Exhibit 10.1

KINDRED HEALTHCARE, INC. 2001 STOCK INCENTIVE PLAN

Amended and Restated

1. Purpose of the Plan

This Amended and Restated Kindred Healthcare, Inc. 2001 Stock Incentive Plan
(the “Plan”), originally adopted as the Kindred Healthcare, Inc. 2001 Stock
Option Plan, is intended to promote the interests of the Company by providing
the employees of the Company, who are largely responsible for the management,
growth and protection of the business of the Company, with incentives and
rewards to encourage them to continue in the employ of the Company.

2. Definitions

As used in the Plan, the following definitions apply to the terms indicated
below:

(a) “Affiliates” shall mean with respect to any person, any other person that,
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with the first person.

(b) “Board of Directors” shall mean the Board of Directors of Kindred.

(c) “Cause,” when used in connection with the termination of a Participant’s
employment, shall mean (i) dishonesty; (ii) deliberate and continual refusal to
perform employment duties on substantially a full-time basis; (iii) failure to
act in accordance with any specific lawful instructions given to the Participant
in connection with the performance of his duties for the Company, unless the
Participant has an existing Disability; (iv) deliberate misconduct that is
reasonably likely to be materially damaging to the Company without a reasonable
good faith belief by the Participant that such conduct was in the best interests
of the Company; or (v) conviction of or plea of nolo contendere to a crime
involving moral turpitude.

(d) “Change in Control” shall mean any one of the following events:

(i) any Person (as this term is used in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act, but excluding any person described in and satisfying the
conditions of Rule 13d-1(b)(1)(i) thereunder) (an “Acquiring Person”) becomes
the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under
the Exchange Act (a “Beneficial Owner”), directly or indirectly, of securities
of the Company representing 50% or more of the combined voting power of the
Company’s then outstanding securities, other than beneficial ownership by a
Participant, the Company, any employee benefit plan of the Company or any Person
organized, appointed or established pursuant to the terms of any such benefit
plan;

(ii) The Company’s stockholders approve an agreement to merge or consolidate the
Company with another corporation, or an agreement providing for the sale of
substantially all of the assets of the Company to one or more Persons, in any
case other than with or to an entity 50% or more of which is controlled by, or
is under common control with, the Company;

(iii) during any two-year period, individuals who at the date on which the
period commences constitute a majority of the Board of Directors (the “Incumbent
Directors”) cease to constitute a majority thereof for any reason; provided,
however, that a director who was not an Incumbent Director shall be deemed to be
an Incumbent Director if such director was elected by, or on the recommendation
of, at least two-thirds of the Incumbent Directors (either actually or by prior
operation of this provision), other than any director who is so approved in
connection with any actual or threatened contest for election to positions on
the Board of Directors; or

 

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(iv) the Company is merged, combined, consolidated, recapitalized or otherwise
organized with one or more other entities that are not affiliates of the
Company, as a result of which less than 50% of the outstanding voting securities
of the surviving or resulting entity immediately after such event are, or will
be, owned, directly or indirectly, by shareholders of the Company, determined on
the basis of record ownership as of the date of determination of holders
entitled to vote on the transaction (or in the absence of a vote, the day
immediately prior to the event).

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
as a result of any event or transaction to the extent that treating such event
or transaction as a Change in Control would cause any tax to become due under
Section 409A of the Code.

(e) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to
time.

(f) “Committee” shall have the meaning given to such term in Section 4.

(g) “Common Stock” shall mean the Company’s common stock, $.25 par value per
share.

(h) “Company” shall mean Kindred together with its Affiliates.

(i) “Disability” shall mean a physical or mental condition that entitles the
Participant to benefits under the Company’s long-term disability plan. For
purposes of this Plan, a Participant’s employment shall be deemed to have
terminated as a result of Disability on the date as of which he is first
entitled to receive disability benefits under such policy.

(j) “EBITDAR” shall mean the consolidated earnings of Kindred and its
subsidiaries before interest, taxes, depreciation, amortization and rent.

(k) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(l) the “Fair Market Value” of a Share with respect to any day shall be (i) the
closing sales price on such day of a Share as reported on the principal
securities exchange on which Shares are then listed or admitted to trading or
(ii) if not so reported, the average of the closing bid and ask prices on such
day as reported on the National Association of Securities Dealers Automated
Quotation System or (iii) if not so reported, as furnished by any member of the
National Association of Securities Dealers, Inc. selected by the Committee. In
the event that the price of a Share shall not be so reported, the Fair Market
Value of a Share shall be determined by the Committee in its absolute
discretion.

(m) “Incentive Award” shall mean an Option, Tandem SAR, Stand-Alone SAR,
Performance Unit, Restricted Share or Stock Bonus granted pursuant to the terms
of the Plan.

(n) “Incentive Stock Option” shall mean an Option which is an “incentive stock
option” within the meaning of Section 422 of the Code and which is identified as
an Incentive Stock Option in the agreement by which it is evidenced.

(o) “Kindred” shall mean Kindred Healthcare, Inc., a Delaware corporation, and
its successors.

(p) “Non-Qualified Stock Option” shall mean an Option which is not an Incentive
Stock Option and which is identified as a Non-Qualified Stock Option in the
agreement by which it is evidenced.

(q) “Option” shall mean an option to purchase Shares granted pursuant to
Section 6 hereof. Each Option shall be identified as either an Incentive Stock
Option or a Non-Qualified Stock Option in the agreement by which it is
evidenced.

 

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(r) “Participant” shall mean an employee of the Company to whom an Incentive
Award is granted pursuant to the Plan, and upon his death, his successors,
heirs, executors and administrators, as the case may be.

(s) “Performance Goals” shall have the meaning given such term in Section 9(b).

(t) “Performance Period” shall have the meaning given such term in Section 9(a).

(u) “Performance Unit” shall mean the right, granted to a Participant pursuant
to Section 9, to receive a Share upon the achievement of specified Performance
Goals.

(v) “Person” shall mean a “person,” as such term is used in Sections 13(d) and
14(d) of the Exchange Act.

(w) “Plan” shall mean this Kindred Healthcare, Inc. 2001 Stock Incentive Plan,
as it may be amended from time to time.

(x) “Restricted Share” shall mean a Share of restricted stock granted pursuant
to Section 10 hereof.

(y) “Retirement” shall mean the termination of the employment of a Participant
with the Company on or after (i) the first date on which the Participant has
both attained age 55 and completed 5 years of service with the Company or
(ii) the date on which the Participant attains age 65.

(z) “Securities Act” shall mean the Securities Act of 1933, as amended.

(aa) “Share” shall mean a share of Common Stock.

(bb) “Spread” shall mean, with respect to an Option, Tandem SAR or Stand-Alone
SAR, the excess, if any, of (i) the Fair Market Value of a Share as of the
applicable valuation date (e.g., the date such Incentive Award is exercised)
over (ii) in the case of an Option, the exercise price of such Option, or in the
case of a Tandem SAR, the exercise price of the related Option, or in the case
of a Stand-Alone SAR, the exercise price of such Stand-Alone SAR.

(cc) “Stand-Alone SAR” shall mean a stock appreciation right granted pursuant to
Section 8 hereof which is not related to any Option.

(dd) “Stock Bonus” shall mean a grant of a bonus payable in Shares pursuant to
Section 11 hereof.

(ee) “Tandem SAR” shall mean a stock appreciation right granted pursuant to
Section 7 hereof which is related to an Option. Each Tandem SAR shall be
exercisable only to the extent its related Option is exercisable and only in the
alternative to the exercise of its related Option.

3. Stock Subject to the Plan

Under the Plan, the Committee may grant to Participants (i) Options, (ii) Tandem
SARs, (iii) Stand-Alone SARs, (iv) Performance Units, (v) Restricted Shares and
(vi) Stock Bonuses.

Subject to adjustment as provided in Section 12 hereof, the Committee may grant
Incentive Awards with respect to a number of Shares that in the aggregate does
not exceed 9,269,291 Shares; provided that (i) no Participant may be granted
(a) Options with respect to more than 150,000 Shares in the aggregate in any
calendar year; (b) Tandem SARs or Stand-Alone SARs (collectively) with respect
to more than 100,000 Shares in the aggregate in any calendar year;
(c) Performance Units with respect to more than 100,000 Shares in the aggregate
in any calendar year; (d) Restricted Shares with respect to more than 100,000
Shares in the aggregate in any calendar year; or (e) Stock Bonuses with respect
to more than 25,000 Shares in the aggregate in any calendar year and (ii)

 

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shares issued during the term of the Plan for Incentive Awards other than
Options, Stand-Alone SARS and Tandem SARS shall in no event exceed fifty percent
(50%) of the shares authorized under the Plan.

In the event that any outstanding Option, Stand-Alone SAR, Restricted Share or
Performance Unit expires, terminates or is cancelled for any reason (other than
pursuant to Section 7(b)(ii) hereof), the Shares subject to the unexercised
portion of such Option, Stand-Alone SAR, Restricted Share or Performance Unit
shall again be available for grants under the Plan. In the event that an
outstanding Option is cancelled pursuant to Section 7(b)(ii) hereof by reason of
the exercise of a Tandem SAR, the Shares subject to the cancelled portion of
such Option shall not again be available for grant under the Plan. To the extent
that Incentive Awards terminate, expire or are cancelled without having been
exercised, vested or paid, the Shares covered thereby shall continue to count
against the annual maximum number of Shares with respect to which each type of
Incentive Award may be granted to a Participant.

Shares issued under the Plan may be either newly issued shares or treasury
shares, at the discretion of the Committee.

4. Administration of the Plan

The Plan shall be administered by a committee of the Board (the “Committee”)
consisting of two or more persons, each of whom shall be a (i) “non-employee
director” within the meaning of Rule 16b-3 promulgated under Section 16 of the
Exchange Act (ii) an “outside director” within the meaning of Treasury
Regulation section 1.162-27(e)(3) promulgated under Section 162(m) of the Code
and (iii) an “independent” director as required by NYSE or any security exchange
on which the Common Stock is listed. The Committee shall from time to time
designate the employees of the Company who shall be granted Incentive Awards.

The Committee shall have full authority to administer the Plan, including
authority to interpret and construe any provision of the Plan and the terms of
any Incentive Award issued under it and to adopt such rules and regulations for
administering the Plan as it may deem necessary. Decisions of the Committee
shall be final and binding on all parties.

The Committee may, in its absolute discretion, accelerate the date on which any
Option or Stand-Alone SAR granted under the Plan becomes exercisable or on which
a Restricted Share granted under the plan vests or, subject to Sections 6(c)(i)
and 8(c)(i) hereof, extend the term of any Option or Stand-Alone SAR granted
under the Plan. In addition, the Committee may modify, with the consent of the
Participant, any Incentive Award to make it consistent with other agreements
approved by the Committee.

Whether an authorized leave of absence, or absence in military or government
service, shall constitute termination of employment shall be determined by the
Committee; provided that, no payment shall be made with respect to any Incentive
Award that is subject to Section 409A of the Code as a result of any such
authorized leave of absence or absence in military or government service unless
such authorized leave or absence constitutes a separation from service for
purposes of Section 409A of the Code and the regulations promulgated thereunder.

Neither the Committee nor any member of the Committee shall be liable for any
action, omission, or determination relating to the Plan, and the Company shall
indemnify and hold harmless each member of the Committee and each other director
or employee of the Company to whom any duty or power relating to the
administration or interpretation of the Plan has been delegated against any cost
or expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of the Committee) arising out of any
action, omission or determination relating to the Plan, unless, in either case,
such action, omission or determination was taken or made by such member,
director or employee in bad faith and without reasonable belief that it was in
the best interests of the Company.

 

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5. Eligibility

The persons who shall be eligible to receive Incentive Awards pursuant to the
Plan shall be such employees of the Company who are largely responsible for the
management, growth and protection of the business of the Company (including
officers of the Company, whether or not they are directors of the Company) as
the Committee shall select from time to time.

6. Options

The Committee may grant Options pursuant to the Plan which Options shall be
evidenced by agreements in such form as the Committee shall from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:

(a) Identification of Options

All Options granted under the Plan shall be clearly identified in the agreement
evidencing such Options as either Incentive Stock Options or Non-Qualified Stock
Options.

(b) Exercise Price

The exercise price of any Option granted under the Plan shall be not less than
100% of the Fair Market Value of a Share on the date on which such Option is
granted.

(c) Term and Exercise of Options

(i) Each Option shall be exercisable on such date or dates, during such period
and for such number of Shares as shall be determined by the Committee on the day
on which such Option is granted and set forth in the agreement evidencing such
Option; provided, however, that no Option shall be exercisable after the
expiration of ten years from the date such Option was granted; and, provided,
further, that each Option shall be subject to earlier termination, expiration or
cancellation as provided in the Plan or in the agreement evidencing such Option.

(ii) Each Option shall be exercisable in whole or in part. The partial exercise
of an Option shall not cause the expiration, termination or cancellation of the
remaining portion thereof.

(iii) An Option shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Corporate Secretary, no less than
three business days in advance of the effective date of the proposed exercise.
Such notice shall specify the number of Shares with respect to which the Option
is being exercised and the effective date of the proposed exercise and shall be
signed by the Participant. The Participant may withdraw such notice at any time
prior to the close of business on the business day immediately preceding the
effective date of the proposed exercise. Payment for Shares purchased upon the
exercise of an Option shall be made on the effective date of such exercise
either (i) in cash, by certified check, bank cashier’s check or wire transfer or
(ii) in Shares previously owned by the Participant for at least six months and
valued at their Fair Market Value on the effective date of such exercise, or
partly in Shares with the balance in cash, by certified check, bank cashier’s
check or wire transfer. In addition, Options may be exercised through a
registered broker-dealer pursuant to such cashless exercise procedures which
are, from time to time, deemed acceptable by the Company. Any payment in Shares
shall be effected by the delivery of such Shares to the Corporate Secretary of
the Company, duly endorsed in blank or accompanied by stock powers duly executed
in blank, together with any other documents and evidences as the Corporate
Secretary of the Company shall require from time to time.

(iv) Certificates for Shares purchased upon the exercise of an Option shall be
issued in the name of the Participant and delivered to the Participant as soon
as practicable following the effective date on which the Option is exercised.

 

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(v) During the lifetime of a Participant, each Option granted to him shall be
exercisable only by him. No Option shall be assignable or transferable otherwise
than by will or by the laws of descent and distribution.

(d) Limitations on Grant of Incentive Stock Options

(i) The aggregate Fair Market Value of Shares with respect to which “incentive
stock options” (within the meaning of Section 422 of the Code) are exercisable
for the first time by a Participant during any calendar year under the Plan and
any other stock option plan of the Company (or any “subsidiary” of the Company
as such term is defined in Section 424(f) of the Code) shall not exceed
$100,000. Such Fair Market Value shall be determined as of the date on which
each such incentive stock option is granted. In the event that the aggregate
Fair Market Value of Shares with respect to such incentive stock options exceeds
$100,000, then Incentive Stock Options granted hereunder to such Participant
shall, to the extent and in the order required by regulations promulgated under
the Code (or any other authority having the force of regulations), automatically
be deemed to be Non-Qualified Stock Options, but all other terms and provisions
of such Incentive Stock Options shall remain unchanged. In the absence of such
regulations (and authority), or in the event such regulations (or authority)
require or permit a designation of the options which shall cease to constitute
incentive stock options, Incentive Stock Options shall, to the extent of such
excess and in the order in which they were granted, automatically be deemed to
be Non-Qualified Stock Options, but all other terms and provisions of such
Incentive Stock Options shall remain unchanged.

(ii) No Incentive Stock Option may be granted to an individual if, at the time
of the proposed grant, such individual owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of Kindred or
any of its “subsidiaries” (within the meaning of Section 424(f) of the Code),
unless (i) the exercise price per Share of such Incentive Stock Option is at
least one hundred and ten percent of the Fair Market Value of a Share at the
time such Incentive Stock Option is granted and (ii) such Incentive Stock Option
is not exercisable after the expiration of five years from the date such
Incentive Stock Option is granted.

(e) Effect of Termination of Employment

(i) In the event that the employment of a Participant with the Company shall
terminate for any reason other than Disability, Retirement, Cause or death
(A) Options granted to such Participant, to the extent that they were
exercisable at the time of such termination, shall remain exercisable for 90
days after such termination, at which time they shall expire, and (B) Options
granted to such Participant, to the extent that they were not exercisable at the
time of such termination, shall expire at the commencement of business on the
date of such termination; provided, however, that no Option shall be exercisable
after the expiration of its term.

(ii) In the event that the employment of a Participant with the Company shall
terminate on account of the Retirement of the Participant, (A) such Participant
shall be entitled to exercise Options granted to him hereunder to the extent
that such Options were exercisable at the time of such termination (x) in the
case of Non-Qualified Stock Options, for two years after the date of Retirement
and (y) in the case of Incentive Stock Options, for 90 days after Retirement,
and (B) Options granted to such Participant, to the extent that they were not
exercisable at the time of such termination, shall expire at the commencement of
business on the date of such termination; provided, however, that no Option
shall be exercisable after the expiration of its term.

(iii) In the event that the employment of a Participant with the Company shall
terminate on account of the Disability or death of the Participant, all then
outstanding Options of such Participant shall become immediately exercisable and
such Participant shall be entitled to exercise Options granted to him hereunder
(x) in the case of Non-Qualified Stock Options, at any time within two years
after the date of death or the determination of Disability, and (y) in the case
of Incentive Stock Options, at any time within

 

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one year after the date of death or determination of Disability; provided,
however, that no Option shall be exercisable after the expiration of its term.

(iv) In the event of the termination of a Participant’s employment for Cause,
all outstanding Options granted to such Participant shall expire at the
commencement of business on the date of such termination.

(f) Consequences of a Change in Control

Upon the occurrence of a Change in Control, each Option granted under the Plan
and outstanding at such time shall become fully and immediately exercisable and
shall remain exercisable until its expiration, termination or cancellation
pursuant to the terms of the Plan. Furthermore, the Committee may specify in the
agreement evidencing an Option that the Participant receiving such Option shall,
following a Change in Control, have the right to sell the Option back to the
Company for an amount equal to the Spread.

7. Tandem Stock Appreciation Rights

The Committee may grant in connection with any Option granted hereunder one or
more Tandem SARs relating to a number of Shares less than or equal to the number
of Shares subject to the related Option. A Tandem SAR may be granted at the same
time as, or subsequent to the time that, its related Option is granted. Each
Tandem SAR shall be evidenced by an agreement in such form as the Committee
shall from time to time approve. Tandem SARs shall comply with and be subject to
the following terms and conditions:

(a) Benefit Upon Exercise

Subject to Section 7(c) hereof, the exercise of a Tandem SAR with respect to any
number of Shares prior to the occurrence of a Change in Control shall entitle a
Participant to (i) a cash payment, for each such Share, equal to the Spread,
(ii) the issuance or transfer to the Participant of a number of Shares which on
the date of the exercise of the Tandem SAR have a Fair Market Value equal to
such Spread or (iii) a combination of cash and Shares in amounts equal to such
Spread, all as determined by the Committee in its discretion. Such payment,
transfer or issuance shall occur as soon as practical, but in no event later
than the expiration of five business days, after the effective date of such
exercise.

(b) Term and Exercise of Tandem SAR

(i) A Tandem SAR shall be exercisable at the same time and to the same extent
(on a proportional basis, with any fractional amount being rounded down to the
immediately preceding whole number) as its related Option.

(ii) The exercise of a Tandem SAR with respect to a number of Shares shall cause
the immediate and automatic cancellation of its related Option with respect to
an equal number of Shares. The exercise of an Option, or the cancellation,
termination or expiration of an Option (other than pursuant to this
subsection (ii)), with respect to a number of Shares shall cause the automatic
and immediate cancellation of its related Tandem SARs to the extent that the
number of Shares subject to such Option after such exercise, cancellation,
termination or expiration is less than the number of Shares subject to such
Tandem SARs. Such Tandem SARs shall be cancelled in the order in which they
became exercisable.

(iii) Each Tandem SAR shall be exercisable in whole or in part; provided, that
no partial exercise of a Tandem SAR shall be for an aggregate exercise price of
less than $1,000. The partial exercise of a Tandem SAR shall not cause the
expiration, termination or cancellation of the remaining portion thereof.

 

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(iv) During the lifetime of a Participant, each Tandem SAR granted to him shall
be exercisable only by him. No Tandem SAR shall be assignable or transferable
otherwise than by will or by the laws of descent and distribution and otherwise
than together with its related Option.

(v) A Tandem SAR shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Corporate Secretary, no less than
three business days in advance of the effective date of the proposed exercise.
Such notice shall specify the number of Shares with respect to which the Tandem
SAR is being exercised and the effective date of the proposed exercise and shall
be signed by the Participant. The Participant may withdraw such notice at any
time prior to the close of business on the business day immediately preceding
the effective date of the proposed exercise.

(c) Consequences of a Change in Control

The exercise of a Tandem SAR with respect to any number of Shares upon or after
the occurrence of a Change in Control shall entitle a Participant to a cash
payment, for each such Share, equal to the Spread.

8. Stand-Alone Stock Appreciation Rights

The Committee may grant Stand-Alone SARs pursuant to the Plan, which Stand-Alone
SARs shall be evidenced by agreements in such form as the Committee shall from
time to time approve. Stand-Alone SARs shall comply with and be subject to the
following terms and conditions:

(a) Exercise Price

The exercise price of any Stand-Alone SAR granted under the Plan shall be
determined by the Committee at the time of the grant of such Stand-Alone SAR but
shall not be less than 100% of the Fair Market Value of a Share on the date on
which such Stand-Alone SAR is granted.

(b) Benefit Upon Exercise

Subject to Section 8(e) hereof, the exercise of a Stand-Alone SAR with respect
to any number of Shares prior to the occurrence of a Change in Control shall
entitle a Participant to (i) a cash payment, for each such Share, equal to the
Spread, (ii) the issuance or transfer to the Participant of a number of Shares
which on the date of the exercise of the Stand-Alone SAR have a Fair Market
Value equal to such Spread or (iii) a combination of cash and Shares in amounts
equal to such Spread, all as determined by the Committee in its absolute
discretion. Such payment, transfer or issuance shall occur as soon as practical,
but in no event later than five business days, after the effective date of the
exercise.

(c) Term and Exercise of Stand-Alone SARs

(i) Each Stand-Alone SAR shall be exercisable on such date or dates, during such
period and for such number of Shares as shall be determined by the Committee and
set forth in the agreement with respect to such Stand-Alone SAR; provided,
however, that no Stand-Alone SAR shall be exercisable after the expiration of
ten years from the date such Stand-Alone SAR was granted; and, provided,
further, that each Stand-Alone SAR shall be subject to earlier termination,
expiration or cancellation as provided in the Plan or in the agreement
evidencing such Stand-Alone SAR.

(ii) Each Stand-Alone SAR may be exercised in whole or in part; provided, that
no partial exercise of a Stand-Alone SAR shall be for an aggregate exercise
price of less than $1,000. The partial exercise of a Stand-Alone SAR shall not
cause the expiration, termination or cancellation of the remaining portion
thereof.

(iii) A Stand-Alone SAR shall be exercised by delivering notice to the Company’s
principal office, to the attention of its Corporate Secretary, no less than
three business days in advance of the

 

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effective date of the proposed exercise. Such notice shall specify the number of
Shares with respect to which the Stand-Alone SAR is being exercised and the
effective date of the proposed exercise and shall be signed by the Participant.
The Participant may withdraw such notice at any time prior to the close of
business on the business day immediately preceding the effective date of the
proposed exercise.

(iv) During the lifetime of a Participant, each Stand-Alone SAR granted to him
shall be exercisable only by him. No Stand-Alone SAR shall be assignable or
transferable otherwise than by will or by the laws of descent and distribution.

(d) Effect of Termination of Employment

(i) In the event that the employment of a Participant with the Company shall
terminate for any reason other than Disability, Retirement, Cause or death
(A) Stand-Alone SARs granted to such Participant, to the extent that they were
exercisable at the time of such termination, shall remain exercisable for 90
days after such termination, at which time they shall expire, and
(B) Stand-Alone SARs granted to such Participant, to the extent that they were
not exercisable at the time of such termination, shall expire at the
commencement of business on the date of such termination; provided, however,
that no Stand-Alone SAR shall be exercisable after the expiration of its term.

(ii) In the event that the employment of a Participant with the Company
terminates on account of the Retirement of the Participant, (A) such Participant
shall be entitled to exercise Stand-Alone SARs granted to him hereunder, to the
extent that such Stand-Alone SARs were exercisable at the time of such
termination, for two years after the date of Retirement, and (B) Stand-Alone
SARs granted to such Participant, to the extent that they were not exercisable
at the time of such termination, shall expire at the commencement of business on
the date of such termination; provided, however, that no Stand-Alone SAR shall
be exercisable after the expiration of its term.

(iii) In the event that the employment of a Participant with the Company shall
terminate on account of the Disability or death of the Participant
(x) Stand-Alone SARs granted to such Participant, to the extent that they were
exercisable at the time of such termination, shall remain exercisable until the
expiration of two years after such termination, on which date they shall expire,
and (y) Stand-Alone SARs granted to such Participant, to the extent that they
were not exercisable at the time of such termination, shall expire at the close
of business on the date of such termination; provided, however, that no
Stand-Alone SAR shall be exercisable after the expiration of its term.

(iv) In the event of the termination of a Participant’s employment for Cause,
all outstanding Stand-Alone SARs granted to such Participant shall expire at the
commencement of business on the date of such termination.

(e) Consequences of a Change in Control

Upon the occurrence of a Change in Control, any Stand-Alone SAR granted under
the Plan and outstanding at such time shall become fully and immediately
exercisable and shall remain exercisable until its expiration, termination or
cancellation pursuant to the terms of the Plan. The exercise of a Stand-Alone
SAR with respect to any number of Shares upon or after the occurrence of a
Change in Control shall entitle a Participant to a cash payment, for each such
Share, equal to the Spread.

9. Performance Units

The Committee may grant Performance Units pursuant to the Plan, which
Performance Units shall be evidenced by agreements in such form as the Committee
shall from time to time approve. Performance Units shall be based upon the
achievement of Performance Goals over a specified Performance Period and shall
comply with and be subject to the following terms and conditions:

 

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(a) Performance Period

The Committee shall determine the period of performance (“Performance Period”),
with respect to each Performance Unit, during which the Performance Goals will
be measured. The Performance Period shall not be less than six months nor more
than five years.

(b) Performance Goals

The goals (“Performance Goals”) that are to be achieved with respect to each
Performance Unit shall be those objectives established by the Committee as it
deems appropriate, and which may be expressed in terms of (i) earnings per
Share, (ii) Share price, (iii) pre-tax profit, (iv) net income, (v) return on
equity or assets, (vi) revenues, (vii) account receivable collection days,
(viii) EBITDAR, (ix) individual management, performance or quality objectives,
(x) any combination of the foregoing, or (xi) such other goals as the Committee
may determine (except with respect to executive officers). Performance Goals may
be in respect of the performance of Kindred and its subsidiaries (which may be
on a consolidated basis) or a subsidiary, division or other operating unit of
the Company. Performance Goals may be absolute or relative and may be expressed
in terms of a progression within a specified range. The Committee shall
establish Performance Goals applicable to a particular Performance Period within
90 days of the commencement of such Performance Period (or, in the case of a
Performance Period that is less than 12 months in duration, before 25% of such
Performance Period has elapsed), provided that the outcome of the Performance
Goal is substantially uncertain at the time of its adoption. The Performance
Goals with respect to a Performance Period shall be established by the Committee
in order to comply with Section 162(m) of the Code, as applicable. The Committee
shall determine the target levels of performance that must be achieved with
respect to each criteria that is identified in a Performance Goal in order for a
Performance Goal to be treated as attained in whole or in part; provided that
the Committee shall establish each such target level of performance so that any
vesting condition related to the attainment of the Performance Goals would be
considered a substantial risk of forfeiture for purposes of Section 409A of the
Code and the regulations promulgated thereunder. In the event that the
Performance Goals are based on more than one business criteria, the Committee
may determine to make a grant of a Performance Unit upon attainment of the
Performance Goal relating to any one or more of such criteria.

(c) Benefit Upon Achievement of Performance Goals

As soon as practicable after the end of a Performance Period, the Committee
shall determine and certify the extent to which the Performance Goals for such
Performance Period were achieved, if at all. If the Performance Goals are
achieved in full, and the Participant remains employed with the Company as of
the end of the relevant Performance Period, the Participant will be allocated
Shares equal to the number of Performance Units initially awarded to the
Participant for the relevant Performance Period. Each award of Performance Units
may provide for the allocation of fewer Performance Units in the event of
partial fulfillment of Performance Goals. After certifying the extent of any
Performance Goals, the Committee may determine at the time of payment whether
such payment shall be made (a) in cash (equal to the Fair Market Value of a
Share multiplied by the number of Performance Units being allocated), (b) in
Shares or (c) in a combination of cash and Shares. Notwithstanding the
foregoing, in no event shall any payment pursuant to this Section 9(c) occur
later than March 15th of the calendar year immediately following the calendar
year in which the relevant Performance Period ends.

(d) No Transferability

No Performance Unit shall be assignable or transferable otherwise than by will
or the laws of descent and distribution.

(e) Effect of Termination of Employment

(i) If the employment of a Participant shall terminate with the Company prior to
the expiration of a Performance Period for any reason other than for death or
Disability, the Performance Units then held by the Participant shall terminate.

 

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(ii) In the event that the employment of a Participant with the Company shall
terminate on account of the Disability or death of the Participant prior to the
expiration of a Performance Period with respect to which such Participant has
Performance Units outstanding, all such outstanding Performance Units shall be
paid to the Participant or the Participant’s estate, as the case may be, as if
all applicable Performance Goals had been fully achieved; provided that such
payment shall be prorated to reflect the portion of the Performance Period
during which such Participant was employed.

(f) Consequences Upon Change in Control

Upon a Change in Control, any and all outstanding Performance Units which are
potentially available under any outstanding award shall become fully vested and
immediately payable as if the Performance Goals were fully achieved, without any
proration, in which case payment shall be in cash equal to the product of the
number of outstanding Performance Units and the greater of (i) the Fair Market
Value of a Share on the date of such Change in Control and (ii) the highest
price per Share paid in connection with such Change in Control.

10. Restricted Shares

The Committee may grant Restricted Shares pursuant to the Plan, which Restricted
Shares shall be evidenced by agreements in such form as the Committee shall from
time to time approve. Restricted Shares shall comply with and be subject to the
following terms and conditions:

(a) Vesting

Subject to the provisions of Section 10(b) hereof, the Restricted Shares granted
to a Participant shall not be transferred, pledged, assigned or otherwise
encumbered and shall be subject to forfeiture until such Restricted Shares vest
and become fully transferable without restriction according to the vesting
schedule set forth in the agreement evidencing such Restricted Shares. Any
Restricted Shares shall vest over a period of at least three years from the date
of grant.

(b) Effect of Termination of Employment

(i) If employment of a Participant with the Company shall terminate prior to the
scheduled vesting dates of any Restricted Shares for any reason other than death
or Disability, all Restricted Shares awarded to such Participant that have not
vested shall be forfeited on the date of such termination without payment of any
consideration therefor.

(ii) In the event that the employment of a Participant with the Company shall
terminate on account of the Disability or death of the Participant prior to the
expiration of any vesting period, all Restricted Shares awarded to such
Participant shall immediately vest.

(c) Consequences of a Change in Control

Upon a Change in Control, any Restricted Share granted under the Plan and
outstanding at such time shall vest and become fully transferable.

11. Stock Bonuses

The Committee may grant Stock Bonuses in such amounts as it shall determine from
time to time. A Stock Bonus shall be paid at such time and subject to such
conditions as the Committee shall determine at the time of the grant of such
Stock Bonus; provided that to the extent that any such Stock Bonus may be
subject to Section 409A of the Code, the agreement evidencing the grant of such
Stock Bonus shall contain terms and conditions (including, without limitation,
deferral and payment provisions), that comply with Section 409A of the Code and
the regulations promulgated thereunder. Certificates for Shares granted as a
Stock Bonus shall be issued in the name of the

 

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Participant to whom such grant was made and delivered to such Participant as
soon as practicable after the date on which such Stock Bonus is required to be
paid.

12. Adjustment Upon Changes in Common Stock

(a) Shares Available for Grants

In the event of any change in the number of Shares outstanding by reason of any
stock dividend or split, recapitalization, merger, consolidation, combination or
exchange of shares or similar corporate change, the maximum number and classes
of Shares and limits on Incentive Awards with respect to which the Committee may
grant Incentive Awards shall be appropriately adjusted by the Committee. In the
event of any change in the number of Shares outstanding by reason of any other
event or transaction, the Committee shall make equitable adjustments in the
number and class of Shares with respect to which Incentive Awards may be
granted.

(b) Adjustments to Outstanding Incentive Awards

(i) In the event of any change in the capitalization of the Company or other
corporate change or transaction involving the Company or its securities, the
Committee shall make equitable adjustments in the number and class of shares
subject to Options (including any Tandem SARs related thereto), Stand-Alone
SARs, Restricted Shares and Performance Units outstanding on the date on which
such change occurs and in the exercise price of any such Option, Tandem SAR or
Stand-Alone SAR. In the event of the occurrence of any transaction or event that
has a substantial impact on the achievement of Performance Goals, the Committee
shall make equitable adjustments to any such Performance Goals with respect to
any then-current Performance Period.

(ii) In the event of (w) a dissolution or liquidation of the Company, (x) a sale
of all or substantially all of the Company’s assets, (y) a merger or
consolidation involving the Company in which the Company is not the surviving
corporation or (z) a merger or consolidation involving the Company in which the
Company is the surviving corporation but the holders of Shares receive
securities of another corporation and/or other property, including cash, the
Committee shall, subject to Section 409A of the Code to the extent applicable,
either:

(A) cancel each Option (including each Tandem SAR related thereto), Stand-Alone
SAR, Performance Unit and Restricted Share outstanding immediately prior to such
event (whether or not then exercisable), and, in full consideration of such
cancellation, pay to the Participant to whom such Option, Stand-Alone SAR,
Performance Unit or Restricted Share was granted an amount in cash equal to
(x) for each Share subject to an Option or Stand-Alone SAR, respectively, the
excess of (A) the value of the property (including cash) received by the holder
of a Share as a result of such event over (B) the exercise price of such Option
or Stand-Alone SAR, or (y) for each Restricted Share or Performance Unit, the
value of the property (including cash) received by the holder of a Share; or

(B) provide for the exchange of each Option (including any related Tandem SAR),
Stand-Alone SAR, Performance Unit and Restricted Share outstanding immediately
prior to such event (whether or not then vested or exercisable) for an option, a
stock appreciation right or a share of restricted stock with respect to, as
appropriate, some or all of the property which a holder of the number of Shares
subject to such Option, Stand-Alone SAR, Performance Unit or Restricted Share
would have received in such transaction and, incident thereto, make an equitable
adjustment, in accordance with U.S. Department of Treasury Regulation
§1.409A-1(b)(5)(v)(D), in the exercise price of the option or stock appreciation
right, and/or the number of shares or amount of property subject to the option,
stock appreciation right or share of restricted stock, or, if appropriate,
provide for a cash payment to the Participant to whom such Option, Stand-Alone
SAR, Performance Unit or Restricted Share was granted in partial consideration
for the exchange of the Option, Stand-Alone SAR, Performance Unit or Restricted
Share.

 

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(c) No Other Rights

Except as expressly provided in the Plan, no Participant shall have any rights
by reason of any subdivision or consolidation of shares of stock of any class,
the payment of any dividend, any increase or decrease in the number of shares of
stock of any class or any dissolution, liquidation, merger or consolidation of
the Company or any other corporation. Except as expressly provided in the Plan,
no issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number of Shares subject to
an Incentive Award or the exercise price of any Option, Tandem SAR or
Stand-Alone SAR.

13. Rights as a Stockholder

No person shall have any rights as a stockholder with respect to any Shares
covered by or relating to any Incentive Award granted pursuant to this Plan
until the date of the issuance of a stock certificate with respect to such
shares. Except as otherwise expressly provided in Section 12 hereof, no
adjustment to any Incentive Award shall be made for dividends or other rights
for which the record date occurs prior to the date such stock certificate is
issued.

14. No Special Employment Rights; No Right to Incentive Award; Sale of a
Division or Affiliate

(a) Nothing contained in the Plan or any Incentive Award shall confer upon any
Participant any right with respect to the continuation of his employment by the
Company or interfere in any way with the right of the Company, subject to the
terms of any separate employment or other agreement to the contrary, at any time
to terminate such employment or to increase or decrease the compensation of the
Participant from the rate in existence at the time of the grant of an Incentive
Award.

(b) No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee’s granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant an Incentive Award to such
Participant or any other Participant or other person at any time nor preclude
the Committee from making subsequent grants to such Participant or any other
Participant or other person.

(c) For all purposes of this Plan, the employment of a Participant with the
Company shall be deemed to have terminated without Cause upon a sale or other
disposition by Kindred, directly or indirectly, of an Affiliate or any division
or business unit of the Company to which such Participant is allocated by the
Committee, unless the Committee, in its sole discretion, determines otherwise.

15. Securities Matters

(a) The Company shall be under no obligation to effect the registration pursuant
to the Securities Act of any Shares to be issued hereunder or to effect similar
compliance under any state laws. Notwithstanding anything herein to the
contrary, the Company shall not be obligated to cause to be issued or delivered
any certificates evidencing Shares pursuant to the Plan unless and until the
Company is advised by its counsel that the issuance and delivery of such
certificates is in compliance with all applicable laws, regulations of
governmental authority and the requirements of any securities exchange on which
Shares are traded. The Committee may require, as a condition of the issuance and
delivery of certificates evidencing Shares pursuant to the terms hereof, that
the recipient of such shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its sole discretion, deems necessary or desirable.

(b) The exercise of any Option (including any Tandem SAR related thereto) or
Stand-Alone SAR granted hereunder shall only be effective at such time as
counsel to the Company shall have determined that the issuance and delivery of
Shares pursuant to such exercise is in compliance with all applicable laws,
regulations of governmental authority and the requirements of any securities
exchange on which Shares are traded. The Company may, in its sole discretion,
defer the effectiveness of any exercise of an Option (including any Tandem SAR
related thereto) or Stand-Alone SAR granted hereunder in order to allow the
issuance of Shares pursuant thereto to be made pursuant to registration or an
exemption from registration or other methods for compliance available under
federal

 

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or state securities laws. The Company shall inform the Participant in writing of
its decision to defer the effectiveness of the exercise of an Option, Tandem SAR
or Stand-Alone SAR granted hereunder. During the period that the effectiveness
of the exercise of an Option, Tandem SAR or Stand-Alone SAR has been deferred,
the Participant may, by written notice, withdraw such exercise and obtain the
refund of any amount paid with respect thereto.

16. Withholding Taxes

(a) Cash Remittance

Whenever Shares are to be issued upon the exercise of an Option, the vesting of
a Restricted Share, the payment of a Performance Unit or the grant of a Stock
Bonus, the Company shall have the right to require the Participant to remit to
the Company in cash an amount sufficient to satisfy federal, state and local
withholding tax requirements, if any, attributable to such exercise, vesting,
payment or grant prior to the delivery of any certificate or certificates for
such shares. In addition, upon the exercise of a Tandem SAR or Stand-Alone SAR
or the payment of a Performance Unit, the Company shall have the right to
withhold from any cash payment required to be made pursuant thereto an amount
sufficient to satisfy the federal, state and local withholding tax requirements,
if any, attributable to such exercise or payment.

(b) Stock Remittance

At the election of the Participant, when Shares are to be issued upon the
exercise of an Option, the vesting of a Restricted Share, the payment of a
Performance Unit or the grant of a Stock Bonus, the Participant may tender to
the Company a number of Shares previously held by such Participant for at least
six months determined by such Participant, the Fair Market Value of which at the
tender date the Company determines to be sufficient to satisfy the federal,
state and local withholding tax requirements, if any, attributable to such
exercise, vesting, payment or grant and not greater than the Participant’s
required federal, state and local tax obligations associated with such exercise,
vesting, payment or grant. Such election shall satisfy the Participant’s
obligations under Paragraph 16(a) hereof, if any.

(c) Stock Withholding

At the election of the Participant when Shares are to be issued upon the
exercise of an Option, the vesting of a Restricted Share, the payment of a
Performance Unit or the grant of a Stock Bonus, the Company shall withhold a
number of such shares determined by such Participant, the Fair Market Value of
which at the exercise, vesting, payment or grant date the Company determines to
be sufficient to satisfy the federal, state and local withholding tax
requirements, if any, attributable to such exercise, vesting, payment or grant
and is not greater than the Participant’s required federal, state and local tax
obligations associated with such exercise or grant. Such election shall satisfy
the Participant’s obligations under Paragraph 16(a) hereof, if any.

17. Amendment of the Plan

The Board of Directors may amend, alter or discontinue the Plan, but no
amendment, alteration, or discontinuation shall be made that would impair the
rights of a Participant under an Award theretofore granted, without the
Participant’s consent, or that without the approval of the Company’s
stockholders would:

(a) except as is provided in Section 12 of the Plan, increase the total number
of Shares reserved for the purpose of the Plan; or

(b) reduce the exercise price for Options, Stand-Alone SARS and Tandem SARS by
repricing or replacing such Awards.

The Committee may amend the terms of any Award therefore granted, prospectively
or retroactively, but no such amendment shall impair the rights of any
Participant without his consent. Except as provided in Section 12, the

 

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Committee shall not have the authority to cancel any outstanding Option and
issue a new Option in its place with a lower exercise price; provided, however,
that this sentence shall not prohibit an exchange offer whereby the Company
provides certain Participants with an election to cancel an outstanding Option
and receive a grant of a new Option at a future date if such exchange offer only
occurs with stockholder approval.

18. No Obligation to Exercise

The grant to a Participant of an Option, Tandem SAR or Stand-Alone SAR, shall
impose no obligation upon such Participant to exercise such Option, Tandem SAR
or Stand-Alone SAR.

19. Transfers Upon Death

Upon the death of a Participant, outstanding Incentive Awards granted to such
Participant may be exercised or paid only by the executors or administrators of
the Participant’s estate or by any person or persons who shall have acquired
such right to exercise by will or by the laws of descent and distribution. No
transfer by will or the laws of descent and distribution of any Incentive Award,
or the right to exercise any Incentive Award, shall be effective to bind the
Company unless the Committee shall have been furnished with (a) written notice
thereof and with a copy of the will and/or such evidence as the Committee may
deem necessary to establish the validity of the transfer and (b) an agreement by
the transferee to comply with all the terms and conditions of the Incentive
Award that are or would have been applicable to the Participant and to be bound
by the acknowledgements made by the Participant in connection with the grant of
the Incentive Award.

20. Expenses and Receipts

The expenses of the Plan shall be paid by the Company. Any proceeds received by
the Company in connection with any Incentive Award will be used for general
corporate purposes.

21. Failure to Comply

In addition to the remedies of the Company elsewhere provided for herein,
failure by a Participant to comply with any of the terms and conditions of the
Plan or the agreement executed by such Participant evidencing an Incentive
Award, unless such failure is remedied by such Participant within ten days after
having been notified of such failure by the Committee, shall be grounds for the
cancellation and forfeiture of such Incentive Award, in whole or in part, as the
Committee, in its absolute discretion, may determine.

22. Effective Date and Term of Plan

The Plan was initially adopted by the Board of Directors on February 12, 2002;
no grants may be made under the Plan after the tenth anniversary of such date.

23. Code Section 409A

The Company intends that the Plan and each Incentive Award granted hereunder
shall comply with Section 409A of the Code and any regulations thereunder and
that the Plan shall be interpreted, operated and administered accordingly. Any
reservation of rights by the Company (including, without limitation, the rights
of the Committee under Section 12(b)(ii) hereof) affecting the timing of payment
of any Incentive Award subject to Section 409A of the Code will only be as broad
as is permitted by Section 409A of the Code and any regulations thereunder.

 

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