-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UnWwfohnqVnRHmMyuj2/9W9HJJTvcmgzbSUn6YdDY7R31zuGuPi7MkRshfkvpavT 4kepQ2UNkSPMsoEEUGjizg== 0000930661-97-001773.txt : 19970728 0000930661-97-001773.hdr.sgml : 19970728 ACCESSION NUMBER: 0000930661-97-001773 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970725 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VENCOR INC CENTRAL INDEX KEY: 0000740260 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 611055020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10989 FILM NUMBER: 97645289 BUSINESS ADDRESS: STREET 1: 3300 PROVIDIAN CENTER STREET 2: 400 WEST MARKET STREET CITY: LOUISVILLE STATE: KY ZIP: 40202 BUSINESS PHONE: 5025967300 MAIL ADDRESS: STREET 1: 3300 PROVIDIAN CENTER STREET 2: 400 WEST MARKET ST CITY: LOUISVILLE STATE: KY ZIP: 40202 10-Q 1 QUARTERLY REPORT - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 1-10989 VENCOR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 61-1055020 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 3300 PROVIDIAN CENTER 400 WEST MARKET STREET LOUISVILLE, KY 40202 (ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE) OFFICES) (502) 596-7300 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS OF COMMON STOCK OUTSTANDING AT JUNE 30, 1997 ---------------------------- ---------------------------- Common stock, $.25 par value 69,331,058 shares
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PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Statement of Income--for the quarter and six months ended June 30, 1997 and 1996....................... 3 Condensed Consolidated Balance Sheet--June 30, 1997 and December 31, 1996............................................. 4 Condensed Consolidated Statement of Cash Flows--for the six months ended June 30, 1997 and 1996........................... 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk...... 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 16 Item 4. Submission of Matters to a Vote of Security Holders............ 17 Item 6. Exhibits and Reports on Form 8-K............................... 17
2 VENCOR, INC. CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER SIX MONTHS ------------------ ---------------------- 1997 1996 1997 1996 -------- -------- ---------- ---------- Revenues.......................... $778,295 $634,554 $1,458,991 $1,260,891 -------- -------- ---------- ---------- Salaries, wages and benefits...... 449,806 366,705 846,379 739,023 Supplies.......................... 77,328 64,075 143,361 126,183 Rent.............................. 21,783 19,102 40,731 38,269 Other operating expenses.......... 118,935 100,797 228,721 194,952 Depreciation and amortization..... 29,479 24,846 53,851 49,639 Interest expense.................. 20,674 12,141 31,334 24,621 Investment income................. (1,746) (3,300) (3,313) (6,878) -------- -------- ---------- ---------- 716,259 584,366 1,341,064 1,165,809 -------- -------- ---------- ---------- Income from operations before income taxes..................... 62,036 50,188 117,927 95,082 Provision for income taxes........ 25,026 19,323 46,935 36,607 -------- -------- ---------- ---------- Income from operations............ 37,010 30,865 70,992 58,475 Extraordinary loss on extinguishment of debt, net of income tax benefit............... (1,590) - (3,849) - -------- -------- ---------- ---------- Net income.................... $ 35,420 $ 30,865 $ 67,143 $ 58,475 ======== ======== ========== ========== Earnings per common and common equivalent share: Primary: Income from operations.......... $ 0.52 $ 0.43 $ 1.00 $ 0.82 Extraordinary loss on extinguishment of debt......... (0.02) - (0.05) - -------- -------- ---------- ---------- Net income.................... $ 0.50 $ 0.43 $ 0.95 $ 0.82 ======== ======== ========== ========== Fully diluted: Income from operations.......... $ 0.52 $ 0.43 $ 1.00 $ 0.82 Extraordinary loss on extinguishment of debt......... (0.02) - (0.05) - -------- -------- ---------- ---------- Net income.................... $ 0.50 $ 0.43 $ 0.95 $ 0.82 ======== ======== ========== ========== Shares used in computing earnings per common and common equivalent share: Primary.......................... 71,016 71,373 70,678 71,415 Fully diluted.................... 71,144 71,373 71,037 71,415
See accompanying notes. 3 VENCOR, INC. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1997 1996 ---------- ------------ ASSETS Current assets: Cash and cash equivalents............................ $ 106,476 $ 112,466 Accounts and notes receivable less allowance for loss of $52,687--June 30 and $23,915--December 31........ 639,889 420,758 Inventories.......................................... 36,525 24,939 Income taxes......................................... 103,556 67,808 Other................................................ 52,200 35,162 ---------- ---------- 938,646 661,133 Property and equipment, at cost....................... 2,050,914 1,609,770 Accumulated depreciation.............................. (462,968) (416,608) ---------- ---------- 1,587,946 1,193,162 Intangible assets less accumulated amortization of $29,238--June 30 and $25,218--December 31............ 699,671 31,608 Investments in affiliates............................. 85,974 7,965 Other................................................. 97,820 74,988 ---------- ---------- $3,410,057 $1,968,856 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 146,427 $ 103,518 Salaries, wages and other compensation............... 153,304 111,366 Other accrued liabilities............................ 132,631 71,434 Long-term debt due within one year................... 24,747 54,692 ---------- ---------- 457,109 341,010 Long-term debt........................................ 1,935,019 710,507 Deferred credits and other liabilities................ 97,503 84,053 Minority interest in equity of consolidated entities.. 42,839 36,195 Stockholders' equity: Common stock, $.25 par value; authorized 180,000 shares; issued 72,859 shares--June 30 and 72,615 shares--December 31................................. 18,215 18,154 Capital in excess of par value....................... 724,294 713,527 Retained earnings.................................... 218,013 150,870 ---------- ---------- 960,522 882,551 Common treasury stock; 3,528 shares--June 30 and 3,730 shares--December 31........................... (82,935) (85,460) ---------- ---------- 877,587 797,091 ---------- ---------- $3,410,057 $1,968,856 ========== ==========
See accompanying notes. 4 VENCOR, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS)
1997 1996 ----------- ----------- Cash flows from operating activities: Net income.......................................... $ 67,143 $ 58,475 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 53,851 49,639 Extraordinary loss on extinguishment of debt....... 6,265 - Deferred income taxes.............................. 5,935 2,671 Other.............................................. 3,143 11,430 Changes in operating assets and liabilities: Accounts and notes receivable..................... (53,838) (26,458) Inventories and other assets...................... (3,694) 1,332 Accounts payable.................................. 23,832 5,151 Income taxes...................................... 26,932 28,127 Other accrued liabilities......................... (5,825) (13,341) ----------- ----------- Net cash provided by operating activities........ 123,744 117,026 ----------- ----------- Cash flows from investing activities: Purchase of property and equipment.................. (132,900) (61,454) Acquisition of TheraTx, Incorporated................ (354,647) - Acquisition of Transitional Hospitals Corporation... (574,971) - Acquisition of other healthcare businesses and previously leased facilities....................... (25,030) (5,182) Sale of assets...................................... 12,165 6,171 Collection of notes receivable...................... 390 23,366 Net change in investments........................... (4,845) (532) Other............................................... (2,381) (3,895) ----------- ----------- Net cash used in investing activities............ (1,082,219) (41,526) ----------- ----------- Cash flows from financing activities: Net change in borrowings under revolving lines of credit............................................. 1,075,250 (40,600) Issuance of long-term debt.......................... 2,818 1,677 Repayment of long-term debt......................... (122,835) (18,471) Payment of deferred financing costs................. (5,483) - Issuance of common stock............................ 2,813 928 Other............................................... (78) 146 ----------- ----------- Net cash provided by (used in) financing activities...................................... 952,485 (56,320) ----------- ----------- Change in cash and cash equivalents.................. (5,990) 19,180 Cash and cash equivalents at beginning of period..... 112,466 35,182 ----------- ----------- Cash and cash equivalents at end of period........... $ 106,476 $ 54,362 =========== =========== Supplemental information: Interest payments................................... $ 32,919 $ 24,704 Income tax payments................................. 23,353 7,071
See accompanying notes. 5 VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--REPORTING ENTITY Vencor, Inc. ("Vencor" or the "Company") operates an integrated network of healthcare services in 46 states primarily focused on the needs of the elderly. At June 30, 1997, Vencor operated 58 hospitals (5,107 licensed beds), 311 nursing centers (40,869 licensed beds), a contract services business ("Vencare") which provides respiratory and rehabilitation therapies, medical services and pharmacy management services to nursing centers and other healthcare providers, and through its affiliate, Atria Communities, Inc. ("Atria"), 40 assisted and independent living communities with 3,977 units. On March 21, 1997, Vencor completed the acquisition of TheraTx, Incorporated ("TheraTx"), a provider of rehabilitation and respiratory therapy management services and operator of nursing centers (the "TheraTx Merger") in a cash-for- stock transaction. See Note 5. On June 24, 1997, Vencor acquired substantially all of the outstanding common stock of Transitional Hospitals Corporation ("Transitional"), an operator of 19 long-term acute care hospitals (the "Transitional Acquisition") in a cash-for-stock transaction. See Note 6. NOTE 2--BASIS OF PRESENTATION The TheraTx Merger and Transitional Acquisition have been accounted for by the purchase method. Accordingly, the accompanying condensed consolidated financial statements include the operations of TheraTx and Transitional since March 21, 1997 and June 24, 1997, respectively. The accompanying condensed consolidated financial statements do not include all of the disclosures normally required by generally accepted accounting principles or those normally required in annual reports on Form 10-K. Accordingly, these statements should be read in conjunction with the audited consolidated financial statements of Vencor for the year ended December 31, 1996 filed with the Securities and Exchange Commission on Form 10-K. The accompanying condensed consolidated financial statements have been prepared in accordance with Vencor's customary accounting practices and have not been audited. Management believes that the financial information included herein reflects all adjustments necessary for a fair presentation of interim results and that all such adjustments are of a normal and recurring nature. Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE 3--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. A summary of revenues by payor type follows (dollars in thousands):
QUARTER SIX MONTHS ------------------ ---------------------- 1997 1996 1997 1996 -------- -------- ---------- ---------- Medicare....................... $246,134 $204,755 $ 479,267 $ 401,483 Medicaid....................... 206,868 199,022 406,374 398,857 Private and other.............. 344,115 241,939 603,892 479,954 -------- -------- ---------- ---------- 797,117 645,716 1,489,533 1,280,294 Elimination.................... (18,822) (11,162) (30,542) (19,403) -------- -------- ---------- ---------- $778,295 $634,554 $1,458,991 $1,260,891 ======== ======== ========== ==========
6 VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--EARNINGS PER SHARE The computation of earnings per common and common equivalent share is based upon the weighted average number of common shares outstanding adjusted for the dilutive effect of common stock equivalents consisting primarily of stock options. In February 1997, the Financial Accounting Standards Board issued Statement No. 128 "Earnings Per Share," which will require Vencor to change the current method of computing earnings per common share and restate all prior periods. Statement No. 128 is required to be adopted on December 31, 1997 and requires, among other things, that the calculation of primary earnings per common share exclude the dilutive effect of common stock options. The change in the calculation method is not expected to have a material impact on previously reported earnings per common share. NOTE 5--THERATX MERGER On March 21, 1997, the TheraTx Merger was consummated following a cash tender offer in which Vencor paid $17.10 for each outstanding share of TheraTx common stock. A summary of the TheraTx Merger follows (dollars in thousands): Fair value of assets acquired.................................... $627,167 Fair value of liabilities assumed................................ 257,605 -------- Net assets acquired............................................ 369,562 Cash received from acquired entity............................... (14,915) -------- Net cash paid.................................................. $354,647 ========
The purchase price paid in excess of the fair value of identifiable net assets acquired (to be amortized over 40 years by the straight-line method) aggregated $322 million. NOTE 6--TRANSITIONAL ACQUISITION On June 24, 1997, Vencor acquired approximately 95% of the outstanding shares of common stock of Transitional through a cash tender offer in which Vencor paid $16.00 per common share. Vencor expects to complete the merger of its wholly-owned subsidiary with and into Transitional in the third quarter of 1997. A summary of the Transitional Acquisition follows (dollars in thousands): Fair value of assets acquired.................................... $713,097 Fair value of liabilities assumed................................ 85,252 -------- Net assets acquired............................................ 627,845 Cash received from acquired entity............................... (52,874) -------- Net cash paid.................................................. $574,971 ========
The purchase price paid in excess of the fair value of identifiable net assets acquired (to be amortized over 40 years by the straight-line method) aggregated $333 million. 7 VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 7--PRO FORMA INFORMATION The pro forma effect of the TheraTx Merger and Transitional Acquisition assuming that the transactions occurred on January 1, 1996 follows (dollars in thousands, except per share amounts):
SIX MONTHS ENDED JUNE 30, --------------------- 1997 1996 ---------- ---------- Revenues............................................ $1,707,261 $1,719,622 Income from operations.............................. 53,709 52,817 Net income.......................................... 49,860 52,817 Earnings per common and common equivalent share: Primary: Income from operations............................ $ 0.76 $ 0.74 Net income........................................ 0.71 0.74 Fully diluted: Income from operations............................ $ 0.75 $ 0.74 Net income........................................ 0.70 0.74
For both periods presented, pro forma financial data have been derived by combining the financial results of Vencor and TheraTx (based upon six month reporting periods ending on June 30) and Transitional (based upon six month reporting periods ending on May 31). Pro forma income from operations for 1997 includes costs incurred by both TheraTx and Transitional in connection with the acquisitions which reduced net income by $10.3 million. NOTE 8--LONG-TERM DEBT In connection with the TheraTx Merger, Vencor entered into a new five-year bank credit facility (the "Vencor Credit Facility") aggregating $1.75 billion on March 31, 1997, replacing a $1.0 billion bank credit facility. On June 24, 1997, the Vencor Credit Facility was amended to increase the amount of the credit to $2.0 billion. Interest is payable, depending on certain leverage ratios and the period of borrowing, at rates up to either (i) the prime rate plus 1/2% or the daily federal funds rate plus 1%, (ii) LIBOR plus 1 1/8% or (iii) the bank certificate of deposit rate plus 1 1/4%. The Vencor Credit Facility is collateralized by the capital stock of certain subsidiaries and intercompany borrowings and contains covenants which require, among other things, maintenance of certain financial ratios and limit amounts of additional debt and repurchases of common stock. Outstanding borrowings under the Vencor Credit Facility aggregated $1.79 billion at June 30, 1997. During the second quarter of 1997, Vencor repurchased substantially all of the outstanding TheraTx $100 million 8% Convertible Subordinated Notes Due 2002 assumed in connection with the TheraTx Merger. The after-tax loss associated with this transaction approximated $1.6 million. During the first quarter of 1997, the Company recorded an after-tax charge of $2.3 million in connection with the refinancing of the bank credit agreements of both Vencor and TheraTx. The Company 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 varying amounts through April 1998 and provide for fixed rates at 5.7% plus 3/8% to 1 1/8%. In addition, the Company entered into interest rate swap agreements in May 1997 on $300 million of floating rate debt. These agreements expire in $100 million increments in May 1999, November 1999 and May 2000, and provide for fixed rates at 6.4% plus 3/8% to 1 1/8%. The fair values of the swap agreements are not recognized in the condensed consolidated financial statements. 8 VENCOR, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 9--LITIGATION The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in a qui tam lawsuit which was filed in the United States District Court for the Eastern District of Arkansas and served on the Company on July 7, 1997. The United States Department of Justice intervened in the suit which was brought under the Federal Civil False Claims Act. AXR provides portable X-ray services to nursing facilities (including those operated by the Company) and other healthcare providers. The Company acquired an interest in AXR when The Hillhaven Corporation was merged into the Company in September 1995 and purchased the remaining interest in AXR in February 1996. The suit alleges that AXR submitted false claims to the Medicare and Medicaid programs. In conjunction with the qui tam action, the United States Attorney's office for the Eastern District of Arkansas also is conducting a criminal investigation into the allegations contained in the qui tam complaint. The Company is cooperating fully in the investigation. On June 19, 1997, a class action lawsuit was filed in the United States District Court for the District of Nevada on behalf of a class consisting of all persons who sold shares of Transitional during the period from February 26, 1997 through May 4, 1997, inclusive. The complaint alleges that Transitional was purchasing shares of its common stock from members of the investing public after it had received a written offer to acquire all of Transitional's common stock and without making the required disclosure that such an offer had been made. The complaint further alleges that defendants disclosed that there were "expressions of interest" in acquiring Transitional when, in fact, at that time, the negotiations had reached an advanced stage with actual firm offers at substantial premiums to the trading price of Transitional's stock having been made which were actively being considered by Transitional's Board of Directors. The complaint asserts claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and common law principles of negligent misrepresentation and names as defendants Transitional as well as certain senior executives and directors of Transitional. On June 6, 1997, Transitional announced that it had been advised that it was the target of a grand jury investigation arising from the activities of Transitional's formerly owned dialysis business. The investigation involves purported Medicare fraud involving certain laboratory tests performed by a partnership which existed from June 1987 to June 1992 between Damon Corporation and Transitional. Transitional spun off its dialysis business, now called Vivra Incorporated, on September 1, 1989. The Company is cooperating fully in the investigation. NOTE 10--SUBSEQUENT EVENTS Private Placement of Debt On July 21, 1997, Vencor completed the private placement of $750 million aggregate principal amount of 8 5/8% Senior Subordinated Notes Due 2007 (the "Notes"). The Notes were issued at 99.575% of face value and are not callable by the Company until 2002. The net proceeds of the offering were used to reduce outstanding borrowings under the Vencor Credit Facility. Atria Secondary Equity Offering In July 1997, Atria issued 6.9 million shares of its common stock in a public offering (the "Atria Offering"), the net proceeds from which aggregated approximately $91 million. The net proceeds will be used primarily to finance Atria's expansion and development activities. As a result of the Atria Offering, Vencor now owns 42.8% of the outstanding common stock of Atria. Accordingly, beginning in July 1997, Atria's financial statements will no longer be consolidated with those of the Company; however, the Company's investment in Atria will be accounted for under the equity method. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BACKGROUND INFORMATION Vencor is one of the nation's largest providers of healthcare services focused primarily on the needs of the elderly. At June 30, 1997, Vencor operated 58 hospitals (5,107 licensed beds), 311 nursing centers (40,869 licensed beds) and Vencare contract services which provided respiratory and rehabilitation therapies, medical services and pharmacy management services under approximately 4,500 contracts to nursing centers and other healthcare providers. The Company also operated 40 assisted and independent living communities with 3,977 units through its Atria affiliate. On March 21, 1997, the TheraTx Merger was completed. TheraTx primarily provided rehabilitation and respiratory therapy management services and operated 26 nursing centers with annualized revenues approximating $425 million. See Note 5 of the Notes to Condensed Consolidated Financial Statements. On June 24, 1997, Vencor completed the Transitional Acquisition. Transitional primarily operated 19 long-term acute care hospitals with annualized revenues approximating $350 million. See Note 6 of the Notes to Condensed Consolidated Financial Statements. In July 1997, the Atria Offering was completed and aggregated approximately $91 million of net proceeds. The net proceeds will be used primarily to finance Atria's expansion and development activities. As a result of the Atria Offering, Vencor now owns 42.8% of the outstanding common stock of Atria. Accordingly, beginning in July 1997, Atria's financial statements will no longer be consolidated with those of the Company; however, the Company's investment in Atria will be accounted for under the equity method. RESULTS OF OPERATIONS A summary of revenues follows (dollars in thousands):
QUARTER SIX MONTHS ------------------ % ---------------------- % 1997 1996 CHANGE 1997 1996 CHANGE -------- -------- ------ ---------- ---------- ------ Hospitals............... $165,794 $138,612 19.6 $ 320,694 $ 268,659 19.4 Nursing centers......... 432,325 393,642 9.8 836,578 786,625 6.4 Vencare................. 182,016 100,625 80.9 301,062 199,562 50.9 Atria................... 16,982 12,837 32.3 31,199 25,448 22.6 -------- -------- ---------- ---------- 797,117 645,716 23.4 1,489,533 1,280,294 16.3 Elimination............. (18,822) (11,162) (30,542) (19,403) -------- -------- ---------- ---------- $778,295 $634,554 22.7 $1,458,991 $1,260,891 15.7 ======== ======== ========== ==========
Hospital revenue increases in both the second quarter and six months ended June 30, 1997 resulted primarily from an increase in patient days and improved patient mix. Hospital patient days rose 10% in both periods to 163,327 and 323,180 for the second quarter and first six months of 1997, respectively, compared to 148,313 and 294,328 for the respective periods last year. Non- Medicaid patient days (for which payment rates are generally higher than Medicaid) increased 13% in the second quarter to 140,157 from 124,415 last year and 13% for the six month period to 278,305 from 246,278. Medicaid patient days declined 3% in the second quarter to 23,170 from 23,898 last year and 7% in the six month period to 44,875 from 48,050. Hospital revenues for the second quarter of 1997 include $5.2 million related to the 19 facilities purchased in the Transitional Acquisition. During the fourth quarter of 1996, the Company entered into an agreement to sell 34 underperforming or non-strategic nursing centers. At June 30, 1997, 27 of these centers had been sold; the remainder are expected to be sold pending certain regulatory approvals. In connection with the TheraTx Merger, Vencor acquired 26 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS (CONTINUED) nursing centers on March 21, 1997. Excluding the effect of sales and acquisitions, nursing center revenues increased 4% in both the second quarter and six months, while patient days declined 1% in the second quarter and 2% in the six month period compared to last year. The increase in same-store nursing center revenues resulted primarily from price increases. Excluding the effect of sales and acquisitions, nursing center revenue growth was adversely impacted by a 5% and 6% decline in private patient days in the second quarter and first six months of 1997, respectively. In an effort to attract increased volumes of Medicare and private pay patients, the Company is implementing a plan to expend approximately $200 million over the next two years to improve existing facilities and expand the range of services provided to accommodate higher acuity patients. Vencare revenues for the second quarter and six months ended June 30, 1997 include approximately $67.8 million and $75.5 million, respectively, related to contract rehabilitation therapy and certain other ancillary service businesses acquired as part of the TheraTx Merger. Excluding the TheraTx Merger, Vencare revenues grew 17% in the second quarter and 16% for the six months primarily as a result of growth in volumes. Vencare ancillary service contracts in effect at June 30, 1997 totaled 4,524 compared to 4,295 at June 30, 1996. During the second quarter of 1997, Vencor terminated approximately 700 contracts which did not meet certain growth criteria. These terminations did not materially impact Vencare operating results. Pharmacy revenues (included in Vencare operations) declined 2% to $43.3 million in the second quarter of 1997 from $44.0 million in the same period last year and 3% in the six month period to $84.7 million from $87.4 million. The decline was primarily attributable to the effects of the restructuring of the institutional pharmacy business initiated in the fourth quarter of 1996 and the sale of the retail pharmacy outlets in January 1997. During the second quarter of 1997, the number of Atria communities in operation expanded from 25 to 40, primarily as a result of a $30.7 million acquisition of 12 communities. Same store revenues rose 7% in both the second quarter and six month period primarily due to price increases and growth in ancillary services. Second quarter 1997 income from operations totaled $37.0 million ($0.52 per fully diluted share), up 20% from $30.9 million ($0.43 per fully diluted share) for the same period in 1996. For the six month period, income from operations rose 21% to $71.0 million from $58.5 million in 1996. The increase in both periods was primarily attributable to growth in hospital and Vencare operations and the continuing effect of merger synergies achieved in 1996 in connection with the acquisition of The Hillhaven Corporation. The operating results of Transitional since the date of acquisition had no material effect on second quarter 1997 net income. During the second quarter of 1997, Vencor repurchased substantially all of the outstanding TheraTx $100 million 8% Convertible Subordinated Notes Due 2002 assumed in connection with the TheraTx Merger. The after-tax loss associated with this transaction approximated $1.6 million ($0.02 per share). During the first quarter of 1997, the Company recorded an after-tax charge of $2.3 million ($0.03 per share) in connection with the refinancing of the bank credit agreements of both Vencor and TheraTx. LIQUIDITY Cash provided by operations totaled $123.7 million for the first six months of 1997 compared to $117.0 million for the same period of 1996. The increase was primarily attributable to growth in income from operations. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY (CONTINUED) Days of revenues in accounts receivable increased to 65 at June 30, 1997 compared to 54 at December 31, 1996. Growth in accounts receivable was primarily related to the restructuring of Vencor's pharmacy operations (which began in the fourth quarter of 1996) and growth in rehabilitation contracts acquired in the TheraTx Merger. The collection cycle for rehabilitation therapy contracts typically requires in excess of three months. In connection with the TheraTx Merger, Vencor entered into the $1.75 billion Vencor Credit Facility, replacing a $1.0 billion bank credit facility. On June 24, 1997, the Vencor Credit Facility was amended to increase the amount of the credit to $2.0 billion. At June 30, 1997, available borrowings under the Vencor Credit Facility approximated $170 million. As discussed in Note 10 of the Notes to Condensed Consolidated Financial Statements, Vencor completed a $750 million private placement of long-term debt on July 21, 1997. The net proceeds of the offering were used to reduce outstanding borrowings under the Vencor Credit Facility. At July 21, 1997, available borrowings under the Vencor Credit Facility approximated $950 million. Since the completion of the initial public offering of Atria in August 1996 (the "IPO"), Atria has maintained a $200 million bank credit facility (the "Atria Credit Facility") to finance its expansion and development program. At June 30, 1997, amounts available under the Atria Credit Facility aggregated $110 million. Working capital totaled $481.5 million at June 30, 1997 compared to $320.1 million at December 31, 1996. Management believes that cash flows from operations and amounts available under the Vencor Credit Facility are sufficient to meet the Company's future expected liquidity needs. At June 30, 1997, the Company's ratio of debt to debt and equity totaled 69.1%. Management intends to reduce the Company's future leverage through, among other things, the use of anticipated excess cash flows from operations and the sale of certain non-strategic assets acquired from TheraTx and Transitional. CAPITAL RESOURCES Excluding acquisitions, capital expenditures totaled $132.9 million for the first six months of 1997 compared to $61.5 million for the same period of 1996. Expenditures in the first six months of 1997 related to Atria approximated $23 million. Planned capital expenditures in 1997 (excluding amounts for acquisitions and Atria) related to hospitals, nursing centers and Vencare are expected to approximate $200 million and include significant expenditures related to nursing center improvements. Management believes that its capital expenditure program is adequate to expand, improve and equip existing facilities. At June 30, 1997, the estimated cost to complete and equip construction in progress approximated $70 million. During 1997, Vencor expended approximately $355 million and $575 million in connection with the TheraTx Merger and the Transitional Acquisition, respectively. These purchases were financed primarily through borrowings under the Vencor Credit Facility. See Notes 5 and 6 of the Notes to Condensed Consolidated Financial Statements for a discussion of these transactions. Vencor also expended $25.0 million for the acquisition of new and previously leased facilities in the first six months of 1997 compared to $5.2 million for the same period in 1996. Subject to certain limitations related to management's plans to reduce long-term debt discussed above, the Company intends to acquire additional hospitals, nursing centers and ancillary service businesses in the future. Capital expenditures were financed primarily through internally generated funds and, in 1997, from borrowings under the Vencor Credit Facility and proceeds from the IPO. Vencor intends to finance a substantial portion of its capital expenditures with internally generated funds and long-term debt. Sources of capital include available borrowings under the Vencor Credit Facility, public or private debt and equity. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 32% and 31% for the six months ended June 30, 1997 and 1996, respectively, while Medicaid percentages of revenues approximated 27% and 31% for the respective periods. On March 28, 1997, the Health Care Financing Administration ("HCFA") issued a proposed rule to change Medicare reimbursement guidelines for therapy services provided by Vencare (including the rehabilitation contract therapy business acquired as part of the TheraTx Merger). Under the proposed rule, HCFA would revise the current salary equivalency guidelines for physical therapy and respiratory therapy services and establish new salary equivalency guidelines for speech and occupational therapy services. The proposed guidelines are based on a blend of data from wage rates for hospitals and skilled nursing facilities, and include salary, fringe benefits and expense factors. Rates are defined by specific geographic market areas, based upon a modified version of the hospital wage index. Following a 60-day comment period, HCFA is considering comments and is expected to issue a final rule. The new guidelines will not become effective until 60 days after publication of the final rule in the Federal Register. While the Company cannot predict when the final regulation will be issued, or if changes will be made to the proposed guidelines, management believes that the imposition of salary equivalency guidelines on speech and occupational therapy services, as proposed, would not significantly decrease Vencare operating margins or have a material adverse effect on the Company's contract services business. OTHER INFORMATION On June 11, 1997, the Company announced that it had entered into a strategic alliance with CNA Financial Corporation ("CNA") to develop and market a long- term care insurance product. Under this arrangement, CNA will offer a long-term care insurance product which features as a benefit certain discounts for services provided by members of the Company's network of long-term care providers. Members of this network will act as preferred providers of care to covered insureds. CNA will be responsible for underwriting, marketing and distributing the product through its national distribution network and will provide administrative insurance product support. The Company will reinsure 50% of the risk through a newly formed wholly-owned insurance company and will provide utilization review services. Management believes that the alliance with CNA will not have a material impact on the Company's liquidity, financial position or results of operations in 1997. 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 Credit Facility and the Atria Credit Facility contain customary covenants which require, among other things, maintenance of certain financial ratios and limit amounts of additional debt and repurchases of common stock. Vencor and Atria were in compliance with all such covenants at June 30, 1997. As discussed in Note 4 of the Notes to Condensed Consolidated Financial Statements, on December 31, 1997, Vencor will be required to change the method of computing earnings per common share on a retroactive basis. The change in calculation method is not expected to have a material impact on previously reported earnings per common share. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 QUARTERS 1997 QUARTERS --------------------------------------- ------------------ FIRST SECOND THIRD FOURTH FIRST SECOND -------- -------- -------- --------- -------- -------- Revenues...................... $626,337 $634,554 $650,551 $ 666,341 $680,696 $778,295 -------- -------- -------- --------- -------- -------- Salaries, wages and benefits..................... 372,318 366,705 372,524 379,391 396,573 449,806 Supplies (a).................. 62,108 64,075 64,967 70,471 66,033 77,328 Rent.......................... 19,167 19,102 19,681 19,845 18,948 21,783 Other operating expenses (a).. 94,155 100,797 105,275 105,570 109,786 118,935 Depreciation and amortization................. 24,793 24,846 24,787 25,107 24,372 29,479 Interest expense.............. 12,480 12,141 11,884 9,417 10,660 20,674 Investment income............. (3,578) (3,300) (3,132) (2,193) (1,567) (1,746) Non-recurring transactions................. - - - 125,200 - - -------- -------- -------- --------- -------- -------- 581,443 584,366 595,986 732,808 624,805 716,259 -------- -------- -------- --------- -------- -------- Income (loss) from operations before income taxes................. 44,894 50,188 54,565 (66,467) 55,891 62,036 Provision for income taxes........................ 17,284 19,323 21,007 (22,439) 21,909 25,026 -------- -------- -------- --------- -------- -------- Income (loss) from operations................... 27,610 30,865 33,558 (44,028) 33,982 37,010 Extraordinary loss on extinguishment of debt, net of income tax benefit...................... - - - - (2,259) (1,590) -------- -------- -------- --------- -------- -------- Net income (loss)......... $ 27,610 $ 30,865 $ 33,558 $ (44,028) $ 31,723 $ 35,420 ======== ======== ======== ========= ======== ======== Earnings (loss) per common and common equivalent share: Primary: Income (loss) from operations................. $ 0.39 $ 0.43 $ 0.48 $ (0.64) $ 0.48 $ 0.52 Extraordinary loss on extinguishment of debt....................... - - - - (0.03) (0.02) -------- -------- -------- --------- -------- -------- Net income (loss)......... $ 0.39 $ 0.43 $ 0.48 $ (0.64) $ 0.45 $ 0.50 ======== ======== ======== ========= ======== ======== Fully diluted: Income (loss) from operations................. $ 0.39 $ 0.43 $ 0.48 $ (0.64) $ 0.48 $ 0.52 Extraordinary loss on extinguishment of debt....................... - - - - (0.03) (0.02) -------- -------- -------- --------- -------- -------- Net income (loss)......... $ 0.39 $ 0.43 $ 0.48 $ (0.64) $ 0.45 $ 0.50 ======== ======== ======== ========= ======== ======== Shares used in computing earnings (loss) per common and common equivalent share: Primary..................... 71,455 71,373 70,028 68,874 (b) 70,207 71,016 Fully diluted............... 71,455 71,373 70,028 68,874 (b) 70,621 71,144
- -------- (a) Certain prior year amounts have been reclassified to conform with the current year presentation. (b) Excludes the dilutive effect of common stock equivalents. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING DATA (UNAUDITED)
1996 QUARTERS 1997 QUARTERS ---------------------------------------------- ---------------------- FIRST SECOND THIRD FOURTH FIRST SECOND ---------- ---------- ---------- ---------- ---------- ---------- REVENUES (IN THOUSANDS): Hospitals............... $ 130,047 $ 138,612 $ 144,228 $ 138,381 $ 154,900 $ 165,794 Nursing centers (a)..... 392,983 393,642 409,258 419,258 404,253 432,325 Vencare (a)............. 98,937 100,625 95,804 103,702 119,046 182,016 Atria................... 12,611 12,837 13,038 13,360 14,217 16,982 ---------- ---------- ---------- ---------- ---------- ---------- 634,578 645,716 662,328 674,701 692,416 797,117 Elimination............. (8,241) (11,162) (11,777) (8,360) (11,720) (18,822) ---------- ---------- ---------- ---------- ---------- ---------- $ 626,337 $ 634,554 $ 650,551 $ 666,341 $ 680,696 $ 778,295 ========== ========== ========== ========== ========== ========== HOSPITAL DATA: End of period data: Number of hospitals.... 36 37 37 38 38 58 Number of licensed beds.................. 3,225 3,265 3,265 3,325 3,325 5,107 Revenue mix %: Medicare............... 57 60 58 62 64 61 Medicaid............... 13 12 14 10 10 9 Private and other...... 30 28 28 28 26 30 Patient days: Medicare............... 94,087 95,680 90,224 95,137 106,646 107,799 Medicaid............... 24,152 23,898 26,280 23,191 21,705 23,170 Private and other...... 27,776 28,735 27,716 29,268 31,502 32,358 ---------- ---------- ---------- ---------- ---------- ---------- 146,015 148,313 144,220 147,596 159,853 163,327 ========== ========== ========== ========== ========== ========== NURSING CENTER DATA: End of period data: Number of nursing centers............... 311 310 313 313 314 311 Number of licensed beds.................. 39,510 39,378 39,640 39,619 40,942 40,869 Revenue mix %: Medicare............... 30 30 29 30 32 32 Medicaid............... 44 44 45 45 43 42 Private and other...... 26 26 26 25 25 26 Patient days: Medicare............... 405,049 396,568 383,458 377,570 406,642 417,336 Medicaid............... 2,011,158 2,012,524 2,082,664 2,085,104 1,962,287 2,039,999 Private and other...... 711,313 698,389 705,783 697,183 663,575 734,593 ---------- ---------- ---------- ---------- ---------- ---------- 3,127,520 3,107,481 3,171,905 3,159,857 3,032,504 3,191,928 ========== ========== ========== ========== ========== ========== ANCILLARY SERVICES DATA: End of period data: Number of Vencare contracts (b)......... 4,244 4,295 4,150 4,346 4,946 4,524 Number of Atria communities........... 22 22 22 21 25 40 Number of Atria units.. 3,022 3,022 3,022 2,942 3,226 3,977
- -------- (a) Certain prior year amounts have been reclassified to conform with the current year presentation. (b) Restated to reflect the integration of the institutional pharmacy business into Vencare in the fourth quarter of 1996. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company's subsidiary, American X-Rays, Inc. ("AXR"), is the defendant in a qui tam lawsuit which was filed in the United States District Court for the Eastern District of Arkansas and served on the Company on July 7, 1997. The United States Department of Justice intervened in the suit which was brought under the Federal Civil False Claims Act. AXR provides portable X-ray services to nursing facilities (including those operated by the Company) and other healthcare providers. The Company acquired an interest in AXR when The Hillhaven Corporation was merged into the Company in September 1995 and purchased the remaining interest in AXR in February 1996. The suit alleges that AXR submitted false claims to the Medicare and Medicaid programs. In conjunction with the qui tam action, the United States Attorney's office for the Eastern District of Arkansas also is conducting a criminal investigation into the allegations contained in the qui tam complaint. The Company is cooperating fully in the investigation. On June 19, 1997, a class action lawsuit was filed in the United States District Court for the District of Nevada on behalf of a class consisting of all persons who sold shares of Transitional during the period from February 26, 1997 through May 4, 1997, inclusive. The complaint alleges that Transitional was purchasing shares of its common stock from members of the investing public after it had received a written offer to acquire all of Transitional's common stock and without making the required disclosure that such an offer had been made. The complaint further alleges that defendants disclosed that there were "expressions of interest" in acquiring Transitional when, in fact, at that time, the negotiations had reached an advanced stage with actual firm offers at substantial premiums to the trading price of Transitional's stock having been made which were actively being considered by Transitional's Board of Directors. The complaint asserts claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and common law principles of negligent misrepresentation and names as defendants Transitional as well as certain senior executives and directors of Transitional. On June 6, 1997, Transitional announced that it had been advised that it was the target of a grand jury investigation arising from the activities of Transitional's formerly owned dialysis business. The investigation involves purported Medicare fraud involving certain laboratory tests performed by a partnership which existed from June 1987 to June 1992 between Damon Corporation and Transitional. Transitional spun off its dialysis business, now called Vivra Incorporated, on September 1, 1989. The Company is cooperating fully in the investigation. The Company intends to vigorously defend these proceedings. While such proceedings are in the preliminary stages, based on the information currently available to the Company, the Company believes that a resolution of these matters will not have, individually or in the aggregate, a material adverse effect on the Company's liquidity, financial position or results of operations. 16 PART II. OTHER INFORMATION (CONTINUED) ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Vencor's Annual Meeting of Stockholders was held on May 15, 1997 in Louisville, Kentucky. At the meeting, stockholders elected a Board of ten directors pursuant to the following votes:
DIRECTOR VOTES IN FAVOR VOTES WITHHELD -------- -------------- -------------- Michael R. Barr.............................. 52,920,549 248,794 Walter F. Beran.............................. 52,909,872 259,471 Ulysses L. Bridgeman, Jr..................... 52,876,894 292,449 Elaine L. Chao............................... 52,865,191 304,152 Donna R. Ecton............................... 52,913,297 256,046 Greg D. Hudson............................... 52,907,927 261,416 William H. Lomicka........................... 52,912,606 256,737 W. Bruce Lunsford............................ 52,913,700 255,643 W. Earl Reed, III............................ 52,910,945 258,398 R. Gene Smith................................ 52,903,757 265,586
In addition, the stockholders approved the Vencor, Inc. 1997 Stock Option Plan for Non-Employee Directors by the vote of 42,932,535 in favor, 2,600,511 against and 277,979 abstentions. The stockholders also approved the Vencor, Inc. 1997 Incentive Compensation Plan by the vote of 34,475,741 in favor, 11,080,920 against and 254,364 abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS: 2.1 Agreement and Plan of Merger dated June 18, 1997 by and among the Company, LV Acquisition Corp. and Transitional Hospitals Corporation. Exhibit 2.1 to the Current Report on Form 8-K of the Company dated July 3, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference. 4.1 Amendment No. 1, dated as of April 22, 1997, to the $1.75 billion Credit Agreement dated as of March 17, 1997, as amended as of March 31, 1997, among the Company, the various banks party thereto, the Swingline Bank party, the LC Issuing Banks party thereto, the Managing Agents and Co-Agents party thereto, Morgan Guaranty Trust Company of New York, as Documentation Agent and Collateral Agent, and Nationsbank, N.A., as Administrative Agent. Exhibit (b)(2) to Amendment No. 8 to the Statement on Schedule 14D-1 of the Company and LV Acquisition Corp., dated May 7, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference. 4.2 $2.0 billion Amended and Restated Credit Agreement dated as of May 30, 1997, amending and restating the Credit Agreement dated as of March 17, 1997, as amended as of March 31, 1997 and April 22, 1997, among the Company, the various banks party thereto, the Swingline Bank party, the LC Issuing Banks party thereto, the Managing Agents and Co- Agents party thereto, Morgan Guaranty Trust Company of New York, as Documentation Agent and Collateral Agent, and Nationsbank, N.A., as Administrative Agent. Exhibit (b)(3) to Amendment No. 8 to the Statement on Schedule 14D-1 of the Company and LV Acquisition Corp., dated May 7, 1997 (Comm. File No. 1-10989) is hereby incorporated by reference. 4.3 Amendment No. 1, dated as of June 24, 1997, to the $2.0 billion Amended and Restated Credit Agreement dated as of May 30, 1997, amending and restating the Credit Agreement dated as of March 17, 1997, as amended as of March 31, 1997 and April 22, 1997, among the Company, the various banks party thereto, the Swingline Bank party, the LC Issuing Banks party thereto, the Managing Agents and Co-Agents party thereto, Morgan Guaranty Trust Company of New York, as Documentation Agent and Collateral Agent, and Nationsbank, N.A., as Administrative Agent.
17 PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (A) EXHIBITS (CONTINUED): 4.4 Amendment No. 3 to Credit Agreement dated as of May 27, 1997 among Atria Communities, Inc., as borrower, the lending institutions named therein, PNC Bank, National Association, as Administrative Agent, PNC Bank Kentucky, Inc., as Managing Agent, and National City Bank of Kentucky, as Documentation Agent. Exhibit 4.6 to the Registration Statement on Form S-1 of Atria Communities, Inc. (Comm. File No. 333- 28577) is hereby incorporated by reference. 10.1 Strategic Alliance Agreement dated as of June 10, 1997 by and between the Company, Continental Casualty Company and Valley Forge Life Insurance Company. 10.2 Amendment No. 2 to Parent Guaranty dated as of May 27, 1997 by Atria Communities, Inc., as Borrower, Vencor, Inc., as Parent Guarantor, First Healthcare Corporation, Northwest Health Care, Inc., Medisave Pharmacies, Inc., Nationwide Care, Inc., TheraTx, Incorporated, Vencor Hospitals Illinois, Inc., Vencor Hospitals South, Inc., Vencor Hospitals East, Inc., Vencor Hospitals California, Inc., Vencor Hospitals Texas, Ltd., Ventech Systems, Inc., Pasatiempo Development Corp., VCI Specialty Services, Inc., and Vencor Properties, Inc., as Supporting Guarantors, and PNC Bank, National Association, as Administrative Agent. 10.3 Amendment No. 1 dated May 8, 1997 to the Vencor, Inc. 1997 Incentive Compensation Plan. 10.4 Form of Indemnification Agreement between Transitional Hospitals Corporation and its Directors and Executive Officers. Exhibit C to the Proxy Statement of Transitional Hospitals Corporation, dated April 24, 1987 relating to its annual meeting of its stockholders on June 1, 1987 (Comm. File No. 1-7008) is hereby incorporated by reference. 10.5 Agreement and Plan of Merger, dated May 2, 1997, among Select Medical Corporation, SM Acquisition Co. and Transitional Hospitals Corporation. Exhibit 99.1 to the Current Report on Form 8-K of Transitional Hospitals Corporation dated May 2, 1997 (Comm. File No. 1-7008) is hereby incorporated by reference. 10.6 Agreement between Community Psychiatric Centers and Foray 911 Limited, dated as of June 21, 1996, related to the sale of the entire issued share capital of CPC (Londinium) Limited. Exhibit 1 to the Current Report on Form 8-K of Transitional Hospitals Corporation dated July 5, 1996 (Comm. File No. 1-7008) is herein incorporated by reference. 10.7 Asset Purchase Agreement between Transitional Hospitals Corporation and Behavioral Healthcare Corporation, dated October 22, 1996. Exhibit 99.1 to the Current Report on Form 8-K of Transitional Hospitals Corporation dated October 22, 1996 (Comm. File No. 1-7008) is hereby incorporated by reference. 10.8 Agreement and Plan of Merger between Transitional Hospitals Corporation and Behavioral Healthcare Corporation, dated October 22, 1996. Exhibit 99.2 to the Current Report on Form 8-K of Transitional Hospitals Corporation dated October 22, 1996 (Comm. File No. 1-7008) is hereby incorporated by reference. 10.9 First Amendment to Asset Purchase Agreement between Transitional Hospitals Corporation and Behavioral Healthcare Corporation, dated November 30, 1996. Exhibit 99.1 to the Current Report on Form 8-K of Transitional Hospitals Corporation dated December 16, 1996 (Comm. File No. 1-7008) is hereby incorporated by reference. 10.10 Amendment to Agreement and Plan of Merger between Transitional Hospitals Corporation and Behavioral Healthcare Corporation, dated November 30, 1996. Exhibit 99.2 to the Current Report on Form 8-K of Transitional Hospitals Corporation dated December 16, 1996 (Comm. File No. 1-7008) is hereby incorporated by reference.
18 PART II. OTHER INFORMATION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) (A) EXHIBITS (CONTINUED): 11 Statement Re: Computation of earnings per common and common equivalent share for the six months ended June 30, 1997 and 1996. 27 Financial Data Schedule (included only in filings submitted under the Electronic Data Gathering Analysis Retrieval system).
(B) REPORTS ON FORM 8-K: Vencor filed a Current Report on Form 8-K on April 1, 1997 reporting the TheraTx Merger. Vencor also filed a Current Report on Form 8-K/A on May 23, 1997 which included historical and pro forma financial statements relating to the TheraTx Merger. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VENCOR, INC. Date: July 25, 1997 /s/ W. EARL REED, III ___________________ _____________________________________ W. Earl Reed, III Executive Vice President and Chief Financial Officer (Duly Authorized Officer of the Registrant and Principal Financial Officer) 20 EX-4.3 2 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 4.3 AMENDMENT NO. 1 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT dated as of June 24, 1997 to the Amended and Restated Credit Agreement dated as of May 30, 1997 (the "Credit Agreement") among VENCOR, INC. ("Vencor"), the BANKS, SWINGLINE BANK, LC ISSUING BANKS, MANAGING AGENTS and CO- AGENTS party thereto, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Documentation Agent (the "Documentation Agent") and Collateral Agent, and NATIONSBANK, N.A., as Administrative Agent. W I T N E S S E T H : WHEREAS, the parties hereto desire to amend the Credit Agreement (i) to permit Vencor to issue certain high yield debt and (ii) to give the Banks the benefit of the financial covenants and other restrictive agreements set forth in the indenture pursuant to which such high yield debt is issued; NOW, THEREFORE, the parties hereto agree as follows: Section 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. Section 2. Definitions. Section 1.01 of the Credit Agreement is amended by adding the following new definitions in the appropriate alphabetical order: "High Yield Debt Indenture" means the Indenture pursuant to which the Permitted High Yield Debt is issued, as such Indenture may be amended from time to time in accordance with the terms thereof and Section 5.29(c) hereof. "Permitted High Yield Debt" means subordinated notes issued by Vencor before December 31, 1997; provided that such subordinated notes comply with the provisions of Section 5.07(e) except for requirements to offer to purchase such subordinated notes in certain events (including, without limitation, a "Change of Control" as defined in the High Yield Debt Indenture), which requirements are subject to the provisions of Section 5.29(b). Section 3. Permission to Incur Permitted High Yield Debt. The last proviso to Section 5.07(e) of the Credit Agreement is amended to read as follows: provided, further, that (A) if Vencor has an Investment Grade Rating when such Debt is incurred or such Guarantee is entered into, the date specified in subclauses (i) and (ii) above shall be changed from March 31, 2003 to June 30, 2002 and (B) subclause (ii) above shall not apply to Permitted High Yield Debt. Section 4. Amendment of Article 5. The following new Section is added at the end of Article 5 of the Credit Agreement: Section 5.29. Permitted High Yield Debt. (a) So long as any Permitted High Yield Debt is outstanding, Vencor agrees to comply with all of the financial covenants and other restrictive agreements set forth in the High Yield Debt Indenture as if such covenants and other restrictive agreements (and the definitions of the terms used therein) were set forth in full herein. (b) Vencor will not purchase or offer to purchase any Permitted High Yield Debt pursuant to any provision of the High Yield Debt Indenture requiring it to do so unless it shall have first (i) repaid all the outstanding Loans, Swingline Loans and LC Reimbursement Obligations, (ii) terminated the Commitments and (iii) cash collateralized each outstanding Letter of Credit in a manner satisfactory to the relevant LC Issuing Bank. (c) Without the prior written consent of the Required Banks, Vencor shall not modify or amend, or waive or solicit any waiver of, any provision of the High Yield Debt Indenture in any manner that could reasonably be expected to be adverse to the interest of the Banks under the Financing Documents. Section 5. Events of Default. Section 6.01(b) of the Credit Agreement is amended to read as follows: (b) Vencor shall (i) fail to observe or perform any of its financial covenants and other restrictive agreements contained in the High Yield Debt Indenture within the applicable grace period (if any) specified therein or (ii) fail to observe or perform any covenant contained in Section 5.01(e), Section 5.01(f), Section 5.07 through 5.28, inclusive, Section 5.29(b) or Section 5.29(c); or Section 6. Additional Letters of Credit. As of the Amendment Effective Date, (i) the letters of credit listed on Schedule I hereto shall be deemed to be issued pursuant to Section 2.08(b) of the Credit Agreement and shall be Additional Letters of Credit thereunder and (ii) the definition of "LC Issuing Bank" in Section 1.01 of the Credit Agreement is amended by 2 replacing the reference to "Seattle First National Bank" with "Bank of America NT & SA dba Seafirst Bank". Section 7. Representations of Vencor. Vencor represents and warrants that (i) the representations and warranties of Vencor set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment Effective Date and (ii) no Default will have occurred and be continuing on such date. Section 8. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. Section 9. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. Section 10. Effectiveness. This Amendment shall become effective on the date (the "Amendment Effective Date") when the Documentation Agent shall have received from each of Vencor, the Required Banks and Bank of America NT & SA, as LC Issuing Bank, a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Documentation Agent) that such party has signed a counterpart hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. VENCOR, INC. By: /s/ Richard A. Lechleiter ------------------------------------------- Title: Vice President of Finance MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ Diana H. Imhof ------------------------------------------- Title: Vice President 3 NATIONSBANK, N.A., as a Bank and an LC Issuing Bank By: /s/ Ashley M. Crabtree ------------------------------------------- Title: Senior Vice President BANK OF AMERICA NT & SA, as a Bank and an LC Issuing Bank By: /s/ Edward S. Han ------------------------------------------- Title: Vice President THE BANK OF NEW YORK By: /s/ Edward J. Dougherty ------------------------------------------- Title: Vice President THE CHASE MANHATTAN BANK By: /s/ Dawn Lee Lum ------------------------------------------- Title: Vice President PNC BANK, KENTUCKY, INC, as a Bank and an LC Issuing Bank By: /s/ Benjamin A. Willingham ------------------------------------------- Title: Vice President 4 TORONTO DOMINION (TEXAS), INC. By: /s/ Neva Nesbitt ------------------------------------------- Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ M.D.Smith ------------------------------------------- Title: Agent CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Farboud Tavangar ------------------------------------------- Title: First Vice President CREDIT SUISSE FIRST BOSTON By: /s/ Robert B. Potter ------------------------------------------- Title: Vice President By: /s/ Steven E. Janauschek ------------------------------------------- Title: Associate 5 DEUTSCHE BANK AG NEW YORK AND/OR CAYMAN ISLAND BRANCHES By: ------------------------------------------- Name: Title: By: ------------------------------------------- Name: Title: FLEET NATIONAL BANK By: /s/ Ginger Stolzenthaler ------------------------------------------- Title: Senior Vice President THE INDUSTRIAL BANK OF JAPAN TRUST COMPANY By: /s/ Takuya Honjo ------------------------------------------- Title: Senior Vice President WACHOVIA BANK, N.A., By: /s/ John Tibe ------------------------------------------- Title: AVP 6 ABN AMRO BANK N.V. By: /s/ Kathryn C. Toth ------------------------------------------- Title: Group Vice President By: /s/ J.Seibly ------------------------------------------- Title: VP BANK OF MONTREAL By: /s/ Peter Steelman ------------------------------------------- Title: Director BANK ONE, KENTUCKY, NA By: /s/ Dennis P. Heishman ------------------------------------------- Title: Senior Vice President COMERICA BANK By: ------------------------------------------- Name: Title: CORESTATES BANK, N.A. By: /s/ Elizabeth D. Morris ------------------------------------------- Title: Vice President 7 THE FUJI BANK, LIMITED By: /s/ Peter L. Chinnici ------------------------------------------- Title: Joint General Manager LTCB TRUST COMPANY By: /s/ Noborli Kubota ------------------------------------------- Title: SVP NATIONAL CITY BANK OF KENTUCKY, as a Bank and an LC Issuing Bank By: /s/ Deroy Scott ------------------------------------------- Title: Vice President NBD BANK, N.A. By: /s/ Cindy A. Herzog ------------------------------------------- Title: Authorized Agent UNION BANK OF CALIFORNIA, N.A. By: /s/ Cary Moore ------------------------------------------- Title: Vice President AMSOUTH BANK OF ALABAMA By: /s/ J. Ken DiFatta ------------------------------------------- Title: Commercial Banking Officer 8 BANQUE PARIBAS By: /s/ Russell A. Pomerantz ------------------------------------------- Title: Vice President By: /s/ David R. Laffey ------------------------------------------- Title: Group Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: /s/ Ann M. Dodd ------------------------------------------- Title: Senior Vice President U.S. BANK OF WASHINGTON, N.A. By: /s/ Arnold J. Conrad ------------------------------------------- Title: Vice President CIBC, INC. By: /s/ Timothy E. Doyle ------------------------------------------- Title: Authorized Signatory KREDIETBANK N.V. By: /s/ Robert Snauffer ------------------------------------------- Title: Vice President By: /s/ Tod R. Angus ------------------------------------------- Title: Vice President 9 THE MITSUBISHI TRUST AND BANKING CORPORATION By: /s/ Masaaki Yamorishi ------------------------------------------- Title: Chief Manager THE SAKURA BANK LIMITED NEW YORK BRANCH By: /s/ Yoshikazu Nagura ------------------------------------------- Title: Vice President SOCIETE GENERALE, CHICAGO BRANCH By: /s/ C. Steve Coffman ------------------------------------------- Title: Assistant Treasurer FIRST AMERICAN NATIONAL BANK By: /s/ Kent D. Wood ------------------------------------------- Title: AVP BANK OF LOUISVILLE, as a Bank and an LC Issuing Bank By: /s/ Roy L. Johnson, Jr. ------------------------------------------- Title: Senior Vice President 10 THE DAI-ICHI KANGYO BANK, LTD. CHICAGO BRANCH By: /s/ Takao Teramura ------------------------------------------- Title: Vice President FIFTH THIRD BANK By: /s/ Robert M. Eversole ------------------------------------------- Title: Senior Vice President 11 SCHEDULE I Transitional Hospitals Corporation Letters of Credit
Expiry Estimated LC # Date Beneficiary Account Party Relevant Facility Amount ---- ------ ----------- ------------- ----------------- --------- 208848 12/31/97 Liberty Mutual Ins. Co. Transitional Hospitals N/A $292,724.00 Corporation 213228 08/10/97 Arkansas Power & Light Co. Transitional Hospitals N/A $ 20,000.00 Corporation 213453 10/17/97 So. Western Electric Power Co. Transitional Hospitals N/A $ 25,000.00 Corporation 214487 12/31/97 Liberty Mutual Ins. Co. Transitional Hospitals N/A $105,017.00 Corporation 218924 12/31/97 Liberty Mutual Ins. Co. Transitional Hospitals N/A $176,000.00 Corporation 221019 07/28/97 Tampa Electric Co. Transitional Hospitals N/A $ 40,000.00 Corporation 3001940 10/15/98 Houston Lighting & Power THC Bay Area Inc. N/A $ 67,400.00 3001941 10/15/98 Houston Lighting & Power THC Houston Inc. N/A $ 27,000.00
EX-10.1 3 STRATEGIC ALLIANCE AGREEMENT EXHIBIT 10.1 STRATEGIC ALLIANCE AGREEMENT ---------------------------- This Agreement is made and entered into as of the 10th day of June, 1997, by and between Continental Casualty Company, an Illinois insurance company, and Valley Forge Life Insurance Company, a Pennsylvania life insurance company (individually and collectively "CNA") and Vencor Inc., a Delaware Corporation ("Vencor"). RECITALS -------- WHEREAS, CNA issues long-term care insurance policies which, subject to the terms and conditions of the policies, provide reimbursement for eligible expenses incurred by the policyholders for specified long-term care services; and WHEREAS, Vencor owns and operates health care facilities and, through a subsidiary, manages a network of providers of long-term care; and WHEREAS, Vencor is or will be the sole owner of a domestic insurance company known as Vencor Insurance Company; and WHEREAS, Vencor and CNA desire to enter into a strategic alliance whereby they will jointly develop and share the risk on a long-term care insurance product to be offered to individuals throughout the United States, and will make long-term care services available to policyholders at favorable rates; and WHEREAS, subject to a compensation agreement between Old Colony Insurance Services and CNA which is separate and apart from this Agreement, Old Colony Insurance Services is the agency responsible for various services in support of the strategic alliance contemplated by this Agreement; NOW, THEREFORE, in consideration of the above premises and the covenants hereinafter set forth, the parties, CNA and Vencor, hereby agree as follows: 1. DEFINITIONS 1.1. In this Agreement, the Coinsurance Agreement, and the Preferred Access Agreement, the following terms shall have the meanings ascribed by this Section 1 unless the term is explicitly redefined or the context clearly requires another definition. 1.2. "Agreement" means this Strategic Alliance Agreement, including all Exhibits which are hereby incorporated into and made a part of this Agreement, as originally executed and as may be amended from time to time. 1.3. "Agreement Year" means the 12-month period commencing on the effective date of this Agreement, and each subsequent anniversary of the effective date of this Agreement, and ending on the following anniversary of the effective date of this Agreement. 1.4. "Coinsurance Agreement" means the agreement entered into by a wholly owned Vencor subsidiary, Vencor Insurance Company ("VIC"), and CNA for VIC to reinsure a fifty percent (50%) quota share of the liability of CNA with respect to the Policies. 1.5. "Covered Services" means health care services with respect to which benefits are payable to or on behalf of Members under the Policies. 1.6. "Member" means an individual who is insured under a Vencor Gold policy at the time he or she receives Covered Services. 1.7. "Policies" means the individual long-term care insurance policies that conform to the design of Vencor Gold policies, are issued by CNA, and are in force. A Vencor Gold policy issued to and in force on an individual is a Policy and the insured individual is a Member. 1.8. "Preferred Access Agreement" means the agreement entered into by a wholly owned Vencor subsidiary, Vencor Provider Network, Inc. ("VPN"), and CNA for VPN to arrange for the provision of Covered Services by Preferred Advantage Selected Providers to Members. 1.9. "Preferred Advantage Selected Providers" means providers of long-term care services that have entered into agreements with VPN to provide Covered Services to Members at favorable rates pursuant to the Preferred Access Agreement. 1.10. "Vencor Gold policy" means the long-term care insurance policy or policies contemplated by this Agreement. In order for a policy to be a Vencor Gold policy, it must be developed by CNA, be marketed by an agent of CNA, be coinsured pursuant to the Coinsurance Agreement, and provide incentives pursuant to the Preferred Access Agreement. A sample Vencor Gold policy is attached to this Agreement as Exhibit A. 2. BUSINESS PURPOSE 2.1. The primary business purpose of this Agreement is to establish a strategic alliance pursuant to which 2.1.1. CNA and its agents will market and issue Vencor Gold policies to individuals and will administer the Policies; 2.1.2. Vencor Provider Network, Inc., a subsidiary of Vencor ("VPN"), will arrange for the provision of Covered Services to Members through a health care provider network organized and managed by VPN; and 2.1.3. Vencor Insurance Company, a subsidiary of Vencor ("VIC"), will coinsure the liabilities under the Policies. 2.2. In establishing the strategic alliance, Vencor and CNA in general desire to rely upon 2.2.1. the special expertise of CNA and its agents in the offering of long-term care insurance products, including expertise in product design, underwriting, policy administration, loss control and claims administration; and 2.2.2. the special expertise of Vencor and its agents in the organization, administration and delivery of long-term care services, including organizational skills, credentialling, and utilization management. 2.3. The rights and obligations of the parties with respect to the strategic alliance are evidenced and governed by this Agreement, the Preferred Access Agreement, and the Coinsurance Agreement. 2.4. The parties will use their best efforts to establish a new underwriting company formed, by CNA and its affiliates by themselves or together with Vencor and its affiliates, to underwrite Vencor Gold policies. 3. MARKETING 3.1. It is the intent of the parties to commence marketing of Vencor Gold policies as soon as is reasonably possible following the execution of this Agreement. Marketing will initially comprise introduction in two states, and the parties will agree on a timetable for further introductions. 3.2. CNA shall assure that every Policy is filed with and approved by applicable insurance regulatory authorities. Any material modifications to the Vencor Gold policies or premium rating structure applicable thereto, other than as may be required by applicable law, shall be approved by VIC prior to implementation of such modifications; provided, however, that approval by VIC shall not be unreasonably withheld, and shall be deemed given with respect to a proposed modification if no written objection is made within thirty (30) days following written notice of such modification. 3.3. CNA shall submit the Vencor Gold policies, including where required the terms and conditions of the Preferred Access Agreement, for review by appropriate regulatory authorities, if and when required, before marketing commences 3.4. Vencor Gold policies shall meet the requirements of each state in which they are marketed and sold. 3.5. CNA shall be responsible for implementing a marketing and sales plan for Vencor Gold policies, including the appointment of qualified and appropriately licensed agents and brokers and the establishment of appropriate promotional policies, procedures, and sales training. 3.6. The premium for Vencor Gold policies shall be competitive with that of other long-term care insurance policies offered in the same market and shall comply with applicable regulatory requirements. 3.7. Vencor and CNA shall cooperate with and assist each other in the performance of their respective obligations under this Agreement, including, but not limited to, requiring Members to comply in all respects with the terms and conditions of the Policies and encouraging Members to obtain Covered Services from Preferred Advantage Selected Providers. 4. COINSURANCE 4.1. Vencor shall use its best efforts to cause VIC to enter into, with CNA, within 90 days of the execution of this Agreement, an agreement which is substantively identical to the Coinsurance Agreement which is attached to this Agreement as Exhibit B. 4.2. Notwithstanding any provision of this Agreement or the Coinsurance Agreement to the contrary, and subject to the following proviso, Vencor is and shall remain liable to CNA for the performance of all obligations of VIC to CNA thereunder. 4.2.1. Provided, however, that the immediately preceding subsection shall apply only to obligations of VIC that are related to Policies that became effective on or before the earlier of 4.2.1.1. the third anniversary of the effective date of this Agreement; or 4.2.1.2. the date on which a viable marketing presence is established by a new underwriting company formed, by CNA and its affiliates by themselves or together with Vencor and its affiliates, to underwrite Vencor Gold policies. 5. PREFERRED ACCESS 5.1. Vencor shall use its best efforts to cause VPN to enter into, with CNA, within 60 days of the execution of this Agreement, an agreement which is substantively identical to the Preferred Access Agreement which is attached to this Agreement as Exhibit C. 5.2. Notwithstanding any provision of this Agreement or the Preferred Access Agreement to the contrary, Vencor is and shall remain liable to CNA for the performance of all obligations of VPN to CNA thereunder. 6. EXCLUSIVITY 6.1. For purposes of this Section 6, "Vencor" shall mean Vencor Inc. or any entity controlled by or under common control with Vencor Inc.; and "CNAF" shall mean CNA Financial Corporation or any entity controlled by or under common control with CNAF. 6.2. Until the expiration of ten years from the date of this Agreement, Vencor shall not enter into any contract or other transaction or relationship pursuant to which Vencor 6.2.1. prominently uses the name "Vencor" in the marketing materials for an individual long-term care insurance product; or 6.2.2. by law is only allowed to participate in the risk of an individual long-term care insurance product through a licensed insurance company; or 6.2.3. guarantees, for the life of an individual insured covered under an individual long-term care insurance product, a discount or network access. 6.3. Until the expiration of ten years from the date of this Agreement, CNAF shall not enter into any contract or other transaction or relationship pursuant to which CNAF, with regard to an individual, domestic, long-term care insurance product underwritten by a subsidiary of CNAF 6.3.1. prominently uses the name of a health care provider in the marketing materials; or 6.3.2. shares any long-term care insurance risk with an entity, affiliated with a contracted provider of long-term care services to CNAF on those same long-term care risks, where such sharing by law is allowed only with a licensed insurance company; or 6.3.3. receives guarantees, for the life of an individual insured, a discount or network access. 6.4. Notwithstanding any other provision of this Agreement to the contrary, either party may waive the provisions of this Section 6 only by delivery to the other party of an unambiguous written waiver executed by a duly authorized officer, vice-president or above, of the party giving the waiver. 7. REPRESENTATIONS AND WARRANTIES OF VENCOR 7.1. To induce CNA to enter into this Agreement and consummate the transactions contemplated hereby, Vencor hereby represents and warrants as follows: 7.1.1. Vencor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to conduct its business and own, operate and lease its properties as and in the places where such business is now conducted and such properties are now owned, leased, or operated. 7.1.2. VPN is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to conduct its business and own, operate and lease its properties as and in the places where such business is now conducted and such properties are now owned, leased, or operated. 7.1.3. VIC is or will be an insurance company duly organized, validly existing and in good standing under the laws of the state of Indiana, has all requisite corporate power and authority to conduct its business and own, operate and lease its properties as and in the places where such business is now conducted and such properties are now owned, leased, or operated, and is authorized to transact accident and health insurance business in the states of ____________. 7.1.4. This Agreement, the Coinsurance Agreement, and the Preferred Access Agreement have been or will be duly executed by Vencor, VIC, and VPN, as applicable, as provided herein, and each constitutes the valid and binding obligation of Vencor, VIC, and VPN, as applicable, enforceable in accordance with its terms. 7.1.5. Neither Vencor, VIC, nor VPN is: (a) subject to any contract or other commitment that would impair its or their ability to perform the obligations of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement; (b) subject to any laws, regulations, or orders of any court, administrative agency, or governmental body that would impair its or their ability to perform the obligations of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement; or (c) subject to any pending or threatened judicial or administrative action, suit, investigation, or other proceeding that would adversely affect its or their ability to perform the obligations of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement. 7.1.6. Vencor, VIC, and VPN each has all licenses, franchises, permits and government authorizations necessary for the conduct of its business, none of which will be terminated or otherwise adversely affected as a result of the execution of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement or the performance of its obligations thereunder. 7.1.7. VIC will not assign any of the Policies to another insurance company unless the other insurance company 7.1.7.1. Is owned by Vencor; and 7.1.7.2. Has at least 200% of the company action level risk based capital required by then current statutes or regulations. 8. REPRESENTATIONS AND WARRANTIES OF CNA 8.1. To induce Vencor to enter into this Agreement and consummate the transactions contemplated hereby, CNA hereby represents and warrants as follows: 8.1.1. Continental Casualty Company is wholly owned by CNA Financial Corporation, a publicly traded company. Valley Forge Life Insurance Company is wholly owned by Continental Assurance Company which in turn is wholly owned by Continental Casualty Company. 8.1.2. Continental Casualty Company and Valley Forge Life Insurance Company possess and shall maintain in good standing during the term of this Agreement any and all valid certificates of authority and licenses under any applicable laws. Continental Casualty Company and Valley Forge Life Insurance Company are and shall remain at all times during this Agreement authorized to do all acts necessary or convenient to carry out the terms and purposes of this Agreement. The parties agree that failure of CNA to maintain active, necessary licenses constitutes a breach of this Agreement that cannot be remedied at law and that actions in equity, including injunctions, are appropriate. 8.1.3. Continental Casualty Company is an insurance company duly organized, validly existing, and in good standing under the laws of the State of Illinois, and has all requisite corporate power and authority to conduct its business and own, operate, and lease its properties as and in the places where such business is now conducted and such properties are now owned, leased, or operated. 8.1.4. Valley Forge Life Insurance Company is a life insurance company duly organized, validly existing, and in good standing under the laws of the State of Pennsylvania, and has all requisite corporate power and authority to conduct its business and own, operate, and lease its properties as and in the places where such business is now conducted and such properties are now owned, leased, or operated. 8.1.5. This Agreement, the Coinsurance Agreement, and the Preferred Access Agreement have been or will be duly executed by CNA, as provided herein, and each constitutes the valid and binding obligation of CNA, enforceable in accordance with its terms. 8.1.6. CNA is not: (a) subject to any contract or other commitment that would impair its ability to perform the obligations of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement; (b) subject to any laws, regulations, or orders of any court, administrative agency, or governmental body that would impair its ability to perform the obligations of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement; or (c) subject to any pending or threatened judicial or administrative action, suit, investigation, or other proceeding that would adversely affect its ability to perform the obligations of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement. 8.1.7. CNA has all licenses, franchises, permits and government authorizations necessary for the conduct of its business, none of which will be terminated or otherwise adversely affected as a result of the execution of this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement or the performance of its obligations thereunder. 8.1.8. Neither Continental Casualty Company nor Valley Forge Life Insurance Company will assign any of the Policies to another insurance company unless the other insurance company 8.1.8.1. Is owned by a parent of either Continental Casualty Company or Valley Forge Life Insurance Company; and 8.1.8.2. Has at least 200% of the company action level risk based capital required by then current statutes or regulations. 9. INDEMNIFICATION 9.1. Indemnification of CNA. Vencor hereby agrees to indemnify and hold harmless CNA, its affiliates and subsidiaries and its and their directors, officers, employees, agents, and any successors in interest or at law (collectively "CNA" for purposes of this Section), from any and all costs, claims, expenses, demands, actions, suits, or proceedings, liabilities and damages (including, but not limited to, awards, statutory or regulatory penalties, and attorneys fees) directly or indirectly arising out of or resulting from any acts or omissions of Vencor, its subsidiaries or affiliates or its or their directors, officers, employees, agents, contractors or authorized representatives (collectively "Vencor" for the purposes of this Section) in the performance of their duties under this Agreement or the breach of any covenant, condition, warranty, or representation contained in this Agreement, the Coinsurance Agreement or the Preferred Access Agreement excluding, however, any acts or omissions of Vencor to the extent they are caused or contributed to by CNA. 9.2. Indemnification of Vencor. CNA hereby agrees to indemnify and hold harmless Vencor, as defined in subsection 9.1, from any and all costs, claims, expenses, demands, actions, suits, or proceedings, liabilities and damages (including but not limited to, awards, statutory or regulatory penalties, and attorneys fees) directly or indirectly arising out of or resulting from any acts or omissions of CNA, as defined in subsection 9.1, in the performance of their duties under this Agreement or the breach of any covenant, condition, warranty or representation contained in this Agreement, the Coinsurance Agreement, or the Preferred Access Agreement, excluding, however, any acts or omissions of CNA to the extent they are caused or contributed to by Vencor, as defined in subsection 9.1. 9.3. Notice. Neither party shall be entitled to be indemnified if it fails to notify the party bearing liability to indemnify ("indemnifying party") of the proceedings and does not furnish the indemnifying party a copy of the legal documents (e.g., complaint, notice of hearing, etc.), if available, within a reasonable time after the non- indemnifying party or its designated service of process agent is served with the summons or other legal process which initially notifies the non-indemnifying party of the nature of the proceeding. 9.4. Defense. With respect to any claim by a third party for which indemnification is due hereunder ("third party indemnification claim"), the indemnifying party shall defend, in good faith and its own expense, any such indemnification claim and the indemnitee, at its expense, shall have the right to participate in the defense of any such third party indemnification claim. In connection with its defense of a third party indemnification claim, the indemnifying party shall have the absolute right to choose or approve counsel for the defense or prosecution of such action. So long as the indemnifying party is defending in good faith any such third party indemnification claim, the indemnitee shall not settle or compromise such third party indemnification claim. The indemnitee shall make available to the indemnifying party or its representatives all records and other materials reasonably required by them for its use in contesting any third party indemnification claim and shall cooperate fully with the indemnifying party in the defense of all such indemnification claims. 10. AUDIT 10.1. CNA shall have the authority to inspect and audit the books and records of Vencor and its assignees which directly pertain to this Agreement provided that all of the following terms and conditions are met: 10.1.1. The party being audited agrees on the place and time of the audit; and 10.1.2. At least 24 months has elapsed since the last audit of Vencor by CNA. 10.2. Vencor shall have the authority to inspect and audit the books and records of CNA and its assignees which directly pertain to this Agreement provided that all of the following terms and conditions are met: 10.2.1. The party being audited agrees on the place and time of the audit; and 10.2.2. At least 24 months has elapsed since the last audit of CNA by Vencor. 11. CONFIDENTIALITY 11.1. Member Information. Neither CNA nor Vencor shall disclose or use or permit the disclosure or use of individually identifiable medical or other personal information about any Member except as reasonably necessary for the administration of this Agreement, the Coinsurance Agreement, the Preferred Access Agreement or the Policies or as otherwise required by applicable law. 11.2. Terms of Agreements. CNA and Vencor shall keep the terms of this Agreement, the Coinsurance Agreement and the Preferred Access Agreement and any related negotiations confidential and shall not disclose them to any other person except as required by said Agreements or applicable law (e.g., either party may file agreements, when necessary for licensing or product approval, without separate notice to the other party). If either party becomes subject to compulsory process to disclose the terms of the Agreements or related negotiations, it shall give the other party immediate oral and written notice of such process. 11.3. Injunction. The parties agree that the failure by either to comply with the obligations of this Section 11 constitutes a breach of this Agreement that cannot be remedied at law and for which actions in equity, including actions for preliminary and permanent injunctions, are appropriate. 12. TERM AND TERMINATION 12.1. Automatic Termination --------------------- 12.1.1. This Agreement shall terminate automatically if either party becomes insolvent or otherwise unable to perform its obligations hereunder. 12.1.2. This Agreement shall terminate automatically if either the Preferred Access Agreement or the Coinsurance Agreement terminates for any reason. 12.2. Termination by Notice - Either party may terminate this Agreement --------------------- without cause by either party giving to the other written notice to that effect no less than one hundred eighty (180) days prior to the termination date; provided, however, that no such termination shall be effective until this Agreement shall have been in effect for ten years. 12.3. Termination for Cause --------------------- 12.3.1. This Agreement may be terminated by thirty (30) days' written notice to the breaching party of breach of any of the terms or conditions of this Agreement, provided such breach has not been cured within such thirty (30) day notice period. 12.3.1.1. Provided, however, that if a breach cannot reasonably be cured within such thirty (30) days, the party giving notice may terminate this Agreement if the breaching party does not proceed to cure the breach as soon as reasonable practicable and in any event does not cure the breach within sixty (60) days of the written notice. 12.3.2. Any egregious or willful violation of any of the terms of this Agreement by either party shall be grounds for termination of this Agreement upon thirty (30) days' written notice to the breaching party. 12.3.3. Any of any of the following events shall be grounds for termination of this Agreement upon thirty (30) days' written notice to the other party. 12.3.3.1. The other party enters into or becomes subject to an agreement with respect to the change of ownership, control, merger, consolidation, or reorganization of any of the parties to the Coinsurance Agreement; or 12.3.3.2. The other party suffers a material adverse change in its financial condition sufficient to threaten its ability to perform hereunder; or 12.3.3.3. On the third anniversary date of this Agreement, this strategic alliance has produced less than $40 million in new written premium and in the third Agreement Year, this strategic alliance has produced less than $20 million in new written premium; or 12.3.3.4. On any third anniversary date of this Agreement between the third anniversary date and the tenth anniversary date, it is determined that the rate of growth of new written premium under this strategic alliance is not at least equal to the rate of growth of the individual long term care business of CNA. 12.4. Obligations Survive Termination ------------------------------- 12.4.1. The provisions of subsections 3.7 through 12.3, inclusive, excluding Section 6, shall survive the termination of this Agreement and shall continue in full force and effect thereafter with respect to all Policies issued prior to such termination and the Members insured thereunder until all such Policies are canceled, surrendered, or otherwise terminated. 12.4.2. The termination of this Agreement shall not terminate or otherwise affect the Coinsurance Agreement or the Preferred Access Agreement which shall continue in full force and effect thereafter with respect to all Policies issued prior to such termination and the Members insured thereunder until all such Policies are canceled, surrendered, or otherwise terminated. 12.4.3. The parties agree that any deviation from the terms of this subsection 12.4, no matter when the deviation occurs, constitutes a breach of this Agreement that cannot be remedied at law and that actions in equity, including injunctions, are appropriate. 13. ARBITRATION 13.1. Resolution of Disputes by Arbitration. The parties agree that all ------------------------------------- controversies or disputes arising out of, in connection with, or which relate to this Agreement or performance under this Agreement, which cannot be resolved by mutual agreement, shall be submitted to arbitration for resolution, as herein provided. 13.2. Selection of Arbitrators. ------------------------ 13.2.1. Arbitration shall be by a panel of three neutral arbitrators, each of which shall be an active or former officer of an insurance company which, at the time of the demand for arbitration, issues or has recently issued policies of insurance of the type covered by this Agreement. In addition, each arbitrator shall meet the requirements of, and shall agree to act in accordance with, the Code of Ethics for Arbitrators in Commercial Disputes sponsored by the American Bar Association and the American Arbitration Association, except to the extent that conduct prohibited by such Code is specifically permitted by the terms of this Agreement. 13.2.2. Within thirty (30) days after receipt of a demand for arbitration, each party shall designate its arbitrator. The designation shall contain information sufficient to allow the other party to judge the qualifications of the person designated as arbitrator. Thereafter, each party shall have fifteen (15) days within which to accept the arbitrator designated by the other party or to challenge the qualifications of the arbitrator so designated. 13.2.3. The arbitrators so designated and accepted shall, within thirty (30) days after acceptance, select the third arbitrator. Arbitrators may consult with the party nominating them as to acceptability of persons under consideration for appointment by them as third arbitrator. If the third arbitrator has not been selected within that time, each arbitrator shall, within fifteen (15) days, nominate three qualified individuals to serve as the third arbitrator. The American Arbitration Association shall appoint a third arbitrator from the persons nominated who meet the qualifications described in this Agreement. 13.3. Arbitration Procedure. --------------------- 13.3.1. Arbitration shall begin upon the filing by one of the parties of a written demand for arbitration. Such demand shall contain a statement setting forth the nature of the dispute, the amount involved, if any, and the remedy sought. Such demand shall be served upon the other party by certified mail, return receipt requested. 13.3.2. Within sixty (60) days after the arbitration panel has been finalized, the parties shall submit their dispute or controversy to the panel of arbitrators for decision. The site for the arbitration hearing shall be Chicago, Illinois, or as mutually agreed by the parties. The rules for the gathering of evidence, taking of discovery or depositions, if any, and the conduct of the hearing shall be such rules as are included in the Commercial Arbitration Rules of the American Arbitration Association as of the date the arbitration panel was finalized, to the extent not inconsistent with the terms of this Agreement. The parties may agree to use modified rules to expedite the arbitration process. The formal rules of evidence need not apply, in the arbitrators' discretion, to the hearing. 13.3.3. All arbitrators shall participate in the deliberations and a decision on any matter shall be by a majority of the arbitrators. 13.3.4. The final decision of the arbitration panel shall be submitted in writing, in such form as the arbitrators determine, within thirty (30) days after the conclusion of the arbitration hearing. The decision of the arbitrators shall be final, except that an appeal may be taken only for one or more of the reasons assigned for vacating an award by the Uniform Arbitration Act as enacted by the State of Illinois, which law shall apply and govern the arbitration process contemplated hereunder, to the extent not inconsistent with this Agreement. 13.4. Costs of Arbitration Proceeding. Each party shall bear the cost of ------------------------------- its own arbitrator. The costs of the arbitration proceeding, including the fees of the third arbitrator, shall be borne equally by the parties, unless the arbitration panel orders otherwise. The panel, in its discretion, may also allocate and award other reasonable out-of-pocket costs of the parties, including reasonable attorney's fees, as it deems fair and equitable under the circumstances. 13.5. Confidentiality. The parties agree, and the appointed arbitrators --------------- shall agree as part of their acceptance of nomination, to keep confidential and not disclose to persons not connected with the arbitration the details of the arbitration proceeding and all information received by them in connection therewith, except as may be required by process of law. 14. MISCELLANEOUS PROVISIONS 14.1. Regulatory Compliance. Vencor and CNA agree, for themselves and --------------------- their agents and subagents, that each shall comply with all applicable requirements of municipal, county, state, and federal authorities, including requirements applicable to federal government subcontractors, now or hereafter in force and effect, governing Vencor, CNA, and Preferred Advantage Selected Providers. Provided, however, that if Vencor or its agent requires providers to agree to standards applicable to federal government subcontractors, then failure of a provider to meet those standards shall not constitute a breach of this Agreement by Vencor. 14.2. Notices. Any optional or required notice pursuant to the terms and ------- provisions of this Agreement shall be in writing and shall be transmitted by fax and shall be sent by either (1) overnight mail; or (2) certified or registered mail, return receipt requested, postage prepaid; or (3) by personal hand delivery, to the other party at the following addresses: if to CNA: Mr. Carl A. Friedrich Executive Vice President Long Term Care - 34S Continental Casualty Company 333 S Wabash Ave Chicago IL 60604 TEL 312-822-6349 FAX 312-822-4671 cc: General Counsel FAX 312-817-3302 if to Vencor: Mr. W. Earl Reed, III Chief Financial Officer Vencor, Inc. 3300 Providian Center 400 W Market St Louisville KY 40202 TEL 502-596-7300 FAX 502-596-4080 cc: General Counsel FAX 502-596-4075 14.3. Independent Contractors. None of the provisions of this Agreement is ----------------------- intended to create any relationship between the parties other than that of independent entities contracting with each other. Neither of the parties nor any of their respective officers, directors or employees, shall be construed to be the agent, the employee, the representative or the partner of, or a joint venturer with, the other. 14.4. Noninterference with Health Care. Nothing in this Agreement is -------------------------------- intended to create any right of CNA to intervene in any manner in the methods or means by which Vencor, VPN, or a Preferred Advantage Selected Provider renders health care services, accommodations or supplies to Members. Nothing herein shall be construed to require Vencor, VPN, or a Preferred Advantage Selected Provider to take any action inconsistent with its professional judgment concerning the care and treatment to be rendered to Members. Notwithstanding any provision in this Agreement to the contrary, CNA shall have the right to perform the statutory functions of a long-term care insurance carrier. 14.5. Assignment. Neither Vencor nor CNA shall assign, subcontract, ---------- sublet, or transfer, by operation of law, agreement or otherwise, this Agreement or any of the obligations or rights under this Agreement without the prior written consent of the other party. 14.5.1. Provided, however, that assignment of this Agreement from one entity to another entity which is under common ownership and control with the assignor does not require consent of the non-assigning party if, prior to the assignment, the assigning party provides to the non- assigning party a document, signed by the chief executive officer of the assignee, stating that the assignee assumes each and every duty and obligation of the assignor. 14.6. Proprietary Rights ------------------ 14.6.1. Vencor retains the exclusive right to the names and symbols of Vencor together with any distinctive trademarks or service marks (collectively referred to herein as the "marks") that may currently exist or hereafter be adopted. CNA agrees not to use the marks of Vencor in any manner without the prior written consent of Vencor. Upon the termination of its obligations under this Agreement, CNA will immediately discontinue the use of the marks and forthwith destroy or return to Vencor any tangible material bearing the marks. 14.6.2. CNA retains the exclusive right to the names and symbols of CNA together with any distinctive trademarks or service marks (collectively referred to herein as the "marks") that may currently exist or hereafter be adopted. Vencor agrees not to use the marks of CNA in any manner without the prior written consent of CNA. Upon the termination of its obligations under this Agreement, Vencor will immediately discontinue the use of the marks and forthwith destroy or return to CNA any tangible material bearing the marks. 14.7. Advertising. All advertising, circulars, or other matter intended ----------- for publication or statements to press or media of any kind, by Vencor, concerning CNA or CNA products, must be submitted to and approved by CNA prior to publication. All advertising, circulars, or other matter intended for publication or statements to press or media of any kind, by CNA, concerning Vencor or Vencor products, must be submitted to and approved by Vencor prior to publication. 14.8. Modifications. This Agreement may be amended or modified only by a ------------- writing executed by the parties. The parties agree that this Agreement shall be subject to (i) amendments in any applicable federal, state or local laws and regulations and (ii) new legislation and/or regulations. Any provision of law or regulation that invalidates or otherwise is inconsistent with the terms of this Agreement or that would cause one or both of the parties to be in violation of the law, shall be deemed to have superseded the terms of this Agreement, provided that the parties shall exercise their reasonable best efforts to accommodate the terms and intent of this Agreement to the greatest extent possible consistent with the requirements of such law or regulation. 14.9. Invalidity or Unenforceability. The invalidity or unenforceability ------------------------------ of any terms or provisions of this Agreement shall in no way affect the validity or enforceability of any other term or provision. 14.10. Applicable Law. This Agreement shall be governed by and construed in -------------- accordance with the law of the state of Illinois (without reference to choice of law rules) except to the extent superseded or preempted by federal law. 14.11. Entire Agreement. This Agreement and all attachments, schedules and ---------------- exhibits hereto shall constitute the entire agreement between the parties regarding the subject matter hereof. Each party acknowledges that no representation, inducement, promise, or agreement has been made, orally or otherwise, by the other party or by anyone acting on behalf of the other party, unless such representation, inducement, promise, or agreement is embodied in this Agreement. 14.12. Captions. The captions and headings contained in this Agreement are -------- for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized representative as of the date first written above. CONTINENTAL CASUALTY COMPANY VALLEY FORGE LIFE ASSURANCE COMPANY VENCOR, INC. By: /s/ Richard Holton By: /s/ W. Earl Reed, III -------------------------- ----------------------------------- (signature) (signature) Name: Richard Holton Name: W. Earl Reed, III ------------------------ --------------------------------- (please print) (please print) Title: President, CAN LTC Title: CFO and Executive Vice President ----------------------- -------------------------------- (please print) (please print) Date: 6/10/97 Date: 6/10/97 ------------------------ --------------------------------- (please print) (please print) EXHIBIT "A" ----------- [LETTERHEAD OF CONTINENTAL CASUALTY COMPANY APPEARS HERE] THIS POLICY IS INTENDED TO BE A QUALIFIED LONG-TERM CARE INSURANCE CONTRACT UNDER THE FEDERAL TAX CODE. We are pleased to issue this Long-Term Care Insurance Policy to You. It was issued in consideration of Your application and payment of the required premium. We suggest You carefully read it. GUARANTEED RENEWABLE FOR LIFE PREMIUMS SUBJECT TO CHANGE Your policy will remain in effect during Your lifetime as long as each premium is paid on time. We cannot cancel or refuse to renew Your policy. We cannot change Your policy without Your consent. However, We may change the premium rates. Any change will apply to all policies in the same class as Yours in the state where the policy was issued. We will notify You in writing 31 days before Your premium changes. Coverage begins and ends at 12:01 a.m. Standard Time at Your residence. Your policy provides a refund of unearned premium when We are notified of Your death. A refund of unearned premium will not be made for any other reason. 30-DAY REVIEW PERIOD If You feel this policy does not meet Your insurance needs, return it to Us or Your agent within 30 days after You have received it. We will return Your premium and consider the policy never to have been issued. CHECK YOUR APPLICATION Caution: The issuance of this long-term care insurance policy is based upon Your responses to the questions on Your application. A copy of Your application is attached. If Your answers are incorrect or untrue, We have the right to deny benefits or rescind Your policy. The best time to clear up any questions is now, before a claim arises! If, for any reason, any of Your answers are incorrect, contact Us at CNA Plaza, Chicago, Illinois, 60685. NOTICE TO BUYER This policy may not cover all of the costs associated with long-term care incurred by You during the period of coverage. You are advised to review carefully all policy limitations. SIGNED FOR THE CONTINENTAL CASUALTY COMPANY /s/ BETH M. LUDDEN ----------------------------------- Senior Operations Officer COUNTERSIGNED BY ---------------------------------------------------------------- LICENSED RESIDENT AGENT (WHERE REQUIRED BY LAW) P1-N0066-A LONG-TERM CARE INSURANCE POLICY THIS PAGE INTENTIONALLY LEFT BLANK P1-N0066-A -2- POLICY SCHEDULE --------------- This policy schedule provides You with specific information about the product You selected. It tells You which benefits You chose and how much they will cost. General policy information is also provided.
BENEFITS - -------- Elimination Period per Lifetime............................ 75 Days --------- Maximum Daily Home and Adult Day Care Benefit.............. $ 50 --------- Maximum Daily Facility Benefit............................. $ 100 --------- Maximum Lifetime Benefit................................... $ 146,000 --------- Preferred Select Network................................... VENCOR --------- Preferred Select Provider Discount......................... 15% --------- This Policy [Includes/Does Not Include] a Nonforfeiture Benefit OPTIONAL BENEFITS - ----------------- Compound Automatic Increase Benefit Rider........................ Included PREMIUM SUMMARY - --------------- Total Annual Premium Before Discounts............................ $1,346.80 ----------- Total Annual Premium Less Spouse and/or Group Discounts.......... $1,212.12 ----------- Mode of Payment.................................................. Annual ----------- Renewal Premium Based on Mode of Payment......................... $1,212.12 ----------- GENERAL POLICY INFORMATION - -------------------------- Policy Number.................................................... 1234567 ------------ Effective Date of Coverage....................................... July 1, 1997 ------------ First Renewal Date............................................... July 1, 1998 ------------ Name of Insured.................................................. John A. Doe -----------
P1-N0066-A -3- GUIDE TO YOUR LONG-TERM CARE POLICY The following is a Guide to Your Long-Term Care Policy. It tells You what is included in Your policy and on what page(s) You can find it. Page(s) ------- Guaranteed Renewable; Premiums Subject to Change........................ 1 30-Day Review Period.................................................... 1 Check Your Application.................................................. 1 Policy Schedule......................................................... 3 SECTION 1: DEFINITIONS OF IMPORTANT TERMS............................... 7-12 . Activities of Daily Living............................................ 10 . Adult Day Care........................................................ 9 . Alternate Care Facility............................................... 8-9 . Caregiver Training.................................................... 11 . Chronically Ill....................................................... 9 . Cognitive Impairment.................................................. 10 . Effective Date of Coverage............................................ 12 . Elimination Period.................................................... 12 . Home and Community Based Care......................................... 7 . Home Convalescent Unit................................................ 7 . Home Health Care Agency............................................... 8 . Informal Caregiver.................................................... 11 . Licensed Health Care Practitioner..................................... 10 . Long-Term Care Facility............................................... 11 . Maintenance or Personal Services...................................... 9 . Maximum Lifetime Benefit.............................................. 12 . Medical Help System................................................... 10 . Medicare.............................................................. 12 . Plan of Care.......................................................... 10 . Pre-existing Condition................................................ 11 . Preferred Advantage Selected Provider................................. 12 . Qualified Long-Term Care.............................................. 7 . Respite Care.......................................................... 11 . We, Our, Us........................................................... 7 . You, Your, Yourself................................................... 7 SECTION 2: BENEFITS..................................................... 13-16 General Benefit Information............................................. 13 . What is in the Policy Schedule........................................ 13 . Limitations or Conditions on Eligibility for Benefits................. 13 . What Happens If You Terminate Your Policy............................. 13 . Coverage for Alzheimer's Disease...................................... 13 . No Need for Hospitalization........................................... 13 Home and Community-Based Care Benefits.................................. 14-15 . What Is The Home and Community-Based Care Benefit and How Does It Work...................................................... 14 P1-N0066-A -5- . Respite Care Benefit................................................... 14 . Medical Help Benefit................................................... 15 . Caregiver Training Benefit............................................. 15 Long-Term Care Facility Benefit.......................................... 15 . What is the Long-Term Care Facility Benefit and How Does it Work....... 15 . Bed Reservation Benefit................................................ 15 Preferred Select Provider Advantage...................................... 16-17 Waiver of Premium Benefit................................................ 18 Alternate Plan of Care Benefit........................................... 18 SECTION 3: EXCLUSIONS AND LIMITATIONS.................................... 19 . When this Policy Will Not Provide Benefits............................. 19 . Pre-existing Condition Limitation...................................... 19 SECTION 4: CLAIMS........................................................ 20-21 . Notifying Us of a Claim................................................ 20 . How to File a Claim.................................................... 20 . When to File a Claim................................................... 20 . Care Management Services............................................... 20 . When Your Claim is Paid................................................ 20 . How Claims are Paid.................................................... 21 . Our Rights to Obtain Information....................................... 21 . Misstatement of Your Age............................................... 21 . Limitations on Legal Actions........................................... 21 SECTION 5: PREMIUM PAYMENT AND REINSTATEMENT OF YOUR POLICY.............. 22-24 . Paying Premiums........................................................ 22 . What Happens When Premiums Are Not Paid................................ 22 . Unintentional Lapse Protection......................................... 22 . What Happens To Your Premiums if You Die............................... 22 . Putting the Policy Back in Force....................................... 22-23 . Putting the Policy Back in Force After Nonpayment of Premium Due to Cognitive Impairment or Functional Incapacity................. 23-24 SECTION 6: THE CONTRACT.................................................. 24-25 . What Makes Up the Contract............................................. 24 . Importance of Information on the Application/Time Limit on Certain Defenses..................................................... 24-25 P1-N0066-A -6- ================================================================================ SECTION 1: DEFINITIONS OF IMPORTANT TERMS This section provides the meaning of special terms used throughout this policy. The first letter of each word or words in a phrase is capitalized to help You easily recognize them wherever they appear in the policy. ================================================================================ THE FOLLOWING DEFINITIONS REFER TO THOSE INVOLVED IN THE CONTRACT ================================================================================ WE, OUR, US The Continental Casualty Company, CNA Plaza, Chicago, Illinois 60685. ================================================================================ YOU, YOUR, YOURSELF The insured named in the Policy Schedule. ================================================================================ THE FOLLOWING DEFINITIONS RELATE TO THE ELIGIBILITY FOR BENEFITS ================================================================================ HOME AND COMMUNITY-BASED CARE Qualified Long-Term Care which is provided: 1. in a Home Convalescent Unit by a Home Health Care Agency; or 2. in an Alternate Care Facility; or 3. in an Adult Day Care facility. ================================================================================ QUALIFIED LONG-TERM CARE Necessary diagnostic, preventive, therapeu- tic, curing, treating, mitigating, and rehabilitative services, and Maintenance or Personal Care Services, which: 1. are required by a Chronically ill individu- al, and 2. are provided pursuant to a Plan of Care prescribed by a Licensed Health Care Practitioner. ================================================================================ HOME CONVALESCENT UNIT 1. Your home; 2. a private home; 3. a home for the retired or aged; 4. a place which provides residential care; or 5. a section of a nursing facility providing only residential care. It does not mean a hospital. P1-N0066-A -7- ================================================================================ HOME HEALTH CARE AGENCY An entity which provides home health care or hospice services and: 1. has an agreement as a provider of home health care services or hospice care under the Medicare program; or 2. is licensed or accredited by state law as a Home Health Care Agency or hospice, if such licensing or accreditation is required by the state in which the care is received. For purposes of this policy, a licensed therapist, a registered nurse, a licensed practical nurse, or a licensed vocational nurse operating within the scope of his or her license will be considered a Home Health Care Agency. ================================================================================ ALTERNATE CARE FACILITY A facility that is engaged primarily in providing ongoing care and related services to inpatients in one location and meets all of the following criteria: 1. provides 24 hour a day care and services sufficient to support needs resulting from inability to perform Activities of Daily Living or Cognitive Impairment; and 2. has a trained and ready to respond employee on duty at all times to provide that care; and 3. provides 3 meals a day and accommo- dates special dietary needs; and 4. is licensed or accredited by the appropriate agency to provide such care, if such licensing or accreditation is required by the state in which the care is received; and 5. has formal arrangements for the services of a physician or nurse to furnish medical care in case of emergency; and 6. has appropriate methods and procedures for handling and administering drugs and biologicals. P1-N0066-A -8- These requirements are typically met by hospice care facilities or assisted living facilities that are either free standing facilities P1-N0066-A -9- or part of a life-care community. They may also be met by some personal care and adult congregate care facilities. They are generally NOT met by individual residences or independent living units. An Alternate Care Facility does not mean a Long-Term Care Facility, hospital or clinic, boarding home, or a place which operates primarily for the treatment of alcoholics or drug addicts. However, care or services provided in these facilities may be covered subject to the conditions of the Alternate Plan of Care Benefit provision. ================================================================================ ADULT DAY CARE A community-based group program that provides health, social, and related support services in a facility which is licensed or certified by the state as an Adult Day Care Center to impaired adults. It does not mean 24-hour care. ================================================================================ MAINTENANCE OR PERSONAL CARE Any care the primary purpose of which is the SERVICES provision of needed assistance with any of the disabilities as a result of which You are Chronically Ill (including the protection from threats to health and safety due to severe Cognitive Impairment). ================================================================================ CHRONICALLY ILL Certified by a Licensed Health Care Practitioner as: 1. being unable to perform (without substantial assistance from another individual) at least 2 Activities of Daily Living for a period of at least 90 days due to a loss of functional capacity, or 2. requiring substantial supervision to protect Yourself from threats to health and safety due to severe Cognitive Impairment. You will not be considered Chronically Ill for any period unless within the 12 months prior to such period a Licensed Health Care Practitioner has certified that You meet the above requirements. ================================================================================ P1-N0066-A -10- ================================================================================ PLAN OF CARE A program of care and treatment: 1. initiated by and approved in writing by a Licensed Health Care Practitioner before the start of such care and treatment; and 2. confirmed in writing at least once every 60 days. ================================================================================ LICENSED HEALTH CARE PRACTITIONER Any physician, registered professional nurse, or licensed social worker. ================================================================================ ACTIVITIES OF DAILY LIVING - (ADLS) The Activities of Daily Living are: 1. Eating. Feeding Yourself by getting food into Your body from a receptacle (such as a plate, cup or table) or by a feeding tube or intravenously. 2. Dressing. Putting on and taking off all items of clothing and any necessary braces, fasteners, or artificial limbs. 3. Bathing. Washing Yourself by sponge bath; or in either a tub or shower, including the task of getting in or out of the tub or shower. 4. Toileting. Getting to and from the toilet, getting on and off the toilet, and performing associated personal hygiene. 5. Transferring. Moving into or out of a bed, chair, or wheelchair. 6. Continence. The ability to maintain control of bowel and bladder function; or, when unable to maintain control of bowel or bladder function, the ability to perform associated personal hygiene, including caring for a catheter or colostomy bag. ================================================================================ COGNITIVE IMPAIRMENT A deficiency in Your short- or long-term memory, orientation as to person, place and time, deductive or abstract reasoning, or judgment as it relates to safety awareness. ================================================================================ MEDICAL HELP SYSTEM A communication system, located in your home, used to summon medical attention in case of a medical emergency. P1-N0066-A -11- ================================================================================ INFORMAL CAREGIVER The person who has the primary responsibility of caring for You in Your Home Convalescent Unit. A person who is paid for caring for You cannot be an Informal Caregiver. ================================================================================ CAREGIVER TRAINING Training provided by a Home Health Care Agency, Long-Term Care Facility, or hospital and received by the Informal Caregiver to care for You in Your residence. ================================================================================ RESPITE CARE Qualified Long-Term Care, provided in the Home Convalescent Unit by a Home Health Care Agency, to temporarily relieve the Informal Caregiver. ================================================================================ LONG-TERM CARE FACILITY A place which: 1. is licensed by the state where it is located; and 2. provides nursing care on an inpatient basis under the supervision of a physician; and 3. has 24-hour-a-day nursing services provided by or under the supervision of a registered nurse (R.N.), licensed vocational nurse (L.V.N.), or licensed practical nurse (L.P.N.), and 4. keeps a daily medical record of each patient; and 5. may be either a freestanding facility or a distinct part of a facility such as a ward, wing, unit, or swing-bed of a hospital or other institution. A Long-Term Care Facility does not mean a hospital or clinic, boarding home, a place which operates primarily for the treatment of alcoholics or drug addicts, or a hospice. However, care or services provided in these facilities may be covered subject to the conditions of the Alternate Plan of Care Benefit provision. ================================================================================ PRE-EXISTING CONDITION A health condition for which You received medical advice or treatment within the 6 P1-N0066-A -12- months before Your Effective Date of Coverage. P1-N0066-A -13- ================================================================================ EFFECTIVE DATE OF COVERAGE The date when coverage starts under Your policy. It is shown on the Policy Schedule. ================================================================================ ELIMINATION PERIOD The number of days in which covered Qualified Long-Term Care services are provided to You before this policy begins to pay benefits. It is shown on the Policy Schedule and can be satisfied by any combination of days of a Long-Term Care Facility stay or days of Home and Community-Based Care. These days of care or services need not be continuous but must be accumulated within a continuous period of 730 days. This Elimination Period has to be satisfied only once while Your policy is in effect. ================================================================================ MAXIMUM LIFETIME BENEFIT The total amount We will pay in Your lifetime for all benefits provided by Your policy. Your Maximum Lifetime Benefit is shown on the Policy Schedule. ================================================================================ PREFERRED SELECT PROVIDER A Long-Term Care Facility, Alternate Care Facility, Home Health Care Agency, or Adult Day Care center contracting with the Preferred Select Network. The list of such providers available on Your Effective Date of Coverage is included with Your policy. We will provide You with the most current list of such providers at Your request. You are not required to use a Preferred Select Provider for benefits to be payable under this policy. ================================================================================ PREFERRED SELECT NETWORK An organization with which We have an agreement to provide the Preferred Select Provider Advantage as described in Section 2. ================================================================================ MEDICARE The Health Insurance for the Aged Act, Title XVIII of the Social Security Amendments of 1965 as then constituted or later amended. P1-N0066-A -14- ================================================================================ SECTION 2: BENEFITS This section provides the following information about Your policy: 1. Your Benefits under this policy; 2. The conditions under which You will receive benefits; 3. How long You will receive benefits. You can refer back to Section 1 for definitions of terms found below: ================================================================================ GENERAL BENEFIT INFORMATION ================================================================================ WHAT IS IN THE POLICY SCHEDULE The Policy Schedule shows You the Maximum Daily Home and Adult Day Care Benefit, the Maximum Daily Facility Benefit, and the Maximum Lifetime Benefit. It also includes optional benefit information, if applicable, and premium and general policy information. LIMITATIONS OR CONDITIONS ON Except where otherwise stated, no benefits ELIGIBILITY FOR BENEFITS under Your policy will be paid: (1) for any services You receive or expenses You incur unless: (a) such services are required because You are Chronically Ill; and (b) You satisfy the Elimination Period; and (2) in excess of the Maximum Lifetime Benefit WHAT HAPPENS IF YOU TERMINATE If you terminate Your policy, it will not YOUR POLICY affect any claim beginning before such termination. We will continue to provide benefits, subject to all of the provisions of Your policy, until You have not received Qualified Long-Term Care for at least 180 consecutive days. COVERAGE FOR ALZHEIMER'S DISEASE Your policy provides benefits, subject to all of its provisions, for nervous or mental disorders of organic origin, including Alzheimer's Disease or senile dementia, which are determined by clinical diagnosis or tests. NO NEED FOR HOSPITALIZATION You are not required to be hospitalized before receiving benefits under Your policy. P1-N0066-A -15- ================================================================================ HOME AND COMMUNITY-BASED CARE BENEFITS ================================================================================ WHAT IS THE HOME AND COMMUNITY- Each day You require Home and BASED CARE BENEFIT AND HOW DOES Community-Based Care, We will pay benefits IT WORK as follows: A. For Qualified Long-Term Care received in a Home Convalescent Unit or Adult Day Care center, the lesser of: 1. The Maximum Daily Home and Adult Day Care Benefit; or 2. The total of: a. 100% of the expenses incurred for occupational, physical, respiratory, or speech therapy; or nursing care services provided by a registered nurse (R.N.) or a licensed practical or vocational nurse (L.P.N. or L.V.N.), and b. 80% of the expenses incurred for services provided by a medical social worker, home health aide, homemaker and similar services; and c. 80% of the expenses incurred for hospice care and Adult Day Care. B. For Qualified Long-Term Care received in an Alternate Care Facility, including room and board, the lesser of: 1. The Maximum Daily Facility Benefit shown in the Schedule, or 2. 80% of the expenses incurred for such care. RESPITE CARE BENEFIT In addition to any benefits payable above, We will pay for up to 21 days of Respite Care per calendar year. For each day of Respite care, We will pay the lesser of: 1. The Maximum Daily Home and Adult Day Care Benefit, or 2. 80% of the expenses incurred for such care. No benefits will be paid before the Elimination Period is satisfied. Unused days cannot be carried over into the next calendar year. P1-N0066-A -16- MEDICAL HELP BENEFIT We will pay the actual expense You incur each month, up to 25% of the Maximum Daily Home and Adult Day Care Benefit, for up to 12 months in Your lifetime, for the rental or lease of a Medical Help System for Your home during a Plan of Care. We will only pay the Medical Help Benefit for a system installed in Your home while Your policy is in effect. We will not pay for any charges for normal telephone service while the system is installed or for a home security system. CAREGIVER TRAINING BENEFIT If You require Qualified Long-Term Care, We will pay the expenses incurred for Caregiver Training, not to exceed 5 times the Maximum Daily Home and Adult Day Care Benefit during any one Plan of Care. The Elimination Period does not apply to this benefit. If You require a stay in a Long-Term Care Facility or are hospitalized, the Caregiver Training Benefit will only be payable if the training will make it possible for You to return to or remain in a Home Convalescent Unit where You can be cared for by the Informal Caregiver. ================================================================================ LONG-TERM CARE FACILITY BENEFIT ================================================================================ WHAT IS THE LONG-TERM CARE If You require Qualified Long-Term Care FACILITY BENEFIT AND HOW DOES IT in a Long-Term Care Facility, for each WORK day of Your stay We will pay the lesser of: 1. The Maximum Daily Facility Benefit, or 2. The charges made by the Long-Term Care Facility for Your Qualified Long-Term Care, including room and board. BED RESERVATION BENEFIT We will continue to pay the Long-Term Care Facility Benefit when You are charged for Your room in a Long-Term Care Facility while You are temporarily absent during the course of Your Long-Term Care Facility stay. This Bed Reservation Benefit will be limited to 21 days per calendar year. Unused days cannot be carried over into the next calendar year. Such days may be used to satisfy the Elimination Period. P1-N0066-A -17- ================================================================================ PREFERRED SELECT PROVIDER ADVANTAGE ================================================================================ WHAT IS THE PREFERRED SELECT We have entered into an agreement with a PROVIDER ADVANTAGE AND HOW DOES Preferred Select Network to help ensure IT WORK Your access to quality care at a reasonable cost. It is solely at Your option to elect to receive care from a Preferred Select Provider. PREFERRED SELECT PROVIDER If You receive covered Qualified Long-Term DISCOUNT Care from a Preferred Select Provider, the charges for such care will be reduced by the Preferred Select Provider Discount shown on the Policy Schedule. PREFERRED ACCESS TO CARE If You require covered Qualified Long Term Care, the Preferred Select Network shall guarantee that You will receive priority for access to such care from a Preferred Select Provider. 1. You will receive access to such care from Your Location of Choice, as defined below, on a timely and priority basis as soon as a facility bed or a service is available. 2. Because availability of care may vary by location, in the event such care is not available within 60 days of Your request at Your Location of Choice, the Preferred Select Network will identify and provide access to: a. A Preferred Select Provider within 50 miles of Your Location of Choice; or b. if no such care is available from a Preferred Select Provider within 50 miles of Your Location of Choice, a Preferred Select Provider as close to your Location of Choice as possible. 3. In addition, in states designated as "Special Access States" in the then current list of Preferred Select Providers, if access to a Preferred Select Provider Long-Term Care Facility within 50 miles of Your Location of Choice is not possible within 60 days: P1-N0066-A -18- a. The Preferred Select Network will identify a Long-Term Care Facility, located within 50 miles of Your Location of Choice or as close as possible, that is qualified to provide covered care and is not a member of the Preferred Select Network; and b. If You receive care from such Long- Term Care Facility, the Preferred Select Network will provide reimbursement such that Your out-of- pocket cost for such care will be the same as if the provider had been a Preferred Select Provider. Any additional payments will not count against Your Maximum Lifetime Benefit. YOUR LOCATION OF CHOICE The site of a Preferred Select Provider selected by You from the current list of those contracted with the Preferred Select Network. P1-N0066-A -19- ================================================================================ WAIVER OF PREMIUM BENEFIT ================================================================================ WHAT IS THE WAIVER OF PREMIUM After a Long-Term Care Facility or BENEFIT AND HOW DOES IT WORK Alternate Care Facility stay of 90 consecutive days (including the days used to satisfy the Elimination Period), You do not have to pay any future premiums that become due during any further stay under a Plan of Care. Premiums that become due will be waived until you leave the Long-Term Care Facility or Alternate Care Facility or until benefits are no longer payable for such stay, whichever occurs first. After that, if the Maximum Lifetime Benefit has not been paid, You must pay the premiums when due. ================================================================================ ALTERNATE PLAN OF CARE BENEFIT =============================================================================== WHAT IS THE ALTERNATE PLAN OF If You would otherwise require a Long-Term CARE BENEFIT AND HOW DOES IT WORK Care Facility stay, We may' pay for alternate services, devices or types of care under a written Alternate Plan of Care, if such plan is medically acceptable. This Alternate Plan of Care: 1. must be mutually agreed to by You, Your physician, and Us; and 2. will be developed by or with Licensed Health Care Professionals. This plan may specify special treatments or different sites or levels of care. Some of the services You may receive may differ from those otherwise covered by Your policy. In this case, benefits will be paid at the levels specified and agreed to in the Alternate Plan of Care. We are not obligated to provide benefits for services received prior to such agreement. Agreement to participate in an Alternate Plan of Care will not waive any of Your or Our rights under the policy. Any benefits payable under this provision will count against the Maximum Lifetime Benefit. P1-N0066-A -20- ================================================================================ SECTION 3: EXCLUSIONS AND LIMITATIONS This section tells You under what circumstances benefits are not payable even if You would otherwise qualify for benefits under another section of this policy. ================================================================================ WHEN THIS POLICY WILL NOT PROVIDE This policy will not pay benefits for any BENEFITS care or services which are: 1. provided without charge in the absence of insurance; or 2. due to a condition for which You can receive benefits under Workers' Compensation or the Occupational Disease Act or Law; or 3. due to mental, psychoneurotic, or personality disorders without evidence of organic disease (Alzheimer's Disease and senile dementia are not excluded from coverage); or 4. the result of war or any act of war; or 5. a. reimbursable under title XVIII of the Social Security Act (Medicare) or would be so reimbursable but for the application of a deductible or coinsurance amount; or b. reimbursable under any other federal, or state health care plan or law, except Medicaid. We will reduce Our benefits payable by the dollar amount paid from the government health care plan or law to the extent that the combination of Our coverage and governmental coverage exceeds 100% of the actual charge for the covered services. PRE-EXISTING CONDITION LIMITATION We will not pay for a loss due to a Pre-existing Condition which You did not disclose in the application unless the loss begins more than 6 months after the Effective Date of Coverage. However, providing incorrect information may cause Your policy to be voided. If this policy replaces another long-term care insurance policy, the 6-month time period above is waived to the extent it was satisfied under the replaced policy. P1-N0066-A -21- Losses due to Pre-existing Conditions shown on the application are covered immediately. ================================================================================ SECTION 4: CLAIMS This section tells You: 1. How to notify Us of a claim; 2. How to file a claim; 3. When to file a claim; 4. When and how claims are paid; 5. Our rights in investigating a claim; 6. What happens to a claim if Your age is stated incorrectly on the application; and 7. Your legal rights regarding claims. ================================================================================ NOTIFYING US OF A CLAIM You must notify Us in writing of a claim within 60 days after a covered loss begins, or as soon as reasonably possible. The notice must identify You and be sent to Us at Our Home Office, CNA Plaza, Chicago, Illinois 60685 or Your agent. HOW TO FILE A CLAIM We will send You a claim form within 15 days after We receive notice of Your claim. If We do not, You can meet the requirements of providing Us with a written proof of loss by sending Us a written statement describing the type and nature of Your loss. WHEN TO FILE A CLAIM You must send Us written proof of loss within 90 days after the end of the period for which You are claiming benefits. If this is not possible, Your claim will not be affected. However, unless You are legally incapable, You must notify Us within one year from the time proof is otherwise required. CARE MANAGEMENT SERVICES During Your claim, We can, with Your agreement, provide You with access to care management professionals who can work with You, Your family, and Your doctor to determine and monitor the appropriate plan of care, including assessments of Your situations and investigation of available care resources. This service will be provided with no cost to You and will not count against your benefit limits. WHEN YOUR CLAIM IS PAID We will pay Your claim immediately after We receive due written proof of loss. P1-N0066-A -22- HOW CLAIMS ARE PAID If You receive covered care that qualifies for the Preferred Select Provider Discount, We will pay the amounts payable under this policy for such care directly to the provider. For all other covered care, We will pay benefits to You, or Your estate, unless You have requested in writing that payment be made otherwise. If benefits are payable to Your estate, We may pay up to $1,000 to any relative of Yours We feel is entitled to the benefits. Any payments made in good faith will discharge Us to the extent of the payment. OUR RIGHTS TO OBTAIN INFORMATION At Our expense, We have the right to have a physician or, other qualified medical personnel examine You or obtain an assessment of Your impairment as often as reasonably necessary while You are receiving benefits. MISSTATEMENT OF YOUR AGE If Your age has been misstated on the application, Your policy benefits will be based on the amount Your premium would have purchased at Your correct age. if We would not have issued a policy, We will refund the premium You paid. CLAIMS APPEAL If Your claim is denied, You may request reconsideration in writing. We will respond to the request within 30 days. LIMITATIONS ON LEGAL ACTIONS You cannot sue or bring legal action against Us: 1. before 60 days after We receive written proof of loss; or 2. more than three years after written proof of loss is required. P1-N0066-A -23- ================================================================================ SECTION 5: PREMIUM PAYMENT AND REINSTATEMENT OF YOUR POLICY This section tells you: 1. When Your premium should be PAID; 2. What happens if Your premium is not paid within a certain time period; 3. What happens to Your premium at Your death; and 4. How to reinstate Your policy if it is terminated. ================================================================================ PAYING PREMIUMS Premiums are to be paid with United States currency. They are due at the beginning of each policy term. Payment may be made to Us at Our Home Office at CNA Plaza, Chicago, Illinois 60685, or to Your agent. You can change the policy term if You notify Us in writing. WHAT HAPPENS WHEN PREMIUMS ARE Except as provided under the Unintentional NOT PAID Lapse Protection below, You are allowed a 31-day grace period for late payment of each premium due after the first premium. Your policy will remain in force during this period. If You do not pay Your premium by the end of the grace period, the policy will terminate. UNINTENTIONAL LAPSE PROTECTION You have the right to designate an individual in addition to Yourself to receive notification when Your policy will terminate because of non-payment of premium. We will give the person You designate notification of the impending termination at least 30 days before the date such termination will occur The notice will be given to the designated person no earlier than 30 days after the premium due date. On every renewal of Your policy, You will be given the right to change the designated person. WHAT HAPPENS TO YOUR PREMIUMS IF When We are notified of Your death, We will YOU DIE make a refund of any unearned premium paid for the period beyond Your death. PUTTING THE POLICY BACK IN FORCE If Your policy is terminated, a subsequent acceptance of premium by Us or by Our agent without requiring an application for reinstatement will reinstate Your policy P1-N0066-A -24- If We do require an application for reinstatement and accept Your premium, We may issue a conditional premium receipt. If We approve Your application, Your policy will be reinstated as of the date of Our approval. If We do not approve Your application, We will notify You in writing within 45 days after the date of Your application. If We do not notify You within 45 days, the policy will be reinstated on the 45th day after the date of the conditional premium receipt. The reinstated policy will cover only losses due to conditions that begin after the date of reinstatement. In all other aspects, Your rights and Ours will be the same as before the policy terminated, unless there are new provisions added due to the reinstatement. The premium We accept for reinstatement may be used for the period for which premiums had not been paid. We can apply the premium back for as many as 60 days before the date of reinstatement. PUTTING THE POLICY BACK IN FORCE Also, within 6 months following AFTER NONPAYMENT OF PREMIUM DUE termination of Your policy for non-payment TO COGNITIVE IMPAIRMENT OR of premiums, You, or any person authorized FUNCTIONAL INCAPACITY to act on Your behalf, may request reinstatement of Your policy on the basis that You suffered from Cognitive Impairment or functional incapacity, or if You would otherwise qualify for benefits under the policy, at the time of policy termination. We will require evidence of clinical diagnosis or tests demonstrating that You suffered from Cognitive Impairment or functional incapacity at the time of policy termination. If such demonstration substantiates, to our satisfaction, the existence of Cognitive Impairment or functional incapacity at the time of policy termination, We will reinstate Your policy. The clinical diagnosis and tests will be at Your expense. Functional incapacity means the Inability to Perform at least Two Activities of Daily Living. If We reinstate Your policy after nonpayment of premium due to Cognitive Impairment, or functional incapacity: P1-N0066-A -25- 1. This reinstatement shall not require any evidence of insurability. 2. The reinstated policy shall cover loss occurring from the date of policy cancellation. There shall be no gaps in coverage. Coverage will be at the level provided prior to reinstatement. 3. Premium shall be paid from the date of the last premium payment at the rate which would have been in effect had the policy remained in force. Payment must be made within 15 days following Our request. ================================================================================ SECTION 6: THE CONTRACT This section tells You: 1. What makes up the contract; 2. Situations where time limits apply to claims ================================================================================ WHAT MAKES UP THE CONTRACT This policy is a legal, binding contract between You and Us. The contract is made up of: 1. the policy; 2. the application; and 3. any attached papers. No one can change any part of this policy or waive any of its provisions unless the change is approved in writing on the policy by one of Our officers. IMPORTANCE OF INFORMATION ON THE We issued this policy based on information APPLICATION/TIME LIMIT ON CERTAIN You provided. Any incorrect or omitted DEFENSES information known to You at the time of application may cause Your policy to be voided or a claim to be denied. If Your policy has been in force for less than six (6) months, We may rescind it or deny any otherwise valid claim upon a showing of misrepresentation that is material to the acceptance of coverage. If Your policy has been in force for at least six (6) months but less than two (2) years, We may rescind it or deny any otherwise valid claim upon a showing of misrepresentation that is both material to the acceptance of P1-N0066-A -26- coverage and which pertains to the conditions for which benefits are sought. After Your policy has been in force for 2 years, only fraudulent misstatements in the application can be used to void the policy or deny a claim for loss incurred after the 2-year period. If We have paid benefits under this policy, such benefit payments may not be recovered by Us in the event that Your policy is rescinded. P1-N0066-A -27- DRAFT -- JULY 10, 1997 -- PAGE 1 OF 17 -- DRAFT EXHIBIT "B" ----------- INDIVIDUAL LONG TERM CARE QUOTA SHARE COINSURANCE AGREEMENT BETWEEN CONTINENTAL CASUALTY COMPANY AN ILLINOIS STOCK INSURANCE COMPANY WITH ITS HOME OFFICE LOCATED IN CHICAGO, ILLINOIS AND VALLEY FORGE LIFE ASSURANCE COMPANY AN ILLINOIS STOCK LIFE INSURANCE COMPANY WITH ITS HOME OFFICE LOCATED IN CHICAGO, ILLINOIS (HEREINAFTER COLLECTIVELY REFERRED TO AS THE CEDING COMPANY) AND VENCOR INSURANCE COMPANY AN INDIANA INSURANCE COMPANY (HEREINAFTER REFERRED TO AS THE REINSURER) WITNESSETH: WHEREAS, Vencor, Inc., a Kentucky corporation ("Vencor") and CNA have executed, prior to or contemporaneously with the execution of this Agreement, a Strategic Alliance Agreement which defines the relationship between CNA, Vencor, and the REINSURER; and WHEREAS, the CEDING COMPANY shall issue as of the effective date of this Agreement and in the future certain individual long term care insurance policies which it wishes to reinsure with the REINSURER; and WHEREAS, the CEDING COMPANY wishes to obligate itself to cede to the REINSURER a portion of its liability with respect to the Vencor Gold policies; and WHEREAS, the REINSURER wishes to obligate itself to assume such portion of the CEDING COMPANY's liability with respect to the Vencor Gold policies. NOW, THEREFORE, in consideration of the above premises and the covenants hereinafter set forth, the parties, the CEDING COMPANY and the REINSURER, hereby agree as follows: DRAFT -- JULY 10, 1997 -- PAGE 1 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 2 OF 17 -- DRAFT I. PRECEDENCE OF PROVISIONS; DEFINITIONS A. To the extent that this Agreement contains a provision or provisions in conflict with the Strategic Alliance Agreement, the provisions of this Agreement shall govern. B. Any term defined in the Strategic Alliance Agreement which is not defined in this Agreement shall have the meaning ascribed by the Strategic Alliance Agreement unless the term is explicitly redefined or the context clearly requires another definition. C. "Affiliate" of any particular person or entity means any other person or entity controlling, controlled by or under common control with such particular person or entity. D. "Agreement" means this Individual Long Term Care Quota Share Coinsurance Agreement, including all Exhibits which are hereby incorporated into and made a part of this Agreement, as originally executed and as may be amended from time to time. E. "Preferred Access Agreement" means the agreement entered into by a wholly owned Vencor subsidiary, Vencor Provider Network, Inc. ("VPN"), and CNA for VPN to arrange for the provision of Covered Services by Preferred Advantage Selected Providers to Members. F. "Strategic Alliance Agreement" means the agreement entered into by Vencor Inc. ("Vencor"), and CNA which describes and defines the relationship between CNA, Vencor, VIC, and VPN. G. "Subsidiary" means any corporation of which the securities or the majority of the ordinary voting power in electing the board of directors are, at the time as of which any determination is being made, owned by the CEDING COMPANY or REINSURER either directly or through one or more subsidiaries. II. CESSIONS; SAMPLE COPIES. A. The CEDING COMPANY agrees to cede and REINSURER agrees to assume a portion of the liability under the Vencor Gold policies. B. The effective date of this Agreement is 12:01 A.M. Central Standard Time, _________. C. This Agreement shall remain continuously in force until terminated in accordance with the respective provisions of this Agreement. DRAFT -- JULY 10, 1997 -- PAGE 2 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 3 OF 17 -- DRAFT D. The CEDING COMPANY hereby represents and warrants that the Vencor Gold policies issued to Members shall conform with the sample insurance policies attached to this Agreement as Appendix "A". III. CEDING COMPANY'S LIABILITY. A. REINSURANCE PREMIUM. The CEDING COMPANY is liable for payment of the Reinsurance Premium (defined below) to the REINSURER within thirty (30) days following the end of each calendar month. B. RECOVERY. The CEDING COMPANY shall credit the REINSURER with fifty percent (50%) of any amounts received by the CEDING COMPANY as recovery. Expenses directly related to recovery may be netted out before the recovery is distributed or credited; provided, however, that consent of the REINSURER shall be required prior to expenditure of recovery expense in excess of fifty percent (50%) of any loss. C. DEFENSE OF CLAIMS. The CEDING COMPANY is responsible for the defense of claims and shall have the right to select attorneys of its choosing in defending claims. The REINSURER may, at its own expense, participate in an advisory capacity in the defense of any claim. IV. REINSURER'S LIABILITY. A. REINSURER'S LIABILITY. The "REINSURER's Liability" shall be to the CEDING COMPANY for fifty percent (50%) of the sum of: 1. Benefits as that term is defined herein; and 2. the CEDING COMPANY "Expense Allowance" as stated in Appendix "C" which is attached hereto and made a part hereof; and 3. the CEDING COMPANY "Sales Commission Allowance" as set out in Appendix "C". B. CHANGES IN THE LAW. It is the intention of the parties to this Agreement that any expenses or costs associated with changes in state law or regulations affecting the Vencor Gold policies, including premium taxes, which are not specifically enumerated or allocated in this Agreement shall be shared by the parties as follows: by the CEDING COMPANY in the amount of fifty percent (50%) and by the REINSURER in the amount of the fifty percent (50%). DRAFT -- JULY 10, 1997 -- PAGE 3 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 4 OF 17 -- DRAFT C. BENEFITS. 1. "Benefits" shall mean amounts attributable to claims incurred on Policies issued while this Agreement is in force. 2. Benefits shall equal the sum of the following: a) amounts which the CEDING COMPANY actually pays in accordance with the terms of a Vencor Gold policy or as a result of settlement of a claim; and b) legal fees incurred in establishing liability for any particular benefit, whether in the claims adjudication process or because of questions raised or litigation brought by a party seeking benefits under the Vencor Gold policies; and c) interest paid pursuant to law or awarded by a court or paid as part of a settlement made in connection with a dispute in a) above; and d) damages paid in accordance with state law, so long as such damages are required to be paid only as a result of claims denial and not for wrongdoing, i.e., if state law requires the insurer to pay the claim and all attorneys fees upon adjudication of the good faith denial of a claim; and e) special investigative fees, whether for fraud or any other special investigation. D. EXTRA-CONTRACTUAL DAMAGES. In the event of extra-contractual damages assessed against the CEDING COMPANY as a result of the contest of any claim, the REINSURER shall pay fifty percent (50%) of such damages provided that the REINSURER had or should have had actual knowledge of the CEDING COMPANY' s denial and concurred in writing with the CEDING COMPANY's denial. V. REINSURANCE PREMIUM. A. The Reinsurance Premium shall be equal to fifty percent (50%) of the gross paid premium received for the sale of the Vencor Gold policies, including first year and renewal premiums. For purposes of this Agreement and any exhibits attached hereto, "gross paid premium" shall mean the premiums paid on Vencor Gold policies issued by the CEDING COMPANY. Within 30 days following the end of each calendar month, the CEDING COMPANY shall pay the DRAFT -- JULY 10, 1997 -- PAGE 4 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 5 OF 17 -- DRAFT REINSURER the Reinsurance Premium and the REINSURER shall pay the CEDING COMPANY the REINSURER's Liability. B. Except as provided by a final arbitration order, the CEDING COMPANY shall be liable for the payment of Reinsurance Premium due to the REINSURER up to and including the effective date of termination. The REINSURER shall waive its right to terminate for nonpayment of Reinsurance Premium upon acceptance of the past due Reinsurance Premium. Failure by the REINSURER to exercise its right under this subsection will not waive the REINSURER's right to terminate the Agreement at a later date for a subsequent nonpayment of Reinsurance Premium. VI. RESERVES AND PERIODIC REPORTS. A. The REINSURER will establish reserves on a basis that is acceptable to the CEDING COMPANY and which complies with every applicable state law defining circumstances under which a ceding insurer may take credit for reinsurance. B. The REINSURER will not be required to sign any statement attesting to the value of reserves that should be held by the CEDING COMPANY for either statutory, tax, or GAAP reporting purposes. C. The CEDING COMPANY will provide the REINSURER with monthly reports of premiums, medical losses, claims expenses, and significant claims and reserves therefor, pursuant to Appendix "???", attached hereto and by this reference made a part hereof. VII. AUDIT. A. VIC shall have the authority to inspect and audit the books and records of CNA and its assignees which pertain to this Agreement, at any time during reasonable business hours, and they may make copies or extracts of any records pertaining thereto. CNA shall notify VIC of any audit or pending audit of CNA by any person or entity other than either of the parties or any of their agents. B. CNA shall have the authority to inspect and audit the books and records of VIC and its assignees which pertain to this Agreement, at any time during reasonable business hours, and they may make copies or extracts of any records pertaining thereto. VIC shall notify CNA of any audit or pending audit of VIC by any person or entity other than either of the parties or any of their agents. DRAFT -- JULY 10, 1997 -- PAGE 5 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 6 OF 17 -- DRAFT VIII. TAXES. The CEDING COMPANY and the REINSURER hereby enter into an election under Internal Revenue Code Regulations section 1.848-2(g) (8) whereby: A. For each taxable year under this Agreement, the party with the net positive consideration, as defined in the regulations promulgated under Internal Revenue Code Section 848, will capitalize specified policy acquisition expenses with respect to this Agreement without regard to general deductions limitation of Section 848 (c) (1); B. The CEDING COMPANY and the REINSURER agree to exchange information pertaining to the net consideration under this Agreement each year to ensure consistency or as otherwise required by the Internal Revenue Service; C. The CEDING COMPANY will submit to the REINSURER by May 1 of each year its calculation of the net consideration for the preceding calendar year. This schedule of calculations will be accompanied by a statement signed by an officer of the CEDING COMPANY stating that the CEDING COMPANY will report such net consideration in its tax return for the preceding calendar year; D. The REINSURER may contest such calculation by providing an alternative calculation to the CEDING COMPANY in writing within thirty (30) days of the REINSURER's receipt of the CEDING COMPANY's calculation. If the REINSURER does not so notify the CEDING COMPANY, the REINSURER will report the net consideration as determined by the CEDING COMPANY in the REINSURER's tax return for the previous calendar year; E. If the REINSURER contests the CEDING COMPANY's calculation of the net consideration, the parties will act in good faith to reach an agreement as to the correct amount within thirty (30) days of the date the REINSURER submits its alternative calculation. If the CEDING COMPANY and the REINSURER reach agreement on the net amount of consideration, each party shall report such amount in their respective tax returns for the previous calendar year; F. The CEDING COMPANY and the REINSURER each represents and warrants that it is subject to taxation by the United States under either Subchapter L of Chapter 1, or Subpart F of Subchapter N of Chapter 1 of the Internal Revenue Code of 1986, as amended. IX. INSOLVENCY. A. INSOLVENCY OF THE CEDING COMPANY. DRAFT -- JULY 10, 1997 -- PAGE 6 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 7 OF 17 -- DRAFT 1. In the event of the insolvency of the CEDING COMPANY, this Agreement shall be automatically terminated as of the date of insolvency. In such event, the reinsurance hereunder shall be payable by the REINSURER, without diminution, because of the insolvency of the CEDING COMPANY, on the basis of this Agreement and the CEDING COMPANY's liabilities which were incurred prior to termination. It is agreed, however, that the liquidator, receiver or statutory successor of the insolvent CEDING COMPANY shall give written notice to the REINSURER of the tendency of a claim against the insolvent CEDING COMPANY on the Vencor Gold policies reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings and that during the pendency of such claim the REINSURER may investigate such claim and interpose, at its own expense, in the proceedings where such claim is to be adjudicated, any defense or defenses which it may deem available to the CEDING COMPANY or its liquidator, receiver or statutory successor. The expense thus incurred by the REINSURER shall be chargeable, subject to court approval, against the insolvent CEDING COMPANY as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the CEDING COMPANY solely as a result of the defense undertaken by the REINSURER. 2. Notwithstanding anything in the provisions of this Section to the contrary, the liability of the REINSURER shall not increase because of the insolvency of the CEDING COMPANY. B. INSOLVENCY OF THE REINSURER. In the event the REINSURER shall become insolvent, this Agreement shall automatically be terminated, as of the date of insolvency. X. ARBITRATION. A. RESOLUTION OF DISPUTES BY ARBITRATION. The parties agree that all controversies or disputes arising out of, in connection with, or which relate to this Agreement or performance under this Agreement, which cannot be resolved by mutual agreement, shall be submitted to arbitration for resolution, as herein provided. B. SELECTION OF ARBITRATORS. 1. Arbitration shall be by a panel of three neutral arbitrators, each of which shall be an active or former officer of an insurance company which, at the time of the demand for DRAFT -- JULY 10, 1997 -- PAGE 7 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 8 OF 17 -- DRAFT arbitration, issues or has recently issued policies of insurance of the type covered by this Agreement. In addition, each arbitrator shall meet the requirements of, and shall agree to act in accordance with, the Code of Ethics for Arbitrators in Commercial Disputes sponsored by the American Bar Association and the American Arbitration Association, except to the extent that conduct prohibited by such Code is specifically permitted by the terms of this Agreement. 2. Within thirty (30) days after receipt of a demand for arbitration, each party shall designate its arbitrator. The designation shall contain information sufficient to allow the other party to judge the qualifications of the person designated as arbitrator. Thereafter, each party shall have fifteen (15) days within which to accept the arbitrator designated by the other party or to challenge the qualifications of the arbitrator so designated. 3. The arbitrators so designated and accepted shall, within thirty (30) days after acceptance, select the third arbitrator. Arbitrators may consult with the party nominating them as to acceptability of persons under consideration for appointment by them as third arbitrator. If the third arbitrator has not been selected within that time, each arbitrator shall, within fifteen (15) days, nominate three qualified individuals to serve as the third arbitrator. The American Arbitration Association shall appoint a third arbitrator from the persons nominated who meet the qualifications described in this Agreement. C. ARBITRATION PROCEDURE. 1. Arbitration shall begin upon the filing by one of the parties of a written demand for arbitration. Such demand shall contain a statement setting forth the nature of the dispute, the amount involved, if any, and the remedy sought. Such demand shall be served upon the other party by certified mail, return receipt requested. 2. Within sixty (60) days after the arbitration panel has been finalized, the parties shall submit their dispute or controversy to the panel of arbitrators for decision. The site for the arbitration hearing shall be Chicago, Illinois, or as mutually agreed by the parties. The rules for the gathering of evidence, taking of discovery or depositions, if any, and the conduct of the hearing shall be such rules as are included in the Commercial Arbitration Rules of the American Arbitration Association as of DRAFT -- JULY 10, 1997 -- PAGE 8 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 9 OF 17 -- DRAFT the date the arbitration panel was finalized, to the extent not inconsistent with the terms of this Agreement. The parties may agree to use modified rules to expedite the arbitration process. The formal rules of evidence need not apply, in the arbitrators' discretion, to the hearing. 3. All arbitrators shall participate in the deliberations and a decision on any matter shall be by a majority of the arbitrators. 4. The final decision of the arbitration panel shall be submitted in writing, in such form as the arbitrators determine, within thirty (30) days after the conclusion of the arbitration hearing. The decision of the arbitrators shall be final, except that an appeal may be taken only for one or more of the reasons assigned for vacating an award by the Uniform Arbitration Act as enacted by the State of ______, which law shall apply and govern the arbitration process contemplated hereunder, to the extent not inconsistent with this Agreement. D. COSTS OF ARBITRATION PROCEEDING. Each party shall bear the cost of its own arbitrator. The costs of the arbitration proceeding, including the fees of the third arbitrator, shall be borne equally by the parties, unless the arbitration panel orders otherwise. The panel, in its discretion, may also allocate and award other reasonable out- of-pocket costs of the parties, including reasonable attorney's fees, as it deems fair and equitable under the circumstances. E. CONFIDENTIALITY. The parties agree, and the appointed arbitrators shall agree as part of their acceptance of nomination, to keep confidential and not disclose to persons not connected with the arbitration the details of the arbitration proceeding and all information received by them in connection therewith, except as may be required by process of law. XI. CONFIDENTIAL INFORMATION. A. During the course of performance under this Agreement, the REINSURER will obtain or have access to certain proprietary information of the CEDING COMPANY or its affiliates or subsidiaries including, without limitation, names of contract owners, insureds, beneficiaries, the identity and production of the CEDING COMPANY's producers, compensation levels, the identity and types of insurance purchased, the CEDING COMPANY's distribution network (the "CEDING COMPANY Confidential Information"). The CEDING COMPANY Confidential Information shall also include rate manuals, experience reports, and underwriting standards to the extent such DRAFT -- JULY 10, 1997 -- PAGE 9 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 10 OF 17 -- DRAFT information applies specifically to the CEDING COMPANY's Policyholders and Vencor Gold policies. Each party acknowledges that all such material is offered on a confidential basis, for the sole purpose of enhancing this Agreement. Further each party agrees that the original owner of these materials is deemed to be the sole owner of these materials. The REINSURER will only disclose the CEDING COMPANY Confidential Information to those persons who require such information for the purpose of this Agreement and who have been advised and agree to be bound by the terms of this paragraph. B. During the course of performance under this Agreement, the CEDING COMPANY will obtain or have access to certain proprietary information of the REINSURER or its affiliates or subsidiaries including, without limitation, rate manuals, experience reports, and underwriting standards to the extent such information applies specifically to Vencor Gold policies(the "REINSURER Confidential Information"). Each party acknowledges that all such material is offered on a confidential basis, for the sole purpose of enhancing this Agreement. Further each party agrees that the original owner of these materials is deemed to be the sole owner of these materials. The CEDING COMPANY will only disclose the REINSURER Confidential Information to those persons who require such information for the purpose of this Agreement and who have been advised and agree to be bound by the terms of this paragraph. C. Each party further warrants, represents, undertakes and agrees, for itself, its agents, employees and representatives: 1. to keep the other party's Confidential Information confidential to the extent it is not already available publicly; and 2. to use the other party's Confidential Information only as is necessary to carry out the terms and conditions of this Agreement; and 3. not to disclose the other party's Confidential Information to any third party without the prior written consent of the party who has claim to the Confidential Information under the terms of this Agreement. Provided, however, that such disclosure is permitted if it is made in accordance with every other provision of this Section and it is made to a direct agent or a direct retrocessionairre of the party making the disclosure. Provided, further that such disclosure may be permitted if required by applicable law or governmental regulations or by DRAFT -- JULY 10, 1997 -- PAGE 10 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 11 OF 17 -- DRAFT order of a court of competent jurisdiction, in which case prior to making such disclosure written notice must be given to the party with legal right of ownership under this Agreement. Provided, further that such notice shall describe in reasonable detail the proposed content of such disclosure and shall permit the non-disclosing party to review and comment upon the form and substance of such disclosure. XII. TERMINATION. A. AUTOMATIC TERMINATION. This Agreement shall terminate for new business automatically if the REINSURER becomes insolvent under Section IX. B. TERMINATION BY NOTICE. Either party may terminate this Agreement for new business without cause by either party giving to the other written notice to that effect no less than one hundred eighty (180) days prior to the termination date; provided, however, that no such notice shall be effective until this Agreement shall have been in effect for ten years.. The parties agree that a reasonable gradual reduction in the CEDING COMPANY's marketing of new Vencor Gold policies may occur during the one hundred eighty (180) days immediately preceding the termination date of this Agreement, and that such a reduction would not be a violation of this provision. C. TERMINATION FOR CAUSE. 1. This Agreement may also be terminated for new business by thirty (30) days' written notice to the other party of breach of any of the terms and conditions of this Agreement, provided such breach has not been cured within such thirty (30) day notice period (or in the case of a breach that cannot be reasonably cured within such thirty (30) days, the breaching party has not undertaken to cure such breach as soon as possible). 2. Any egregious or willful violation of any of the terms of this Agreement by either party shall be grounds for termination of this Agreement for new business upon thirty (30) days written notice to the breaching party. 3. If either party terminates this Agreement for new business for cause under this subsection C, the terminating party may initiate arbitration as to the date of termination for inforce business. DRAFT -- JULY 10, 1997 -- PAGE 11 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 12 OF 17 -- DRAFT D. Except as otherwise provided in this Section XII, this Agreement shall remain in full force and effect on all Vencor Gold policies issued or renewed by the CEDING COMPANY prior to the effective date of termination of this Agreement for new business. Accordingly, the REINSURER shall continue to provide reinsurance for all Vencor Gold policies issued or renewed by the CEDING COMPANY prior to the effective date of termination of this Agreement for new business. E. In no event shall the liability of the REINSURER be extended to any Vencor Gold policies whose coverage takes effect after the termination date for the acceptance of new business. XIII. OTHER PROVISIONS. A. REINSURER'S RELATIONSHIPS. It is agreed that no rights or legal relations shall arise between the REINSURER and Members by virtue of the reinsurance of the Vencor Gold policies under this Agreement. The REINSURER's sole liability as reinsurer is that provided under the terms of this Agreement. B. POLICY CHANGES. The REINSURER agrees that the CEDING COMPANY may from time to time, make reasonable alterations in the terms and provisions of the Vencor Gold policies reinsured hereunder. The CEDING COMPANY agrees to furnish the REINSURER with a copy of all proposed changes not less than thirty (30) days prior to their effective date. Upon receipt of a proposed change, the REINSURER shall promptly advise the CEDING COMPANY in writing, of its approval or disapproval of the proposed change. All alterations or modifications made to the Vencor Gold policies shall be endorsed upon and attached to the copies of such Vencor Gold policies which were previously made a part of this Agreement. It is understood that any changes to the Vencor Gold policies which are disapproved by the REINSURER shall automatically relieve the REINSURER of any liability that it incurs as a result of such changes with respect to the Vencor Gold policies as of the effective date of such changes. C. INFORMATION NEEDED TO COMPLETE STATEMENT. After the end of each calendar quarter, the CEDING COMPANY hereby agrees to supply the REINSURER with any information on the Vencor Gold policies that may reasonably be required by the REINSURER for completion of its financial statements. D. OMISSIONS OR ERRORS. It is agreed that any inadvertent delays, omissions or errors made in connection with this Agreement shall not be held to relieve either of the Parties hereto from any liability which would have attached to them hereunder if such delays, omis- DRAFT -- JULY 10, 1997 -- PAGE 12 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 13 OF 17 -- DRAFT sions or errors had not been made, such omissions and/or errors to be made good as soon as reasonably possible after discovery. E. PUBLICITY RELEASES. Neither party shall disclose the other party's name or identity or relationship with the other in any press release or other public announcement or in any document or material filed with any governmental entity, without the prior written consent of the non- disclosing party unless such disclosure is required by applicable law or governmental regulations or by order of a court of competent jurisdiction, in which case prior to making such disclosure the disclosing party shall give written notice to the non-disclosing party describing in reasonable detail the proposed content of such disclosure and shall permit the non-disclosing party to review and comment upon the form and substance of such disclosure. F. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all previous agreements and understandings, written or oral, between the REINSURER and the CEDING COMPANY as to the subject matter of this Agreement. DRAFT -- JULY 10, 1997 -- PAGE 13 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 14 OF 17 -- DRAFT G. AMENDMENT. This Agreement may, at any time, be altered by mutual consent of the Parties hereto by an amendment signed by responsible officials of the Parties and such amendment shall be binding upon both Parties and be deemed to be an integral part of this Agreement. IN WITNESS WHEREOF, this Agreement to be executed, in duplicate, by their respective officers duly authorized to do so. _______________________________________ ______ By --------------------------------------------- Title ------------------------------------------ Date ------------------------------------------- Continental Casualty CompanyValley Forge Life Insurance Company By --------------------------------------------- Title ------------------------------------------ Date ------------------------------------------- DRAFT -- JULY 10, 1997 -- PAGE 14 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 15 OF 17 -- DRAFT INDIVIDUAL LONG TERM CARE QUOTA SHARE COINSURANCE AGREEMENT APPENDIX A: SAMPLE INSURANCE POLICIES DRAFT -- JULY 10, 1997 -- PAGE 15 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 16 OF 17 -- DRAFT INDIVIDUAL LONG TERM CARE QUOTA SHARE COINSURANCE AGREEMENT APPENDIX C: SCHEDULE OF PAYMENT INSTRUCTIONS I. CEDING COMPANY Sales Commission II. CEDING COMPANY Expense Allowance Expenses will be allocated in a fair and equitable manner. Allocations will be reviewed and any appropriate revisions will be made at least once each calendar year but no more frequently than quarterly. DRAFT -- JULY 10, 1997 -- PAGE 16 OF 17 -- DRAFT DRAFT -- JULY 10, 1997 -- PAGE 17 OF 17 -- DRAFT INDIVIDUAL LONG TERM CARE QUOTA SHARE COINSURANCE AGREEMENT APPENDIX D: RATES AND UNDERWRITING GUIDE DRAFT -- JULY 10, 1997 -- PAGE 17 OF 17 -- DRAFT EXHIBIT "C" ---------- Draft -- June 10, 1997 -- Page 1 of ll -- Draft PREFERRED ACCESS AGREEMENT -------------------------- This Agreement is made and entered into as of the _____ day of ____________ 199__, by and between Continental Casualty Company, an Illinois insurance company, and Valley Forge Life Assurance Company, a Pennsylvania life insurance company (individually and collectively "CNA") and Vencor Provider Network, Inc., a Delaware corporation ("VPN"). RECITALS -------- WHEREAS, Vencor, Inc., a Delaware corporation ("Vencor") and CNA have executed, prior to or contemporaneously with the execution of this Agreement, a Strategic Alliance Agreement which defines the relationship between CNA, Vencor, and VPN; and WHEREAS, VPN has in place a contracted network of long term care facilities and long term care service providers that have agreed to provide healthcare services to Members pursuant to a predetermined schedule of benefits and discounts; and WHEREAS, CNA issues long term care insurance policies which, subject to the terms and conditions of the policies, provide reimbursement for eligible expenses incurred in long term care facilities and in other settings. NOW, THEREFORE, in consideration of the above premises and the covenants hereinafter set forth, the parties, CNA and VPN, hereby agree as follows: 1. PRECEDENCE OF PROVISIONS; DEFINITIONS 1.1. To the extent that this Agreement contains a provision or provisions in conflict with the Strategic Alliance Agreement, the provisions of this Agreement shall govern. 1.2. Any term defined in the Strategic Alliance Agreement which is not defined in this Agreement shall have the meaning ascribed by the Strategic Alliance Agreement unless the term is explicitly redefined or the context clearly requires another definition. 1.3. "Agreement" means this Preferred Access Agreement, including all Exhibits which are hereby incorporated into and made a part of this Agreement, as originally executed and as may be amended from time to time. 1.4. "Coinsurance Agreement" means the agreement entered into by a wholly owned Vencor subsidiary, Vencor Insurance Company ("VIC"), and CNA Draft -- June 10, 1997 -- Page 2 of ll -- Draft for VIC to reinsure a fifty percent (50%) quota share of the liability of CNA with respect to the Policies. 1.5 "Strategic Alliance Agreement" means the agreement entered into by Vencor Inc. ("Vencor"), and CNA which describes and defines the relationship between CNA, Vencor, VIC, and VPN. 1.6. "Preferred Advantage Selected Provider" means a provider so designated by VPN which meets all of the criteria set forth in section 3.1 herein. 2. DUTIES OF CNA 2.1. Make a policy available - CNA shall use its reasonable best ----------------------- efforts to make a Vencor Gold policy available in every jurisdiction covered by this Agreement. CNA shall assure that every long term care insurance policy to which this agreement applies is filed with and approved by applicable insurance regulatory authorities. Any material modifications to the Vencor Gold policies or premium rating structure applicable thereto, other than as may be required by applicable law, shall be approved by VPN prior to implementation of such modifications; provided, however, that approval by VPN shall not be unreasonably withheld, and shall be deemed given with respect to a proposed modification if no written objection is made within thirty (30) days following written notice of such modification. 2.2. Verification of, and payment pursuant to a Policy - CNA shall ------------------------------------------------- provide a process by which a Preferred Advantage Selected Provider may verify existence of a Policy covering anyone who claims to be a Member. 2.2.1. CNA shall verify existence of a Policy within 24 hours of receipt of a request from a Preferred Advantage Selected Provider. 2.2.2. Within 30 days of receiving due written proof of loss, CNA shall pay a Preferred Advantage Selected Provider that provides Covered Services to a Member in accordance with this Agreement and the Strategic Alliance Agreement. 2.2.3. CNA shall have the sole authority to determine: (i) what is a Covered Service; and (ii) who is a Member. 2.3. Statistical Reports - CNA shall provide to VPN reports relating ------------------- to Members who have received services from Preferred Advantage Selected Providers in a format generally utilized by CNA in its normal course of business. Such reports shall include the number of Members, their utilization of Preferred Advantage Selected Provider's services and the amounts paid by CNA for such services. Draft -- June 10, 1997 -- Page 3 of ll -- Draft 3. DUTIES OF VPN 3.1. Maintain a Network of Preferred Advantage Selected Providers - VPN ------------------------------------------------------------ shall, during the term of this Agreement, use its reasonable best efforts to maintain a network of Preferred Advantage Selected Providers sufficient to provide Covered Services to Members. 3.1.1. VPN represents and warrants that it has contracts that conform to the requirements of this Agreement in effect with providers of long term care services, supplies, equipment, or accommodations in all of the geographical areas listed in Exhibit "E" as amended from time to time. 3.1.2. VPN represents and warrants that those providers designated by VPN (subject to all of the terms and conditions of this agreement) as "Preferred Advantage Selected Providers" have agreed to provide Covered Services to Members in accordance with terms of this Agreement. 3.1.3. VPN shall exercise any and all procedures, care, and other precautions as shall be necessary or advisable to ensure that Preferred Advantage Selected Providers are selected and monitored in a manner consistent with any applicable legal requirements under federal or state law, and this Agreement. VPN shall require that all Preferred Advantage Selected Providers and their personnel shall have and maintain all necessary credentials in accordance with applicable law and standards established by VPN. 3.1.4. VPN shall not make additions to its network of Preferred Advantage Selected Providers without the written approval of CNA, which approval will not be unreasonably withheld. If CNA fails to approve an addition to the network of Preferred Advantage Selected Providers within 15 business days of receiving written notice of the change, approval of CNA will be deemed given. 3.2. Maintain a Directory - VPN shall send to CNA at least once each -------------------- calendar month a current list of Preferred Advantage Selected Providers. The list shall be sent to LTC Administration, P O Box 305153, Nashville, Tennessee 37230-5153. 3.2.1. Upon execution of this Agreement and at least once each year thereafter, VPN shall send to CNA a diskette containing a complete list of Preferred Advantage Selected Providers. Draft -- June 10, 1997 -- Page 4 of ll -- Draft 3.2.2. In the intervening months, VPN shall send to CNA a diskette containing all changes to the list of Preferred Advantage Selected Providers. 3.2.3. In addition, VPN shall provide a method that enables CNA to determine, in a commercially reasonable manner, at any time during normal business hours, whether a healthcare provider is a Preferred Advantage Selected Provider. 3.3. Provide Services - VPN shall require all Preferred Advantage Selected ---------------- Providers to provide Covered Services to Members in accordance with and subject to both Exhibit "B" and the following terms and conditions: 3.3.1. Each of the Preferred Advantage Selected Providers shall provide to Members any and all Covered Services which the Preferred Advantage Selected Provider is qualified by law to provide and provides to non-Members. 3.3.2. Each of the Preferred Advantage Selected Providers shall admit Members into its facilities in accordance with Exhibit "B" and on a priority basis such that, subject to applicable law, Members will be given first access to the next available bed or service. 3.3.3. Preferred Advantage Selected Providers shall provide any and all Covered Services to Members in the same (or better) manner and in accordance with the same (or better) standards provided to non-Members. 3.3.4. Preferred Advantage Selected Providers shall not discriminate in the treatment of or the quality of the services delivered to Members on the basis of race, creed, color, national origin, sex, age, religion, sexual orientation, veteran status, disability, place of residence, health status, or source of payment. 3.4. Maintain Medical Records. Preferred Advantage Selected Providers ------------------------ shall standard medical records relating to Covered Services rendered to Members in accordance with accepted principles of practice and in compliance with all applicable state and federal laws and regulations. Preferred Advantage Selected Providers shall maintain all information contained in the medical records of Members in confidence. 3.5. Compensation. Each Preferred Advantage Selected Provider ------------ 3.5.1. shall accept the amount specified in Exhibit "B" as full remuneration for Covered Services provided to a Member; and Draft -- June 10, 1997 -- Page 5 of ll -- Draft 3.5.2. shall not bill or attempt to collect any additional amount for such services from any Member or from any other person or entity. 3.6. Insurance. Each Preferred Advantage Selected Provider shall obtain --------- and maintain, at its own expense, policies of general liability and professional liability insurance, or sound self-insurance programs, to provide reasonable insurance against claims for damages occasioned directly or indirectly in connection with the performance of professional services by Preferred Advantage Selected Providers. Preferred Advantage Selected Providers shall provide to CNA at least thirty (30) days notice of termination or substantial reduction of any insurance coverage. Each Preferred Advantage Selected Provider shall provide to CNA, upon request, evidence of the insurance coverages. 3.7. Licensing. VPN hereby represents and warrants that it possesses and --------- shall maintain in good standing during the term of this Agreement any and all valid certificates of authority and licenses under any applicable laws. VPN further represents and warrants that it is and shall remain at all times during this Agreement authorized to do all acts necessary or convenient to carry out the terms and purposes of this Agreement. The parties agree that failure of VPN to maintain active, necessary licenses constitutes a breach of this Agreement that cannot be remedied at law and that actions in equity, including injunctions, are appropriate. 4. INDEMNIFICATION 4.1. Indemnification of CNA. VPN hereby agrees to indemnify and hold harmless CNA and its affiliates and subsidiaries and CNA's directors, officers, employees, agents, attorneys and any successors in interest or at law (collectively "CNA" for purposes of this Section), from any and all costs, claims, expenses, demands, actions, suits or proceedings, liabilities and damages (including but not limited to, awards, statutory or regulatory penalties, and attorneys fees) directly or indirectly arising out of or resulting from any act of VPN or its subsidiaries or affiliates or VPN's or affiliates' or subsidiaries' directors, officers, employees, agents, contractors or authorized representatives (collectively "VPN" for the purposes of this Section) in the performance of their duties under this Agreement excluding, however, any acts of VPN to the extent they are caused or contributed to by CNA. 4.2. Indemnification of VPN. CNA hereby agrees to indemnify and hold harmless VPN, as defined in section 4.1, from any and all costs, claims, expenses, demands, actions, suits or proceedings, liabilities and damages (including but not limited to, awards, statutory or regulatory penalties, and attorneys fees) directly or indirectly arising out of or resulting from any act Draft -- June 10, 1997 -- Page 6 of ll -- Draft of CNA, as defined in section 4.1, in the performance of their duties under this Agreement, excluding, however, any acts of CNA to the extent they are caused or contributed to by VPN, as defined in section 4.1. 4.3. Notice. Neither party shall be entitled to be indemnified if it fails to notify the party bearing liability to indemnify ("indemnifying party") of the proceedings and does not furnish the indemnifying party a copy of the legal documents (e.g., complaint, notice of hearing, etc.), if available, within a reasonable time after the non- indemnifying party or its designated service of process agent is served with the summons or other legal process which initially notifies the non-indemnifying party of the nature of the proceeding. 4.4. Defense. With respect to any third party indemnification claim, the indemnifying party shall defend, in good faith and its own expense, any such indemnification claim and the indemnitee, at its expense, shall have the right to participate in the defense of any such third party indemnification claim. In connection with its defense of a third party indemnification claim, the indemnifying party shall have the absolute right to choose or approve counsel for the defense or prosecution of such action. So long as the indemnifying party is defending in good faith any such third party indemnification claim, the indemnitee shall not settle or compromise such third party indemnification claim. The indemnitee shall make available to the indemnifying party or its representatives all records and other materials reasonably required by them for its use in contesting any third party indemnification claim and shall cooperate fully with the indemnifying party in the defense of all such indemnification claims. 5. AUDIT 5.1. VPN shall have the authority to inspect and audit the books and records of CNA and its assignees which pertain to this Agreement, at any time during reasonable business hours, and they may make copies or extracts of any records pertaining thereto. CNA shall notify VPN of any audit or pending audit of CNA by any person or entity other than either of the parties or any of their agents. 5.2. CNA shall have the authority to inspect and audit the books and records of VPN and its assignees which pertain to this Agreement, at any time during reasonable business hours, and they may make copies or extracts of any records pertaining thereto. VPN shall notify CNA of any audit or pending audit of VPN by any person or entity other than either of the parties or any of their agents. Draft -- June 10, 1997 -- Page 7 of ll -- Draft 6. CONFIDENTIALITY 6.1. Medical Records. Neither CNA nor VPN shall disclose individually --------------- identifiable medical or other personal information about any Member to any third party except in compliance with all applicable state and federal laws and regulations and with the valid written consent of the Member, pursuant to a valid order of a court of competent jurisdiction, or as otherwise permitted by law and this Agreement. CNA and VPN shall follow appropriate procedures to ensure that Member confidentiality rights are not abridged. The parties' obligations under this Section 6.1 shall survive the termination of this Agreement. The parties agree that failure of VPN to maintain confidentiality of individually identifiable information constitutes a breach of this agreement that cannot be remedied at law and that actions in equity, including injunctions, are appropriate. 6.2. Terms of Agreement. CNA and VPN shall keep the terms of this ------------------ Agreement, Reimbursement Rates, Fee Schedules, and/or any related negotiations confidential and not disclose the same to any person or organization, except as otherwise required by this Agreement or applicable law (e.g., either party may file agreements, when necessary for licensing or product approval, without separate notice to the other party). If either party becomes subject to compulsory process to disclose the terms of this Agreement or related negotiations, such party shall give the other party immediate oral and written notice of such process. The parties' obligations under this Section 6.2 shall survive the termination of this Agreement. 7. TERM AND TERMINATION 7.1. Automatic Termination - This Agreement shall terminate in accordance --------------------- with the terms of the Strategic Alliance Agreement. 7.2. Obligations Survive Termination - Except as otherwise provided in ------------------------------- this Section, this Agreement shall remain in full force and effect on all Policies issued by CNA prior to the effective date of termination of this Agreement for new business. 8. MISCELLANEOUS PROVISIONS 8.1. Noninterference with Medical Care. Nothing in this Agreement is --------------------------------- intended to create any right of CNA to intervene in any manner in the methods or means by which a Preferred Advantage Selected Provider renders health care services, accommodations, or supplies to Members. Nothing in this Agreement is intended to require a Preferred Advantage Selected Provider to take any action inconsistent with professional judgment concerning the care and treatment to be rendered to Members. Draft -- June 10, 1997 -- Page 8 of ll -- Draft 8.2. Invalidity or Unenforceability. The invalidity or unenforceability ------------------------------ of any terms or provisions of this Agreement shall in no way affect the validity or enforceability of any other term or provision. 8.3. Applicable Law. This Agreement shall be governed by and -------------- construed in accordance with the law of the state of Illinois (without reference to choice of law rules) except to the extent superseded or preempted by federal law. 8.4. Entire Agreement. This Agreement and all attachments, schedules ---------------- and exhibits hereto shall constitute the entire agreement between the parties regarding the subject matter hereof. Each party acknowledges that no representation, inducement, promise, or agreement has been made, orally or otherwise, by the other party or by anyone acting on behalf of the other party, unless such representation, inducement, promise, or agreement is embodied in this Agreement. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized representative as of the date first written above. CONTINENTAL CASUALTY COMPANY VALLEY FORGE LIFE ASSURANCE COMPANY VENCOR PROVIDER NETWORK, INC By: By: ------------------------ ------------------------ (signature) (signature) Name: Name: ---------------------- ---------------------- (please print) (please print) Title: Title: --------------------- --------------------- (please print) (please print) Date: Date: ---------------------- ---------------------- (please print) (please print) EXHIBIT "A" ---------- to be provided EXHIBIT "B" ---------- 1. Each Preferred Advantage Selected Provider shall accept, as full remuneration for Covered Services provided to a Member, the lesser of A. 85% of the Preferred Advantage Selected Provider's usual charge; or B. 85% of the amount the Preferred Advantage Selected Provider would have billed had the person not been a Member; or C. the amount the Preferred Advantage Selected Provider billed any other individual pursuant to a discount obtained or secured by VPN (or an affiliate of VPN) across a network of long-term care facilities or service providers. 2. VPN and Vencor guarantee that A. If a member seeks admission to a Preferred Advantage Selected Provider facility ("Location of Choice"). VPN shall guarantee that the Member will receive priority for access to such care from a Preferred Select Provider. 1. the Member will receive access to such care from the Member's Location of Choice, as defined below, on a timely and priority basis as soon as a facility bed or a service is available. 2. Because availability of care may vary by location, in the event such care is not available within 60 days of the Member's request at the Member's Location of Choice, VPN will identify and provide access to: a. A Preferred Advantage Selected Provider within 50 miles of the Member's Location of Choice; or b. if no such care is available from a Preferred Advantage Selected Provider within 50 miles of the Member's Location of Choice, a Preferred Advantage Selected Provider as close to your Location of Choice as possible. 3. In addition, in states designated as "Special Access States" in the then current list of Preferred Select Providers, if access to a Preferred Advantage Selected Provider Long-Term Care Facility within 50 miles of the Member's Location of Choice is not possible within 60 days: a. The Preferred Select Network will identify a Long-Term Care Facility, located within 50 miles of the Member's Location of Choice or as close as possible, that is qualified to provide covered care and is not a member of the Preferred Select Network; and b. If the Member receive care from such Long-Term Care Facility, the Preferred Select Network will provide reimbursement such that the Member's out-of-pocket cost for such care will be the same as if the provider had been a Preferred Select Provider. Any additional payments will not count against the Member's Maximum Lifetime Benefit. c. None of the guarantees described in this Section 2 will be offered to or made to any entity that makes payments to providers of long-term care services except CNA and Members. 3. VPN and Vencor guarantee that a Member shall be permitted to transfer, at the Member's expense, to a Preferred Advantage Selected Provider facility preferred by the Member at any time there is an opening in the preferred facility and the Member can be transported there with no degradation in care and without jeopardizing the health and safety of the Member. 4. If a Member is receiving services from a provider which is removed from the network of Preferred Advantage Selected Providers by VPN for any reason, VPN shall, at the request of the Member and at VPN's expense, transfer the Member to a like facility within 25 miles. If the provider to which the Member is transferred does not agree to the remuneration terms specified in this Agreement, VPN shall make up the difference in payment to the provider. EX-10.2 4 AMENDMENT NO. 2 TO PARENT GUARANTY EXHIBIT 10.2 AMENDMENT NO. 2 TO PARENT GUARANTY THIS AMENDMENT, dated as of May 27, 1997, by (i) ATRIA COMMUNITIES, INC., a Delaware corporation (herein, together with its successors and assigns, the "BORROWER"); (ii) VENCOR, INC., a Delaware corporation (herein, together with its successors and assigns, the "PARENT GUARANTOR"); (iii) each of the entities whose signature appears at the end hereof as a Supporting Guarantor (each, together with its successors and assigns, a "SUPPORTING GUARANTOR" and collectively, the "SUPPORTING GUARANTORS"); and (iv) PNC BANK, NATIONAL ASSOCIATION, a national banking association, as Administrative Agent (the "ADMINISTRATIVE AGENT") under the Credit Agreement referred to in the Parent Guaranty identified below: PRELIMINARY STATEMENTS: (1) The Borrower, the Parent Guarantor and the Supporting Guarantors have heretofore entered into the Parent Guaranty, dated as of August 15, 1996, and Amendment No. 1 to Parent Guaranty, dated as of March 27, 1997, in favor of the Administrative Agent (as so amended, the "PARENT GUARANTY"; with the terms defined therein, or the definitions of which are incorporated therein, being used herein as so defined). (2) The parties hereto desire to amend certain of the terms and provisions of the Parent Guaranty, all as more fully set forth below. NOW, THEREFORE, the parties hereby agree as follows: 1. ADDITIONAL SUPPORTING GUARANTORS. For the avoidance of doubt: (a) Each Supporting Guarantor which was not a party to the Parent Guaranty as originally executed and delivered in August 1996 hereby (i) joins in and becomes a party to the Parent Guaranty as a Supporting Guarantor thereunder, and (ii) becomes bound by all of the representations, warranties, covenants and provisions of the Parent Guaranty applicable to any Supporting Guarantor. (b) The Parent Guarantor hereby confirms that such joinder has been made at the request and with the consent of the Parent Guarantor. (c) Each such Additional Supporting Guarantor represents and warrants that (i) it is a corporation or partnership duly formed and validly existing under the laws of the jurisdiction of its formation; (ii) it has the corporate or partnership power and authority to enter into and perform its obligations hereunder; (iii) this Amendment has been duly authorized by all requisite corporate or partnership action on its part, has been duly executed and delivered by it and constitutes its valid and binding obligation, enforceable against it in accordance with its terms; (iv) its execution, delivery and performance of this Amendment will not conflict with or violate any of the terms or provisions of (A) its corporate charter or partnership agreement, (B) any law, regulation, rule or order of any governmental authority or court applicable to it or to any of its property, or (C) any agreement or instrument to which it is a party or by which any of its property is bound; (v) no consent or approval of any governmental authority is required to be obtained as a condition to the valid execution, delivery or performance by it of this Amendment; and (vi) there is no litigation or other proceeding pending which questions the valid execution, delivery or performance by it of this Amendment. 2. AMENDMENT RELATIVE TO 1997 CREDIT AGREEMENT OF PARENT GUARANTOR. Clause (f) of section 7 of the Parent Guaranty is amended to read in its entirety as follows: (f) promptly after execution thereof, copies of any amendment to its existing Credit Agreement, dated as of March 17, 1997, with the banks named therein and Morgan Guaranty Trust Company of New York, as Documentation Agent and Collateral Agent, and NationsBank, N.A., as Administrative Agent, as in effect on March 18, 1997, which is the closing date thereunder (as so in effect on March 18, 1997, and as the same may be amended (including the proposed amendment to be entered into on or about May 30, 1997 to inter alia increase the credit facilities thereunder to $2,000,000,000), supplemented or modified, amended and restated, or replaced, with an agreement with substantially the same bank group (i.e., with most of the lenders with the largest commitments remaining lenders at significant commitment levels), whether in the same or a larger or smaller aggregate amount of credit facilities), the "1997 CREDIT AGREEMENT"), and copies of any other credit agreement entered into after the Closing Date in connection with a replacement or refinancing thereof (and any amendments thereto); and 3. AMENDMENT OF INCORPORATED LEVERAGE COVENANT. Section 14(a) of the Parent Guaranty is amended to read in its entirety as follows: (a) LEVERAGE COVENANTS IN 1997 CREDIT AGREEMENT. The Parent Guarantor will comply with the covenants contained in Sections 5.17 and 5.26 of the 1997 Credit Agreement. 4. AMENDMENT OF SEPARATE LEVERAGE COVENANT. Section 14(b) of the Parent Guaranty is amended to read in its entirety as follows: (b) SEPARATE LEVERAGE COVENANT. The Parent Guarantor will maintain at the end of each Fiscal Quarter (a "QUARTERLY MEASUREMENT DATE"), the ratio of (x) Consolidated Debt for Borrowed Money to (y) Consolidated EBITDA for the four consecutive Fiscal Quarters then ended not in excess of the ratio set forth below opposite the period in which such Quarterly Measurement Date falls:
Period Ratio -------------------------------------------- ------------ June 1, 1997 through September 29, 1998 4.75 to 1.00 September 30, 1998 through December 30, 1998 4.60 to 1.00 December 31, 1998 through December 30, 1999 4.50 to 1.00 December 31, 1999 and thereafter 4.00 to 1.00
For purposes of calculating the foregoing ratio at any Quarterly Measurement Date, if any corporation or other entity shall have been acquired by any Vencor Company during the relevant period of four consecutive Fiscal Quarters, Consolidated EBITDA for such period shall be calculated as if such corporation or other entity had been acquired at the beginning of such period, to the extent that the relevant financial information with respect to it for the portion of such period prior to such acquisition can be determined with reasonable accuracy. As used in this Agreement, the terms "FISCAL QUARTERS", "CONSOLIDATED DEBT FOR BORROWED MONEY", "CONSOLIDATED EBITDA", "VENCOR COMPANY", "CONSOLIDATED NET WORTH" and "DEBT" shall have the same meanings as are ascribed to such terms in the 1997 Credit Agreement as in effect on May 30, 1997 (which is the date Amendment No. 2 to the 1997 Credit Agreement became effective, herein the "VENCOR CLOSING DATE"), without giving effect to any subsequent modification or termination thereof, and any other defined terms which are used in such terms in the 1997 Credit Agreement shall likewise have such meanings without giving effect to any subsequent modification or termination thereof. 2 5. ADDITION OF SENIOR DEBT LEVERAGE RATIO COVENANT. The Parent Guaranty is amended by adding section 14(c) thereto, reading in its entirety as follows: (c) SENIOR DEBT LEVERAGE RATIO COVENANT. The Parent Guarantor will maintain at the end of each Fiscal Quarter (a "QUARTERLY MEASUREMENT DATE"), the ratio of (x) Consolidated Senior Debt for Borrowed Money to (y) Consolidated EBITDA for the four consecutive Fiscal Quarters then ended not in excess of the ratio set forth below opposite the period in which such Quarterly Measurement Date falls:
Period Ratio -------------------------------------------- ------------ June 1, 1997 through December 30, 1997 4.50 to 1.00 December 31, 1997 through March 30, 1998 4.00 to 1.00 March 31, 1998 through June 29, 1998 3.85 to 1.00 June 30, 1998 through September 29, 1998 3.80 to 1.00 September 30, 1998 through December 30, 1998 3.75 to 1.00 December 31, 1998 through December 30, 1999 3.50 to 1.00 December 31, 1999 and thereafter 3.00 to 1.00
For purposes of calculating the foregoing ratio at any Quarterly Measurement Date, if any corporation or other entity shall have been acquired by any Vencor Company during the relevant period of four consecutive Fiscal Quarters, Consolidated EBITDA for such period shall be calculated as if such corporation or other entity had been acquired at the beginning of such period, to the extent that the relevant financial information with respect to it for the portion of such period prior to such acquisition can be determined with reasonable accuracy. As used in this Agreement, the terms "FISCAL QUARTERS", "CONSOLIDATED SENIOR DEBT FOR BORROWED MONEY", "CONSOLIDATED EBITDA", "VENCOR COMPANY", "CONSOLIDATED NET WORTH" and "DEBT" shall have the same meanings as are ascribed to such terms in the 1997 Credit Agreement as in effect on the Vencor Closing Date, without giving effect to any subsequent modification or termination thereof, and any other defined terms which are used in such terms in the 1997 Credit Agreement shall likewise have such meanings without giving effect to any subsequent modification or termination thereof. 6. RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Parent Guaranty, and except as expressly modified and superseded by this Amendment, the terms and provisions of the Parent Guaranty are ratified and confirmed and shall continue in full force and effect. 7. MISCELLANEOUS. The terms and provisions of sections 20 [Survival of Agreements, etc.], 24 [Costs and Expenses of Enforcement, etc.], 28 [Jury Trial Waiver], 29 [Waiver; Amendment], 30 [Kentucky Notice of Guaranteed Amount and Termination Date], and 31 [Miscellaneous] of the Parent Guaranty are hereby incorporated into this Amendment as if set forth in full herein, except that references in such incorporated terms and provisions to "this Agreement", "herein", "hereby" and words of similar import shall be deemed to refer to this Amendment instead of the Parent Guaranty. [The balance of this page is intentionally blank.] 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed and delivered by their respective officers thereunto duly authorized as of the date first above written. VENCOR, INC. FIRST HEALTHCARE CORPORATION NORTHWEST HEALTH CARE, INC. MEDISAVE PHARMACIES, INC. NATIONWIDE CARE, INC. THERATX, INCORPORATED VENCOR HOSPITALS ILLINOIS, INC. VENCOR HOSPITALS SOUTH, INC. VENCOR HOSPITALS EAST, INC. VENCOR HOSPITALS CALIFORNIA, INC. VENCOR HOSPITALS TEXAS, LTD. BY: VCI SPECIALTY SERVICES, INC., ITS GENERAL PARTNER VENTECH SYSTEMS, INC. PASATIEMPO DEVELOPMENT CORP. VCI SPECIALTY SERVICES, INC. VENCOR PROPERTIES, INC. BY: ----------------------------------------- VICE PRESIDENT [SIGNATURES CONTINUED ON FOLLOWING PAGES] 4 PERSONACARE, INC. RESPIRATORY CARE SERVICES, INC. THERATX MEDICAL SUPPLIES, INC. THERATX HEALTHCARE MANAGEMENT INC. THERATX STAFFING, INC. HORIZON HEALTHCARE SERVICES, INC. PERSONACARE OF CONNECTICUT, INC. PERSONACARE OF HUNTSVILLE, INC. PERSONACARE OF OHIO, INC. PERSONACARE OF OWENSBORO, INC. PERSONACARE OF PENNSYLVANIA, INC. PERSONACARE OF READING, INC. PERSONACARE OF SAN ANTONIO, INC. PERSONACARE OF SAN PEDRO, INC. PERSONACARE OF WISCONSIN, INC. PERSONACARE OF RHODE ISLAND, INC. PERSONACARE OF ST. PETERSBURG, INC. PERSONACARE OF POMPANO WEST, INC. PERSONACARE OF CLEARWATER, INC. PERSONACARE OF BRADENTON, INC. PERSONACARE OF POMPANO EAST, INC. PERSONACARE OF SHREVEPORT, INC. TUCKER NURSING CENTER, INC. LAFAYETTE HEALTH CARE CENTER, INC. PERSONACARE OF WARNER ROBINS, INC. NFM, INC. STAMFORD HEALTH FACILITIES, INC. COURTLAND GARDENS HEALTH CENTER, INC. COURTLAND GARDENS RESIDENCE, INC. HOMESTEAD HEALTH CENTER, INC. TUNSTALL ENTERPRISES, INC. STAMFORD HEALTH ASSOCIATES LIMITED PARTNERSHIP BY: STAMFORD HEALTH FACILITIES, INC., ITS GENERAL PARTNER CARE VENTURE PARTNERS, L.P. BY: PERSONACARE OF RHODE ISLAND, INC. ITS GENERAL PARTNER OAK HILL NURSING ASSOCIATES LIMITED PARTNERSHIP BY: PERSONACARE OF RHODE ISLAND, INC., ITS GENERAL PARTNER HEALTH HAVENS ASSOCIATES LIMITED PARTNERSHIP BY: PERSONACARE OF RHODE ISLAND, INC., ITS GENERAL PARTNER BY: ---------------------------------------- VICE PRESIDENT PNC BANK, NATIONAL ASSOCIATION, AS ADMINISTRATIVE AGENT BY: ---------------------------------------- VICE PRESIDENT 5 EX-10.3 5 AMENDMENT NO. 1 TO 1997 INCENTIVE COMP. PLAN EXHIBIT 10.3 AMENDMENT NO. 1 TO THE VENCOR, INC. 1997 INCENTIVE COMPENSATION PLAN The undersigned, JOSEPH L. LANDENWICH, the duly elected and acting Assistant Secretary of VENCOR, INC., a Delaware corporation (the "Company"), hereby certifies that set forth below is Amendment No. 1 to the Vencor, Inc. 1997 Incentive Compensation Plan, which Amendment No. 1 became effective on May 8, 1997: Section 3.2 of the Vencor, Inc. 1997 Incentive Compensation Plan is amended by deleting subsections (d) and (h) in their entirety. WITNESS the signature of the undersigned Assistant Secretary of the Company as of July 9, 1997. /s/ Joseph L. Landenwich ------------------------ Joseph L. Landenwich Assistant Secretary EX-11 6 COMPUTATON OF EARNINGS EXHIBIT 11 VENCOR, INC. COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER SIX MONTHS ---------------- ---------------- 1997 1996 1997 1996 ------- ------- ------- ------- PRIMARY EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: Earnings: Income from operations...................... $37,010 $30,865 $70,992 $58,475 Extraordinary loss on extinguishment of debt, net of income tax benefit............ (1,590) - (3,849) - ------- ------- ------- ------- Net income................................. $35,420 $30,865 $67,143 $58,475 ======= ======= ======= ======= Shares used in the computation: Weighted average common shares outstanding.. 69,194 70,351 69,062 70,304 Dilutive effect of common stock equivalents. 1,822 1,022 1,616 1,111 ------- ------- ------- ------- Shares used in computing earnings per common and common equivalent share........ 71,016 71,373 70,678 71,415 ======= ======= ======= ======= Primary earnings per common and common equivalent share: Income from operations...................... $ 0.52 $ 0.43 $ 1.00 $ 0.82 Extraordinary loss on extinguishment of debt....................................... (0.02) - (0.05) - ------- ------- ------- ------- Net income................................. $ 0.50 $ 0.43 $ 0.95 $ 0.82 ======= ======= ======= ======= FULLY DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: Earnings: Income from operations...................... $37,010 $30,865 $70,992 $58,475 Extraordinary loss on extinguishment of debt, net of income tax benefit............ (1,590) - (3,849) - ------- ------- ------- ------- Net income................................. $35,420 $30,865 $67,143 $58,475 ======= ======= ======= ======= Shares used in the computation: Weighted average common shares outstanding.. 69,194 70,351 69,062 70,304 Dilutive effect of common stock equivalents. 1,950 1,022 1,975 1,111 ------- ------- ------- ------- Shares used in computing earnings per common and common equivalent share........ 71,144 71,373 71,037 71,415 ======= ======= ======= ======= Fully diluted earnings per common and common equivalent share: Income from operations...................... $ 0.52 $ 0.43 $ 1.00 $ 0.82 Extraordinary loss on extinguishment of debt....................................... (0.02) - (0.05) - ------- ------- ------- ------- Net income................................. $ 0.50 $ 0.43 $ 0.95 $ 0.82 ======= ======= ======= =======
EX-27 7 FINANCIAL DATA SCHEDULE
5 This schedule contains summary information extracted from Vencor, Inc.'s condensed consolidated financial statements for the six months ended June 30, 1997 and is qualified in its entirety by reference to such statements. 1,000 6-MOS DEC-31-1997 JUN-30-1997 106,476 0 639,889 (52,687) 36,525 938,646 2,050,914 (462,968) 3,410,057 457,109 1,935,019 0 0 18,215 859,372 3,410,057 0 1,458,991 0 1,030,471 220,354 8,367 31,334 117,927 46,935 70,992 0 (3,849) 0 67,143 0.95 0.95
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