgated under the Exchange Act and that
such delegation would not jeopardize compliance with the "outside directors"
requirements (or any other applicable requirement) under Section 162(m) of the
Code.
3.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan, and all related orders or
resolutions of the Board, shall be final, conclusive and binding upon all
persons, including the Company, its stockholders, Employees, Participants and
their estates and beneficiaries.
3.4 Section 16 Compliance; Bifurcation of Plan. It is the intention of the
Company that the Plan and the administration of the Plan comply in all
respects with Section 16(b) of the Exchange Act and the rules and regulations
promulgated thereunder. If any Plan provision, or any aspect of the
administration of the Plan, is
4
<PAGE>
found not to be in compliance with Section 16(b) of the Exchange Act, the
provision or administration shall be deemed null and void, and in all events
the Plan shall be construed in favor of its meeting the requirements of Rule
16b-3 promulgated under the Exchange Act. Notwithstanding anything in the Plan
to the contrary, the Board or the Committee, in its discretion, may bifurcate
the Plan so as to restrict, limit or condition the use of any provision of the
Plan to Participants who are subject to Section 16 of the Exchange Act without
so restricting, limiting or conditioning the Plan with respect to other
Participants.
ARTICLE 4. SHARES AVAILABLE UNDER THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.2, the
number of Shares reserved for issuance upon the exercise of Awards and the
payment of benefits in connection with Awards is 3,400,000 Shares. Any Shares
issued under the Plan may consist, in whole or in part, of authorized and
unissued Shares or treasury Shares. If and to the extent an Award shall expire
or terminate for any reason without having been exercised in full (including a
cancellation and regrant of an Option), or shall be forfeited, the Shares
(including Restricted Stock) associated with such Awards shall again become
available for Awards under the Plan.
4.2 Adjustments in Authorized Shares and Outstanding Awards. In the event of
a merger, reorganization, consolidation, recapitalization, reclassification,
split-up, spin-off, separation, liquidation, stock dividend, stock split,
reverse stock split, property dividend, share repurchase, share combination,
share exchange, issuance of warrants, rights or debentures, or other change in
the corporate structure of the Company affecting the Shares, the Committee may
substitute or adjust the total number and class of Shares or other stock or
securities which may be issued under the Plan, and the number, class and/or
price of Shares subject to outstanding Awards, as it determines to be
appropriate and equitable to prevent dilution or enlargement of the rights of
Participants and to preserve, without exceeding, the value of any outstanding
Awards; and further provided, that the number of Shares subject to any Award
shall always be a whole number. In the case of ISOs, such adjustments shall be
made in such a manner so as not to constitute a "modification" within the
meaning of Section 424(h)(3) of the Code and only to the extent otherwise
permitted by Sections 422 and 424 of the Code.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
All Employees are eligible to receive Awards under the Plan. In selecting
Employees to receive Awards under the Plan, as well as in determining the
number of Shares subject to, and the other terms and conditions applicable to,
each Award, the Committee shall take into consideration such factors as it
deems relevant in promoting the purposes of the Plan, including the duties of
the Employees, their present and potential contribution to the success of the
Company and their anticipated number of years of active service as employees.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan, the
Committee may grant Options to Participants at any time and from time to time,
in the form of options which are intended to qualify as incentive stock
options within the meaning of Section 422 of the Code ("ISOs"), Options which
are not intended to so qualify ("NQSOs") or a combination thereof. All ISOs
must be granted within ten years from the date on which the Plan was adopted
by the Board, and may only be granted to employees of the Company or any
subsidiary corporation (within the meaning of Section 422(f)). The maximum
number of Shares with respect to which Options may be granted to any
Participant during any calendar year shall be 250,000, subject to adjustment
as provided in Section 4.2.
6.2 Option Agreement. Each Option shall be evidenced by an Option Agreement
that shall specify the Option Exercise Price, the duration of the Option, the
number of Shares to which the Option relates and such other provisions as the
Committee may determine or which are required by the Plan. The Option
Agreement shall also specify whether the Option is intended to be an ISO or a
NQSO and shall include such provisions applicable to the particular type of
Option granted.
5
<PAGE>
6.3 Duration of Options. Each Option shall expire at such time as is
determined by the Committee at the time of grant; provided, however, that no
Option shall be exercised later than the tenth anniversary of its grant (fifth
anniversary in the case of an ISO granted to a Ten Percent Shareholder).
6.4 Exercise of Options. Options shall be exercisable at such times and be
subject to such restrictions and conditions as the Committee shall approve at
the time of grant, which need not be the same for each grant or for each
Participant. Except as provided in Section 6.6, however, in no event may any
Option become exercisable within six months of the date of grant in the case
of any Participant subject to Section 16(b) of the Exchange Act. Subject to
the foregoing sentence, the Committee may accelerate the exercisability of any
Option. Options shall be exercised, in whole or in part, by delivery to the
Company of a written notice of exercise, setting forth the number of Shares
with respect to which the Option is to be exercised and accompanied by full
payment of the Option Exercise Price and all applicable withholding taxes.
6.5 Payment of Option Exercise Price. The Option Exercise Price for Shares
as to which an Option is exercised shall be paid to the Company in full at the
time of exercise either (a) in cash in the form of currency or other cash
equivalent acceptable to the Company, (b) by tendering Shares having a Fair
Market Value (determined as of the close of the business day immediately
preceding the day on which the Option is exercised) equal to the Option
Exercise Price (provided, however, that in the case of a Participant subject
to Section 16(b) of the Exchange Act, such Shares have been held by the
Participant for at least six months prior to their tender), (c) any other
reasonable consideration that the Committee may deem appropriate or (d) by a
combination of the forms of consideration described in (a), (b) and (c) of
this Section 6.5. The Committee may permit the cashless exercise of Options as
described in Regulation T promulgated by the Federal Reserve Board, subject to
applicable securities law restrictions, or by any other means which the
Committee determines to be consistent with the Plan's purpose and applicable
law.
6.6 Vesting Upon Change in Control. Upon a Change in Control, any then
outstanding Options held by Participants shall become fully vested and
immediately exercisable. Furthermore, if provided in an Option Agreement, the
Participant shall have the right to sell the Option back to the Company for an
amount generally equal to the excess of the Fair Market Value of the Shares
subject to the Option over the Option Price.
6.7 Termination of Employment. If the employment of a Participant is
terminated for Cause, all then outstanding Options of such Participant,
whether or not exercisable, shall terminate immediately. If the employment of
a Participant is terminated for any reason other than for Cause, death,
Disability or Retirement, to the extent then outstanding Options of such
Participant are exercisable, such Options may be exercised by such Participant
or such Participant's personal representative at any time prior to the
expiration date of the Options or within 90 days after the date of such
termination of employment, whichever is earlier. In the event of the
Retirement of a Participant, to the extent then outstanding Options of such
Participant are exercisable, such Options may be exercised by the Participant
(a) in the case of NQSOs, within two years after the date of Retirement and
(b) in the case of ISOs, within 90 days after Retirement; provided, however,
that no such Options may be exercised on a date subsequent to their
expiration. In the event of the death or Disability of a Participant while
employed by the Company or a Subsidiary, all then outstanding Options of such
Participant shall become fully vested and immediately exercisable, and may be
exercised at any time (a) in the case of NQSOs, within two years after the
date of death or determination of Disability and (b) in the case of ISOs,
within one year after the date of death or determination of Disability;
provided, however, that no such Options may be exercised on a date subsequent
to their expiration. In the event of the death of a Participant, the Option
may be exercised by the person or persons to whom rights pass by will or by
the laws of descent and distribution, or if appropriate, the legal
representative of the deceased Participant's estate. In the event of the
Disability of a Participant, Options may be exercised by the Participant, or
if such Participant is incapable of exercising the Options, by such
Participant's legal representative.
6.8 Transferable Options. The Committee may, in its discretion by
appropriate provision in the Participant's Option Agreement, authorize all or
a portion of any NQSOs to be granted to a Participant be on terms which permit
transfer by such Participant to (i) the spouse, children or grandchildren of
the Participant ("Immediate
6
<PAGE>
Family Members"), (ii) a trust or trusts for the exclusive benefit of such
Participant and/or his Immediate Family Members, or (iii) a partnership or
limited liability company in which such Participant and/or his Immediate
Family Members are the only partners or members, as applicable; provided that
(a) there may be no consideration for any such transfer, (b) the Option
Agreement must expressly provide for transferability in a manner consistent
with this Section and (c) subsequent transfers of transferable NQSOs shall be
prohibited except by will or the laws of descent and distribution. Following
transfer, any such NQSOs shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that for
purposes of this Article 6 (excluding Section 6.7) the term "Participant"
shall be deemed to refer to the transferee. The events of termination of
employment as set forth in Section 6.7 shall continue to be applied with
respect to the original Participant. Any transferred NQSOs shall be
exercisable by the transferee only to the extent, and for the periods,
specified in the Option Agreement.
6.9 Repurchase. Upon approval of the Committee, the Company may repurchase a
previously granted Option from a Participant by mutual agreement before such
Option has been exercised by payment to the Participant of an amount equal to
the amount by which (i) the Fair Market Value of the Shares subject to the
Option on the date immediately preceding the date of repurchase exceeds (ii)
the Option Exercise Price of such Shares.
6.10 Certificate Legend. For any Shares issued upon exercise of an ISO, the
Company may legend such Shares as it deems appropriate.
ARTICLE 7. RESTRICTED STOCK
7.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee may grant shares of Restricted Stock to Participants at
any time and from time to time and upon such terms and conditions as it may
determine.
7.2 Restricted Stock Agreement. Each grant of Restricted Stock shall be
evidenced by a Restricted Stock Agreement which shall specify the Restriction
Period, the number of shares of Restricted Stock granted and such other
provisions as the Committee may determine and which are required by the Plan.
7.3 Non-Transferability of Restricted Stock. Except as provided in this
Article 7, shares of Restricted Stock may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated until the end of the
applicable Restriction Period as specified in the Restricted Stock Agreement,
or upon earlier satisfaction of any other conditions determined at the time of
grant specified in the Restricted Stock Agreement. Except as provided in
Section 7.8, however, in no event may any Restricted Stock become vested in a
Participant subject to Section 16(b) of the Exchange Act prior to six months
following the date of its grant.
7.4 Other Restrictions. The Committee may impose such other restrictions on
any shares of Restricted Stock as it may deem advisable, including, without
limitation, restrictions based upon the achievement of Performance Goals,
years of service and/or restrictions under applicable Federal or state
securities laws. The Committee may provide that any share of Restricted Stock
shall be held (together with a stock power executed in blank by the
Participant) in custody by the Company until any or all restrictions thereon
shall have lapsed.
7.5 Reacquisition of Restricted Stock. Committee shall determine and set
forth in a Participant's Restricted Stock Agreement such events upon which a
Participant's shares of Restricted Stock shall be reacquired by the Company,
which may include, without limitation, the termination of a Participant's
employment during the Restriction Period or the nonachievement of Performance
Goals. Any such forfeited shares of Restricted Stock held by a Participant
which are to be reacquired by the Company shall be immediately returned to the
Company by the Participant, and the Participant shall only receive the amount,
if any, paid by the Participant for such Restricted Stock.
7
<PAGE>
7.6 Certificate Legend. In addition to any legends placed on certificates
pursuant to Section 7.4, each certificate representing shares of Restricted
Stock shall bear the following legend:
"The sale or other transfer of the shares represented by this
Certificate, whether voluntary, involuntary or by operation of
law, is subject to certain restrictions on transfer as set
forth in the Vencor, Inc. 1997 Incentive Compensation Plan,
and in the related Restricted Stock Agreement. A copy of the
Plan and such Restricted Stock Agreement may be obtained from
the Secretary of Vencor, Inc."
7.7 Lapse of Restrictions Generally. Except as otherwise provided in this
Article 7, shares of Restricted Stock shall be delivered to the Participant
and no longer subject to reacquisition after the last day of the Restriction
Period; provided, however, that if the restriction relates to the achievement
of a Performance Goal, the Restriction Period shall not end until the
Committee has certified in writing that the Performance Goal has been met.
Once the shares of Restricted Stock are released from their restrictions, the
Participant shall be entitled to have the legend required by Section 7.6
removed from the Participant's share certificate, which certificate shall
thereafter represent Shares free from any and all restrictions under the Plan.
7.8 Lapse of Restrictions Upon Change in Control. Upon a Change in Control,
any restrictions and other conditions pertaining to then outstanding shares of
Restricted Stock held by Participants, including, but not limited to, vesting
requirements, shall lapse and such Shares shall thereafter be immediately free
from any and all restrictions under the Plan.
7.9 Voting Rights; Dividends and Other Distributions. Unless the Committee
exercises its discretion as provided in Section 7.10, during the Restriction
Period, Participants holding shares of Restricted Stock may exercise full
voting rights, and shall be entitled to receive all dividends and other
distributions paid, with respect to such Restricted Stock. If any dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions as the shares of Restricted Stock with respect to which they were
paid.
7.10 Treatment of Dividends. At the time shares of Restricted Stock are
granted to a Participant, the Committee may, in its discretion, determine that
the payment of dividends, or a specified portion thereof, declared or paid on
such Shares shall be deferred until the lapse of the restrictions with respect
to such Shares, in which event such deferred dividends shall be held by the
Company for the account of the Participant. In the event of such deferral,
there may be credited at the end of each year (or portion thereof) interest on
the amount of the account during the year at a rate per annum as the
Committee, in its discretion, may determine. Deferred dividends, together with
interest accrued thereon, if any, shall be (i) paid to the Participant upon
the lapse of restrictions on the shares of Restricted Stock as to which the
dividends related or (ii) revert to the Company upon the reacquisition of such
Shares.
7.11 Termination of Employment. If the employment of a Participant is
terminated for any reason other than death or Disability prior to the
expiration of the Restriction Period applicable to any shares of Restricted
Stock then held by the Participant, such Shares shall thereupon be immediately
reacquired by and returned to the Company, and the Participant shall only
receive the amount, if any, paid by the Participant for such Restricted Stock.
If the employment of a Participant is terminated as a result of death or
Disability prior to the expiration of the Restriction Period applicable to any
Shares of Restricted Stock then held by the Participant, any restrictions and
other conditions pertaining to such Shares then held by the Participant,
including, but not limited to, vesting requirements, shall immediately lapse
and such Shares shall thereafter be immediately transferable and
nonforfeitable. Notwithstanding anything in the Plan to the contrary, except
in the case of Restricted Stock for which a Performance Goal must be achieved,
the Committee may determine, in its sole discretion, in the case of any
termination of a Participant's employment other than for Cause, that the
restrictions on some or all of the shares of Restricted Stock awarded to a
Participant shall immediately lapse and such Shares shall thereafter be
immediately transferable and nonforfeitable.
8
<PAGE>
ARTICLE 8. PERFORMANCE UNITS
8.1 Grant of Performance Units. The Committee may, from time to time and
upon such terms and conditions as it may determine, grant Performance Units
which will become payable to a Participant upon certification in writing by
the Committee that the Performance Goals related thereto have been achieved.
The maximum number of Performance Units which may be awarded to a Participant
during any calendar year shall be 100,000 units, subject to adjustment as
provided in Section 4.2. If the Performance Goals are achieved in full, and
the Participant remains employed with the Company as of the end of the
relevant Performance Period, the Participant will be allocated Shares equal to
the number of Performance Units initially awarded to the Participant for the
relevant Performance Period. Each award of Performance Units may provide for
the allocation of fewer Performance Units in the event of partial fulfillment
of Performance Goals.
8.2 Performance Unit Agreement. Each Performance Unit grant shall be
evidenced by a Performance Unit Agreement that shall specify the Performance
Goals, the Performance Period and the number of Performance Units to which it
pertains.
8.3 Performance Period. The period of performance ("Performance Period")
with respect to each Performance Unit shall be such period of time, which
shall not be less than six months, nor more than five years, as determined by
the Committee, for the measurement of the extent to which Performance Goals
are attained.
8.4 Performance Goals. The goals ("Performance Goals") that are to be
achieved with respect to each Performance Unit (or Restricted Stock, stock
award or cash award subject to a requirement that Performance Goals be
achieved), shall be those objectives established by the Committee as it deems
appropriate, and which may be expressed in terms of (a) earnings per Share,
(b) Share price, (c) pre-tax profit, (d) net earnings, (e) return on equity or
assets, (f) revenues, (g) any combination of the foregoing, or (h) such other
goals as the Committee may determine. Performance Goals may be in respect of
the performance of the Company and its Subsidiaries (which may be on a
consolidated basis), a Subsidiary, a division or other operating unit of the
Company. Performance Goals may be absolute or relative and may be expressed in
terms of a progression within a specified range. The Committee shall establish
Performance Goals applicable to a particular fiscal year within 90 days of the
commencement of such fiscal year, provided that the outcome of the Performance
Goal is substantially uncertain at the time of its adoption. The Performance
Goals with respect to a Performance Period shall be established by the
Committee in order to comply with Rule 16b-3 under the Exchange Act and
Section 162(m) of the Code, as applicable. The Committee shall determine the
target levels of performance that must be achieved with respect to each
criteria that is identified in a Performance Goal in order for a Performance
Goal to be treated as attained in whole or in part. In the event that the
Performance Goals are based on more than one business criteria, the Committee
may determine to make a grant of an Award upon attainment of the Performance
Goal relating to any one or more of such criteria.
8.5 Termination of Employment. If the employment of a Participant shall
terminate prior to the expiration of the Performance Period for any reason
other than for death or Disability, the Performance Units then held by the
Participant shall terminate. In the case of termination of employment by
reason of death or Disability of a Participant prior to the expiration of the
Performance Period, then all Performance Units which are potentially available
under an outstanding Award and which have not been issued shall be fully
vested in, paid and issued to Participant or, in the case of Participant's
death, shall be vested in, paid and issued to Participant's estate, as of the
date of the Participant's death.
8.6 Payment Upon Change In Control. Upon a Change in Control, any and all
outstanding Performance Units which are potentially available under any
outstanding Award shall become fully vested and immediately payable.
8.7 Payment of Performance Units. Subject to such terms and conditions as
the Committee may impose, and unless otherwise provided in the Performance
Unit Agreement, Performance Units shall be payable within 90 days following
the end of the Performance Period during which the Participant attained at
least the minimum
9
<PAGE>
acceptable level of achievement under the Performance Goals, or 90 days
following a Change in Control, as applicable. The Committee, in its
discretion, may determine at the time of payment required in connection with a
Performance Unit whether such payment shall be made (a) solely in cash, (b)
solely in Shares (valued at the Fair Market Value of the Shares on the date of
payment) or (c) a combination of cash and Shares; provided, however, that if a
Performance Unit becomes payable upon a Change in Control, the Performance
Unit shall be paid solely in cash.
8.8 Designation of Beneficiary. Each Participant may, from time to time,
name any beneficiary or beneficiaries (who may be named contingently or
successively) to whom the right to receive payments under a Performance Unit
is to be paid in case of the Participant's death before receiving any or all
such payments. Each such designation shall revoke all prior designations by
the Participant, shall be in a form prescribed by the Company and shall be
effective only when filed by the Participant in writing with the Committee
during the Participant's lifetime. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be paid to the
Participant's estate.
8.9 No Rights as Stockholder. The award of Performance Units to a
Participant shall not create any rights in such Participant as a stockholder
of the Company, until the payment of any Shares associated with such
Performance Units.
ARTICLE 9. STOCK APPRECIATION RIGHTS
9.1 Grant of Stock Appreciation Rights. An SAR is a right to receive,
without payment to the Company, a number of Shares, cash or any combination
thereof, the amount of which is determined pursuant to the formula set forth
in Section 9.5. An SAR may be granted (a) with respect to any Option granted
under the Plan, either concurrently with the grant of such Option or at such
later time as determined by the Committee (as to all or any portion of the
Shares subject to the Option) or (b) alone, without reference to any Option.
9.2 Number of SARs. Each SAR granted to any Participant shall relate to such
number of Shares as the Committee shall determine, subject to adjustment as
provided in Section 4.2. If an SAR is granted in conjunction with an Option,
the number of Shares to which the SAR pertains shall be reduced by the same
number for which the holder of the Option exercises the related Option. The
maximum number of SARs which may be granted to any Participant during any
calendar year shall be 100,000, subject to adjustment as provided in Section
4.2.
9.3 Duration. Subject to early termination as herein provided, the term of
each SAR shall be as determined by the Committee, but shall not exceed ten
years from the date of grant. Unless otherwise provided by the Committee, each
SAR shall become exercisable at such time or times, to such extent and upon
such conditions as the Option, if any, to which it relates is exercisable.
Notwithstanding the above, no SAR may be exercised during the first six months
of its term. Subject to the foregoing sentence, the Committee may, in its
discretion, accelerate the exercisability of any SAR.
9.4 Exercise. A holder may exercise an SAR, in whole or in part, by giving
written notice to the Company, specifying the number of SARs which such
Participant wishes to exercise. Upon receipt of such written notice, the
Company shall deliver, within 90 days thereafter, to the exercising holder,
certificates for the Shares or cash or both as determined by the Committee, to
which the Participant is entitled pursuant to Section 9.5.
9.5 Payment.
(a) Number of Shares. Subject to the right of the Committee to deliver cash
in lieu of Shares (which, as it pertains to officers and directors of the
Company, shall comply with all requirements of the Exchange Act and
regulations adopted thereunder), the number of Shares which shall be issuable
upon the exercise of an SAR shall be determined by dividing (i) the number of
Shares to which the SAR is exercised multiplied by the amount of the
appreciation in such Shares (for this purpose, the "appreciation" shall be the
amount by which the Fair Market Value of the Shares subject to the SAR on the
date of exercise exceeds (x) in the case of an SAR related
10
<PAGE>
to an Option, the Option Exercise Price of the Shares under the Option or (y)
in the case of an SAR granted alone without reference to a related Option, an
amount that the Committee determined at the time of grant to be the Fair
Market Value of a Share, subject to adjustment as provided in Section 4.2) by
(ii) the Fair Market Value of a Share on the exercise date.
(b) Cash. In lieu of issuing Shares upon the exercise of an SAR, the
Committee may elect, in its sole discretion, to pay the holder of the SAR cash
equal to the Fair Market Value on the exercise date of any or all of the
Shares which would otherwise be issuable. No fractional Shares shall be issued
upon exercise of an SAR; instead, the holder of the SAR shall be entitled to
receive a cash adjustment equal to the same fraction of the Fair Market Value
of a Share on the exercise date or to purchase the portion necessary to make a
whole Share at its Fair Market Value on the date of exercise.
9.6 SAR Agreement. Each SAR shall be evidenced by an SAR Agreement that
shall further specify the terms and conditions of such Award. Any terms and
conditions of the Award shall be consistent with the terms of the Plan.
ARTICLE 10. STOCK AND CASH AWARDS
A stock award consists of the transfer by the Company to a Participant of
Shares, without other payment therefor, as additional compensation for
services to the Company. A cash award consists of a monetary payment made by
the Company to a Participant as additional compensation for services to the
Company. The Committee shall determine, in its sole discretion, the amount of
any stock or cash award. Stock and cash awards may be subject to the terms and
conditions, which may vary from time to time and among Participants, as the
Committee deems appropriate. The maximum amount of a cash award which may be
granted to a Participant during any calendar year under the Plan shall not be
greater than $500,000. Payment of a stock or cash award will normally depend
on meeting Performance Goals. Each award of stock or cash may provide for
lesser payment in the event of partial fulfillment of Performance Goals.
ARTICLE 11. AMENDMENT, MODIFICATION AND TERMINATION
11.1 Effective Date. The Plan shall become effective upon adoption by the
Board. The Plan shall be rescinded and all Options, Shares of Restricted
Stock, SARs and Performance Units granted hereunder shall be null and void
unless within 12 months from the date of the adoption of the Plan by the Board
it shall have been approved by the holders of a majority of the outstanding
Shares present or represented and entitled to vote on the Plan at a
stockholders' meeting.
11.2 Termination Date. The Plan shall terminate on the earliest to occur of
(a) the tenth anniversary of the adoption of the Plan by the Board, (b) the
date when all Shares available under the Plan shall have been acquired
pursuant to the exercise of Awards and the payment of all benefits in
connection with Performance Unit Awards has been made or (c) such other date
as the Board may determine in accordance with Section 11.3.
11.3 Amendment, Modification and Termination. The Board may, at any time,
amend, modify or terminate the Plan. Without the approval of the stockholders
of the Company (as may be required by the Code, Section 16 of the Exchange Act
and the rules promulgated thereunder, any national securities exchange or
system on which the Shares are then listed or reported or a regulatory body
having jurisdiction with respect hereto), however, no such amendment,
modification or termination may:
(a) materially increase the benefits accruing to Participants under the
Plan;
(b) increase the total amount of Shares which may be issued under the Plan,
except as provided in Section 4.2; or
(c) materially modify the class of Employees eligible to participate in the
Plan.
11
<PAGE>
11.4 Awards Previously Granted. No amendment, modification or termination of
the Plan shall in any manner adversely affect any outstanding Award without
the written consent of the Participant holding such Award.
ARTICLE 12. NON-TRANSFERABILITY
Except as expressly provided in the Plan, a Participant's rights under the
Plan may not be assigned, pledged or otherwise transferred other than by will
or the laws of descent and distribution, except that upon a Participant's
death, the Participant's rights to payment pursuant to a Performance Unit may
be transferred to a beneficiary designated in accordance with Section 8.8.
Except as expressly provided in the Plan, during a Participant's lifetime, an
Award may be exercised only by such Participant.
ARTICLE 13. NO GRANTING OF EMPLOYMENT RIGHTS
Neither the Plan, nor any action taken under the Plan, shall be construed as
giving any Employee the right to become a Participant, nor shall an Award
under the Plan be construed as giving a Participant any right with respect to
continuance of employment by the Company. The Company expressly reserves the
right to terminate, whether by dismissal, discharge or otherwise, a
Participant's employment at any time, with or without Cause, except as may
otherwise be provided by any written agreement between the Company and the
Participant.
ARTICLE 14. WITHHOLDING
14.1 Tax Withholding. A Participant shall remit to the Company an amount
sufficient to satisfy Federal, state and local taxes (including the
Participant's FICA and Medicare obligation) required by law to be withheld
with respect to any grant, exercise or payment made under or as a result of
the Plan.
14.2 Share Withholding. If the Company has a withholding obligation upon the
issuance of Shares under the Plan, a Participant may, subject to the
discretion of the Committee, elect to satisfy the withholding requirement, in
whole or in part, by having the Company withhold Shares having a Fair Market
Value on the date the withholding tax is to be determined equal to the amount
required to be withheld under applicable law. Notwithstanding the foregoing,
the Committee may, by the adoption of rules or otherwise, modify the
provisions of this Section 14.2 or impose such other restrictions or
limitations on such elections as may be necessary to ensure that such
elections will be exempt transactions under Section 16(b) of the Exchange Act.
ARTICLE 15. INDEMNIFICATION
No member of the Board or the Committee, nor any officer or Employee acting
on behalf of the Board or the Committee, shall be personally liable for any
action, determination or interpretation taken or made with respect to the
Plan, and all members of the Board, the Committee and each officer or Employee
of the Company acting on their behalf shall, to the extent permitted by law,
be fully indemnified and protected by the Company with respect to any such
action, determination or interpretation.
ARTICLE 16. SUCCESSORS
All obligations of the Company with respect to Awards granted under the Plan
shall be binding on any successor to the Company, whether the existence of
such successor is a result of a direct or indirect purchase, merger,
consolidation or otherwise, of all or substantially all of the business and/or
assets of the Company.
ARTICLE 17. GOVERNING LAW
To the extent not preempted by Federal law, the Plan, and all agreements
under the Plan, shall be governed by, and construed in accordance with, the
laws of the State of Delaware without regard to its conflict of laws rules.
Furthermore, the Plan and all Option Agreements relating to ISOs shall be
interpreted so as to qualify as incentive stock options under the Code.
12
<PAGE>
IN WITNESS WHEREOF, this Vencor, Inc. 1997 Incentive Compensation Plan has
been executed by the Company as of the 31st day of December, 1996, being the
date the Plan was adopted by the Board.
VENCOR, INC.
By: /s/ W. Bruce Lunsford
-----------------------------------
Title: Chairman of the Board,
President and Chief Executive
Officer
13
<PAGE>
P R O X Y
DETACH CARD
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
7 7 7 7 7 7 7
VENCOR, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
MAY 15, 1997
The undersigned hereby appoints W. Bruce Lunsford and W. Earl Reed, III, and
each of them, his or her attorneys and agents, with full power of substitution
to vote as Proxy for the undersigned, as herein stated, at the Annual Meeting
of Stockholders of Vencor, Inc. to be held at the Hyatt Regency, 320 West
Jefferson Street, Louisville, Kentucky, on Thursday, May 15, 1997, at 9:00 a.m.
(EDT), and at any adjournments thereof, according to the number of votes the
undersigned would be entitled to vote if personally present on the proposals
set forth below and in accordance with their discretion on any other matters
that may properly come before the meeting or any adjournments thereof.
The Board of Directors recommends a vote FOR the following proposals:
1.ELECTION OF DIRECTORS
For [_] the election of Michael R. Barr, Walter F. Beran, Ulysses L.
Bridgeman, Jr., Elaine L. Chao, Donna R. Ecton, Greg D. Hudson, William H.
Lomicka, W. Bruce Lunsford, W. Earl Reed, III, and R. Gene Smith as
directors, or WITHHOLD AUTHORITY [_] to vote for all nominees in such
election.
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH THE NOMINEE'S NAME ABOVE.
2.APPROVAL OF VENCOR, INC. 1997 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS.
Approval of Vencor, Inc. 1997 Stock Option Plan for Non-Employee Directors.
[_] FOR [_] AGAINST [_] ABSTAIN
3.APPROVAL OF VENCOR, INC. 1997 INCENTIVE COMPENSATION PLAN.
Approval of Vencor, Inc. 1997 Incentive Compensation Plan
[_] FOR [_] AGAINST [_] ABSTAIN
<PAGE>
DETACH CARD
7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7 7
7 7 7 7 7 7 7
THE SHARES COVERED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THE PROXY WILL BE VOTED IN FAVOR OF THE FOREGOING
PROPOSALS.
PLEASE FILL IN, DATE, SIGN AND RETURN THIS PROXY IN THE ACCOMPANYING
ENVELOPE.
Dated: _______________________, 1997
------------------------------------
Signature
------------------------------------
Signature (if held jointly)
Signatures of stockholders should
correspond exactly with the names
shown on the proxy card. Attorneys,
trustees, executors,
administrators, guardians and
others signing in a representative
capacity should designate their
full titles.
IF YOU PLAN TO ATTEND THE ANNUAL MEETING OF STOCKHOLDERS IN PERSON, YOU WILL
NEED AN ADMISSION TICKET. PLEASE CHECK THE FOLLOWING BOX IF YOU WANT AN
ADMISSION TICKET: [_]
