FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1996
Commission File Number: 33-85458
MedCath Incorporated
(Exact name of Registrant as specified in its charter)
North Carolina 56-1635096
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
(Address of Principal Executive Offices) (Zip Code)
(704) 541-3228
(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act:
None
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K[ ].
The aggregate market value of the Company's Common Stock (its only
voting stock) held by non-affiliates of the Registrant, as of December 11, 1996,
was $132,121,375. (Reference is made to the final paragraph of Part I herein for
a statement of the assumptions upon which the calculation is based.)
As of December 11, 1996, there were 11,146,749 shares of the
Registrant's Common Stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for
the fiscal year ended September 30, 1996 (the "1996 Annual Report to
Shareholders") are incorporated by reference in Part II. Portions of the
Registrant's Proxy Statement for the Annual Meeting of Shareholders to be held
February 19, 1997 are incorporated by reference in Part III.
<PAGE>
PART I
MedCath Incorporated
Index to Form 10-K
For the Year Ended September 30, 1996
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Part I
Item 1 - Business 3
Item 2 - Properties 18
Item 3 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 19
Part II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 20
Item 6 - Selected Financial Data 21
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 21
Item 8 - Financial Statements and Supplementary Data 21
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 21
Part III
Item 10 - Directors and Executive Officers of the Registrant 22
Item 11 - Executive Compensation 22
Item 12 - Security Ownership of Certain Beneficial Owners and Management 22
Item 13 - Certain Relationships and Related Transactions 22
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
</TABLE>
<PAGE>
PART I
Item 1 - Business
Overview
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. The Company believes that a
fully-integrated network incorporating leading physicians, state-of-the-art
facilities and practice management systems designed to provide high quality,
cost-effective diagnosis and treatment of cardiovascular disease offers
significant advantages to patients, providers and payors.
As part of its strategy, the Company partners with cardiologists and
cardiovascular and vascular surgeons to develop, co-own and operate specialty
heart hospitals ("Heart Hospitals") dedicated to providing comprehensive
professional services to dignose and treat heart disease. MedCath opened its
first Heart Hospital in McAllen, Texas in January 1996 and is developing
additional Heart Hospitals in Little Rock, Arkansas; Tucson, Arizona; Austin,
Texas and Bakersfield, California. The Arkansas and Tucson Heart Hospitals are
expected to open in fiscal year 1997 and the Austin and Bakersfield Heart
Hospitals in fiscal year 1998. The Company has long-term contracts to manage
three physician group practices which include leading cardiologists and
cardiovascular surgeons ("Managed Practices") located in Arizona, Virginia and
Texas. MedCath also manages eight fixed-site cardiac diagnostic and therapeutic
facilities ("Fixed-Site Facilities") located in Arizona, New Jersey,
Massachusetts and North Carolina. Two of those eight Fixed-Site Facilities, both
of which are located in North Carolina, began operations in fiscal year 1997.
MedCath currently operates 23 mobile cardiac diagnostic centers ("Mobile Cath
Labs"), principally serving networks of hospitals located in smaller
communities.
Business Strategy
MedCath's objective is to remain a leader in the delivery of cardiology and
cardiovascular services by developing affiliations with cardiologists and
cardiovascular and vascular surgeons and providing management services and
state-of-the-art facilities in order to provide high quality, cost-effective
patient care. The Company is achieving this objective by:
o Focusing exclusively on cardiology and cardiovascular services and becoming
a leader in cardiovascular disease management.
o Targeting new geographic markets based largely on the opportunities for
affiliation with leading local cardiologists and cardiovascular and
vascular surgeons.
o Developing, co-owning with local physicians and operating Heart Hospitals
dedicated to providing a comprehensive range of care required to diagnose
and treat heart disease, from outpatient non-invasive diagnostic tests to
sophisticated surgical procedures such as coronary artery bypass graft
surgery. The Company intends to continue to develop Heart Hospitals through
affiliations with cardiologists and cardiovascular and vascular surgeons
who will practice at the hospitals.
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PART I
o Operating these Heart Hospitals with a substantially lower cost structure
than conventional acute care hospitals while achieving equivalent or more
favorable outcomes. The majority of medical treatment costs for
cardiovascular disease are incurred in hospitals, therefore the Company
believes that the lower cost structure of its Heart Hospitals will provide
significant competitive advantages.
o Acquiring contracts to provide services to Managed Practices having leading
local market positions. The Company's physician practice management
services include, among others, financing, staffing, billing and
collections, purchasing and marketing and assisting in the negotiation of
managed care contracts.
o Developing, owning or co-owning with leading local physicians or medical
facilities and operating Fixed-Site Facilities in selected markets.
o Owning and operating Mobile Cath Labs in selected markets.
The Company believes that its fully-integrated networks for cardiac care
will be highly attractive to HMOs and other third-party payors and will be well
positioned to meet the demands of HMOs and other managed care plans for high
quality, cost-effective patient care. Moreover, the Company believes its
strategy reflects future trends in integrated health care delivery systems.
Business Segments
Financial information about the Company's operations by business
segment at September 30, 1994, 1995 and 1996 and for the years then ended is set
forth in Note 15 of Notes to Consolidated Financial Statements, which
information is incorporated herein by reference.
Diagnostic and Therapeutic Procedures
As a result of rapid technological developments during the past 35 years, a
wide range of diagnostic and therapeutic treatment options exists today for
patients suffering from heart disease. While heart disease has many forms, by
far the most common form is atherosclerosis, which accounts for the vast
majority of the cases of heart disease. Atherosclerosis causes the inside lining
of arteries that supply blood to the heart to become thickened and hardened by
fatty deposits commonly referred to as plaque.
As a first step in diagnosing heart disease, an internist or family
practitioner takes a medical history, conducts a physical exam and blood tests
and, typically, has the patient undergo an electrocardiogram and stress test. If
this process indicates the patient may have heart disease, he or she usually is
referred to a cardiologist. After reviewing the patient's medical history and
physical examination results, a cardiologist typically will have a patient
undergo non-invasive testing such as a treadmill stress test or an
echocardiogram (ultrasound test). If the results of these procedures are
positive, the cardiologist most likely will perform a cardiac catheterization
procedure to confirm the diagnosis and to identify the extent and location of
arterial blockages. Advanced cases of heart disease are treated through invasive
therapeutic procedures, such as angioplasty, atherectomy or, in many cases,
coronary artery bypass graft or valve replacement surgery.
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PART I
A brief description of each of the principal cardiac diagnostic and therapeutic
procedures is provided below.
Diagnostic Procedures--Non-lnvasive
Standard Treadmill Exercise Test. During this test, a patient is exercised
on a motorized treadmill while the electrical activity of the patient's heart is
measured using electrodes attached to the patient's chest. This test frequently
is used as a screening test for heart disease but is relatively insensitive in
detecting or localizing coronary artery blockages.
Nuclear Treadmill Exercise Test. During this test, a patient is exercised
on a motorized treadmill and electrical activity of the heart is measured in a
manner similar to a standard treadmill exercise test. In addition, a low level
radioactive tracer isotope such as thallium or technesium is injected into the
patient's bloodstream during exercise. After exercise, a nuclear scanning camera
and computer produce an image of the coronary blood flow to the heart muscle.
This test, also called a nuclear angiogram, is more sensitive in detecting and
analyzing coronary artery blockages than a standard treadmill exercise test.
Since this test involves minimal risk, it frequently is used in selecting
patients for cardiac catheterization testing and also for evaluating the results
in patients who have undergone angioplasty or cardiac surgery.
Echocardiogram with Color Flow Doppler (Ultrasound Test). In this test,
ultrasound technology is used to produce real time images of the interior of the
heart muscle and valves. This test accurately evaluates heart valve and muscle
problems and can measure heart muscle damage. The data obtained in this test
frequently is complementary to that obtained from stress testing or cardiac
catheterization.
Diagnostic Procedures--Invasive
Cardiac Catheterization. Cardiac catheterization, which is the most
accurate and precise of all cardiac diagnostic studies, utilizes catheters,
contrast agents and sophisticated diagnostic instruments to evaluate the
functioning of the heart and the coronary arteries. A narrow, flexible tube, or
catheter, is inserted through a main artery in the leg or arm and guided into
the patient's coronary arteries, where a physician can use the catheter to
perform various tests. A non-toxic dye, or contrast agent, is released through
the catheter, mixes with the patient's blood and becomes visible on a screen. By
viewing these test results, cardiologists can diagnose the nature and extent of
the patient's heart disease.
Invasive Therapeutic Procedures
Percutaneous Transluminal Coronary Angioplasty ("PTCA"). Angioplasty
utilizes the techniques of cardiac catheterization to open coronary arteries
that have become clogged with concentrations of plaque. The procedure allows
many patients suffering from heart disease to avoid or defer coronary artery
bypass graft surgery. A catheter is inserted through a main artery in the arm or
leg and guided to the coronary arteries. A second catheter tipped with a
deflated balloon is then threaded through the first catheter into the coronary
arteries and inflated to compress the plaque against the inner walls of the
artery. This procedure is also commonly used to clear blockages in arteries
supplying blood to other parts of the body and is referred to as peripheral
angioplasty.
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PART I
Installation of Stents. The effectiveness of PTCA is limited by the
tendency of treated arteries to restenose or abruptly close after treatment, as
well as the elastic recoil of the arteries, a condition in which the walls of
the arteries return to their stenosed state. Increasingly, a tiny metal sleeve
called a "stent," which serves as a scaffold to keep clogged arteries open, is
placed into a coronary artery when a patient undergoes PTCA as an adjunct
treatment. A research report has provided additional evidence of the safety and
effectiveness of implanted stents, which help prevent reclogging of blocked
arteries and reduce the need for patients to undergo repeat PTCA.
Installation of Pacemakers. A pacemaker is a device which emits electrical
signals that aid in the regulation of a patient's abnormal heart rate. To
install a pacemaker, a generator is placed just under the patient's skin by a
small incision in the upper left part of the chest. Lead wires are then threaded
to the heart via needle puncture in a large vein in the upper chest and then
threaded to the heart under x-ray visualization.
Atherectomy. Atherectomy utilizes the techniques of cardiac catheterization
and a variation of angioplasty to remove concentrations of plaque from coronary
arteries. A catheter tipped with a deflated balloon and a rotary shaver is
guided to the area of blockage and used to extract the plaque build-up in the
artery.
Coronary Artery Bypass Graft Surgery ("CABG"). CABG is an open heart
surgical procedure through which the flow of blood to the heart is bypassed
around sections of one or more coronary arteries that have become clogged with
plaque by using vein or artery grafts taken from other areas of the body.
Valve Replacement Surgery. Valve replacement is an open heart surgical
procedure involving the replacement of valves that regulate the flow of blood
between chambers in the heart which have become narrowed or ineffective due to
the build-up of calcium or scar tissue or the presence of some other physical
damage.
Heart Hospitals
General
A key part of the Company's strategy is developing, co-owning with
physicians and operating Heart Hospitals dedicated to providing comprehensive
professional services to diagnose and treat heart disease. The Company
structures its ownership of Heart Hospitals through limited liability companies
and limited partnerships with local cardiologists, cardiovascular and vascular
surgeons and other physicians. The Company believes that these Heart Hospitals
will be well positioned to promote the national policy to contain health care
costs by operating with a substantially lower cost structure than most general
acute care hospitals that offer similar care as just one of many other health
care services. The Company achieves substantially lower costs by:
o Designing the Heart Hospitals to improve patient flow, incorporate advanced
technology and create efficiencies in the performance of services by nurses
and technical personnel;
o Cross-training nursing, technical and other hospital staff members to the
greatest extent possible, enabling administrators to utilize staff
resources more productively and reduce both direct and indirect labor costs
per procedure;
o Capturing efficiencies and economies available within a facility designed
for the diagnosis and treatment of a single disease category by eliminating
unnecessary overhead frequently associated with conventional hospitals
providing a wide range of health care services; and
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PART I
o Aligning the interests of the cardiologists, cardiovascular and vascular
surgeons and other physicians practicing at the Heart Hospital with the
hospital's interests to achieve the operating efficiencies required to
deliver cost-effective patient care.
The Company intends to organize an integrated delivery system for
cardiology and cardiovascular services in each market in which it develops a
Heart Hospital. The system will be designed to permit the Company and the
affiliated physicians to respond proactively to the restructuring of the health
care system away from traditional fee-for-service based benefit plans and toward
managed care contractual arrangements under which health care providers must
accept more of the risk for the cost of care. With a substantially lower cost
structure, the Company believes its Heart Hospitals and related integrated
delivery systems will be well positioned in their local markets to capture a
significant share of patients enrolled in HMOs and other managed care programs.
By concentrating on providing comprehensive diagnostic and therapeutic services
to patients suffering from cardiovascular diseases, the Company also believes
the hospitals will improve the quality of outcomes for patients and achieve
positive marketing benefits.
Each of the Company's Heart Hospitals is fully equipped to enable
cardiologists and cardiovascular and vascular surgeons to perform a
comprehensive range of diagnostic and therapeutic procedures from outpatient
non-invasive diagnostic tests to sophisticated surgical procedures, such as
coronary artery bypass graft surgery. In addition, the Heart Hospitals are fully
equipped to provide clinical laboratory services and diagnostic x-ray services.
The Company owns a majority interest in each of the Heart Hospitals with the
remaining investors consisting of area cardiologists, cardiovascular and
vascular surgeons and other physicians who will practice at the hospital. The
Company will serve as manager and employ full-time nursing, technical and
administrative and other support personnel. It is anticipated that either
MedCath or a third-party lender will provide the Heart Hospitals with working
capital advances through revolving lines of credit which will be repaid as soon
as possible using the cash flows of the respective hospital.
Each of the Company's Heart Hospitals has been and will be subject to various
federal and state licensing requirements, including those related to the
Medicare and Medicaid programs, that must be satisfied in order to operate the
hospital. The Company does not expect any delays in obtaining the licenses and
certification necessary in operating its Heart Hospitals. See
"Business--Regulation."
McAllen Heart Hospital
The Company's McAllen Heart Hospital is owned and operated by MedCath of McAllen
Limited Partnership (the "McAllen Partnership"), in which MedCath owns a
majority interest and serves as the general partner. The hospital, which was
completed in December 1995 and opened in January 1996 after a Medicare and
Medicaid certification survey was completed, is a 60-bed hospital with three
surgery suites and three cardiac catheterization laboratories. In October 1995,
the McAllen Partnership completed the acquisition of a home health care business
which services the home health care needs of hospital patients after they are
discharged as well as other individuals needing such services in the McAllen
area. A number of the physicians who hold ownership interests in the McAllen
Partnership have built a three story medical office building on a site adjacent
to the McAllen Heart Hospital, which is connected to the hospital by a covered
walkway.
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PART I
The total cost of developing the McAllen Heart Hospital, including land
acquisition, construction and equipment costs, was approximately $27.3 million.
Land and construction costs were financed primarily by a $13.8 million
construction loan, which, upon completion of construction, converted to a
seven-year mortgage loan, renewable for an additional seven years at the option
of the McAllen Partnership. Most of the equipment for the hospital, with an
aggregate cost of approximately $10.6 million, was acquired through financing
arrangements with two equipment lenders.
Arkansas Heart Hospital
The Arkansas Heart Hospital, to be located in Little Rock, Arkansas, will
be owned and operated by MedCath of Little Rock, L.L.C. (the "Little Rock
Company"), in which MedCath owns a majority interest and serves as manager. The
Arkansas Heart Hospital, on which the Little Rock Company commenced construction
in February 1996, is expected to open in March 1997 and will be an 84-bed
hospital with three surgery suites and six cardiac catheterization laboratories.
The total cost of developing the Arkansas Heart Hospital, including land
acquisition, construction and equipment costs currently is anticipated to be
approximately $44 million. Land and construction costs are being financed
primarily by a $27.0 million construction loan, which, upon completion of
construction, will convert to a seven-year mortgage loan, renewable for an
additional seven years at the option of the Little Rock Company. The Company
will obtain the equipment for the Arkansas Heart Hospital, estimated to cost
approximately $16 million, through financing arrangements with equipment
lenders.
Tucson Heart Hospital
The Tucson Heart Hospital, to be located in Tucson, Arizona, will be owned
and operated by MedCath of Tucson L.L.C. (the "Tucson Company"), in which
MedCath owns a majority interest and serves as manager. The Tucson Heart
Hospital is expected to open in October 1997 and will be a 66-bed hospital with
three surgery suites. The Tucson Heart Hospital will have three cardiac
catheterization laboratories that will be separately owned and operated by CCT,
L.L.C. (the "Tucson Cath Lab Company"). The Company owns a majority interest in
and manages the Tucson Cath Lab Company. The remaining interests in the Tucson
Cath Lab Company are owned by local cardiologists.
Five of the 23 physicians who own membership interests in the Tucson
Company are the owners of the Heart Institute of Tucson, a Fixed-Site Facility
managed by the Company that is located in Tucson immediately adjacent to a
general acute care hospital. See "Business--Diagnostic Services--Fixed-Site
Facilities." In February 1996, the hospital filed a civil action against the
Company alleging the Company unlawfully interfered with the hospital's
contractual rights by inducing these physicians to violate noncompetition
covenants in their agreement with the hospital. See "Business--Legal
Proceedings."
The total cost of developing the Tucson Heart Hospital, including land
acquisition, construction and equipment costs, and potential acquisition
payments to be made by the Company to the owners of, and costs to be incurred in
connection with the closing of, the Heart Institute of Tucson, currently is
anticipated to be approximately $32 million. Land and construction costs are
being financed primarily by a $20.0 million construction loan, which, upon
completion of construction, will convert to a seven-year mortgage loan,
renewable for an additional seven years at the option of the Tucson Company. The
Company expects that most of the equipment for the Tucson Heart Hospital,
estimated to cost approximately $11 million, will be acquired through financing
arrangements with equipment lenders.
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PART I
Austin Heart Hospital
The Austin Heart Hospital, to be located in Austin, Texas, will be owned
and operated by a limited partnership, Heart Hospital IV, Limited Partnership
(the "Austin Partnership") in which MedCath owns a majority interest and
serves as the general partner. The Austin Heart Hospital, on which the Austin
Partnership will commence construction in fiscal year 1997, is expected to
open in fiscal year 1998 and will be a 60-bed hospital with three surgery
suites and three cardiac catheterization laboratories.
The total cost of developing the Austin Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $30 million. The Company expects to enter into a
70-year land lease agreement for approximately 5 acres of land in Austin,
on which the hospital will be constructed. The Company expects to be
able to obtain third-party financing for the land lease, construction and
other development costs of the Austin Heart Hospital and that most of the
equipment for the Austin Heart Hospital will be acquired through financing
arrangements with equipment lenders.
Bakersfield Heart Hospital
The Bakersfield Heart Hospital, to be located in Bakersfield, California,
will be owned and operated by a limited liability company, Heart Hospital of BK,
L.L.C. (the "Bakersfield Company") in which MedCath owns a majority interest and
serves as manager. The Bakersfield Heart Hospital, on which the Bakersfield
Company will commence construction in fiscal year 1997, is expected to open in
fiscal year 1998 and will be a 54-bed hospital with three surgery suites and
three cardiac catheterization laboratories.
The total cost of developing the Bakersfield Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $31.5 million. The Company has entered into an option to purchase
approximately 11 acres of land in Bakersfield as a site for the Bakersfield
Heart Hospital. The Company expects to be able to obtain third-party financing
for the land acquisition, construction and other development costs of the
Bakersfield Heart Hospital and that most of the equipment for the Bakersfield
Heart Hospital will be acquired through financing arrangements with equipment
lenders.
Other Heart Hospitals
The Company is currently seeking to develop additional Heart Hospitals in
conjunction with leading cardiologists, cardiovascular and vascular surgeons and
other physicians serving targeted geographic markets. The complete development
cycle, from initial discussions with physicians through execution of agreements,
obtaining the financing for and completing construction of a hospital, is
complex and lengthy. The Company expects to encounter opposition from
established hospitals in many of the markets in which it seeks to establish
Heart Hospitals.
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PART I
Physician Practice Management
As part of the Company's strategy of establishing and maintaining fully
integrated cardiac care networks, the Company enters into long-term management
services agreements with established physician groups that include leading local
cardiologists and cardiovascular and vascular surgeons. MedCath believes the
management of established cardiology group practices will help lay the
groundwork for the Company to develop additional Heart Hospitals in selected
markets. As managed care programs continue to penetrate the market for health
care services, physicians are becoming increasingly aware of the importance of
positioning themselves to adapt to the demands of the managed care market by
associating with a business partner that has managed care administrative skills.
These skills focus on increasing operating efficiencies, improving the
utilization of existing facilities and equipment and installing financial and
management information systems. If successful in negotiating management services
agreements, the Company anticipates that it will perform the principal financial
and administrative functions for physician groups, including billing,
recruiting, record keeping, and negotiating with HMOs and other managed care
plans for the services of the physicians.
Under the terms of the management services agreements, the Company's fees
include reimbursement of operating expenses plus a percentage of the net
revenues or operating income of the Managed Practice. MedCath provides most
non-physician personnel required to operate the practice, prepares financial
information regarding the operations of the practice, negotiates managed care
contracts, provides billing and collection and other management and
administrative services as well as capital for expanded and new services. The
Company also agrees to provide working capital advances to the Managed
Practices, repayable from time to time with interest from the cash flows of the
respective practice. The physicians under management are responsible for all
aspects of the medical practice at the clinic, including the hiring of
physicians and the supervision of non-physician personnel when they perform
patient care services. The Managed Practices and MedCath are required to provide
insurance for themselves and their employees and to name the other party as
co-insured, and each party has agreed to indemnify the other for losses
resulting from the acts or omissions of their respective employees.
Arizona Medical Clinic. In October 1994, MedCath acquired PhysMed Management
Services, Inc. ("PhysMed"), which, under a 40-year agreement, manages the
Arizona Medical Clinic ("AMC"), a 57-physician multi-specialty medical clinic
that serves the Sun City, Arizona area. Included in the group are three
cardiologists who are leading providers of cardiology services in the Sun City
area. Two of these cardiologists were among the founders of the Sun City Cardiac
Center, a Fixed-Site Facility that the Company has managed since November 1992.
Approximately one-half of the physicians at AMC are primary care specialists,
and the balance practice various medical and surgical specialties.
Mid-Atlantic. In January 1996, the Company acquired MedCath Physician
Management of Virginia, Inc. ("MPMV"), which, under a 40-year agreement manages
Mid-Atlantic Medical Specialists, Inc. ("Mid-Atlantic"), a 12-physician practice
that includes two cardiologists and is located in southwest Virginia.
Mid-Atlantic provides invasive cardiology, gastroenterology and internal
medicine services and since 1990, one of the physician owners of Mid-Atlantic
has been performing cardiac catheterizations in one of the Company's Mobile Cath
Labs.
Heart Clinic. In September 1996, the Company formed Physician Management of
McAllen, Inc. ("PMMI"), a management services organization. PMMI has a 40-year
contract to manage Heart Clinic, P.A. ("Heart Clinic") a seven member
cardiologist group located in McAllen, Texas. Management of Heart Clinic
commenced in October 1996.
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PART I
In order to broaden its exposure to cardiology groups, the Company entered
into a development agreement in May 1994 with Healthcare Management and
Development, Inc. ("HMDI") providing for joint marketing of MedCath's physician
management services to cardiologists. HMDI is a cardiology consulting firm in
which MedCath owns slightly less than a 20% interest. If the Company enters into
management services agreements with cardiology groups as the result of these
joint marketing efforts, MedCath will be obligated to pay the principals of HMDI
a transaction fee, payable in shares of MedCath's common stock, and to offer to
contract with HMDI to perform certain specified on-site management services for
each cardiology group on MedCath's behalf at a specified rate of compensation.
The Company's agreement with HMDI does not apply to Heart Hospitals that MedCath
may develop with cardiology groups introduced to the Company through its joint
marketing efforts with HMDI. To date, the Company has incurred no obligations to
HMDI related to HMDI's marketing activities on behalf of MedCath.
Diagnostic Services
Fixed-Site Facilities
The Company, through affiliations with leading local physician groups or
medical facilities, either manages or co-owns eight Fixed-Site Facilities
located in targeted geographic markets. Physicians practicing in each Fixed-Site
Facility may perform either invasive or non-invasive diagnostic procedures, and
two of the facilities also offer a broad range of invasive therapeutic
procedures.
Certain information concerning the Fixed-Site Facilities is presented in the
table below:
<TABLE>
<CAPTION>
Commencment
Year of Operations Managed
Name of Fixed-Site Facility Location Founded or Management or co-owned
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sun City Cardiac Center Sun City, AZ 1985 November 1992 Managed
Heart Institute of Tucson Tucson, AZ 1982 January 1994 Managed
Cardiac Testing Centers New Providence, NJ 1986 July 1992 Managed
Cardiac Testing Centers Summit, NJ 1994 January 1994 Managed
Heart Institute of Northern Arizona Kingman, AZ 1994 August 1994 Managed
Cape Cod Cardiac Cath Hyannis, Mass. 1996 September 1996 Co-owned
Cardiac Diagnostic Center Raleigh, NC 1996 October 1996 Managed
Gaston Cardiology Services Gastonia, NC 1996 November 1996 Co-owned
</TABLE>
MedCath serves as manager in all of the Fixed-Site Facilities and the
management services include providing all non-physician personnel required to
deliver patient care at these Fixed-Site Facilities and the administrative,
management and support functions required in their operation. The support
functions MedCath performs include purchasing, accounting and billing services,
hiring, scheduling and providing for the maintenance of equipment and
facilities. The physicians who practice at the Fixed-Site Facilities have
complete control over the delivery of medical services.
MedCath co-owns Fixed-Site Facilities through limited liability companies
and limited partnerships with hospitals in which MedCath owns a majority
interest and serves as manager. Each Fixed-Site Facility has an
agreement to provide cardiology and cardiovascular services to the
hospital investor under agreements having initial terms of 20 to 32 years,
subject to extension at the option of the investors.
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PART I
The Fixed-Site Facilities managed by MedCath operate under management
agreements having extended initial terms of 30 years or more and also typically
include several renewal options ranging from five to ten years each. The
physicians with whom the Company has contracted to operate the Fixed-Site
Facilities typically may terminate the agreements only for cause. The Company
typically may terminate the agreements for cause or upon the occurrence of
specified material adverse changes in the business of the facilities.
Sun City Cardiac Center. The Sun City Cardiac Center has two cardiac
catheterization laboratories, offers invasive cardiology diagnostic and
therapeutic services and is located in Sun City, Arizona on the campus of a
nonprofit, general acute care community hospital. By deed restriction, no other
hospital may operate in Sun City. When first established in 1985, the Sun City
Cardiac Center entered into an agreement with this hospital to provide
cardiology diagnostic and therapeutic services to its patients. The Sun City
Cardiac Center derived substantially all of its revenue during fiscal year 1996
from the hospital for inpatient procedures. This center is owned by a small
group of physicians, two of whom are cardiologists affiliated with AMC, which is
managed by the Company.
Heart Institute of Tucson. The Heart Institute of Tucson is located in
Tucson, Arizona immediately adjacent to a 142-bed general acute care hospital
and derives substantially all of its revenue from this hospital for inpatient
services. Although it is smaller than the Sun City Cardiac Center, the Tucson
facility offers the same comprehensive range of invasive diagnostic and
therapeutic procedures. The Heart Institute of Tucson was established in 1982 by
a group of cardiologists who entered into a long-term agreement with the
hospital to provide cardiology services to its patients similar to the agreement
between the Sun City Cardiac Center and the hospital it serves. Two large,
nonprofit general acute care hospitals compete directly with the Heart Institute
of Tucson for patients.
In November 1995, the Heart Institute of Tucson notified the hospital at
which it is located of the termination of its relationship with that hospital
which will be effective in July 1997. Upon the termination, the Company will
receive no further revenue under its management agreement with the Heart
Institute of Tucson. If the Tucson Heart Hospital is not developed and opened
for business, the Company would be required to write off its investments
relating to the Heart Institute of Tucson as well as the Tucson Heart Hospital.
In February 1996, the hospital filed a civil action against the Company alleging
the Company unlawfully interfered with the hospital's contractual rights by
inducing these physicians to breach the contract by violating the noncompetition
covenants in their agreement with the hospital and seeking damages. The hospital
also notified the Heart Institute of Tucson that (i) the hospital intends to
contest the hospital's obligation to pay for certain services rendered, (ii) the
hospital believes the execution of the management agreement between the Heart
Institute of Tucson and MedCath violated the prohition on assignments set forth
in the agreement between the hospital and the Heart Institute of Tucson, and
(iii) the investment by the physician owners of the Heart Institute of Tucson in
the Tucson Company violates their noncompetition covenants. The Heart Institute
of Tucson and MedCath believe that the Heart Institute of Tucson is owed the
funds at issue and that there is no merit to the additional allegations made by
the hospital. An arbitration proceeding has been commenced by the hospital
regarding the hospital's obligation for payment of the funds at issue. It is
possible that the hospital's claims regarding the Heart Institute of Tucson's
alleged violations of the applicable agreements may also be included in the
arbitration proceeding. An adverse outcome of such arbitration could have a
material adverse effect on the Company. See "Item 3--Legal Proceedings."
Cardiac Testing Centers. Cardiac Testing Centers consists of two facilities
located approximately 10 miles apart in northern New Jersey which are owned by a
cardiology group practice. At each facility, Cardiac Testing Centers provides
noninvasive diagnostic procedures, including nuclear imaging tests and
echocardiograms.
12
<PAGE>
PART I
The Heart Institute of Northern Arizona. The Heart Institute of Northern
Arizona is located in Kingman, Arizona and provides cardiac catheterization
procedures as well as nuclear imaging tests. There are five invasive
cardiologists practicing in Kingman, three of whom perform most of their cardiac
diagnostic procedures at the Heart Institute of Northern Arizona.
Cape Cod Cardiac Cath. Cape Cod Cardiac Cath is located in Hyannis,
Massachusetts in a building immediately adjacent to Cape Cod Hospital ("CCH").
MedCath and CCH co-own this Fixed-Site Facility which under the terms of a
20-year agreement with CCH, provides invasive cardiology and cardiovascular
services to patients at CCH. Cape Cod Cardiac Cath commenced operations in
September 1996 and replaces those previously provided to CCH through the use of
one of the Company's Mobile Cath Labs.
Cardiac Diagnostic Center. Cardiac Diagnostic Center is located in Raleigh,
North Carolina in a medical office building adjacent to an acute care hospital.
The Cardiac Diagnostic Center is owned by Wake Heart Associates, P.A., a group
of eight leading cardiologists, and provides cardiac catheterization procedures.
The Cardiac Diagnostic Center commenced operations in October 1996.
Gaston Cardiology Services. Gaston Cardiology Services is located in
Gastonia, North Carolina in a building immediately adjacent to Gaston Memorial
Hospital ("GMH"). MedCath and GMH co-own this Fixed-Site Facility which under
the terms of a 32-year agreement with GMH, provides invasive cardiology and
cardiovascular services to patients at GMH. Gaston Cardiology Services commenced
operations in November 1996 and replaces those previously provided to GMH
through the use of one of the Company's Mobile Cath Labs.
Mobile Cath Labs
The Company owns or operates 23 Mobile Cath Labs that serve networks of
hospitals throughout the United States or are leased to hospitals and other
medical facilities that directly operate such laboratories on their campuses.
The Mobile Cath Labs operated by the Company to service hospital networks
are moved, usually on a daily basis, from one hospital to another within each
network and are fully equipped and operated by highly skilled, non-physician
MedCath technologists and nurses to enable cardiologists to perform cardiac
catheterization procedures for hospital patients. The cardiac catheterization
procedures are performed by cardiologists located in the communities served by
the hospitals or, in some instances, by cardiologists with whom MedCath has
contracted or arranged to perform, as independent contractors, such procedures.
These Mobile Cath Labs permit a group of hospitals located in geographic
proximity to one another, each with a limited patient volume, to offer cardiac
catheterization services through shared access to equipment and personnel that
allows them to avoid substantial outlays of capital and increases in operating
expenses. Under the Company's existing contracts, the hospitals typically pay
for the use of the Mobile Cath Labs on a fixed-fee-per-procedure basis and
reimburse MedCath for certain costs incurred in performing procedures. In most
instances, the hospitals are obligated to pay a minimum monthly amount,
regardless of the number of procedures performed, while the Mobile Cath Lab is
made available to the hospital.
The Company also provides Mobile Cath Labs to hospitals or medical
facilities on an interim basis under operating leases that provide for monthly
lease payments to the Company over the terms of the respective contracts. The
interim Mobile Cath Lab rentals will allow hospitals to support increased
demand or to refurbish existing catheterization labs. The hospital
utilizes its staff and does not rely on MedCath to provide non-physician
personnel or management and technical expertise in the operation of the
Mobile Cath Labs leased on an interim basis.
13
<PAGE>
PART I
All of the Company's current contracts expire at various times prior to the
end of fiscal year 2000. While MedCath believes it will be successful in
negotiating renewals or extensions of contracts with most of the hospitals
within its Mobile Cath Lab networks or negotiating new contracts with suitable
alternate hospitals, there can be no assurance that it will be able to do so or
that newly negotiated rates will be as favorable to MedCath as those that exist
under most of its current contracts.
Regulation
The Company's business and the health care industry in general are subject
to extensive federal and state regulation. The Company believes it and its
affiliated physicians are in compliance with the laws and regulations applicable
to MedCath's business. The Company also believes that its business relationships
with physicians affiliated with Fixed-Site Facilities comply with federal law
which, subject to certain statutory exceptions, prohibits physicians who have a
financial relationship with an entity providing health care services from
referring or admitting patients to that entity for the furnishing of certain
designated services (the "Stark II Legislation"). However, there can be no
assurance that the enactment of future legislation or amendments to or differing
interpretations of existing laws and regulations will not restrict or otherwise
adversely affect the Company's business.
Federal Anti-Referral Laws. The Stark II Legislation prohibits, with
certain statutory exceptions, physicians who have a financial relationship with
an entity providing health care services from referring or admitting patients to
that entity for the furnishing of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state health
care programs. Possible sanctions for violations of the Stark II Legislation
include civil monetary penalties, exclusion from the Medicare and Medicaid
programs, and forfeiture of all amounts collected in violation of such
prohibition.
The Company believes the Stark II Legislation does not apply to MedCath
with respect to its physician practice management, Mobile Cath Lab activities
and certain of its Fixed-Site Facilities but that such legislation does have
potential application to its Heart Hospitals and the balance of its Fixed-Site
Facilities. MedCath believes that the physician investors in its Heart Hospitals
are not and will not be, subject to the referral prohibitions of the Stark II
Legislation because they qualify for a statutory exception available to
physicians holding an ownership or investment interest in a hospital in which
they are authorized to perform services. MedCath believes the ownership
structures of the Fixed-Site Facilities with which it is affiliated and to which
the prohibitions to the Stark II prohibitions apply also comply with a statutory
exception to the prohibitions of the Stark II Legislation. Failure of the
Company, or the physician owners of facilities managed by the Company, to comply
with the Stark II Legislation could have a material adverse effect on the
Company, not only because of the potential for sanctions but also due to the
potential revenue loss from the prohibitions on physician referrals. In
addition, particularly in light of prevailing governmental policies against
physician self-referral, the Company's strategic objective of establishing
relationships with physicians, including physician ownership of health care
facilities, entails the risk that new laws or regulations will be enacted which
will require further restructuring of operations or otherwise have a material
adverse effect on the Company.
State Anti-Referral Laws. Certain states in which the Company operates or
may operate in the future have anti-referral laws similar to the Stark II
Legislation which are in some cases more restrictive than the Stark II
Legislation. Depending on their scope, these laws may restrict the ability of
the Company to expand into certain states. Although the Company has attempted to
structure its business relationships with physician groups in accordance with
these anti-referral laws, there can be no assurance that such laws ultimately
will be interpreted in a manner consistent with the Company's practices.
14
<PAGE>
PART I
Federal Fraud and Abuse Laws. With certain exceptions, federal law
prohibits activities and arrangements which are designed to provide "kickbacks"
or to induce the referral of business under Medicare and Medicaid programs.
Violations of anti-kickback laws are felonies punishable by monetary fines,
civil and criminal penalties and exclusion from participation in Medicare or
Medicaid programs. The federal government has published exemptions, or "safe
harbors," for business transactions that will be deemed not to violate the
anti-kickback statute. Although satisfaction of the requirements of any of these
safe harbors generally provides a guarantee of compliance with the law, failure
to meet the safe harbor does not mean necessarily that a transaction violates
the prohibitions. These laws impose an intent-based standard of culpability, and
if the arrangement is not intended to induce referrals, there is generally no
violation.
The federal fraud and abuse laws have a sweeping scope, with potential
application to virtually all business transactions between participants in the
health care industry, which may include all of the Company's current and planned
activities. MedCath believes its physician practice management and Mobile Cath
Lab activities entail minimal risk of violation by the Company of the fraud and
abuse laws because, in carrying out such activities, MedCath neither refers
patients to other health care providers nor obtains reimbursement for its
services from Medicare or Medicaid. Although the Company has attempted to
structure its operations of Fixed-Site Facilities and Heart Hospitals to avoid
any violations of these fraud and abuse laws, there can be no assurance that
such laws ultimately will be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted which
will have a material adverse effect on the Company.
State Illegal Remuneration Laws. Certain states in which the Company
operates or may operate in the future have "illegal remuneration" laws similar
to the federal anti-kickback laws which are in some cases more restrictive than
the anti-kickback legislation and are not limited to the Medicare and Medicaid
programs. Although the Company has attempted both to structure its business
relationships with physician groups and establish its policies and procedures in
accordance with these remuneration laws, there can be no assurance that such
laws ultimately will be interpreted in a manner consistent with the Company's
practices.
Corporate Practice of Medicine. The laws of certain states in which the
Company operates or may operate in the future prohibit non-physician entities
from practicing medicine, exercising control over physicians or engaging in
certain practices such as fee-splitting with physicians. The Company has
structured its affiliations with physician groups and medical facilities so that
the physicians maintain exclusive authority regarding the delivery of medical
care, and MedCath believes its activities do not constitute the corporate
practice of medicine as contemplated by these statutes. There can be no
assurance, however, that these laws ultimately will be interpreted in a manner
consistent with the Company's practices or that other laws or regulations will
not be enacted in the future which will have a material adverse effect on the
Company.
Certificate of Need, Licensing and Medicare Certification Requirements.
Certain states in which the Company operates or may operate in the future
prohibit the establishment, expansion or modification of certain health care
facilities or services without obtaining a CON from the appropriate state
regulatory agency. Approximately two-thirds of the states have CON laws that
apply to certain of the Company's businesses. Obtaining CONs in those states is
typically an expensive and lengthy process and may involve adversarial
proceedings brought by competing facilities. The existence of these laws will
make it more difficult for the Company to build Heart Hospitals and Fixed-Site
Facilities. The inability of the Company to obtain CONs for facilities it wishes
to operate in the future could have a material adverse effect on its business.
15
<PAGE>
PART I
In addition to any CON requirements which may apply, each Heart Hospital
developed by the Company will be required to comply with other licensing
requirements which vary from state to state. There can be no assurance that any
applications for the Arkansas, Tucson, Austin and Bakersfield Heart Hospitals or
other future hospitals will be approved on a timely basis, or at all. Failure to
obtain such regulatory approval could have a material adverse effect on the
Company.
In order to participate in the Medicare and Medicaid programs, the
Company's Heart Hospitals must obtain Medicare and Medicaid certification, a
process which cannot commence until a facility opens. Lengthy delays in the
certification process could have an adverse impact on the Company's cash flows.
In order to avoid any potential delays and to mitigate cash flow problems, the
Company intends to schedule the certification of Heart Hospitals as soon as
possible following the commencement of operations.
Historically, an agency of the government of the state in which a new
hospital or other medical facility is located has conducted the initial survey
required for the facility's Medicare and Medicaid certification in accordance
with rules established by the Health Care Financing Administration ("HCFA"), an
agency of the Department of Health and Human Services within the federal
government that sets guidelines for Medicare. In June 1996, the Department of
Human Services and HCFA agreed to accept the successful completion of an initial
survey by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a private hospital accreditation organization, for Medicare and
Medicaid certification of a new medical facility as an alternative to successful
completion of a survey done by a state government agency. This agreement gives
the Company an alternative source for obtaining Medicare and Medicaid
certification if the applicable state agency is unable to conduct its survey
when the Company is ready to open a new Heart Hospital.
Medicare Payment System. Substantially all of the Company's revenue is
derived directly or indirectly from payments made under Medicare or other
third-party payors. During 1996, the McAllen Heart Hospital derived over 70% of
its net revenue from patients enrolled in the Medicare and Medicaid programs,
and the Company expects that its other Heart Hospitals will derive from 40% to
80% of their net revenue from patients enrolled in these programs. The Medicare
and Medicaid programs are subject to statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings and funding
restrictions, all of which could have the effect of limiting or reducing
reimbursement levels for the hospital's services. Although the Company's Heart
Hospitals are planned to operate profitably under current levels of
reimbursement, there can be no assurance that payments under governmental
programs will remain comparable to present levels.
Health care system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for the federal and certain state
governments. In 1996, the President vetoed legislation approved by the Congress
that would have reshaped the Medicare and Medicaid programs through significant
reductions in the overall rate of spending growth in both programs. The impact
on the Company of the outcome of future negotiations between the President and
Congress over reducing the overall rate of spending growth in these programs is
not readily determinable. However, if legislation implementing reductions in the
rate of spending growth in the Medicare and Medicaid programs of substantially
the same magnitude as was vetoed by the President in 1996 is enacted into law,
such reductions could have a material adverse effect on the Company.
16
<PAGE>
PART I
Competition
The fundamental restructuring of the health care system currently underway
in the United States is leading to consolidation of the existing, highly
fragmented health care delivery system into larger and more organized groups and
networks of health care service providers. In executing its business strategy,
MedCath competes with other management services organizations, PPMs, hospitals,
HMOs and others, some of which are seeking to form strategic alliances with
cardiologists and cardiovascular surgeons or provide management services to
physicians or to diagnostic and therapeutic facilities owned by them. An
increasing number of PPMs offer services similar to those the Company provides
to AMC, Mid-Atlantic and Heart Clinic and plans to provide to cardiology group
practices or other multi-specialty group practices with practicing
cardiologists. MedCath believes that most of these other companies are
attempting to affiliate with large primary care and/or multi-specialty group
practices. The Company is not aware of any other company actively pursuing a
strategy of establishing fully integrated cardiac care delivery systems
incorporating specialty heart hospitals, affiliations with leading cardiologists
and cardiovascular surgeons and physician practice management services.
The Company expects to encounter competition from general acute care
hospitals and free-standing cardiac diagnostic and therapeutic facilities
serving the same markets the Company operates in or seeks to enter, but believes
it will have substantial cost advantages over these competitors. In addition,
the Company believes that to compete successfully in the delivery of low cost,
high quality cardiology and cardiovascular services requires the establishment
of capital intensive facilities, such as its Heart Hospitals, which imposes a
significant barrier to entry for new competitors. Furthermore, the Company
believes that it would have a significant lead over any competitor adopting a
similar strategy.
Medical Malpractice Insurance
While the Company's employees are not physicians and do not practice
medicine, certain of the employees are or will be involved in the delivery of
health care services to the public under the supervision of physicians. To
protect the Company from medical malpractice claims, including claims associated
with its employees' activities, the Company, or the partnerships or limited
liability companies for which the Company serves as general partner or manager,
maintain professional liability and general liability insurance on a "claims
made" basis in amounts deemed appropriate by management based upon the nature
and risks of the Company's business. Such policies provide primary general
liability and malpractice coverage in the amount of $1.0 million per occurrence
with no aggregate limit and $4.0 million of umbrella coverage. Insurance
coverage under such policies is contingent upon a policy being in effect when a
claim is made, regardless of when the events which caused the claim occurred.
The cost and availability of such coverage has varied widely in recent years.
While the Company believes its insurance policies are adequate in amount and
coverage for its current operations, there can be no assurance that the coverage
maintained by the Company is sufficient to cover all future claims or will
continue to be available in adequate amounts or at a reasonable cost. The
McAllen Partnership has obtained separate hospital professional liability and
comprehensive general liability insurance coverage for the activities conducted
at the McAllen Heart Hospital which includes primary limits of $1.0 million per
occurrence with no aggregate limit and $10.0 million of umbrella coverage.
17
<PAGE>
PART I
Employees
As of December 11, 1996, the Company employed 716 people, of which 65 were
engaged in managing and operating the Company's Mobile Cath Labs, 267 in
operating Fixed-Site Facilities and managing physician practices, 329 in
operating or developing the Company's five Heart Hospital projects and the
remainder in management, development, finance and administrative capacities.
None of the Company's employees are represented by a labor union.
Item 2 - Properties
The Company leases approximately 11,000 square feet of space in
Charlotte, North Carolina, where its executive offices are located. The lease
expires in 1999, and the Company is evaluating its continued occupancy of this
space in light of anticipated growth.
The Company currently operates the McAllen Heart Hospital and has under
construction the Arkansas and Tucson Heart Hospitals. The Company owns the real
property for each of these hospitals and the sites range from 6 to 12 acres.
Each of these facilities is subject to a mortgage, and substantially all the
equipment located at these facilities is pledged as collateral to secure
long-term debt. The Company expects to either own or lease the property on which
the Austin, Bakersfield and any future Heart Hospitals will be constructed.
The three physician group practices that are managed by the Company
each own or lease the office space in which they are located. The Company has no
ownership interest in the facilities in which the physicians under management
practice medicine. The Company owns or leases certain medical and office
equipment used in the practices.
The Company co-owns two Fixed-Site Facilites through limited liability
companies or partnerships with general acute care hospitals. These hospitals
lease the building space that the facility is located to the respective
limited liability company or partnership through operating leases.
The Company manages six Fixed-Site Facilities and in connection with
the management of these faciltities, the Company leases certain of the
facilities and office space through operating leases.
18
<PAGE>
PART I
Item 3 - Legal Proceedings
In February 1996, Hospital Corporation of Arizona, the owner of the
hospital at which the Heart Institute of Tucson is located in Tucson, Arizona,
instituted an action against the Company and the Tucson Company. The plaintiff
claims that MedCath and the Tucson Company interfered with its contractual
rights by inducing the physician owners of the Heart Institute of Tucson to
violate noncompetition covenants between those individuals and the plaintiff.
The physician owners of the Heart Institute of Tucson are five of the 23
physician members of the Tucson Company. In November 1995, the Heart Institute
of Tucson notified the hospital, in accordance with the terms of the applicable
agreements giving the Heart Institute of Tucson the right to do so, that the
Heart Institute of Tucson is terminating its relationship with the hospital
effective in July 1997. The lawsuit is pending in Superior Court of Pima County,
Arizona, and seeks unspecified monetary damages, costs and attorneys' fees.
Management believes that there is no basis for these claims, and MedCath and the
Tucson Company are defending this action vigorously. In the opinion of
management of the Company, it is unlikely that the ultimate outcome of this
litigation will have a material adverse effect on the Company's plans to develop
the Tucson Heart Hospital, the Tucson Cath Lab Company, the Company's operations
or its financial condition. There can be no assurance, however, that an adverse
outcome of any such litigation would not have a material adverse effect on the
Company, the Tucson Company or the Tucson Cath Lab Company.
There are no other pending legal proceedings to which the Company is a party,
which the Company believes, if adversely determined, would have a material
adverse effect on the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
* * * * * * *
For the purposes of calculating the aggregate market value of the
shares of Common Stock of the Company held by non-affiliates, as shown on the
cover page of this report, it has been assumed that all the outstanding shares
were held by non-affiliates except for shares outstanding that are beneficially
owned by directors and executive officers of the Company. However, this should
not be deemed to constitute an admission that all directors and executive
officers of the Company are, in fact, affiliates of the Company, or that there
are not other persons who may be deemed to be affiliates of the Company. Further
information concerning shareholdings of directors, executive officers and
principal shareholders is included in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held February 19, 1997 and incorporated
herein by reference, such Proxy Statement having been or to be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the Company's fiscal year ended September 30, 1996.
19
<PAGE>
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
The Common Stock of MedCath is traded on the Nasdaq Stock Market's
National Market under the symbol MCTH. The following table sets forth
for the fiscal periods indicated the high and low sale prices for the
Company's Common Stock as reported by the Nasdaq National Market,
beginning with the Company's initial public offering on December 7,
1994.
Price Range
--------------------------------
High Low
1995
First Quarter $16 $14
(from December 7, 1994)
Second Quarter $15 $12 3/4
Third Quarter $14 $11 1/8
Fourth Quarter $20 $11
1996
First Quarter $25 3/4 $17
Second Quarter $30 $18 1/2
Third Quarter $42 5/8 $10 3/4
Fourth Quarter $19 1/4 $7 3/4
(b) Holders
As of December 11, 1996, there were 222 holders of record of the
Company's Common Stock and 5,050 persons or entities holding in nominee
name.
(c) Dividends on the Company's Common Stock.
No cash dividends have ever been paid, and the Company does not intend
to pay any cash dividends in the foreseeable future. In connection with
the initial public offering of the Company's common stock in December
1994, the Company paid a stock dividend in October 1994 pursuant to
which 2.5308 additional shares of common stock were issued for each
outstanding share of common stock. In October 1996, the Company paid a
dividend in the form of one Preferred Share Purchase Right issued for
each outstanding share of common stock. The Company does not intend to
pay any additional stock dividends in the foreseeable future.
20
<PAGE>
PART II
Item 6 - Selected Financial Data
The information in response to this item is incorporated by
reference from the Company's 1996 Annual Report to Shareholders. Such portion
of the 1996 Annual Report to Shareholders has been filed as Exhibit 13.1
to this report.
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation
The information in response to this item is incorporated by reference
from the Company's 1996 Annual Report to Shareholders. Such portion of the
1996 Annual Report to Shareholders has been filed as Exhibit 13.1 to
this report.
Item 8 - Financial Statements and Supplementary Data
The information in response to this item is incorporated by reference
from the Company's 1996 Annual Report to Shareholders. Such portion of the
1996 Annual Report to Shareholders has been filed as Exhibit 13.1 to this
report.
Item 9 - Changes in and Disagreements with Accountants or Accounting and
Financial Disclosure
None.
21
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant
Reference is made to the information set forth in the sections entitled
"Election of Directors" and "Management" in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held February 19, 1997, which
information is incorporated herein by reference, such Proxy Statement having
been or to be filed with the Securities and Exchange Commission not later than
120 days after the close of the Company's fiscal year ended September 30, 1996.
Item 11 - Executive Compensation
Reference is made to the information set forth in the section entitled
"Management-Executive Compensation" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held February 19, 1997, which information
is incorporated herein by reference, such Proxy Statement having been or to be
filed with the Securities and Exchange Commission not later than 120 days after
the close of the Company's fiscal year ended September 30, 1996.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
February 19, 1997, which information is incorporated herein by reference, such
Proxy Statement having been or to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal year
ended September 30, 1996.
Item 13 - Certain Relationships and Related Transactions
None.
22
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Included with this 10-K Report are the following Consolidated Financial
Statements:
<TABLE>
<CAPTION>
<S> <C>
o Consolidated Statements of Income -- For the Years Ended September 30,
1994, 1995 and 1996 are incorporated by reference from the Company's 1996
Annual Report to Shareholders. Such portion of the 1996 Annual Report to
Shareholders is filed as Exhibit 13.1 to this report.
o Consolidated Balance Sheets at September 30, 1995 and 1996 are incorporated
by reference from the Company's 1996 Annual Report to Shareholders. Such
portion of the 1996 Annual Report to Shareholders is
filed as Exhibit 13.1 to this report.
o Consolidated Statements of Shareholders' Equity -- For the Years Ended
September 30, 1994, 1995 and 1996. are incorporated by reference
from the Company's 1996 Annual Report to Shareholders. Such portion
of the 1996 Annual Report to Shareholders is filed as
Exhibit 13.1 to this report.
o Consolidated Statements of Cash Flows -- For the Years Ended September 30,
1994, 1995 and 1996 are incorporated by reference from the Company's 1996
Annual Report to Shareholders. Such portion of the Company's 1996 Annual
Report to Shareholders is filed as Exhibit 13.1 to this report.
o Notes to Consolidated Financial Statements -- For the Years Ended September
30, 1994, 1995 and 1996 are incorporated by reference from the
Company's 1996 Annual Report to Shareholders. Such portion of the 1996
Annual Report to Shareholders is filed as Exhibit 13.1 to this report.
(a)(2) Included with this 10-K Report is the following Consolidated Financial
Statement schedule:
Page
-----
o Report of Independent Auditors on Supplemental Schedule (included in
Consent of Ernst & Young LLP, independent auditors, filed as Exhibit 23.1
to this report)
o Schedule II - Valuation and Qualifying Accounts for the years ended 30
September 30, 1994, 1995 and 1996
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
23
<PAGE>
PART IV
(b) Reports on Form 8-K
Reports on Form 8-K filed during the three months ended September 30,
1996 are as follows:
Date of Report Items Reported
August 19, 1996 Item 5. OTHER EVENTS
September 3, 1996 Item 5. OTHER EVENTS
October 2, 1996 Item 5. OTHER EVENTS
October 4, 1996 Item 5. OTHER EVENTS
November 14, 1996 Item 5. OTHER EVENTS
(c) Exhibits
<TABLE>
<CAPTION>
Previously Filed
With File Number
33-85458 *
----------------------------
In As
Exhibits Document Exhibit Exhibit Description
<S> <C> <C> <C>
3.1 (1) 3.1 Articles of Incorporation of the Company, as amended and restated.
3.2 (1) 3.2 Bylaws of the Company, as amended and restated.
4.1 (1) 4.1 Form of Common Stock Certificate.
4.2 (1) 4.2A First Amendment and Restatement of Amended and Restated Shareholders
Agreement dated as of October 31, 1994 by and among the Company, the
shareholders of the Company parties thereto and First Union National Bank of
North Carolina as Trustee.
4.3 (7) 99.1 Rights Agreement dated October 15, 1996 between MedCath incorporated and
First Union National Bank of North Carolina, which includes the Articles
of Amendment to the amended and Restated Articles of Incorporation of the
Company setting forth the terms of the Series A Junior Participating
Preferred Stock as Exhibit A.
10.1 (1) 10.1A First Amendment and Restatement of Amended and Restated Shareholders
Agreement dated as of October 31, 1994 by and among the Company, the
shareholders of the Company parties thereto and First Union National Bank of
North Carolina as Trustee
10.2 ** (1) 10.3 Employment Agreement dated as of November 25, 1991 by and between the
Company and Stephen R. Puckett.
10.3 ** (1) 10.4 Employment Agreement dated as of November 25, 1991 by and between the
Company and David Crane.
10.4 ** (1) 10.5 Employment Agreement dated as of September 20, 1992 by and between the
Company and David A. Ward.
10.5 ** (5) 10.49 Employment Agreement dated as of April 24, 1995 by and between the
Company and Charles W. Johnson.
10.6 (1) 10.8 Lease Agreement dated as of August 12, 1992 by and between the Company
and Quail Hollow Property Corporation and Amendment thereto dated as of
December 31, 1993.
24
<PAGE>
Previously Filed
With File Number
33-85458 *
----------------------------
In Document As
Exhibits Exhibit Exhibit Description
10.7 (1) 10.9 Asset Purchase Agreement dated as of October 31, 1992 by and between
MedCath of Arizona, Inc. and Sun City Cardiac Center, Inc.
10.8 (1) 10.10 Partnership Agreement dated as of October 31, 1992 by and between MedCath
of Arizona, Inc. and Sun City Cardiac Center, Inc.
10.9 (1) 10.11 Management Agreement dated as of October 31, 1992 by and between Sun City
Cardiac Center, Inc. and Sun City Cardiac Center Associates.
10.10 (1) 10.21 Representation Agreement dated as of January 1, 1994 by and between
MedCath of Arizona, Inc. and Heart Institute of Tucson Services, Inc.
10.11 (1) 10.22 Management Agreement dated as of January 1, 1994 by and between MedCath
of Arizona, Inc. and Heart Institute of Tucson Services, Inc.
10.12 (1) 10.24 Construction Agreement and Lease dated as of February 7, 1994 by and
between MedCath of Kingman Limited Partnership and Kalanithi Limited
Partnership.
10.13 (1) 10.25 Guaranty of Lease dated as of February 15, 1994 by and between MedCath of
Kingman Limited Partnership and Kalanithi Limited Partnership.
10.14 (1) 10.26 Restated and Amended Agreement of Limited Partnership dated as of June 1,
1994 by and among MedCath of Texas, Inc., Hugo G. Blake, M.D., Shereef
Hilmy, II, M.D., Michael D. Evans, M.D., Norman M. Ramirez, M.D., Eduardo
D. Flores, M.D., Naji Kandalaft, M.D., Paul Manoharan, M.D., Benjamin
Robalino, M.D., Harish Koolwal, M.D., Augusto Villa, M.D., Filiberto S.
Rodriguez, M.D. and Jorge L. De La Garza, M.D. and Amendment thereto
dated as of August 16, 1994.
10.15 (1) 10.27 Loan Agreement dated as of August 19, 1994 by and between the McAllen
Partnership and Health Care REIT, Inc.
10.16 (1) 10.28 Note dated as of August 19, 1994 from the McAllen Partnership to Health
Care REIT, Inc. in the amount of $13,750,000.
10.17 (1) 10.29 Deed of Trust and Security Agreement dated as of August 19, 1994 by the
McAllen Partnership to Robert V. Case for the benefit of Health Care
REIT, Inc.
10.18 (1) 10.30 Unconditional and Continuing Limited Guaranty dated as of August 19, 1994
by the Company in favor of Health Care REIT, Inc.
10.19 (1) 10.34 Pledge Agreement dated as of August 19, 1994 by and between MedCath of
Texas, Inc. and Health Care REIT, Inc.
10.20 ** (1) 10.35 MedCath Incorporated 1992 Incentive Stock Option Plan.
10.21 ** (1) 10.36 MedCath Incorporated 1994 Omnibus Stock Plan.
10.22 ** (1) 10.37 MedCath Incorporated Outside Director's Stock Option Plan.
10.23 ** (1) 10.38 Option granted by the Company to W. Jack Duncan, dated September 8, 1994.
10.24 (1) 10.39 Stock Purchase Agreement dated as of October 1, 1994 by and among the
Company and each of the shareholders
of Physmed Management Services, Inc.
25
<PAGE>
PART IV
Previously Filed
With File Number
33-85458 *
----------------------------
In Document As
Exhibits Exhibit Exhibit Description
10.25 (1) 10.41 Shareholders' Agreement dated as of October 1, 1994 by and among the
Company and the shareholders of Physmed Management Services, Inc. parties
thereto.
10.26 (1) 10.42 Amended and Restated Management Agreement dated as of October 1, 1994 by
and between AMC and PhysMed Management Services, Inc.
10.27 (1) 10.43 Security Agreement dated as of October 1, 1994 by and between AMC and
PhysMed Management Services, Inc.
10.28 (1) 10.44 Guaranty Agreement dated as of October 1, 1994 by the Company extended to
AMC for the benefit of PhysMed Management Services, Inc.
10.29 (1) 10.45 Limited Guaranty Agreement dated as of October 1, 1994 by the
shareholders of PhysMed Management Services, Inc. extended to PhysMed
Management Services, Inc. for the benefit of AMC.
10.30 (2) 10.1 Management Agreement dated as of December 31, 1994 by and between Heart
Institute of Northern Arizona, L.L.C. and MedCath of Kingman, Inc.
10.31 (3) 2.1 Share Exchange Agreement and Plan of Reorganization dated as of April 7,
1995 by and among the Company, HealthTech and the shareholders of
HealthTech parties thereto.
10.32 (5) 10.50 Registration Rights Agreement dated as of April 24, 1995 by and among the
Company and the shareholders of HealthTech parties thereto.
10.33 (5) 10.51 Operating Agreement of the Little Rock Company dated as of July 11, 1995
by and among MedCath of Arkansas, Inc. and the several other parties
thereto.
10.34 (5) 10.51A1 First Amendment to Operating Agreement of the Little Rock Company dated
as of September 21, 1995 by and among MedCath of Arkansas, Inc. and the
several other parties thereto.
10.35 (5) 10.51A2 Second Amendment to Operating Agreement of the Little Rock Company dated
as of December 6, 1995 by and among MedCath of Arkansas, Inc. and the
several other parties thereto.
10.36 (6) 10.1 Construction and Term Loan Agreement dated December 7, 1995 between the
Little Rock Company and Health Care REIT, Inc.
10.37 (6) 10.2 Note dated as of December 7, 1995 from the Little Rock Company to Health
Care REIT, Inc. in the amount of $27,000,000.
10.38 (6) 10.3 Unconditional and Continuing Limited Guaranty dated as of December 7,
1995 by the Company in favor of Health Care REIT, Inc.
10.39 (6) 10.4 Amended and Restated Loan Agreement dates as of January 31, 1996 by and
among the Company, MedCath of Arizona, Inc. and MedCath of New Jersey,
Inc. to First Union Naional Bank of North Carolina as agent for various
lenders.
26
<PAGE>
PART IV
Previously Filed
With File Number
33-85458 *
----------------------------
In Document As
Exhibits Exhibit Exhibit Description
10.40 (6) 10.5 Revolving Credit Note dated January 31, 1996 from the Company, MedCath of
Arizona, Inc. and MedCath of New Jersey, Inc. to First Union National
Bank of North Carolina in the amount of $20,000,000.
10.41 (5) 10.52 Operating Agreement of the Tucson Company dated as of September 14, 1995
by and among Southern Arizona Heart, Inc. and the several other parties
thereto.
10.42 Operating Agreement of the Tucson Cath Lab Company dated as of January
15, 1996 by and among Southern Arizona Heart, Inc. and the several other
parties thereto.
10.43 Loan Agreement dated July 18, 1996 between the Tucson Company and Capstone
Capital Corporation.
10.44 Promissory note dated July 18, 1996 from the Tucson Company and Capstone
Capital Corporation in the amount of $17,800,000.
10.45 Guaranty Agreement dated July 18, 1996 between the Company and Capstone
Capital Corporation.
10.46 Agreement of Limited Partnership for the Austin Partnership dated as of
February 22, 1996 by and among Hospital Management IV, Inc. and the
several other parties thereto.
10.47 Operating Agreement of the Bakersfield Company dated as of June 14, 1996
by and among HHBF, Inc. and the several other parties thereto.
10.48 Master Transaction Agreement dated July, 31, 1996 by and between MedCath
Incorporated and Heart Clinic, P.A.
10.49 Service Agreement dated October 1, 1996 by and between Physician Management
of McAllen, Inc. and Heart Clinic, P.A.
10.50 Convertible Subordinated Promissory Note dated October 1, 1996 from MedCath
Incorporated to Heart Clinic, P.A. in the amount of $6,359,958.
10.51 Convertible Subordinated Promissory Note dated October 1, 1996
from MedCath Incorporated to Heart Clinic, P.A.
10.52 Standard Form of Agreement between Owner and Contractor dated as of December 18,
1995 by and between the Little Rock Company and Faulkner Construction Company.
(In accordance with Rule 202 of Regulation S-T, this exhibit is being filed in
paper pursuant to a continuing hardship exemption.)
10.53 Standard Form of Agreement between Owner and Contractor dated as of June 26,
1996 by and between the Tucson Company and Connelley Construction Company. (In
accordance with Rule 202 of Regulation S-T, this exhibit is being filed in paper
pursuant to a continuing hardship exemption.)
13.1 Such portions of the 1996 Annual Report
to Shareholders as have been incorporated by reference into the Annual Report on
Form 10-K.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, independent auditors.
23.2 Consent of Arthur Andersen LLP, independent public accountants.
27 Financial Data Schedule (included in the EDGAR filing only.)
99.1 (4) Report of Arthur Andersen LLP, independent public accountants, on the
Consolidated Financial Statements of HealthTech.
- -----------------------------
</TABLE>
27
<PAGE>
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
- -----------------------------
(1) Registration Statement on Form S-1 dated October 21, 1994.
(2) Form 10-Q for the quarterly period ended December 31, 1994.
(3) Form 8-K dated April 9, 1995.
(4) Form 8-K/A dated April 9, 1995.
(5) Form 10-K for the year ended September 30, 1995
(6) Form 10-Q for the quarterly period ended December 31, 1995.
(7) Form 8-A dated October 18, 1996.
28
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
MEDCATH INCORPORATED
By /s/ Stephen R. Puckett
Stephen R. Puckett, Chairman of
the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities indicated on the 24th day of December, 1996.
Signature Title
/s/ Stephen R. Puckett Chairman of the Board and President
Stephen R. Puckett (Principal Executive Officer)
/s/ David Crane Executive Vice President, Chief Operating Officer
David Crane and Director
/s/ Richard J. Post Chief Financial Officer, Secretary and Treasurer
Richard J. Post
/s/ Daniel L. Belongia Vice President of Finance
Daniel L. Belongia
Director
Patrick J. Welsh
/s/ Andrew M. Paul Director
Andrew M. Paul
/s/ W. Jack Duncan Director
W. Jack Duncan
/s/ John B. McKinnon Director
John B. McKinnon
29
<PAGE>
MedCath Incorporated
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
---------------------------------
Balance at Charged to Charged to Other Balance at End
Beginning of Costs and Accounts Deductions of
Description Period Expenses (Describe) (Describe) Period
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for losses in collection
of current accounts receivable
Year ended September 30, 1993 - $40,250 - - $40,250
Year ended September 30, 1994 $40,250 $23,750 - - $64,000
Year ended September 30, 1995 $64,000 $734,803 - $381,803 (1) $417,000
(1) Uncollectible accounts written off.
</TABLE>
30
OPERATING AGREEMENT
OF
CCT, L.L.C.
A North Carolina Limited Liability Company
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM SUCH
REGISTRATION SET FORTH IN THE SECURITIES ACT OF 1933 PROVIDED BY SECTION 4(2)
THEREOF, NOR HAVE THEY BEEN REGISTERED WITH THE SECURITIES COMMISSION OF CERTAIN
STATES IN RELIANCE UPON CERTAIN EXEMPTIONS FROM REGISTRATION. THESE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE OFFERED WITH THE
TERMS AND CONDITIONS OF THIS AGREEMENT AND IN A TRANSACTION WHICH IS EITHER
EXEMPT FROM REGISTRATION UNDER SUCH ACTS OR PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH ACTS.
THIS OPERATING AGREEMENT (the "Agreement") of CCT, L.L.C. (the
"Company"), a North Carolina Limited Liability Company is effective as of the
15th day of January, 1996, by and among the Company and Southern Arizona Heart,
Inc., a North Carolina corporation ("SAHI") as a Member and each of the other
parties identified on Schedule A as Members (the "Investor Members").
RECITALS
1. The Company has been formed to develop, own and operate a fixed-site
cardiac catheterization laboratory which shall be located on the premises of an
acute care hospital being developed as a high-quality cost-effective provider of
cardiology and cardiovascular care and surgery in Tucson, Arizona (the "Hospital
Venture").
2. No member of the Hospital Venture is subject to any prohibitions on
their ownership of an acute care hospital which includes in it a catheterization
laboratory among its numerous other services and facilities. However, the
members of the Hospital Venture desire to take every step and action reasonably
available to them to avoid giving rise to even the argument that members of the
Hospital Venture are in violation of any agreement to which they are a party
relating to their interests in other catheterization laboratories in Tucson.
Accordingly, the members of the Hospital Venture have elected to have the
catheterization laboratories located at the heart hospital being developed by
the Hospital Venture separately owned and operated by this Company, whose
Members will not include any party who separately has an ownership interest in
any other cardiac catheterization laboratory in Tucson, Arizona.
<PAGE>
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).
1.1 "Affiliate" with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) any corporation,
partnership, limited liability company, trust, or any officer, director,
trustee, partner, manager, employee or holder of ten percent (10%) or more of
the outstanding voting securities or of an equity interest of any corporation,
partnership, limited liability company, trust or other equity, controlling,
controlled by, or under common control with such Person.
1.2 "Agreement" shall mean this Operating Agreement, as amended from
time to time.
1.3 "Articles of Organization." The Articles of Organization of the
Company, as filed with the Secretary of State of North Carolina as the same may
be amended from time to time.
1.4 "Capital Account" shall mean the amount of any actual or imputed
contribution to the capital of the Company of each of the Members, including any
value specifically assigned to any property or right, tangible or intangible,
contributed by such Member to the capital of the Company, as the same may be (i)
increased from time to time by such Member's share of income and gains for
federal income tax purposes, (ii) decreased from time to time by distributions
to such Member from the Company and by such Member's share of deductions or
losses for Federal income tax purposes, (iii) increased and/or decreased by
those other items required by the Code and the Regulations thereunder (items
described in (i) and (ii) are subject to change from time to time to comply with
the Code and the Regulations), and (iv) upon or in connection with (1) the
liquidation of the Company, (2) a contribution of money or other property (other
than a de minimis amount) to the Company by a new or existing member as
consideration for an interest in the Company, or (3) a distribution of money or
other property (other than a de minimis amount) by the Company to a retiring or
continuing member as consideration for an interest in the Company, the capital
accounts of all Members shall be increased or decreased to reflect a
re-evaluation of all assets of the Company on its books and records in
accordance with the requirements of Treasury Regulation ss. 1.704-1(b)(2)(iv)(f)
or any successor regulatory or statutory provision, as of the date that the
event occurs causing the capital accounts to be re-evaluated. For purposes of
computing the amount of any item of income, gain, deduction, or loss to be
reflected in the Member's Capital Accounts, the determination, recognition, and
classification of any such items shall be the same as its determination,
recognition, and classification for Federal income tax purposes (including any
method of depreciation, cost recovery, or amortization used for this purpose);
provided that if in any taxable year the Company has in effect an election under
Section 754 of the Code, capital accounts shall be adjusted in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(m).
-2-
<PAGE>
Loans by a Member to the Company shall not be considered Capital Contributions.
If any Member or Assignee shall advance funds to the Company in excess of the
amounts required hereunder to be contributed by it to the capital of the
Company, the making of such advances shall not result in any increase in the
amount of the Capital Account of such Member or Assignee, shall be treated
solely as loans, and shall be payable or collectible only out of the Company
assets in accordance with the terms and conditions upon which such advances are
made.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulation Section 1.704-1(b)(2)(iv), and shall be interpreted and applied in a
manner consistent with such Regulation. In the event SAHI shall determine that
it is prudent to modify the manner in which the Capital Accounts, or any debits
or credits thereto, are computed to comply with such Regulation, SAHI may make
such modification, provided that it is not likely to have a material effect on
the amounts distributable to any Member pursuant to Articles VI or VII hereof
upon the dissolution of the Company. In the event SAHI shall determine such
adjustments are necessary or appropriate to comply with Regulation Section
1.704-1(b)(2)(iv), SAHI shall adjust the amounts debited or credited to Capital
Accounts with respect to (i) any property contributed by the Members or
distributed to the Members and (ii) any liabilities secured by such contributed
or distributed property or assumed by the Members. SAHI shall also make any
other appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulation Section 1.704-1(b).
In the event any interest in the Company is transferred in accordance with the
terms of this Agreement, the transferee shall succeed to the Capital Account of
the transferor to the extent it relates to the transferred interest.
1.5 "Capital Contribution" shall mean the gross amount of cash
investment in the Company by each and all of the Members.
1.6 "Cash Distributions" shall mean net cash distributed to Members
resulting from Cash Flow from Operations or Cash from Sales or Refinancing, but
shall not include any amount in repayment of loans made by the Members to the
Company.
1.7 "Cash Flow from Operations" shall mean net cash funds provided from
operations of the Company or investment of any Company funds, without deduction
for depreciation, but after deducting cash funds used to pay or establish a
reserve for expenses, debt payments, capital improvements, and replacements and
for such other items as SAHI reasonably determines to be necessary or
appropriate.
1.8 "Cash from Sales or Refinancing" shall mean the net cash proceeds
received by the Company from or as a result of any Sale or Refinancing of
property after deducting (i) all expenses incurred in connection therewith, (ii)
any amounts applied by SAHI in its sole and absolute discretion toward the
payment of any indebtedness and other obligations of the Company, including
payments of principal and interest on mortgages, (iii) the payment of any other
expenses or amounts owed by the Company to other parties, and (iv) the
establishment of any reserves deemed necessary by SAHI in its sole and absolute
discretion. If the proceeds of any Sale or Refinancing are paid in more than one
installment, each such installment shall be treated as a separate Sale or
Refinancing for the purposes of this definition.
-3-
<PAGE>
1.9 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time. "Regulations" shall mean rules, orders, and regulations
issued pursuant to or under the authority of the Code. Any reference herein to a
specific section(s) of the Code or Regulations shall be deemed to include a
reference to any corresponding provision of future law.
1.10 "Company" shall refer to CCT, L.L.C. which shall be created upon
the filing of the Articles of Organization with the Office of the Secretary of
State of North Carolina, to be operated under the name CCT, L.L.C., a North
Carolina limited liability company, and to continue under this Agreement, as
amended from time to time.
1.11 "Economic Interest" shall refer to that portion of the Membership
Interest of a Member in the economic rights and benefits of the Company,
including but not limited to all Income, Loss and Cash Distributions. Such an
Economic Interest will be measured by an amount equal to the percentage of the
Member's Membership Interest in the Company as the same may be adjusted from
time to time.
1.12 "Economic Interest Owner" shall mean a person who has acquired a
Member's Economic Interest but who has not become a Member.
1.13 "Entity" shall mean any general partnership, limited partnership,
limited liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
1.14 "Hospital" shall mean the acute care hospital specializing in
cardiology and cardiovascular care and surgery being developed by MedCath of
Tucson, L.L.C. in or near Tucson, Arizona.
1.15 "Income" or "Loss" shall mean, with respect to any fiscal year,
the taxable income or taxable loss in such year or other period determined in
accordance with Code Section 703(a) by the Company under the Code and
Regulations including, without limitation, each item of income, credit, gain,
loss, or deduction required to be separately stated pursuant to Code Section
703(a)(1), determined by the method of accounting then being utilized by the
Company (provided it is permitted by the Code), applied on a consistent basis
throughout the period for which taxable income or taxable loss is determined,
adjusted to take into account (i) any tax exempt income received or accrued;
(ii) expenditures and losses referred to in Code Section 705(a)(2)(B),
267(a)(1), 707(b), and 709 which are not deductible, depreciable, or amortizable
in computing net income or net loss; (iii) amounts of net income or net loss
that would be recognized if property distributed in kind to a Member was sold to
an unrelated person at fair market value on the date of distribution, and (iv)
expenditures which reduce capital accounts under Regulation Section
1.704-1(b)(2)(iv) including, but not limited to, nonamortizable syndication
expenses. To the extent the Company recognizes a tax deduction attributable to
an amount included in Income or Loss under the preceding sentence, such amount
shall not again be included in taxable income or taxable loss but shall be
allocated among the Members in accordance with the allocation of the amount
under the preceding sentence.
1.16 "Investor Manager" shall refer to the individual elected by
Investor Members in accordance with Section 5.14 who shall serve as a Manager of
the Company.
-4-
<PAGE>
1.17 "Investor Members" shall mean the Members other than SAHI listed
on Schedule A attached hereto.
1.18 "Laboratory" shall have the meaning provided in Section 2.3
hereof.
1.19 "Majority Vote of Investor Members" shall refer to the affirmative
vote, approval or consent of Investor Members holding a majority of the
Membership Interests held by the Investor Members in the aggregate.
1.20 "Majority Vote of Members" shall refer to the affirmative vote,
approval or consent of Members holding sixty-seven percent (67%) of the
Membership Interests in the aggregate.
1.21 "Manager" or "Managers" shall refer to one or more managers
designated pursuant to this Agreement. Pursuant to this Agreement and the
Articles of Organization, no Member shall automatically be a manager by virtue
of such Person's status as a Member. Subject to Section 11.1(g) hereof, the
Managers of the Company shall be SAHI and the Investor Manager. The powers,
rights and duties of each Manager to manage the affairs of the Company are
specified or designated in this Agreement.
1.22 "Member" shall refer to the organizers of the Company and each of
the members identified in the then applying Schedule A attached hereto and
incorporated herein by this reference. To the extent a Manager has purchased a
Membership Interest in the Company, such Person will have all the rights of a
Member with respect to such Membership Interest, and the term "Member" as used
herein shall include a Manager to the extent he has purchased such Membership
Interest in the Company. If a Person is already a Member immediately prior to
the purchase or other acquisition by such Person of an Economic Interest or
Membership Interest, such Person shall have all the rights of a Member with
respect to such purchased or otherwise acquired Membership Interest or Economic
Interest, as the case may be.
1.23 "Membership Interest" shall mean all of a Member's rights in the
Company, including without limitation the Member's share of the profits, losses
and benefits of the Company, the right to receive distributions of the Company
assets, any right to vote, any right to participate in the management of the
business and affairs of the Company, including the right to vote on, consent to,
or otherwise participate in any decision or action of or by the Members granted
pursuant to this Operating Agreement or the North Carolina Act. The initial
Membership Interest of each Member shall be listed on Schedule A and shall be
based upon the pro rata Capital Contribution of each Member.
1.24 "Minimum Gain" shall mean the excess, if any, of debt of the
Company as to which no Member is personally liable over the Company's basis in
the assets that secure such debt, and as such term is further defined in
Temporary Regulation Section 1.704-1T(b)(4)(iv)(c).
1.25 "North Carolina Act." The North Carolina Limited Liability Company
Act, N.C. Gen. Stat. ss. 57-1-01, et. seq.
-5-
<PAGE>
1.26 "Organization Expenses" shall mean those expenses incurred, either
by the Company or for which the Company has agreed to make reimbursement, in
connection with the formation of the Company including such expenses as: (i)
registration fees, filing fees, and taxes; and (ii) legal fees incurred in
connection with any of the foregoing.
1.27 "Person" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors, and assigns of
such individual or Entity where the context so permits.
1.28 "Prime Rate" means the rate of interest as of the relevant day or
time period as announced by the First Union National Bank, N.A. or its successor
in interest from time to time as its prime or reference rate.
1.29 "Refinancing" means any borrowing incurred or made to recapitalize
the Company or the equity investment in, or to refinance any loan used to
finance the acquisition of property.
1.30 "SAHI" shall refer to Southern Arizona Heart, Inc. who shall serve
as a Manager of the Company.
1.31 "Sale" means the sale, exchange, involuntary conversion (other
than a casualty followed by reconstruction), condemnation, or other disposition
of property by the Company, except for dispositions of inventory items and
personal property in the ordinary course of business and in connection with the
replacement of such property.
1.32 "Substitute Manager" shall mean a Manager who succeeds either SAHI
or any of the Investor Manager with all of the specific rights and powers of
such Manager under this Agreement.
1.33 "Substitute Member" shall mean an assignee of a Member who has
been admitted to the Company and granted all the rights of a Member in place of
his or her assignor pursuant to the provisions of this Agreement. A Substitute
Member, upon his or her admission as such, shall replace and succeed to the
rights, privileges, and liabilities of the Member from whom he or she acquired
his or her interest in the Company, to the extent of the Economic Interest
assigned.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
2.1 Company Formation. The Company will be formed upon the execution
by SAHI and one other individual or entity on behalf of the Company of Articles
of Organization which are then filed with the Secretary of State of North
Carolina in accordance with the provisions of the North Carolina Act. SAHI shall
execute or cause to be executed all other such certificates or documents, and
shall do or cause to be done all such filing, recording, or other acts, as may
be necessary or appropriate from time to time to comply with the requirements of
-6-
<PAGE>
law for the continuation and/or operation of a limited liability company in the
State of North Carolina, the operation of a foreign limited liability company in
the State of Arizona and other documents to reflect the admission of additional
Members to the Company. Any costs incurred by SAHI in connection with the
foregoing shall be reimbursed promptly upon the completion of such action.
2.2 Name of Company. The name of the Company is CCT, L.L.C., a North
Carolina limited liability company.
2.3 Purposes and Investment Objectives. The principal purposes of the
Company are as follows:
(a) To develop, own and operate a cardiac catheterization
laboratory which shall be located in space leased to the Company by the
Hospital (the "Laboratory").
(b) Any other purpose reasonably related to (a) above.
2.4 Registered Office and Principal Place of Business; Registered
Agent. The registered office and principal place of business of the Company
shall be maintained at the offices of SAHI, whose mailing address is 7621 Little
Avenue, Suite 106, Charlotte, Mecklenburg County, North Carolina 28226 or such
other place in the State of North Carolina as SAHI shall designate. The
Registered Agent of the Company shall be David A. Ward whose business office is
identical with the registered office. SAHI shall promptly notify the Members of
any changes in the principal place of business, the registered office, or the
registered agent of the Company.
2.5 Commencement and Term. The Company shall commence on the filing of
the Articles of Organization in the Office of the Secretary of State of North
Carolina, as required by Section 2.1 hereof, and shall continue until December
31, 2035, unless sooner terminated or dissolved as provided herein; provided,
however, that the termination date may be extended for up to an additional forty
(40) years in five (5) year increments upon the election of SAHI. In the event
SAHI does not elect to extend the term hereof, the Investor Manager may instead
elect to extend the term hereof, subject to SAHI's consent which shall not be
unreasonably withheld or delayed.
ARTICLE IIII
MEMBERS AND CAPITAL CONTRIBUTIONS
3.1 Contributions of Members.
(a) The Members shall contribute capital as follows:
(i) SAHI shall own at least a fifty-one percent
(51%) Membership Interest in the Company and shall contribute
to the Company for its Membership Interest the amount shown on
Schedule A.
-7-
<PAGE>
(ii) The Investor Members shall own in the
aggregate up to a forty-nine percent (49%) Membership Interest
and shall contribute to the Company for their Membership
Interests amounts as shown on Schedule A attached hereto.
The Members may be liable to the Company for amounts distributed to
them as a return of capital as provided by the North Carolina Act. The
Members shall not be required to contribute any additional capital to
the Company except as provided in Section 3.5.
3.2 Liability of Members - For Capital. The liability of each Member,
as such, shall be limited to the amount of its Capital Contribution as a Member.
3.3 Members' Accounts and Withdrawals. An individual Capital Account
shall be maintained for each Member in accordance with requirements of the Code
and the Regulations promulgated thereunder for limited liability companies. It
shall be credited initially with the amount of each Member's Capital
Contribution and shall be increased by such Member's share of income and gain
and any additional contributions at fair market value, decreased by such
Member's share of distributions and losses, and increased and/or decreased by
those other items required by the Code and the Regulations. No Member shall be
entitled to withdraw or to make demand for withdrawal of any part of his or her
Capital Account or to receive any distribution except as provided herein.
3.4 Interest on Capital Contributions. No interest shall be paid on
Capital Contributions.
3.5 Additional Funding. If from time to time, SAHI reasonably
determines that funds in addition to that contemplated by Sections 3.1 and 3.2
are necessary or appropriate for the development or operation of the Laboratory,
then:
(a) First, SAHI shall use commercially reasonable efforts to
borrow such funds from a bank or other lender on terms and conditions
reasonably acceptable to SAHI, or SAHI may, but shall not be required,
to loan such funds to the Company at the Prime Rate plus one percent
(1%) per annum which loan shall be secured by the Company's assets.
Interest shall be paid monthly in arrears and principal shall be repaid
as the Company has funds available therefore. All loans obtained
hereunder shall be subject to the approval of the Investor Manager
which approval shall not be unreasonably withheld or delayed;
(b) Second, if loans as provided in (a) above are not
available, SAHI may request that the Members contribute additional
capital to the Company pro rata according to their respective
Membership Interests, provided however, such Capital Contributions
shall be made only if SAHI and the Investor Manager approve such
Capital Contributions. If additional Capital Contributions are so
approved, each Member may elect whether or not to contribute its pro
rata portion thereof. The other Investor Members may elect to
contribute capital not contributed by any Investor Member hereunder.
SAHI may then elect to contribute amounts which the Investor Members,
in the aggregate, have not so contributed. Thereafter, SAHI shall
reasonably adjust the
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Membership Interest of each Member (taking into
consideration the Capital Contributions made by the Members in
accordance with this Section 3.5) in the event any Member elects not to
contribute capital pursuant to a capital call approved in accordance
with this Section 3.5;
(c) If funds are not available in accordance with (a) or (b)
above, then SAHI may elect to dissolve the Company.
ARTICLE IV
NAMES AND ADDRESSES OF INITIAL MEMBERS
4.1 The names and addresses of the Members are as follows:
Name Address
o Southern Arizona Heart, Inc. 7621 Little Avenue, Suite 106
Charlotte, NC 28226
o See the Members listed on Schedule A attached hereto.
ARTICLE V
MANAGEMENT OF THE COMPANY
5.1 General Authority and Powers of SAHI. Subject to the terms and
conditions of this Agreement SAHI shall have complete authority over and the
exclusive control and management of the business affairs of the Company,
provided, however, that certain actions and decisions of SAHI as specified
herein shall be made with the approval of the Investor Manager, and decisions
relating to medical and clinical practice at the Laboratory shall be made
exclusively by the Investor Manager and/or qualified medical personnel who
perform procedures within the Laboratory. Without limiting the generality of the
foregoing, SAHI shall have the right and the power, if, as, and when it, from
time to time, deems necessary or appropriate on behalf of the Company, subject
only to the terms and conditions of this Agreement:
(a) To negotiate and execute on behalf of the Company all
documents, instruments and agreements reasonably necessary or
appropriate to lease appropriate space and to develop and construct the
Laboratory, and to borrow funds to finance such efforts, the material
terms and conditions of which shall be subject to the approval of the
Investor Manager which approval shall not be unreasonably withheld or
delayed;
(b) To prepare a budget for the development of the Laboratory
and thereafter, annual operating budgets;
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(c) To acquire all appropriate equipment and supplies required
from time to time in connection with the development and operation of
the Laboratory (the "Equipment") and loans or other financing therefor,
provided however, material items of medical equipment shall be acquired
with the approval of the Investor Manager which approval shall not be
unreasonably withheld or delayed;
(d) The negotiation and execution of fair market agreements
pursuant to which the services of the Laboratory will be provided to
patients of the Hospital;
(e) The negotiation and execution of all such other agreements
regarding the purchase of goods or services for the Laboratory,
provided however, any agreement involving physician services or any
agreement for the expenditure of more than One Hundred Thousand Dollars
($100,000.00) by the Company which is not cancelable upon no more than
ninety (90) days notice shall not be entered into without the approval
of the Investor Manager which approval shall not be unreasonably
withheld or delayed;
(f) With the approval of the Investor Manager which will not
be unreasonably withheld or delayed, establish regular procedures for
quality assurance, peer review and granting privileges to physicians at
the Laboratory;
(g) To expend all or portions of the Company's capital and
income in furtherance of or relating to the Company's business and
purposes, including, but not limited to, payment of all ongoing
operational expenses, payment of commissions, organization expenses,
professional fees, rental fees, and management fees, and to invest in
short-term debt obligations (including, but not limited to, obligations
of Federal and state governments and their agencies, commercial paper,
and certificates of deposit of commercial banks, or savings banks or
savings and loan associations) such of the Company's funds as are
temporarily not required for the development or operation of the
Company and the payment of Company obligations;
(h) To employ or retain on such terms and for such
compensation as SAHI may reasonably determine, such persons, firms, or
corporations as SAHI may deem advisable, including without limitation
qualified medical and other employees necessary or appropriate to
operate the Laboratory, attorneys, accountants, financial and technical
consultants, supervisory managing agents, insurance brokers, brokers
and loan brokers, appraisers, architects and engineers, who may also
provide such services to SAHI, provided that physicians and the senior
administrator of the Laboratory shall be hired or retained with the
approval of the Investor Manager which shall not be unreasonably
withheld or delayed; provided further, that the Investor Manager shall
present to SAHI any concerns which they may have about the senior
administrator of the Laboratory from time to time and SAHI shall meet
with the Investor Manager to discuss such concerns and to explore what
actions should reasonably be taken by SAHI on behalf of the Company
with respect thereto;
(i) Except to the extent the approval of the Investor Manager
is expressly required elsewhere in this Section 5.1:
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(A) To execute leases, deeds, contracts, rental
agreements, construction contracts, sales agreements, and
management contracts;
(B) To exercise all rights, powers, and privileges of
the Company as lessee with respect to the Laboratory or rights
held by the Company;
(C) To consent to the modification, renewal, or
extension of any obligations to the Company of any person or
of any agreement to which the Company is a party or of which
it is a beneficiary;
(D) To execute in furtherance of any or all of the
purposes of the Company, any deed, lease, deed of trust,
security interest, mortgage, promissory note, bill of sale,
assignment, contract, or other instrument purporting to
purchase or convey or encumber in whole or in part the
Equipment or the Laboratory or other real or personal property
of the Company;
(E) To prepay in whole or in part, refinance, recast,
increase, modify, or extend any security interest, deed of
trust, or mortgage affecting the Laboratory and in connection
therewith to execute any extensions or renewals thereof on the
Laboratory and to grant security interests in any of the
Equipment or the Laboratory;
(j) To adjust, compromise, settle, or refer to arbitration any
claim against or in favor of the Company, and to institute, prosecute,
and defend any actions or proceedings relating to the Company, its
business, and properties; provided, however, the resolution of any
claim in excess of Two Hundred Fifty Thousand Dollars ($250,000.00)
shall be subject to the approval of the Investor Manager which approval
shall not be unreasonably withheld or delayed;
(k) To acquire and enter into any contract of insurance which
SAHI deems necessary or appropriate for the protection of the Company
and SAHI, for the conservation of the Company or its assets, or for any
purpose beneficial to the Company; however, neither SAHI nor its
Affiliates shall be compensated for providing insurance brokerage
services relating to obtaining such insurance;
(l) To prepare or cause to be prepared reports, statements,
and other relevant information for distribution to the Members
including annual reports;
(m) To open accounts and deposit and maintain funds in the
name of the Company in banks or savings and loan associations;
provided, however, that the Company's funds shall not be commingled
with the funds of any other person;
(n) To cause the Company to make or revoke any of the
elections referred to in Section 754 of the Internal Revenue Code of
1986 as amended or any similar provisions enacted in lieu thereof;
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<PAGE>
(o) To make all decisions related to generally accepted
principles of accounting to be applied on a consistent basis and
Federal income tax election;
(p) Except to the extent the approval of the Investor Manager
is expressly required elsewhere in this Section 5.1, generally, to
possess and exercise any and all of the rights, powers and privileges
of a Manager under the North Carolina Act;
(q) To execute, acknowledge, and deliver any and all documents
or instruments in connection with any or all of the foregoing;
(r) Except to the extent the approval of the Investor Manager
is expressly required elsewhere in this Section 5.1, to modify or
otherwise improve the Laboratory;
(s) To manage, direct, and guide the operation of the
Laboratory, other than medical or clinical matters which shall be under
the direction of the Investor Manager and other agreed upon qualified
medical personnel, including all necessary acts relating thereto;
(t) With the approval of the Investor Manager not to be
unreasonably withheld or delayed to establish minimum insurance
requirements for all physicians practicing at the Laboratory;
(u) To admit as Members additional investors who have been
approved by the Investor Manager, which approval shall not be
unreasonably withheld or delayed.
(v) Subject to Section 5.2(j), to sell assets of
the Company.
5.2 Restrictions on Authority of the Managers. The Managers shall not
do any of the following:
(a) Act in contravention of this Agreement;
(b) Act in any manner which would make it impossible to carry
on the express business purposes of the Company;
(c) Commingle the Company funds with those of any other person
or entity;
(d) Admit an additional Manager, except as provided in this
Agreement;
(e) Admit an additional Member, except as provided in this
Agreement;
(f) Alter the primary purposes of the Company as set forth in
Section 2.3;
(g) Possess any property or assign the rights of the Company
in specific property for other than a Company purpose;
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<PAGE>
(h) Employ, or permit the employ of, the funds or assets of
the Company in any manner except for the exclusive benefit of the
Company;
(i) Make any payments of any type, directly or indirectly, to
anyone for the referral of patients to the Laboratory in order to use
the Laboratory or to provide other services payable by Medicare or
Medicaid;
(j) Sell all or substantially all of the assets of the Company
or merge the Company without the approval of a Majority Vote of the
Members.
5.3 Duties of the Managers. Each Manager shall do the following:
(a) Diligently and faithfully devote such of its time to the
business of the Company as may be necessary to properly conduct the
affairs of the Company, however, each Manager shall not be required to
devote its full time to such duties;
(b) Use its best efforts to cause the Company to comply with
such conditions as may be required from time to time to permit the
Company to be classified for Federal income tax purposes as a limited
liability company and not as an association taxable as a corporation;
(c) In the case of SAHI file and publish all certificates,
statements, or other instruments required by law for the formation and
operation of the Company as a limited liability company in all
appropriate jurisdictions;
(d) In the case of SAHI cause the Company to obtain and keep
in force during the term of the Company fire and extended coverage and
public liability and professional liability insurance with such issuers
and in such amounts shall deem advisable, but in amounts not less (and
deductible amounts not greater) than those customarily maintained with
respect to the business equipment and property comparable to the
Company's; and
(e) Have a fiduciary duty to conduct the affairs of the
Company in the best interests of the Company and of the Members,
including the safekeeping and use of all funds and assets, whether or
not in its immediate possession and control, and it shall not employ or
permit others besides Managers to employ such funds or assets in any
manner except for the benefit of the Company.
(f) In the case of SAHI deliver to the Secretary of State of
North Carolina for filing an annual report in accordance with the North
Carolina Act and deliver to the Arizona Secretary of State a
qualification as a foreign limited liability company.
5.4 Delegation by the Managers. Subject to restrictions otherwise
provided herein, the Managers may at any time employ any other person, including
persons and entities employed by, affiliated with, or related to the Managers to
perform services for the Company and its business, and may delegate all or part
of their authority or control to any such other persons, provided that such
employment or delegation shall not relieve the Managers of their
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<PAGE>
respective responsibilities and obligations under this Agreement or under the
laws of the State of North Carolina nor will it make any such person a Member or
Manager of the Company.
5.5 Right to Rely Upon the Authority of the Managers. Persons dealing
with the Company may rely upon the representation of the Managers that such
Managers are managers of the Company and that such Managers have the authority
to make any commitment or undertaking on behalf of the Company. No person
dealing with the Managers shall be required to determine its authority to make
any such commitment or undertaking. In addition, no purchaser from the Company
shall be required to determine the sole and exclusive authority of any Manager
to sign and deliver on behalf of the Company any instruments of transfer with
respect thereto or to see to the application or distribution of revenues or
proceeds paid or credited in connection therewith, unless such purchaser shall
have received written notice from the Company affecting the same.
5.6 Company Expenses.
(a) In general, the Company's expenses shall be billed
directly to and paid by the Company. The Company shall reimburse the
Managers or their Affiliates for: (i) all Organization Expenses
incurred by the Managers or their Affiliates in connection with the
formation of the Company; (ii) the actual costs to the Managers or
their Affiliates of goods, services, and materials used for and by the
Company; and (iii) all reasonable travel and other out-of-pocket
expenses incurred by the Managers in the development and management of
the Company and its business. The reimbursement for expenses provided
for in this Section 5.6(a) shall be made to the Managers or their
Affiliates regardless of whether any distributions are made to the
Members under Article VI and Article VII.
(b) The Company shall also pay the following expenses of the
Company:
(i) All development and operational expenses of
the Company, which may include, but are not limited to: the
salary and related expenses of any employees and staff of the
Laboratory, all costs of borrowed money, taxes, and
assessments on the Laboratory, and other taxes applicable to
the Company; expenses in connection with the acquisition,
maintenance, leasing, refinancing, operation, and disposition
of the Equipment, furniture and fixtures of the Laboratory
(including legal, accounting, audit, commissions, engineering,
appraisal, and the other fees); the maintenance of the
Laboratory and its Equipment may be performed by SAHI or one
of its Affiliates as long as the charges to the Company for
such service are no greater than the charges for such service
from a third party service provider;
(ii) All fees and expenses paid to third parties
for accounting, legal, documentation, professional, and
reporting services to the Company, which may include, but are
not limited to: preparation and documentation of Company
bookkeeping, accounting and audits; preparation and
documentation of budgets, cash flow projections, and working
capital requirements; preparation and documentation of Company
state and federal tax returns; and taxes incurred in
connection with the issuance, distribution, transfer,
registration, and recordation
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<PAGE>
of documents evidencing ownership of a Membership Interest or
Economic Interest in the Company or in connection with the
business of the Company; expenses in connection with preparing
and mailing reports required to be furnished to the Members or
Economic Interest Owners for tax reporting or other purposes,
including reports, if any, that may be required to be filed
with any federal or state regulatory agencies, or expenses
associated with furnishing reports to Members which SAHI deems
to be in the best interest of the Company; expenses of
revising, amending, converting, modifying, or terminating the
Company or this Agreement; costs incurred in connection with
any litigation in which the Company is involved as well as any
examination, investigation, or other proceedings conducted by
any regulatory agency involving the Company; costs of any
computer equipment or services used for or by the Company; the
costs of preparing and disseminating informational material
and documentation relating to potential sale, refinancing, or
other disposition of the Laboratory or the Equipment.
5.7 No Management by Members. Other than the Managers, the Members
shall take no part in, or at any time interfere in any manner with, the
management, conduct, or control of the Company's business and operations and
shall have no right or authority to act for or bind the Company except as set
forth in this Agreement. The rights and powers of such Members shall not extend
beyond those set forth in this Agreement and those granted under the Articles of
Organization and any attempt to participate in the control of the Company in a
manner contrary to the rights and powers granted herein and under the Articles
of Organization shall be null and void and without force and effect. Subject to
the decisions and judgement with respect to all professional medical or clinical
matters of qualified medical personnel, SAHI, in conjunction with the Investor
Manager where applicable, shall have the right to determine when and how the
operations of the Company shall be conducted. The exercise by any other Member
of any of the rights granted him or her hereunder shall not be deemed to be
taking part in the control of the business of the Company and shall not
constitute a violation of this section.
5.8 Consent by Members to Exercise of Certain Rights and Powers by
Managers. By its execution hereof, each Member expressly consents to the
exercise by the Managers of the rights, powers, and authority conferred on the
Managers by this Agreement.
5.9 Other Business of Members.
(a) Subject to (b) below, any Member, including any Manager,
may engage independently or with others in other business ventures of
every nature and description, including without limitation the purchase
of medical equipment, the rendering of medical services of any kind,
and the making or management of other investments and neither the
Company nor any Member shall have any right by virtue of this Agreement
or the relationship created hereby in or to such other ventures or
activities or to the income or proceeds derived therefrom, and the
pursuit of such ventures.
(b) As long as any Member owns a Membership Interest herein,
and for a period of five (5) years after a Member ceases for any reason
to own a Membership
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<PAGE>
Interest in the Company, neither a Member nor any of its respective
Affiliates, shall hold, directly or indirectly, an investment or
ownership interest in any entity which provides any of the services or
facilities then being provided by the Laboratory or by SAHI within or
adjacent to the Laboratory within a fifty (50) mile radius of the
Laboratory (the "Territory"), provided that no Member shall be
prohibited from holding an investment or ownership interest in MedCath
of Tucson, L.L.C. and no Member who is a physician shall be prohibited
from: (A) engaging in his or her regular medical practice which may
include nuclear imaging, cardiac catheterization, ultrasound, cardiac
rehabilitation and office based electro-physiology studies, cardiac
research programs and cardiac devices in connection with which
subcontracts are entered into with other area hospitals but all only to
the extent that these facilities exist and the services are provided as
of the date hereof; provided that no such practice shall hereafter be
expanded to include any other modalities or equipment which provide any
of the services provided or intended to be provided by the Laboratory
unless the Investor Manager and SAHI agree, which agreement shall not
be unreasonably withheld or delayed, that such modalities or equipment
are being generally provided in physician's offices in communities
comparable to Tucson, Arizona, (B) notwithstanding (A) above, engaging
at any time and to any extent in that portion of his or her medical
practice which includes only clinical laboratories and
electrocardiograms, or (C) maintaining his or her staff privileges at
any other hospital. SAHI may continue to provide management services to
any cardiac catheterization lab in Tucson to which it provides services
as of the date hereof until the opening of the Hospital. In addition,
SAHI may separately operate a mobile catheterization laboratory within
the Territory but only upon a Majority Vote of Investor Members;
(c) The Members, including the Managers, have reviewed the
term and geographical restrictions included in Section 5.9(b), and in
light of the interests of the parties hereto, agree that such
restrictions are fair and reasonable.
(d) If there is a breach or threatened breach of the
provisions of this Section 5.9 of this Agreement, in addition to other
remedies at law or equity, the non-breaching party shall be entitled to
injunctive relief. The parties desire and intend that the provisions of
this Section 5.9 shall be enforced to the fullest extent permissible
under the law and public policies applied, but the unenforceability or
modification of any particular paragraph, subparagraph, sentence,
clause, phrase, word, or figure shall not be deemed to render
unenforceable the remainder of this Section 5.9. Should any such
paragraph, subparagraph, sentence, clause, phrase, word, or figure be
adjudicated to be wholly invalid or unenforceable, the balance of this
Section 5.9 shall thereupon be modified in order to render the same
valid and enforceable and the unenforceable portion of this Section 5.9
shall be deemed to have been deleted from this Agreement.
(e) SAHI, the Company and the Investor Members agree that the
benefits to any Investor Member hereunder do not require, are not
payment for, and are not in any way contingent upon the referral,
admission or any other arrangement for the provision of any item or
service offered by SAHI or the Company to patients of such Investor
Member in any facility, laboratory, cardiac catheterization facility or
other health care
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operation controlled, managed or operated by SAHI or
the Company and nothing herein is intended to prohibit any party from
practicing medicine at any other facility.
5.10 Managers' Standard of Care. Each Manager shall act in a manner he,
she or it believes in good faith to be in the best interest of the Company and
with such care as an ordinarily prudent person in a like position would use
under similar circumstances. In discharging its duties, each Manager shall be
fully protected in relying in good faith upon the records required to be
maintained under this Agreement and upon such information, opinions, reports and
statements by any of its other Managers, Members, or agents, or by any other
person as to matters each Manager reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, including information, opinions,
reports or statements as to the value and amount of the assets, liabilities,
profits or losses of the Company or any other facts pertinent to the existence
and amount of assets from which distributions to members might properly be paid.
5.11 Limitation of Liability. A Manager shall not be liable to the
Company, its Members, or other Managers for any action taken in managing the
business or affairs of the Company if he, she or it performs the duty of his,
her or its office in compliance with the standard contained in Section 5.10. No
Manager has guaranteed nor shall have any obligation with respect to the return
of a Member's Capital Contribution or profits from the operation of the Company.
Furthermore, no Manager, its Affiliates or its employees (collectively, its
"Agents") shall be liable to the Company or to any Member for any loss or damage
sustained by the Company or any Member except loss or damage resulting from
gross negligence or intentional misconduct or knowing violation of law or a
transaction for which such Manager or Agent received a personal benefit in
violation or breach of the provisions of this Agreement.
5.12 Indemnification of the Managers.
(a) The Manager and its Agents shall be indemnified by the
Company against any losses, judgments, liabilities, expenses, including
attorneys' fees and amounts paid in settlement of any claims sustained
by them arising out of any action or inaction of the Manager or its
Agents in its capacity as a Manager of the Company (or, in the case of
an Agent, within the scope of the Manager's authority) to the fullest
extent allowed by law, provided that the same were not the result of
gross negligence or willful misconduct on the part of the Manager or an
Agent and provided that the Manager or an Agent, in good faith,
reasonably determined that such course of conduct was in the best
interest of the Company; provided, however, that such indemnification
and agreement to hold harmless shall be recoverable only out of Company
assets. Subject to applicable law, the Company shall advance expenses
incurred with respect to matters for which a Manager may be indemnified
hereunder.
(b) If at any time, the Company has insufficient funds to
furnish indemnification as herein provided, it shall provide such
indemnification if and as it generates sufficient funds and prior to
any cash distributions, pursuant to Article VI or Article VII hereof,
to the Members.
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5.13 Decisions by Investor Manager. The Investor Members shall elect an
Investor Manager.
5.14 Election and Replacement of Investor Manager. In accordance with
the procedures outlined in Section 10.1 herein, the Investor Members shall elect
an Investor Manager to serve for one year terms or until his successor is duly
elected. At any time, in accordance with Section 10.1, the Investor Members may
replace the Investor Manager and elect a new Investor Manager.
5.15 Role of Investor Manager. Notwithstanding anything herein to the
contrary, the Investor Manager shall take no action nor make any decision on
behalf of the Company except to the extent he is expressly authorized to do so
under this Agreement in his capacity as a Investor Manager.
5.16 Purchase of Goods and Services from SAHI. SAHI shall give the
Investor Manager prior written notice of any purchase by the Company of goods
and services from SAHI or its Affiliates. The Investor Manager shall be deemed
to have approved any such purchase unless they provide a reasonable written
objection to the purchase of the goods or services described in such notice
within five (5) days from the date of such notice. Goods and services purchased
from SAHI or its Affiliates shall be of substantially the same quality and price
as could be obtained from an unrelated third party.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 Allocations and Distributions of Cash Flow from Operations and
Cash from Sales or Refinancing. After repayment of any loans made by the Members
to the Company, Cash Flow from Operations and Cash from Sales or Refinancing
shall be allocated, or distributed as Cash Distributions according to the
Economic Interests of the Members and Economic Interest Owners which, subject to
the provisions of Section 6.6 and Article VII, initially shall be in accordance
with their respective Membership Interests shown on Schedule A attached hereto.
Notwithstanding anything herein to the contrary no distributions shall be made
to Members if prohibited by N.C.G.S. ss. 57C-4-06.
6.2 Allocations of Income and Loss.
(a) Taxable gains shall be first allocated to those Members
and Economic Interest Owners, if any, with negative capital accounts,
pro rata according to their negative capital accounts, until all such
accounts have been returned to zero.
(b) After the allocations are made pursuant to Section 6.2(a),
all allocations and distributions of Income and Loss from whatever
source shall then be made according to the Economic Interest of each
Member and Economic Interest Owner.
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(c) In accordance with Code Section 704(c) and the Regulations
thereunder, Income and Loss with respect to that portion of the
property contributed to the capital of the Company shall, solely for
tax purposes, be allocated among the Members so as to take account of
any variation between the adjusted basis of such property to the
Company for Federal income tax purposes and its initial fair market
value used as the book value of the property by the Company.
6.3 Capital Accounts. Notwithstanding anything in this Agreement to
the contrary, no Member or Economic Interest Owner shall be entitled to any
allocation of Loss if such allocation, would result in such Member or Economic
Interest Owner having a negative Capital Account while any other Member or
Economic Interest Owner has a positive Capital Account. In such event, the
Losses shall be allocated to the Members or Economic Interest Owners with
positive Capital Accounts until their Capital Accounts have been reduced to zero
or until the negative amount in the Capital Accounts are proportionately the
same as the negative accounts of the other Members or Economic Interest Owners
as measured by their respective Economic Interests in the Company.
6.4 Qualified Income Offset Provision. Any Member or Economic Interest
Owner who unexpectedly receives an adjustment, allocation, or distribution as
described in Regulation Section 1.704-1(b)(2)(ii)(d) at (4) to (6), will be
allocated items of income and gain in an amount and manner sufficient to
eliminate such deficit balance as quickly as possible. This provision is
intended to be a "qualified income offset" as defined in Regulation Section
1.704-1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by
reference.
6.5 Minimum Gain Chargeback. If there is a net decrease in Minimum
Gain of the Company during any taxable year or other period, each Member or
Economic Interest Owner shall be allocated, before any other allocation is made
under Code Section 704(b) of Company items for such taxable year, an amount
equal to the greater of (i) such Company's share of the net decrease in Minimum
Gain allocable to the disposition of Company property subject to nonrecourse
liability, or (ii) the deficit balance in such Member's or Economic Interest
Owner's Capital Account. The items to be so allocated shall be determined in
accordance with Temporary Regulation Section 1.704-1T(b)(4)(iv)(e). This
provision is intended to be a "minimum gain chargeback" as described in
Temporary Regulation Section 1.704-1T(b)(4)(iv)(e), such Regulation being
specifically incorporated herein by reference.
6.6 Time and Manner of Cash Distributions. Cash Flow from Operations
and Cash from Sales or Refinancing (collectively, "Cash Distributions") shall be
distributed to the Members and Economic Interest Owners as Cash Distributions
according to the allocations set forth in Section 6.1 above, from time to time
as follows. SAHI shall distribute any cash available for distribution quarterly,
but shall retain such amounts as it may reasonably determine are required for
the support of the operations of the Company or payment of Company obligations
during a sixty (60) day period, plus amounts reasonably established as a reserve
to replace capital assets.
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ARTICLE VII
TERMINATION AND DISSOLUTION OF THE COMPANY
7.1 No Termination by Certain Acts of Member. Neither the transfer of
interest, withdrawal from the Company, bankruptcy, insolvency, dissolution,
liquidation or other disability, nor the legal incompetency of any Member shall
result in the termination or dissolution of the Company or affect its
continuance in any manner whatsoever.
7.2 Dissolution of the Company. The Company shall be dissolved upon
the happening of any of the following events, whichever shall first occur:
(a) The election by SAHI to dissolve the Company in accordance
with the terms of Section 3.5(c) hereof;
(b) The death, insanity, bankruptcy, retirement (other than
due to a failure of an Investor Manager to be re-elected as an Investor
Manager), resignation (other than due to an Investor Manager's
resigning from serving as a Manager while still remaining a Member) or
expulsion of any member - manager, unless the Company is continued by
the consent of not less than a majority in interest of the remaining
Members within sixty (60) days after notice of such event, effective as
of the date of such event. If there is no remaining Manager, the
remaining Members owning at least 51% of the Membership Interests which
are owned by the remaining Members shall elect a Substitute Manager who
shall assume all of the rights and duties of SAHI under this Agreement
(which Substitute Manager accepts such election);
(c) Upon the written agreement of SAHI and the Investor
Manager;
(d) The expiration of the term of the Company as provided in
Section 2.5 hereof;
(e) The adjudication of bankruptcy of the Company;
(f) Upon the written consent of a Majority Vote of the
Members;
(g) The dissolution of MedCath of Tucson, L.L.C.;
(h) Except as otherwise expressly provided herein, the
occurrence of any event which, under the North Carolina Act or any
other law, causes the dissolution or termination of the Company under
the law of the State of North Carolina; and
(i) In accordance with Section 12.11 hereof.
7.3 Dissolution and Final Liquidation.
(a) Upon any dissolution of the Company, the Company shall not
terminate, but shall cease to engage in further business except to the
extent necessary to perform
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existing contracts and preserve the value of its assets. Its assets
shall be liquidated and its affairs shall be wound up as soon as
practical thereafter by SAHI and the Investor Manager, or if for any
reason there is no Manager, by another person (including a corporation,
firm, or entity) designated by a Majority Vote of the Members. In
winding up the Company and liquidating assets, SAHI, or other person so
designated for such purpose, may arrange, either by itself or through
others, for the collection and disbursement to the Members of any
future receipts from the Laboratory or other sums to which the Company
may be entitled, or may sell the Company's interest in the Laboratory
and the Equipment to any person, including SAHI or any Affiliate
thereof, on such terms and for such consideration as shall be
consistent with obtaining the fair market value thereof.
(b) Upon any such dissolution and liquidation of the Company,
the net assets, if any, of the Company available for distribution, and
any cash proceeds from the liquidation of any such assets, shall be
applied and distributed in the following manner or order, to the extent
available:
(i) To the payment of or creation of reserves
for all debts, liabilities, and obligations to all creditors
of the Company (other than the Members or its Affiliates) and
the expenses of liquidation;
(ii) To the payment of all debts and
liabilities (including interest) owed to the Members or their
Affiliates as a creditor; and
(iii) The balance according to the Members' and
Economic Interest Owners' positive Capital Accounts after
taking into account all other adjustments during the fiscal
year in which liquidation occurs;
(c) The Members shall look solely to the assets, if any, of
the Company for any return of their Capital Contributions and, if the
assets of the Company remaining after payment or discharge of the
Company's debts and liabilities, or provision therefor, are
insufficient to return all or any part of the Capital Contributions, no
Member shall have any right of recourse against the Managers or other
Members or to charge the Managers or other Members for any amounts
except as provided herein and except to the extent otherwise provided
by the North Carolina Act and/or North Carolina law.
(d) Upon such dissolution, reasonable time shall be allowed
for the orderly liquidation of the assets of the Company and the
discharge of liabilities to creditors so as to minimize the losses
normally attendant to a liquidation.
(e)The Capital Accounts of the Members and Economic Interest
Owners, as adjusted pursuant to Section 1.4, shall be utilized by the
Company for the purpose of making distributions to those Members and
Economic Interest Owners with positive balances in their respective
capital accounts pursuant to Section 7.3(b). In making such
distributions, SAHI or the person winding up the affairs of the Company
shall distribute all funds available for distribution to the Members
and Economic Interest Owners (after establishing any reserves that SAHI
or the person winding up the affairs of the Company
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deems reasonably necessary pursuant to Section 7.3(b)) prior to the
later of (a) the end of the taxable year in which the event occurs
which caused the termination and dissolution of the Company, or (b)
ninety (90) days after the occurrence of such event. SAHI in its sole
discretion, or the person winding up the affairs of the Company, in
his, her or its discretion, may elect to have the Company retain any
installment obligations owed to the Company until collected in full so
long as any portion of the reserves which are later determined to be
unnecessary, and all collections on such installment obligations which
are not deemed to be reasonably necessary by SAHI or the person winding
up the affairs of the Company to add to such reserves are distributed
as soon as practicable in accordance with the provisions of Section
7.3(b) as modified by this Section.
7.4 Termination. Upon completion of the dissolution, winding up,
distribution of the liquidation proceeds and any other Company assets, the
Company shall terminate.
7.5 Payment in Cash or in Kind. Any payments made to any Member
pursuant to Section 7.3 hereof may be made in cash or in property, tangible or
intangible, or partially in cash and partially in such property in the
discretion of SAHI; provided, however, that the other Members have no right to
receive other than cash in return for their contributions.
7.6 Good Will and Trade Name. Upon the dissolution of the Company the
firm or trade name of the Company and any good will associated therewith shall
become the sole property of SAHI, provided that distributions and allocations
otherwise due to SAHI shall not be reduced as a result of SAHI becoming entitled
to such assets.
7.7 Termination of Noncompetition Covenants. Upon a dissolution of
the Company, the Members shall have no continuing liability, or obligation under
Section 5.9(b) except that Section 5.9(b) shall continue to be binding upon a
Member whose breach of this Agreement caused a dissolution of the Company.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBER AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS
8.1 Manager - Transfers.
(a) Except as provided in this Section 8.1, without the
consent of a Majority Vote of Investor Members, SAHI shall not
voluntarily withdraw from the Company as a Manager at any time prior to
its termination, or transfer or assign any of its rights and duties as
a Manager, provided that SAHI may assign its Membership Interest in the
Company and its rights to be a Manager to any party who purchases all
or substantially all of SAHI's and its subsidiaries' assets or capital
stock if such purchaser assumes in writing the obligations of SAHI
hereunder or to a party under control of, common control, or which
controls, SAHI. SAHI may also assign its Membership Interest in the
Company and its rights to be a Manager to a financial institution as
collateral security for repayment of indebtedness for borrowed funds by
SAHI or its Affiliates. In the event
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that SAHI desires to sell any Membership Interest and such sale is not
in connection with the sale of all or substantially all of the assets
or capital stock of SAHI and its subsidiaries, then the other Members
shall first have an option to purchase such Membership Interest in
accordance with the Right of First Refusal provided in Section 8.4.
(b) No Investor Manager may assign his rights to be a Manager
herein. Upon the withdrawal or resignation of an Investor Manager, a
substitute therefore who must be an Investor Member may be elected by a
Majority Vote of Investor Members.
(c) Any resignation or withdrawal by a Manager as a manager
shall not constitute such Manager's withdrawal as a Member.
8.2 Members' Right to Continue. If at any time there is no remaining
Manager, a meeting of the Members shall be held at the principal place of
business of the Company within forty-five (45) days after the happening of such
event to consider whether to continue the Company on the same terms and
conditions as are contained in this Agreement (except that the Managers may be
different) and to select a Manager for the Company, or whether to wind up the
affairs of the Company, liquidate its assets and distribute the proceeds
therefrom in accordance with Article VII hereof. The Company may be continued
and a new Manager (who accept such appointment) selected by the Members within
ninety (90) days of the occurrence of the event described in Section 7.2(a). The
new Manager shall execute, acknowledge, file or record (as appropriate) Articles
of Organization and an Operating Agreement and such other documents as may be
required by the North Carolina Act. The continuance of the Company pursuant to
the terms of this Section 8.2 is conditioned upon (i) the amendment of the
Articles of Organization to reflect the foregoing change and, if applicable,
compliance by the Company with any notice provisions of the North Carolina Act
and (ii) delivery to the withdrawing Manager of an indemnification agreement by
the Company, in form and substance reasonably satisfactory to the withdrawing
Manager, indemnifying and holding SAHI harmless against all future liabilities
of the Company.
8.3 Relationship with Substitute Manager. The relationship of the
Members to any person or entity that has acquired the Membership Interest of
either SAHI or the Investor Manager shall be governed by this Agreement. If the
acquiring party was not theretofore a Manager, then such Substitute Manager
shall have all the rights and powers of such Manager under this Agreement;
provided, it assumes in writing the obligations of such Manager under this
Agreement and any arising thereafter, and accepts and adopts all the terms and
provisions of this Agreement in writing. The withdrawing Manager shall be liable
for all of its covenants and obligations under this Agreement for all periods
prior to its withdrawal until such liability is assumed by a Substitute Manager.
8.4 Members Who Are Not Managers - Restriction on Transfer. Except
as otherwise set forth in this Section or in this Agreement, no Economic
Interest and/or Membership Interest of an Investor Member or any portion
thereof, shall be validly sold or assigned whether voluntarily, involuntarily or
by operation of law, and no purported assignee shall be recognized by the
Company for any purpose, unless such Economic Interest and/or Membership
Interest shall have been transferred in accordance with the provisions of this
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Agreement and in compliance with such additional restrictions as may be imposed
by SAHI to comply with requirements imposed by any Federal or state securities
regulatory authority and unless SAHI's and the Investor Manager's consent is
obtained. In no event, however, shall an Investor Member transfer or sell all or
any of its Economic Interest and/or Membership Interest to any party which, if a
Member, would be in violation of Section 5.9(b) hereof. Except as otherwise set
forth in this Section or in this Agreement, an Investor Member may transfer,
sell or assign his or her entire Economic Interest and/or Membership Interest if
it has received the approval of both the Investor Manager and SAHI not to be
unreasonably withheld, provided however: (a) the Company first for a period of
fifteen (15) days, and thereafter the other Members for a period of fifteen (15)
days shall have the right, but not the obligation, to purchase all, but not less
than all, of the Economic Interest and/or Membership Interest proposed to be
transferred, which right shall be exercisable on the terms and for the purchase
price set forth in writing in a bona fide offer made for the Interests by a
third-party (the "Right of First Refusal"), and (b) there shall have been filed
with the Company a duly executed and acknowledged counterpart of the instrument
making such assignment signed by both the assignor and assignee and such
instrument evidences the written acceptance by the assignee of all of the terms
and provisions of the Agreement, represents that such assignment was made in
accordance with all applicable laws and regulations and the assignee shall have
represented to the Company in writing that he, she or it meets the investor
suitability standards established by his, her or its state of residence, or, in
the absence thereof, the investor suitability standards established by the
Company. SAHI shall use reasonable care to determine that transfers are in
accordance with applicable laws and regulations, including obtaining an opinion
of counsel to that effect. Any Member who is not a Manager who shall assign all
its Membership Interest shall cease to be a Member of the Company, except that
unless and until a Substitute Member is admitted in his or her stead, such
assigning Member shall retain the statutory rights of an assignor of a
Membership Interest under the North Carolina Act. Any Membership Interests
acquired by the Company pursuant to Section 8.4 shall, subject to applicable
law, be re-offered by the Company to suitable investors.
8.5 Condition Precedent to Transfer of Economic Interest and/or
Membership Interest. Notwithstanding anything herein to the contrary, no
transfer of an Economic Interest and/or Membership Interest may be made if such
transfer (a) constitutes a violation of the registration provisions of the
Securities Act of 1933, as amended, or the registration provisions of any
applicable state securities laws; (b) if after such transfer the Company will
not be classified as a limited liability company for Federal income tax
purposes; and (c) if when taken together with other prior transfers, results in
a "termination" of the Company for Federal income tax purposes. The Company may
require, as a condition precedent to transfer of an Economic Interest and/or
Membership Interest, delivery to the Company, at the proposed transferor's
expense, of an opinion of counsel satisfactory (both as to the counsel and
substance of the opinion) to SAHI that the transfer will not violate any of the
foregoing restrictions.
8.6 Substitute Member - Conditions to Fulfill. No assignee of a
Member's Membership Interest in the Company shall have the right to become a
Substitute Member in place of his or her assignor unless, in addition to any
other requirement herein, all of the following conditions are satisfied:
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(a) The Company has waived its right pursuant to Section 8.4
to purchase the Membership Interest held by the assignee;
(b) The duly executed and acknowledged written instrument of
assignment which has been filed with the Company sets forth that the
assignee becomes a Substitute Member in place of the assignor;
(c) The assignor and assignee execute and acknowledge such
other instruments as SAHI may deem reasonably necessary or desirable to
effect such admission, including, but not limited to, the written
acceptance and adoption by the assignee of the provisions of this
Agreement;
(d) The written consent of SAHI and the Investor Manager to
such substitution is obtained, which consent may be withheld in SAHI's
sole and absolute discretion;
(e) The payment by the Member of all costs to the Company
associated with the transaction, including but not limited to legal
fees, transfer fees, and filing fees.
8.7 Allocations Between Transferor and Transferee. Upon the transfer
of a Member's Economic Interest or Membership Interest, all items of income,
gain, loss, deduction and credit attributable to the Economic Interest or
Membership Interest so transferred shall be allocated between the transferor and
the transferee in such manner as the transferor and transferee agree at the time
of transfer; provided such allocation does not violate federal or state income
tax law. If SAHI, in its sole discretion, deems such laws violated, then such
allocation shall be made pro rata for the fiscal year based upon the number of
days during the applicable fiscal year of the Company that the Economic Interest
or Membership Interest so transferred was held by the transferor and transferee,
without regard to the results of Company activities during the period in which
each was the holder, or in such other manner as SAHI deems necessary to comply
with Federal or state income tax laws. Distributions as called for by this
Agreement shall be made to the holder of record of the Economic Interest or
Membership Interest on the date of distribution. Notwithstanding anything
contained in this Agreement to the contrary, both the Company and SAHI shall be
entitled to treat the assignor of any assigned Economic Interest or Membership
Interest as the absolute owner thereof in all respects, and shall incur no
liability for distributions of cash or other property made in good faith to such
assignor in reliance on the Company records as they exist until such time as the
written assignment has been received by, and recorded on the books of, the
Company. For purposes of this Article VIII, the effective date of an assignment
of any Economic Interest or Membership Interest shall be the last day of the
month specified in the written instrument of assignment.
8.8 Rights, Liabilities of, and Restrictions on Assignee. No
assignee of a Member's Economic Interest or Membership Interest shall have the
right to participate in the Company, inspect the books of account of the Company
or exercise any other right of a Member unless and until admitted as a
Substitute Member. Notwithstanding SAHI's failure or refusal to admit an
assignee as a Substitute Member, such assignee shall be entitled to receive the
share of income, credit, gain, expense, loss and deduction and cash
distributions provided hereunder that is assigned to it, and, upon demand, may
receive copies of all reports thereafter delivered pursuant to the requirements
of this Agreement; provided, the Company shall have first received
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notice of such assignment and all required consents thereto shall have been
obtained and other conditions precedent to transfer thereof shall have been
satisfied. The Company's tax returns shall be prepared to reflect the interest
of assignees as well as Members.
8.9 Death of a Member. Heirs of Members shall be entitled to inherit
the Membership Interests of a deceased Member, provided that upon a Member's
death such interests shall be automatically converted to an Economic Interest
only in the Company until such heir agrees in writing to all of the terms and
conditions of this Agreement and such other reasonable terms as may be
established by SAHI as a condition to such heir becoming a Member, in which
event such interest shall again become a Membership Interest in the Company.
Notwithstanding the previous sentence, within one hundred twenty (120) days of
the Company first learning of the death of a Member, the Company shall have the
option to purchase the Membership Interest of the deceased Member, and the
estate of the deceased Member shall be obligated to sell such Membership
Interest to the Company, in accordance with the terms of this Section 8.9. The
Company may exercise its option by giving written notice thereof to the estate
of the deceased Member, or the appropriate representative thereof, within such
one hundred twenty (120) day period. The purchase price for such Membership
Interest shall equal five (5) multiplied by the pretax net income (as reasonably
determined by the Company's accountants) of the Company for the twelve (12)
month period ending as of the calendar quarter most recently ended prior to the
death of such Member multiplied by the percentage interest of such Member in the
Company (the "Formula Purchase Price"). The purchase price shall be paid (the
"Payment Method") in three (3) equal annual installments, the first third of
which shall be paid upon the determination of the purchase price and the
remaining two (2) installments of which shall be paid on the first and second
anniversary of such date. The outstanding amounts due from the Company to the
estate of the deceased Member shall bear interest at Prime Rate as of the date
of such Member's death. Accrued interest shall be paid as of the dates payments
of principal are due as provided above.
8.10 Repurchase of Interests in Certain Event.
(a) In the discretion of SAHI, the Company may, but is not
obligated to, repurchase a Member's Economic Interest or Membership
Interest upon such Member's breach of the Member's obligations
contained in Article III, Sections 5.9, 8.1(b), 8.4, 8.9, 12.1 and
12.11 of this Agreement.
(b) Each Member agrees to sell its Membership Interest to the
Company in the event SAHI elects to exercise the right of repurchase
granted under Section 8.10(a) and the purchase price shall the lower of
(x) the Capital Contribution of the Member less all amounts distributed
to such Member by the Company, and (y) the fair market value of such
Member's Membership Interest determined by an appraiser reasonably
selected by SAHI.
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ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
9.1 Books of Account. At all times during the continuance of the
Company, SAHI shall maintain or cause to be maintained true and full financial
records and books of account showing all receipts and expenditures, assets and
liabilities, profits and losses, and all other records necessary for recording
the Company's business and affairs including those sufficient to record the
allocations and distributions required by the provisions of this Agreement.
9.2 Access to Records. The books of account and all documents and
other writings of the Company, including the Articles of Organization and any
amendments thereto, shall at all times be kept and maintained at the registered
office of the Company. Each Member or his or her designated representatives
shall, upon reasonable notice to SAHI, have access to such financial books,
records and documents during reasonable business hours and may inspect and make
copies of any of them. Each Member may receive by mail, upon written request to
the Company and at his or her cost, a list of the names and addresses of the
Members and the percentage of Economic Interest held by each of them or such
other information which may be obtained pursuant to requirements of the North
Carolina Act.
9.3 Bank Accounts and Investment of Funds.
(a) SAHI shall open and maintain, on behalf of the Company, a
bank account or accounts in a federally insured bank or savings
institution as it shall determine, in which all monies received by or
on behalf of the Company shall be deposited. All withdrawals from such
accounts shall be made upon the signature of such person or persons as
SAHI may from time to time designate.
(b) Any funds of the Company which SAHI may determine are not
currently required for the conduct of the Company's business may be
deposited with a federally insured bank or savings institution or
invested in short-term debt obligations (including obligations of
federal or state governments and their agencies, commercial paper,
certificates of deposit of commercial banks, savings banks or savings
and loan associations) as shall be determined by SAHI in its sole
discretion.
9.4 Fiscal Year. The fiscal year and accounting period of the Company
shall end on September 30 of each year.
9.5 Accounting Reports. As soon as reasonably practicable after the
end of each fiscal year but in no event later than 120 days after the end
thereof, each Member shall be furnished an annual accounting showing the
financial condition of the Company at the end of such fiscal year and the
results of its operations for the fiscal year then ended, which annual
accounting shall be prepared on an accrual basis in accordance with generally
accepted accounting principles applied on a consistent basis and shall be
delivered to each of the Members promptly after it has been prepared. It shall
include a balance sheet as of the end of such fiscal year and statements of
income and expense, each Member's equity, and cash flow for such fiscal
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year. At SAHI's election the Company shall either be audited or such annual
accountings shall be either reviewed or compiled by a firm of independent
certified public accountants engaged by SAHI on behalf of the Company. The
report shall set forth the distributions to the Members for such fiscal year and
shall separately identify distributions from (i) operating revenue during such
fiscal year, (ii) operating revenue from a prior period which had been held as
reserves, (iii) proceeds from the sale or refinancing of the Equipment, and (iv)
unexpended proceeds received from the sale of Membership Interests. SAHI shall
also cause to be prepared and distributed to the Members monthly financial
statements in a form and containing such information as reasonably determined by
SAHI.
9.6 Tax Returns. SAHI shall cause income tax returns for the Company
to be prepared, at Company expense, and timely filed with the appropriate
authorities. As soon as is reasonably practicable, and in any event on or before
the expiration of 75 days following the end of each fiscal year, each Member
shall be furnished with a statement to be used by him or her in the preparation
of his or her individual income tax returns, showing the amounts of any Income
or Losses allocated to him or her, and the amount of any distributions made to
him or her, pursuant to this Agreement, along with a reconciliation of the
annual report with information furnished to investors for income tax purposes.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS
10.1 Meetings.
(a) Meetings of the Members of the Company for any purpose may
be called by SAHI, the Investor Manager or by Investor Members holding
in the aggregate ten percent (10%) of the Membership Interests. Such
request shall state the purpose of the proposed meeting and the matters
proposed to be acted upon thereat. Such meetings shall be held in
Tucson, Arizona.
(b) A notice of any such meeting shall be given by mail, not
less than fifteen (15) days nor more than sixty (60) days before the
date of the meeting, to each Member at his address as specified in
Section 12.7. Such notice shall be in writing, and shall state the
place, date and hour of the meeting, and shall indicate that it is
being issued at or by the direction of SAHI or by the Investor Members,
as the case may be. The notice shall state the purpose or purposes of
the meeting. If a meeting is adjourned to another time or place, and if
any announcement of the adjournment of time or place is made at the
meeting, it shall not be necessary to give notice of the adjourned
meeting.
(c) Each Member may authorize any person or persons to act for
him or her by proxy in all matters in which a Member is entitled to
participate, whether by waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Member or
his or her attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure
of the Member executing it.
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10.2 Voting Rights of Members.
(a) Each Member shall take no part in or interfere in any
manner with the control, conduct or operation of the Company, and shall
have no right or authority to act for or bind the Company except as
provided herein. Votes, to the extent taken, of the Members may be cast
at any duly called meeting of the Company. Each Member shall be
entitled to the number of votes determined by multiplying one thousand
(1,000) by the percentage Membership Interest of such Member.
(b) No Member shall have the right or power to vote to: (i)
withdraw or reduce his or her contributions to the capital of the
Company except as a result of the dissolution of the Company or as
otherwise provided by law or this Agreement; (ii) bring an action for
partition against the Company; (iii) cause the termination and
dissolution of the Company by court decree or otherwise, except as set
forth in this Agreement; or (iv) demand or receive property other than
cash in return for his or her contribution.
ARTICLE XI
AMENDMENTS
11.1 Authority to Amend by Managers. Except as otherwise provided by
Section 11.2, this Agreement and the Articles of Organization of the Company may
be amended by SAHI with the approval of the Investor Manager which approval
shall not be unreasonably withheld or delayed:
(a) To admit additional Members or Substitute Members but only
in accordance with and if permitted by the other terms of this
Agreement;
(b) To preserve the legal status of the Company as a limited
liability company under the North Carolina Act or other applicable
state or federal laws if such does not change the substance hereof, and
the Company has obtained the written opinion of its counsel to that
effect;
(c) To cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, to clarify any provision of this Agreement, or to make any
other provisions with respect to matters or questions arising under
this Agreement which will not be inconsistent with the provisions of
this Agreement;
(d) To satisfy the requirements of the Code and Regulations
with respect to limited liability companies or of any Federal or state
securities laws or regulations, provided such amendment does not
adversely affect the Membership Interests of Members and is necessary
or appropriate in the written opinion of counsel. Any amendment under
this subsection (e) shall be effective as of the date of this
Agreement;
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(e) To the extent that it can do so without materially
reducing the economic return to any Member on his or her investment in
the Company, to satisfy any requirements of federal or state
legislation or regulations, court order, or action of any governmental
administrative agency with respect the operation or ownership of the
Laboratory;
(f) Subject to the terms of Section 2.5, to extend the term of
the Company; and
11.2 Restrictions on Managers' Amendments; Amendments by Investor
Members. Except as provided in Section 11.1, amendments to this Agreement shall
be made only upon the consent of a Majority Vote of Investor Members. Except as
set forth in this Section 11.2, no amendment shall be made pursuant to Section
11.1 which would materially adversely affect the federal income tax treatment to
be afforded each Member, materially adversely affect the interests and
liabilities of each Member as provided herein, materially change the purposes of
the Company, extend or otherwise modify the term of the Company, or materially
change the method of allocations and distributions as provided in Article VI.
11.3 Amendments to Certificates. In making any amendments to this
Agreement, there shall be prepared, executed and filed for recording by SAHI
such documents amending the Articles of Organization as required under the North
Carolina Act.
ARTICLE XII
MISCELLANEOUS
12.1 Limited Power of Attorney. Upon the execution hereof, each Member
hereby irrevocably constitutes and appoints SAHI his or her true and lawful
attorney in his or her name and on his or her behalf to take at any time all
such action which SAHI is expressly authorized to perform, or which a Member is
expressly required to perform, under this Agreement.
12.2 Waiver of Provisions. The waiver of compliance at any time with
respect to any of the provisions, terms or conditions of this Agreement shall
not be considered a waiver of such provision, term or condition itself or of any
of the other provisions, terms or conditions hereof.
12.3 Interpretation and Construction. This Agreement contains the
entire agreement among the Members and any modification or amendment hereto must
be accomplished in accordance with the provisions of Article XI and Article XII.
Where the context so requires, the masculine shall include the feminine and the
neuter, and the singular shall include the plural. The headings and captions in
this Agreement are inserted for convenience and identification only and are in
no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.
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12.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of North Carolina, exclusive of its
conflict of law rules.
12.5 Partial Invalidity. In the event that any part or provision of
this Agreement shall be determined to be invalid or unenforceable, the remaining
parts and provisions of said Agreement which can be separated from the invalid
or unenforceable provision and shall continue in full force and effect.
12.6 Binding on Successors. The terms, conditions and provisions of
this Agreement shall inure to the benefit of, and be binding upon the parties
hereto and their respective heirs, successors, distributees, legal
representatives, and assigns. However, none of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the Company.
12.7 Notices and Delivery.
(a) To Members. Any notice to be given hereunder at any time
to any Member, or any document, reports or returns required by this
Agreement to be delivered to any Member, may be delivered personally or
mailed to such Member, postage prepaid, addressed to him or her at such
address as (s)he shall by notice to the Company have designated as his
or her address for the mailing of all notices hereunder or, in the
absence of such notice, to the address set forth in Article IV hereof.
Any notice, or any document, report or return so delivered or mailed
shall be deemed to have been given or delivered to such Member at the
time it is mailed, as the case may be.
(b) To the Company. Any notice to be given to the Company
hereunder shall be delivered personally or mailed to the Company, by
certified mail, postage prepaid, addressed to the Company at its
registered office. Any notice so delivered or mailed shall be deemed to
have been given to the Company at the time it is delivered or mailed,
as the case may be.
12.8 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall be deemed an original, and the
several counterparts taken together shall constitute the Agreement of the
Members.
12.9 Statutory Provisions. Any statutory reference in this Agreement
shall include a reference to any successor to such statute and/or revision
thereof.
12.10 Waiver of Partition. Each party does hereby waive any right to
partition or the right to take any other action which might otherwise be
available to such party for the purpose of severing its relationship with the
Company or such party's interest in the Equipment held by the Company from the
interests of other Members until the end of the term of both this Company and
any successor company formed pursuant to the terms hereof.
12.11 Change In Law. If due to any new law, rule or regulation, or due
to an interpretation or enforcement of any existing law, rule or regulation,
health care counsel reasonably selected by SAHI determines in writing that it is
reasonably likely that the
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relationships established between any of the parties to this Agreement including
any of their Affiliates and/or successors or assigns will not comply with any
law, rule, regulation or interpretation thereof ("Applicable Law"), then the
parties hereto hereby agree first, to negotiate in good faith to restructure the
relationships established under this Agreement so as to bring them into
compliance with such applicable laws while at the same time preserving the
material benefits of each of the parties hereto. In the event that a specific
proposal for the restructuring of this Agreement is approved by SAHI and a
Majority Vote of Investor Members, such restructured agreement shall become
binding upon all Members of the Company. Second, in the event that within
forty-five (45) days following the Company's receipt of legal advice in writing
from such health care counsel regarding Applicable Law the parties hereto are
unable to negotiate an acceptable restructuring of their relationship, then SAHI
shall have the option, within the following forty-five (45) day period, to
purchase the Membership Interests of some or all of the Investor Members whose
ownership is involved with such noncompliance with Applicable Law for a purchase
price equal to the greater of: (a) the Formula Purchase Price or (b) the amount
of the Capital Contribution made by each Member to the Company together with
interest thereon computed at the Prime Rate as of the date of this Agreement
from the date of such contribution through the date upon which SAHI pays all
amounts due under the terms of this Section 12.11. Such purchase price shall be
paid in accordance with the Payment Method. Third, in the event that SAHI does
not exercise its option to purchase Membership Interests of a Member whose
ownership causes the Company not to be in compliance with Applicable Law, such
Members may elect in writing within the following forty-five (45) day period, to
require that the Company be dissolved, in which event the Company shall be
dissolved in accordance with the terms of this Agreement.
12.12 Investment Representations of the Members.
(a) Each Member or individual executing this Agreement on
behalf of an entity which is a Member hereby represents and warrants to
the Company and to the Members that such Member has acquired such
Member's Membership Interest in the Company for investment solely for
such Company's own account with the intention of holding such
Membership Interest for investment, without any intention of
participating directly or indirectly in any distribution of any portion
of such Membership Interest, including an Economic Interest, and
without the financial participation of any other Person in acquiring
such Membership Interest in the Company.
(b) Each Member or individual executing this Agreement on
behalf of an entity which is a Member hereby acknowledges that such
Member is aware that such Member's Membership Interest in the Company
has not been registered (i) under the Securities Act of 1933, as
amended (the "Federal Act"), (ii) under the Uniform Securities Act of
the State of North Carolina, as amended (the "Uniform Securities Act")
in reliance upon the exemption contained in ss. 78A-17(9) of the
Uniform Securities Act, or (iii) under any other State securities laws.
Each Member or individual executing this Agreement on behalf of an
entity which is a Member further understands and acknowledges that his
representations and warranties contained in this Section are being
relied upon by the Company and by the Members as the basis for the
exemption of the Members' Membership Interest in the Company from the
registration requirements of the Federal Act and from the registration
requirements of the Uniform Securities Act and all
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other State securities laws. Each Member or individual executing this
Agreement on behalf of an entity which is a Member further acknowledges
that the Company will not and has no obligation to recognize any sale,
transfer, or assignment of all or any part of such Member's Membership
Interest, including an Economic Interest in the Company to any Person
unless and until the provisions of this Agreement hereof have been
fully satisfied.
(c) Each Member or individual executing this Agreement on
behalf of an entity which is a Member hereby acknowledges that prior to
his execution of this Agreement, such Member received a copy of this
Agreement and that such Member has examined this Agreement or caused
this Agreement to be examined by such Member's representative or
attorney. Each Member or individual executing this Agreement on behalf
of an entity which is a Member hereby further acknowledges that such
Member or such Member's representative or attorney is familiar with
this Agreement and with the Company's business plans. Each Member or
individual executing this Agreement on behalf of an entity which is a
Member acknowledges that such Member or such Member's representative or
attorney has made such inquiries and requested, received, and reviewed
any additional documents necessary for such Member to make an informed
investment decision and that such Member does not desire any further
information or data relating to the Company or to the Members. Each
Member or individual executing this Agreement on behalf of an entity
which is a Member hereby acknowledges that such Member understands that
the purchase of such Member's Membership Interest in the Company is a
speculative investment involving a high degree of risk and hereby
represents that such Member has a net worth sufficient to bear the
economic risk of such Member's investment in the Company and to justify
such Member's investing in a highly speculative venture of this type.
12.13 Decisions by Investment Managers. Each of the Investor Members
hereby authorize the Investor Manager to make the decisions to be made by the
Investor Manager hereunder and hereby release and hold harmless the Investor
Manager from any and all claims, liabilities, losses or damages which any of
them may have now or in the future resulting from any decision made by the
Investor Manager hereunder unless due to the gross negligence or willful
misconduct of the Investor Manager.
12.14 Ownership of Shares of SAHI. Each Investor Member agrees that
either that he shall not acquire, nor continue to own any of the common shares
of the parent corporation of SAHI to the extent that in the reasonable opinion
of health care counsel of SAHI, that such ownership, together with referrals of
patients to the Laboratory, by such Investor Member, would cause or constitute a
violation of any federal or state law, rule or regulation or that such Investor
Member shall not refer patients to the Laboratory as long as such referral would
cause a violation of any such law, rule or regulation.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their
respective hands and seals as of the day and year first above written.
MEMBERS:
SOUTHERN ARIZONA HEART, INC.
By: /s/David A. Ward
David A. Ward
Title: Vice President
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SCHEDULE A
Membership Interests of Member
Name and Address Capital Contribution Interest
Southern Arizona Heart, Inc. $66,233.77 %
7621 Little Avenue, Suite 106
Charlotte, NC 28226
Exhibit 10.43
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made this 18th day of July,
1996, between and among MEDCATH OF TUCSON, L.L.C., a North Carolina limited
liability company (the "Borrower) and CAPSTONE CAPITAL CORPORATION, a Maryland
corporation, its successors and assigns (the "Lender").
R E C I T A L S:
Borrower has requested that the Lender make a land acquisition and
construction/mini-perm loan to the Borrower in the principal sum of up to
$17,800,000 in order to finance the construction of the "Tucson Heart Hospital,"
an acute care hospital having not less than 60-beds and specializing in
cardiology services and cardiovascular surgery, to be located in Tucson,
Arizona. Lender has agreed to make such loan on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, it is hereby agreed as follows:
ARTICLE I
DEFINITIONS, ACCOUNTING PRINCIPLES, UCC TERMS
1.1 As used in this Agreement, the following terms shall have the
following meanings unless the context hereof shall otherwise indicate:
"Advances" means the advances of the Loan to be made by the Lender to
the Borrower either for Hard Cost Advances or for Soft Cost Advances in
accordance with the provisions of Article III hereof.
"Applicable Environmental Law" means any applicable federal, state or
local laws, rules or regulations pertaining to health or the environment, or
petroleum products, or radon radiation, or oil or hazardous substances,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA") and the Federal
Emergency Planning and Community Right-To-Know Act of 1986, as amended. The
terms "hazardous substance" and "release" shall have the meanings specified in
CERCLA, and the terms "solid waste," disposal," "dispose," and "disposed" shall
have the meanings specified in RCRA, except that if such acts are amended to
broaden the meanings thereof, the broader meaning shall apply herein
prospectively from and after the date of such amendments; notwithstanding the
foregoing, provided, to the extent that the laws of the State of Arizona
establish a meaning for "hazardous substance" or "release" which is broader than
that specified in CERCLA, as CERCLA may be amended from time to time, or a
meaning for "solid waste," "disposal," and "disposed" which is broader than
specified in RCRA, as RCRA may be amended from time to time, such broader
meanings under said state law shall apply in all matters relating to the laws of
such State.
<PAGE>
"Assignment and Security Agreement" means that certain Assignment and
Security Agreement of even date herewith from Southern Arizona Heart, Inc. in
favor of the Lender.
"Assignment of Rents and Leases" means that certain Assignment of Rents
and Leases of even date herewith from Borrower to Lender.
"Business Day" means a day, other than Saturday or Sunday and legal
holidays, when the Lender is open for business.
"Cash Flow Coverage" means a ratio in which the first number is the
EBITDAR of the Improvements, based upon the operations of the Improvements for
the preceding twelve (12) months, and the second number is the sum of the
current portion of the Long Term Debt (including Long Term Debt attributable to
the Loan) plus the interest expenses (including interest on the Loan) and lease
expense which is scheduled to be paid during the succeeding twelve (12) month
period.
"Collateral" means, collectively, the real property described in the
Deed of Trust, which grants to Lender a security interest in all Borrower's
building materials, fixtures, and certain contract rights, and general
intangibles (all as more particularly described in the Deed of Trust), now or
hereafter located on, used or useful in connection with, or relating to the
Property or the construction of the Improvements, together with the rents and
profits accruing from the Property, the Guaranty executed by the Guarantor, and
the Assignment and Security Agreement. Collateral shall not include accounts
receivable.
"Cost Budget" means the detailed estimation of the cost (both Hard
Costs and Soft Costs) to complete the Improvements attached hereto as Exhibit A,
as may be adjusted from time to time as herein provided.
"Closing Date" means the date on which all or any part of the Loan is
first disbursed by the Lender to or for the benefit of the Borrower.
"Deed of Trust" means that certain Deed of Trust and Security Agreement
of even date herewith from Borrower in favor of or for the benefit of Lender and
covering the Property.
"Default" means the occurrence or existence of any event which, but for
the giving of notice or expiration of time or both, would constitute an Event of
Default.
"EBITDAR" means earnings before interest, taxes, depreciation,
amortization, and rent.
"Event of Default" means any "Event of Default" as hereinafter defined.
"Exhibit" means an Exhibit to this Agreement, unless the context refers
to another
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document, and each such Exhibit shall be deemed a part of this Agreement to the
same extent as if it were set forth in its entirety wherever reference is made
thereto.
"GAAP" means, as in effect from time to time, generally accepted
accounting principles consistently applied as promulgated by the American
Institute of Certified Public Accountants.
"General Contractor" means the general contractor for the construction
of the Improvements and shall be Connelly Construction Company.
"Guarantor" means MedCath Incorporated, in its capacity as guarantor of
the Loan Obligations pursuant to its Guaranty Agreement ("Guaranty") of even
date herewith in favor of Lender.
"Hard Costs" means costs of the Land and actual physical construction
of the Improvements (labor and material).
"Hard Cost Advances" means Advances for Hard Costs.
"Improvements" means the approximate 83,000 square foot acute care
hospital, which will contain not less than 60 acute care beds and 6 rest care
beds, which will specialize in cardiology services and cardiovascular surgery,
and which will be located on the Property, together with related parking and
site improvements to be constructed in accordance with the Plans and
Specifications.
"Indebtedness" means any (i) obligations for borrowed money, (ii)
obligations representing the deferred purchase price of property other than
accounts payable arising in the ordinary course of business, (iii) obligations,
whether or not assumed, secured by Liens or payable out of the proceeds or
production from property now or hereafter owned or acquired, and (iv) the amount
of any other obligation (including obligations under financing leases) which
would be shown as a liability on a balance sheet prepared in accordance with
GAAP.
"Indemnity Agreement" means that certain Indemnity Agreement of even
date herewith from the Borrower in favor of the Lender.
"Lender's Inspecting Consultant" shall be the independent consultant
retained by the Lender to review the Plans and Specifications, soils tests for
the Property, and all draw requests for Advances for Hard Costs, and to make
monthly inspections of the Improvements, and who shall be CLJ Associates, Inc.
"Lien" means any voluntary or involuntary mortgage, security deed, deed
of trust, deed to secure debt, lien, pledge, assignment, security interest,
title retention agreement, financing lease, levy, execution, seizure, judgment,
attachment, garnishment, charge, lien or other encumbrance of any kind,
including those contemplated by or permitted in this Agreement and the other
Loan Documents.
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"Loan" means the loan in the principal sum of up to $17,800,000 to be
made by Lender to the Borrower pursuant hereto as evidenced by the Note.
"Loan Documents" means, collectively, this Agreement, the Note, the
Deed of Trust, the Assignment of Rents and Leases, the Assignment and Security
Agreement, the Indemnity Agreement, the Guaranty Agreement, and the
Subordination Agreement together with any and all other documents executed by
Borrower or others, evidencing, securing, or otherwise relating to the Loan.
"Loan Obligations" means the aggregate of all principal and interest
owing from time to time under the Note and all expenses, charges and other
amounts from time to time owing under the Note, this Agreement, or the other
Loan Documents and all covenants, agreements and other obligations from time to
time owing to, or for the benefit of, Lender pursuant to the Loan Documents.
"Long Term Debt" means all obligations (including capital lease
obligations) which are due more than one (1) year from the date as of which the
computation thereof is made.
"MedCath Credit Facility" means that revolving credit from MedCath
Incorporated to the Borrower in the principal sum of not less than $6,205,000
and not more than $10,000,000; payments due under the MedCath Credit Facility
are fully subordinated to the Loan Obligations pursuant to that certain
Subordination Agreement of even date herewith among Borrower, Lender and MedCath
Incorporated (the "Subordination Agreement").
"Note" means the Promissory Note of even date herewith in the principal
amount of the Loan payable by Borrower to the order of Lender.
"Person" means any person, firm, corporation, partnership, limited
liability company, trust or other entity.
"Plans and Specifications" means the Plans and Specifications for
construction of the Improvements as heretofore or hereafter submitted to and
approved by the Lender and as amended from time to time subject to the terms of
this Agreement.
"Proceeds" means all proceeds (whether cash or non-cash, moveable or
immoveable, tangible or intangible), including proceeds of insurance and
condemnation, from the sale, exchange, transfer, collection, loss, damage,
disposition, substitution or replacement of any of the Collateral.
"Property" means the real estate in Pima County, Arizona which is more
particularly described in Exhibit B hereto, upon which the Improvements are to
be located.
"Required Equity" means the amount of equity required to be injected by
the Borrower
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in payment of budgeted items as approved by Lender, and shall be not less than
$2,200,000. Lender agrees that $995,000 of the Required Equity has been injected
against the acquisition cost of the land, and that the remaining Required Equity
of $1,205,000 may be advanced by MedCath, Incorporated to the Borrower pursuant
to the MedCath Credit Facility.
"Retainage" shall be the amount of the Loan to be retained by the
Lender pending completion of the Improvements, and shall be ten percent (10%) of
the value of completed construction of the Improvements.
"Scheduled Completion Date" means the date by which the Improvements
are to be completed, and shall be no later than sixteen (16) months from the
date hereof, provided, however, that the Scheduled Completion Date shall be
extended pro tanto for any delays in construction caused by acts of God, acts of
war, casualties or other events or circumstances beyond Borrower's control.
"Soft Costs" means all development costs other than Hard Costs,
including, without limitation, operating deficits, closing costs, permits and
governmental fees, leasing costs, closing costs, legal and architectural fees,
and construction interest.
"Soft Cost Advances" means Advances for Soft Costs.
"Title Company" means the title company insuring the Deed of Trust, and
shall be Chicago Title Insurance Company.
1.2 Singular terms shall include the plural forms and vice versa, as
applicable, of the terms defined.
1.3 Terms contained in this Agreement shall, unless otherwise defined
herein or unless the context otherwise indicates, have the meanings, if any,
assigned to them by Uniform Commercial Code in effect in the State of Arizona.
1.4 All accounting terms used in this Agreement shall be construed in
accordance with GAAP, except as otherwise defined.
1.5 All references to other documents or instruments shall be deemed to
refer to such documents or instruments as they may hereafter be extended,
renewed, modified, or amended and all replacements and substitutions therefor.
ARTICLE II
CONDITIONS TO ADVANCES
Lender's obligation to make Advances shall be effective only upon
fulfillment of the following conditions:
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2.1 Required Equity. Evidence that Borrower has injected its Required
Equity in payment of budgeted items as set forth on the Cost Budget.
2.2 Payment of Fees. Payment by Borrower of all fees and expenses
required by this Agreement and by the commitment letter issued by the Lender
dated April 16, 1996.
2.3 Execution of Documents. Execution, delivery and, when appropriate,
recording or filing of this Agreement, the Note, the Collateral, and all other
documents evidencing or securing the Loan, and all other documents required by
this Agreement, all in form and content satisfactory to Lender.
2.4 Title Insurance. Issuance of a title insurance policy in form
acceptable to the Lender and receipt by Lender of an endorsement to the title
policy insuring each Advance being requisitioned, updating the effective date of
said title insurance policy, and containing no new lien or encumbrance except as
are previously approved or as are acceptable to Lender in Lender's reasonable
determination.
2.5 Approval by Lender's Inspecting Consultant. Approval by the
Lender's Inspecting Consultant of any draw request for Hard Costs, which such
approval may not be unreasonably withheld.
In the event Lender, at its option, elects to make one or more Advances
prior to receipt and approval of all items required by this Article II, such
election shall not obligate Lender to make any subsequent Advance.
ARTICLE III
DISBURSEMENT OF THE LOAN
3.1 Disbursement Procedure. Lender agrees, on the terms and conditions
and relying on the representations set forth herein, to lend to Borrower, and
Borrower agrees to borrow from Lender, an amount not to exceed the principal
amount of the Loan. Subject to compliance by Borrower with all of the provisions
of this Loan Agreement, the Loan shall be disbursed by Lender making Advances of
all approved requisitions in accordance with the following procedures:
(a) Not less than five (5) Business Days before the date on
which Borrower desires an Advance, Borrower shall submit to Lender a requisition
in form reasonably satisfactory to Lender requesting an Advance. Each request
for an Advance is to be accompanied by the following:
i) In the case of Hard Costs, a cost breakdown
showing the cost of Improvements to the date of the requisition and
showing the percentage of completion of each line item on the Cost
Budget; the accuracy of the cost breakdown shall be certified
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<PAGE>
by Borrower, the General Contractor and by the Borrower's architect
(or, as to any items not within the scope of a general contract, by the
contractors directly responsible to Borrower for such items);
ii) All requests for Hard Costs shall be supported by
AIA Document G702 and G703, by invoices for materials, and, if required
by the Title Company or by the Lender following the occurrence of any
Default hereunder, by lien waivers for all preceding draws from the
General Contractor and from all subcontractors or suppliers as required
by the Title Company;
iii) All requests for Soft Costs shall be supported
by invoices and any other items as may be reasonably required by the
Lender; and
iv) An endorsement to the title insurance policy
insuring the Deed of Trust insuring each Advance being requisitioned,
updating the effective date of said title insurance policy, and
containing no new lien or encumbrance except as are previously approved
or as are acceptable to the Lender in Lender's reasonable
determination.
(b) Borrower appoints Robert Weathers or Jay Stock (either one
may sign) as its agents to make disbursement requests. Borrower may hereafter by
written notice to Lender appoint one or more other agents or change agents to
make disbursement requests, provided any such notice is not effective until
actually received by Lender.
(c) The completed construction will be reviewed by the
Lender's Inspecting Consultant who will certify to Lender, among other things,
as to the value of completed construction, percentage of completion, and
substantial compliance with the Plans and Specifications.
(d) The maximum allowable Advance will equal the total of (i)
Soft Costs actually incurred within the budgeted amounts therefor as shown on
the Cost Budget, plus (ii) the lesser of (x) the Hard Cost of the completed
construction or (y) the scheduled value of each completed item shown on the
General Contractor's schedule of values for the Improvements, with no Advance
being made for any duplication of work, work which does not substantially
conform to the Plans and Specifications or work which is unsatisfactory in the
reasonable opinion of the Lender's Inspecting Consultant. Advances will be made
for stored materials as long as such stored materials are either (i) stored in a
bonded warehouse approved by the Lender's Inspecting Consultant, or (ii) stored
at the Property in a locked and otherwise secure storage arrangement acceptable
to the Lender and insured in an amount acceptable to the Lender; however, in no
event will Lender be obligated to make Advances to pay for stored materials more
than one hundred and twenty (120) days prior to the date such stored materials
are to be used in the construction of the Improvements. Upon request, Borrower
shall provide the Lender with a detailed listing of and invoices for all stored
materials. The Advance to be made will be the maximum allowable advance less the
Retainage. Except as otherwise provided in the construction contract between
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the Borrower and the General Contractor and with the consent of the Lender's
Inspecting Consultant which such approval shall not be unreasonably withheld,
the Retainage shall be advanced only after substantial completion of all
construction work and approval thereof by the Lender's Inspecting Consultant
(which approval will not be unreasonably withheld) and the furnishing to Lender
of evidence reasonably satisfactory to Lender that such completion is free of
all mechanic's and materialman's liens (or any such liens have been bonded off)
and the appropriate department of Pima County, Arizona has issued a certificate
of occupancy for the Improvements.
(e) Advances shall be made for costs on each line item shown
on the Cost Budget only up to the amount budgeted on the Cost Budget for such
line item. A reallocation among line items may be made only with the prior
written consent of Lender, which consent shall not be unreasonably withheld.
Through the construction period and thereafter, disbursements may be made to pay
interest accrued and owing on the Loan only to the extent cash flow from the
Improvements is insufficient to do so, notwithstanding that the Cost Budget
contains unadvanced sums for interest.
(f) Lender shall not be required to make Advances more than
once each month and Lender reserves the right to limit the total amount advanced
on the Loan at any time to an amount which, when deducted from the total amount
of the Loan, leaves a balance to be advanced equal to or greater than the
estimated cost of completion of the Improvements and remaining nonconstruction
expenses plus the Retainage applicable to the total amount of the Loan, all as
reasonably determined by Lender from time to time. Notwithstanding the
foregoing, the Lender will not be relieved of its obligation to make Advances
hereunder in the event that there are changes in the Cost Budget as long as the
Borrower injects additional equity (or provides Lender with evidence reasonably
satisfactory to Lender of such other sources of funds) by an amount equal to any
increases in cost over the previously approved Cost Budget; any such
supplemental amount shall be expended and evidenced to Lender before additional
Advances are available hereunder.
The provisions of this Section 3.1 are solely for the benefit of
Lender. Lender may make one or more Advances to Borrower upon written or oral
disbursement requests not complying with the requirements of this Section 3.1,
and such Advances will, in the absence of bad faith by Lender, conclusively be
deemed to be Advances to Borrower hereunder.
3.2 Direct Advances. Regardless of whether Borrower has submitted a
requisition therefor, Lender may from time to time advance amounts which become
due for Hard Costs and Soft Costs for which the Borrower is responsible for
payment, including interest on the Loan (provided, however, that, as long as no
Event of Default exists, Lender agrees to obtain the Borrower's consent prior to
making any direct Advances for any Hard Costs or any Soft Costs other than
direct Advances for interest on the Loan). Such Advances may be made directly to
parties to whom such amounts are due or to Lender to reimburse Lender for sums
due to it. All such advances to parties other than Borrower shall be deemed
Advances to Borrower hereunder and shall be secured by the Collateral to the
same extent as if they were made directly to Borrower.
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3.3 Representations and Warranties. Each submission by Borrower to
Lender of a requisition for an Advance of the Loan shall constitute Borrower's
representation and warranty to Lender that, to the best of Borrower's knowledge:
(1) all completed construction substantially is in accordance with the Plans and
Specifications, and (2) all construction and nonconstruction costs for the
payment of which Lender has previously advanced funds have in fact been paid.
3.4 Delivery of Funds. Lender will make Advances by depositing the same
to an account of Borrower designated in writing by Borrower. After the
occurrence of any Event of Default hereunder, Lender may, in its discretion,
advance funds through a disbursing agent appointed by Lender at Borrower's
expense, and any advance to such agent will be deemed to be an Advance to
Borrower. The making of any Advance by Lender shall not constitute Lender's
approval or acceptance of the construction theretofore completed. Lender's
inspection and approval of the Plans and Specifications, the construction of the
Improvements, or the workmanship and materials used therein, shall impose no
liability of any kind on Lender, the sole obligation of Lender as the result of
such inspection and approval being to make the Advances if, and to the extent,
required by this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into this Agreement, and to make the Loan to
the Borrower, the Borrower represents and warrants to Lender as follows:
4.1 Existence, Power and Qualification. Borrower is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of North Carolina, is duly qualified to do business under the laws of
the State of Arizona, has the power to own its properties and to carry on its
business as is now being conducted, and is duly qualified to do business and is
in good standing in every other jurisdiction in which the character of the
property owned by it or in which the transaction of its business makes its
qualification necessary.
4.2 Power and Authority. Borrower has full power and authority to
borrow hereunder and to incur the obligations provided for herein and in each of
the other Loan Documents to which Borrower is a party, all of which have been
authorized by all proper and necessary limited liability company action.
4.3 Due Execution and Enforcement. Each of the Loan Documents to which
Borrower is a party constitutes a valid and legally binding obligation of the
Borrower, enforceable in accordance with its respective terms and does not
violate, conflict with, or constitute any default under any law, government
regulation, decree, judgment, the Borrower's articles of organization, operating
agreement, or any other agreement or instrument binding upon the Borrower.
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4.4 Pending Matters. Other than as set forth on Schedule I attached
hereto, no action or investigation is pending or threatened before or by any
state or federal court or administrative agency which might result in any
material adverse change in the financial condition, operations or prospects of
the Borrower or Guarantor. Neither Borrower nor Guarantor is in violation of any
agreement, the violation of which might reasonably be expected to have a
materially adverse effect on its business or assets, and neither Borrower nor
Guarantor is in violation of any order, judgment, or decree of any state or
federal court, or any statute or governmental regulation to which they are
subject.
4.5 Financial Statements Accurate. All financial statements heretofore
or hereafter provided by the Borrower and Guarantor are and will be true and
complete in all material respects as of their respective dates and will fairly
present the financial condition of the Borrower or Guarantor in all material
respects, and there are no material liabilities, direct or indirect, fixed or
contingent, as of the respective dates of such statements which are not
reflected therein or in the notes thereto or in a written certificate delivered
with such statements. The financial statements of the Borrower and Guarantor
have been prepared in accordance with GAAP. There has been no material adverse
change in the financial condition, operations, or prospects of the Borrower or
Guarantor since the dates of such statements except as fully disclosed in
writing with the delivery of such statements.
4.6 Intended Use of Improvements. No certificate of need is required in
the State of Arizona for the intended use of the Improvements as an acute care
hospital. Other than required building permits, no licenses, certifications,
accreditations or other required permits are issued in the State or Arizona
prior to such time as the Improvements are completed substantially in accordance
with the Plans and Specifications. The Plans and Specifications comply with all
applicable requirements for licensure, certification, and accreditation (as
applicable) and, upon completion of construction of the Improvements
substantially in accordance with the Plans and Specifications, Borrower in good
faith after due and proper inquiry, knows of no reason which would prevent the
Improvements from receiving full licensure, certification, and accreditation as
an acute care hospital containing not less than 60 acute care beds and 6 rest
care beds.
4.7 Compliance With Other Applicable Laws. All necessary and
appropriate action has been taken to permit construction of the Improvements
according to the Plans and Specifications and will be taken to permit full use
of the Improvements for their intended purpose under applicable laws,
ordinances, and regulations existing on the date hereof, including, without
limitation, zoning, subdivision regulations, building codes, the Americans with
Disabilities Act and regulations thereunder, and Applicable Environmental Laws.
To the best of Borrower's knowledge, when completed substantially in accordance
with the Plans and Specifications, the Improvements will comply with all
applicable laws and regulations.
4.8 Roads and Utilities. All utility and sanitary sewage services
necessary for the construction and use of the Improvements are available and
Borrower has received permission to make such use thereof as is necessary for
construction and to make permanent connections thereto upon completion.
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4.9 Payment of Taxes. The Borrower has filed all federal, state, and
local tax returns which are required to be filed and has paid, or made adequate
provision for the payment of, all taxes which have or may become due pursuant to
such returns or to assessments received by Borrower, including, without
limitation, provider taxes.
4.10 Title to Collateral. The Borrower has good and marketable title to
all of the Collateral which is owned by the Borrower, subject to no Lien except
those Liens specifically permitted by this Agreement.
4.11 Priority of Deed of Trust. The Deed of Trust constitutes a first
lien upon and security interest in the real and personal property described
therein, prior to all other Liens, including those which may hereafter accrue,
excepting only those Liens specifically permitted by this Agreement or those
"Permitted Encumbrances" specifically set forth in the Deed of Trust.
4.12 Location of Chief Executive Offices. The location of Borrower's
principal place of business and chief executive office are as set forth on
Exhibit C hereto.
4.13 Disclosure. All information furnished or to be furnished by
Borrower to the Lender in connection with the Loan or any of the Loan Documents,
is, or will be at the time the same is furnished, accurate and correct in all
material respects and complete insofar as completeness may be necessary to
provide the Lender a true and accurate knowledge of the subject matter.
4.14 ERISA. The Borrower is compliance with all applicable provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
4.15 Ownership. The ownership of the Borrower as set forth on Exhibit D
hereto is true and correct.
4.16 Proceedings Pending. There are no proceedings pending, or, to the
best of the Borrower's knowledge, threatened, to acquire any power of
condemnation or eminent domain with respect to any part of the Property, or to
enjoin or similarly prevent or restrict the intended use of the Property or the
intended use of the Improvements in any manner.
4.17 Environmental Matters. To the best of Borrower's knowledge,
neither the Improvements, the Property, nor the Borrower is in violation of or
subject to any existing, pending, or threatened investigation or inquiry by any
governmental authority or any response costs or remedial obligations under any
Applicable Environmental Law, and this representation and warranty would
continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions and circumstances, if
any, pertaining to the Improvements, the Property, or the Borrower. Borrower has
not obtained and is not required to obtain, any permits, licenses or similar
authorizations to construct, occupy, operate or use any Improvements by reason
of any Applicable Environmental Law (except such permits, licenses and
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authorizations which have been obtained). To the best of Borrower's knowledge,
no petroleum products, oil, or hazardous substances or solid wastes have been
disposed of or otherwise released on or are otherwise located on the Property.
The use of the Property as previously operated and hereafter intended to be
operated by the Borrower will not result in the location on or disposal or other
release of any petroleum products, oil, or hazardous substances or solid wastes
on or to the Property, other than medical wastes and biohazardous materials
generated in the ordinary course of business as an acute care hospital, which
will be disposed of in accordance with Applicable Environmental Laws. Borrower
agrees to permit Lender to have access to the Improvements and the Property at
all reasonable times in order to conduct any investigation and testing which
Lender deems necessary to ensure that Borrower, the Improvements, and the
Property are in compliance with all Applicable Environmental Laws, and Borrower
agrees to promptly reimburse Lender for all costs incurred in such investigation
and testing. Borrower and Guarantor have entered into the Indemnity Agreement,
the terms and conditions of which are incorporated herein by this reference.
4.18 Solvency. Borrower represents and warrants that it is solvent
within the meaning of 11 U.S.C. ss. 548 and GAAP, and the borrowing of the Loan
will not render the Borrower insolvent within the meaning of 11 U.S.C. ss. 548
and GAAP.
ARTICLE V
AFFIRMATIVE COVENANTS OF THE BORROWER
Borrower agrees with and covenant unto the Lender that until the Loan
Obligations have been paid in full, the Borrower shall:
5.1 Payment of Loan/Performance of Loan Obligations. Duly and
punctually pay or cause to be paid the principal and interest of the Note in
accordance with its terms and duly and punctually pay and perform or cause to be
paid or performed all Loan Obligations hereunder and under the other Loan
Documents.
5.2 Construct Improvements. Cause the Improvements to be constructed on
the Property substantially in accordance with the Plans and Specifications and
in compliance with all applicable regulations including zoning and setback
requirements, and so as not to encroach upon or overhang into any easement or
right-of-way; to cause such construction to proceed continuously; and to
complete construction of the Improvements by the Scheduled Completion Date, time
being of the essence; to furnish to Lender a foundation survey upon completion
of all foundations, and an as-built survey upon completion of the Improvements,
each in form satisfactory to Lender showing the extent of construction of the
Improvements without violation of set back lines, zoning requirements or
restrictive covenants and showing no encroachments or other conditions which
could adversely affect the value and utility of the Property or Improvements,
except for any plats, repeats, or easements necessary for the development of the
Property and approved by the Lender.
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5.3 Use of Proceeds. Use the Advances solely and exclusively for the
purposes set forth on the Cost Budget and pay such fees, closing costs, and
other nonconstruction expenses relating to the Loan, the construction of the
Improvements, or the discharge of Borrower's obligations under this Loan as
Lender has approved or may from time to time approve.
5.4 Liens and Encumbrances. Keep the Property and Improvements and all
other assets of Borrower free from all liens and encumbrances except for those
contemplated by this Agreement or as set forth in the Deed of Trust as a
Permitted Encumbrance or equipment leases or security interests to the extent
permitted herein, to pay promptly all persons or entities supplying work or
materials for the construction of the Improvements (provided, however, that
Borrower shall have the opportunity to contest any such payment as long as
adequate assurances are made to Lender with respect to any possible lien that
may arise against the Property); to discharge or make other arrangements
acceptable to Lender with respect to (including, without limitation, bonding off
or insuring over any such lien), any mechanic's or other lien filed against the
Property or the Borrower, within thirty (30) days of the date Borrower receives
notice of such lien.
5.5 Maintenance of Existence. To maintain its limited liability company
existence, and, in each jurisdiction in which the character of the property
owned by it or in which the transaction of its business makes qualification
necessary, maintain qualification and good standing.
5.6 Accrual and Payment of Taxes. During each fiscal year, to accrue
all current tax liabilities of all kinds (including, without limitation, federal
and state income taxes, franchise taxes, payroll taxes, and so-called provider
specific taxes (to the extent necessary to participate in and receive maximum
funding pursuant to Reimbursement Contracts)), all required withholding of
income taxes of employees, all required old age and unemployment contributions,
and all required payments to employee benefit plans, and pay the same when they
become due.
5.7 Insurance. At all times while Borrower is indebted to Lender, to
maintain the following insurance (Lender acknowledges that during construction,
the builder's risk and liability insurance may be provided by the General
Contractor):
(a) Liability insurance (which shall include professional
liability insurance) in an amount equal to at least $1,000,000 per occurrence,
with a $4,000,000 umbrella policy. The general liability insurance shall name
the Lender as an additional insured;
(b) During construction of the Improvements, builders risk
insurance in an amount not less than the replacement cost thereof, and following
completion of construction, "all-risk" broad form coverage on the Improvements
in an amount not less than the replacement cost thereof, with endorsements
insuring against such potential causes of loss as shall be required by Lender,
including, but not limited to, loss or damage from (i) earthquake and subsidence
(if required by Lender), and (ii) flood, unless evidence satisfactory to Lender
is provided that all of the Property is located in an area which is designated
as not being in a flood hazard area;
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(c) After completion of construction, business income
insurance in an amount equal to at least twelve (12) months anticipated gross
revenues less those expenses that are not typically incurred during a period of
business interruption; and
(d) Workers' compensation insurance as required by the laws of
the state in which the Property is located.
Each of the policies described in 5.7(b) and 5.7(c) shall name Lender
as mortgagee and loss payee under a standard non-contributory mortgagee and
lender loss payable clause, and shall provide that Lender shall receive not less
than thirty (30) days written notice prior to cancellation. The proceeds of
either of the policies described in 5.7(b) and 5.7(c) shall be payable by check
payable to Lender or jointly payable to Borrower and to Lender, and shall be
delivered to Lender, and such proceeds (after deducting Lender's costs and
expenses of obtaining such proceeds) shall be applied by Lender, at Lender's
sole option (but subject to the provisions hereinafter set forth), either (i) to
the full or partial payment or prepayment of the Loan Obligations (without
premium), or (ii) to the repair and/or restoration of the Improvements damaged
or taken, or Lender may release the net proceeds to the Borrower.
Notwithstanding the foregoing, Lender agrees that Lender shall make the
net proceeds of insurance (after payment of Lender's costs and expenses)
available to Borrower for Borrower's repair, restoration and replacement of the
Improvements on the following terms and subject to Borrower's satisfaction of
the following conditions:
(a) At the time of such loss or damage and at all times
thereafter while Lender is holding any portion of such proceeds, there shall
exist no Default or Event of Default;
(b) The Improvements for which loss or damage has resulted
shall be capable of being restored to their pre-existing condition and utility
in all material respects with a value equal to or greater than prior to such
loss or damage and shall be capable of being completed prior to the Maturity
Date (as defined in the Note);
(c) Within thirty (30) days from the date of such loss or
damage Borrower shall have given Lender a written notice electing to have the
proceeds applied for such purpose;
(d) Within sixty (60) days following the date of notice under
the preceding subparagraph (c) and prior to any proceeds being disbursed to
Borrower, Borrower shall have provided to Lender all of the following:
(i) complete plans and specifications for restoration,
repair and replacement of the Improvements damaged to the
condition, utility and value required by (b) above,
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(ii) if loss or damage exceeds $50,000, then
fixed-price or guaranteed maximum cost bonded construction
contracts for completion of the repair and restoration work in
accordance with such plans and specifications,
(iii) builder's risk insurance for the full cost of
construction with Lender named under a standard mortgagee
loss-payable clause,
(iv) such additional funds as in Lender's opinion are
necessary to complete the repair, restoration and replacement,
and
(v) copies of all permits and licenses necessary to
complete the work in accordance with the plans and
specifications;
(e) Lender may, at Borrower's expense, retain an independent
inspector to review and approve plans and specifications and completed
construction and to approve all requests for disbursement, which approvals shall
be conditions precedent to release of proceeds as work progresses;
(f) No portion of such proceeds shall be made available by
Lender for architectural reviews or for any other purposes which are not
directly attributable to the cost of repairing, restoring or replacing the
Improvements for which a loss or damage has occurred unless the same are covered
by such insurance;
(g) Borrower shall commence such work within one hundred
twenty (120) days of such loss or damage and shall diligently pursue such work
to completion;
(h) Each disbursement by Lender of such proceeds and deposits
shall be funded subject to conditions and in accordance with disbursement
procedures which a commercial construction lender would typically establish in
the exercise of sound banking practices and shall be made only upon receipt of
disbursement requests on an AIA G702/703 form (or similar form approved by
Lender) signed and certified by the Borrower and its architect and the General
Contractor with appropriate invoices and lien waivers as required by Lender;
(i) Lender shall have a first lien and security interest in
all building materials and completed repair and restoration work and in all
fixtures and equipment acquired with such proceeds, and Borrower shall execute
and deliver such mortgages, deeds of trust, security agreements, financing
statements and other instruments as Lender shall request to create, evidence, or
perfect such lien and security interest; and
(j) In the event and to the extent such proceeds are not
required or used for the repair, restoration and replacement of the
Improvements, for which a loss or damage has occurred, or in the event Borrower
fails to timely make such election or having made such election fails to
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timely comply with the terms and conditions set forth herein, Lender shall be
entitled without notice to or consent from Borrower to apply such proceeds, or
the balance thereof, at Lender's option either (i) to the full or partial
payment or prepayment of the Loan Obligations in the manner aforesaid, or (ii)
to the repair, restoration and/or replacement of all or any part of such
Improvements for which a loss or damage has occurred, or Lender may release the
balance of such net proceeds to the Borrower.
Borrower appoints Lender as Borrower's attorney-in-fact to cause the
issuance of or an endorsement of any policy to bring Borrower into compliance
herewith and, as limited above, at Lender's sole option, to make any claim for,
receive payment for, and execute and endorse any documents, checks or other
instruments in payment for loss, theft, or damage covered under any such
insurance policy; however, in no event will Lender be liable for failure to
collect any amounts payable under any insurance policy.
5.8 Financial and Other Information. Provide Lender with the following
financial statements and information on a continuing basis:
(a) Within one hundred and twenty (120) days after the end of
the applicable fiscal year for such entity, financial statements of the
Borrower, which shall be audited by accounting firms or independent certified
public accounting firms acceptable to the Lender (and Lender agrees that if such
statements are prepared by any of the "Big Six" accounting firms, such firm
shall be accepted), which statements shall include a balance sheet and a
statement of income and expenses for the year then ended, and a copy of the 10-K
Report of the Guarantor filed with the United States Securities and Exchange
Commission.
(b) Following completion of construction, within fifty (50)
days after the end of each calendar quarter, unaudited financial statements of
the Borrower indicating the results of operations of the Improvements, prepared
in accordance with GAAP, which such statements shall include a balance sheet and
statement of income and expenses for the quarter, together with such utilization
and statistical data which are standard and customary in the hospital industry
as may be reasonably required by Lender, and shall be certified to be true and
correct by Borrower's executive director or chief financial officer, and copies
of the 10-Q Report of the Guarantor filed with the United States Securities and
Exchange Commission.
(c) Upon completion of construction, if requested by Lender
within twenty (20) days of filing or receipt, all Medicaid and Medicare cost
reports and any amendments thereto filed with respect to the Improvements, and
all responses, audit reports, or inquiries with respect to such cost reports.
(d) Upon completion of construction, within twenty (20) days
of receipt, copies of all licensure, certification and accreditation survey
reports and statements of deficiencies (with plans of correction attached
thereto).
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(e) Within three (3) days of receipt, any and all notices
(regardless of form) from any and all licensing and/or certifying and/or
accreditation agencies that the Improvement's license and/or accreditation
and/or Medicare and/or Medicaid certification is being downgraded to a
substandard category, revoked, or suspended, or that action is pending or being
considered to downgrade to a substandard category, revoke, or suspend the
Improvement's license, accreditation, or certification.
The Lender reserves the right to require such other financial
information (including tax returns, detailed cash flow information and
contingent liability information) of Borrower, Guarantor and any affiliate of
any of the foregoing, all at such times as Lender shall reasonably deem
necessary, and Borrower agrees promptly to provide such information to Lender.
All financial statements must be in the form and detail as the Lender shall from
time to time request.
5.9 Financial Covenants. Commencing with the sixth (6th) fiscal quarter
following the date that the Improvements have been completed in accordance with
the Plans and Specifications and have begun admission of patients, and for each
quarter thereafter during the Loan Term, maintain (a) a Cash Flow Coverage of
not less than 1.50, and (b) a Current Ratio (as defined according to GAAP,
provided, however, that subordinated intercompany loans will be excluded from
the computation of Current Ratio) of not less than 1.75, and to provide evidence
of the achievement thereof in the form of the Compliance Certificate described
in Section 5.10 hereof.
5.10 Compliance Certificate. At the time of furnishing the quarterly
financial statements required under Section 5.8, furnish to Lender a compliance
certificate in the form attached hereto as Exhibit E with all information
completed and certified by the Borrower as true and correct.
5.11 Books and Records. Upon three (3) days notice from Lender, permit
Persons designated by Lender to inspect the Property and Improvements and books
and records of the Borrower and the Improvements to discuss the affairs of the
Borrower and the Improvements with any officer or employee of Borrower, as
designated by Lender, all at such times as Lender shall request.
5.12 Payment of Indebtedness. Duly and punctually pay or cause to be
paid all other Indebtedness now owing or hereafter incurred by the Borrower in
accordance with the terms of such Indebtedness, except such Indebtedness owing
to those other than Lender which is being contested in good faith and with
respect to which any execution against properties of the Borrower has been
effectively stayed and for which reserves adequate for payment have been
established.
5.13 Notice of Loss. Immediately notify the Lender of any event causing
a loss or depreciation in value of Borrower's assets (other than writeoffs of
accounts receivable in the ordinary course of business) in excess of $100,000.00
and the amount of such loss, amortization,
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or depreciation, except Borrower shall not be required to notify Lender of
depreciation or amortization.
5.14 Conduct of Business. Following completion of construction,
Borrower shall:
(i) maintain the standard of care for the patients or
residents of the Improvements at all times at a level necessary to
insure quality care for the patients or residents of the Improvements;
(ii) operate the Improvements in a prudent manner in
compliance with applicable laws and regulations relating thereto and
cause all licenses, permits, certificates of need, certifications,
accreditations, reimbursement contracts, and any other agreements
necessary for the use and operation of the Improvements or as may be
necessary for participation in the Medicaid, Medicare, or other
applicable reimbursement programs to remain in effect without reduction
in the number of licensed beds or beds authorized for use in Medicaid
or other applicable reimbursement programs;
(iii) maintain sufficient inventory and equipment of
types and quantities at the Improvements to enable Borrower adequately
to perform operation of the Improvements;
(iv) keep all Improvements located on or used or
useful in connection with the Improvements in good repair, working
order and condition, reasonable wear and tear excepted, and from time
to time make all needed and proper repairs, renewals, replacements,
additions, and improvements thereto to keep the same in good operating
condition; and
(v) to maintain sufficient cash in the operating
accounts of the Improvements in order to satisfy the working capital
needs of the Improvements.
5.15 Periodic Surveys. Following completion of construction, to furnish
to Lender within ten (10) days of receipt a copy of any Medicare, Medicaid,
licensing agency, accreditation agency, or reimbursement agency survey or report
and any statement of deficiencies, and within the time period required by the
particular agency for furnishing a plan of correction also furnish or cause to
be furnished to Lender a copy of the plan of correction generated from such
survey or report for the Improvements, and correct or cause to be corrected any
deficiency, the curing of which is a condition of continued licensure or
accreditation, or for full participation in Medicaid, Medicare or other
reimbursement program pursuant to any reimbursement contracts for existing
patients or residents or for new patients or residents to be admitted with
Medicaid, Medicare or reimbursement contract coverage, by the date required for
cure by such agency (plus extensions granted by such agency).
5.16 Comply with Covenants and Laws. Comply in all material respects
with all applicable covenants and restrictions of record and all laws,
ordinances, rules and regulations and
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keep the Improvements and the Property in compliance (in all material respects)
with all applicable laws, ordinances, rules and regulations, including, without
limitation, the Americans with Disabilities Act and regulations thereunder, and
laws, ordinances, rules and regulations relating to zoning, health, building
codes, setback requirements, Medicaid, Medicare and Applicable Environmental
Laws.
5.17 Taxes and Other Charges. Pay all taxes, assessments, charges,
claims for labor, supplies, rent, and other obligations which, if unpaid, might
give rise to a Lien against property of Borrower, except Liens to the extent
permitted by this Agreement.
5.18 Certificate. Upon Lender's written request, furnish Lender with a
certificate stating that Borrower has complied with and is in compliance with
all terms, covenants and conditions of the Loan Documents to which Borrower is a
party and that there exists no Default or Event of Default or, if such is not
the case, that one or more specified events have occurred, and that the
representations and warranties contained herein are true with the same effect as
though made on the date of such certificate.
5.19 Changes to Plans and Specifications. Not authorize or permit any
material changes to the Plans and Specifications without the prior written
consent of Lender, which consent will not be unreasonably withheld, and to the
extent such approval is required by law or regulation, without the consent of
all governmental bodies having jurisdiction. For purposes hereof, any change in
the Plan and Specifications shall be deemed a material change if it results in a
change in the scope of the Improvements or a net increase in the cost of the
Improvements of more than $250,000 per change order, or an aggregate net
increase of $500,000 or more. For any change order of $50,000 or more, Borrower
agrees that it will provide Lender with evidence satisfactory to Lender as to
the source of funding for such change order (which must be a source other than
the Loan). Borrower agrees to provide to Lender copies of all fully executed
change orders on AIA Form G-107.
5.20 Compliance with Hospital Laws. Upon completion of construction (or
sooner if possible under applicable laws), to obtain all necessary licenses,
certifications, accreditations, or other required permits in order to operate
the Improvements as an acute care hospital specializing in cardiology services
and cardiovascular surgery at a licensed bed capacity of not less than 60 acute
care beds and 6 rest care beds in accordance with applicable state and federal
licensure, certification, and accreditation laws, rules, and regulations,
including without limitation, accreditation by the Joint Commission on
Accreditation of Hospital Organizations.
ARTICLE VI
NEGATIVE COVENANTS
Until the Loan Obligations have been paid in full, Borrower shall not:
6.1 Assignment of Licenses and Permits. Assign or transfer, or permit
the
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assignment or transfer of, any interest in any permits or reimbursement
contracts (including rights to payment thereunder), or assign, transfer, or
remove or permit any other person to assign, transfer, or remove any records
pertaining to the Improvements, including, without limitation, patient records,
medical and clinical records (except for removal of such patient records as
directed by the patients or residents owning such records), without Lender's
prior written consent, which consent may be granted or refused in Lender's sole
discretion.
6.2 No Liens; Exceptions. Create, incur, assume or suffer to exist any
Lien upon or with respect to any of its rights, income or other assets, whether
now owned or hereafter acquired, other than the following Permitted Liens:
(a) Liens at any time existing in favor of the Lender;
(b) Liens which are listed in Exhibit F attached hereto;
(c) Inchoate Liens arising by operation of law for the
purchase of labor, services, materials, equipment or supplies, provided payment
shall not be delinquent and, if such Lien is a lien upon any of the Property or
Improvements, which Lien is fully subordinate to the Deed of Trust, and is
disclosed to Lender and bonded off and removed from the Property and
Improvements in a manner satisfactory to Lender;
(d) Liens incurred in the ordinary course of business in
connection with workmen's compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure performance of statutory
obligations (provided Borrower complies with all obligations with respect to
such insurance, benefits and statutory obligations);
(e) Liens for current year's taxes, assessments or
governmental charges or levies provided payment thereof shall not be delinquent;
(f) "Permitted Encumbrances" upon the Property, as defined in
the Deed of Trust; or
(g) Liens to the extent permitted under Section 5.4 hereof.
6.3 Merger, Consolidation, Etc. Except as permitted in Section 6.9 and
7.1(g) hereof, enter into any merger, consolidation or similar transaction, or
sell, assign, lease or otherwise dispose of (whether in one transaction or in a
series of transactions), all or substantially all of its assets (whether now or
hereafter acquired), without the prior written consent of the Lender, which may
be granted or refused by Lender in Lender's sole discretion; provided, however,
that Lender's consent shall not be required for "small shop" leases of 5,000
square feet or less, and provided further that is agreed and acknowledged that
Borrower intends to lease space in the Improvements to CCT, L.L.C., a North
Carolina limited liability company, who will operate at least three (3) cath
labs in its demised premises (the "CCT Lease"). The terms and
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conditions of the CCT Lease are subject to Lender's prior written approval, such
approval not to be unreasonably withheld. CCT will be required to execute a
subordination agreement in form and content acceptable to the Lender and will be
required to provide Lender with nondisturbance agreements (or other assurances
reasonably acceptable to Lender) from any party providing equipment financing or
equipment leasing to CCT, L.L.C., whereby Lender (or its nominee) will be
allowed, in its sole discretion, to assume CCT, L.L.C.'s position under such
equipment financing or equipment lease upon the occurrence of any Event of
Default under the Loan and termination of the CCT Lease.
6.4 Disposition of a Material Portion of Its Assets. Sell, lease
(except as expressly permitted in Section 6.3 above) , transfer or otherwise
dispose of any material portion of its assets, unless any such disposition is of
property other than the Collateral and is in the ordinary course of business for
a full and fair consideration, which in no event shall include a transfer for
full or partial satisfaction of a preexisting debt.
6.5 Change in Business. Make any material change in the nature of its
business or the intended business of the Improvements as described herein.
6.6 Changes in Accounting. Change its methods of accounting, unless
such change is permitted by GAAP, and provided such change does not have the
effect of curing or preventing what would otherwise be an Event of Default or
Default had such change not taken place.
6.7 ERISA Funding and Termination. Permit (a) the funding requirements
of ERISA with respect to any employee plan to be less than the minimum required
by ERISA at any time, or (b) any employee plan to be subject to involuntary
termination proceedings at any time.
6.8 Transactions with Affiliates. Except for permitted subordinated
intercompany loans which Lender has consented to, enter into any transaction
with any Person affiliated with the Borrower other than in the ordinary course
of their business and on fair and reasonable terms no less favorable to the
Borrower than those it would obtain in a comparable arms-length transaction with
a Person not an affiliate.
6.9 Prohibited Transfers. Permit the transfer of the membership
interest of Southern Arizona Heart, Inc. in the Borrower unless the written
consent of the Lender is first obtained, which consent may be granted or refused
by the Lender in its sole discretion (provided, however, that in the event
Lender refuses to consent to such transfer, Borrower shall be allowed to prepay
the Loan without premium), or, subject to the one-time right of assignment set
forth in Section 8.13 hereof, sell, transfer, or otherwise convey the Property.
6.10 Change of Use. Alter or change the use of the Improvements from
that as described herein or enter into any management agreement or lease for the
Improvements other than the leases described in Section 6.3 hereof, unless
Borrower first notifies Lender and provides Lender a copy of the proposed
management agreement or lease, obtains Lender's written consent
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thereto and obtains and provides Lender with a subordination agreement in form
satisfactory to Lender from such manager or lessee subordinating to all rights
of Lender.
6.11 Place of Business. Change its chief executive office or its
principal place of business without first giving Lender at least thirty (30)
days prior written notice thereof and promptly providing Lender such information
as Lender may request in connection therewith.
6.12 Dividends, Distributions and Redemptions. Declare or pay any
dividends or distributions to any of its members or permit the making of any
intercompany loans or advances to any affiliate of the Borrower or any
shareholder or employee of the Borrower, if (i) the payment such dividend or
distribution or the making of such loan or advances is to be made at a time when
a Default or Event of Default exists or is outstanding hereunder, or (ii) the
payment of such dividend or distribution or the making of such loan or advance
would result in the occurrence of a Default or Event of Default hereunder; at no
time shall the Borrower purchase, redeem, retire, or otherwise acquire for value
any of its membership interests now or hereafter outstanding; provided, however,
that Lender agrees that Borrower may redeem up to ten percent (10%) of its
membership interest without Lender's prior written consent, but Lender must
receive notice of such redemption.
ARTICLE VII
EVENTS OF DEFAULT AND REMEDIES
7.1 Events of Default. The occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:
(a) The failure by Borrower to pay any installment of
principal, interest, or other charges required under the Note within five (5)
Business Days of the date the same becomes due; or
(b) The Borrower's violation of any covenant set forth in
Sections 6.1, 6.2, 6.3, 6.4, 6.5, 6.7, 6.9, 6.10, or 6.12; or
(c) The failure of Borrower properly and timely to perform or
observe any covenant or condition set forth in this Agreement (other than those
specified in (a) and (b) of this Section) or any other Loan Documents which is
not cured within any applicable cure period as set forth herein or, if no cure
period is specified therefor, is not cured within thirty (30) days of Lender's
written notice to Borrower of such Default; or
(d) The filing by the Borrower or the Guarantor of a voluntary
petition in bankruptcy or the adjudication of any of the aforesaid Persons as a
bankrupt or insolvent, or the filing by any of the aforesaid Persons of any
petition or answer seeking or acquiescing in any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief for itself
under any present or future federal, state or other statute, law or regulation
relating to
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bankruptcy, insolvency or other relief for debtors, or if any of the aforesaid
Persons should seek or consent to or acquiesce in the appointment of any
trustee, receiver or liquidator for itself or of all or any substantial part its
property or of any or all of the rents, revenues, issues, earnings, profits or
income thereof, or the making of any general assignment for the benefit of
creditors or the admission in writing by any of the aforesaid Persons of its
inability to pay its debts generally as they become due; or
(e) The entry by a court of competent jurisdiction of an
order, judgment, or decree approving a petition filed against the Borrower or
the Guarantor, which such petition seeks any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future federal, state or other statute, law or regulation relating to
bankruptcy, insolvency, or other relief for debtors, which order, judgment or
decree remains unvacated and unstayed for an aggregate of sixty (60) days
(whether or not consecutive) from the date of entry thereof, or the appointment
of any trustee, receiver or liquidator of any of the aforesaid Persons or of all
or any substantial part of its properties or of any or all of the rents,
revenues, issues, earnings, profits or income thereof which appointment shall
remain unvacated and unstayed for an aggregate of sixty (60) days (whether or
not consecutive); or
(f) Either (i) the sale or other transfer of the membership
interests of Southern Arizona Heart, Inc. in the Borrower, unless the written
consent of the Lender is first obtained, which consent may be granted or refused
by the Lender in its sole discretion, or (ii) the sale or other transfer of any
stock ownership interests of the Guarantor such that there is a "material
change" in the ownership interest of the Guarantor which is unacceptable to the
Lender in Lender's reasonable discretion; notwithstanding the foregoing, Lender
agrees that if either of the events described in this Subsection (f) occurs,
Lender will give the Borrower and Guarantor written notice that such event has
occurred, and the Borrower shall have a period of one hundred and eighty (180)
days from the date of such notice in which to pay the Loan Obligations in full
to the Lender, and Lender further agrees that no Default Rate interest or
prepayment premium will be due and payable with respect thereto; an "Event of
Default" will not be deemed to exist unless and until the Borrower fails to pay
the Loan Obligations in full within the time deadlines so demanded by Lender;
for purposes of this subsection (f), a "material change" in the ownership
interests of the Guarantor shall be deemed to exist if 50% or more of the stock
ownership interests of the Guarantor are so conveyed.
(g) Any certificate, statement, representation, warranty or
audit heretofore or hereafter furnished by or on behalf of the Borrower or
Guarantor pursuant to or in connection with this Agreement or otherwise
(including, without limitation, representations and warranties contained herein
or in any Loan Documents) or as an inducement to Lender to extend any credit to
or to enter into this or any other agreement with Borrower or Guarantor in
connection with this Loan or other loans now existing or hereafter created,
proves to have been false in any material respect at the time when the facts
therein set forth were stated or certified, or proves to have omitted any
substantial contingent or unliquidated liability or claim against Borrower or
Guarantor, or on the date of execution of this Agreement there shall have been
any materially
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adverse change in any of the facts previously disclosed by any
such certificate, statement, representation, warranty or audit, which change
shall not have been disclosed to Lender in writing at or prior to the time of
such execution; or
(h) Following completion of construction, the Improvements or
the Borrower should be assessed fines or penalties in excess of $50,000 for any
single occurrence or $100,000 in the aggregate for any calendar year by any
state or any Medicare, Medicaid, health, reimbursement, licensing, or
accreditation agency having jurisdiction over Borrower or the Improvements,
unless such fine or penalty is being contested by the Borrower in accordance
with applicable laws and the Borrower is ultimately successful in such contest;
or
(i) A final judgment shall be rendered by a court of law or
equity against Borrower in excess of $100,000 or against the Guarantor in excess
of $1,000,000 and the same shall remain undischarged for a period of thirty (30)
days, unless such judgment is either (i) fully covered by collectible insurance
and such insurer has within such period acknowledged such coverage in writing,
or (ii) although not fully covered by insurance, enforcement of such judgment
has been effectively stayed, such judgment is being contested or appealed by
appropriate proceedings and Borrower or the Guarantor, as the case may be, has
established reserves adequate for payment in the event Borrower or Guarantor is
ultimately unsuccessful in such contest or appeal and evidence thereof is
provided to Lender; or
(j) A decrease of twenty percent (20%) or more in the
Guarantor's net worth during any fiscal quarter; provided, however, that Lender
agrees that it will forbear from declaring an Event of Default hereunder upon
the occurrence of such decline in the Guarantor's net worth if Guarantor shall
deposit with Lender, within five (5) Business Days of Lender's written demand
therefor, cash or an unconditional, irrevocable letter of credit in favor of
Lender which must be in form and content and from an issuer acceptable to
Lender, which such cash or letter of credit shall be equal to the principal
amount of the Loan then guaranteed by the Guarantor and shall be held by the
Lender as additional Collateral for the Loan Obligations until the Loan is paid
in full; or
(k) Following completion of construction, the failure of
Borrower to correct, or cause to be corrected, within the time deadlines set by
any applicable Medicare, Medicaid or licensing agency, or any accreditation
agency, including any extension thereof granted under any appeals proceeding or
through court action, that results in either of the following actions by such
agency with respect to the Improvements:
(i) a termination of Borrower's Medicare or Medicaid
contract, or a termination (summary or otherwise) of the license for
the Improvements, or a termination (summary or otherwise) of the
accreditation for the Improvements, irrespective of whether or not
Borrower has appealed from any such termination action, which is not
corrected within twenty (20) days of Lender's written notice to
Borrower of such Default; or
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(ii) a ban on new admissions generally or on admission
of patients otherwise qualifying for Medicaid or Medicare coverage,
irrespective of whether or not Borrower has appealed from any such
action, which is not corrected within twenty (20) days of Lender's
written notice to Borrower of such Default.
(l) Failure or refusal by the Title Company, by reason of any
matter affecting title to the Property or Improvements, to insure any Advance as
giving rise to a valid first lien, subject only to those exceptions previously
approved by the Lender.
(m) Failure by Borrower to complete the construction of the
Improvements and obtain a certificate of occupancy or other final governmental
approval of the Improvements for their intended use on or before the Scheduled
Completion Date, or the cessation of work on the construction of the
Improvements for any period of twenty (20) consecutive days (the "Twenty Day
Period"); provided, however, that any delays in construction caused by acts of
God, acts of war, casualties or other events or circumstances beyond Borrower's
control shall extend the Scheduled Completion Date and the Twenty Day Period pro
tanto.
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Notwithstanding anything in this Section, all requirements of notice
shall be deemed eliminated if Lender is prevented from giving such notice by
bankruptcy or other applicable law. The cure period, if any, shall then run from
the occurrence of the event or condition of Default rather than from the date of
notice.
7.2 Remedies. Upon the occurrence of any one or more of the foregoing
Events of Default, Lender shall have the absolute right to refuse to disburse
any funds hereunder and at its option and election and in its sole discretion to
exercise alternatively or cumulatively any or all of the following remedies:
(a) To cancel Lender's obligations pursuant to this Agreement
by written notice to Borrower. Upon the occurrence of an Event of Default
described in Subsections 7.1 (d) and (e), Lender's obligations pursuant to this
Loan Agreement shall be terminated immediately and automatically.
(b) To institute appropriate proceedings to specifically
enforce performance of the terms and conditions of this Agreement.
(c) If foreclosure proceedings have been instituted and a
receiver has been appointed, to take immediate possession of the Property and
Improvements as well as all other property to which title is held by Borrower as
is necessary fully to complete all on-site and off-site Improvements and
complete the construction and equipping of the Improvements and do anything in
its sole judgment to fulfill the obligations of Borrower hereunder, including
availing itself of and procuring performance of existing contracts, amending the
same, or entering into new contracts with the same contractors or others and
employment of watchmen to protect the Property and Improvements from injury.
Without restricting the generality of the foregoing and for the purposes
aforesaid, Borrower hereby appoints and constitutes Lender its lawful
attorney-in-fact with full power of substitution in the premises to complete
construction and equip the Improvements, to use unadvanced Loan funds or funds
which Borrower may have deposited with Lender pursuant to this Loan Agreement,
or to advance funds in excess of the Loan pursuant to this Loan Agreement, or to
advance funds in excess of the Loan amount (and Borrower agrees to reimburse
Lender for any expenses of such completion which exceed undisbursed Loan funds)
to complete the Improvements; to pay all taxes and assessments on the Property
or Improvements not paid by Borrower when due and to add the amounts of any such
payments to the amount of indebtedness secured by the Deed of Trust; to make
necessary changes in the Plans and Specifications which shall be necessary or
desirable to complete the Improvements in substantially the manner contemplated
by the Plans and Specifications; to retain or employ new general contractors,
subcontractors, architects, engineers and inspectors as shall be required for
said purposes; to pay, settle, or compromise all bills and claims, which may be
incurred in connection with constructing and equipping the Improvements; to
purchase any fixtures, equipment, machinery, furniture or any other personal
property as may be necessary or desirable for the completion of the construction
and equipping of the Improvements or for the clearance of title; to execute all
applications and certificates in the name of Borrower which may be required;
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to prosecute and defend all actions or proceedings in connection with the
Property or Improvements, fixtures, equipment, machinery, furniture or any other
personal property; and to do any act which Borrower might do in its own behalf
relating to the Property or Improvements, it being understood and agreed that
this power of attorney shall be a power coupled with an interest and cannot be
revoked.
(d) To appoint or seek appointment of a receiver, without
notice and without regard to the solvency of Borrower or the adequacy of the
security, for the purpose of preserving the Property and Improvements,
preventing waste, and to protect all rights accruing to Lender by virtue of this
Agreement and the Deed of Trust, and expressly to make any and all further
Improvements, whether on-site or off-site, as Lender may determine to be
necessary to complete the development and construction of the Improvements. All
expenses incurred in connection with the appointment of such receiver, or in
protecting, preserving, or improving the Property, shall be charged against
Borrower and shall be secured by the Deed of Trust and enforced as a lien
against the Property and Improvements.
(e) To accelerate maturity of the Note and any other
indebtedness of Borrower to Lender arising under this Agreement, the Deed of
Trust or any other Loan Documents, and demand payment of the principal sum due
thereunder, with interest, advances, costs, and attorneys' fees, and enforce
collection of such payment by foreclosure of the Deed of Trust or the
enforcement of any other Collateral, or other appropriate action.
(f) To exercise any and all rights and remedies afforded by
the laws of the United States, the state in which the Property or other
Collateral is located or any other appropriate jurisdiction as may be available
for the collection of debts and enforcement of covenants and conditions such as
those contained in this Agreement and the Loan Documents.
(g) To exercise the rights and remedies of setoff and/or
banker's lien against the interest of the Borrower in and to every account and
other property of the Borrower which is in the possession of the Lender or any
person who then owns a participating interest in the Loan, to the extent of the
full amount of the Loan.
(h) To exercise its rights and remedies pursuant to any other
Loan Documents.
All rights and remedies of Lender under the terms of this Agreement,
the Note, any of the other Loan Documents, and any applicable statutes or rules
of law shall be cumulative and may be exercised successively or concurrently.
ARTICLE VIII
MISCELLANEOUS
8.1 One-Time Right of Assignment. Provided that no Default or Event of
Default then exists hereunder or under any of the Loan Documents, the Lender
agrees that the Borrower
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shall have a ONE TIME right to assign the Loan, with the Lender's prior written
consent, which consent may be given or withheld in Lender's sole and absolute
discretion, upon payment of an assumption fee equal to one-half of one percent
(1/2%) of the outstanding principal balance of the Loan, and payment by the
Borrower of all fees, costs, and other expenses incurred by Lender (including,
without limitation, fees and expenses of Lender's counsel), in connection with
such assignment; provided that, in addition to the foregoing, each of the
following conditions must be satisfied:
(i) The proposed transferee of the Loan (the
"Transferee") shall be subject to the Lender's review and approval in
the Lender's sole and absolute discretion. Borrower agrees and
acknowledges that the Lender has been induced to made the Loan based
on, among other things, the Borrower's and Guarantor's
creditworthiness, financial strength, and ability to operate the
Improvements as intended. Accordingly, it shall be within Lender's sole
and absolute discretion to approve or disapprove any proposed
Transferee, and Borrower hereby waives, releases, and forever
relinquishes any claim or cause of action against Lender in the event
Lender disapproves any proposed Transferee.
(ii) Lender must approve, in its sole and absolute
discretion, any management company or lessee of the Improvements, and
must be provided with such financial information of any such proposed
manager or lessee as Lender shall reasonably require. Any management
agreement must be in form and content acceptable to the Lender, and any
such manager will be required to subordinate the management agreement
and all management fees owing thereunder to the Loan. Any lease
agreement must be in form and content acceptable to the Lender, and any
such lessee will be required to enter into a subordination and
attornment agreement acceptable to the Lender.
(iii) Lender reserves the right, in its sole and
absolute discretion, to require a replacement guarantor or substitute
collateral as a condition precedent to its approval of any Transferee
and release of the Guaranty.
(iv) The Transferee shall assume and agree to pay and
perform the obligations of the Borrower under its Loan Documents, and
the Borrower and the Transferee shall execute and deliver such
documents as Lender or its counsel may require to effectuate such
assignment and assumption.
It is expressed agreed and understood that this is a one-time right
only, must be exercised in good faith by the Borrower and may not be exercised
by the Transferee as to any proposed sale by the Transferee. In the event Lender
refuses to consent to the proposed Transferee as provided in this Section 8.1,
Borrower will have a period of one hundred and eighty (180) days from such
refusal in which to pay the Loan Obligations in full to Lender, and Lender
agrees that no Default Rate interest or prepayment premium will be due and
payable with respect thereto.
8.2 Unfunded Loan Proceeds. In the event that there are any Loan funds
which have
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not been Advanced by the Lender by either the earlier of the Scheduled
Completion Date, or November 1, 1997, then, in such event and at Borrower's sole
option, either:
(a) such unfunded Loan funds shall be Advanced into an
interest bearing escrow account with a depository institution acceptable to the
Lender in Lender's sole discretion, with Advances to continue to be made from
said escrow account in accordance with the provisions set forth herein; however,
such funds shall be deemed fully advanced to the Borrower. Lender shall be
granted a security interest in such account and all funds on deposit in the
account as security for the Loan Obligations; or
(b) Borrower shall advise Lender that it does not wish to draw
any additional Loan funds, in which case the outstanding principal balance under
the Loan shall "term out" and be payable as set forth in the Note, but in such
event, the Borrower must pay to Lender a fee in the amount of one percent (1%)
of the unfunded Loan proceeds which Borrower will not be drawing, which such fee
will be due and payable within ten (10) days of the date such notice is given to
Lender.
In the event Borrower fails to notify Lender of its election of option
(a) or (b) as described above, option (a) shall control and Lender is hereby
authorized to so advance such funds.
8.3 Commitment to Loan Additional Funds. Lender agrees that it will, at
Borrower's request, increase the Loan amount to an aggregate of up to Twenty
Million Dollars ($20,000,000) at such time as each of the following conditions
have been satisfied:
(a) No Event of Default shall have occurred pursuant to this
Agreement or pursuant to any other loan which Lender may have extended to the
Borrower or any affiliate of the Borrower; and
(b) The Project shall have been completed substantially in
accordance with the Plans and Specifications and shall have been fully licensed,
certified, and accredited as contemplated herein;
(c) The Borrower shall have provided to Lender evidence in
form and content acceptable to Lender confirming that the Cash Flow Coverage for
the preceding six (6) consecutive months has exceeded 1.0; and
(d) No material adverse change shall have occurred in the
financial condition or prospects of the Borrower, the Project, or the Guarantor,
and Lender shall have determined (in its sole and absolute discretion) that the
underwriting for such additional loan does not materially deviate from its
underwriting of the Loan as of the date hereof and Lender shall have received
approval of such increased Loan by its board of directors; and
(e) Borrower shall have executed and delivered to Lender
necessary modifications to the Loan Documents (to be prepared by Lender's
counsel) evidencing such
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increased loan (including, without limitation, an amendment to the Guaranty
increasing the amount guaranteed by the Guarantor by such increased loan amount
or, if the amount guaranteed by the Guarantor has been "reduced," then
increasing the amount guaranteed by the Guarantor proportionately), all of which
shall be in form and content acceptable to Lender; and
(f) Lender shall have received an endorsement to its title
insurance policy, insuring such additional loan, updating the effective date of
said title insurance policy, and containing no new lien or encumbrance except as
previously approved or as are otherwise acceptable to Lender in Lender's
reasonable determination.
8.4 Waiver. No remedy conferred upon, or reserved to, the Lender in
this Agreement or any of the other Loan Documents is intended to be exclusive of
any other remedy or remedies, and each and every remedy shall be cumulative and
shall be in addition to every other remedy given hereunder or now or hereafter
existing in law or in equity. Exercise or omission to exercise any right of the
Lender shall not affect any subsequent right of Lender to exercise the same. No
course of dealing between Borrower and Lender or any delay on the Lender's part
in exercising any rights shall operate as a waiver of any of the Lender's
rights. No waiver of any Default under this Agreement or any of the other Loan
Documents shall extend to or shall affect any subsequent or other then existing
Default or shall impair any rights, remedies or powers of Lender.
8.5 Costs and Expenses. Borrower will bear all taxes, fees and expenses
(including reasonable fees and expenses of counsel for Lender) in connection
with the Loan, the Note, the preparation of this Agreement and the other Loan
Documents (including any amendments hereafter made), and in connection with any
modifications thereto and the recording of any of the Loan Documents. Borrower
shall pay for all fees of Lender's Inspecting Consultant, subject, however, to a
"cap" of $750.00 per inspection. Lender agrees that, unless a Default or Event
of Default has occurred hereunder, it will not require more than one (1)
inspection for each draw for Hard Costs. If, at any time, an Event of Default
occurs and or to collect the balance of the Loan Obligations or to take any
action in or with respect to any suit or proceeding relating to this Agreement,
any of the other Loan Documents, any Collateral for any of the Loan Obligations,
the Borrower, or the Guarantor, or to protect, collect, or liquidate any of the
Collateral for the Loan Obligations, or attempt to enforce any security interest
or lien granted to the Lender by any of the Loan Documents, then in any such
events, all of the reasonable attorney's fees arising from such services,
including fees on appeal and in any bankruptcy proceedings, and any expenses,
costs and charges relating thereto shall constitute additional obligations of
Borrower to the Lender payable on demand of the Lender. As used herein,
"reasonable attorneys fees" shall be deemed to mean standard hourly rates and
fees actually incurred. Without limiting the foregoing, Borrower has undertaken
the obligation for payment of, and shall pay, all recording and filing fees,
revenue or documentary stamps or taxes, intangibles taxes, transfer taxes,
recording taxes and other taxes, expenses and charges payable in connection with
this Agreement, any of the Loan Documents, the Loan Obligations, or the filing
of any financing statements or other instruments required to effectuate the
purposes of this Agreement, and should Borrower fail to do so, Borrower agrees
to reimburse Lender for the amounts paid by Lender, together with penalties or
interest, if any,
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incurred by Lender as a result of underpayment or nonpayment. This Section shall
survive repayment of the remaining Loan Obligations.
8.6 Headings. The headings of the Sections of this Agreement are for
convenience of reference only, are not to be considered a part hereof, and shall
not limit or otherwise affect any of the terms hereof.
8.7 Survival of Covenants. All covenants, agreements, representations
and warranties made herein and in certificates or reports delivered pursuant
hereto shall be deemed to have been material and relied on by Lender,
notwithstanding any investigation made by or on behalf of Lender, and shall
survive the execution and delivery to Lender of the Note and this Agreement.
8.8 Notices, etc. Any notice or other communication required or
permitted to be given by this Agreement or the other Loan Documents or by
applicable law shall be in writing and shall be deemed received (a) on the date
delivered, if sent by hand delivery (to the person or department if one is
specified below), (b) three (3) days following the date deposited in U.S. mail,
certified or registered, with return receipt requested, or (c) one (1) day
following the date deposited with Federal Express or other national overnight
carrier, and in each case addressed as follows:
If to Borrower:
MedCath of Tucson, L.L.C.
762 Little Avenue
Suite 106
Charlotte, North Carolina 28226
Attn: Mr. Stephen R. Puckett
with a copy to:
Hal Levinson, Esq.
Moore & Van Allen, PLLC
100 North Tryon Street
47th Floor
Charlotte, North Carolina 28202-4003
If to Lender:
Capstone Capital Corporation
1000 Urban Center Parkway, Suite 630
Birmingham, Alabama 35243
Attn: Mr. William C. Harlan
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Failure to provide courtesy copies shall not render invalid any notice otherwise
properly given. Either party may change its address to another single address by
notice given as herein provided, except any change of address notice must be
actually received in order to be effective.
8.9 Benefits. All of the terms and provisions of this Agreement shall
bind and inure to the benefit of the parties hereto and their respective
successors and assigns. No Person other than Borrower or Lender shall be
entitled to rely upon this Agreement or be entitled to the benefits of this
Agreement.
8.10 No Agency Relationship. Lender is not the agent or representative
of Borrower and this Agreement shall not make Lender liable to materialmen,
contractors, craftsmen, laborers or others for goods delivered to or services
performed by them upon the Property, or for debts or claims accruing to such
parties against Borrower and there is no contractual relationship, either
expressed or implied, between Lender and any materialmen, subcontractors,
craftsmen, laborers, or any other person supplying any work, labor or materials
for the improvements of the Property.
8.11 Collateral Assignment. Borrower hereby assigns to Lender all
Borrower's right, title, and interest in:
(a) The Plans and Specifications (Lender acknowledges that the
Plans and Specifications are proprietary information of the Borrower which
cannot be used by Lender (or its nominee) except to complete the Improvements
upon the occurrence of an Event of Default hereunder, and may not be sold or
transferred to any person by Lender for any purpose other than completion of the
Improvements).
(b) Borrower's books and records relating to the Property or
construction of the Improvements,
(c) All contracts now or hereafter made by Borrower relating
to the Property or the construction, equipping, marketing, management, sale or
lease of all or any part of the Property or Improvements, and all bonds and
other guarantees of performance in favor of Borrower with respect to any such
contracts.
Borrower agrees that upon any Event of Default under this Agreement, Lender
shall have the absolute right to make such similar use of the Property so
assigned as Lender shall desire, and, as to any such property which is also the
subject of a security agreement or financing statement in favor of Lender, that
Lender will not be limited to remedies available under the Uniform Commercial
Code, but may at its option avail itself of the rights granted herein in
addition to or in substitution for its Uniform Commercial Code remedies.
8.12 Interest Reserves. The Loan will include an interest reserve in an
amount designated "Construction Interest" on the Cost Budget and which, subject
to the terms of this
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Agreement, will be advanced by Lender, following an appropriate requisition from
Borrower, to pay interest on the Loan as it becomes due. Interest will be
payable by Borrower to Lender on that portion of the interest reserve actually
disbursed by Lender.
8.13 Participation. Borrower acknowledge that Lender may, at its
option, sell participation interests in, or assign all of its interest in, the
Loan; however, Lender agrees that it will at all times retain at least a
fifty-one percent (51%) interest in the Loan and will retain all decision making
responsibility. Borrower agrees with each present and future participant or
owner of the Loan that if an Event of Default should occur, each present and
future participant or owner shall have all of the rights and remedies of Lender
with respect to any deposit due from any participant to the Borrower. The
execution by a participant of a participation agreement with Lender, and the
execution by the Borrower of this Agreement, regardless of the order of
execution, shall evidence an agreement between Borrower and said participant in
accordance with the terms of this Section.
8.14 Supersedes Prior Agreements; Counterparts. This Agreement and the
Loan Documents referred to herein supersede and incorporate all representations,
promises, and statements, oral or written, made by Lender in connection with the
Loan. This Agreement may not be varied, altered, or amended except by a written
instrument executed by an authorized officer of the Lender. This Agreement may
be executed in any number of counterparts, each of which, when executed and
delivered, shall be an original, but such counterparts shall together constitute
one and the same instrument.
8.15 Construction of Provisions of this Agreement. Lender has not
agreed to make any loan other than that specifically described herein. All
requirements herein shall be deemed material to Lender. Except as specified
herein, all conditions and requirements must be satisfied by Borrower prior to
the Closing Date. Whenever this Agreement refers to a matter being
"satisfactory" to Lender, subject to Lender's "approval" or "consent," at
Lender's "option," at Lender's "determination," "required" by Lender, at
Lender's "request," as Lender shall "deem necessary," or similar terminology, it
is deemed that each of the aforesaid shall be in the reasonable discretion of
the Lender, and if any term or condition requires Lender's approval, consent, or
satisfaction (the "Lender's Approval"), the Lender's Approval shall not be
implied, but shall be evidenced only by a written notice from Lender
specifically addressed to the particular requirement or condition and expressing
Lender's Approval.
8.16 CONTROLLING LAW. THE VALIDITY, INTERPRETATION, ENFORCEMENT AND
EFFECT OF THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF ALABAMA. THE LENDER'S PRINCIPAL PLACE OF BUSINESS IS
LOCATED IN JEFFERSON COUNTY IN THE STATE OF ALABAMA, AND THE BORROWER AGREES
THAT THIS AGREEMENT SHALL BE HELD BY LENDER AT SUCH PRINCIPAL PLACE OF BUSINESS,
AND THE HOLDING OF THIS AGREEMENT BY LENDER THEREAT SHALL CONSTITUTE SUFFICIENT
MINIMUM CONTACTS OF
33
<PAGE>
BORROWER WITH JEFFERSON COUNTY AND THE STATE OF ALABAMA FOR THE PURPOSE OF
CONFERRING JURISDICTION UPON THE FEDERAL AND STATE COURTS PRESIDING IN SUCH
COUNTY AND STATE. BORROWER CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING ARISING
HEREUNDER MAY BE BROUGHT IN THE CIRCUIT COURT OF THE STATE OF ALABAMA, JEFFERSON
COUNTY, ALABAMA OR THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
ALABAMA AND ASSENTS AND SUBMITS TO THE PERSONAL JURISDICTION OF ANY SUCH COURT
IN ANY ACTION OR PROCEEDING INVOLVING THIS AGREEMENT. NOTHING HEREIN SHALL LIMIT
THE JURISDICTION OF ANY OTHER COURT.
8.17 WAIVER OF JURY TRIAL. BORROWER HEREBY WAIVES ANY RIGHT THAT IT MAY
HAVE TO A TRIAL BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR
CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT, THE
LOAN DOCUMENTS OR THE LOAN, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR
RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR BORROWER WITH RESPECT
TO THE LOAN DOCUMENTS OR IN CONNECTION WITH THIS AGREEMENT OR THE EXERCISE OF
EITHER PARTY'S RIGHTS AND REMEDIES UNDER THIS AGREEMENT OR OTHERWISE, OR THE
CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES
WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT
OR OTHERWISE. BORROWER AGREES THAT LENDER MAY FILE A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT
OF BORROWER IRREVOCABLY TO WAIVE THEIR RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT
OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN
BORROWER AND LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION
BY A JUDGE SITTING WITHOUT A JURY.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
properly executed as of the date first above written.
BORROWER:
MEDCATH OF TUCSON, L.L.C.,
a North Carolina limited liability company
BY: SOUTHERN ARIZONA HEART, INC.
a North Carolina corporation
34
<PAGE>
Its Managing Member
By: /s/ Robert R. Weathers
Its: President
LENDER:
CAPSTONE CAPITAL CORPORATION
a Maryland corporation
BY: /s/ Willian C. Harlan
William C. Harlan
Its Senior Vice President
STATE OF Arizona )
---------------------------------------------
COUNTY OF Pima )
-----------------------------------------
I, the undersigned, a Notary Public, in and for said County in said
State, hereby certify that Robert R. Weathers whose name as President of
Southern Arizona Heart, Inc., a North Carolina corporation, as the Managing
Member of MedCath of Tucson, L.L.C., a North Carolina limited liability company,
is signed to the foregoing Agreement and who is known to me, acknowledged before
me on this day that, being informed of the contents of the Agreement, he, as
such officer, and with full authority, executed the same voluntarily for and as
the act of said corporation, acting in its capacity as aforesaid.
Given under my hand this the 18 day of July, 1996.
/s/ Suzanne T. Garcia
-------------------------------------
Notary Public
My Commission Expires: October 20, 1997
STATE OF Alabama)
COUNTY OF Jefferson)
I, the undersigned, a Notary Public, in and for said County in said
State, hereby certify that William C. Harlan, whose name as Senior Vice
President of Capstone Capital Corporation, a Maryland corporation, is signed to
the foregoing Agreement and who is known to me, acknowledged before me on this
day that, being informed of the contents of the Agreement, he, as such officer
and with full authority, executed the same voluntarily for and as the act of
said corporation.
35
<PAGE>
Given under my hand this the 17 day of July, 1996.
/s/ Alice Kay Laywon
-------------------------------------
Notary Public
My Commission Expires: 6/6/97
36
<PAGE>
EXHIBIT A
COST BUDGET
(See attached capital expense information)
37
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION
Lots 7, 8 and 9 of Northmall Centre, according to Book 44 of Maps and Plats at
Page 62, records of Pima County, Arizona.
38
<PAGE>
EXHIBIT C
LOCATION OF BORROWER'S PRINCIPAL PLACE OF BUSINESS
AND CHIEF EXECUTIVE OFFICE
Principal Place of Business:
Southeast corner of River Road and Stone Avenue, Tucson, Arizona
Chief Executive Office:
762 Little Avenue
Suite 106
Charlotte, North Carolina 28226
39
<PAGE>
EXHIBIT D
OWNERSHIP INTEREST OF BORROWER
40
<PAGE>
EXHIBIT E
COMPLIANCE CERTIFICATE
Capstone Capital Corporation
1000 Urban Center Drive
Suite 630
Birmingham, Alabama 35242
RE: Loan Agreement dated July ____, 1996 (together with
amendments, if any, the "Loan Agreement") between MedCath of
Tucson, L.L.C., as Borrower and Capstone Capital Corporation,
as Lender
The undersigned officer of the above named Borrower does hereby certify
that for the quarterly financial period ending
____________________________________:
1. No Default or Event of Default has occurred or exists except
________________________ .
2. The Cash Flow Coverage for the preceding twelve (12) months through the
end of such period was:
Required 1.50 to 1.0
Actual: ________ to ________
3. The Current Ratio for the preceding quarter was:
Required 1.75 to 1.0
Actual: ________ to ________
4. All information provided herein is true and correct.
5. Capitalized terms not defined herein shall have the meanings given to
such terms in the Loan Agreement.
- --------------------------------------
Name:________________________________
Title:_________________________________
Dated this the ______ day of ________________________, 1996.
41
<PAGE>
EXHIBIT F
PERMITTED LIENS
None.
42
<PAGE>
SCHEDULE I
PENDING LITIGATION
In February 1996, the corporate owner of El Dorado Hospital, filed a
civil action against MedCath and several of its affiliates alleging that they
unlawfully interfered with the hospital's contractual rights by inducing five
physicians who own the Heart Institute of Tucson, a cardiac catheterization
laboratory company which is managed by a subsidiary of MedCath Incorporated, to
breach their contract with El Dorado Hospital. The alleged breach is based upon
such physicians' investment in MedCath of Tucson, L.L.C., which El Dorado
Hospital alleges is a violation of the physicans' noncompetition covenants with
El Dorado Hospital. El Dorado has also notified the Heart Institute of Tucson
that (i) the hospital contests the hospital's obligation to pay approximately
$120,000 for certain services rendered, (ii) the hospital believes that the
execution of the management agreement between the Heart Institute of Tucson and
a MedCath subsidiary violated the prohibition on assignments set forth in the
agreement between the hospital and the Heart Institute of Tucson, and (iii) the
investment by the physician owners of the Heart Institute of Tucson in the
Tucson Company violates their noncompetition covenants. The Heart Institute of
Tucson and MedCath believe that the Heart Institute of Tucson is owed the funds
at issue and that there is no merit to the additional allegations made by the
hospital. An arbitration proceeding has been commenced by El Dorado Hospital
against the Heart Institute of Tucson and its owners regarding the hospital's
obligation for payment of the funds at issue. It is likely that El Dorado
Hospital's claims regarding the Heart Institute of Tucson's alleged violations
of the applicable agreements will also be included in the arbitration
proceeding. MedCath and its affiliates are not parties to the arbitation
proceeding.
43
Exhibit 10.44
PROMISSORY NOTE
$17,800,000 Birmingham, Alabama
July 18, 1996
FOR VALUE RECEIVED, the undersigned, MEDCATH OF TUCSON, L.L.C., a North
Carolina limited liability company ("Borrower"), promises to pay to the order of
CAPSTONE CAPITAL CORPORATION, a Maryland corporation ("Lender"), the principal
sum of SEVENTEEN MILLION EIGHT HUNDRED THOUSAND DOLLARS ($17,800,000), or so
much as may be advanced hereunder, together with interest on the unpaid
principal amount from time to time outstanding at the per annum rates set forth
herein.
This Note is executed pursuant to the Loan Agreement dated as of the
date hereof between Borrower and Lender (such Loan Agreement, as it may from
time to time be supplemented, modified and amended, being referred to in this
Note as the "Loan Agreement"; capitalized terms used herein and not otherwise
defined shall have the meanings set forth in the Loan Agreement).
1. Defined Terms. As used herein, the following terms shall have
the following meanings:
"Adjustment Date" shall mean the dates during the Permanent Term upon
which the interest rate accruing hereunder will be adjusted; the first
adjustment date will be on the anniversary of the Conversion Date, and each
succeeding Adjustment Date will be on the anniversary of the first Adjustment
Date.
"Advances" means the advances of the Loan to be made by Lender in
accordance with the provisions of the Loan Agreement during the Construction
Term.
"Assumed Term" means a period of twenty-five (25) years commencing as
of the Conversion Date.
"Construction Term" means the period of time during which Lender will
make Advances of the Loan to Borrower, which shall commence on the date hereof
and shall expire on the Conversion Date.
"Conversion Date" means the date on which this Note will convert from a
"draw" note to a term loan note, and shall on the earlier to occur of (i) the
date the Improvements are completed in substantial compliance with the Plans and
Specifications and certificates of occupancy are issued by the applicable
authority, or (ii) November 1, 1997.
"Fixed Rate" means a per annum rate to be determined by Lender by
adding three hundred and fifty (350) basis points (3.50%) to the seven (7) year
United States Treasury most
<PAGE>
immediately available to Lender on the Conversion Date, and which shall be the
effective rate accruing on the principal sum during the Permanent Term.
"Floating Rate" means a variable rate of interest equal to the Prime
Rate plus one percent (1%), as the same may change from time to time.
"Improvements" means the Tucson Heart Hospital, a 60-bed acute care
hospital specializing in cardiology services and cardiovascular surgery, and
related site improvements to be constructed on the Property in accordance with
the Loan Agreement.
"Loan" means the loan made by Lender to the Borrower pursuant to the
Loan Agreement and evidenced hereby.
"Loan Year" shall mean the twelve (12) month period from the Conversion
Date until the day before the anniversary of the date thereof, and each
successive twelve (12) month period thereafter until the Maturity Date.
"Maturity Date" means the date on which the Loan will be due and
payable, and shall be the date that is eighty-four (84) months from the
Conversion Date, but not later than November 1, 2004.
"Permanent Term" means the period of time from the Conversion Date
through the Maturity Date.
"Prime Rate" means the rate of interest designated by NationsBank, N.A.
as its Prime Rate, as the same may change from time to time.
2. Advances.
The Proceeds of the Loan will be advanced from time to time to the
Borrower by the Lender in installments pursuant to the terms of the Loan
Agreement.
3. Interest Rate.
(a) During the Construction Term, the outstanding principal
balance will bear interest at the Floating Rate.
(b) Commencing on Conversion Date, the outstanding principal
balance hereof shall bear interest at the Fixed Rate; however, the Fixed Rate
will be adjusted on each Adjustment Date during the Permanent Term, by adding
twenty-seven (27) basis points to the last effective rate. For example, if
during the first Loan Year of the Permanent Term, the Fixed Rate is ten percent
(10%) per annum, during the second Loan Year of the Permanent Term, the interest
rate will be 10.27%, during the third Loan Year of the Permanent Term, the
interest rate will be 10.54%, etc.
<PAGE>
(c) Interest on the principal amount shall be calculated on
the basis of a 360-day year by multiplying the principal amount by the per annum
Fixed Rate set forth above, multiplying the product thereof by the actual number
of days elapsed, and dividing the product so obtained by 360.
(d) Upon the occurrence and during the continuance of any
Event of Default hereunder, the interest rate accruing hereunder will be
increased by ten percent (10%) of the rate then accruing hereunder (the "Default
Rate").
(e) Borrower agrees to pay an effective rate of interest based
on the rates stated above plus any additional rate of interest resulting from
any other charges in the nature of interest paid or to be paid by or on behalf
of Borrower, or any benefit received or to be received by Lender, in connection
with this Note.
4. Payment Terms. The principal of and interest on this Note are
payable as follows:
(a) On September 1, 1996, and on the first (1st) business day
of each calendar month thereafter, to and including the first (1st) business day
of the calendar month immediately succeeding the Conversion Date, Borrower shall
pay to Lender all accrued and unpaid interest at the Floating Rate.
(b) On the first (1st) business day of the second calendar
month immediately succeeding the Conversion Date, and on the same day of each
calendar month thereafter for the following eighty-three (83) months, Borrower
will pay to Lender an installment of principal and interest in an amount
necessary to amortize fully the Loan over the Assumed Term at the applicable
Fixed Rate then in effect; provided, however, that the Borrower may by written
notice delivered to Lender at least five (5) Business Days prior to the
Conversion Date, elect to defer the payment of principal and interest described
in this Subsection 4(b) for six (6) months, during which such period Borrower
shall pay installments of interest only at the applicable Fixed Rate, and said
installments of principal and interest shall instead commence on the eighth
(8th) calendar month thereafter. On each adjustment of the interest rate
hereunder, the monthly installments shall be recalculated based on the adjusted
interest rate and the remaining years in the Assumed Term.
(c) On the Maturity Date, the outstanding principal balance of
this Note, together with accrued and unpaid interest thereon, will be due and
payable. A substantial principal payment will be due at maturity.
(d) Each payment hereunder shall be applied first to accrued
but unpaid interest on the outstanding principal balance hereof, and then to
reduction of principal.
3
<PAGE>
(e) The Loan may not be prepaid at any time prior to the
expiration of the third (3) Loan Year of the Permanent Term; thereafter,
commencing with the beginning of the fourth (4) Loan Year of the Permanent Term,
the Loan may be prepaid, in whole or in part, at any time and from time to time
provided that (i) such prepayments must be accompanied by a prepayment premium
equal to three percent (3%) of the amount prepaid during the fourth Loan Year of
the Permanent Term, decreasing by one percent (1%) per Loan Year thereafter, and
(ii) and partial prepayments must be in increments of $100,000. Borrower must
give Lender thirty (30) days prior written notice of any partial prepayments of
$500,000 or more, and fifteen (15) days prior written notice of any partial
prepayment of less than $500,000. Prepayments will be applied to installments
coming due in their inverse order of maturity. Amounts prepaid may not be
reborrowed. Notwithstanding the foregoing, no prepayment premium will be due and
payable with respect to prepayments from insurance proceeds or condemnation
awards or as otherwise provided in the Loan Agreement.
(f) If the Loan is declared to be immediately due and payable
by reason of an Event of Default under the Loan Documents, there shall be added
to the principal balance then due an amount equal to the prepayment premium
which would be due in the event of voluntary prepayment; if this Note is not
then subject to prepayment at the option of the Borrower, a premium of five
percent (5%) of the outstanding principal balance being prepaid shall be added.
(g) All payments on this Note shall be made in lawful money of
the United States by wire transfer of same day funds to the Lender's account
#0000040999 at First Commercial Bank, Birmingham, Alabama, ABA Routing No.
062003605, Attention: Todd Beard, with advice to William C. Harlan at (205)
967-2092 (or such other account or location specified by the Lender from time to
time in writing) on or before 2:00 p.m., Central Standard Time, on any Business
Day. Each payment received shall be credited first to interest then due, with
the remainder credited to principal.
5. Interest on Overdue Installments; Collection Costs.
(a) Upon the occurrence and during the continuance of an Event
of Default hereunder, Borrower agrees to pay interest to Lender at the Default
Rate on the aggregate outstanding Loan Obligations (including accrued interest).
(b) Lender shall be entitled to recover all costs of
collecting, securing or attempting to collect or secure this Note, including,
without limitation, court costs and reasonable attorneys' fees, including
reasonable attorneys' fees in any appellate or bankruptcy proceedings.
6. Security. This Note is evidenced, secured, and guaranteed by the
Loan Documents and the Collateral.
7. Events of Default. The occurrence of any of the following events
shall constitute an "Event of Default" hereunder and under each of the other
Loan Documents:
4
<PAGE>
(a) Nonpayment of Indebtedness. Failure by Borrower to make
any payment of interest or principal or any other sum due within five (5)
business days of the day same becomes due, whether by acceleration or otherwise,
under the terms of this Note or any other Loan Document.
(b) Event of Default under Loan Documents. The occurrence of
any Event of Default under any other Loan Document which is not cured within
applicable curative periods. Notwithstanding anything in this Section, all
requirements of notice shall be deemed eliminated if Lender is prevented from
giving such notice by bankruptcy or other applicable law. The cure period, if
any, shall then run from the occurrence of the event or condition of Default
rather than from the date of notice.
8. Usury. In no event shall the amount of interest due or payable
hereunder (including interest calculated at the Default Rate) exceed the maximum
rate of interest allowed by applicable law, and in the event any such payment is
inadvertently paid by Borrower or inadvertently received by Lender (or any
subsequent holder hereof), then such excess sum shall be credited as a payment
of principal, unless Lender (or any subsequent holder hereof) elects to have
such excess sum refunded to Borrower forthwith, which refund Borrower hereby
agrees to accept. It is the express intent hereof that Borrower not pay and
Lender (or any subsequent holder hereof) not receive, directly or indirectly,
interest in excess of that which may be legally paid by Borrower under
applicable law.
9. Relationship of Parties. Borrower and Lender agree that the
relationship between them shall be solely that of debtor and creditor. Nothing
contained in this Note or in any other Loan Document shall be deemed to create a
partnership, tenancy-in-common, joint tenancy, joint venture or co-ownership by
or between Borrower and Lender. Lender (or any subsequent holder hereof) shall
not be in any way responsible or liable for debts, losses, obligations or duties
of Borrower with respect to any collateral given as security for this Note or
otherwise. Borrower, at all times consistent with the terms and provisions of
this Note and the Loan Documents, shall be free to determine and follow its own
policies and practices in the conduct of its business.
10. Miscellaneous.
(a) Borrower agrees that, as of the date hereof, there are no
defenses, equities, or setoffs with respect to the obligations set forth herein.
(b) All amounts due hereunder shall be payable in lawful money
of the United States of America.
(c) With respect to the amounts due under this Note, Borrower
waives the following to the fullest extent permitted by law:
5
<PAGE>
(i) All rights of exemption of property from levy or
sale under execution or other process for the collection of debts under
the Constitution or laws of the United States or any state thereof;
(ii) Demand, presentment, protest, notice of
dishonor, notice of non-payment, diligence in collection, and all other
requirements necessary to charge or hold the Borrower liable on any
obligations hereunder; and
(iii) Receipt of any further notice from or
acknowledgment by Lender of any collateral now or hereafter deposited
as security for the obligations hereunder.
(d) Section headings are inserted for convenience of reference
only and shall be disregarded in the interpretation of this Note.
(e) The provisions of this Note shall be construed without
regard to the party responsible for the drafting and preparation hereof.
(f) Lender may, at its option, release any Collateral given to
secure the indebtedness evidenced hereby, or the Guarantor from its obligations
under the Guaranty, or release any other guarantor from its obligations under
any other guaranty hereof, and no such release shall impair the obligations of
Borrower to Lender.
(g) Time is of the essence of this Note and the performance of
each of the covenants and agreements contained herein.
(h) Lender shall not by any act, delay, omission, or otherwise
be deemed to have waived any of its rights or remedies, and no waiver of any
kind shall be valid unless in writing and signed by Lender. All rights and
remedies of Lender under the terms of this Note, the other Loan Documents and
applicable statutes or rules of law, shall be cumulative and may be exercised
successively or concurrently.
(i) The obligations of Borrower hereunder shall be binding
upon and enforceable against Borrower and its successors and assigns.
(j) Any provision in this Note which may be unenforceable or
invalid under any law shall be ineffective to the extent of such
unenforceability or invalidity without affecting the enforceability or validity
of any other provision hereof.
(k) THE VALIDITY, INTERPRETATION, ENFORCEMENT AND EFFECT OF
THIS INSTRUMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF ALABAMA. THE LENDER'S PRINCIPAL PLACE OF BUSINESS IS LOCATED IN
JEFFERSON COUNTY IN THE
6
<PAGE>
STATE OF ALABAMA, AND THE BORROWER AGREES THAT THIS INSTRUMENT SHALL BE
DELIVERED TO, FUNDED FROM, AND HELD BY LENDER AT SUCH PRINCIPAL PLACE OF
BUSINESS, AND THE HOLDING OF THIS INSTRUMENT BY LENDER THEREAT SHALL CONSTITUTE
SUFFICIENT MINIMUM CONTACTS OF BORROWER WITH JEFFERSON COUNTY AND THE STATE OF
ALABAMA FOR THE PURPOSE OF CONFERRING JURISDICTION UPON THE FEDERAL AND STATE
COURTS PRESIDING IN SUCH COUNTY AND STATE. BORROWER CONSENTS THAT ANY LEGAL
ACTION OR PROCEEDING ARISING HEREUNDER MAY BE BROUGHT IN THE CIRCUIT COURT OF
THE STATE OF ALABAMA, JEFFERSON COUNTY, ALABAMA OR THE UNITED STATES DISTRICT
COURT FOR THE NORTHERN DISTRICT OF ALABAMA AND ASSENTS AND SUBMITS TO THE
PERSONAL JURISDICTION OF ANY SUCH COURT IN ANY ACTION OR PROCEEDING INVOLVING
THIS INSTRUMENT. NOTHING HEREIN SHALL LIMIT THE JURISDICTION OF ANY OTHER COURT.
(l) BORROWER HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY ON ANY
CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT
OF OR IN ANY WAY PERTAINING OR RELATING TO THIS NOTE OR ANY OTHER LOAN DOCUMENT,
OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO
ANY DEALINGS OF THE PARTIES HERETO WITH RESPECT TO THIS NOTE, OR ANY OTHER
INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH
OR IN CONNECTION WITH THE TRANSACTIONS RELATED THERETO OR CONTEMPLATED THEREBY
OR THE EXERCISE OF EITHER PARTY'S RIGHTS AND REMEDIES THEREUNDER, IN ALL OF THE
FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING
IN CONTRACT, TORT OR OTHERWISE. BORROWER AGREES THAT LENDER MAY FILE A COPY OF
THIS PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY AND
BARGAINED AGREEMENT OF THE BORROWER IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY
JURY AS AN INDUCEMENT TO LENDER TO MAKE THE LOAN, AND THAT ANY DISPUTE OR
CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN BORROWER AND
LENDER SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE
SITTING WITHOUT A JURY.
IN WITNESS WHEREOF, Borrower has caused this instrument to be properly
executed on the day and year first above written.
MEDCATH OF TUCSON, L.L.C.,
a North Carolina limited liability company
BY: SOUTHERN ARIZONA HEART, INC.,
7
<PAGE>
a North Carolina corporation
Its Managing Member
By: /s/ Robert R. Weathers
--------------------------------------
Its President
-----------------------------
8
<PAGE>
STATE OF Arizona )
-----------------------------------------
COUNTY OF Pima )
----------------------------------------
I, the undersigned, a Notary Public, in and for said County in said
State, hereby certify that Robert R. Weathers whose name as President of
Southern Arizona Heart, Inc., a North Carolina corporation, as the Managing
Member of MedCath of Tucson, L.L.C., a North Carolina limited liability company,
is signed to the foregoing Agreement and who is known to me, acknowledged before
me on this day that, being informed of the contents of the Agreement, he, as
such officer, and with full authority, executed the same voluntarily for and as
the act of said corporation, acting in its capacity as aforesaid.
Given under my hand this the 18 day of July, 1996.
/s/ Suzanne T. Garcia
-------------------------------------
Notary Public
My Commission Expires: October 20, 1997
9
<PAGE>
Exhibit 10.45
GUARANTY AGREEMENT
THIS GUARANTY AGREEMENT (this "Guaranty") made as of the 18th day of
July, 1996, by MEDCATH, INCORPORATED, a North Carolina corporation (the
"Guarantor") in favor of CAPSTONE CAPITAL CORPORATION, a Maryland corporation
(the "Lender").
R E C I T A L S:
Pursuant to that certain Loan Agreement of even date herewith (as the
same may hereafter be amended, the "Loan Agreement;" defined terms used herein
without definition shall have the meanings ascribed to them in the Loan
Agreement) between the Lender and MedCath of Tucson, L.L.C., a North Carolina
limited liability company (the "Borrower"), Lender has agreed to make a
construction/mini-perm loan to the Borrower in the principal amount of up to
Seventeen Million Eight Hundred Thousand and No/100 Dollars ($17,800,000) (the
"Loan"). The Loan will be used to finance the construction of the Tucson Heart
Hospital, a 60-bed acute care hospital specializing in cardiology services and
cardiovascular surgery (the "Improvements") in accordance with the Plans and
Specifications therefor prepared by Henningson, Durham & Richardson, dated March
18, 1996, as approved by the Lender (the "Plans and Specifications"). As a
condition to making the Loan, the Lender has required that the Guarantor
guarantee repayment of a portion of the Loan and further that the Guarantor
guarantee in full the performance obligations of the Borrower hereinafter set
forth.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals,
and in order to induce the Lender to make the Loan, and as security for all
agreements and covenants of the Borrower to Lender pursuant to the Loan
Documents, including, but not limited to the payment of the principal, interest
and other charges pursuant to the Note, and the performance of all covenants,
agreements and other obligations from time to time owing to, or for the benefit
of, Lender pursuant to the Loan Documents (collectively, the "Loan
Obligations"), the Guarantor agrees and covenants with Lender and represents and
warrants to Lender as follows:
1. Guarantee of Loan Obligations. The Guarantor hereby
unconditionally guarantees to the Lender the following (collectively, the
"Guaranteed Obligations"):
(a) The full and prompt payment of the Loan, together with all
accrued and unpaid interest owed on the Loan; plus
(b) The full, prompt, and timely performance of all of the Borrower's
obligations under the Loan Agreement to complete construction of the
Improvements to the reasonable satisfaction of the Lender and the Lender's
Inspecting Consultant on or before the Scheduled Completion Date of November 1,
1997, which such performance obligations shall include,
<PAGE>
without limitation, (i)
equipping and fixturing of the Improvements so as to enable the Improvements to
be fully utilized for their intended purposes as an acute care hospital
specializing in cardiology services and cardiovascular surgery, and (ii)
obtaining all necessary licenses, certifications, accreditations, or other
required permits in order to operate the Improvements as aforesaid as a licensed
bed capacity of not less than 66-beds in accordance with applicable state and
federal licensure, certification, and accreditation laws, rules, and
regulations, including, without limitation, accreditation by the Joint
Commission on Accreditation of Hospital Organizations (the "Performance
Obligations"). Furthermore, the Guarantor covenants and agrees with Lender that
it will cause the Improvements to be kept free from all liens and encumbrances
in favor of any persons or entities supplying work or materials for the
construction of the Improvements by (i) paying promptly (or causing Borrower to
pay promptly) all such persons or entities, or (ii) within thirty (30) days of
the filing of any such lien (irrespective of any dispute which the Borrower or
the General Contractor may have with any such entity), discharging or making
other arrangements acceptable to Lender, or causing Borrower to discharge or
make other arrangements acceptable to Lender, with respect to such mechanics' or
materialmens' liens filed against the Improvements. Guarantor hereby further
agrees that, in the event it fails to comply with its Performance Obligations
under this subsection (d), Lender may, at its option (but Lender shall have no
obligation to do so), cause such Performance Obligations to be performed on
behalf of the Borrower or Guarantor and may use, without limitation, such
portions of the Loan proceeds which are budgeted for such uses in payment of
such Performance Obligations. Guarantor hereby ratifies and affirms such use of
the Loan proceeds in the circumstances set forth in this subsection (d) and
Guarantor agrees immediately to reimburse Lender, upon Lender's demand
therefore, for all costs and expenses incurred by the Lender in performing such
Performance Obligations, together with all losses or damages that the Lender may
suffer as a result of the Borrower's or Guarantor's failure to perform its
Performance Obligations, even if such costs, expenses, losses, and damages are
in excess of the Loan proceeds budgeted for such uses; plus
(c) the payment of all costs, reasonable attorneys' fees, and
expenses that may be incurred by the Lender as set forth in Section 12 hereof.
Lender agrees that if Guarantor performs the Performance Obligations
with respect to the construction of the Improvements, provided that there remain
any undisbursed Loan funds, Lender will make Advances (as defined in the Loan
Agreement) to the Guarantor in order to reimburse Guarantor for its costs of
performance, however such Advances will only be made in strict accordance with
the terms governing Advances as set forth in the Loan Agreement (taking into
account, however, any extensions of deadlines as may be necessitated in order
for the Guarantor to complete such construction).
This Guaranty is an unconditional guaranty, and the Guarantor agrees
that the Lender, upon the occurrence of any Event of Default pursuant to any of
the Loan Documents, shall not be required to assert any claim or cause of action
against the Borrower or other guarantors before
<PAGE>
asserting any claim or cause of action against the Guarantor under this
Guaranty. The Guarantor further agrees that the Lender shall not be required to
pursue or foreclose on any Collateral that it may receive from the Borrower, the
Guarantor, or others as security for any of the Loan Obligations before making a
claim or asserting a cause of action against the Guarantor under this Guaranty.
Notice of acceptance of this Guaranty and of any Default or Event of
Default is hereby waived by the Guarantor. Presentment, protest, demand, and
notice of protest and demand, and notice of receipt of any and all Collateral,
and of the exercise of possessory remedies or foreclosure on any and all
Collateral received by the Lender from the Borrower, the Guarantor, or others
are hereby waived. All settlements, compromises, compositions, accounts stated,
and agreed balances in good faith between any primary or secondary obligors on
any accounts received as Collateral shall be binding upon the Guarantor.
This Guaranty shall not be affected, modified, or impaired by the
voluntary or involuntary liquidation, dissolution, or sale or other disposition
of all or substantially all of the assets, marshalling of assets and
liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangements, composition with creditors or
readjustment of, or other similar proceedings affecting the Borrower or the
Guarantor, or any of the assets belonging to either of them, nor shall this
Guaranty be affected, modified or impaired by the invalidity of any of the Loan
Documents executed by the Borrower, the Guarantor, or others in connection with
the Loan.
The failure of the Lender to perfect its security interest in any of
the Collateral as set forth in any of the Loan Documents or any other collateral
now or hereafter securing all or any part of the Loan Obligations shall not
release the Guarantor from its liabilities and obligations hereunder.
Without notice to the Guarantor, without the consent of the Guarantor,
and without affecting or limiting the Guarantor's liability hereunder, the
Lender may:
(a) grant the Borrower extensions of time for payment of the
Loan Obligations or any part hereof;
(b) renew any of the Loan Obligations;
(c) grant the Borrower extensions of time for performance of
agreements or other indulgences;
(d) at any time release any or all of the Collateral, or any
mortgage, deed of trust or security interest in any Collateral, that now or
hereafter secures any of the Loan Obligations;
3
<PAGE>
(e) compromise, settle, release, or terminate any or all of
the obligations, covenants, or agreements of the Borrower under the Note or
other Loan Documents;
(f) at any time release any other guarantor from its guaranty
of any of the Loan Obligations; and
(g) with the Borrower's written consent, modify or amend any
obligation, covenant, or agreement of Borrower as set forth in the Note or any
of the other Loan Documents (and such amendments shall nevertheless be binding
upon Guarantor).
2. Representations and Warranties of the Guarantor. To induce the
Lender to make the Loan to Borrower, the Guarantor represents and warrants to
the Lender as follows:
(a) Existence, Power and Qualification. Guarantor is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its formation as set forth in the heading of this Guaranty, has
the power to own its properties and to carry on its business as is now being
conducted, and is duly qualified to do business and is in good standing in every
jurisdiction in which the character of the properties owned by it or in which
the transaction of its business makes its qualification necessary.
(b) Power to Incur Obligations. The Guarantor has full power
and unrestricted right to enter into this Guaranty and to incur the obligations
provided for herein, all of which have been authorized by all requisite
corporate action of Guarantor.
(c) Conflicts. This Guaranty does not violate, conflict with,
or constitute any default under any decree, judgment, or any other agreement or
instrument binding upon the Guarantor and does not violate or conflict with the
articles of incorporation or by-laws of Guarantor.
(d) Pending Matters. Except as otherwise set forth on Schedule
I attached hereto, no action or investigation is pending or, to the best of
Guarantor's knowledge, threatened before or by any state or federal court or
administrative agency which might result in any material adverse change in the
financial condition, operations or prospects of the Guarantor. The Guarantor is
not in violation of any agreement, the violation of which might reasonably be
expected to have a materially adverse effect on its business or assets, and the
Guarantor is not in violation of any order, judgment, or decree of any state or
federal court.
(e) Financial Statements Accurate. All financial statements
heretofore or hereafter provided by the Guarantor are and will be true and
complete in all material respects as of their respective dates and fairly
present the financial condition of the Guarantor, and there are no material
liabilities, direct or indirect, fixed or contingent, as of the respective dates
of such statements which are not reflected therein or in the notes thereto or in
a written certificate delivered with such statements. The financial statements
of the Guarantor hereafter will be
4
<PAGE>
prepared in accordance with GAAP. There has been no material adverse change in
the financial condition, operations, or prospects of the Guarantor since the
dates of such statements except as fully disclosed in writing with the delivery
of such statements.
(f) No Defaults or Restrictions. There is no declared default
under any agreement or instrument that causes or would cause a material adverse
effect on the business, properties, or financial operations or condition of the
Guarantor.
(g) Payment of Taxes. Guarantor has filed all federal, state,
and local tax returns which are required to be filed and has paid, or made
adequate provision for the payment of, all taxes which have or may become due
pursuant to said returns or to assessments received by the Guarantor.
(h) Disclosure. Neither this Guaranty nor any other document,
financial statement, credit information, certificate or statement required
herein to be furnished to Lender by Guarantor in connection with this Guaranty
contains any untrue, incorrect or misleading statement of material fact. All
representations and warranties made herein or in any certificate or other
document delivered to Lender by or on behalf of Guarantor pursuant to or in
connection with this Guaranty shall be deemed to have been relied upon by Lender
notwithstanding any investigation heretofore or hereafter made by Lender or on
its behalf, and shall survive the making of the Loan.
(i) ERISA. Guarantor is compliance with all applicable
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
3. Affirmative Covenants of the Guarantor. The Guarantor covenants and
agrees that so long as the Loan Obligations are outstanding, it shall comply
with each of the following affirmative covenants:
(a) Payment of Loan/Performance of Loan Obligations. Upon
Lender's demand thereof, duly and punctually pay or cause to be paid the
principal and interest then due pursuant to the Note and duly and punctually
perform or cause to be performed all the Performance Obligations.
(b) Payment of Taxes. Pay and discharge all taxes,
assessments, and governmental charges or levies imposed upon it, including,
without limitation, all current tax liabilities of all kinds, all required
withholdings of income taxes of employees, and all required old age and
unemployment contributions.
(c) Reporting Requirements. Provide to Lender, within one
hundred twenty (120) days after the end of each fiscal year, copies of the 10-K
Report of the Guarantor filed with the United States Securities and Exchange
Commission, and, within fifty (50) days of the end of each fiscal quarter,
copies of the 10-Q Report of the Guarantor filed with the United States
Securities and Exchange Commission.
5
<PAGE>
(d) Payment of Indebtedness. Pay duly and punctually or cause
to be paid, all principal and interest of any material indebtedness of Guarantor
to its creditors in accordance with its terms, and comply with and perform all
material conditions, terms and obligations of the notes or other instruments
evidencing such indebtedness and any mortgages, deeds of trust, security
agreements and other instruments evidencing security for such indebtedness.
(e) Notice of Loss. Notify Lender of any event causing a loss
which has a material adverse effect on Guarantor's net worth (for purposes of
this Agreement, a material adverse change in the Guarantor's net worth shall be
deemed a decrease by twenty percent (20%) or more during any fiscal quarter).
(f) Maintenance of Existence. Maintain its corporate
existence, and, in each jurisdiction in which the character of the property
owned by it or in which the transaction of its business makes qualification
necessary, maintain qualification and good standing.
(g) Shareholders' Equity. Maintain at all times during the
term of the Loan, a minimum shareholders' equity of not less than One Hundred
Million Dollars ($100,000,000).
(h) MedCath Credit Facility. At all times during the term of
the Loan, maintain for the Borrower's benefit an unsecured line of credit in the
amount of not less than $6,205,000 nor more than $10,000,000 (the "MedCath
Credit Facility"), which may be used by the Borrower as needed to fund costs
necessary to complete construction of the Improvements and following completion
of construction to fund operating deficits of the Improvements, such line of
credit being evidenced by that certain Promissory Note of even date herewith
between Borrower and Guarantor and is secured by that certain Security Agreement
of even date herewith Borrower and Guarantor. Borrower, Guarantor, and Lender
have entered into a Subordination Agreement of even date herewith with respect
to the MedCath Credit Facility, and Guarantor covenants and agreements to comply
with the terms and conditions of such Subordination Agreement.
4. Events of Default. Guarantor's failure to properly and timely
perform or observe any covenant or condition set forth in this Guaranty which is
not cured within any applicable cure period as set forth herein or, if no cure
period is specified therefor, is not cured within thirty (30) days of Lender's
notice to Guarantor of such default, or the falsity of any representation or
warranty herein or in any financial statement, certificate or other information
heretofore or hereafter provided by Guarantor to Lender, shall constitute an
"Event of Default" hereunder and under each of the Loan Documents. The foregoing
provision or any other provision requiring or providing for notice or demand
from Lender is deemed eliminated if Lender is prevented from giving such notice
or demand by bankruptcy or other applicable law, and the Event of Default shall
occur on the occurrence of such event or condition if not cured within any
applicable period measured from the occurrence of such event or condition rather
than from notice or demand.
6
<PAGE>
5. Reduction in Guaranteed Obligations. Notwithstanding any provision
hereof to the contrary, provided that no Event of Default shall have occurred at
any time prior to any scheduled reduction hereunder, Lender agrees that the
principal amount guaranteed hereunder shall be reduced to the following
principal amounts at such time as the following conditions precedent have been
satisfied:
(a) Once the Improvements have achieved and maintained the minimum Cash
Flow Coverage requirement specified in the Loan Agreement for twenty-four (24)
consecutive months as evidenced by the certificate hereinafter described,
(provided, however, that for purposes of this Guaranty, such Cash Flow Coverage
shall be tested based on the operation of the Improvements on a monthly basis
commencing with the first month in which the required Cash Flow Coverage has
been met), the principal amount guaranteed hereunder shall be reduced to Twelve
Million Eight Hundred Thousand Dollars ($12,800,000); and
(b) Thereafter, provided that the Improvements continue to achieve and
maintain the minimum Cash Flow Coverage requirement, the principal amount
guaranteed hereunder shall be reduced annually in increments of Five Million
Dollars ($5,000,000) each, provided however, that in no event will the principal
amount guaranteed hereunder ever be less than Four Million Five Hundred Thousand
Dollars ($4,500,000) and provided further that if, at the time the amount
guaranteed hereunder is reduced to $4,500,000 the Cash Flow Coverage is less
than 2.0, Guarantor must post (or cause Borrower to post) with Lender an
irrevocable letter of credit in form and content and from an issuer acceptable
to Lender in the face amount of $1,000,000, which such letter of credit shall be
held by Lender as additional collateral for the Loan Obligations until such time
as the Improvements have achieved and maintained a Cash Flow Coverage of not
less than 2.0 for two (2) consecutive fiscal years. Each reduction of the amount
guaranteed hereunder shall be conditioned upon Lender's receipt of a compliance
certificate from the chief financial officer of the Borrower or Guarantor
confirming compliance with the required Cash Flow Coverage requirement. In the
event the audited financial statements of the Borrower reveal that the Cash Flow
Coverage was not met at the time of any guaranty reduction hereunder, such
guaranty reduction shall be null and void; however, future reductions of the
Guaranteed Obligations shall not be precluded if the requirements set forth
herein are thereafter satisfied.
6. Subordination. Guarantor subordinates its right to payments of any
indebtedness owing from Borrower to Guarantor, whether now existing or arising
at any time in the future (including, but not limited to, rights to payment
arising by virtue of any subrogation or indemnification upon payment by
Guarantor of amounts due from Borrower to Lender), to the prior right of Lender
to receive or require payment in full of the Loan Obligations, until such time
as the Loan Obligations are fully paid (and including interest accruing on the
Note after any petition under the Bankruptcy Code, which post-petition interest
Guarantor agrees shall remain a claim that is prior and superior to any claim of
Guarantor notwithstanding any contrary practice, custom or ruling in proceedings
under the Bankruptcy Code generally) and such payments are final and not subject
to refund or recision under bankruptcy or other applicable law. Furthermore,
upon the occurrence of an Event of Default under the Loan Documents, Guarantor
7
<PAGE>
agrees not to accept any payment or satisfaction of any kind of indebtedness of
Borrower to the Guarantor or any security for such indebtedness. If Guarantor
should receive any such payment, satisfaction or security for any indebtedness
of Borrower to the Guarantor, the Guarantor agrees to deliver the same promptly
to Lender in the form received, endorsed, or assigned as may be appropriate for
application on account of, or as security for, the Loan Obligations and until so
delivered, agrees to hold the same in trust for Lender. Notwithstanding the
foregoing, Lender agrees that Borrower will be permitted to pay, and Guarantor
will be permitted to receive, payments of interest pursuant to the MedCath
Credit Facility described in Subsection 3(h) as long as there is no outstanding
Default or Event of Default pursuant to the Loan Agreement, but payments of
principal under the MedCath Credit Facility are further restricted as set forth
in the above-described Subordination Agreement.
7. Termination. This Guaranty shall continue to be effective, or be
reinstated, as the case may be, if at any time any whole or partial payment or
performance of any Loan Obligations is or is sought to be rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or the Guarantor upon
or as a result of the appointment of a receiver, intervenor, or conservator of,
or trustee or similar officer for, the Borrower or such guarantor of or for any
substantial part of its property, or otherwise, all as though such payments and
performance had not been made. This Guaranty shall not be affected in any way by
the transfer or other disposition of any of the Collateral described in and
granted to Lender pursuant to the Loan Documents, whether by deed, operation of
law, or otherwise.
8. Successors and Assigns. This Guaranty shall be binding upon, and
inure to the benefit of, the parties hereto and their respective successors and
assigns.
9. Severability. In the event that any provision hereof is deemed to be
invalid by reason of the operation of any law or by reason of the interpretation
placed thereon by any court, this Guaranty shall be construed as not containing
such provisions, and the invalidity of such provisions shall not affect other
provisions hereof which are otherwise lawful and valid and shall remain in full
force and effect.
10. Notices. Any notice or other communication required or permitted to
be given pursuant to this Guaranty or by applicable law shall be in writing and
shall be deemed received (a) on the date delivered, if delivered in person to
the person or department specified below, (b) three (3) business days after
depositing the same in the U.S. Mail, certified or registered, with return
receipt requested, or (c) one (1) day following the date deposited with Federal
Express or other national overnight carrier, and in each case addressed as
follows:
If to Guarantor to:
MedCath, Incorporated
7621 Little Avenue
8
<PAGE>
Suite 106
Charlotte, North Carolina 28226
Attn: Steve Puckett
with a copy to:
Hal Levinson, Esq.
Moore & Van Allen, PLLC
100 North Tryon Street
47th Floor
Charlotte, North Carolina 28202-4003
If to the Lender to:
Capstone Capital Corporation
1000 Urban Center Parkway
Suite 630
Birmingham, AL 35243
Attention: William C. Harlan
Failure to provide courtesy copies shall not render invalid any notice otherwise
properly given. Any party may change its address to another single address by
notice given as herein provided, except any change of address notice must be
actually received in order to be effective.
11. Waivers. The failure by the Lender at any time or times hereafter
to require strict performance by Guarantor of any of the provisions, warranties,
terms, and conditions contained herein or in any other agreement, document, or
instrument now or hereafter executed by Guarantor and delivered to the Lender
shall not waive, affect, or diminish any right of the Lender thereafter to
demand strict compliance or performance therewith and with respect to any other
provisions, warranties, terms, and conditions contained in such agreements,
documents, and instruments, and any waiver of any Default shall not waive or
affect any other Default, whether prior or subsequent thereto and whether of the
same or a different type. None of the warranties, conditions, provisions, and
terms contained in this Guaranty or in any agreement, document, or instrument
now or hereafter executed by Guarantor and delivered to the Lender shall be
deemed to have been waived by any act or knowledge of the Lender, its agents,
officers, or employees, but only by an instrument in writing, signed by an
officer of the Lender, and directed to the Guarantor specifying such waiver.
Guarantor waives the benefits of any possibly applicable statutory provision or
rule of court limiting the liability of a surety or requiring that Lender bring
an action against Borrower or the collateral, including without limitation,
Arizona Revised Statutes Sections 12-1641, et seq., and Arizona Rules of Civil
Procedure 17(f) and North Carolina General Statutes Section 26-7, et seq.
12. Expenses. If, at any time or times hereafter, the Lender employs
counsel to commence, defend, or intervene, file a petition, complaint, answer,
motion, or any other pleading
9
<PAGE>
or to take any other action in or with respect to any suit or proceeding
relating to this Guaranty, or to represent the Lender in any litigation with
respect to the affairs of Guarantor or to enforce any rights of the Lender or
obligations of Guarantor by virtue of this Guaranty, then in any such events,
all of the reasonable attorneys' fees actually incurred arising from such
services, including fees in any appellate or bankruptcy proceedings, and any
other expenses, costs, and charges relating to this Guaranty, shall constitute
additional obligations of the Guarantor payable on demand. As used herein, the
term "reasonable attorney's fees" shall mean attorney's fees at standard hourly
rates and fees actually incurred.
13. Singular and Plural. Singular terms shall include the plural forms,
and vice versa.
14. Entire Agreement. This Guaranty constitutes the entire agreement
and supersedes all prior agreements and understandings both oral and written,
between the parties with respect to the subject matter hereof.
15. THE VALIDITY, INTERPRETATION, ENFORCEMENT, AND EFFECT OF THIS
GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE
OF ALABAMA. THE LENDER'S PRINCIPAL PLACE OF BUSINESS IS LOCATED IN JEFFERSON
COUNTY IN THE STATE OF ALABAMA, AND GUARANTOR AGREES THAT THIS GUARANTY SHALL BE
HELD BY LENDER AT SUCH PRINCIPAL PLACE OF BUSINESS, AND THE HOLDING OF THIS
GUARANTY BY LENDER THEREAT SHALL CONSTITUTE SUFFICIENT MINIMUM CONTACTS OF
GUARANTOR WITH JEFFERSON COUNTY AND THE STATE OF ALABAMA FOR THE PURPOSE OF
CONFERRING JURISDICTION UPON THE FEDERAL AND STATE COURTS PRESIDING IN SUCH
COUNTY AND STATE. THE GUARANTOR CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING
ARISING HEREUNDER MAY BE BROUGHT IN THE CIRCUIT COURT OF THE STATE OF ALABAMA,
IN JEFFERSON COUNTY, ALABAMA, OR IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ALABAMA AND ASSENTS AND SUBMITS TO THE PERSONAL
JURISDICTION OF ANY SUCH COURTS IN ANY SUCH ACTION OR PROCEEDING. NOTHING HEREIN
SHALL LIMIT THE JURISDICTION OF ANY OTHER COURT.
16. GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY ON ANY CLAIM,
COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN
ANY WAY RELATED TO THIS GUARANTY OR THE LOAN, OR (B) IN ANY WAY CONNECTED WITH
OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LENDER AND/OR
BORROWER AND GUARANTOR WITH RESPECT TO THE LOAN DOCUMENTS OR IN CONNECTION WITH
THIS GUARANTY OR THE EXERCISE OF ANY PARTY'S RIGHTS AND REMEDIES UNDER THIS
GUARANTY OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO,
IN ALL OF THE
10
<PAGE>
FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING
IN CONTRACT, TORT OR OTHERWISE. GUARANTOR AGREES THAT LENDER MAY FILE A COPY OF
THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND
BARGAINED AGREEMENT OF GUARANTOR IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY JURY
AS AN INDUCEMENT OF LENDER TO MAKE THE LOAN, AND THAT, TO THE EXTENT PERMITTED
BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT
MODIFIED HEREIN) BETWEEN GUARANTOR AND LENDER SHALL INSTEAD BE TRIED IN A COURT
OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
executed by its duly authorized officer as of the day and year first above
written.
WITNESS: MEDCATH, INCORPORATED
a North Carolina corporation
BY: David Crane
Its: Vice President
STATE OF North Carolina)
COUNTY OF Mecklenburg)
I, the undersigned, a Notary Public, in and for said County in said
State, hereby certify that David Crane whose name as Vice President of
MedCath Incorporated, a North Carolina corporation, is signed to the foregoing
Agreement and who is known to me, acknowledged before me on this day that,
being informed of the contents of the Agreement, he, as such officer and with
full authority, executed the same voluntarily for and as the act of said
corporation.
Given under my hand this the 18 day of July, 1996.
_______________________________________
Notary Public
My Commission Expires:________________
11
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEART HOSPITAL IV, L.P.
AS AMENDED
BY THE FIRST, SECOND AND THIRD
AMENDMENTS THERETO
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
HEART HOSPITAL IV, L.P.
A Texas Limited Partnership
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE TEXAS SECURITIES ACT IN
RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") of Heart
Hospital IV, L.P. (the "Partnership"), a Texas limited partnership is made and
entered into as of the 22nd day of February, 1996, by and among the Partnership
and HOSPITAL MANAGEMENT IV, INC., a North Carolina corporation ("HM"), as a
general partner and EACH OF THE OTHER PARTIES IDENTIFIED ON SCHEDULE A AS
LIMITED PARTNERS (THE "INVESTOR PARTNERS).
RECITALS
1. The Partnership has been formed to develop, own and operate an acute
care hospital which hospital shall be located in or near Austin, Texas and shall
specialize in all aspects of cardiology and cardiovascular care and surgery
which the HM and the Investor Representatives may agree upon;
2. It is intended that the hospital will be a low-cost, quality
provider of medical services within the Austin, Texas area in a manner which is
consistent with the national health care policy of lowering the costs of health
care;
3. The capital contributions and participation of the Investor Partners
as provided herein are necessary to enable the Partnership to achieve its
objectives.
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).
<PAGE>
1.1 "Adjusted Capital Account" means, with respect to any Partner or
Assignee, such Person's Capital Account as of the end of the relevant fiscal
year of the Partnership with the following adjustments:
(i) credit to such Capital Account any amounts
which such Person is obligated to restore or
is deemed obligated to restore pursuant to
the penultimate sentences of Regulation
Sections 1.704-2(g)(1) (share of minimum
gain) and 1.704-2(i)(5) (share of partner
nonrecourse debt minimum gain); and
(ii) debit to such Capital Account the items
described in Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
1.2 "Affiliate" with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) any Entity or
holder of ten percent (10%) or more of the outstanding voting securities or of
an equity interest of any Entity, controlling, controlled by, or under common
control with such Person.
1.3 "Agreement" shall mean this Agreement of Limited Partnership, as
amended from time to time.
1.4 "Assignee" shall mean a Person who has acquired a Partner's
Partnership Interest but who has not become a Partner and thereby is only
entitled to the rights granted hereunder to a Person holding an Economic
Interest.
1.5 "Capital Account" shall mean the amount of any Capital
Contributions of each of the Partners, as the same may be (i) increased from
time to time by such Partner's share of Income, (ii) decreased from time to time
by distributions to such Partner and by such Partner's distributive share of
Losses, (iii) increased and/or decreased by those other items required by the
Code and the Regulations thereunder (items described in (i) and (ii) are subject
to change from time to time to comply with the Code and the Regulations), and
(iv) upon or in connection with (1) the liquidation of the Partnership, (2) a
Capital Contribution (other than a de minimis amount) to the Partnership by a
new or existing Partner as consideration for a Partnership Interest in the
Partnership, or (3) a distribution of money or other property (other than a de
minimis amount) by the Partnership to a retiring or continuing Partner as
consideration for a Partnership Interest in the Partnership, the Capital
Accounts of all Partners shall be increased or decreased to reflect a
revaluation of all assets of the Partnership on its books and records in
accordance with the requirements of Treasury Regulation ss. 1.704-1(b)(2)(iv)(f)
or any successor regulatory or statutory provision, as of the date the event
occurs causing the Capital Accounts to be revalued. For purposes of computing
the amount of any item of income, gain, deduction, or loss to be reflected in
the Partners' Capital Accounts, the determination, recognition, and
classification of any such items shall be the same as its determination,
recognition, and classification for Federal income tax purposes (including any
method of depreciation, cost recovery, or amortization used for this purpose);
provided that if in any taxable year the Partnership has in effect an election
under Section 754 of the Code, capital accounts shall be
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adjusted in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(m).
Loans by a Partner to the Partnership shall not be considered Capital
Contributions. If any Partner or Assignee shall advance funds to the Partnership
in excess of the amounts required hereunder to be contributed by it to the
capital of the Partnership, the making of such advances shall not result in any
increase in the amount of the Capital Account of such Partner or Assignee, shall
be treated solely as loans, and shall be payable or collectible only out of the
Partnership assets in accordance with the terms and conditions upon which such
advances are made.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulation Section 1.704-1(b)(2)(iv), and shall be interpreted and applied in a
manner consistent with such Regulation. In the event HM and the Investor
Representatives shall determine that it is prudent to modify the manner in which
the Capital Accounts, or any debits or credits thereto, are computed to comply
with such Regulation, HM and the Investor Representatives may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Articles VI or VII hereof upon
the dissolution of the Partnership. In the event HM and the Investor
Representatives shall determine such adjustments are necessary or appropriate to
comply with Regulation Section 1.704-1(b)(2)(iv), HM and the Investor
Representative shall adjust the amounts debited or credited to Capital Accounts
with respect to (i) any property contributed by the Partners or distributed to
the Partners and (ii) any liabilities secured by such contributed or distributed
property or assumed by the Partners. HM and the Investor Representatives shall
also make any other appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Regulation Section
1.704-1(b). In the event any interest in the Partnership is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the transferred
interest.
1.6 "Capital Contribution" shall mean the gross amount of cash
investment in the Partnership by each and all of the Partners.
1.7 "Cash Distributions" shall mean net cash distributed to Partners
resulting from Cash Flow from Operations or Cash from Sales or Refinancing, but
shall not include cash distributed to HM as its Management Fee for services or
any amount in repayment of loans made by the Partners to the Partnership.
1.8 "Cash Flow from Operations" shall mean net cash funds provided from
operations of the Partnership or investment of any Partnership funds, without
deduction for depreciation, but after deducting cash funds used to pay or
establish a reserve for expenses, debt payments, capital improvements and
replacements thereof and for such other items as HM and the Investor
Representatives reasonably determine to be necessary or appropriate, provided
that a minimum operating reserve to cover a period of three (3) months is hereby
deemed reasonable.
1.9 "Cash from Sales or Refinancing" shall mean the net cash proceeds
received by the Partnership from or as a result of any Sale or Refinancing of
property after deducting (i) all expenses incurred in connection therewith, (ii)
any amounts applied by HM and the Investor Representatives toward the payment of
any indebtedness and other obligations of the Partnership, including payments of
principal and interest on mortgages, (iii) the payment of any other
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expenses or amounts owed by the Partnership to other parties, and (iv) the
establishment of any reserves deemed necessary by HM and the Investor
Representatives. If the proceeds of any Sale or Refinancing are paid in more
than one installment, each such installment shall be treated as a separate Sale
or Refinancing for the purposes of this definition.
1.10 "Certificate of Limited Partnership" shall refer to the
Certificate of Limited Partnership of the Partnership, as filed with the
Secretary of State of Texas, as the same may be amended from time to time.
1.11 "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time. "Regulations" shall mean rules, orders, and regulations
issued pursuant to or under the authority of the Code. Any reference herein to a
specific section(s) of the Code or Regulations shall be deemed to include a
reference to any corresponding provision of future law.
1.12 "Economic Interest" shall refer to that portion of the Partnership
Interest of a Partner in the economic rights and benefits of the Partnership,
including but not limited to all Income, Loss and Cash Distributions. Such an
Economic Interest will be measured by an amount equal to the percentage of a
Partner's Partnership Interest in the Partnership as the same may be adjusted
from time to time.
1.13 "Entity" shall mean any general partnership, limited partnership,
limited liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
1.14 "General Partner" or "HM" shall refer to Hospital Management IV,
Inc. which shall serve as the initial general partner of the Partnership or any
Substitute General Partner.
1.15 "Hospital" shall have the meaning provided in Section 2.3 hereof.
1.16 "Income" or "Loss" shall mean, with respect to any fiscal year or
other period, the taxable income or taxable loss in such year or other period
determined by the Partnership in accordance with Code Section 703(a) and
Regulations thereunder, including without limitation, each item of income,
credit, gain, loss, or deduction required to be separately stated pursuant to
Code Section 703(a)(1), determined by the method of accounting then being
utilized by the Partnership (provided it is permitted by the Code), applied on a
consistent basis throughout the period for which taxable income or taxable loss
is determined, adjusted to take into account (i) any income received or accrued
that is exempt from federal income tax; (ii) expenditures and losses referred to
in Code Section 705(a)(2)(B) (or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Regulation Section 1.704-1(b)(2)(iv)(i)), 267(a)(1),
707(b), and 709 which are not deductible, depreciable or amortizable in
computing Income or Loss; (iii) amounts of net income or net loss that would be
recognized if property distributed in kind to a Partner was sold to an unrelated
person at fair market value on the date of distribution, and (iv) expenditures
which reduce capital accounts under Regulation Section 1.704-1(b)(2)(iv)
including, but not limited to, nonamortizable syndication expenses. To the
extent the Partnership recognizes a tax deduction attributable to an amount
included in Income or Loss under the preceding sentence, such amount shall not
again be included in taxable income or taxable loss
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but shall be allocated among the Partners in accordance with the allocation of
the amount under the preceding sentence.
1.17 "Investor Partners" shall mean the Limited Partners other than VHI
listed on Schedule A attached hereto.
1.18 "Investor Representatives" shall refer to the individuals elected
by Investor Partners who shall serve as representatives of the Investor
Partners. The first five (5) Investor Partners who acquire at least a four
percent (4%) Partnership Interest shall be entitled to designate one (1)
Investor Representative; provided that there be no more than five (5) Investor
Representatives unless the then existing Investor Representatives elect to
expand the number of Investor Representatives to a total of up to nine (9). It
is agreed that as long as an original Investor Partner owns at least an eight
percent (8%) Partnership Interest as a result of its merger, or the merger of an
Affiliate, with another Investor Partner, then the original Investor Partner
shall be entitled to designate two (2) Investor Representatives who shall each
have the rights and obligations set forth in the Partnership Agreement.
1.19 "Limited Partners" shall refer to VHI and other individuals or
entities hereafter admitted to the Partnership as Limited Partners.
1.20 "Majority Vote of Investor Partners" shall refer to the
affirmative vote, approval or consent of the then existing Investor Partners
holding sixty-seven percent (67%) of the Partnership Interests held by such
Investor Partners in the aggregate.
1.21 "Majority Vote of Partners" shall refer to the affirmative vote,
approval or consent of Partners holding seventy-six percent (76%) of the
Partnership Interests in the aggregate.
1.22 "Management Fee" shall mean the amounts payable to HM pursuant to
Section 5.6(b)(ii) for services rendered in managing the operations of the
Partnership.
1.23 "MedCath" shall refer to MedCath Incorporated, a North Carolina
corporation, which is the sole shareholder of HM and VHI.
1.24 "Minimum Gain" shall mean the excess, if any, of debt of the
Partnership as to which no Partner is personally liable over the Partnership's
basis in the assets (for Capital Account purposes) that secure such debt, and as
such term is further defined in Regulation Section 1.704-2(d).
1.25 "Organization Expenses" shall mean those expenses incurred, either
by the Partnership or for which the Partnership has agreed to make
reimbursement, in connection with the formation of the Partnership which shall
be subject to the reasonable approval of the Investor Representatives and which
shall include such expenses as: (i) registration fees, filing fees, and taxes;
and (ii) legal and accounting fees incurred in connection with any of the
foregoing.
1.26 "Partner" shall refer to the General Partner and each of the
Limited Partners identified in the then applicable Schedule A attached hereto
and incorporated herein by this
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reference. If a Person is already a Partner immediately prior to the purchase or
other acquisition by such Person of an Economic Interest or Partnership
Interest, such Person shall have all the rights of a Partner with respect to
such purchased or otherwise acquired Partnership Interest or Economic Interest,
as the case may be.
1.27 "Partnership" shall refer to Heart Hospital IV, L.P., which shall
be created upon the filing of the Certificate of Limited Partnership with the
Office of the Secretary of State of Texas, to be operated under the name Heart
Hospital IV, L.P., a Texas limited Partnership, and to continue under this
Agreement, as amended from time to time.
1.28 "Partnership Interest" shall mean all of a Partner's rights in the
Partnership, including without limitation the Partner's share of the profits,
losses and benefits of the Partnership, the right to receive distributions of
the Partnership assets, any right to vote, any right to participate in the
management of the business and affairs of the Partnership, including the right
to vote on, consent to, or otherwise participate in any decision or action of or
by the Partners granted pursuant to this Operating Agreement or the Texas Act.
The percentage Partnership Interest of each Partner, their Capital Contributions
and other related information shall be listed on Schedule A. Partnership
Interests shall be based upon the pro rata Capital Contribution of each Partner.
1.29 "Person" shall mean any individual or Entity, and the heirs,
executors, administrators, legal representatives, successors, and assigns of
such individual or Entity where the context so permits.
1.30 "Prime Rate" means the rate of interest as of the relevant day or
time period as announced by the First Union National Bank, N.A. or its successor
in interest from time to time as its prime or reference rate.
1.31 "Refinancing" means any borrowing incurred or made to recapitalize
the Partnership or the equity investment in, or to refinance any loan used to
finance the acquisition of property.
1.32 "Sale" means the sale, exchange, involuntary conversion (other
than a casualty followed by reconstruction), condemnation, or other disposition
of property by the Partnership, except for dispositions of inventory items and
personal property in the ordinary course of business and in connection with the
replacement of such property.
1.33 "Substitute General Partner" shall mean a General Partner who
succeeds either HM or another General Partner with all of the specific rights
and powers of such General Partner under this Agreement.
1.34 "Substitute Investor Representative" shall mean an Investor
Representative who succeeds an Investor Representative with all of the specific
rights and powers of such Investor Representative under this Agreement.
1.35 "Substitute Partner" shall mean an Assignee of a Partner who has
been admitted to the Partnership and granted all the rights of a Partner in
place of his or her assignor pursuant
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to the provisions of this Agreement. A Substitute Partner, upon his or her
admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Partner from whom he or she acquired his or her interest in
the Partnership, to the extent of the Partnership Interest assigned.
1.36 "Texas Act" means the Texas Revised Limited Partnership Act.
1.37 "VHI" shall refer to Venture Holdings, Inc., an Arizona
corporation, which is a Limited Partner in the Partnership.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED PARTNERSHIP
2.1 Partnership Formation and Agreement. The Partnership will be
formed upon the execution of this Agreement and the execution and filing by HM
on behalf of the Partnership of the Certificate of Limited Partnership with the
Secretary of State of Texas in accordance with the provisions of the Texas Act.
HM shall execute or cause to be executed all other such certificates or
documents, and shall do or cause to be done all such filing, recording, or other
acts, as may be necessary or appropriate from time to time to comply with the
requirements of law for the continuation and/or operation of a limited
partnership in the State of Texas and other documents to reflect the admission
of additional Partners to the Partnership. Any costs incurred by HM in
connection with the foregoing shall be reimbursed promptly upon the completion
of such action.
2.2 Name of Partnership. The name of the Partnership is Heart Hospital
IV, L.P., a Texas limited partnership.
2.3 Purposes and Investment Objectives. The principal purposes of
the Partnership are as follows:
(a) To develop, own and operate an acute care hospital
specializing in all aspects of cardiology and cardiovascular care and
surgery in Austin, Texas (the "Hospital") which would include, but not
be limited to, the following:
(i) Services and facilities to meet all
requirements of the State of Texas, Medicare, JCAHO and other
credentialing or licensing bodies or agencies in order to have
the Hospital licensed as a general acute care hospital and to
perform cardiology and cardiovascular surgical services of
every type or nature and to be eligible to obtain appropriate
reimbursements therefor;
(ii) Sixty to ninety thousand square
feet in a building to be constructed in accordance with plans
and specifications approved by the Partnership;
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(iii) Forty to eighty medical/surgical
beds;
(iv) Two to three heart catheterization
laboratories;
(v) Two to three heart surgical suites;
(vi) All appropriate support services and
systems;
(vii) Appropriate equipment and services with
respect to the facilities described above and as otherwise
reasonably necessary or appropriate for the diagnosis and
treatment of cardiovascular disease, including but not limited
to invasive and non-invasive cardiac testing, interventional
treatment including percutaneous transluminal coronary
angioplasty and atherectomy, and cardiac surgery which would
include, but not be limited to, bypass grafts and valve
surgery;
The above size, number and scope of facilities of the Hospital
are only preliminary estimates. HM and the Investor Representatives are
authorized to finally make all determinations with respect thereto.
(b) To lease or acquire the real property, and if
appropriate to construct a suitable building, in which the Hospital
shall be located;
(c) Any other purpose reasonably related to (a) and (b)
above.
2.4 Registered Office and Principal Place of Business; Registered
Agent. The principal place of business of the Partnership shall be maintained at
the Texas offices of HM or such other place in the State of Texas as HM shall
designate. The Registered Agent of the Partnership shall be CT Corporation
System and the Registered Office of the Partnership is c/o CT Corporation
System, 350 N. St. Paul Street, Dallas, Texas 75201. HM shall promptly notify
the Partners of any changes in the principal place of business, the registered
office, or the registered agent of the Partnership.
2.5 Commencement and Term. The Partnership shall commence on the
filing of the Certificate of Limited Partnership in the Office of the Secretary
of State of Texas, as required by Section 2.1 hereof, and shall continue until
December 31, 2035, unless sooner terminated or dissolved as provided herein;
provided, however, that the termination date may be extended for up to an
additional forty (40) years in five (5) year increments upon the election of HM.
In the event HM does not elect to extend the term hereof, the Investor
Representatives may instead elect to extend the term hereof, subject to HM's
consent which shall not be unreasonably withheld or delayed.
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ARTICLE III
PARTNERS AND CAPITAL CONTRIBUTIONS
3.1 Contributions of Partners. The Partners shall contribute capital
as follows:
(a) HM shall contribute to the Partnership for its
Partnership Interest at least Thirty Thousand Dollars ($30,000.00).
(b) VHI shall contribute for its Partnership Interest at least
One Million Five Hundred Thousand Dollars ($1,500,000.00).
(c) The Investor Partners shall contribute to the Partnership
for their Partnership Interests an amount, in the aggregate, of up to
One Million Four Hundred Seventy Thousand Dollars ($1,470,000.00).
The Partnership Interests of the Investor Partners shall be owned as
shown on Schedule A attached hereto. The Partners may be liable to the
Partnership for amounts distributed to them as a return of capital as
provided by the Texas Act. The Partners shall not be required to
contribute any additional Capital Contributions to the Partnership
except as provided in Section 3.5.
3.2 Liability of Partners - For Capital. The liability of each
Limited Partner, as such, shall be limited to the amount of his agreed Capital
Contribution as a Limited Partner as provided in Section 3.1. The liability of
the General Partner, as such, shall be limited to the amount of its agreed
Capital Contributions as a General Partner as provided in Section 3.1.
3.3 Partners' Accounts and Withdrawals. An individual Capital Account
shall be maintained for each Partner in accordance with requirements of the Code
and the Regulations promulgated thereunder. No Partner shall be entitled to
withdraw or to make demand for withdrawal of any part of his or her Capital
Account or to receive any distribution except as provided herein.
3.4 Interest on Capital Contributions. No interest shall be paid on
Capital Contributions.
3.5 Additional Funding. If from time to time, HM and the Investor
Representatives determine that funds in addition to that contemplated by
Sections 3.1 and 3.2 are necessary or appropriate for the development or
operation of the Hospital, then:
(a) First, HM shall use commercially reasonable efforts to
borrow such funds from a bank or other lender on terms and conditions
reasonably acceptable to HM, or HM may, but shall not be required, to
loan such funds to the Partnership at the Prime Rate plus one percent
(1%) per annum which loan shall be secured by the Partnership's assets.
Interest shall be paid monthly in arrears and principal shall be repaid
as the Partnership has funds available therefor. All loans obtained
hereunder shall be subject
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to the approval of HM and the Investor Representatives which approval
shall not be unreasonably withheld or delayed;
(b) Second, if loans as provided in (a) above are not
available, HM and the Investor Representatives may decide to request
that the Partners contribute additional capital to the Partnership pro
rata according to their respective Partnership Interests. If additional
Capital Contributions are so requested, each Partner may elect whether
or not to contribute its pro rata portion thereof. The other Investor
Partners may elect to contribute capital not contributed by any
Investor Partner hereunder. HM or VHI may then elect to contribute
amounts which the Investor Partners, in the aggregate, have not so
contributed. Thereafter, HM and the Investor Representatives shall
reasonably adjust the Partnership Interest of each Partner (taking into
consideration the Capital Contributions made by the Partners in
accordance with this Section 3.5) in the event any Partner elects not
to contribute capital pursuant to a capital call approved in accordance
with this Section 3.5;
(c) If funds are not available in accordance with (a) or (b)
above, then HM and the Investor Representatives may elect to dissolve
the Partnership.
3.6 Funds to be Held in Escrow. The Capital Contributions made by the
Investor Partners on or about the date hereof (the "Escrowed Funds") shall be
immediately deposited into and retained in a separate bank account of the
Partnership. All funds previously deposited in such account by certain of the
Investor Partners in anticipation of the formation of the joint venture that is
now the Partnership shall be treated as Escrowed Funds hereunder. If (a) on or
before March 31, 1996 the Investor Partners who have as of such date become
Partners have not elected, by a Majority Vote of Investor Partners, to withdraw
from the Partnership, and (b) the Partnership has accepted subscriptions from
Investor Partners whose Capital Contributions total at least One Million Two
Hundred Thousand Dollars ($1,200,000.00) (the "Minimum Amount") by April 30,
1996 (the "Termination Date"), then the Escrowed Funds may be placed by HM into
an operating account for the benefit of the Partnership. If the Investor
Partners have so elected to withdraw by March 31, 1996 or if the Minimum Amount
has not been received by the Termination Date, unless such dates are extended by
HM and the then existing Investor Representatives, then the Escrowed Funds shall
be returned pro rata to HM, VHI and the Investor Partners and the Partnership
shall be dissolved and this Agreement terminated.
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ARTICLE IV
NAMES AND ADDRESSES OF INITIAL PARTNERS
4.1 The names and addresses of the Partners are as follows:
Name Address
o Hospital Management IV, Inc. 7621 Little Avenue, Suite 106
Charlotte, NC 28226
o See the Partners listed on Schedule A attached hereto.
ARTICLE V
MANAGEMENT OF THE PARTNERSHIP
5.1 General Authority and Powers of HM and the Investor
Representatives. Subject to the terms of this Agreement, including without
limitation Section 5.16 hereof, HM and the Investor Representatives shall be
responsible for developing management and administrative policies for the
overall operation of the Hospital. HM and the Investor Representatives shall
have the following duties and obligations:
(a) Hospital Development. HM and the Investor Representatives
shall approve the development plan for the Hospital, the selection
of the site for the Hospital, the design of the Hospital and the
construction contracts for the development of the Hospital.
(b) Capital Improvements and Expansion. Any renovation and
expansion plans and capital equipment expenditures with respect to the
Hospital shall be reviewed and approved by HM and the Investor
Representatives and shall be based upon economic feasibility, patient
care criteria and then current market conditions.
(c) Annual Budgets. All annual capital and operating
budgets, including financing plans, prepared by HM shall be subject
to the review and approval of HM and the Investor Representatives.
(d) Marketing. All advertising and other marketing
of the services performed at the Hospital shall be subject to the
prior review and approval of HM and the Investor Representatives.
(e) Patient Fees. As a part of the annual operating budget,
HM and the Investor Representatives shall review and adopt the charge
schedule for all services rendered by the Hospital.
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(f) Ancillary Services. HM and the Investor Representatives
shall approve Hospital-provided ancillary services based upon the
pricing, access to and quality of such services.
(g) Provider and Payor Relationships. Decisions regarding
the establishment or maintenance of relationships with other health
care providers and payors shall be made by HM and the Investor
Representatives.
(h) Strategic Planning. HM and the Investor
Representatives shall develop long-term strategic planning
objectives and adopt a strategic plan for the Hospital.
(i) Capital Expenditures. HM and the Investor Representatives
shall determine the priority of major capital expenditures.
(j) Senior Administrator. The selection, retention and
removal of the senior administrator for the Hospital (the "Senior
Administrator") shall be subject to the approval of HM and
the Investor Representatives.
(k) Other Material Decisions. HM and the Investor
Representatives shall approve all Material Agreements and Material
Decisions. "Material Agreement" and "Material Decision" shall mean (i)
any agreement or decision defined elsewhere in this Agreement as a
Material Agreement or Material Decision and (ii) any binding agreement
which may not be canceled upon less than thirty (30) days notice and
which calls for the expenditure of funds, or involves an obligation for
financing, in excess of $50,000.00 exclusive of agreements or
obligations contemplated by any budget, development plan, financing or
construction contract approved by HM and the Investor Representatives
or agreements incurred in the ordinary course of business such as
employment agreements, purchases of supplies and routine services and
the like.
(l) Exclusive Contracts. HM and the Investor
Representatives shall approve the execution of exclusive contracts to
provide physician services to the Hospital.
(m) Global Contracting. HM and the Investor Representatives
shall develop and approve a unified managed care strategy under which
the Hospital and physicians practicing at the Hospital would enter into
managed care agreements, including agreements containing package
pricing for the Hospital and such physicians' services.
The day-to-day management of the business and affairs of the
Partnership shall be the responsibility of HM, which management shall be subject
to decisions, guidelines and policies made or established by HM and the Investor
Representatives hereunder, provided, however, decisions relating to medical and
clinical practice at the Hospital shall be made exclusively by the qualified
medical personnel of the Hospital. Subject in all cases to the foregoing, HM
shall have the right and the power, if, as, and when it, from time to time,
deems necessary or appropriate on behalf of the Partnership, subject only to the
terms and conditions of this Agreement:
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(a) To negotiate and execute on behalf of the Partnership all
documents, instruments and agreements reasonably necessary or
appropriate to lease, acquire and/or construct the Hospital and/or the
real property on which the Hospital is or will be located, and to
borrow funds to finance such lease, acquisition and/or construction (it
being acknowledged that the Hospital may be an existing building or may
be a newly constructed building);
(b) To prepare a budget for the development of the
Hospital and thereafter, annual operating budgets;
(c) To acquire all appropriate equipment and supplies required
from time to time in connection with the development and operation of
the Hospital (the "Equipment") and loans or other financing therefor;
(d) The negotiation and execution of all such other
agreements regarding the purchase of goods or services for the
Hospital;
(e) Subject to the terms of the hospital and medical staff
bylaws to be adopted for the Hospital, propose procedures for quality
assurance, peer review and granting privileges to physicians with other
specialties at the Hospital;
(f) To expend all or portions of the Partnership's capital and
income in furtherance of or relating to the Partnership's business and
purposes, including, but not limited to, payment of all ongoing
operational expenses, payment of commissions, organization expenses,
professional fees, rental fees, and management fees, and to invest in
short-term debt obligations (including, but not limited to, obligations
of Federal and state governments and their agencies, commercial paper,
and certificates of deposit of commercial banks, or savings banks or
savings and loan associations) such of the Partnership's funds as are
temporarily not required for the development or operation of the
Partnership and the payment of Partnership obligations; provided that
HM and the Investor Representatives shall establish cash management
guidelines to be followed by HM;
(g) To employ or retain on such terms and for such
compensation as HM may reasonably determine, such persons, firms, or
corporations as HM may deem advisable, including without limitation
qualified medical and other employees necessary or appropriate to
operate the Hospital, attorneys, accountants, financial and technical
consultants, supervisory managing agents, insurance brokers, brokers
and loan brokers, appraisers, architects and engineers, who may also
provide such services to HM, provided that the selection of the Senior
Administrator shall be a Material Decision;
(h) To execute leases, deeds, contracts, rental
agreements, construction contracts, sales agreements, and management
contracts;
(i) To exercise all rights, powers, and privileges of the
Partnership as lessee with respect to the Hospital or rights held by
the Partnership;
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(j) To consent to the modification, renewal, or extension
of any obligations to the Partnership of any person or of any
agreement to which the Partnership is a party or of which it is a
beneficiary;
(k) To execute in furtherance of any or all of the purposes of
the Partnership, any deed, lease, deed of trust, security interest,
mortgage, promissory note, bill of sale, assignment, contract, or other
instrument purporting to purchase or convey or encumber in whole or in
part the Equipment or the Hospital or other real or personal property
of the Partnership;
(l) To prepay in whole or in part, refinance, recast,
increase, modify, or extend any security interest, deed of trust, or
mortgage affecting the Hospital and in connection therewith to execute
any extensions or renewals thereof on the Hospital and to grant
security interests in any of the Equipment or the Hospital;
(m) To adjust, compromise, settle, or refer to arbitration any
claim against or in favor of the Partnership, and to institute,
prosecute, and defend any actions or proceedings relating to the
Partnership, its business, and properties;
(n) To acquire and enter into any contract of insurance which
HM deems necessary or appropriate for the protection of the Partnership
and HM, for the conservation of the Partnership or its assets, or for
any purpose beneficial to the Partnership; however, neither HM nor its
Affiliates shall be compensated for providing insurance brokerage
services relating to obtaining such insurance;
(o) To prepare or cause to be prepared reports, statements,
and other relevant information for distribution to the Partners
including annual reports;
(p) To open accounts and deposit and maintain funds in the
name of the Partnership in banks or savings and loan associations;
provided, however, that the Partnership's funds shall not be commingled
with the funds of any other Person;
(q) To cause the Partnership to make or revoke any of the
elections referred to in Section 754 of the Internal Revenue Code of
1986 as amended or any similar provisions enacted in lieu thereof;
(r) To make all decisions related to generally
accepted principles of accounting to be applied on a consistent basis
and Federal income tax elections;
(s) Generally, to possess and exercise any and all of
the rights, powers and privileges of a General Partner under the Texas
Act;
(t) To execute, acknowledge, and deliver any and all documents
or instruments in connection with any or all of the foregoing;
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(u) To manage, direct, and guide the operation of the
Hospital, other than medical or clinical matters which shall be under
the direction of qualified medical personnel, including all necessary
acts relating thereto;
(v) To establish minimum insurance requirements for
all physicians practicing at the Hospital;
(w) To admit as Limited Partners after the Termination Date
(as extended) additional investors who have been approved by a Majority
Vote of Investor Partners;
(x) Subject to Section 5.2(j), to sell assets of the
Partnership;
(y) Subject to applicable law and to the terms of the hospital
and medical staff bylaws to be hereafter adopted, in order to assure
the availability to the Hospital of qualified physicians and to
maintain the quality of medical services to be provided by the
Hospital, the execution of exclusive professional services agreements
with professional associations or professional limited liability
companies, who directly or through their owners or Affiliates, became
Partners prior to the Termination Date and thereafter with physicians
approved by HM and the Investor Representatives under which such
physicians shall serve as the exclusive providers of cardiology
services to the Hospital. All physicians in such professional
associations or professional limited liability companies who provide
such services to the Hospital must obtain medical staff membership and
privileges in accordance with the bylaws and the reasonable rules and
regulations adopted by the Hospital. Subject to applicable law and to
the terms of the hospital and medical staff bylaws to be hereafter
adopted, in order to assure the availability to the Hospital of
qualified physicians and to maintain the quality of medical services to
be provided by the Hospital, the execution of an exclusive professional
services agreement with the first professional association or
professional limited liability company which specializes in
cardiovascular surgery which, directly or indirectly, through its
owners or Affiliates, became a Partner herein prior to the Termination
Date under which such physicians shall serve as the exclusive providers
of cardiovascular surgery services to the Hospital for the two year
period commencing as of the effective date of the Hospital's Medicare
certification. All such physicians in such professional association or
professional limited liability company who provide service to the
Hospital must obtain medical staff membership and privileges in
accordance with the bylaws and the reasonable rules and regulations
adopted by the Hospital; and
(z) Upon written request of the Investor Representatives,
establish a medical practice committee to make medical and clinical
decisions with respect to patient care matters whose voting members
shall be physicians selected by Partners provided that such committee
shall no longer exist once the medical staff is chosen and the medical
staff bylaws are adopted.
5.2 Restrictions on Authority of HM and the Investor Representatives.
Neither HM nor the Investor Representatives shall do any of the following:
(a) Act in contravention of this Agreement;
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(b) Act in any manner which would make it impossible
to carry on the express business purposes of the Partnership;
(c) Commingle the Partnership funds with those of any
other Person;
(d) Admit an additional General Partner, Investor
Representative, Substitute General Partner, or Substitute Investor
Representative, except as provided in this Agreement;
(e) Admit an additional Limited Partner, except as
provided in this Agreement;
(f) Alter the primary purposes of the Partnership as set
forth in Section 2.3;
(g) Possess any property or assign the rights of the
Partnership in specific property for other than a Partnership purpose;
(h) Employ, or permit the employ of, the funds or assets
of the Partnership in any manner except for the exclusive benefit of
the Partnership;
(i) Make any payments of any type, directly or indirectly, to
anyone for the referral of patients to the Hospital in order to use the
Hospital or to provide other services payable by Medicare or Medicaid;
(j) Sell all or substantially all of the assets
of the Partnership or merge the Partnership with or into any other
Entity without the approval of a Majority Vote of the Partners;
(k) Cause the Hospital, once it has opened for business, to
cease its operations, without the consent of HM and a Majority Vote of
Investor Partners unless after the Hospital has been operating for at
least three (3) years, the net revenues of the Hospital have been less
than expenses, including payments of principal and interest due with
respect to any indebtedness, of the Hospital, during the previous
twelve (12) month period, in which event either HM or any Investor
Representative who has guaranteed outstanding financing (debt or
leases) of Two Million Dollars ($2,000,000.00) or more may upon one
hundred twenty (120) days prior written notice to the other General
Partners and Investor Representatives, require the Hospital to cease
its operations and cause the Partnership to be dissolved unless within
such one hundred twenty (120) day period HM and the Investor
Representatives are able to refinance such financing without the
requirement for any guarantee by HM, an Investor Representative or any
Partner hereof, provided however, in the event that substantially all
of the assets of MedCath or of HM, or more than fifty percent (50%) of
its capital stock or the capital stock of HM, has been sold to an
unrelated third party, then upon the consummation of such transaction,
the reference above to "twelve (12) months" shall be deemed to be
deleted herefrom and "twenty-four (24) months" shall be substituted in
lieu thereof.
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5.3 Duties of HM and the Investor Representatives. HM and each Investor
Representative shall do the following:
(a) Diligently and faithfully devote such of its time to the
business of the Partnership as may be necessary to properly conduct the
affairs of the Partnership and, in the case of HM, perform the duties
for which it will receive a Management Fee as provided in Section
5.6(b), or otherwise; however, HM and each Investor Representative
shall not be required to devote its full time to such duties;
(b) Use its best efforts to cause the Partnership to comply
with such conditions as may be required from time to time to permit the
Partnership to be classified for Federal income tax purposes as a
partnership and not as an association taxable as a corporation;
(c) In the case of HM file and publish all certificates,
statements, or other instruments required by law for the formation and
operation of the Partnership as a partnership in all appropriate
jurisdictions;
(d) In the case of HM cause the Partnership to obtain and keep
in force during the term of the Partnership fire and extended coverage
and public liability and professional liability insurance with such
issuers and in such amounts as HM and the Investor Representatives,
deem advisable; and
(e) Have a fiduciary duty to conduct the affairs of the
Partnership in the best interests of the Partnership and of the
Partners, including the safekeeping and use of all funds and assets,
whether or not in its immediate possession and control, and it shall
not employ or permit others besides HM and the Investor Representatives
to employ such funds or assets in any manner except for the benefit of
the Partnership.
5.4 Delegation by HM and the Investor Representatives. Subject to
restrictions otherwise provided herein, HM and the Investor Representatives may
at any time employ any other Person, including Persons employed by, affiliated
with, or related to HM and the Investor Representatives to perform services for
the Partnership and its business, and may delegate all or part of their
authority or control to any such other Persons, provided that such employment or
delegation shall not relieve HM and the Investor Representatives of their
respective responsibilities and obligations under this Agreement or, if
applicable, under the laws of the State of Texas nor will it make any such
person a Partner of the Partnership.
5.5 Right to Rely Upon the Authority of HM. All actions and decisions
of the Partnership, including those actions or decisions reserved to the
Partners, the Limited Partners, the Investor Partners, or HM and the Investor
Partners, shall be taken or carried out by and through HM. Persons dealing with
the Partnership may rely upon the representation of HM as to (a) the identity of
the General Partner or any Limited Partner or Investor Partner; (b) the
existence or nonexistence of any fact or facts that constitute a condition
precedent to acts by a Partner (including, without limitation, the power and
authority of HM and the Investor Representatives to bind the Partnership in any
of the matters or to authorize and direct HM to take any of the actions
described in this Agreement) or which are in any other manner germane
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to the affairs of the Partnership; or (c) any act or failure to act by the
Partnership or any other matter whatsoever involving the Partnership or any
Partner. In addition, no purchaser from the Partnership shall be required to
determine the sole and exclusive authority of HM to sign and deliver on behalf
of the Partnership any instruments of transfer with respect thereto or to see
to the application or distribution of revenues or proceeds paid or credited in
connection therewith, unless such purchaser shall have received written notice
from the Partnership affecting the same.
5.6 Partnership Expenses.
(a) In general, the Partnership's expenses shall be billed
directly to and paid by the Partnership. The Partnership shall
reimburse HM and the Investor Representatives or their Affiliates for:
(i) all Organization Expenses incurred by HM and the Investor
Representatives or their Affiliates in connection with the formation of
the Partnership; (ii) the actual costs to HM and the Investor
Representatives or their Affiliates of goods, services, and materials
used for and by the Partnership; and (iii) all reasonable travel and
other out-of-pocket expenses incurred by HM and the Investor
Representatives in the development and management of the Partnership
and its business. The reimbursement for expenses provided for in this
Section 5.6(a) shall be made to HM and the Investor Representatives or
their Affiliates regardless of whether any distributions are made to
the Partners under Article VI and Article VII.
(b) The Partnership shall also pay the following
expenses of the Partnership:
(i) All development and operational expenses of
the Partnership, which may include, but are not limited to:
the salary and related expenses of employees and staff of the
Hospital, all costs of borrowed money, taxes, and assessments
on the Hospital, and other taxes applicable to the
Partnership; expenses in connection with the acquisition,
maintenance, leasing, refinancing, operation, and disposition
of the Equipment, furniture and fixtures of the Hospital
(including legal, accounting, audit, commissions, engineering,
appraisal, and the other fees); the maintenance of the
Hospital and its Equipment may be performed by HM or one of
its Affiliates as long as the charges to the Partnership for
such service are no greater than the charges for such service
from a third party service provider;
(ii) In addition to reimbursements and other
amounts due hereunder, a Management Fee equal to One Hundred
Thousand Dollars ($100,000.00) per year due to HM which fees
shall first accrue commencing on the first to occur of (the
"Completion Date") (X) the substantial completion of the
construction of the Hospital if the Hospital is to be located
in a new building (whether to be leased to or owned by the
Partnership), or (Y) the closing of the purchase of the real
property in which the Hospital is to be located if located in
an existing building (either by the Partnership or by a third
party who shall in turn lease such building to the
Partnership) and which fees shall be increased annually by the
Consumer Price Index reasonably applied by HM on January 1st
of each year. The Management Fee shall compensate HM for the
efforts of employees of HM or its Affiliates in managing all
aspects of the development of
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the Hospital (i.e., seeking Investor Partners, the design,
construction and financing of the Hospital) and in supervising
the business of the Partnership after the Hospital commences
operations;
(iii) A fee of One Hundred Thousand Dollars
($100,000.00) payable to the medical director of the Hospital
which fee shall first accrue commencing as of the Completion
Date, which fee shall be increased annually by the Consumer
Price Index reasonably applied by HM on January 1st of each
year. The medical director shall be a cardiologist and shall
be elected by a Majority Vote of Investor Partners for a two
(2) year term subject however to the terms of the medical
staff bylaws;
(iv) All fees and expenses paid to third parties
for accounting, legal, documentation, professional, and
reporting services to the Partnership, which may include, but
are not limited to: preparation and documentation of
Partnership bookkeeping, accounting and audits; preparation
and documentation of budgets, cash flow projections, and
working capital requirements; preparation and documentation of
Partnership state and federal tax returns; and taxes incurred
in connection with the issuance, distribution, transfer,
registration, and recordation of documents evidencing
ownership of a Partnership Interest or Economic Interest in
the Partnership or in connection with the business of the
Partnership; expenses in connection with preparing and mailing
reports required to be furnished to the Partners or Assignees
for tax reporting or other purposes, including reports, if
any, that may be required to be filed with any federal or
state regulatory agencies, or expenses associated with
furnishing reports to Partners which HM and the Investor
Representatives deem to be in the best interest of the
Partnership; expenses of revising, amending, converting,
modifying, or terminating the Partnership or this Agreement;
costs incurred in connection with any litigation in which the
Partnership is involved as well as any examination,
investigation, or other proceedings conducted by any
regulatory agency involving the Partnership; costs of any
computer equipment or services used for or by the Partnership;
the costs of preparing and disseminating informational
material and documentation relating to potential sale,
refinancing, or other disposition of the Hospital or the
Equipment.
(c) Neither HM nor its Affiliates shall be paid or reimbursed
for the overhead of its corporate offices including, without
limitation, the costs of employees of HM or of its Affiliates, unless
those employees work full-time for the Hospital (or part-time as
approved by HM and the Investor Representatives), in which event such
expenses shall be paid by the Partnership.
5.7 No Management by Partners. Other than HM and the Limited Partners
acting through the Investor Representatives to the extent permitted under this
Agreement, the Partners shall take no part in, or at any time interfere in any
manner with, the management, conduct, or control of the Partnership's business
and operations and shall have no right or authority to act for or bind the
Partnership except as set forth in this Agreement. The rights and powers of such
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Partners shall not extend beyond those set forth in this Agreement and those
granted under the Certificate of Limited Partnership and any attempt to
participate in the control of the Partnership in a manner contrary to the rights
and powers granted herein and under the Certificate of Limited Partnership shall
be null and void and without force and effect. Subject to the decisions and
judgement with respect to all professional medical or clinical matters of
qualified medical personnel, HM and the Investor Representatives shall have the
right to determine when and how the operations of the Partnership shall be
conducted in accordance with the terms of this Agreement. The exercise by any
Limited Partner of any of the rights granted him hereunder shall not be deemed
to be taking part in the control of the business of the Partnership and shall
not constitute a violation of this section.
5.8 Consent by Partners to Exercise of Certain Rights and Powers by HM
and the Investor Representatives. By its execution hereof, each Partner
expressly consents to the exercise by HM and the Investor Representatives of the
rights, powers, and authority conferred on HM and the Investor Representatives
by this Agreement.
5.9 Other Business of Partners.
(a) Subject to (b) below, any Partner, including without
limitation HM or any Investor Partner that has the right to appoint an
Investor Representative under this Agreement, may engage independently
or with others in other business ventures of every nature and
description, including without limitation the purchase of medical
equipment, the rendering of medical services of any kind, and the
making or management of other investments and neither the Partnership
nor any Partner shall have any right by virtue of this Agreement or the
relationship created hereby in or to such other ventures or activities
or to the income or proceeds derived therefrom, and the pursuit of such
ventures.
(b) As long as any Partner owns a Partnership Interest herein,
and for a period of five (5) years after a Partner ceases for any
reason to own a Partnership Interest in the Partnership, neither a
Partner nor any of its respective Affiliates shall hold, directly or
indirectly, an investment, ownership or other beneficial interest in
(i) any hospital or (ii) other Entity which provides any of the
following services or facilities: cardiac catheterization, angioplasty,
peripheral angioplasty, atherectomy, stenting and PTCA or other cardiac
surgical procedures or services, in either case within a fifty (50)
mile radius of the Hospital (the "Territory"), provided that (i) no
Partner who is a physician shall be prohibited from or maintaining his
or her staff privileges at any other hospital, (ii) nothing herein
shall prohibit a Partner from owning up to three percent (3%) of the
outstanding capital stock of a company whose stock is publicly traded
and listed on a nationally recognized securities exchange or from
investing in a publicly traded mutual fund, and (iii) nothing herein
shall restrict a Partner from entering into managed care or other
professional service agreements with health care facilities within the
Territory the purpose of which is to enable the Partner or its
physicians the opportunity to provide professional services either
alone or pursuant to a pricing package with such facility as long as
such agreements or arrangements do not constitute or represent,
directly or indirectly, an interest in such health care facilities (the
sharing of funds in a risk sharing pool or arrangement created by such
package pricing shall not constitute a violation of
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this subsection (b)). In addition, HM or its Affiliates may separately
operate a mobile catheterization laboratory within the Territory, but
only if either HM or an Affiliate thereof is providing such service
pursuant to a lease of six (6) months or less to a provider who is
already providing cath lab services or if HM and the Investor
Representatives have elected not to have such service provided by the
Partnership.
(c) The Partners have reviewed the term and geographical
restrictions included in Section 5.9(b), and in light of the interests
of the parties hereto, agree that such restrictions are fair and
reasonable.
(d) If there is a breach or threatened breach of the
provisions of this Section 5.9 of this Agreement, in addition to other
remedies at law or equity, the non-breaching party shall be entitled to
injunctive relief. The parties desire and intend that the provisions of
this Section 5.9 shall be enforced to the fullest extent permissible
under the law and public policies applied, but the unenforceability or
modification of any particular paragraph, subparagraph, sentence,
clause, phrase, word, or figure shall not be deemed to render
unenforceable the remainder of this Section 5.9. Should any such
paragraph, subparagraph, sentence, clause, phrase, word, or figure be
adjudicated to be wholly invalid or unenforceable, the balance of this
Section 5.9 shall thereupon be modified in order to render the same
valid and enforceable and the unenforceable portion of this Section 5.9
shall be deemed to have been deleted from this Agreement.
(e) The Partnership, HM, VHI, the Investor Representatives and
the Investor Partners agree that the benefits to any Investor Partner
hereunder do not require, are not payment for, and are not in any way
contingent upon the referral, admission or any other arrangement for
the provision of any item or service offered by HM or the Partnership
to patients of such Investor Partner in any facility, laboratory,
cardiac catheterization facility or other health care operation
controlled, managed or operated by HM or the Partnership and nothing
herein is intended to prohibit any party from practicing medicine at
any other facility.
(f) If an Investor Partner is a legal entity and not an
individual, such Investor Partner shall cause each of its existing and
future Affiliates to agree in writing to be personally bound by the
terms of this Section 5.09.
5.10 HM's and Investor Representatives' Standard of Care. HM and each
Investor Representative shall act in a manner he, she or it believes in good
faith to be in the best interest of the Partnership and with such care as an
ordinarily prudent person in a like position would use under similar
circumstances. In discharging its duties, HM and each Investor Representative
shall be fully protected in relying in good faith upon the records required to
be maintained under this Agreement and upon such information, opinions, reports
and statements by any of its other General Partners, Investor Representatives,
Partners, or agents, or by any other person as to matters HM or such Investor
Representative, as the case may be, reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Partnership, including any formation,
opinions, reports or statements as to the value and amount of the assets,
liabilities, profits or losses of the
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Partnership or any other facts pertinent to the existence and amount of assets
from which distributions to members might properly be paid.
Notwithstanding anything herein to the contrary, a Partner or an
Investor Representative shall have the right to vote or approve Partnership
matters in accordance with the terms of this Agreement regardless of the
personal interest of any Partner or any Investor Representative in the outcome
of any vote, decision or matter.
5.11 Limitation of Liability. HM and the Investor Representatives shall
not be liable to the Partnership or its Partners for any action taken in
managing the business or affairs of the Partnership if he, she or it performs
the duty of his, her or its office in compliance with the standard contained in
Section 5.10. Neither HM nor the Investor Representatives has guaranteed nor
shall have any obligation with respect to the return of a Partner's Capital
Contribution or profits from the operation of the Partnership. Furthermore,
neither HM or any Investor Representative, their Affiliates or their employees
(collectively, their "Agents") shall be liable to the Partnership or to any
Partner for any loss or damage sustained by the Partnership or any Partner
except loss or damage resulting from gross negligence or intentional misconduct
or knowing violation of law or a transaction for which HM, such Investor
Representative or Agent received a personal benefit in violation or breach of
the provisions of this Agreement.
5.12 Indemnification of HM and the Investor Representatives.
(a) To the fullest extent permitted under the Texas Act and
any other applicable law, each of HM, the Investor Representatives and
their Agents (an "Indemnitee") shall be indemnified by the Partnership
against any losses, judgments, liabilities, expenses, including
attorneys' fees and amounts paid in settlement of any claims sustained
by them arising out of any action or inaction of the Indemnitee in its
capacity as a General Partner or Investor Representative of the
Partnership (or, in the case of an Agent, within the scope of the
General Partner's or Investor Representative's authority), provided
that the same were not the result of gross negligence or willful
misconduct on the part of an Indemnitee and provided that the
Indemnitee, in good faith, reasonably determined that such course of
conduct was in the best interest of the Partnership; provided, however,
that such indemnification and agreement to hold harmless shall be
recoverable only out of Partnership assets. Subject to applicable law,
the Partnership shall advance expenses incurred with respect to matters
for which an Indemnitee may be indemnified hereunder.
(b) If at any time, the Partnership has insufficient funds to
furnish indemnification as herein provided, it shall provide such
indemnification if and as it generates sufficient funds and prior to
making any Cash Distributions, pursuant to Article VI or Article VII
hereof, to the Partners.
5.13 Election and Replacement of Investor Representative. In accordance
with the procedures outlined in Section 1.17 herein, the Investor Partners shall
designate Investor Representatives to serve until their successors are duly
elected subject, however, to the Investor Partner relinquishing its rights to
designate an Investor Representative as set forth in Section 8.4 hereof. At any
time, in accordance with Section 1.17, an Investor Partner entitled to designate
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an Investor Representative may replace the individual it designates as an
Investor Representative and designate a new Investor Representative.
5.14 Role of Investor Representative. Notwithstanding anything herein
to the contrary, the Investor Representatives shall take no action nor make any
decision on behalf of the Partnership except to the extent they are expressly
authorized to do so under this Agreement in their capacity as Investor
Representatives.
5.15 Purchase of Goods and Services from HM. Goods and services
purchased from HM or its Affiliates shall be of substantially the same quality
and price as could be obtained from an unrelated third party and first shall be
disclosed to HM and the Investor Representatives.
5.16 Decisions by HM and the Investor Representatives. Except as
provided in this Agreement, decisions and actions to be taken by HM and the
Investor Representatives shall be deemed to have been made only upon the
affirmative approval or consent of HM and of at least fifty percent (50%) of the
then designated Investor Representatives which may be obtained and evidenced by
the written vote, consent or approval of such required number of Investor
Representatives. In the event a decision, approval or consent is requested of
the Investor Representatives by HM, it shall be deemed to have been
affirmatively made if the Investor Representatives fail to respond to any such
written request therefor within five (5) days of notice thereof by HM; provided,
however, once the Hospital has been open for business for six (6) months,
responses to requests for decisions shall be due in ten (10), rather than five
(5) days. Notwithstanding anything in this Agreement to the contrary, all
decisions and actions to be made by HM and the Investor Representatives with
respect to any loan, lease or other similar financing of the development,
construction or operation of the Hospital or the Partnership's affairs,
including without limitation the decisions with respect to incurring any
indebtedness or the refinancing thereof, shall be made by HM and shall be
subject to the consent of the Investor Representatives (pursuant to the
procedure for Investor Representative approval as provided above), which consent
shall not be unreasonably withheld; provided, further, however, the application
of the Partnership's funds towards the repayment of all or a portion of any
financing of the Partnership in excess of amounts then required to be paid (i.e.
voluntary prepayments) shall be made only with the consent of HM and the
Investor Representatives.
The development and annual operating budgets to be proposed by HM shall
be approved by HM and the Investor Representatives as provided above subject to
the following:
(a) The Investor Representatives shall be deemed to have
approved a development budget which is substantially consistent with
the development budget included in the Partnership's Private Placement
Memorandum;
(b) The Investor Representatives shall not unreasonably
withhold their approval of budgets which are within the reasonable
revenue expectations of the Hospital and which are in compliance (both
as to terms and availability of financing) with agreements with the
Partnership's lenders and other parties providing financing to the
Partnership;
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(c) The priority for capital expenditures shall be subject to
HM and Investor Representative approval as set forth in the first
sentence of Section 5.16; and
(d) In the event that HM and the Investor Representatives are
unable to approve an annual budget, HM shall be authorized to operate
under the previous year's budget increased by the greater of 5% or the
increase during the previous year in the Consumer Price Index for
Medical Items until a new budget is approved.
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 Distributions of Cash Flow from Operations and Cash from Sales or
Refinancing. Prior to the dissolution of the Partnership, Cash Flow from
Operations and Cash from Sales or Refinancing, if any, remaining after repayment
of any loans made by the Partners to the Partnership shall be distributed
quarterly by HM and the Investor Representatives as Cash Distributions according
to the relative Economic Interests of the Partners and Assignees.
Notwithstanding anything herein to the contrary, no distributions shall be made
to Partners or Assignees if prohibited by the Texas Act.
6.2 Allocations of Income and Loss.
(a) Income shall be first allocated to those Partners and
Assignees, if any, with negative Adjusted Capital Account balances, pro
rata according to their negative Adjusted Capital Account balances,
until all such balances have been returned to zero.
(b) After the allocations are made pursuant to Section 6.2(a),
all allocations of Income and Loss from whatever source shall then be
made according to the Economic Interest of each Partner and Assignee.
(c) In accordance with Code Section 704(c) and the Regulations
thereunder, Income and Loss with respect to that portion of the
property contributed to the capital of the Partnership shall, solely
for tax purposes, be allocated among the Partners so as to take account
of any variation between the adjusted basis of such property to the
Partnership for Federal income tax purposes and its initial fair market
value used as the book value of the property by the Partnership.
(d) Notwithstanding anything in this Agreement to the
contrary, no Partner or Assignee shall be entitled to any allocation of
Loss if such allocation would result in such Partner or Assignee having
a negative Adjusted Capital Account while any other Partner or Assignee
has a positive Adjusted Capital Account. In such event, the Losses
shall be allocated to the Partners or Economic Interest Owners with
positive Adjusted Capital Accounts until their Adjusted Capital
Accounts have been reduced to zero or until the negative amount in the
Adjusted Capital Accounts are proportionately the same as the negative
accounts of the other Partners or Assignee as measured by their
respective Economic Interests in the Partnership. Additionally, HM
shall at all times during the
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existence of the Partnership have at least a 1% interest in each
material item of Partnership income, gain, loss, deduction or credit.
6.3 Qualified Income Offset Provision. Any Partner or Assignee who
unexpectedly receives an adjustment, allocation, or distribution as described in
Regulation Section 1.704-1(b)(2)(ii)(d) at (4) to (6), will be allocated items
of income and gain in an amount and manner sufficient to eliminate any deficit
balance in the Partner's or Assignee's Adjusted Capital Account created by such
adjustment, allocation or distribution as quickly as possible. This provision is
intended to be a "qualified income offset" as defined in Regulation Section
1.704-1(b)(2)(ii)(d), such Regulation being specifically incorporated herein by
reference.
6.4 Minimum Gain Chargeback. If there is a net decrease in Minimum
Gain of the Partnership during any taxable year or other period, each Partner or
Assignee shall be allocated items of Partnership income and gain, before any
other allocation is made under Code Section 704(b) of Partnership items for such
taxable year, in an amount equal to such Partner's or Assignee's share of the
net decrease in Minimum Gain of the Partnership. The items to be so allocated
shall be determined in accordance with Regulation Section 1.704-2(g)(2). This
provision is intended to be a "minimum gain chargeback" as described in
Regulation Section 1.704-2(f), such Regulation being specifically incorporated
herein by reference.
6.5 Partner Nonrecourse Debt Minimum Gain Chargeback. If there is a
net decrease in partner nonrecourse debt minimum gain attributable to a partner
nonrecourse debt for any fiscal year of the Partnership, each Partner who has a
share of the partner nonrecourse debt minimum gain attributable to such partner
nonrecourse debt as of the beginning of such fiscal year, determined in
accordance with Regulation Section 1.704-2(i)(5), shall be allocated items of
Partnership income gain for such year (and, if necessary, subsequent years) in
an amount equal to such Partner's share of the net decrease in partner
nonrecourse debt minimum gain attributable to such partner nonrecourse debt,
determined in accordance with Regulation Sections 1.704-2(i)(4) and (5). For
purposes of this Section, "partner nonrecourse debt" means any liability of the
Partnership with respect to which one or more but less than all of the Partners
bears the economic risk of loss within the meaning of Regulation Section 1.752-2
as a guarantor, lender or otherwise, and "partner nonrecourse debt minimum gain"
means the minimum gain attributable to partner nonrecourse debt as determined
pursuant to Regulation Section 1.704-2(i)(3). This Section is intended to comply
with the member nonrecourse debt minimum gain chargeback requirement in Treasury
Regulations ss. 1.704-2(i)(4) and shall be interpreted consistently therewith.
ARTICLE VII
TERMINATION AND DISSOLUTION OF THE PARTNERSHIP
7.1 No Termination by Certain Acts of Partner. Neither the transfer
of interest, withdrawal from the Partnership, bankruptcy, insolvency,
dissolution, liquidation or other disability, nor the legal incompetency of any
Partner shall result in the termination or dissolution of the Partnership or
affect its continuance in any manner whatsoever.
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7.2 Dissolution of the Partnership. The Partnership shall be
dissolved upon the happening of any of the following events, whichever shall
first occur:
(a) The election by HM and the Investor Representatives to
dissolve the Partnership in accordance with the terms of Section
3.5(c) hereof or as provided in Section 3.6;
(b) The death, dissolution, insanity, bankruptcy, retirement,
resignation or expulsion of HM, unless the remaining Partners owning at
least 51% of the Partnership Interests which are owned by the remaining
Partners shall elect a Substitute General Partner which shall assume
all rights and duties of HM under this Agreement (which Substitute
General Partner accepts such election);
(c) The written agreement of HM and the Investor
Representatives;
(d) The expiration of the term of the Partnership as
provided in Section 2.5 hereof;
(e) The adjudication of bankruptcy of the Partnership;
(f) The written consent of a Majority Vote of the Partners;
(g) Except as otherwise expressly provided herein, the
occurrence of any event which, under the Texas Act or any other law,
causes the dissolution or termination of the Partnership under the law
of the State of Texas;
(h) In accordance with Section 12.11 hereof; and
(i) The election of HM or an Investor Representative to
dissolve the Partnership in accordance with Section 5.2(k) hereof.
7.3 Dissolution and Final Liquidation.
(a) Upon any dissolution of the Partnership, the Partnership
shall not terminate, but shall cease to engage in further business
except to the extent necessary to perform existing contracts and
preserve the value of its assets. Its assets shall be liquidated and
its affairs shall be wound up as soon as practical thereafter by HM and
the Investor Representatives, or if for any reason there is no General
Partner or Investor Representative, by another Person designated by a
Majority Vote of the Partners. In winding up the Partnership and
liquidating assets, HM, or other Person so designated for such purpose,
may arrange, either by itself or through others, for the collection and
disbursement to the Partners of any future receipts from the Hospital
or other sums to which the Partnership may be entitled, or may sell the
Partnership's interest in the Hospital and the Equipment to any person,
including HM or any Affiliate thereof, on such terms and for such
consideration as shall be consistent with obtaining the fair market
value thereof.
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(b) Upon any such dissolution and liquidation of the
Partnership, the net assets, if any, of the Partnership available for
distribution, and any cash proceeds from the liquidation of any such
assets, shall be applied and distributed in the following manner or
order, to the extent available:
(i) To the payment of or creation of
reserves for all debts, liabilities, and obligations to all
creditors of the Partnership (other than the Partners or their
Affiliates) and the expenses of liquidation;
(ii) To the payment of all debts and
liabilities (including interest) owed to the Partners or their
Affiliates as creditors; and
(iii) The balance according to the Partners' and
Assignees' positive Capital Account balances after taking into
account all other adjustments during the fiscal year in which
liquidation occurs.
(c) Except as otherwise provided in this Agreement, the
Partners shall look solely to the assets, if any, of the Partnership
for any return of their Capital Contributions. If the assets of the
Partnership remaining after payment or discharge of the Partnership's
debts and liabilities, or provision therefor, are insufficient to
return all or any part of the Capital Contributions, no Partner shall
have any right of recourse against HM and the Investor Representatives
or other Partners or to charge HM and the Investor Representatives or
other Partners for any amounts except as provided herein and except to
the extent otherwise provided by the Texas Act and/or Texas law.
(d) Upon such dissolution, reasonable time shall be allowed
for the orderly liquidation of the assets of the Partnership and the
discharge of liabilities to creditors so as to minimize the losses
normally attendant to a liquidation.
(e) The Capital Accounts of the Partners and Assignees, as
adjusted pursuant to Section 1.4, shall be utilized by the Partnership
for the purpose of making distributions to those Partners and Assignees
with positive balances in their respective capital accounts pursuant to
Section 7.3(b). In making such distributions, HM or the person winding
up the affairs of the Partnership shall distribute all funds available
for distribution to the Partners and Assignees (after establishing any
reserves that HM or the person winding up the affairs of the
Partnership deems reasonably necessary pursuant to Section 7.3(b))
prior to the later of (a) the end of the taxable year in which the
event occurs which caused the termination and dissolution of the
Partnership, or (b) ninety (90) days after the occurrence of such
event. HM in its sole discretion, or the person winding up the affairs
of the Partnership, in his, her or its discretion, may elect to have
the Partnership retain any installment obligations owed to the
Partnership until collected in full so long as any portion of the
reserves which are later determined to be unnecessary, and all
collections on such installment obligations which are not deemed to be
reasonably necessary by HM or the person winding up the affairs of the
Partnership to add to such reserves are distributed as soon as
practicable in accordance with the provisions of Section 7.3(b) as
modified by this Section.
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7.4 Termination. Upon completion of the dissolution, winding up,
distribution of the liquidation proceeds and any other Partnership assets, the
Partnership shall terminate.
7.5 Payment in Cash or in Kind. Any payments made to any Partner
pursuant to Section 7.3 hereof may be made in cash or in property, tangible or
intangible, or partially in cash and partially in such property in the
discretion of HM; provided, however, that the other Partners have no right to
receive other than cash in return for their contributions.
7.6 Good Will and Trade Name. Upon the dissolution of the Partnership
the firm or trade name of the Partnership and any good will associated therewith
shall become the sole property of HM, provided that distributions and
allocations otherwise due to HM shall not be reduced as a result of HM's
becoming entitled to such assets.
7.7 Termination of Noncompetition Covenants. Upon a dissolution of
the Partnership, the Partners shall have no continuing liability or obligation
under Section 5.9(b) except that Section 5.9(b) shall continue to be binding
upon a Partner whose breach of this Agreement caused a dissolution of the
Partnership.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF PARTNERS
AND TRANSFER OF PARTNERS' PARTNERSHIP
AND/OR ECONOMIC INTERESTS
8.1 HM, VHI and Investor Representatives - Transfers.
(a) (i) Except as provided in this Section 8.1,
without the consent of a Majority Vote of Investor Partners
neither HM nor VHI shall voluntarily withdraw from the
Partnership as a Partner at any time prior to the termination
of the Partnership, and neither HM nor VHI shall transfer or
assign any of their rights and duties as a General Partner or
Limited Partner, respectively, without such consent. Further,
except as otherwise provided in this Section 8.1, a sale of
fifty-one percent (51%) or more of the capital stock of either
HM or VHI shall constitute a transfer or assignment of such
Partner's respective Partnership Interests in the Partnership.
Notwithstanding the foregoing, HM and VHI may assign their
Partnership Interests in the Partnership, and each may assign
its rights to be a General Partner or a Limited Partner, as
the case may be, to any party who purchases all or
substantially all of MedCath's and its subsidiaries' assets or
its capital stock if such purchaser assumes in writing the
obligations of HM hereunder, or to a party under control of,
common control with, or which controls HM. HM and VHI may also
assign their Partnership Interest in the Partnership and their
rights to be a General Partner or Limited Partner, as the case
may be, to a financial institution as collateral security for
repayment of indebtedness for borrowed funds by HM, MedCath or
their Affiliates. A sale or transfer of fifty-one percent
(51%) or more of the capital stock of either HM or VHI shall
not be considered a transfer or assignment of such Partner's
respective Partnership Interest for purposes of this Agreement
if such sale or transfer occurs
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in a transaction pursuant to which a sale of HM's or VHI's
assets, if a part thereof, would not have constituted an
assignment of their Partnership Interests in a manner which
gives the other Partners the right to purchase such
Partnership Interests in accordance with the following
sentence. In the event that HM or VHI desires to sell any
Partnership Interest and such sale is not permitted as
provided above, then the other Partners shall first have an
option to purchase such Partnership Interest in accordance
with the Right of First Refusal provided in Section 8.4 except
that in no event shall the purchase price due to HM or VHI for
its Partnership Interest exceed the appraised value for such
Partnership Interest determined in accordance with (ii) below.
(ii) The appraised value of the Partnership
Interest of HM or VHI, as appropriate (the "Seller") shall be
the fair market value thereof as determined by a qualified
appraiser who has no equity investment in Seller or its
Affiliate and who has experience in providing appraisals for
comparable businesses and transactions. Such appraiser shall
be retained in good faith by Seller with the approval of the
Investor Representatives, which approval shall not be
unreasonably withheld or delayed. If Seller and the Investor
Representatives are unable to agree upon the selection of the
appraiser within fifteen (15) days of Seller first proposing
an appraiser to the Investor Representatives, then each of
Seller and the Investor Representatives shall, within fifteen
(15) days, in good faith select and retain an appraiser who
meets the requirements outlined above solely for the purpose
of determining the fair market value of the interest being
valued (respectively, the "Seller Appraiser" and the "Investor
Representatives Appraiser"). Each of the Seller Appraiser and
the Investor Representatives Appraiser shall, within thirty
(30) days, then independently determine the fair market value
of the interest being valued. If, upon completion of such
appraisals, the amounts determined by the Seller Appraiser and
the Investor Representatives Appraiser to be the fair market
value of the interest being valued differ by ten percent (10%)
or less, then the appraised value of such interest shall be
the average of the amounts determined by such Appraisers to be
fair market value of such interest. If, upon completion of
such appraisals, the amounts determined by the Seller
Appraiser and the Investor Representatives Appraiser to be the
fair market value of the interest being valued differ by more
than ten percent (10%), the Seller Appraiser and the Investor
Representatives Appraiser shall, within fifteen (15) days,
then select and retain a third appraiser who meets the
requirements outlined above (the "Third Appraiser") solely to
determine the fair market value of such interest, and the
appraised value of such interest shall be the average of the
amount determined by the Third Appraiser to be the fair market
value of such interest (the "Third Value") and the closest to
the Third Value of the amounts determined by the Seller
Appraiser and the Investor Representatives Appraiser to be
fair market values of such interest. The Third Appraiser shall
have fifteen (15) days from the date of his or her selection
to complete his or her appraisal. Seller and the Investor
Partners shall share equally all the fees and expenses of the
Seller Appraiser, the Investor Representatives Appraiser and
the Third Appraiser (collectively, the "Appraisers") in
connection with the performance of the services described
above.
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(b) The Investor Representatives may not assign their rights
to be an Investor Representative herein. Upon the withdrawal or
resignation of an Investor Representative, a substitute therefor who
must be either an Investor Partner or an owner thereof may be elected
as provided herein.
(c) Any resignation or withdrawal as an Investor
Representative by an Investor Representative who is also a Partner
shall not constitute such Investor Representative's withdrawal as a
Partner.
8.2 Partners' Right to Continue. If at any time there is no
remaining General Partner, a meeting of the Partners shall be held at the
principal place of business of the Partnership within forty-five (45) days after
the happening of such event to consider whether to continue the Partnership on
the same terms and conditions as are contained in this Agreement (except that
the General Partner may be different) and to select a General Partner for the
Partnership, or whether to wind up the affairs of the Partnership, liquidate its
assets and distribute the proceeds therefrom in accordance with Article VII
hereof. The Partnership may be continued and a new General Partner (who accepts
such appointment) selected by the Partners as provided in Section 7.2(b) within
ninety (90) days of the occurrence of the event described in Section 7.2(b). The
new General Partner shall execute, acknowledge, file or record (as appropriate)
a Certificate of Limited Partnership and an Agreement of Limited Partnership and
such other documents as may be required by the Texas Act. The continuance of the
Partnership pursuant to the terms of this Section 8.2 is conditioned upon (i)
the amendment of the Certificate of Limited Partnership to reflect the foregoing
change and, if applicable, compliance by the Partnership with any notice
provisions of the Texas Act and (ii) delivery to the withdrawing General Partner
of an indemnification agreement by the Partnership, in form and substance
reasonably satisfactory to the withdrawing General Partner, indemnifying and
holding the withdrawing General Partner harmless against all future liabilities
of the Partnership.
8.3 Relationship with Substitute General Partner. The relationship
of the Partners to any Person that has either acquired the Partnership Interest
of HM or has been elected as a Substitute General Partner as provided herein
shall be governed by this Agreement. If such Person was not theretofore a
General Partner, then such Person, as Substitute General Partner, shall have all
the rights and powers of its predecessor General Partner under this Agreement;
provided, it assumes in writing the obligations of such General Partner under
this Agreement and any arising thereafter, and accepts and adopts all the terms
and provisions of this Agreement in writing. All references to HM under this
Agreement shall thereafter be deemed to refer to such Substitute General
Partner. The withdrawing General Partner shall be liable for all of its
covenants and obligations under this Agreement for all periods prior to its
withdrawal until such liability is assumed by a Substitute General Partner.
8.4 Investor Partners - Restriction on Transfer. Except as otherwise
set forth in this Section or in this Agreement, no Economic or Partnership
Interest of an Investor Partner or any portion thereof, shall be validly sold or
assigned whether voluntarily, involuntarily or by operation of law, and no
purported assignee shall be recognized by the Partnership for any purpose,
unless such Economic or Partnership Interest shall have been transferred in
accordance with the provisions of this Agreement and in compliance with such
additional restrictions as may be imposed by HM to comply with requirements
imposed by any Federal or state securities
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regulatory authority and unless the consent of HM and the Investor
Representatives is obtained. In no event, however, shall an Investor Partner
transfer or sell all or any of its Economic or Partnership Interest to any
party which, if a Partner, would be in violation of Section 5.9(b) hereof.
Except as otherwise set forth in this Section or in this Agreement, an
Investor Partner may transfer, sell or assign his or her entire Economic
or Partnership Interest if it has received the approval of HM and the
Investor Representatives, not to be unreasonably withheld, provided however:
(a) the other Investor Partners on a pro rata basis first for a period
of fifteen (15) days, and thereafter HM for a period of fifteen (15) days shall
have the right, but not the obligation, to purchase all, but not less than all,
of the Economic or Partnership Interest proposed to be transferred, which right
shall be exercisable on the terms and for the purchase price set forth in
writing in a bona fide offer made for the Interests by a third-party (the "Right
of First Refusal"), and (b) there shall have been filed with the Partnership a
duly executed and acknowledged counterpart of the instrument making such
assignment signed by both the assignor and assignee and such instrument
evidences the written acceptance by the assignee of all of the terms and
provisions of the Agreement, represents that such assignment was made in
accordance with all applicable laws and regulations and the assignee shall have
represented to the Partnership in writing that he, she or it meets the investor
suitability standards established by his, her or its state of residence, or, in
the absence thereof, the investor suitability standards established by the
Partnership. HM shall use reasonable care to determine that transfers are in
accordance with applicable laws and regulations, including obtaining an opinion
of counsel to that effect. Any Partner who is not a General Partner who shall
assign all its Partnership Interest shall cease to be a Partner of the
Partnership, except that unless and until a Substitute Partner is admitted in
his or her stead, such assigning Partner shall retain the statutory rights of an
assignor of a Partnership Interest under the Texas Act. Any Partnership
Interests acquired by the Partnership pursuant to Section 8.4 shall, subject to
applicable law, be re-offered by the Partnership to suitable investors.
Any dissolution, liquidation, merger (unless Investor Partners or their
Affiliates existing prior to such merger own at least fifty-one percent (51%) of
the surviving entity after the merger or unless both parties to such merger are
majority owned by parties who are Investor Partners or their Affiliates prior to
such merger) or sale of an Investor Partner which is an Entity (a sale shall
include a transfer of fifty percent (50%) or more of its capital stock or other
ownership interest or of substantially all of its assets or any other
transaction intended to accomplish, in substance, a sale of fifty percent (50%)
or more of such Entity) shall constitute an offer by such Investor Partner to
sell such Investor Partner's Interest pursuant to Section 8.4 for the Formula
Purchase Price (as defined in Section 8.9 below).
In the event that HM or its Affiliates acquires or enters into a
practice acquisition transaction with an Investor Partner which does not convey,
directly or indirectly, the Partnership Interest of the Investor Partner to HM
or its Affiliates, then such transaction shall not be deemed to have resulted in
an offer by such Investor Partner to sell its interest pursuant to Section 8.4;
provided however, HM shall not directly or indirectly be entitled to exercise
the voting rights of an Investor Partner in the event of any practice
acquisition transaction, the employment of Investor Partners by HM or its
Affiliates or the execution of a management or service agreement between HM or
its Affiliates and Investor Partners or their Affiliates (a "Practice
Transaction"). In the event that it is intended that HM or its Affiliates
purchase, directly or indirectly, the Partnership Interest of an Investor
Partner, then such Investor Partner
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shall be deemed to have made an offer to sell such Investor Partner's
Partnership Interest pursuant to Section 8.4 hereof for the Formula Purchase
Price. In the event of a Practice Transaction, neither HM, the Investor Partner
which is a party thereto nor their Affiliates shall be entitled to the voting
or decision making rights (including without limitation the rights to
designate an Investor Representative) held by such Investor Partner and all
such voting and decision making rights shall be deemed to have been transferred
to the remaining Investor Partners on a pro rata basis based upon their current
percentage Partnership Interests in the Partnership.
8.5 Condition Precedent to Transfer of Economic Interest and/or
Partnership Interest. Notwithstanding anything herein to the contrary, no
transfer of an Economic or Partnership Interest may be made if such transfer (a)
constitutes a violation of the registration provisions of the Securities Act of
1933, as amended, or the registration provisions of any applicable state
securities laws; (b) if after such transfer the Partnership will not be
classified as a partnership for Federal income tax purposes; or (c) if when
taken together with other prior transfers, results in a "termination" of the
Partnership for Federal income tax purposes. The Partnership may require, as a
condition precedent to transfer of an Economic Interest and/or Partnership
Interest, delivery to the Partnership, at the proposed transferor's expense, of
an opinion of counsel satisfactory (both as to the counsel and substance of the
opinion) to HM that the transfer will not violate any of the foregoing
restrictions.
8.6 Substitute Partner - Conditions to Fulfill. No Assignee of a
Partner's Economic or Partnership Interest in the Partnership shall have the
right to become a Substitute Partner in place of his or her assignor unless, in
addition to any other requirement herein, all of the following conditions are
satisfied:
(a) The Partners have waived their right pursuant to Section
8.4 to purchase the Economic or Partnership Interest held by the
assignee;
(b) The duly executed and acknowledged written instrument of
assignment which has been filed with the Partnership sets forth that
the assignee becomes a Substitute Partner in place of the assignor;
(c) The assignor and Assignee execute and acknowledge such
other instruments as HM may deem reasonably necessary or desirable to
effect such admission, including, but not limited to, the written
acceptance and adoption by the assignee of the provisions of this
Agreement;
(d) The written consent of HM and the Investor Representatives
to such substitution is obtained, which consent may be withheld in sole
and absolute discretion of HM and the Investor Representatives;
(e) The payment by the Partner of all costs to the Partnership
associated with the transaction, including but not limited to legal
fees, transfer fees, and filing fees.
8.7 Allocations Between Transferor and Transferee. Upon the transfer
of a Partner's Economic or Partnership Interest, all items of income, gain,
loss, deduction and credit
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attributable to the Economic or Partnership Interest so transferred shall be
allocated between the transferor and the transferee in such manner as the
transferor and transferee agree at the time of transfer; provided such
allocation does not violate federal or state income tax law. If HM, in its
sole discretion, deems such laws violated, then such allocation shall be made
pro rata for the fiscal year based upon the number of days during the
applicable fiscal year of the Partnership that the Economic or Partnership
Interest so transferred was held by the transferor and transferee, without
regard to the results of Partnership activities during the period in which each
was the holder, or in such other manner as HM deems necessary to comply with
Federal or state income tax laws. Distributions as called for by this Agreement
shall be made to the holder of record of the Economic or Partnership Interest on
the date of distribution. Notwithstanding anything contained in this Agreement
to the contrary, both the Partnership and HM shall be entitled to treat the
assignor of any assigned Economic or Partnership Interest as the absolute owner
thereof in all respects, and shall incur no liability for distributions of cash
or other property made in good faith to such assignor in reliance on the
Partnership records as they exist until such time as the written assignment has
been received by, and recorded on the books of the Partnership. For purposes of
this Article VIII, the effective date of an assignment of any Economic or
Partnership Interest shall be the last day of the month specified in the written
instrument of assignment.
8.8 Rights, Liabilities of, and Restrictions on Assignee. No
assignee of a Partner's Economic or Partnership Interest shall have the right to
participate in the Partnership, inspect the books of account of the Partnership
or exercise any other right of a Partner unless and until admitted as a
Substitute Partner. Notwithstanding HM and the Investor Representatives' failure
or refusal to admit an assignee as a Substitute Partner, such assignee shall be
entitled to receive the share of income, credit, gain, expense, loss and
deduction and cash distributions provided hereunder that is assigned to it, and,
upon demand, may receive copies of all reports thereafter delivered pursuant to
the requirements of this Agreement; provided, the Partnership shall have first
received notice of such assignment and all required consents thereto shall have
been obtained and other conditions precedent to transfer thereof shall have been
satisfied. The Partnership's tax returns shall be prepared to reflect the
interests of assignees as well as Partners.
8.9 Death of a Partner. Heirs of Partners shall be entitled to
inherit the Partnership Interest of a deceased Partner, provided that upon a
Partner's death such Partnership Interest shall be automatically converted to an
Economic Interest only in the Partnership until such heir agrees in writing to
all of the terms and conditions of this Agreement and such other reasonable
terms as may be established by HM and the Investor Representatives as a
condition to such heir becoming a Partner, in which event such interest shall
again become a Partnership Interest in the Partnership. Notwithstanding the
previous sentence, within one hundred twenty (120) days of the Partnership first
learning of the death of a Partner, the Investor Partners, and if they decline
HM, shall have the option to purchase the Partnership Interest of the deceased
Partner, and the estate of the deceased Partner shall be obligated to sell such
Partnership Interest in accordance with the terms of this Section 8.9. The other
Investor Partners may exercise their option by giving written notice thereof to
the estate of the deceased Partner, or the appropriate representative thereof,
within such one hundred twenty (120) day period. The purchase price for such
Partnership Interest shall equal five (5) multiplied by the pretax net income
(as reasonably determined by the Partnership's accountants) of the Partnership
for the twelve (12)
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month period ending as of the calendar quarter most recently ended prior to
the death of such Partner multiplied by the percentage interest of such Partner
in the Partnership (the "Formula Purchase Price"). The purchase price shall be
paid (the "Payment Method") in three (3) equal annual installments, the first
third of which shall be paid upon the determination of the purchase price and
the remaining two (2) installments of which shall be paid on the first and
second anniversary of such date. The outstanding amounts due to the estate of
the deceased Partner shall bear interest at Prime Rate as of the date of such
Partner's death. Accrued interest shall be paid as of the dates payments of
principal are due as provided above. It is acknowledged and agreed that this
Section 8.9 applies only to Partners who are individuals and not Entities.
8.10 Repurchase of Interests in Certain Events.
(a) At the election of HM and the Investor Representatives,
the Investor Partners on a pro rata basis may, but are not obligated
to, purchase a Partner's Economic or Partnership Interest upon such
Partner's breach of the Partner's obligations contained in Article III,
Sections 5.9, 8.1(b), 8.4, 8.9, 12.1 and 12.11 of this Agreement. Any
portion of such Interest not purchased by the Investor Partners may be
purchased by HM.
(b) Each Partner agrees to sell its Partnership Interest to
the other Partners as provided above in the event HM and the Investor
Representatives agree upon the exercise of the right of purchase
granted under Section 8.10(a) and the purchase price in such events
shall be the lower of (x) the Capital Contribution of the Partner less
all amounts distributed to such Partner by the Partnership, or (y) the
fair market value of such Partner's Partnership Interest determined by
an appraiser reasonably selected by HM and the Investor
Representatives.
8.11 Permissible Transfers by Investor Partners. Notwithstanding
anything in this Agreement to the contrary, upon ten (10) days prior written
notice to HM accompanied by copies of appropriate supporting documents and
agreements which conform to the terms of this Agreement, an Investor Partner may
elect within thirty (30) days of acquiring a Partnership Interest in the
Partnership to assign its Partnership Interest to a limited liability company or
limited partnership or corporation formed and maintained for the sole purpose of
holding such Partnership Interest whose owners are substantially identical to
the owners of such Investor Partner as long as such assignee and its Affiliates
agree in writing to be bound by all the terms and conditions of this Agreement.
The Entity to which a Partnership Interest is assigned pursuant to this Section
8.11 and which becomes an Investor Partner, together with the owners thereof,
shall enter into appropriate buy/sell agreements or arrangements which shall be
in writing and which shall be subject to the approval of HM, which approval
shall not be unreasonably withheld. Such agreements and arrangements shall
include provisions giving such Investor Partner, or the other owners thereof,
the option to purchase the interest therein of any owner of such Investor
Partner who resigns, dies, becomes disabled or otherwise ceases (for any reason)
his relationship with such Investor Partner or the medical practice which is an
Affiliate of such Investor Partner. Further, those agreements and arrangements
shall provide new physicians who obtain an equity or ownership interest in the
medical practice which is an Affiliate of such Investor Partner with a
reasonable opportunity to become an owner in such Investor Partner.
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ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
9.1 Books of Account. At all times during the continuance of the
Partnership, HM shall maintain or cause to be maintained true and full financial
records and books of account showing all receipts and expenditures, assets and
liabilities, profits and losses, and all other records necessary for recording
the Partnership's business and affairs including those sufficient to record the
allocations and distributions required by the provisions of this Agreement.
9.2 Access to Records. The books of account and all documents and
other writings of the Partnership, including the Certificate of Limited
Partnership and any amendments thereto, shall at all times be kept and
maintained at the registered office of the Partnership. Each Partner or his or
her designated representatives shall, upon reasonable notice to HM, have access
to such financial books, records and documents during reasonable business hours
and may inspect and make copies of any of them. Each Partner may receive by
mail, upon written request to the Partnership and at his or her cost, a list of
the names and addresses of the Partners and the percentage of Economic Interest
held by each of them or such other information which may be obtained pursuant to
requirements of the Texas Act.
9.3 Bank Accounts and Investment of Funds.
(a) HM shall open and maintain, on behalf of the Partnership,
a bank account or accounts in a federally insured bank or savings
institution as it shall determine, in which all monies received by or
on behalf of the Partnership shall be deposited. All withdrawals from
such accounts shall be made upon the signature of such Person or
Persons as HM may from time to time designate.
(b) Any funds of the Partnership which HM may determine are
not currently required for the conduct of the Partnership's business
may be deposited with a federally insured bank or savings institution
or invested in short-term debt obligations (including obligations of
federal or state governments and their agencies, commercial paper,
certificates of deposit of commercial banks, savings banks or savings
and loan associations) as shall be determined by HM and the Investor
Representatives.
9.4 Fiscal Year. The fiscal year and accounting period of the
Partnership shall end on September 30 of each year.
9.5 Accounting Reports. As soon as reasonably practicable after the
end of each fiscal year but in no event later than 120 days after the end
thereof, each Partner shall be furnished an annual accounting showing the
financial condition of the Partnership at the end of such fiscal year and the
result of its operations for the fiscal year then ended, which annual accounting
shall be prepared on an accrual basis in accordance with generally accepted
accounting principles applied on a consistent basis and shall be delivered to
each of the Partners promptly after it has been prepared. It shall include a
balance sheet as of the end of such fiscal year and statements of income and
expense, each Partner's equity, and cash flow for such fiscal year. It shall
also include supplementary statements prepared pursuant to the Capital Account
accounting methods prescribed by this Agreement and Regulations Section
1.704-1(b) and such other information and reports as requested by the Mangers.
At HM's election the Partnership shall either be audited or such annual
accountings shall be either reviewed or compiled by a firm of independent
certified public accountants engaged by HM on behalf of the Partnership. The
report shall set forth the distributions to the Partners for such fiscal year
and shall separately identify distributions from (i) operating revenue during
such fiscal year, (ii) operating revenue from a prior period which had been held
as reserves, (iii) proceeds from the sale or refinancing of the Equipment, and
(iv) unexpended proceeds received from the sale of Partnership Interests. Once
the Hospital has opened, HM shall also cause to be prepared and distributed to
the Partners quarterly (at such times as MedCath prepares and publicly announces
its results for such quarter) financial statements in a form and containing such
information as reasonably determined by HM and the Investor Representatives.
9.6 Tax Returns. HM shall cause income tax returns for the Partnership
to be prepared, at Partnership expense, and timely filed with the appropriate
authorities. As soon as is reasonably practicable, and in any event on or before
the expiration of 75 days following the end of each fiscal year, each Partner
shall be furnished with a statement to be used by him or her in the preparation
of his or her individual income tax returns, showing the amounts of any Income
or Losses allocated to him or her, and the amount of any distributions made to
him or her, pursuant to this Agreement, along with a reconciliation of the
annual report with information furnished to investors for income tax purposes.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF PARTNERS
10.1 Meetings.
(a) Meetings of the Partners of the Partnership for any
purpose may be called by HM, the Investor Representatives or by
Investor Partners holding in the aggregate ten percent (10%) of the
Partnership Interests. Such request shall state the purpose of the
proposed meeting and the matters proposed to be acted upon thereat.
Such meetings shall be held in the Austin, Texas area.
(b) A notice of any such meeting shall be given by mail, not
less than fifteen (15) days nor more than sixty (60) days before the
date of the meeting, to each Partner at his address as specified in
Section 12.7. Such notice shall be in writing, and shall state the
place, date and hour of the meeting, and shall indicate that it is
being issued at or by the direction of HM or by the Investor Partners,
as the case may be. The notice shall state the purpose or purposes of
the meeting. If a meeting is adjourned to another time or place, and if
any announcement of the adjournment of time or place is made at the
meeting, it shall not be necessary to give notice of the adjourned
meeting.
(c) Each Partner may authorize any Person or Persons to act
for him or her by proxy in all matters in which a Partner is entitled
to participate, whether by waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be
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signed by the Partner or his or her attorney-in-fact. No proxy shall
be valid after the expiration of eleven months from the date thereof
unless otherwise provided in the proxy. Every proxy shall be revocable
at the pleasure of the Partner executing it.
10.2 Voting Rights of Partners.
(a) Each Partner shall take no part in or interfere in any
manner with the control, conduct or operation of the Partnership, and
shall have no right or authority to act for or bind the Partnership
except as provided herein. Votes or decisions, to the extent taken or
to be made, of the Partners may be cast at any duly called meeting of
the Partnership or in writing within ten (10) days after written
request therefor. Each Partner shall be entitled to the number of votes
equal to the percentage Partnership Interest of such Partner.
(b) No Partner shall have the right or power to vote to: (i)
withdraw or reduce his or her Capital Contributions except as a result
of the dissolution of the Partnership or as otherwise provided by law
or this Agreement; (ii) bring an action for partition against the
Partnership; (iii) cause the termination and dissolution of the
Partnership by court decree or otherwise, except as set forth in this
Agreement; or (iv) demand or receive property other than cash in return
for his or her Capital Contributions.
ARTICLE XI
AMENDMENTS
11.1 Authority to Amend by HM and the Investor Representatives. Except
as otherwise provided by Section 11.2, this Agreement and the Articles of
Organization of the Partnership may be amended by HM and the Investor
Representatives:
(a) To admit additional Partners or Substitute Partners but
only in accordance with and if permitted by the other terms of this
Agreement;
(b) To preserve the legal status of the Partnership as a
limited partnership under the Texas Act or other applicable state or
federal laws if such does not change the substance hereof, and the
Partnership has obtained the written opinion of its counsel to that
effect;
(c) To cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, to clarify any provision of this Agreement, or to make any
other provisions with respect to matters or questions arising under
this Agreement which will not be inconsistent with the provisions of
this Agreement;
(d) To satisfy the requirements of the Code and Regulations
with respect to limited partnerships taxed as partnerships or of any
Federal or state securities laws or regulations, provided such
amendment does not adversely affect the Partnership Interests
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of Partners and is necessary or appropriate in the written opinion of
counsel. Any amendment under this subsection (d) shall be effective as
of the date of this Agreement;
(e) To the extent that it can do so without materially
reducing the economic return to any Partner on his or her investment in
the Partnership, to satisfy any requirements of federal or state
legislation or regulations, court order, or action of any governmental
administrative agency with respect the operation or ownership of the
Hospital;
(f) Subject to the terms of Section 2.5, to extend the term
of the Partnership;
(g) Upon written notice to all Partners, HM may elect to
create a governing body for the Hospital with up to nine (9) directors
(the "Directors"). In such event, the Directors shall include, in
addition to HM or its designee, the president or chief executive
officer of the Hospital who shall be designated by HM and three (3)
additional Directors elected from time to time by the Investor Partners
one of whom must be the medical director of the hospital. The remaining
Directors shall be elected from time to time by HM. HM and the Investor
Representatives may delegate to such governing body such duties and
responsibilities as HM and the Investor Representatives deem necessary
or appropriate. Notwithstanding the foregoing, in the event of creation
of such governing body, the Investor Partners shall continue to have
the right to elect Investor Representatives, and HM and the Investor
Representatives shall continue to have the voting and decision-making
rights provided to them under this Agreement; and
(h) To change the principal place of business, the
registered office or registered agent of the Partnership.
11.2 Restrictions on HM's and Investor Representatives' Amendments:
Amendments by Investor Partners. Except as provided in Section 11.1, amendments
to this Agreement shall be made only upon the Majority Vote of Partners,
provided that any term of this Agreement which requires the approval of a
Majority Vote of Investor Partners may only be amended by a Majority Vote of
Investor Partners. Except as set forth in this Section 11.2, no amendment shall
be made pursuant to Section 11.1 which would materially adversely affect the
federal income tax treatment to be afforded each Partner, materially adversely
affect the interests and liabilities of each Partner as provided herein,
materially change the purposes of the Partnership, extend or otherwise modify
the term of the Partnership, or materially change the method of allocations and
distributions as provided in Article VI.
11.3 Amendments to Certificate. In making any amendments to this
Agreement, there shall be prepared, executed and filed for recording by HM such
documents amending the Certificate of Limited Partnership as required under the
Texas Act.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
12.1 Intentionally Omitted.
12.2 Waiver of Provisions. The waiver of compliance at any time with
respect to any of the provisions, terms or conditions of this Agreement shall
not be considered a waiver of such provision, term or condition itself or of any
of the other provisions, terms or conditions hereof.
12.3 Interpretation and Construction. This Agreement contains the
entire agreement among the Partners and any modification or amendment hereto
must be accomplished in accordance with the provisions of Article XI and Article
XII. Where the context so requires, the masculine shall include the feminine and
the neuter, and the singular shall include the plural. The headings and captions
in this Agreement are inserted for convenience and identification only and are
in no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.
12.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas, exclusive of its conflict of
law rules.
12.5 Partial Invalidity. In the event that any part or provision of
this Agreement shall be determined to be invalid or unenforceable, the remaining
parts and provisions of said Agreement which can be separated from the invalid
or unenforceable provision and shall continue in full force and effect.
12.6 Binding on Successors. The terms, conditions and provisions of
this Agreement shall inure to the benefit of, and be binding upon the parties
hereto and their respective heirs, successors, distributees, legal
representatives, and assigns. However, none of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the Partnership.
12.7 Notices and Delivery.
(a) To Partners. Any notice to be given hereunder at any time
to any Partner or any document reports or returns required by this
Agreement to be delivered to any Partner, may be delivered personally
or mailed to such Partner, postage prepaid, addressed to him or her at
such times as (s)he shall by notice to the Partnership have designated
as his or her address for the mailing of all notices hereunder or, in
the absence of such notice, to the address set forth in Article IV
hereof. Any notice, or any document, report or return so delivered or
mailed shall be deemed to have been given or delivered to such Partner
at the time it is mailed, as the case may be.
(b) To the Partnership. Any notice to be given to the
Partnership hereunder shall be delivered personally or mailed to the
Partnership, by certified mail, postage prepaid, addressed to the
Partnership at its registered office. Any notice so delivered or
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<PAGE>
mailed shall be deemed to have been given to the Partnership at the
time it is delivered or mailed, as the case may be.
12.8 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which shall be deemed an original, and the
several counterparts taken together shall constitute the Agreement of the
Partners.
12.9 Statutory Provisions. Any statutory reference in this Agreement
shall include a reference to any successor to such statute and/or revision
thereof.
12.10 Waiver of Partition. Each party does hereby waive any right to
partition or the right to take any other action which might otherwise be
available to such party for the purpose of severing its relationship with the
Partnership or such party's interest in the Equipment held by the Partnership
from the interests of other Partners until the end of the term of both this
Partnership and any successor Entity formed pursuant to the terms hereof.
12.11 Change In Law. If due to any new law, rule or regulation, or due
to an interpretation or enforcement of any existing law, rule or regulation,
health care counsel reasonably selected by HM and the Investor Representatives
determines in writing that it is reasonably likely that the relationships
established between any of the parties to this Agreement including any of their
Affiliates and/or successors or assigns will not comply with any law, rule,
regulation or interpretation thereof ("Applicable Law"), then the parties hereto
hereby agree first, to negotiate in good faith to restructure the relationships
established under this Agreement so as to bring them into compliance with such
applicable laws while at the same time preserving the material benefits of each
of the parties hereto. In the event that a specific proposal for the
restructuring of this Agreement is approved by HM and a Majority Vote of
Investor Partners, such restructured agreement shall become binding upon all
Partners of the Partnership. Second, in the event that within forty-five (45)
days following the Partnership's receipt of legal advice in writing from such
health care counsel regarding Applicable Law the parties hereto are unable to
negotiate an acceptable restructuring of their relationship, then HM shall have
the option, within the following forty-five (45) day period, to purchase the
Partnership Interests of some or all of the Investor Partners whose ownership is
involved with such noncompliance with Applicable Law for a purchase price equal
to the greater of (the "Buyout Price"): (a) the Formula Purchase Price or (b)
the amount of the Capital Contribution made by each Partner to the Partnership
together with interest thereon computed at the Prime Rate as of the date of this
Agreement from the date of such contribution through the date upon which HM pays
all amounts due under the terms of this Section 12.11. Such purchase price shall
be paid in accordance with the Payment Method. Third, in the event that HM does
not exercise its option to purchase Partnership Interests of a Partner whose
ownership causes the Partnership not to be in compliance with Applicable Law,
such Partners may elect by a Majority Vote of Investor Partners in writing
within the following forty-five (45) day period, to either purchase on a pro
rata basis HM's and MedCath's Partnership Interest for the Buyout Price or to
require that the Partnership be dissolved, in which event the Partnership shall
be dissolved in accordance with the terms of this Agreement.
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<PAGE>
12.12 Investment Representations of the Partners.
(a) Each Partner or individual executing this Agreement on
behalf of an Entity which is a Partner hereby represents and warrants
to the Partnership and to the Partners that such Partner has acquired
such Partner's Partnership Interest in the Partnership for investment
solely for such Partnership's own account with the intention of holding
such Partnership Interest for investment, without any intention of
participating directly or indirectly in any distribution of any portion
of such Partnership Interest, including an Economic Interest, and
without the financial participation of any other Person in acquiring
such Partnership Interest in the Partnership.
(b) Each Partner or individual executing this Agreement on
behalf of an Entity which is a Partner hereby acknowledges that such
Partner is aware that such Partner's Partnership Interest in the
Partnership has not been registered (i) under the Securities Act of
1933, as amended (the "Federal Act"), (ii) under applicable Texas
securities laws, or (iii) under any other State securities laws. Each
Partner or individual executing this Agreement on behalf of an Entity
which is a Partner further understands and acknowledges that his
representations and warranties contained in this Section are being
relied upon by the Partnership and by the Partners as the basis for the
exemption of the Partners' Partnership Interest in the Partnership from
the registration requirements of the Federal Act and from the
registration requirements of the Uniform Securities Act and all other
State securities laws. Each Partner or individual executing this
Agreement on behalf of an Entity which is a Partner further
acknowledges that the Partnership will not and has no obligation to
recognize any sale, transfer, or assignment of all or any part of such
Partner's Partnership Interest, including an Economic Interest in the
Partnership to any Person unless and until the provisions of this
Agreement hereof have been fully satisfied.
(c) Each Partner or individual executing this Agreement on
behalf of an entity which is a Partner hereby acknowledges that prior
to his execution of this Agreement, such Partner received a copy of
this Agreement and that such Partner has examined this Agreement or
caused this Agreement to be examined by such Partner's representative
or attorney. Each Partner or individual executing this Agreement on
behalf of an Entity which is a Partner hereby further acknowledges that
such Partner or such Partner's representative or attorney is familiar
with this Agreement and with the Partnership's business plans. Each
Partner or individual executing this Agreement on behalf of an entity
which is a Partner acknowledges that such Partner or such Partner's
representative or attorney has made such inquiries and requested,
received, and reviewed any additional documents necessary for such
Partner to make an informed investment decision and that such Partner
does not desire any further information or data relating to the
Partnership or to the Partners. Each Partner or individual executing
this Agreement on behalf of an Entity which is a Partner hereby
acknowledges that such Partner understands that the purchase of such
Partner's Partnership Interest in the Partnership is a speculative
investment involving a high degree of risk and hereby represents that
such Partner has a net worth sufficient to bear the economic risk of
such Partner's investment in the Partnership and to justify such
Partner's investing in a highly speculative venture of this type.
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<PAGE>
12.13 Decisions by HM and Investor Representatives. Each of the
Investor Partners hereby authorizes HM and the Investor Representatives to make
the decisions to be made by HM and the Investor Representatives hereunder and
hereby releases and holds harmless HM and the Investor Representatives from any
and all claims, liabilities, losses or damages which any of them may have now or
in the future resulting from any decision made by HM and the Investor
Representatives hereunder unless due to the gross negligence or willful
misconduct of HM and the Investor Representatives.
12.14 Ownership of Shares of MedCath. Each Investor Partner agrees
that either he shall not refer patients to the Hospital or that he shall not
acquire, nor continue to own any of the common shares of MedCath to the extent
that in the reasonable opinion of health care counsel of MedCath, that such
ownership, together with referrals of patients to the Hospital, by such Investor
Partner, would cause or constitute a violation of any federal or state law, rule
or regulation.
12.15 Arbitration. The parties hereto agree that any dispute between
them other than a dispute regarding a violation or alleged violation of Section
5.9 hereof shall be resolved by binding arbitration. Such arbitration shall be
conducted by the American Arbitration Association in accordance with its then
existing commercial rules applicable to such disputes. Such arbitration shall be
conducted in Austin, Texas provided that no arbitrator conducting such
arbitration shall reside or have an office within a fifty (50) mile radius of
the Hospital. The decision of such arbitrators shall be final and binding upon
the parties hereto and may be enforced by a court with applicable authority.
12.16 Medical Office Building. It is anticipated that HM and the
Investor Representatives or certain Affiliates thereof will use their
commercially reasonable best efforts to cause a medical office building to be
constructed adjacent to or near the Hospital. HM and the Investor
Representatives shall cause the tenant space in such building to be made
available to the Investor Partners pursuant to a selection and priority method
which allows an Investor Partner to select space in such building in the order
in which such Investor Partners became Partners of the Partnership.
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IN WITNESS WHEREOF, the parties hereto have hereunto set their
respective hands and seals as of the day and year first above written.
PARTNERS:
HOSPITAL MANAGEMENT IV, INC.,
As a General Partner
By: /s/Charles W. Johnson
Charles W. Johnson
President
VENTURE HOLDINGS, INC.,
As a Limited Partner
By: /s/Charles W. Johnson
Charles W. Johnson
Vice President
<PAGE>
SCHEDULE A
PARTNERSHIP INTERESTS OF PARTNERS
<TABLE>
<CAPTION>
Type of
Name and Address Capital Contribution Interest Interest Tax ID No.
<S> <C> <C> <C> <C>
Hospital Management IV, Inc. $ 30,000 General __%
7621 Little Avenue, Suite 106
Charlotte, NC 28226
Venture Holdings, Inc. 1,500,000 Limited __%
7621 Little Avenue, Suite 106
Charlotte, NC 28226
- ---------------------- --%
- ---------------------- --%
- ---------------------- --%
- ---------------------- --%
</TABLE>
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<PAGE>
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
AS AMENDED BY
FIRST AMENDMENT DATED JULY 11, 1996
<PAGE>
TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I
DEFINITIONS.......................................................................................................2
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY..............................................................2
SECTION 2.1. COMPANY FORMATION; EFFECTIVE DATE.............................................2
SECTION 2.2. NAME OF COMPANY...............................................................2
SECTION 2.3. PURPOSES AND INVESTMENT OBJECTIVES............................................2
SECTION 2.4. REGISTERED AGENT AND OFFICE; PRINCIPAL PLACE OF BUSINESS......................3
SECTION 2.5. COMMENCEMENT AND TERM.........................................................3
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS.................................................................................4
SECTION 3.1. CONTRIBUTIONS OF MEMBERS......................................................4
SECTION 3.2. LIABILITY OF MEMBERS - FOR CAPITAL............................................4
SECTION 3.3. MEMBERS' ACCOUNTS AND WITHDRAWALS.............................................4
SECTION 3.4. INTEREST ON CAPITAL CONTRIBUTIONS OR CAPITAL ACCOUNTS.........................4
SECTION 3.5. ADDITIONAL FUNDING............................................................5
ARTICLE IV
NAMES AND ADDRESSES OF MEMBERS....................................................................................5
ARTICLE V
MANAGEMENT OF THE COMPANY.........................................................................................6
SECTION 5.1. GENERAL AUTHORITY AND POWERS OF MANAGERS......................................6
SECTION 5.2. MANAGEMENT OF DAY-TO-DAY OPERATIONS......................................... 11
SECTION 5.3. RESTRICTIONS ON AUTHORITY OF THE MANAGERS................................... 13
SECTION 5.4. DUTIES OF THE MANAGERS...................................................... 14
SECTION 5.5. DELEGATION BY THE MANAGERS.................................................. 15
SECTION 5.6. RIGHT TO RELY UPON THE AUTHORITY OF THE MANAGERS............................ 15
SECTION 5.7. COMPANY EXPENSES............................................................ 15
SECTION 5.8. NO MANAGEMENT BY MEMBERS.................................................... 17
i
<PAGE>
SECTION 5.9. CONSENT BY MEMBERS TO EXERCISE OF CERTAIN RIGHTS AND POWERS BY
MANAGERS.................................................................... 17
SECTION 5.10. OTHER BUSINESS OF MEMBERS................................................... 17
SECTION 5.11. MANAGERS' STANDARD OF CARE.................................................. 19
SECTION 5.12. LIMITATION OF LIABILITY..................................................... 19
SECTION 5.13. INDEMNIFICATION OF THE MANAGERS............................................. 20
SECTION 5.14. ELECTION AND REPLACEMENT OF INVESTOR MANAGER................................ 20
SECTION 5.15. ROLE OF INVESTOR MANAGER.................................................... 20
SECTION 5.16. PURCHASE OF GOODS AND SERVICES FROM HHBF.................................... 20
ARTICLE VI
DISTRIBUTIONS AND ALLOCATIONS................................................................................... 21
SECTION 6.1. DISTRIBUTIONS OF CASH FLOW FROM OPERATIONS AND CASH FROM SALES OR
REFINANCING................................................................. 21
SECTION 6.2. PROFITS..................................................................... 21
SECTION 6.3. LOSSES. .................................................................... 21
SECTION 6.4. CODE SECTION 704(C) TAX ALLOCATIONS. ....................................... 21
SECTION 6.5. MISCELLANEOUS. ............................................................. 22
ARTICLE VII
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS........................................................... 23
SECTION 7.1. NO TERMINATION BY CERTAIN ACTS OF MEMBER.................................... 23
SECTION 7.2. DISSOLUTION................................................................. 23
SECTION 7.3. DISSOLUTION AND FINAL LIQUIDATION........................................... 24
SECTION 7.4. TERMINATION................................................................. 25
SECTION 7.5. PAYMENT IN CASH............................................................. 25
SECTION 7.6. GOODWILL AND TRADE NAME..................................................... 25
SECTION 7.7. TERMINATION OF NONCOMPETITION COVENANTS..................................... 26
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS....................................................... 26
SECTION 8.1. MANAGER - TRANSFERS......................................................... 26
SECTION 8.2. MEMBERS' RIGHT TO CONTINUE WHEN COMPANY HAS NO MANAGER...................... 27
SECTION 8.3. RELATIONSHIP WITH SUBSTITUTE MANAGER........................................ 27
SECTION 8.4. MEMBERS WHO ARE NOT MANAGERS - RESTRICTION ON TRANSFER...................... 27
SECTION 8.5. CONDITION PRECEDENT TO TRANSFER OF ECONOMIC INTEREST AND/OR
MEMBERSHIP INTEREST......................................................... 28
ii
<PAGE>
SECTION 8.6. SUBSTITUTE MEMBER - CONDITIONS TO FULFILL................................... 29
SECTION 8.7. ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE............................... 29
SECTION 8.8. RIGHTS, LIABILITIES OF, AND RESTRICTIONS ON ASSIGNEE........................ 30
SECTION 8.9. DEATH OF A MEMBER........................................................... 30
SECTION 8.10. REPURCHASE OF INTERESTS IN CERTAIN EVENT.................................... 31
SECTION 8.11. PERMISSIBLE TRANSFERS BY INVESTOR MEMBERS................................... 31
SECTION 8.12. SPECIAL PROVISIONS REGARDING WITHDRAWAL..................................... 31
ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS................................................................................ 33
SECTION 9.1. BOOKS OF ACCOUNT............................................................ 33
SECTION 9.2. ACCESS TO RECORDS........................................................... 33
SECTION 9.3. BANK ACCOUNTS AND INVESTMENT OF FUNDS....................................... 33
SECTION 9.4. FISCAL YEAR................................................................. 34
SECTION 9.5. ACCOUNTING REPORTS.......................................................... 34
SECTION 9.6. TAX RETURNS................................................................. 34
ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS........................................................................... 35
SECTION 10.1. MEETINGS.................................................................... 35
SECTION 10.2. VOTING RIGHTS OF MEMBERS.................................................... 35
ARTICLE XI
AMENDMENTS...................................................................................................... 36
SECTION 11.1. AUTHORITY TO AMEND BY MANAGERS.............................................. 36
SECTION 11.2. RESTRICTIONS ON MANAGERS' AMENDMENTS: AMENDMENTS BY INVESTOR MEMBERS........ 37
SECTION 11.3. AMENDMENTS TO CERTIFICATES.................................................. 37
ARTICLE XII
MISCELLANEOUS................................................................................................... 37
SECTION 12.1. LIMITED POWER OF ATTORNEY................................................... 37
SECTION 12.2. WAIVER OF PROVISIONS........................................................ 38
SECTION 12.3. INTERPRETATION AND CONSTRUCTION............................................. 38
SECTION 12.4. GOVERNING LAW; JUDICIAL VENUE............................................... 38
SECTION 12.5. PARTIAL INVALIDITY.......................................................... 38
SECTION 12.6. BINDING ON SUCCESSORS....................................................... 38
SECTION 12.7. NOTICES AND DELIVERY........................................................ 38
SECTION 12.8. COUNTERPART EXECUTION; FACSIMILE EXECUTION.................................. 39
SECTION 12.9. STATUTORY PROVISIONS........................................................ 39
SECTION 12.10. WAIVER OF PARTITION......................................................... 39
iii
<PAGE>
SECTION 12.11. CHANGE IN LAW............................................................... 39
SECTION 12.12. INVESTMENT REPRESENTATIONS OF THE MEMBERS................................... 40
SECTION 12.13. DECISIONS BY INVESTOR MANAGER............................................... 41
SECTION 12.14. REFERRALS TO HOSPITAL AND OWNERSHIP OF SHARES OF COMMON STOCK OF
MEDCATH INCORPORATED........................................................ 41
SECTION 12.15. EXHIBITS.................................................................... 41
</TABLE>
iv
<PAGE>
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE CALIFORNIA SECURITIES ACT
IN RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
THIS OPERATING AGREEMENT (THE "AGREEMENT") OF HEART HOSPITAL OF BK, LLC
(THE "COMPANY"), A NORTH CAROLINA LIMITED LIABILITY COMPANY IS MADE AND ENTERED
INTO BY AND AMONG THE COMPANY AND HHBF, INC., A NORTH CAROLINA CORPORATION
("HHBF"), AS A MEMBER AND EACH OF THE OTHER PARTIES IDENTIFIED ON THE
INFORMATION EXHIBIT AS MEMBERS (THE "INVESTOR MEMBERS").
RECITALS
1. THE COMPANY HAS BEEN FORMED TO DEVELOP, OWN AND OPERATE AN ACUTE
CARE HOSPITAL WHICH HOSPITAL SHALL BE LOCATED IN OR NEAR BAKERSFIELD, CALIFORNIA
AND SHALL SPECIALIZE IN ALL ASPECTS OF ADULT CARDIOLOGY AND ADULT CARDIOVASCULAR
CARE AND SURGERY WHICH HHBF AND THE INVESTOR MANAGER MAY AGREE UPON;
2. IT IS INTENDED THAT THE HOSPITAL WILL BE A LOW-COST, HIGH QUALITY
PROVIDER OF MEDICAL SERVICES WITHIN THE BAKERSFIELD, CALIFORNIA AREA IN A MANNER
WHICH IS CONSISTENT WITH THE NATIONAL HEALTH CARE POLICY OF LOWERING THE COSTS
OF HEALTH CARE;
3. THE CAPITAL CONTRIBUTIONS AND ACTIVE INVOLVEMENT OF THE INVESTOR
MEMBERS ARE NECESSARY TO ENABLE THE COMPANY TO ACHIEVE ITS OBJECTIVES.
<PAGE>
ARTICLE I
DEFINITIONS
UNLESS OTHERWISE INDICATED, CAPITALIZED WORDS AND PHRASES IN THIS
OPERATING AGREEMENT SHALL HAVE THE MEANINGS SET FORTH IN THE ATTACHED GLOSSARY
OF TERMS.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
SECTION 2.1. COMPANY FORMATION; EFFECTIVE DATE. THE COMPANY WAS FORMED UPON
THE FILING OF THE ARTICLES OF ORGANIZATION WITH THE SECRETARY OF STATE OF NORTH
CAROLINA IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. UPON THE EFFECTIVENESS OF
THIS AGREEMENT, THE PERSONS LISTED ON THE ATTACHED INFORMATION EXHIBIT SHALL BE
ADMITTED TO THE COMPANY AS MEMBERS AND THE PERSONS WHO EXECUTED THE ARTICLES
SHALL BE WITHDRAWN AS MEMBERS (UNLESS THEY ARE LISTED ON THE INFORMATION
EXHIBIT), ALL WITHOUT THE NECESSITY OF ANY FURTHER ACT OR INSTRUMENT AND WITHOUT
CAUSING THE DISSOLUTION OF THE COMPANY. HHBF SHALL EXECUTE OR CAUSE TO BE
EXECUTED ALL OTHER SUCH CERTIFICATES OR DOCUMENTS, AND SHALL DO OR CAUSE TO BE
DONE ALL SUCH FILING, RECORDING, OR OTHER ACTS, AS MAY BE NECESSARY OR
APPROPRIATE FROM TIME TO TIME TO COMPLY WITH THE REQUIREMENTS OF LAW FOR THE
CONTINUATION AND/OR OPERATION OF A LIMITED LIABILITY COMPANY IN THE STATE OF
NORTH CAROLINA, AND OTHER DOCUMENTS TO REFLECT THE ADMISSION OF ADDITIONAL
MEMBERS TO THE COMPANY. ANY COSTS INCURRED BY HHBF IN CONNECTION WITH THE
FOREGOING SHALL BE REIMBURSED PROMPTLY UPON THE COMPLETION OF SUCH ACTION. THE
AGREEMENT SHALL BE EFFECTIVE AS OF THE DATE THE COMPANY WAS FORMED.
SECTION 2.2. NAME OF COMPANY. THE NAME OF THE COMPANY IS HEART HOSPITAL OF
BK, LLC.
SECTION 2.3. PURPOSES AND INVESTMENT OBJECTIVES. THE PRINCIPAL PURPOSES OF
THE COMPANY ARE AS FOLLOWS:
(A) TO DEVELOP, OWN AND OPERATE THE HOSPITAL WHICH WOULD
INCLUDE, BUT NOT BE LIMITED TO, THE FOLLOWING:
(I) SERVICES AND FACILITIES TO MEET ALL REQUIREMENTS
OF THE STATE OF CALIFORNIA, MEDICARE, JCAHO AND OTHER
CREDENTIALLING OR LICENSING BODIES OR AGENCIES IN ORDER TO
HAVE THE HOSPITAL LICENSED AS A GENERAL ACUTE CARE HOSPITAL
AND TO PERFORM ADULT CARDIOLOGY AND ADULT CARDIOVASCULAR
SURGICAL SERVICES OF EVERY TYPE OR NATURE AND TO BE ELIGIBLE
TO OBTAIN APPROPRIATE REIMBURSEMENTS THEREFORE;
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(II) 70,000 TO 80,000 SQUARE FEET IN A BUILDING TO
BE CONSTRUCTED IN ACCORDANCE WITH PLANS AND SPECIFICATIONS
APPROVED BY THE COMPANY;
(III) APPROXIMATELY 60 MEDICAL/SURGICAL BEDS;
(IV) 4 HEART CATHETERIZATION LABORATORIES WITH ONE
SET UP FOR PROCEDURES RELATING TO ELECTROPHYSIOLOGY AND
PACEMAKERS;
(V) 3 HEART SURGICAL SUITES WITH SPACE FOR THE
DEVELOPMENT OF ONE ADDITIONAL HEART SURGICAL SUITE;
(VI) ALL APPROPRIATE SUPPORT SERVICES AND SYSTEMS;
AND
(VII) APPROPRIATE EQUIPMENT AND SERVICES WITH RESPECT
TO THE FACILITIES DESCRIBED ABOVE AND AS OTHERWISE REASONABLY
NECESSARY OR APPROPRIATE FOR THE DIAGNOSIS AND TREATMENT OF
CARDIOVASCULAR DISEASE, INCLUDING BUT NOT LIMITED TO INVASIVE
AND NON-INVASIVE CARDIAC TESTING, INTERVENTIONAL TREATMENT
INCLUDING PERCUTANEOUS TRANSLUMINAL CORONARY ANGIOPLASTY AND
ATHERECTOMY, AND CARDIAC SURGERY WHICH WOULD INCLUDE, BUT NOT
BE LIMITED TO, BYPASS GRAFTS AND VALVE SURGERY.
THE ABOVE SIZE, NUMBER AND SCOPE OF FACILITIES OF THE HOSPITAL
ARE ONLY PRELIMINARY ESTIMATES. THE MANAGERS ARE AUTHORIZED TO FINALLY
MAKE ALL DETERMINATIONS WITH RESPECT THERETO.
(B) TO LEASE OR ACQUIRE THE REAL PROPERTY, AND IF APPROPRIATE
TO CONSTRUCT A SUITABLE BUILDING, IN WHICH THE HOSPITAL SHALL BE LOCATED;
(C) ANY OTHER PURPOSE REASONABLY RELATED TO (A) AND (B) ABOVE.
SECTION 2.4. REGISTERED AGENT AND OFFICE; PRINCIPAL PLACE OF BUSINESS. THE
REGISTERED AGENT AND OFFICE OF THE COMPANY SHALL BE AS INDICATED IN THE ARTICLES
OF ORGANIZATION, AS AMENDED FROM TIME TO TIME. THE PRINCIPAL PLACE OF BUSINESS
OF THE COMPANY SHALL BE AT SUCH LOCATION IN CALIFORNIA AS SELECTED BY HHBF FROM
TIME TO TIME. HHBF SHALL PROMPTLY NOTIFY THE MEMBERS OF ANY CHANGES IN THE
COMPANY'S REGISTERED AGENT, REGISTERED OFFICE, OR PRINCIPAL PLACE OF BUSINESS.
SECTION 2.5.COMMENCEMENT AND TERM. THE COMPANY COMMENCED ON THE FILING OF
THE ARTICLES OF ORGANIZATION IN THE OFFICE OF THE SECRETARY OF STATE OF NORTH
CAROLINA, AS REQUIRED BY SECTION 2.1 HEREOF, AND SHALL CONTINUE UNTIL DECEMBER
31, 2035, UNLESS SOONER TERMINATED OR DISSOLVED AS PROVIDED HEREIN; PROVIDED,
HOWEVER, THAT THE TERMINATION DATE MAY BE EXTENDED FOR UP TO AN ADDITIONAL FORTY
(40) YEARS IN FIVE (5) YEAR INCREMENTS UPON THE ELECTION OF HHBF. IN THE EVENT
HHBF DOES NOT ELECT TO EXTEND THE TERM
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HEREOF, THE INVESTOR MANAGER MAY INSTEAD ELECT TO EXTEND THE TERM HEREOF,
SUBJECT TO HHBF'S CONSENT WHICH SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED.
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
SECTION 3.1. CONTRIBUTIONS OF MEMBERS. THE MEMBERS SHALL CONTRIBUTE CAPITAL
AS FOLLOWS:
(A) HHBF SHALL OWN AT LEAST A FIFTY-ONE PERCENT (51%)
MEMBERSHIP INTEREST IN THE COMPANY AND SHALL CONTRIBUTE TO THE COMPANY
FOR ITS MEMBERSHIP INTEREST ONE MILLION FIVE HUNDRED THIRTY THOUSAND
DOLLARS ($1,530,000).
(B) THE INVESTOR MEMBERS SHALL OWN IN THE AGGREGATE UP TO A
FORTY-NINE PERCENT (49%) MEMBERSHIP INTEREST AND SHALL CONTRIBUTE TO
THE COMPANY FOR THEIR MEMBERSHIP INTERESTS AN AMOUNT, IN THE AGGREGATE,
OF UP TO ONE MILLION FOUR HUNDRED SEVENTY THOUSAND DOLLARS
($1,470,000). THE MEMBERSHIP INTERESTS OF THE INVESTOR MEMBERS SHALL BE
OWNED AS SHOWN ON THE INFORMATION EXHIBIT ATTACHED HERETO.
THE MEMBERS MAY BE LIABLE TO THE COMPANY FOR AMOUNTS DISTRIBUTED TO
THEM AS A RETURN OF CAPITAL AS PROVIDED BY THE ACT. THE MEMBERS SHALL NOT BE
REQUIRED TO CONTRIBUTE ANY ADDITIONAL CAPITAL TO THE COMPANY EXCEPT AS PROVIDED
IN SECTION 3.5.
SECTION 3.2. LIABILITY OF MEMBERS - FOR CAPITAL. THE LIABILITY OF EACH
MEMBER, AS SUCH, SHALL BE LIMITED TO THE AMOUNT OF ITS AGREED CAPITAL
CONTRIBUTION AS A MEMBER AS PROVIDED IN SECTION 3.1.
SECTION 3.3. MEMBERS' ACCOUNTS AND WITHDRAWALS. AN INDIVIDUAL CAPITAL
ACCOUNT SHALL BE MAINTAINED FOR EACH MEMBER IN ACCORDANCE WITH REQUIREMENTS OF
THE CODE AND THE REGULATIONS PROMULGATED THEREUNDER. EXCEPT AS PROVIDED IN
SECTION 8.12 BELOW, NO MEMBER SHALL BE ENTITLED TO WITHDRAW OR TO MAKE DEMAND
FOR WITHDRAWAL OF ANY PART OF ITS CAPITAL ACCOUNT OR TO RECEIVE ANY DISTRIBUTION
EXCEPT AS PROVIDED HEREIN.
SECTION 3.4. INTEREST ON CAPITAL CONTRIBUTIONS OR CAPITAL ACCOUNTS. NO
INTEREST SHALL BE PAID TO ANY MEMBER BASED SOLELY ON ITS CAPITAL CONTRIBUTIONS
OR CAPITAL ACCOUNT. THE PRECEDING SENTENCE SHALL NOT PREVENT THE COMPANY FROM
EARNING INTEREST ON ITS BANK ACCOUNTS AND INVESTMENTS AND DISTRIBUTING SUCH
EARNINGS TO THE MEMBER IN ACCORDANCE WITH ARTICLES VI AND VII.
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SECTION 3.5. ADDITIONAL FUNDING. IF FROM TIME TO TIME, HHBF REASONABLY
DETERMINES THAT FUNDS IN ADDITION TO THAT CONTEMPLATED BY SECTIONS 3.1 AND 3.2
ARE NECESSARY OR APPROPRIATE FOR THE DEVELOPMENT OR OPERATION OF THE HOSPITAL,
THEN:
(A) FIRST, HHBF SHALL USE COMMERCIALLY REASONABLE EFFORTS TO
BORROW SUCH FUNDS FROM A BANK OR OTHER LENDER ON TERMS AND CONDITIONS
REASONABLY ACCEPTABLE TO HHBF, OR HHBF MAY, BUT SHALL NOT BE REQUIRED,
TO LOAN SUCH FUNDS TO THE COMPANY AT THE PRIME RATE PLUS ONE PERCENT
(1%) PER ANNUM WHICH LOAN SHALL BE SECURED BY THE COMPANY'S ASSETS.
INTEREST SHALL BE PAID MONTHLY IN ARREARS AND PRINCIPAL SHALL BE REPAID
AS THE COMPANY HAS FUNDS AVAILABLE THEREFORE. ALL LOANS OBTAINED
HEREUNDER SHALL BE SUBJECT TO THE APPROVAL OF THE INVESTOR MANAGER
WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED;
(B) SECOND, IF LOANS AS PROVIDED IN (A) ABOVE ARE NOT
AVAILABLE, HHBF MAY REQUEST THAT THE MEMBERS CONTRIBUTE ADDITIONAL
CAPITAL TO THE COMPANY PRO RATA ACCORDING TO THEIR RESPECTIVE
MEMBERSHIP INTERESTS, PROVIDED HOWEVER, SUCH CAPITAL CONTRIBUTIONS
SHALL BE MADE ONLY IF HHBF AND THE INVESTOR MANAGER APPROVE SUCH
CAPITAL CONTRIBUTIONS. IF ADDITIONAL CAPITAL CONTRIBUTIONS ARE SO
APPROVED, EACH MEMBER MAY ELECT WHETHER OR NOT TO CONTRIBUTE ITS PRO
RATA PORTION THEREOF. THE OTHER INVESTOR MEMBERS MAY ELECT TO
CONTRIBUTE CAPITAL NOT CONTRIBUTED BY ANY INVESTOR MEMBER HEREUNDER.
HHBF MAY THEN ELECT TO CONTRIBUTE AMOUNTS WHICH THE INVESTOR MEMBERS,
IN THE AGGREGATE, HAVE NOT SO CONTRIBUTED. THEREAFTER, HHBF SHALL
REASONABLY ADJUST THE PERCENTAGE MEMBERSHIP INTEREST OF EACH MEMBER
(BASED ON THE RELATIVE AGGREGATE CAPITAL CONTRIBUTIONS MADE BY THE
MEMBERS IN ACCORDANCE WITH THIS AGREEMENT) IN THE EVENT ANY MEMBER
ELECTED NOT TO CONTRIBUTE CAPITAL PURSUANT TO A CAPITAL CALL APPROVED
IN ACCORDANCE WITH THIS SECTION 3.5; AND
(C) THIRD, IF FUNDS ARE NOT AVAILABLE IN ACCORDANCE WITH (A)
OR (B) ABOVE, THEN HHBF MAY ELECT TO DISSOLVE THE COMPANY.
ARTICLE IV
NAMES AND ADDRESSES OF MEMBERS
THE NAMES AND ADDRESSES OF THE MEMBERS ARE AS INDICATED ON THE
INFORMATION EXHIBIT, ATTACHED HERETO AND AS AMENDED FROM TIME TO TIME.
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ARTICLE V
MANAGEMENT OF THE COMPANY
SECTION 5.1. GENERAL AUTHORITY AND POWERS OF MANAGERS. EXCEPT AS SET FORTH
IN THOSE PROVISIONS OF THIS AGREEMENT THAT SPECIFICALLY REQUIRE THE VOTE,
CONSENT, APPROVAL OR RATIFICATION OF THE MEMBERS, THE MANAGERS SHALL HAVE
COMPLETE AUTHORITY AND EXCLUSIVE CONTROL OVER THE MANAGEMENT OF THE BUSINESS AND
AFFAIRS OF THE COMPANY. NO MEMBER HAS THE ACTUAL OR APPARENT AUTHORITY TO CAUSE
THE COMPANY TO BECOME BOUND IN ANY CONTRACT, AGREEMENT OR OBLIGATION, AND NO
MEMBER SHALL TAKE ANY ACTION PURPORTING TO BE ON BEHALF OF THE COMPANY. NO
MANAGER SHALL CAUSE THE COMPANY TO BECOME BOUND TO ANY CONTRACT, AGREEMENT OR
OBLIGATION, AND NO MANAGER SHALL TAKE ANY OTHER ACTION ON BEHALF OF THE COMPANY,
UNLESS SUCH MATTER HAS RECEIVED THE VOTE, CONSENT, APPROVAL OR RATIFICATION AS
REQUIRED PURSUANT TO THIS AGREEMENT WITH RESPECT TO SUCH MATTER OR EXCEPT AS
PROVIDED IN SECTION 5.2 BELOW WITH RESPECT TO THE AUTHORITY AND ACTIONS OF HHBF.
IT IS ACKNOWLEDGED THAT ALL DECISIONS RELATING TO THE HOSPITAL AND MEDICAL STAFF
BYLAWS AND PHYSICIAN CREDENTIALLING MATTERS SHALL BE HANDLED IN ACCORDANCE WITH
SECTION 11.1(G).
EXCEPT AS PROVIDED IN THIS AGREEMENT, DECISIONS AND ACTIONS TO BE TAKEN
BY THE MANAGERS SHALL BE DEEMED TO HAVE BEEN MADE ONLY UPON THE AFFIRMATIVE
APPROVAL OR CONSENT OF HHBF AND THE INVESTOR MANAGER. IN THE EVENT A DECISION,
APPROVAL OR CONSENT IS REQUESTED OF THE INVESTOR MANAGER BY HHBF, IT SHALL BE
DEEMED TO HAVE BEEN AFFIRMATIVELY MADE IF THE INVESTOR MANAGER FAILS TO RESPOND
TO ANY SUCH WRITTEN REQUEST THEREFOR WITHIN FIVE (5) DAYS OF NOTICE THEREOF BY
HHBF, PROVIDED HOWEVER, ONCE THE HOSPITAL HAS OPENED FOR BUSINESS AND REGULARLY
CONDUCTS SUCH BUSINESS THE FIVE (5) DAY PERIOD SHALL BE EXTENDED TO TEN (10)
DAYS. NOTWITHSTANDING ANYTHING IN THIS AGREEMENT TO THE CONTRARY, ALL DECISIONS
AND ACTIONS TO BE MADE BY THE MANAGERS WITH RESPECT TO ANY LOAN, LEASE OR OTHER
SIMILAR FINANCING OF THE DEVELOPMENT, CONSTRUCTION OR OPERATION OF THE HOSPITAL
OR THE COMPANY'S AFFAIRS, INCLUDING WITHOUT LIMITATION THE DECISIONS WITH
RESPECT TO INCURRING ANY INDEBTEDNESS OR THE REFINANCING THEREOF, SHALL BE MADE
BY HHBF AND SHALL BE SUBJECT TO THE CONSENT OF THE INVESTOR MANAGER, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD; PROVIDED, THE APPLICATION OF THE
COMPANY'S FUNDS TOWARD THE REPAYMENT OF ALL OR A PORTION OF ANY FINANCING OF THE
COMPANY IN EXCESS OF AMOUNTS THEN REQUIRED TO BE PAID (I.E., VOLUNTARY
PREPAYMENTS) SHALL BE MADE ONLY WITH THE CONSENT OF HHBF AND THE INVESTOR
MANAGER.
THE FOLLOWING MATERIAL DECISIONS SHALL BE MADE BY THE MANAGERS AS
DETERMINED ABOVE, EXCEPT AS OTHERWISE PROVIDED:
(A) HOSPITAL DEVELOPMENT. HHBF AND THE INVESTOR MANAGER SHALL APPROVE
THE DEVELOPMENT PLAN FOR THE HOSPITAL, THE SELECTION OF THE SITE FOR THE
HOSPITAL, THE DESIGN OF THE HOSPITAL AND THE CONSTRUCTION FOR THE
DEVELOPMENT OF THE HOSPITAL.
(B) CAPITAL IMPROVEMENTS AND EXPANSION. ANY RENOVATION AND EXPANSION
PLANS AND CAPITAL EQUIPMENT EXPENDITURES WITH RESPECT TO THE HOSPITAL SHALL BE
REVIEWED AND
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APPROVED BY HHBF AND THE INVESTOR MANAGER AND SHALL BE BASED UPON
ECONOMIC FEASIBILITY, PATIENT CARE CRITERIA AND THEN CURRENT MARKET CONDITIONS.
(C) KEY MANAGEMENT AND CLINICAL EMPLOYEES. THE SELECTION, RETENTION AND
REMOVAL OF THE PRESIDENT/SENIOR ADMINISTRATOR, VICE PRESIDENT-CLINICAL, VICE
PRESIDENT-MANAGED CARE, CATHETERIZATION LABORATORY DIRECTOR, NURSES AND
TECHNICIANS, OPERATING ROOM/SURGERY SUITES DIRECTOR, NURSES AND TECHNICIANS, AND
ICU/CCU DIRECTOR, NURSES AND TECHNICIANS SHALL BE SUBJECT TO THE APPROVAL OF
HHBF AND THE INVESTOR MANAGER UPON THE WRITTEN REQUEST OF THE INVESTOR MANAGER
ON AN EMPLOYEE BY EMPLOYEE BASIS. EITHER HHBF OR THE INVESTOR MANAGER MAY
INITIATE THE PROCESS TO DETERMINE WHETHER THE EMPLOYMENT OF ANY OF THE ABOVE
INDIVIDUALS SHOULD BE TERMINATED BY PROVIDING TO THE OTHER A WRITTEN REPORT
WHICH DOCUMENTS THE REASONS WHY THE INDIVIDUAL'S JOB PERFORMANCE IS MATERIALLY
DEFICIENT AND INCLUDES A RECOMMENDED COURSE OF ACTION FOR THE COMPANY TO TAKE.
WITH THE CONSENT OF THE NON-INITIATING MANAGER, WHICH CONSENT SHALL NOT BE
UNREASONABLY WITHHELD, THE MANAGERS SHALL CAUSE THE COMPANY TO TAKE SUCH
RECOMMENDED ACTIONS; PROVIDED, SUCH ACTIONS SHALL BE CONSISTENT WITH THE
ESTABLISHED DISCIPLINARY PROCEDURES OF THE COMPANY WITH RESPECT TO EMPLOYEES,
WHICH SHALL INCLUDE ANY PROCEDURES SET FORTH IN ANY EMPLOYEE HANDBOOKS OR
MANUALS; PROVIDED FURTHER, THE ACTIONS MUST BE CONSISTENT WITH THE OBLIGATIONS
OF THE COMPANY UNDER ANY CONTRACTS OR AGREEMENTS TO WHICH IT IS A PARTY,
INCLUDING AGREEMENTS WITH THE INDIVIDUAL IN QUESTION, AND WITH APPLICABLE LAW.
(D) CERTAIN SERVICE PROVIDERS. THE SELECTION, RETENTION AND REMOVAL OF
PERFUSIONISTS, RADIOLOGISTS, EMERGENCY ROOM PHYSICIANS, PATHOLOGISTS AND
ANESTHESIOLOGISTS TO PROVIDE SERVICES AT THE HOSPITAL SHALL BE SUBJECT TO THE
APPROVAL OF HHBF AND THE INVESTOR MANAGER UPON THE WRITTEN REQUEST OF THE
INVESTOR MANAGER ON AN EMPLOYEE BY EMPLOYEE BASIS. EITHER HHBF OR THE INVESTOR
MANAGER MAY INITIATE THE PROCESS TO DETERMINE WHETHER THE SERVICE RELATIONSHIP
OF ANY OF THE ABOVE SERVICE PROVIDERS SHOULD BE TERMINATED BY PROVIDING TO THE
OTHER A WRITTEN REPORT WHICH DOCUMENTS THE REASONS WHY THE SERVICE PROVIDER'S
PERFORMANCE IS MATERIALLY DEFICIENT AND INCLUDES A RECOMMENDED COURSE OF ACTION
FOR THE COMPANY TO TAKE. WITH THE CONSENT OF THE NON-INITIATING MANAGER, WHICH
CONSENT SHALL NOT BE UNREASONABLY WITHHELD, THE MANAGERS SHALL CAUSE THE COMPANY
TO TAKE SUCH RECOMMENDED ACTIONS; PROVIDED, SUCH ACTIONS SHALL BE CONSISTENT
WITH THE ESTABLISHED DISCIPLINARY PROCEDURES OF THE COMPANY (I) CONTAINED IN THE
MEDICAL STAFF BYLAWS AND RULES AND REGULATIONS AND HOSPITAL BYLAWS AND (II) WITH
RESPECT TO EMPLOYEES, WHETHER OR NOT SUCH SERVICE PROVIDER IS AN EMPLOYEE OF THE
COMPANY, WHICH SHALL INCLUDE ANY PROCEDURES SET FORTH IN ANY EMPLOYEE HANDBOOKS
OR MANUALS; PROVIDED FURTHER, THE ACTIONS MUST BE CONSISTENT WITH THE
OBLIGATIONS OF THE COMPANY UNDER ANY CONTRACTS OR AGREEMENTS TO WHICH IT IS A
PARTY, INCLUDING AGREEMENTS WITH THE SERVICE PROVIDER IN QUESTION, AND WITH
APPLICABLE LAW.
(E) MARKETING. ALL ADVERTISING AND OTHER MARKETING OF THE SERVICES
PERFORMED AT THE HOSPITAL SHALL BE SUBJECT TO THE PRIOR REVIEW AND APPROVAL OF
HHBF AND THE INVESTOR MANAGER.
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(F) ANCILLARY SERVICES. HHBF AND THE INVESTOR MANAGER SHALL APPROVE
HOSPITAL-PROVIDED ANCILLARY SERVICES BASED UPON THE PRICING, ACCESS TO AND
QUALITY OF SUCH SERVICES.
(G) PROVIDER AND PAYOR RELATIONSHIPS. DECISIONS REGARDING THE
ESTABLISHMENT OR MAINTENANCE OF RELATIONSHIPS WITH OTHER HEALTH CARE PROVIDERS
AND PAYORS SHALL BE MADE BY HHBF AND THE INVESTOR MANAGER.
(H) STRATEGIC PLANNING. HHBF AND THE INVESTOR MANAGER SHALL DEVELOP
LONG-TERM STRATEGIC PLANNING OBJECTIVES AND ADOPT A STRATEGIC PLAN FOR THE
HOSPITAL.
(I) CAPITAL EXPENDITURES AND REPLACEMENTS. HHBF AND THE INVESTOR
MANAGER SHALL DETERMINE THE PRIORITY OF MAJOR CAPITAL EXPENDITURES. IN ADDITION,
WITH RESPECT TO EQUIPMENT FOR THE CATHETERIZATION LABORATORY, THE OPERATING
ROOMS/SURGERY SUITES AND THE ICC/CCU DEPARTMENT, EITHER HHBF OR THE INVESTOR
MANAGER MAY PRESENT TO THE OTHER PROPOSALS FOR THE REPLACEMENT OF ANY SUCH
EQUIPMENT THAT IS USED AND OBSOLETE AND SUCH PROPOSAL SHALL BE IMPLEMENTED WITH
THE CONSENT OF THE OTHER MANAGER, WHICH CONSENT SHALL NOT BE UNREASONABLY
WITHHELD; PROVIDED, SUCH REPLACEMENT SHALL BE MADE ONLY AFTER THE COST OF ANY
SUCH USED EQUIPMENT HAS BEEN FULLY RECOVERED AS DEPRECIATION ON THE COMPANY'S
BOOKS AND FINANCIAL RECORDS IN ACCORDANCE WITH GENERAL ACCEPTED ACCOUNTING
PRINCIPALS.
(J) SELECTION OF SURGICAL SUPPLIES AND IMPLANTS. DECISIONS REGARDING
THE SELECTION OF SUPPLIES AND IMPLANTS USED IN CARDIAC, THORACIC AND VASCULAR
SURGERY, INCLUDING INSTRUMENTS, SUTURES, CARDIOPLEGIA, VALVES AND SYNTHETIC
GRAPHS, SHALL BE MADE BY HHBF AND THE INVESTOR MANAGER AS FOLLOWS:
(I) THE INVESTOR MANAGER SHALL SUBMIT TO HHBF A LIST OF
PREFERRED PARTIES TO BE THE "PRIMARY VENDOR" FOR SUCH
ITEMS.
(II) HHBF SHALL SOLICIT BIDS FROM THOSE PARTIES WHO DESIRE
TO SERVE AS THE HOSPITAL'S PRIMARY VENDOR FOR SUCH
ITEMS.
(III) HHBF SHALL SUBMIT SUCH BIDS TO THE INVESTOR MANAGER
AND THE INVESTOR MANAGER SHALL CHOOSE ONE SUCH PARTY
TO BE THE PRIMARY VENDOR AND ANOTHER SUCH PARTY TO BE
THE "SECONDARY VENDOR."
(IV) THE MANAGERS SHALL CAUSE THE COMPANY TO ENTER INTO AN
AGREEMENT WITH THE PARTY SELECTED BY THE INVESTOR
MANAGER AS THE PRIMARY VENDOR PURSUANT TO WHICH SUCH
PARTY SHALL PROVIDE SUCH ITEMS TO THE HOSPITAL.
(V) THE NEEDED ITEMS SHALL THEREAFTER BE ACQUIRED FROM
THE PARTY SELECTED AS THE PRIMARY VENDOR PURSUANT TO
THE AGREEMENT REACHED WITH THAT PARTY. IN THE EVENT
THE PRIMARY VENDOR IS NOT ABLE TO PROVIDE THE
REQUIRED ITEMS, THE HOSPITAL MAY ACQUIRE THEM FROM
THE SECONDARY VENDOR. IN
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THE CASE OF SPECIALTY ITEMS THAT NEITHER THE PRIMARY
VENDOR NOR THE SECONDARY VENDOR CAN PROVIDE, THE
HOSPITAL MAY ACQUIRE THEM FROM OTHER VENDORS.
(VI) UPON REASONABLE NOTICE, THE INVESTOR MANAGER MAY GIVE
NOTICE TO HHBF OF ITS DESIRE TO CHANGE THE PARTY WHO
WILL SERVE AS THE PRIMARY VENDOR, AND TO THE EXTENT
SUCH A CHANGE WILL NOT VIOLATE ANY CONTRACT OR
AGREEMENT TO WHICH THE COMPANY IS A PARTY, INCLUDING
ANY CONTRACT OR AGREEMENT WITH THE PARTY WHO IS THE
PRIMARY VENDOR AT THAT TIME, HHBF WILL ATTEMPT TO
ENTER INTO AN AGREEMENT WITH THE PARTY SELECTED BY
THE INVESTOR MANAGER TO REPLACE THE PRIOR PARTY AS
THE PRIMARY VENDOR.
(K) SELECTION OF SUPPLIES UTILIZED IN THE CATHETERIZATION LABORATORY.
DECISIONS REGARDING THE SELECTION OF SUPPLIES, INCLUDING PACEMAKERS, USED IN THE
CATHETERIZATION LABORATORY SHALL BE MADE BY HHBF AND THE INVESTOR MANAGER AS
FOLLOWS:
(I) THE INVESTOR MANAGER SHALL SUBMIT TO HHBF A LIST OF
PREFERRED PARTIES TO BE THE "PRIMARY VENDOR" FOR SUCH
ITEMS.
(II) HHBF SHALL SOLICIT BIDS FROM THOSE PARTIES WHO DESIRE
TO SERVE AS THE HOSPITAL'S PRIMARY VENDOR FOR SUCH
ITEMS.
(III) HHBF SHALL SUBMIT SUCH BIDS TO THE INVESTOR MANAGER
AND THE INVESTOR MANAGER SHALL CHOOSE ONE SUCH PARTY
TO BE THE PRIMARY VENDOR AND ANOTHER SUCH PARTY TO BE
THE "SECONDARY VENDOR."
(IV) THE MANAGERS SHALL CAUSE THE COMPANY TO ENTER INTO AN
AGREEMENT WITH THE PARTY SELECTED BY THE INVESTOR
MANAGER AS THE PRIMARY VENDOR PURSUANT TO WHICH SUCH
PARTY SHALL PROVIDE SUCH ITEMS TO THE HOSPITAL.
(V) THE NEEDED ITEMS SHALL THEREAFTER BE ACQUIRED FROM
THE PARTY SELECTED AS THE PRIMARY VENDOR PURSUANT TO
THE AGREEMENT REACHED WITH THAT PARTY. IN THE EVENT
THE PRIMARY VENDOR IS NOT ABLE TO PROVIDE THE
REQUIRED ITEMS, THE HOSPITAL MAY ACQUIRE THEM FROM
THE SECONDARY VENDOR. IN THE CASE OF SPECIALTY ITEMS
THAT NEITHER THE PRIMARY VENDOR NOR THE SECONDARY
VENDOR CAN PROVIDE, THE HOSPITAL MAY ACQUIRE THEM
FROM OTHER VENDORS.
(VI) UPON REASONABLE NOTICE, THE INVESTOR MANAGER MAY GIVE
NOTICE TO HHBF OF ITS DESIRE TO CHANGE THE PARTY WHO
WILL SERVE AS THE PRIMARY VENDOR, AND TO THE EXTENT
SUCH A CHANGE WILL NOT VIOLATE ANY CONTRACT OR
AGREEMENT TO WHICH THE COMPANY IS A PARTY, INCLUDING
ANY CONTRACT OR AGREEMENT WITH THE PARTY WHO IS THE
PRIMARY VENDOR AT THAT TIME,
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HHBF WILL ATTEMPT TO ENTER INTO AN AGREEMENT WITH THE
PARTY SELECTED BY THE INVESTOR MANAGER TO REPLACE THE
PRIOR PARTY AS THE PRIMARY VENDOR.
(L) SCOPE OF HOSPITAL SERVICES. ANY DECISION TO EXPAND THE SCOPE OF THE
HOSPITAL SERVICES BEYOND THOSE CONSISTENT WITH THE SERVICES REASONABLY EXPECTED
TO BE PROVIDED BY A HOSPITAL SPECIALIZING IN ALL ASPECTS OF ADULT CARDIOLOGY AND
ADULT CARDIOVASCULAR CARE AND SURGERY SHALL BE MADE ONLY UPON THE UNANIMOUS
CONSENT OF HHBF AND THE INVESTOR MANAGER, WHICH CONSENT CAN BE GIVEN OR WITHHELD
ON THE SOLE AND ABSOLUTE DISCRETION OF EACH MANAGER.
(M) EXCLUSIVE CONTRACTS. HHBF AND THE INVESTOR MANAGER SHALL APPROVE
THE EXECUTION OF EXCLUSIVE CONTRACTS TO PROVIDE PHYSICIAN SERVICES TO THE
HOSPITAL.
(N) GLOBAL CONTRACTING. HHBF AND THE INVESTOR MANAGER SHALL DEVELOP AND
APPROVE A UNIFIED MANAGED CARE STRATEGY UNDER WHICH THE HOSPITAL AND PHYSICIANS
PRACTICING AT THE HOSPITAL WOULD ENTER INTO MANAGED CARE AGREEMENTS INCLUDING
AGREEMENTS CONTAINING PACKAGE PRICING FOR THE SERVICES OF THE HOSPITAL AND SUCH
PHYSICIANS.
(O) OTHER MATERIAL DECISIONS. HHBF AND THE INVESTOR MANAGER SHALL
APPROVE ANY BINDING AGREEMENT WHICH MAY NOT BE CANCELED UPON LESS THAN NINETY
(90) DAYS' NOTICE AND WHICH CALLS FOR THE EXPENDITURE OF FUNDS, OR INVOLVES AN
OBLIGATION FOR FINANCING, IN EXCESS OF $100,000, EXCLUSIVE OF AGREEMENTS OR
OBLIGATIONS CONTEMPLATED BY ANY BUDGET, DEVELOPMENT PLAN, FINANCING OR
CONSTRUCTION CONTRACT APPROVED BY THE MANAGERS OR AGREEMENTS INCURRED IN THE
ORDINARY COURSE OF BUSINESS SUCH AS EMPLOYMENT AGREEMENTS FOR OTHER THAN KEY
EMPLOYEES, PURCHASES OF SUPPLIES AND ROUTINE SERVICES AND THE LIKE.
(P) BUDGETS. THE DEVELOPMENT AND ANNUAL OPERATING BUDGETS TO BE
PROPOSED BY HHBF SHALL BE APPROVED BY THE MANAGERS AS PROVIDED ABOVE SUBJECT
TO THE FOLLOWING:
(I) THE INVESTOR MANAGER SHALL BE DEEMED TO HAVE APPROVED A
DEVELOPMENT BUDGET WHICH IS SUBSTANTIALLY CONSISTENT WITH THE ATTACHED
DEVELOPMENT BUDGET EXHIBIT TO THIS AGREEMENT;
(II) THE INVESTOR MANAGER SHALL NOT UNREASONABLY WITHHOLD ITS
APPROVAL OF BUDGETS WHICH ARE WITHIN THE REASONABLE REVENUE
EXPECTATIONS OF THE HOSPITAL AND WHICH ARE IN COMPLIANCE (BOTH AS TO
TERMS AND AVAILABILITY OF FINANCING) WITH AGREEMENTS WITH THE COMPANY'S
LENDERS AND OTHER PARTIES PROVIDING FINANCING TO THE COMPANY; AND
(III) IN THE EVENT THAT THE MANAGERS ARE UNABLE TO APPROVE AN
ANNUAL BUDGET, HHBF SHALL BE AUTHORIZED TO OPERATE THE COMPANY UNDER
THE PREVIOUS YEAR'S BUDGET INCREASED BY THE GREATER OF 5% OR THE
INCREASE DURING THE PREVIOUS YEAR IN THE CONSUMER PRICE INDEX FOR
MEDICAL ITEMS UNTIL A NEW BUDGET IS APPROVED.
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SECTION 5.2. MANAGEMENT OF DAY-TO-DAY OPERATIONS. THE DAY-TO-DAY MANAGEMENT
OF THE BUSINESS AND AFFAIRS OF THE COMPANY SHALL BE THE RESPONSIBILITY OF HHBF,
WHICH MANAGEMENT SHALL BE SUBJECT TO DECISIONS, GUIDELINES AND POLICIES MADE OR
ESTABLISHED BY THE MANAGERS HEREUNDER, INCLUDING THOSE GOVERNED BY SECTION 5.1,
PROVIDED, HOWEVER, DECISIONS RELATING TO MEDICAL AND CLINICAL PRACTICE AT THE
HOSPITAL SHALL BE MADE EXCLUSIVELY BY THE QUALIFIED MEDICAL PERSONNEL OF THE
HOSPITAL. SUBJECT IN ALL CASES TO THE FOREGOING, HHBF SHALL HAVE THE RIGHT AND
THE POWER, IF, AS, AND WHEN IT, FROM TIME TO TIME, DEEMS NECESSARY OR
APPROPRIATE ON BEHALF OF THE COMPANY, SUBJECT ONLY TO THE TERMS AND CONDITIONS
OF THIS AGREEMENT:
(A) TO NEGOTIATE AND EXECUTE ON BEHALF OF THE COMPANY ALL
DOCUMENTS, INSTRUMENTS AND AGREEMENTS REASONABLY NECESSARY OR
APPROPRIATE TO LEASE, ACQUIRE AND/OR CONSTRUCT THE HOSPITAL AND/OR THE
REAL PROPERTY ON WHICH THE HOSPITAL IS OR WILL BE LOCATED, AND TO
BORROW FUNDS TO FINANCE SUCH LEASE, ACQUISITION AND/OR CONSTRUCTION (IT
BEING ACKNOWLEDGED THAT THE HOSPITAL MAY BE AN EXISTING BUILDING OR MAY
BE A NEWLY CONSTRUCTED BUILDING);
(B) TO PREPARE A BUDGET FOR THE DEVELOPMENT OF THE HOSPITAL
AND THEREAFTER, ANNUAL OPERATING BUDGETS;
(C) TO ACQUIRE THE EQUIPMENT AND ENTER INTO LOANS OR OTHER
FINANCING ARRANGEMENTS THEREFOR;
(D) TO HANDLE THE NEGOTIATION AND EXECUTION OF ALL SUCH
OTHER AGREEMENTS REGARDING THE PURCHASE OF GOODS OR SERVICES FOR THE
HOSPITAL;
(E) TO ESTABLISH PROCEDURES FOR QUALITY ASSURANCE, PEER REVIEW
AND GRANTING PRIVILEGES TO PHYSICIANS WITH OTHER SPECIALTIES AT THE
HOSPITAL, SUBJECT TO THE TERMS OF THE HOSPITAL AND MEDICAL STAFF BYLAWS
ADOPTED FOR THE HOSPITAL;
(F) TO EXPEND ALL OR PORTIONS OF THE COMPANY'S CAPITAL AND
INCOME IN FURTHERANCE OF OR RELATING TO THE COMPANY'S BUSINESS AND
PURPOSES, INCLUDING, BUT NOT LIMITED TO, PAYMENT OF ALL ONGOING
OPERATIONAL EXPENSES, PAYMENT OF COMMISSIONS, ORGANIZATION EXPENSES,
PROFESSIONAL FEES, RENTAL FEES, AND MANAGEMENT FEES, AND TO INVEST IN
SHORT-TERM DEBT OBLIGATIONS (INCLUDING, BUT NOT LIMITED TO, OBLIGATIONS
OF FEDERAL AND STATE GOVERNMENTS AND THEIR AGENCIES, COMMERCIAL PAPER,
AND CERTIFICATES OF DEPOSIT OF COMMERCIAL BANKS, OR SAVINGS BANKS OR
SAVINGS AND LOAN ASSOCIATIONS) SUCH OF THE COMPANY'S FUNDS AS ARE
TEMPORARILY NOT REQUIRED FOR THE DEVELOPMENT OR OPERATION OF THE
COMPANY AND THE PAYMENT OF COMPANY OBLIGATIONS; PROVIDED, THAT THE
MANAGERS SHALL ESTABLISH CASH MANAGEMENT GUIDELINES TO BE FOLLOWED BY
HHBF;
(G) TO EMPLOY OR RETAIN ON SUCH TERMS AND FOR SUCH
COMPENSATION AS HHBF MAY REASONABLY DETERMINE, SUCH PERSONS, FIRMS, OR
CORPORATIONS AS HHBF MAY DEEM ADVISABLE, INCLUDING WITHOUT LIMITATION
QUALIFIED MEDICAL AND OTHER EMPLOYEES
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NECESSARY OR APPROPRIATE TO OPERATE THE HOSPITAL, ATTORNEYS,
ACCOUNTANTS, FINANCIAL AND TECHNICAL CONSULTANTS, SUPERVISORY MANAGING
AGENTS, INSURANCE BROKERS, BROKERS AND LOAN BROKERS, APPRAISERS,
ARCHITECTS AND ENGINEERS, WHO MAY ALSO PROVIDE SUCH SERVICES TO HHBF,
PROVIDED THAT THE SELECTION OF THE SENIOR ADMINISTRATOR OF THE HOSPITAL
SHALL BE A MATERIAL DECISION;
(H) TO EXECUTE LEASES, DEEDS, CONTRACTS, RENTAL AGREEMENTS,
CONSTRUCTION CONTRACTS, SALES AGREEMENTS, AND MANAGEMENT CONTRACTS;
(I) TO EXERCISE ALL RIGHTS, POWERS, AND PRIVILEGES OF THE
COMPANY AS LESSEE WITH RESPECT TO THE HOSPITAL OR RIGHTS HELD BY THE
COMPANY;
(J) TO CONSENT TO THE MODIFICATION, RENEWAL, OR EXTENSION OF
ANY OBLIGATIONS TO THE COMPANY OF ANY PERSON OR OF ANY AGREEMENT TO
WHICH THE COMPANY IS A PARTY OR OF WHICH IT IS A BENEFICIARY;
(K) TO EXECUTE IN FURTHERANCE OF ANY OR ALL OF THE PURPOSES OF
THE COMPANY, ANY DEED, LEASE, DEED OF TRUST, SECURITY INTEREST,
MORTGAGE, PROMISSORY NOTE, BILL OF SALE, ASSIGNMENT, CONTRACT, OR OTHER
INSTRUMENT PURPORTING TO PURCHASE OR CONVEY OR ENCUMBER IN WHOLE OR IN
PART THE EQUIPMENT OR THE HOSPITAL OR OTHER REAL OR PERSONAL PROPERTY
OF THE COMPANY;
(L) TO PREPAY IN WHOLE OR IN PART, REFINANCE, RECAST,
INCREASE, MODIFY, OR EXTEND ANY SECURITY INTEREST, DEED OF TRUST, OR
MORTGAGE AFFECTING THE HOSPITAL AND IN CONNECTION THEREWITH TO EXECUTE
ANY EXTENSIONS OR RENEWALS THEREOF ON THE HOSPITAL AND TO GRANT
SECURITY INTERESTS IN ANY OF THE EQUIPMENT OR THE HOSPITAL;
(M) TO ADJUST, COMPROMISE, SETTLE, OR REFER TO ARBITRATION ANY
CLAIM AGAINST OR IN FAVOR OF THE COMPANY, AND TO INSTITUTE, PROSECUTE,
AND DEFEND ANY ACTIONS OR PROCEEDINGS RELATING TO THE COMPANY, ITS
BUSINESS, AND PROPERTIES;
(N) TO ACQUIRE AND ENTER INTO ANY CONTRACT OF INSURANCE WHICH
HHBF DEEMS NECESSARY OR APPROPRIATE FOR THE PROTECTION OF THE COMPANY
AND HHBF, FOR THE CONSERVATION OF THE COMPANY OR ITS ASSETS, OR FOR ANY
PURPOSE BENEFICIAL TO THE COMPANY; HOWEVER, NEITHER HHBF NOR ITS
AFFILIATES SHALL BE COMPENSATED FOR PROVIDING INSURANCE BROKERAGE
SERVICES RELATING TO OBTAINING SUCH INSURANCE;
(O) TO PREPARE OR CAUSE TO BE PREPARED REPORTS, STATEMENTS,
AND OTHER RELEVANT INFORMATION
FOR DISTRIBUTION TO THE MEMBERS, INCLUDING ANNUAL REPORTS;
(P) TO OPEN ACCOUNTS AND DEPOSIT AND MAINTAIN FUNDS IN THE
NAME OF THE COMPANY IN BANKS OR SAVINGS AND LOAN ASSOCIATIONS;
PROVIDED, HOWEVER, THAT THE COMPANY'S FUNDS SHALL NOT BE COMMINGLED
WITH THE FUNDS OF ANY OTHER PERSON;
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(Q) TO CAUSE THE COMPANY TO MAKE OR REVOKE ANY OF THE
ELECTIONS REFERRED TO IN SECTION 754 OF THE INTERNAL REVENUE CODE OF
1986 AS AMENDED OR ANY SIMILAR PROVISIONS ENACTED IN LIEU THEREOF;
(R) TO MAKE ALL DECISIONS RELATED TO GENERALLY ACCEPTED
PRINCIPLES OF ACCOUNTING TO BE APPLIED ON A CONSISTENT BASIS AND
FEDERAL INCOME TAX ELECTIONS;
(S) TO POSSESS AND EXERCISE, SUBJECT TO THE RESTRICTIONS
CONTAINED IN THIS AGREEMENT, ANY AND ALL OF THE RIGHTS, POWERS AND
PRIVILEGES OF A MANAGER UNDER THE ACT;
(T) TO EXECUTE, ACKNOWLEDGE, AND DELIVER ANY AND ALL DOCUMENTS
OR INSTRUMENTS IN CONNECTION WITH ANY OR ALL OF THE FOREGOING;
(U) TO MODIFY OR OTHERWISE IMPROVE THE HOSPITAL, SUBJECT TO
THE RESTRICTIONS CONTAINED IN THIS AGREEMENT;
(V) TO MANAGE, DIRECT, AND GUIDE THE OPERATION OF THE HOSPITAL
INCLUDING ALL NECESSARY ACTS RELATING THERETO, OTHER THAN MEDICAL OR
CLINICAL MATTERS WHICH SHALL BE UNDER THE DIRECTION OF THE INVESTOR
MANAGER AND OTHER AGREED UPON QUALIFIED MEDICAL PERSONNEL;
(W) TO ESTABLISH MINIMUM INSURANCE REQUIREMENTS FOR ALL
PHYSICIANS PRACTICING AT THE HOSPITAL;
(X) TO ADMIT AS MEMBERS ADDITIONAL INVESTORS WHO HAVE BEEN
PROPOSED FOR MEMBER STATUS BY HHBF AND APPROVED BY THE INVESTOR
MANAGER, WHICH APPROVAL SHALL BE GIVEN OR WITHHELD IN THE SOLE AND
ABSOLUTE DISCRETION OF THE INVESTOR MANAGER; AND
(Y) TO SELL ASSETS OF THE COMPANY, SUBJECT TO THE RESTRICTIONS
CONTAINED IN THIS AGREEMENT.
SECTION 5.3. RESTRICTIONS ON AUTHORITY OF THE MANAGERS. THE MANAGERS SHALL NOT
DO ANY OF THE FOLLOWING:
(A) ACT IN CONTRAVENTION OF THIS AGREEMENT;
(B) ACT IN ANY MANNER WHICH WOULD MAKE IT IMPOSSIBLE TO CARRY
ON THE EXPRESS BUSINESS PURPOSES OF THE COMPANY;
(C) COMMINGLE THE COMPANY FUNDS WITH THOSE OF ANY OTHER
PERSON;
(D) ADMIT AN ADDITIONAL MANAGER, EXCEPT AS PROVIDED IN THIS
AGREEMENT;
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(E) ADMIT AN ADDITIONAL MEMBER, EXCEPT AS PROVIDED IN THIS
AGREEMENT;
(F) ALTER THE PRIMARY PURPOSES OF THE COMPANY AS SET FORTH IN
SECTION 2.3;
(G) POSSESS ANY PROPERTY OR ASSIGN THE RIGHTS OF THE COMPANY
IN SPECIFIC PROPERTY FOR OTHER THAN A COMPANY PURPOSE;
(H) EMPLOY, OR PERMIT THE EMPLOY OF, THE FUNDS OR ASSETS OF
THE COMPANY IN ANY MANNER EXCEPT FOR THE EXCLUSIVE BENEFIT OF THE
COMPANY;
(I) MAKE ANY PAYMENTS OF ANY TYPE, DIRECTLY OR INDIRECTLY, TO
ANYONE FOR THE REFERRAL OF PATIENTS TO THE HOSPITAL IN ORDER TO USE THE
HOSPITAL OR TO PROVIDE OTHER SERVICES PAYABLE BY MEDICARE OR MEDICAID;
OR
(J) SELL ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY
OR MERGE THE COMPANY WITH OR INTO ANY OTHER ENTITY WITHOUT THE APPROVAL
OF A SUPERMAJORITY VOTE OF THE MEMBERS.
SECTION 5.4. DUTIES OF THE MANAGERS. EACH MANAGER SHALL DO THE FOLLOWING:
(A) DILIGENTLY AND FAITHFULLY DEVOTE SUCH OF ITS TIME TO THE
BUSINESS OF THE COMPANY AS MAY BE NECESSARY TO PROPERLY CONDUCT THE
AFFAIRS OF THE COMPANY, HOWEVER, EACH MANAGER SHALL NOT BE REQUIRED TO
DEVOTE ITS FULL TIME TO SUCH DUTIES;
(B) USE ITS BEST EFFORTS TO CAUSE THE COMPANY TO COMPLY WITH
SUCH CONDITIONS AS MAY BE REQUIRED FROM TIME TO TIME TO PERMIT THE
COMPANY TO BE CLASSIFIED FOR FEDERAL INCOME TAX PURPOSES AS A
PARTNERSHIP AND NOT AS AN ASSOCIATION TAXABLE AS A CORPORATION;
(C) IN THE CASE OF HHBF FILE AND PUBLISH ALL CERTIFICATES,
STATEMENTS, OR OTHER INSTRUMENTS REQUIRED BY LAW FOR THE FORMATION AND
OPERATION OF THE COMPANY AS A LIMITED LIABILITY COMPANY IN ALL
APPROPRIATE JURISDICTIONS;
(D) IN THE CASE OF HHBF CAUSE THE COMPANY TO OBTAIN AND KEEP
IN FORCE DURING THE TERM OF THE COMPANY FIRE AND EXTENDED COVERAGE AND
PUBLIC LIABILITY AND PROFESSIONAL LIABILITY INSURANCE WITH SUCH ISSUERS
AND IN SUCH AMOUNTS AS HHBF SHALL DEEM ADVISABLE, BUT IN AMOUNTS NOT
LESS (AND DEDUCTIBLE AMOUNTS NOT GREATER) THAN THOSE CUSTOMARILY
MAINTAINED WITH RESPECT TO THE BUSINESS EQUIPMENT AND PROPERTY
COMPARABLE TO THE COMPANY'S;
(E) HAVE A FIDUCIARY DUTY TO CONDUCT THE AFFAIRS OF THE
COMPANY IN THE BEST INTERESTS OF THE COMPANY AND OF THE MEMBERS,
INCLUDING THE SAFEKEEPING AND USE OF ALL FUNDS AND ASSETS, WHETHER OR
NOT IN ITS IMMEDIATE POSSESSION AND CONTROL, AND IT
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SHALL NOT EMPLOY OR PERMIT OTHERS BESIDES MANAGERS TO EMPLOY SUCH FUNDS
OR ASSETS IN ANY MANNER EXCEPT FOR THE BENEFIT OF THE COMPANY; AND
(F) IN THE CASE OF HHBF, DELIVER TO THE SECRETARY OF STATE OF
NORTH CAROLINA FOR FILING AN ANNUAL STATEMENT IN ACCORDANCE WITH THE
ACT AND MAKE ANY SIMILAR FILINGS REQUIRED UNDER CALIFORNIA LAW.
SECTION 5.5. DELEGATION BY THE MANAGERS. SUBJECT TO RESTRICTIONS OTHERWISE
PROVIDED HEREIN, THE MANAGERS MAY AT ANY TIME EMPLOY ANY OTHER PERSON, INCLUDING
PERSONS AND ENTITIES EMPLOYED BY, AFFILIATED WITH, OR RELATED TO THE MANAGERS TO
PERFORM SERVICES FOR THE COMPANY AND ITS BUSINESS, AND MAY DELEGATE ALL OR PART
OF THEIR AUTHORITY OR CONTROL TO ANY SUCH OTHER PERSONS, PROVIDED THAT SUCH
EMPLOYMENT OR DELEGATION SHALL NOT RELIEVE THE MANAGERS OF THEIR RESPECTIVE
RESPONSIBILITIES AND OBLIGATIONS UNDER THIS AGREEMENT OR UNDER THE LAWS OF THE
STATE OF NORTH CAROLINA NOR WILL IT MAKE ANY SUCH PERSON A MEMBER OR MANAGER OF
THE COMPANY.
SECTION 5.6. RIGHT TO RELY UPON THE AUTHORITY OF THE MANAGERS. PERSONS
DEALING WITH THE COMPANY MAY RELY UPON THE REPRESENTATION OF THE MANAGERS THAT
SUCH MANAGERS ARE MANAGERS OF THE COMPANY AND THAT SUCH MANAGERS HAVE THE
AUTHORITY TO MAKE ANY COMMITMENT OR UNDERTAKING ON BEHALF OF THE COMPANY. NO
PERSON DEALING WITH THE MANAGERS SHALL BE REQUIRED TO DETERMINE ITS AUTHORITY TO
MAKE ANY SUCH COMMITMENT OR UNDERTAKING. IN ADDITION, NO PURCHASER FROM THE
COMPANY SHALL BE REQUIRED TO DETERMINE THE SOLE AND EXCLUSIVE AUTHORITY OF ANY
MANAGER TO SIGN AND DELIVER ON BEHALF OF THE COMPANY ANY INSTRUMENTS OF TRANSFER
WITH RESPECT THERETO OR TO SEE TO THE APPLICATION OR DISTRIBUTION OF REVENUES OR
PROCEEDS PAID OR CREDITED IN CONNECTION THEREWITH, UNLESS SUCH PURCHASER SHALL
HAVE RECEIVED WRITTEN NOTICE FROM THE COMPANY AFFECTING THE SAME.
SECTION .5.7. COMPANY EXPENSES
(A) IN GENERAL, THE COMPANY'S EXPENSES SHALL BE BILLED
DIRECTLY TO AND PAID BY THE COMPANY. THE COMPANY SHALL REIMBURSE THE
MANAGERS OR THEIR AFFILIATES FOR: (I) ALL ORGANIZATION EXPENSES
INCURRED BY THE MANAGERS OR THEIR AFFILIATES IN CONNECTION WITH THE
FORMATION OF THE COMPANY; (II) THE ACTUAL COSTS TO THE MANAGERS OR
THEIR AFFILIATES OF GOODS, SERVICES, AND MATERIALS USED FOR AND BY THE
COMPANY; AND (III) ALL REASONABLE TRAVEL AND OTHER OUT-OF-POCKET
EXPENSES INCURRED BY THE MANAGERS IN THE DEVELOPMENT AND MANAGEMENT OF
THE COMPANY AND ITS BUSINESS. NOTWITHSTANDING THE ABOVE PROVISION, EACH
PARTY HERETO SHALL BEAR THE COSTS OF ITS OWN LEGAL FEES INCURRED PRIOR
TO THE EXECUTION OF THIS AGREEMENT IN CONNECTION WITH THIS VENTURE AND
HHBF SHALL NOT BE REIMBURSED FOR ANY SALARY OR COMPENSATION OF ITS
EMPLOYEES OR ITS AFFILIATES' EMPLOYEES FOR SERVICES PRIOR TO THE
EXECUTION OF THIS AGREEMENT (I.E., HHBF AND ITS AFFILIATES SHALL NOT BE
ENTITLED TO A REIMBURSEMENT OF CORPORATE OVERHEAD RESULTING FROM
EMPLOYEE COMPENSATION); PROVIDED, THE PARTIES HERETO SPECIFICALLY
RECOGNIZE THAT HHBF AND ITS AFFILIATES HAVE INCURRED LEGAL FEES, FILING
FEES, AND OTHER OUT-OF-POCKET COSTS FOR THE BENEFIT OF THE COMPANY,
INCLUDING
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COSTS IN CONNECTION WITH THE PREPARATION OF DOCUMENTS FOR SECURITIES
LAW AND HEALTH CARE LAW COMPLIANCE, REAL ESTATE ACQUISITION MATTERS AND
FORMATION AND REGISTRATION OF THE COMPANY, AND AGREE THAT HHBF SHALL BE
REIMBURSED FOR THE FIRST $25,000.00 OF SUCH COSTS. THE REIMBURSEMENT
FOR EXPENSES PROVIDED FOR IN THIS SECTION 5.7(A) SHALL BE MADE TO THE
MANAGERS OR THEIR AFFILIATES REGARDLESS OF WHETHER ANY DISTRIBUTIONS
ARE MADE TO THE MEMBERS UNDER ARTICLE VI AND ARTICLE VII.
(B) THE COMPANY SHALL ALSO PAY THE FOLLOWING EXPENSES OF THE
COMPANY:
(I) ALL DEVELOPMENT AND OPERATIONAL EXPENSES OF THE
COMPANY, WHICH MAY INCLUDE, BUT ARE NOT LIMITED TO: THE SALARY
AND RELATED EXPENSES OF EMPLOYEES AND STAFF OF THE HOSPITAL,
ALL COSTS OF BORROWED MONEY, TAXES, AND ASSESSMENTS ON THE
HOSPITAL, AND OTHER TAXES APPLICABLE TO THE COMPANY; EXPENSES
IN CONNECTION WITH THE ACQUISITION, MAINTENANCE, LEASING,
REFINANCING, OPERATION, AND DISPOSITION OF THE EQUIPMENT,
FURNITURE AND FIXTURES OF THE HOSPITAL (INCLUDING LEGAL,
ACCOUNTING, AUDIT, COMMISSIONS, ENGINEERING, APPRAISAL, AND
THE OTHER FEES); AND THE MAINTENANCE OF THE HOSPITAL AND ITS
EQUIPMENT, WHICH MAY BE PERFORMED BY HHBF OR ONE OF ITS
AFFILIATES AS LONG AS THE CHARGES TO THE COMPANY FOR SUCH
SERVICE ARE NO GREATER THAN THE CHARGES FOR SUCH SERVICE FROM
A THIRD PARTY SERVICE PROVIDER;
(II) ALL FEES AND EXPENSES PAID TO THIRD PARTIES FOR
ACCOUNTING, LEGAL, DOCUMENTATION, PROFESSIONAL, AND REPORTING
SERVICES TO THE COMPANY, WHICH MAY INCLUDE, BUT ARE NOT
LIMITED TO: PREPARATION AND DOCUMENTATION OF COMPANY
BOOKKEEPING, ACCOUNTING AND AUDITS; PREPARATION AND
DOCUMENTATION OF BUDGETS, CASH FLOW PROJECTIONS, AND WORKING
CAPITAL REQUIREMENTS; PREPARATION AND DOCUMENTATION OF COMPANY
STATE AND FEDERAL TAX RETURNS; AND TAXES INCURRED IN
CONNECTION WITH THE ISSUANCE, DISTRIBUTION, TRANSFER,
REGISTRATION, AND RECORDATION OF DOCUMENTS EVIDENCING
OWNERSHIP OF A MEMBERSHIP INTEREST OR ECONOMIC INTEREST IN THE
COMPANY OR IN CONNECTION WITH THE BUSINESS OF THE COMPANY;
EXPENSES IN CONNECTION WITH PREPARING AND MAILING REPORTS
REQUIRED TO BE FURNISHED TO THE MEMBERS OR ECONOMIC INTEREST
OWNERS FOR TAX REPORTING OR OTHER PURPOSES, INCLUDING REPORTS,
IF ANY, THAT MAY BE REQUIRED TO BE FILED WITH ANY FEDERAL OR
STATE REGULATORY AGENCIES, OR EXPENSES ASSOCIATED WITH
FURNISHING REPORTS TO MEMBERS WHICH HHBF DEEMS TO BE IN THE
BEST INTEREST OF THE COMPANY; EXPENSES OF REVISING, AMENDING,
CONVERTING, MODIFYING, OR TERMINATING THE COMPANY OR THIS
AGREEMENT; COSTS INCURRED IN CONNECTION WITH ANY LITIGATION IN
WHICH THE COMPANY IS INVOLVED AS WELL AS ANY EXAMINATION,
INVESTIGATION, OR OTHER PROCEEDINGS CONDUCTED BY ANY
REGULATORY AGENCY INVOLVING THE COMPANY; COSTS OF ANY COMPUTER
EQUIPMENT OR SERVICES USED FOR OR BY THE COMPANY; AND THE
COSTS OF PREPARING AND DISSEMINATING INFORMATIONAL MATERIAL
AND DOCUMENTATION RELATING TO A POTENTIAL SALE, REFINANCING,
OR OTHER DISPOSITION OF THE HOSPITAL OR THE EQUIPMENT.
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SECTION 5.8. NO MANAGEMENT BY MEMBERS. OTHER THAN THE MANAGERS, THE MEMBERS
SHALL TAKE NO PART IN, OR AT ANY TIME INTERFERE IN ANY MANNER WITH, THE
MANAGEMENT, CONDUCT, OR CONTROL OF THE COMPANY'S BUSINESS AND OPERATIONS AND
SHALL HAVE NO RIGHT OR AUTHORITY TO ACT FOR OR BIND THE COMPANY EXCEPT AS SET
FORTH IN THIS AGREEMENT. THE RIGHTS AND POWERS OF SUCH MEMBERS SHALL NOT EXTEND
BEYOND THOSE SET FORTH IN THIS AGREEMENT AND THOSE GRANTED UNDER THE ARTICLES OF
ORGANIZATION AND ANY ATTEMPT TO PARTICIPATE IN THE CONTROL OF THE COMPANY IN A
MANNER CONTRARY TO THE RIGHTS AND POWERS GRANTED HEREIN AND UNDER THE ARTICLES
OF ORGANIZATION SHALL BE NULL AND VOID AND WITHOUT FORCE AND EFFECT. SUBJECT TO
THE DECISIONS AND JUDGMENT WITH RESPECT TO ALL PROFESSIONAL MEDICAL OR CLINICAL
MATTERS OF QUALIFIED MEDICAL PERSONNEL, HHBF, IN CONJUNCTION WITH THE INVESTOR
MANAGER WHEN APPLICABLE, SHALL HAVE THE RIGHT TO DETERMINE WHEN AND HOW THE
OPERATIONS OF THE COMPANY SHALL BE CONDUCTED. THE EXERCISE BY ANY OTHER MEMBER
OF ANY OF THE RIGHTS GRANTED TO THE MEMBER HEREUNDER SHALL NOT BE DEEMED TO BE
TAKING PART IN THE CONTROL OF THE BUSINESS OF THE COMPANY AND SHALL NOT
CONSTITUTE A VIOLATION OF THIS SECTION.
SECTION 5.9. CONSENT BY MEMBERS TO EXERCISE OF CERTAIN RIGHTS AND POWERS BY
MANAGERS. BY ITS EXECUTION HEREOF, EACH MEMBER EXPRESSLY CONSENTS TO THE
EXERCISE BY THE MANAGERS OF THE RIGHTS, POWERS, AND AUTHORITY CONFERRED ON THE
MANAGERS BY THIS AGREEMENT.
SECTION 5.10. OTHER BUSINESS OF MEMBERS
(A) SUBJECT TO (B) BELOW, ANY MEMBER, INCLUDING ANY MANAGER,
MAY ENGAGE INDEPENDENTLY OR WITH OTHERS IN OTHER BUSINESS VENTURES OF
EVERY NATURE AND DESCRIPTION, INCLUDING WITHOUT LIMITATION THE PURCHASE
OF MEDICAL EQUIPMENT, THE RENDERING OF MEDICAL SERVICES OF ANY KIND,
AND THE MAKING OR MANAGEMENT OF OTHER INVESTMENTS AND NEITHER THE
COMPANY NOR ANY MEMBER SHALL HAVE ANY RIGHT BY VIRTUE OF THIS AGREEMENT
OR THE RELATIONSHIP CREATED HEREBY IN OR TO SUCH OTHER VENTURES OR
ACTIVITIES OR TO THE INCOME OR PROCEEDS DERIVED THEREFROM, AND THE
PURSUIT OF SUCH VENTURES.
(B) AS LONG AS ANY MEMBER OWNS A MEMBERSHIP INTEREST IN THE
COMPANY, AND FOR A PERIOD OF FIVE (5) YEARS (THE "TAIL PERIOD") AFTER A
MEMBER CEASES FOR ANY REASON TO OWN A MEMBERSHIP INTEREST IN THE
COMPANY, NEITHER A MEMBER NOR ANY OF ITS RESPECTIVE AFFILIATES, SHALL
HOLD, DIRECTLY OR INDIRECTLY, AN INVESTMENT, OWNERSHIP OR OTHER
BENEFICIAL INTEREST IN (I) ANY HOSPITAL OR (II) OTHER ENTITY (INCLUDING
A SOLE PROPRIETORSHIP) WHICH PROVIDES ANY OF THE FOLLOWING SERVICES OR
FACILITIES: CARDIAC CATHETERIZATION, ANGIOPLASTY, PERIPHERAL
ANGIOPLASTY, ATHERECTOMY, STENTING AND PTCA OR OTHER CARDIAC SURGICAL
PROCEDURES OR SERVICES, IN ANY CASE WITHIN KERN COUNTY, CALIFORNIA AND
TULARE COUNTY, CALIFORNIA (THE "TERRITORY"), PROVIDED THAT (I) NO
MEMBER WHO IS A PHYSICIAN SHALL BE PROHIBITED FROM MAINTAINING HIS OR
HER STAFF PRIVILEGES AT ANY OTHER HOSPITAL OR FROM OWNING AN INTEREST
IN A MEDICAL PRACTICE THAT PROVIDES THE PROFESSIONAL SERVICE COMPONENT
OF THE MEDICAL PROCEDURES DESCRIBED IN (B)(II) ABOVE AND (II) NOTHING
HEREIN SHALL PROHIBIT A MEMBER FROM OWNING UP TO THREE
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PERCENT (3%) OF THE OUTSTANDING CAPITAL STOCK OF A COMPANY WHOSE STOCK
IS PUBLICLY TRADED AND LISTED ON A NATIONALLY RECOGNIZED SECURITIES
EXCHANGE OR FROM INVESTING IN A PUBLICLY TRADED MUTUAL FUND; PROVIDED,
FURTHER, THE TAIL PERIOD SHALL BE REDUCED TO TWO (2) YEARS ONCE THE
HOSPITAL HAS BEEN OPENED FOR BUSINESS AND REGULARLY CONDUCTING THAT
BUSINESS PROVIDED THE MEMBER IN QUESTION CAN DEMONSTRATE THAT AT THE
COMMENCEMENT OF THE TAIL PERIOD HE WAS NOT A PARTY TO ANY AGREEMENT,
WHETHER WRITTEN OR ORAL, BINDING OR CONDITIONAL/TENTATIVE, TO ACQUIRE
(OR HAVE AN OPTION TO ACQUIRE) AN INTEREST IN ANY ENTITY OR ENTERPRISE
TO WHICH THIS SECTION 5.10(B) WOULD OTHERWISE APPLY. IF AT ANY TIME
AFTER THE HOSPITAL HAS BEEN OPENED FOR BUSINESS AND REGULARLY
CONDUCTING BUSINESS FOR AT LEAST FIVE (5) YEARS SUBSTANTIALLY ALL OF
THE ASSETS OR STOCK OF MEDCATH INCORPORATED OR HHBF IS ACQUIRED BY ONE
PERSON OR A GROUP OF PERSONS WHO ARE NOT AFFILIATES OF MEDCATH
INCORPORATED IN ONE TRANSACTION OR SERIES OF RELATED TRANSACTIONS
WITHIN A TWELVE (12) MONTH PERIOD, THE TAIL PERIOD SHALL BE REDUCED TO
ONE (1) YEAR. FURTHER, IF DURING THE FIRST FIVE (5) YEARS AFTER THE
HOSPITAL HAS OPENED FOR BUSINESS AND IS REGULARLY CONDUCTING THAT
BUSINESS THE STOCK OF HHBF IS SOLD TO A PERSON WHO IS NEITHER AN
AFFILIATE OF MEDCATH INCORPORATED NOR A PURCHASER OF ALL OR
SUBSTANTIALLY ALL OF MEDCATH INCORPORATED'S ASSETS OR STOCK, THEN THERE
WILL BE NO TAIL PERIOD. IN ADDITION, NEITHER HHBF NOR ITS AFFILIATES
SHALL SEPARATELY OPERATE A MOBILE CATHETERIZATION LABORATORY WITHIN THE
TERRITORY. NOTHING CONTAINED HEREIN SHALL LIMIT THE ABILITY OF A
RELATIVE OF AN INDIVIDUAL MEMBER TO OWN AN INTEREST IN AN ENTITY
PROVIDING THE ABOVE-REFERENCED SERVICES OR FACILITIES IF SUCH RELATIVE
IS ACTIVELY ENGAGED IN THE PRACTICE OF MEDICINE AS A LICENSED PHYSICIAN
OR IF THE MEMBER IN QUESTION CAN REASONABLY DEMONSTRATE THAT SUCH
RELATIVE'S OWNERSHIP IS NOT DESIGNED TO CIRCUMVENT THE INTENT OF THIS
SECTION 5.10(B). NOTWITHSTANDING THE ABOVE LIMITATIONS, IF A WRITTEN
PROPOSAL IS MADE BY EITHER HHBF OR THE INVESTOR MANAGER REGARDING THE
ESTABLISHMENT OR OPERATION OF A MOBILE CATHETERIZATION LABORATORY IN
THE TERRITORY BY THE COMPANY, AND HHBF (IF THE PROPOSAL IS MADE BY THE
INVESTOR MANAGER) OR THE INVESTOR MANAGER (IF THE PROPOSAL IS MADE BY
HHBF), DOES NOT APPROVE SUCH PROPOSAL, THEN THE PARTY MAKING SUCH
PROPOSAL MAY, ALONE OR WITH OTHER MEMBERS ESTABLISH OR OPERATE SUCH A
SERVICE BUT ONLY IN SUBSTANTIAL CONFORMITY WITH SUCH PROPOSAL. ANY SUCH
WRITTEN PROPOSAL MUST HAVE SUFFICIENT DETAILS AND SPECIFICITY TO ALLOW
A PROPER EVALUATION OF IT AND TO DETERMINE WHETHER ANY MEMBER(S)
SEPARATELY ESTABLISHING OR OPERATING SUCH A SERVICE HAVE DONE SO IN
SUBSTANTIAL CONFORMANCE WITH SUCH PROPOSAL.
(C) THE MEMBERS, INCLUDING THE MANAGERS, HAVE REVIEWED THE
TERM AND GEOGRAPHICAL RESTRICTIONS INCLUDED IN SECTION 5.10(B), AND IN
LIGHT OF THE INTERESTS OF THE PARTIES HERETO, AGREE THAT SUCH
RESTRICTIONS ARE FAIR AND REASONABLE.
(D) IF THERE IS A BREACH OR THREATENED BREACH OF THE
PROVISIONS OF THIS SECTION 5.10 OF THIS AGREEMENT, IN ADDITION TO OTHER
REMEDIES AT LAW OR EQUITY, THE NON-BREACHING PARTY SHALL BE ENTITLED TO
INJUNCTIVE RELIEF. THE PARTIES DESIRE AND INTEND THAT THE PROVISIONS OF
THIS SECTION 5.10 SHALL BE ENFORCED TO THE FULLEST EXTENT PERMISSIBLE
UNDER THE LAW AND PUBLIC POLICIES APPLIED, BUT THE UNENFORCEABILITY OR
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MODIFICATION OF ANY PARTICULAR PARAGRAPH, SUBPARAGRAPH, SENTENCE,
CLAUSE, PHRASE, WORD, OR FIGURE SHALL NOT BE DEEMED TO RENDER
UNENFORCEABLE THE REMAINDER OF THIS SECTION 5.10. SHOULD ANY SUCH
PARAGRAPH, SUBPARAGRAPH, SENTENCE, CLAUSE, PHRASE, WORD, OR FIGURE BE
ADJUDICATED TO BE WHOLLY INVALID OR UNENFORCEABLE, THE BALANCE OF THIS
SECTION 5.10 SHALL THEREUPON BE MODIFIED IN ORDER TO RENDER THE SAME
VALID AND ENFORCEABLE AND THE UNENFORCEABLE PORTION OF THIS SECTION
5.10 SHALL BE DEEMED TO HAVE BEEN DELETED FROM THIS AGREEMENT.
(E) THE COMPANY, THE MANAGERS AND THE INVESTOR MEMBERS AGREE
THAT THE BENEFITS TO ANY INVESTOR MEMBER HEREUNDER DO NOT REQUIRE, ARE
NOT PAYMENT FOR, AND ARE NOT IN ANY WAY CONTINGENT UPON THE REFERRAL,
ADMISSION OR ANY OTHER ARRANGEMENT FOR THE PROVISION OF ANY ITEM OR
SERVICE OFFERED BY HHBF OR THE COMPANY TO PATIENTS OF SUCH INVESTOR
MEMBER IN ANY FACILITY, LABORATORY, CARDIAC CATHETERIZATION FACILITY OR
OTHER HEALTH CARE OPERATION CONTROLLED, MANAGED OR OPERATED BY HHBF OR
THE COMPANY AND NOTHING HEREIN IS INTENDED TO PROHIBIT ANY PARTY FROM
PRACTICING MEDICINE AT ANY OTHER FACILITY.
(F) IF AN INVESTOR MEMBER IS A LEGAL ENTITY AND NOT AN
INDIVIDUAL, SUCH INVESTOR MEMBER SHALL CAUSE EACH OF ITS EXISTING AND
FUTURE AFFILIATES TO AGREE IN WRITING TO BE PERSONALLY BOUND BY THE
TERMS OF THIS SECTION 5.10.
SECTION 5.11. MANAGERS' STANDARD OF CARE. EACH MANAGER SHALL ACT IN A
MANNER IT BELIEVES IN GOOD FAITH TO BE IN THE BEST INTEREST OF THE COMPANY AND
WITH SUCH CARE AS AN ORDINARILY PRUDENT PERSON IN A LIKE POSITION WOULD USE
UNDER SIMILAR CIRCUMSTANCES. IN DISCHARGING ITS DUTIES, EACH MANAGER SHALL BE
FULLY PROTECTED IN RELYING IN GOOD FAITH UPON THE RECORDS REQUIRED TO BE
MAINTAINED UNDER THIS AGREEMENT AND UPON SUCH INFORMATION, OPINIONS, REPORTS AND
STATEMENTS BY ANY OF ITS OTHER MANAGERS, MEMBERS, OR AGENTS, OR BY ANY OTHER
PERSON AS TO MATTERS EACH MANAGER REASONABLY BELIEVES ARE WITHIN SUCH OTHER
PERSON'S PROFESSIONAL OR EXPERT COMPETENCE AND WHO HAS BEEN SELECTED WITH
REASONABLE CARE BY OR ON BEHALF OF THE COMPANY, INCLUDING INFORMATION, OPINIONS,
REPORTS OR STATEMENTS AS TO THE VALUE AND AMOUNT OF THE ASSETS, LIABILITIES,
INCOME OR LOSSES OF THE COMPANY OR ANY OTHER FACTS PERTINENT TO THE EXISTENCE
AND AMOUNT OF ASSETS FROM WHICH DISTRIBUTIONS TO MEMBERS MIGHT PROPERLY BE PAID.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, A MANAGER OR MEMBER
SHALL HAVE THE RIGHT TO VOTE OR APPROVE COMPANY MATTERS IN ACCORDANCE WITH THE
TERMS OF THIS AGREEMENT REGARDLESS OF THE PERSONAL INTEREST OF ANY MEMBER OR
MANAGER IN THE OUTCOME OF ANY VOTE, DECISION OR MATTER.
SECTION 5.12. LIMITATION OF LIABILITY. A MANAGER SHALL NOT BE LIABLE TO THE
COMPANY, ITS MEMBERS, OR OTHER MANAGERS FOR ANY ACTION TAKEN IN MANAGING THE
BUSINESS OR AFFAIRS OF THE COMPANY IF IT PERFORMS THE DUTY OF ITS OFFICE IN
COMPLIANCE WITH THE STANDARD CONTAINED IN SECTION 5.11. NO MANAGER HAS
GUARANTEED NOR SHALL HAVE ANY OBLIGATION WITH RESPECT TO THE RETURN OF A
MEMBER'S CAPITAL CONTRIBUTION OR SHARE OF INCOME FROM THE
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OPERATION OF THE COMPANY. FURTHERMORE, NO MANAGER, ITS AFFILIATES OR ITS
EMPLOYEES (COLLECTIVELY, ITS "AGENTS") SHALL BE LIABLE TO THE COMPANY OR TO ANY
MEMBER FOR ANY LOSS OR DAMAGE SUSTAINED BY THE COMPANY OR ANY MEMBER EXCEPT LOSS
OR DAMAGE RESULTING FROM GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OR KNOWING
VIOLATION OF LAW OR A TRANSACTION FOR WHICH SUCH MANAGER OR AGENT RECEIVED A
PERSONAL BENEFIT IN VIOLATION OR BREACH OF THE PROVISIONS OF THIS AGREEMENT.
SECTION 5.13. INDEMNIFICATION OF THE MANAGERS
(A) EACH MANAGER AND ITS AGENTS SHALL BE INDEMNIFIED BY THE
COMPANY AGAINST ANY LOSSES, JUDGMENTS, LIABILITIES, EXPENSES, INCLUDING
ATTORNEYS' FEES AND AMOUNTS PAID IN SETTLEMENT OF ANY CLAIMS SUSTAINED
BY THEM ARISING OUT OF ANY ACTION OR INACTION OF THE MEMBER OR ITS
AGENTS IN ITS CAPACITY AS A MANAGER OF THE COMPANY (OR, IN THE CASE OF
AN AGENT, WITHIN THE SCOPE OF THE MANAGER'S AUTHORITY) TO THE FULLEST
EXTENT ALLOWED BY LAW, PROVIDED THAT THE SAME WERE NOT THE RESULT OF
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT ON THE PART OF THE MANAGER OR AN
AGENT AND PROVIDED THAT THE MANAGER OR AN AGENT, IN GOOD FAITH,
REASONABLY DETERMINED THAT SUCH COURSE OF CONDUCT WAS IN THE BEST
INTEREST OF THE COMPANY; PROVIDED, HOWEVER, THAT SUCH INDEMNIFICATION
AND AGREEMENT TO HOLD HARMLESS SHALL BE RECOVERABLE ONLY OUT OF COMPANY
ASSETS. SUBJECT TO APPLICABLE LAW, THE COMPANY SHALL ADVANCE EXPENSES
INCURRED WITH RESPECT TO MATTERS FOR WHICH A MANAGER MAY BE INDEMNIFIED
HEREUNDER.
(B) IF AT ANY TIME, THE COMPANY HAS INSUFFICIENT FUNDS TO
FURNISH INDEMNIFICATION AS HEREIN PROVIDED, IT SHALL PROVIDE SUCH
INDEMNIFICATION IF AND AS IT GENERATES SUFFICIENT FUNDS AND PRIOR TO
ANY CASH DISTRIBUTIONS, PURSUANT TO ARTICLE VI OR ARTICLE VII HEREOF,
TO THE MEMBERS.
SECTION 5.14. ELECTION AND REPLACEMENT OF INVESTOR MANAGER. IN ACCORDANCE
WITH THE PROCEDURES OUTLINED IN SECTION 10.1 HEREIN, THE INVESTOR MEMBERS SHALL
ELECT AN INVESTOR MANAGER TO SERVE FOR ONE YEAR TERMS OR UNTIL A SUCCESSOR IS
DULY ELECTED. AT ANY TIME, IN ACCORDANCE WITH SECTION 10.1, THE INVESTOR MEMBERS
MAY REPLACE THE INVESTOR MANAGER AND ELECT A NEW INVESTOR MANAGER.
SECTION 5.15. ROLE OF INVESTOR MANAGER. NOTWITHSTANDING ANYTHING HEREIN TO
THE CONTRARY, THE INVESTOR MANAGER SHALL TAKE NO ACTION NOR MAKE ANY DECISION ON
BEHALF OF THE COMPANY EXCEPT TO THE EXTENT IT IS EXPRESSLY AUTHORIZED TO DO SO
UNDER THIS AGREEMENT IN ITS CAPACITY AS INVESTOR MANAGER.
SECTION 5.16. PURCHASE OF GOODS AND SERVICES FROM HHBF. GOODS AND SERVICES
PURCHASED FROM HHBF OR ITS AFFILIATES SHALL BE OF SUBSTANTIALLY THE SAME QUALITY
AND PRICE AS COULD BE OBTAINED FROM AN UNRELATED THIRD PARTY.
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ARTICLE VI
DISTRIBUTIONS AND ALLOCATIONS
SECTION 6.1. DISTRIBUTIONS OF CASH FLOW FROM OPERATIONS AND CASH FROM SALES
OR REFINANCING. PRIOR TO THE DISSOLUTION OF THE COMPANY, CASH FLOW FROM
OPERATIONS AND CASH FROM SALES OR REFINANCING, IF ANY, REMAINING AFTER REPAYMENT
OF ANY LOANS MADE BY THE MEMBERS TO THE COMPANY SHALL BE DISTRIBUTED QUARTERLY
BY THE MANAGERS AS CASH DISTRIBUTIONS ACCORDING TO THE RELATIVE PERCENTAGE
MEMBERSHIP INTERESTS OF THE MEMBERS AND ECONOMIC INTEREST OWNERS.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, NO DISTRIBUTIONS SHALL BE MADE
TO MEMBERS IF PROHIBITED BY THE ACT.
SECTION 6.2. PROFITS. EXCEPT AS PROVIDED IN THE REGULATORY ALLOCATIONS
EXHIBIT, PROFITS SHALL BE ALLOCATED AS FOLLOWS:
(A) FIRST, TO THE MEMBERS WHO HAVE BEEN ALLOCATED LOSSES PURSUANT TO
SUBSECTION 6.3(C) BELOW UNTIL THE CUMULATIVE PROFITS ALLOCATED PURSUANT TO THIS
SUBSECTION 6.2(A) EQUAL THE CUMULATIVE PRIOR ALLOCATIONS OF LOSSES UNDER THAT
SUBSECTION.
(B) NEXT, TO THE MEMBERS WHO HAVE BEEN ALLOCATED LOSSES PURSUANT TO
SUBSECTION 6.3(B) BELOW UNTIL THE CUMULATIVE PROFITS ALLOCATED PURSUANT TO THIS
SUBSECTION 6.2(B) EQUAL THE CUMULATIVE PRIOR ALLOCATIONS OF LOSSES UNDER THAT
SUBSECTION.
(C) ALL REMAINING PROFITS SHALL BE ALLOCATED TO THE MEMBERS IN
ACCORDANCE WITH THEIR PERCENTAGE MEMBERSHIP INTERESTS.
SECTION 6.3. LOSSES. EXCEPT AS PROVIDED IN THE REGULATORY ALLOCATIONS
EXHIBIT, LOSSES SHALL BE ALLOCATED AS FOLLOWS:
(A) FIRST, TO THE MEMBERS WHO HAVE BEEN ALLOCATED PROFITS PURSUANT TO
SUBSECTION 6.2(C) ABOVE UNTIL THE CUMULATIVE LOSSES ALLOCATED PURSUANT TO THIS
SUBSECTION 6.3(A) EQUAL THE CUMULATIVE PRIOR ALLOCATIONS OF PROFITS UNDER THAT
SUBSECTION.
(B) NEXT, LOSSES SHALL BE ALLOCATED TO THE MEMBERS WITH POSITIVE
ADJUSTED CAPITAL ACCOUNT BALANCES IN PROPORTION TO THOSE BALANCES.
(C) ALL REMAINING LOSSES SHALL BE ALLOCATED TO THE MEMBERS IN
ACCORDANCE WITH THEIR PERCENTAGE MEMBERSHIP INTERESTS.
SECTION 6.4. CODE SECTION 704(C) TAX ALLOCATIONS. INCOME, GAIN, LOSS, AND
DEDUCTION WITH RESPECT TO ANY PROPERTY CONTRIBUTED TO THE CAPITAL OF THE COMPANY
SHALL, SOLELY FOR TAX PURPOSES, BE ALLOCATED AMONG THE MEMBERS SO AS TO TAKE
ACCOUNT OF ANY VARIATION BETWEEN THE ADJUSTED BASIS OF SUCH PROPERTY TO THE
COMPANY FOR FEDERAL INCOME TAX PURPOSES
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AND ITS INITIAL AGREED VALUE PURSUANT TO ANY METHOD ALLOWABLE UNDER CODE SECTION
704(C) AND THE REGULATIONS PROMULGATED THEREUNDER.
IN THE EVENT THE AGREED VALUE OF ANY COMPANY ASSET IS ADJUSTED AFTER
ITS CONTRIBUTION TO THE COMPANY, SUBSEQUENT ALLOCATIONS OF INCOME, GAIN, LOSS
AND DEDUCTION WITH RESPECT TO SUCH ASSET SHALL TAKE INTO ACCOUNT ANY VARIATION
BETWEEN THE ADJUSTED BASIS OF SUCH ASSET FOR FEDERAL INCOME TAX PURPOSES AND ITS
AGREED VALUE PURSUANT TO ANY METHOD ALLOWABLE UNDER CODE SECTION 704(C) AND THE
REGULATIONS PROMULGATED THEREUNDER.
ANY ELECTIONS OR OTHER DECISIONS RELATING TO ALLOCATIONS UNDER THIS
SECTION SHALL BE DETERMINED BY HHBF. ABSENT A DETERMINATION BY HHBF, THE
REMEDIAL ALLOCATION METHOD UNDER REGULATION SECTION 1.704-3(D) SHALL BE USED.
ALLOCATIONS PURSUANT TO THIS SECTION ARE SOLELY FOR PURPOSES OF FEDERAL, STATE,
AND LOCAL TAXES AND SHALL NOT BE TAKEN INTO ACCOUNT IN COMPUTING ANY MEMBER'S
CAPITAL ACCOUNT OR SHARE OF PROFITS, LOSSES, OTHER ITEMS, OR DISTRIBUTIONS
PURSUANT TO ANY PROVISION OF THIS AGREEMENT.
SECTION 6.5. MISCELLANEOUS.
(A) ALLOCATIONS ATTRIBUTABLE TO PARTICULAR PERIODS. FOR PURPOSES OF
DETERMINING PROFITS, LOSSES OR ANY OTHER ITEMS ALLOCABLE TO ANY PERIOD, SUCH
ITEMS SHALL BE DETERMINED ON A DAILY, MONTHLY, OR OTHER BASIS, AS DETERMINED BY
HHBF USING ANY PERMISSIBLE METHOD UNDER CODE SECTION 706 AND THE REGULATIONS
THEREUNDER.
(B) OTHER ITEMS. EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, ALL
ITEMS OF COMPANY INCOME, GAIN, LOSS, DEDUCTION, CREDIT AND ANY OTHER ALLOCATIONS
NOT OTHERWISE PROVIDED FOR SHALL BE DIVIDED AMONG THE MEMBERS IN THE SAME
PROPORTION AS THEY SHARE PROFITS OR LOSSES, AS THE CASE MAY BE, FOR THE YEAR.
(C) TAX CONSEQUENCES; CONSISTENT REPORTING. THE MEMBERS ARE AWARE OF
THE INCOME TAX CONSEQUENCES OF THE ALLOCATIONS MADE BY THIS ARTICLE AND BY THE
REGULATORY ALLOCATIONS AND HEREBY AGREE TO BE BOUND BY THOSE ALLOCATIONS AS
REFLECTED ON THE INFORMATION RETURNS OF THE COMPANY IN REPORTING THEIR SHARES OF
COMPANY INCOME AND LOSS FOR INCOME TAX PURPOSES. EACH MEMBER AGREES TO REPORT
ITS DISTRIBUTIVE SHARE OF COMPANY ITEMS OF INCOME, GAIN, LOSS, DEDUCTION AND
CREDIT ON ITS SEPARATE RETURN IN A MANNER CONSISTENT WITH THE REPORTING OF SUCH
ITEMS TO IT BY THE COMPANY. ANY MEMBER FAILING TO REPORT CONSISTENTLY, AND WHO
NOTIFIES THE INTERNAL REVENUE SERVICE OF THE INCONSISTENCY AS REQUIRED BY LAW,
SHALL REIMBURSE THE COMPANY FOR ANY LEGAL AND ACCOUNTING FEES INCURRED BY THE
COMPANY IN CONNECTION WITH ANY EXAMINATION OF THE COMPANY BY FEDERAL OR STATE
TAXING AUTHORITIES WITH RESPECT TO THE YEAR FOR WHICH THE MEMBER FAILED TO
REPORT CONSISTENTLY.
(D) ECONOMIC INTEREST OWNERS. EACH ECONOMIC INTEREST OWNER SHALL BE
ENTITLED TO THE DISTRIBUTIONS AND ALLOCATIONS TO WHICH ITS PREDECESSOR IN
INTEREST WOULD HAVE BEEN ENTITLED UNDER THIS ARTICLE VI HAD IT RETAINED THE
ECONOMIC INTEREST ACQUIRED BY THE ECONOMIC INTEREST OWNER.
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ARTICLE VII
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
SECTION 7.1. NO TERMINATION BY CERTAIN ACTS OF MEMBER. NEITHER THE TRANSFER
OF INTEREST, WITHDRAWAL FROM THE COMPANY, BANKRUPTCY, INSOLVENCY, DISSOLUTION,
LIQUIDATION OR OTHER DISABILITY, NOR THE LEGAL INCOMPETENCY OF ANY MEMBER SHALL
RESULT IN THE TERMINATION OR DISSOLUTION OF THE COMPANY OR AFFECT ITS
CONTINUANCE IN ANY MANNER WHATSOEVER.
SECTION 7.2. DISSOLUTION. THE COMPANY SHALL BE DISSOLVED UPON THE HAPPENING
OF ANY OF THE FOLLOWING EVENTS, WHICHEVER SHALL FIRST OCCUR:
(A) THE ELECTION BY HHBF TO DISSOLVE THE COMPANY IN
ACCORDANCE WITH THE TERMS OF SECTION 3.5(C) HEREOF;
(B) THE DEATH, INSANITY, BANKRUPTCY, RETIREMENT (OTHER THAN
DUE TO A FAILURE OF AN INVESTOR MANAGER TO BE RE-ELECTED AS AN INVESTOR
MANAGER), RESIGNATION (OTHER THAN DUE TO AN INVESTOR MANAGER'S
RESIGNING FROM SERVING AS A MANAGER WHILE STILL REMAINING A MEMBER) OR
EXPULSION OF ANY MANAGER WHO IS ALSO A MEMBER, UNLESS THE COMPANY IS
CONTINUED BY THE CONSENT OF NOT LESS THAN A MAJORITY IN INTEREST
(DEFINED IN ACCORDANCE WITH REVENUE PROCEDURE 94-46 OR SUCCESSOR
PROVISIONS) OF THE REMAINING MEMBERS WITHIN NINETY (90) DAYS AFTER
NOTICE OF SUCH EVENT, EFFECTIVE AS OF THE DATE OF SUCH EVENT. IF THERE
IS NO REMAINING MANAGER, THE REMAINING MEMBERS OWNING AT LEAST 51% OF
THE MEMBERSHIP INTERESTS WHICH ARE OWNED BY THE REMAINING MEMBERS
SHALL, IF THEY DESIRE TO CONTINUE THE COMPANY, ELECT A SUBSTITUTE
MANAGER WHO SHALL ASSUME ALL OF THE RIGHTS AND DUTIES OF HHBF UNDER
THIS AGREEMENT (WHICH SUBSTITUTE MANAGER ACCEPTS SUCH ELECTION);
(C) UPON THE WRITTEN AGREEMENT OF HHBF AND THE INVESTOR
MANAGER;
(D) THE EXPIRATION OF THE TERM OF THE COMPANY AS PROVIDED IN
SECTION 2.5 HEREOF;
(E) THE ADJUDICATION OF BANKRUPTCY OF THE COMPANY;
(F) UPON THE WRITTEN CONSENT OF A SUPERMAJORITY VOTE OF THE
MEMBERS;
(G) IN ACCORDANCE WITH SECTION 12.11 HEREOF;
(H) THE ENTRY OF A DECREE OF JUDICIAL DISSOLUTION OR THE
ADMINISTRATIVE DISSOLUTION OF THE COMPANY AS PROVIDED IN THE ACT; AND
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(I) IN ACCORDANCE WITH SECTION 8.12 HEREOF.
SECTION 7.3. DISSOLUTION AND FINAL LIQUIDATION.
(A) UPON ANY DISSOLUTION OF THE COMPANY, THE COMPANY SHALL NOT
TERMINATE, BUT SHALL CEASE TO ENGAGE IN FURTHER BUSINESS EXCEPT TO THE
EXTENT NECESSARY TO PERFORM EXISTING CONTRACTS AND PRESERVE THE VALUE
OF ITS ASSETS. ITS ASSETS SHALL BE LIQUIDATED AND ITS AFFAIRS SHALL BE
WOUND UP AS SOON AS PRACTICAL THEREAFTER BY THE MANAGERS, OR IF FOR ANY
REASON THERE IS NO MANAGER, BY ANOTHER PERSON DESIGNATED BY A
SUPERMAJORITY VOTE OF THE MEMBERS. IN WINDING UP THE COMPANY AND
LIQUIDATING ASSETS, THE MANAGERS, OR OTHER PERSON SO DESIGNATED FOR
SUCH PURPOSE, MAY ARRANGE, EITHER DIRECTLY OR THROUGH OTHERS, FOR THE
COLLECTION AND DISBURSEMENT TO THE MEMBERS OF ANY FUTURE RECEIPTS FROM
THE HOSPITAL OR OTHER SUMS TO WHICH THE COMPANY MAY BE ENTITLED, AND
SHALL SELL THE COMPANY'S INTEREST IN THE HOSPITAL AND THE EQUIPMENT TO
ANY PERSON, INCLUDING HHBF OR ANY AFFILIATE THEREOF, ON SUCH TERMS AND
FOR SUCH CONSIDERATION AS SHALL BE CONSISTENT WITH OBTAINING THE FAIR
MARKET VALUE THEREOF; PROVIDED IF THE BUYER IS HHBF OR ANY OF ITS
AFFILIATES, SUCH FAIR MARKET VALUE SHALL, AT THE OPTION OF THE INVESTOR
MANAGER, BE DETERMINED BY INDEPENDENT APPRAISAL.
(B) UPON ANY SUCH DISSOLUTION AND LIQUIDATION OF THE COMPANY,
THE NET ASSETS, IF ANY, OF THE COMPANY AVAILABLE FOR DISTRIBUTION,
INCLUDING ANY CASH PROCEEDS FROM THE LIQUIDATION OF COMPANY ASSETS,
SHALL BE APPLIED AND DISTRIBUTED IN THE FOLLOWING MANNER OR ORDER, TO
THE EXTENT AVAILABLE:
(I) TO THE PAYMENT OF OR CREATION OF RESERVES FOR ALL
DEBTS, LIABILITIES, AND OBLIGATIONS TO ALL CREDITORS OF THE
COMPANY (OTHER THAN THE MEMBERS OR THEIR AFFILIATES) AND THE
EXPENSES OF LIQUIDATION;
(II) TO THE PAYMENT OF ALL DEBTS AND LIABILITIES
(INCLUDING INTEREST) OWED TO THE MEMBERS OR THEIR AFFILIATES
AS CREDITORS; AND
(III) THE BALANCE TO THE MEMBERS WITH POSITIVE
CAPITAL ACCOUNT BALANCES AFTER TAKING INTO ACCOUNT ALL OTHER
ADJUSTMENTS DURING THE FISCAL YEAR IN WHICH LIQUIDATION
OCCURS.
(C) THE MEMBERS SHALL LOOK SOLELY TO THE ASSETS, IF ANY, OF
THE COMPANY FOR ANY RETURN OF THEIR CAPITAL CONTRIBUTIONS AND, IF THE
ASSETS OF THE COMPANY REMAINING AFTER PAYMENT OR DISCHARGE OF THE
COMPANY'S DEBTS AND LIABILITIES, OR PROVISION THEREFOR, ARE
INSUFFICIENT TO RETURN ALL OR ANY PART OF THE CAPITAL CONTRIBUTIONS, NO
MEMBER SHALL HAVE ANY RIGHT OF RECOURSE AGAINST THE MANAGERS OR OTHER
MEMBERS OR TO CHARGE THE MANAGERS OR OTHER MEMBERS FOR ANY AMOUNTS
EXCEPT AS PROVIDED HEREIN AND EXCEPT TO THE EXTENT OTHERWISE PROVIDED
BY THE ACT AND/OR NORTH CAROLINA LAW.
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(D) UPON SUCH DISSOLUTION, REASONABLE TIME SHALL BE ALLOWED
FOR THE ORDERLY LIQUIDATION OF THE ASSETS OF THE COMPANY AND THE
DISCHARGE OF LIABILITIES TO CREDITORS SO AS TO MINIMIZE THE LOSSES
NORMALLY ATTENDANT TO A LIQUIDATION.
(E) THE CAPITAL ACCOUNTS OF THE MEMBERS, AS ADJUSTED, SHALL BE
UTILIZED BY THE COMPANY FOR THE PURPOSE OF MAKING DISTRIBUTIONS TO
THOSE MEMBERS WITH POSITIVE BALANCES IN THEIR RESPECTIVE CAPITAL
ACCOUNTS PURSUANT TO SECTION 7.3(B). IN MAKING SUCH DISTRIBUTIONS, THE
MANAGERS OR THE PERSON WINDING UP THE AFFAIRS OF THE COMPANY SHALL
DISTRIBUTE ALL FUNDS AVAILABLE FOR DISTRIBUTION TO THE MEMBERS AND
ECONOMIC INTEREST OWNERS (AFTER ESTABLISHING ANY RESERVES THAT THE
MANAGERS DEEM OR THE PERSON WINDING UP THE AFFAIRS OF THE COMPANY DEEMS
REASONABLY NECESSARY PURSUANT TO SECTION 7.3(B)) PRIOR TO THE LATER OF
(A) THE END OF THE TAXABLE YEAR IN WHICH THE EVENT OCCURS WHICH CAUSED
THE TERMINATION AND DISSOLUTION OF THE COMPANY, OR (B) NINETY (90) DAYS
AFTER THE OCCURRENCE OF SUCH EVENT. THE MANAGERS IN THEIR SOLE
DISCRETION, OR THE PERSON WINDING UP THE AFFAIRS OF THE COMPANY, IN ITS
DISCRETION, MAY ELECT TO HAVE THE COMPANY RETAIN ANY INSTALLMENT
OBLIGATIONS OWED TO THE COMPANY UNTIL COLLECTED IN FULL SO LONG AS ANY
PORTION OF THE RESERVES WHICH ARE LATER DETERMINED TO BE UNNECESSARY,
AND ALL COLLECTIONS ON SUCH INSTALLMENT OBLIGATIONS WHICH ARE NOT
DEEMED TO BE REASONABLY NECESSARY BY THE MANAGERS OR THE PERSON WINDING
UP THE AFFAIRS OF THE COMPANY TO ADD TO SUCH RESERVES ARE DISTRIBUTED
AS SOON AS PRACTICABLE IN ACCORDANCE WITH THE PROVISIONS OF SECTION
7.3(B) AS MODIFIED BY THIS SECTION.
(F) EACH ECONOMIC INTEREST OWNER SHALL BE ENTITLED TO THE
DISTRIBUTIONS TO WHICH ITS PREDECESSOR IN INTEREST WOULD HAVE BEEN
ENTITLED PURSUANT TO THIS ARTICLE VII HAD IT RETAINED THE ECONOMIC
INTEREST ACQUIRED BY THE ECONOMIC INTEREST OWNER.
SECTION 7.4. TERMINATION. UPON COMPLETION OF THE DISSOLUTION, WINDING UP,
DISTRIBUTION OF THE LIQUIDATION PROCEEDS AND ANY OTHER COMPANY ASSETS, THE
COMPANY SHALL TERMINATE.
SECTION 7.5. PAYMENT IN CASH. ANY PAYMENTS MADE TO ANY MEMBER PURSUANT TO
THIS ARTICLE VII SHALL BE MADE ONLY IN CASH.
SECTION 7.6. GOODWILL AND TRADE NAME. UPON THE DISSOLUTION OF THE COMPANY,
THE FIRM OR TRADE NAME OF THE COMPANY AND ANY GOODWILL ASSOCIATED THEREWITH
SHALL BECOME THE SOLE PROPERTY OF HHBF, PROVIDED THAT DISTRIBUTIONS AND
ALLOCATIONS OTHERWISE DUE TO HHBF SHALL NOT BE REDUCED AS A RESULT OF HHBF
BECOMING ENTITLED TO SUCH ASSETS, UNLESS THE DISSOLUTION WAS CAUSED DUE TO
HHBF'S BREACH OF THIS AGREEMENT IN WHICH CASE SUCH INTANGIBLE ASSETS SHALL NOT
BE DISTRIBUTED TO HHBF ON A NON PRO RATA BASIS; PROVIDED HOWEVER, UPON A
DISSOLUTION OF THE COMPANY IN CONNECTION WITH THE SALE OF SUBSTANTIALLY ALL OF
THE ASSETS OF THE COMPANY, THIS SECTION 7.6 SHALL NOT INCREASE THE DISTRIBUTIONS
AND ALLOCATIONS TO WHICH HHBF IS OTHERWISE ENTITLED.
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SECTION 7.7. TERMINATION OF NONCOMPETITION COVENANTS. UPON THE LATER OF THE
DISSOLUTION OF THE COMPANY AND THE COMPLETION OF THE LIQUIDATION PROCESS, THE
MEMBERS SHALL HAVE NO CONTINUING LIABILITY, OR OBLIGATION UNDER SECTION 5.10(B)
EXCEPT THAT SECTION 5.10(B) SHALL CONTINUE TO BE BINDING UPON A MEMBER WHOSE
BREACH OF THIS AGREEMENT CAUSED A DISSOLUTION OF THE COMPANY AND ANY ACTIONS FOR
A BREACH OF THIS AGREEMENT, INCLUDING A BREACH OF SECTION 5.10(B), SHALL NOT BE
IMPAIRED BY THE DISSOLUTION OR COMPLETED LIQUIDATION.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS
SECTION 8.1. MANAGER - TRANSFERS.
(A) EXCEPT AS PROVIDED IN THIS SECTION 8.1, WITHOUT THE
CONSENT OF A MAJORITY VOTE OF INVESTOR MEMBERS, HHBF SHALL NOT
VOLUNTARILY WITHDRAW FROM THE COMPANY AS A MEMBER AT ANY TIME PRIOR TO
ITS TERMINATION, OR TRANSFER OR ASSIGN ANY OF ITS RIGHTS AND DUTIES AS
A MANAGER, PROVIDED THAT HHBF MAY ASSIGN ITS MEMBERSHIP INTEREST IN THE
COMPANY AND ITS RIGHTS TO BE A MANAGER TO ANY PARTY WHO PURCHASES ALL
OR SUBSTANTIALLY ALL OF MEDCATH INCORPORATED'S ASSETS OR CAPITAL STOCK
IF SUCH PURCHASER ASSUMES IN WRITING THE OBLIGATIONS OF HHBF HEREUNDER
OR TO A PARTY UNDER CONTROL OF, COMMON CONTROL, OR WHICH CONTROLS,
HHBF. HHBF MAY ALSO ASSIGN ITS MEMBERSHIP INTEREST IN THE COMPANY AND
ITS RIGHTS TO BE A MANAGER TO A FINANCIAL INSTITUTION AS COLLATERAL
SECURITY FOR REPAYMENT OF INDEBTEDNESS FOR BORROWED FUNDS BY HHBF OR
ITS AFFILIATES. IN THE EVENT THAT HHBF DESIRES TO SELL ANY MEMBERSHIP
INTEREST AND SUCH SALE IS NOT IN CONNECTION WITH THE SALE OF ALL OR
SUBSTANTIALLY ALL OF THE ASSETS OR CAPITAL STOCK OF MEDCATH
INCORPORATED, THEN THE OTHER MEMBERS SHALL FIRST HAVE AN OPTION TO
PURCHASE SUCH MEMBERSHIP INTEREST IN ACCORDANCE WITH THE RIGHT OF FIRST
REFUSAL PROVIDED IN SECTION 8.4. IN ADDITION, HHBF SHALL ENSURE THAT
FOR THE FIRST FIVE (5) YEARS AFTER THE HOSPITAL FIRST OPENED FOR
BUSINESS AND REGULARLY CONDUCTED SUCH BUSINESS THE STOCK OF HHBF WILL
NOT BE SOLD TO ANY PERSON OR ENTITY THAT IS NOT AN AFFILIATE OF MEDCATH
INCORPORATED OTHER THAN IN CONNECTION WITH THE SALE OF SUBSTANTIALLY
ALL OF THE ASSETS OF MEDCATH INCORPORATED AND THEREAFTER, THE INVESTOR
MEMBERS SHALL BE GIVEN WRITTEN NOTICE OF ANY PROPOSED SALE AND SHALL
HAVE A RIGHT OF FIRST REFUSAL TO ACQUIRE THE STOCK OF HHBF SHOULD THE
OWNER INTEND TO SELL SUCH STOCK OTHER THAN IN CONNECTION WITH THE SALE
OF SUBSTANTIALLY ALL OF THE ASSETS OF MEDCATH INCORPORATED, WHICH RIGHT
SHALL BE EXERCISABLE FOR FORTY-FIVE (45) DAYS AFTER THE DATE THE
INVESTOR MEMBERS RECEIVE NOTICE OF A PROPOSED SALE.
(B) THE INVESTOR MANAGER MAY NOT ASSIGN ITS RIGHTS TO BE A
MANAGER HEREIN. UPON THE WITHDRAWAL OR RESIGNATION OF THE INVESTOR
MANAGER, A SUBSTITUTE THEREFORE WHO MUST BE AN INVESTOR MEMBER MAY BE
ELECTED BY A MAJORITY VOTE OF INVESTOR MEMBERS.
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(C) ANY RESIGNATION OR WITHDRAWAL BY A MANAGER AS A MANAGER
SHALL NOT CONSTITUTE SUCH MANAGER'S WITHDRAWAL AS A MEMBER.
SECTION 8.2. MEMBERS' RIGHT TO CONTINUE WHEN COMPANY HAS NO MANAGER. IF AT
ANY TIME THERE IS NO REMAINING MANAGER, A MEETING OF THE MEMBERS SHALL BE HELD
AT THE PRINCIPAL PLACE OF BUSINESS OF THE COMPANY WITHIN FORTY-FIVE (45) DAYS
AFTER THE HAPPENING OF SUCH EVENT TO CONSIDER WHETHER TO CONTINUE THE COMPANY ON
THE SAME TERMS AND CONDITIONS AS ARE CONTAINED IN THIS AGREEMENT (EXCEPT THAT
THE MANAGERS MAY BE DIFFERENT) AND TO SELECT A MANAGER FOR THE COMPANY, OR
WHETHER TO WIND UP THE AFFAIRS OF THE COMPANY, LIQUIDATE ITS ASSETS AND
DISTRIBUTE THE PROCEEDS THEREFROM IN ACCORDANCE WITH ARTICLE VII HEREOF. THE
COMPANY MAY BE CONTINUED AND A NEW MANAGER (WHO ACCEPTS SUCH APPOINTMENT)
SELECTED BY THE MEMBERS WITHIN NINETY (90) DAYS OF THE OCCURRENCE OF THE EVENT
DESCRIBED IN SECTION 7.2(B) WITH RESPECT TO THE LAST MANAGER. THE NEW MANAGER
SHALL EXECUTE, ACKNOWLEDGE, FILE OR RECORD (AS APPROPRIATE) ARTICLES OF
ORGANIZATION AND AN OPERATING AGREEMENT, OR AMENDMENTS TO THOSE DOCUMENTS, AND
SUCH OTHER DOCUMENTS AS MAY BE REQUIRED BY THE ACT. THE CONTINUANCE OF THE
COMPANY PURSUANT TO THE TERMS OF THIS SECTION 8.2 IS CONDITIONED UPON (I) ANY
AMENDMENT REQUIRED BY THE ACT OF THE ARTICLES OF ORGANIZATION TO REFLECT THE
FOREGOING CHANGE AND, IF APPLICABLE, COMPLIANCE BY THE COMPANY WITH ANY NOTICE
PROVISIONS OF THE ACT AND (II) DELIVERY TO THE WITHDRAWING MANAGER OF AN
INDEMNIFICATION AGREEMENT BY THE COMPANY, IN FORM AND SUBSTANCE REASONABLY
SATISFACTORY TO THE WITHDRAWING MANAGER, INDEMNIFYING AND HOLDING THE
WITHDRAWING MANAGER HARMLESS AGAINST ALL FUTURE LIABILITIES OF THE COMPANY.
SECTION 8.3. RELATIONSHIP WITH SUBSTITUTE MANAGER. THE RELATIONSHIP OF THE
MEMBERS TO ANY PERSON THAT HAS EITHER ACQUIRED THE MEMBERSHIP INTEREST OF HHBF
OR HAS BEEN ELECTED AS A SUCCESSOR MANAGER AS PROVIDED HEREIN SHALL BE GOVERNED
BY THIS AGREEMENT. IF SUCH PERSON WAS NOT PREVIOUSLY A MANAGER, THEN SUCH
PERSON, AS SUBSTITUTE MANAGER, SHALL HAVE ALL THE RIGHTS AND POWERS OF ITS
PREDECESSOR MANAGER UNDER THIS AGREEMENT; PROVIDED, SUCH PERSON ASSUMES IN
WRITING THE OBLIGATIONS OF SUCH MANAGER UNDER THIS AGREEMENT AND ANY ARISING
THEREAFTER, AND ACCEPTS AND ADOPTS ALL THE TERMS AND PROVISIONS OF THIS
AGREEMENT IN WRITING. THE WITHDRAWING MANAGER SHALL BE LIABLE FOR ALL OF ITS
COVENANTS AND OBLIGATIONS UNDER THIS AGREEMENT FOR ALL PERIODS PRIOR TO ITS
WITHDRAWAL UNTIL SUCH LIABILITY IS ASSUMED BY A SUBSTITUTE MANAGER.
SECTION 8.4. MEMBERS WHO ARE NOT MANAGERS - RESTRICTION ON TRANSFER. EXCEPT
AS OTHERWISE SET FORTH IN THIS SECTION OR IN THIS AGREEMENT, NO ECONOMIC
INTEREST AND/OR MEMBERSHIP INTEREST OF AN INVESTOR MEMBER OR ANY PORTION
THEREOF, SHALL BE VALIDLY SOLD OR ASSIGNED WHETHER VOLUNTARILY, INVOLUNTARILY OR
BY OPERATION OF LAW, AND NO PURPORTED ASSIGNEE SHALL BE RECOGNIZED BY THE
COMPANY FOR ANY PURPOSE, UNLESS SUCH ECONOMIC INTEREST AND/OR MEMBERSHIP
INTEREST SHALL HAVE BEEN TRANSFERRED IN ACCORDANCE WITH THE PROVISIONS OF THIS
AGREEMENT AND IN COMPLIANCE WITH SUCH ADDITIONAL RESTRICTIONS AS MAY BE IMPOSED
BY HHBF TO COMPLY WITH REQUIREMENTS IMPOSED BY ANY FEDERAL OR STATE SECURITIES
REGULATORY AUTHORITY AND UNLESS HHBF'S CONSENT IS OBTAINED. IN NO EVENT,
HOWEVER, SHALL AN INVESTOR MEMBER TRANSFER OR SELL ALL OR ANY OF ITS ECONOMIC
INTEREST AND/OR MEMBERSHIP INTEREST TO
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ANY PARTY WHICH, IF A MEMBER, WOULD BE IN VIOLATION OF SECTION 5.10(B) HEREOF.
EXCEPT AS OTHERWISE SET FORTH IN THIS SECTION OR IN THIS AGREEMENT, AN INVESTOR
MEMBER MAY TRANSFER, SELL OR ASSIGN ITS ENTIRE ECONOMIC INTEREST AND/OR
MEMBERSHIP INTEREST IF IT HAS RECEIVED THE APPROVAL OF HHBF, NOT TO BE
UNREASONABLY WITHHELD, PROVIDED HOWEVER: (A) THE OTHER INVESTOR MEMBERS (ON A
PRO RATA BASIS OF ALL SUCH INVESTOR MEMBERS DESIRING TO DO SO) FIRST FOR A
PERIOD OF FIFTEEN (15) DAYS, AND THEREAFTER THE COMPANY FOR A PERIOD OF FIFTEEN
(15) DAYS SHALL HAVE THE RIGHT, BUT NOT THE OBLIGATION, TO PURCHASE ALL, BUT NOT
LESS THAN ALL, OF THE ECONOMIC INTEREST AND/OR MEMBERSHIP INTEREST PROPOSED TO
BE TRANSFERRED, WHICH RIGHT SHALL BE EXERCISABLE ON THE TERMS AND FOR THE
PURCHASE PRICE SET FORTH IN WRITING IN A BONA FIDE OFFER MADE FOR THE INTERESTS
BY A THIRD-PARTY (THE "RIGHT OF FIRST REFUSAL"), AND (B) THERE SHALL HAVE BEEN
FILED WITH THE COMPANY A DULY EXECUTED AND ACKNOWLEDGED COUNTERPART OF THE
INSTRUMENT MAKING SUCH ASSIGNMENT SIGNED BY BOTH THE ASSIGNOR AND ASSIGNEE AND
SUCH INSTRUMENT EVIDENCES THE WRITTEN ACCEPTANCE BY THE ASSIGNEE OF ALL OF THE
TERMS AND PROVISIONS OF THE AGREEMENT, REPRESENTS THAT SUCH ASSIGNMENT WAS MADE
IN ACCORDANCE WITH ALL APPLICABLE LAWS AND REGULATIONS AND THE ASSIGNEE SHALL
HAVE REPRESENTED TO THE COMPANY IN WRITING THAT IT MEETS THE INVESTOR
SUITABILITY STANDARDS ESTABLISHED BY THE APPROPRIATE STATE OF RESIDENCE, OR, IN
THE ABSENCE THEREOF, THE INVESTOR SUITABILITY STANDARDS ESTABLISHED BY THE
COMPANY. HHBF SHALL USE REASONABLE CARE TO DETERMINE THAT TRANSFERS ARE IN
ACCORDANCE WITH APPLICABLE LAWS AND REGULATIONS, INCLUDING OBTAINING AN OPINION
OF COUNSEL TO THAT EFFECT. ANY MEMBER WHO IS NOT A MANAGER THAT ASSIGNS ALL ITS
MEMBERSHIP INTEREST SHALL CEASE TO BE A MEMBER OF THE COMPANY, EXCEPT THAT
UNLESS AND UNTIL A SUBSTITUTE MEMBER IS ADMITTED IN HIS OR HER STEAD, SUCH
ASSIGNING MEMBER SHALL RETAIN THE STATUTORY RIGHTS OF AN ASSIGNOR OF A
MEMBERSHIP INTEREST UNDER THE ACT. ANY MEMBERSHIP INTERESTS ACQUIRED BY THE
COMPANY PURSUANT TO SECTION 8.4 SHALL, SUBJECT TO APPLICABLE LAW, BE RE-OFFERED
BY THE COMPANY TO SUITABLE INVESTORS.
ANY DISSOLUTION, LIQUIDATION, MERGER (UNLESS INVESTOR MEMBERS OR THEIR
AFFILIATES EXISTING PRIOR TO SUCH MERGER OWN AT LEAST FIFTY-ONE PERCENT (51%) OF
THE SURVIVING ENTITY AFTER THE MERGER OR UNLESS BOTH PARTIES TO SUCH MERGER ARE
MAJORITY OWNED BY PARTIES WHO ARE INVESTOR MEMBERS OR THEIR AFFILIATES PRIOR TO
SUCH MERGER) OR SALE OF AN INVESTOR MEMBER WHICH IS AN ENTITY (A SALE SHALL
INCLUDE A TRANSFER OF FIFTY PERCENT (50%) OR MORE OF ITS OWNERSHIP INTERESTS OR
OF SUBSTANTIALLY ALL OF ITS ASSETS OR ANY OTHER TRANSACTION OR SERIES OF RELATED
TRANSACTIONS INTENDED TO ACCOMPLISH, IN SUBSTANCE, A SALE OF SUCH ENTITY) SHALL
CONSTITUTE AN OFFER BY SUCH INVESTOR MEMBER TO SELL SUCH INVESTOR MEMBER'S
INTEREST PURSUANT TO SECTION 8.4 FOR THE FORMULA PURCHASE PRICE (AS DEFINED IN
SECTION 8.9 BELOW).
SECTION 8.5. CONDITION PRECEDENT TO TRANSFER OF ECONOMIC INTEREST AND/OR
MEMBERSHIP INTEREST. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, NO
TRANSFER OF AN ECONOMIC INTEREST AND/OR MEMBERSHIP INTEREST MAY BE MADE IF SUCH
TRANSFER (A) CONSTITUTES A VIOLATION OF THE REGISTRATION PROVISIONS OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE REGISTRATION PROVISIONS OF ANY
APPLICABLE STATE SECURITIES LAWS; (B) IF AFTER SUCH TRANSFER THE COMPANY WILL
NOT BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES; AND (C) IF
WHEN TAKEN TOGETHER WITH OTHER PRIOR TRANSFERS, RESULTS IN A "TERMINATION" OF
THE COMPANY FOR FEDERAL INCOME TAX PURPOSES. THE COMPANY MAY REQUIRE, AS A
CONDITION PRECEDENT TO TRANSFER
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OF AN ECONOMIC INTEREST AND/OR MEMBERSHIP INTEREST, DELIVERY TO THE COMPANY, AT
THE PROPOSED TRANSFEROR'S EXPENSE, OF AN OPINION OF COUNSEL SATISFACTORY (BOTH
AS TO THE COUNSEL AND SUBSTANCE OF THE OPINION) TO HHBF THAT THE TRANSFER WILL
NOT VIOLATE ANY OF THE FOREGOING RESTRICTIONS.
SECTION 8.6. SUBSTITUTE MEMBER - CONDITIONS TO FULFILL. NO ASSIGNEE OF A
MEMBER'S MEMBERSHIP INTEREST IN THE COMPANY SHALL HAVE THE RIGHT TO BECOME A
SUBSTITUTE MEMBER IN PLACE OF ITS ASSIGNOR UNLESS, IN ADDITION TO ANY OTHER
REQUIREMENT HEREIN, ALL OF THE FOLLOWING CONDITIONS ARE SATISFIED:
(A) THE COMPANY HAS WAIVED ITS RIGHT PURSUANT TO SECTION 8.4
TO PURCHASE THE MEMBERSHIP INTEREST HELD BY THE ASSIGNEE;
(B) THE DULY EXECUTED AND ACKNOWLEDGED WRITTEN INSTRUMENT OF
ASSIGNMENT WHICH HAS BEEN FILED WITH THE COMPANY SETS FORTH THAT THE
ASSIGNEE BECOMES A SUBSTITUTE MEMBER IN PLACE OF THE ASSIGNOR;
(C) THE ASSIGNOR AND ASSIGNEE EXECUTE AND ACKNOWLEDGE SUCH
OTHER INSTRUMENTS AS HHBF MAY DEEM REASONABLY NECESSARY OR DESIRABLE TO
EFFECT SUCH ADMISSION, INCLUDING, BUT NOT LIMITED TO, THE WRITTEN
ACCEPTANCE AND ADOPTION BY THE ASSIGNEE OF THE PROVISIONS OF THIS
AGREEMENT;
(D) THE WRITTEN CONSENT OF HHBF AND A MAJORITY OF THE OTHER
MEMBERS TO SUCH SUBSTITUTION IS OBTAINED, WHICH CONSENT MAY BE WITHHELD
IN HHBF'S OR THE OTHER MEMBERS' SOLE AND ABSOLUTE DISCRETION; AND
(E) THE PAYMENT BY THE ASSIGNEE OF ALL COSTS TO THE COMPANY
ASSOCIATED WITH THE TRANSACTION, INCLUDING BUT NOT LIMITED TO LEGAL
FEES, TRANSFER FEES, AND FILING FEES.
SECTION 8.7. ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. UPON THE
TRANSFER OF A MEMBER'S ECONOMIC INTEREST OR MEMBERSHIP INTEREST, ALL ITEMS OF
INCOME, GAIN, LOSS, DEDUCTION AND CREDIT ATTRIBUTABLE TO THE ECONOMIC INTEREST
OR MEMBERSHIP INTEREST SO TRANSFERRED SHALL BE ALLOCATED BETWEEN THE TRANSFEROR
AND THE TRANSFEREE IN SUCH MANNER AS THE TRANSFEROR AND TRANSFEREE AGREE AT THE
TIME OF TRANSFER; PROVIDED SUCH ALLOCATION DOES NOT VIOLATE FEDERAL OR STATE
INCOME TAX LAW. IF HHBF, IN ITS SOLE DISCRETION, DEEMS SUCH LAWS VIOLATED, THEN
SUCH ALLOCATION SHALL BE MADE PRO RATA FOR THE FISCAL YEAR BASED UPON THE NUMBER
OF DAYS DURING THE APPLICABLE FISCAL YEAR OF THE COMPANY THAT THE ECONOMIC
INTEREST OR MEMBERSHIP INTEREST SO TRANSFERRED WAS HELD BY THE TRANSFEROR AND
TRANSFEREE, WITHOUT REGARD TO THE RESULTS OF COMPANY ACTIVITIES DURING THE
PERIOD IN WHICH EACH WAS THE HOLDER, OR IN SUCH OTHER MANNER AS HHBF DEEMS
NECESSARY TO COMPLY WITH FEDERAL OR STATE INCOME TAX LAWS. DISTRIBUTIONS AS
CALLED FOR BY THIS AGREEMENT SHALL BE MADE TO THE HOLDER OF RECORD OF THE
ECONOMIC INTEREST OR MEMBERSHIP INTEREST ON THE DATE OF DISTRIBUTION.
NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT TO THE CONTRARY, BOTH THE
COMPANY AND HHBF SHALL BE
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ENTITLED TO TREAT THE ASSIGNOR OF ANY ASSIGNED ECONOMIC INTEREST OR MEMBERSHIP
INTEREST AS THE ABSOLUTE OWNER THEREOF IN ALL RESPECTS, AND SHALL INCUR NO
LIABILITY FOR DISTRIBUTIONS MADE IN GOOD FAITH TO SUCH ASSIGNOR IN RELIANCE ON
THE COMPANY RECORDS AS THEY EXIST UNTIL SUCH TIME AS THE WRITTEN ASSIGNMENT HAS
BEEN RECEIVED BY, AND RECORDED ON THE BOOKS OF THE COMPANY. FOR PURPOSES OF THIS
ARTICLE VIII, THE EFFECTIVE DATE OF AN ASSIGNMENT OF ANY ECONOMIC INTEREST OR
MEMBERSHIP INTEREST SHALL BE THE LAST DAY OF THE MONTH SPECIFIED IN THE WRITTEN
INSTRUMENT OF ASSIGNMENT.
SECTION 8.8. RIGHTS, LIABILITIES OF, AND RESTRICTIONS ON ASSIGNEE. NO
ASSIGNEE OF A MEMBER'S ECONOMIC INTEREST OR MEMBERSHIP INTEREST SHALL HAVE THE
RIGHT TO PARTICIPATE IN THE COMPANY, INSPECT THE BOOKS OF ACCOUNT OF THE COMPANY
OR EXERCISE ANY OTHER RIGHT OF A MEMBER UNLESS AND UNTIL ADMITTED AS A
SUBSTITUTE MEMBER. NOTWITHSTANDING HHBF'S FAILURE OR REFUSAL TO ADMIT AN
ASSIGNEE AS A SUBSTITUTE MEMBER, SUCH ASSIGNEE SHALL BE ENTITLED TO RECEIVE THE
SHARE OF INCOME, CREDIT, GAIN, EXPENSE, LOSS AND DEDUCTION AND CASH
DISTRIBUTIONS PROVIDED HEREUNDER THAT IS ASSIGNED TO IT, AND, UPON DEMAND, MAY
RECEIVE COPIES OF ALL REPORTS THEREAFTER DELIVERED PURSUANT TO THE REQUIREMENTS
OF THIS AGREEMENT; PROVIDED, THE COMPANY SHALL HAVE FIRST RECEIVED NOTICE OF
SUCH ASSIGNMENT AND ALL REQUIRED CONSENTS THERETO SHALL HAVE BEEN OBTAINED AND
OTHER CONDITIONS PRECEDENT TO TRANSFER THEREOF SHALL HAVE BEEN SATISFIED. THE
COMPANY'S TAX RETURNS SHALL BE PREPARED TO REFLECT THE INTERESTS OF ASSIGNEES AS
WELL AS MEMBERS.
SECTION 8.9.DEATH OF A MEMBER. HEIRS OF MEMBERS SHALL BE ENTITLED TO
INHERIT THE MEMBERSHIP INTERESTS OF A DECEASED MEMBER, PROVIDED THAT UPON A
MEMBER'S DEATH SUCH INTERESTS SHALL BE AUTOMATICALLY CONVERTED TO AN ECONOMIC
INTEREST ONLY IN THE COMPANY UNTIL SUCH HEIR AGREES IN WRITING TO ALL OF THE
TERMS AND CONDITIONS OF THIS AGREEMENT AND SUCH OTHER REASONABLE TERMS AS MAY BE
ESTABLISHED BY HHBF AS A CONDITION TO SUCH HEIR BECOMING A MEMBER, IN WHICH
EVENT SUCH INTEREST SHALL AGAIN BECOME A MEMBERSHIP INTEREST IN THE COMPANY.
NOTWITHSTANDING THE PREVIOUS SENTENCE, WITHIN ONE HUNDRED TWENTY (120) DAYS OF
THE COMPANY FIRST LEARNING OF THE DEATH OF A MEMBER, THE COMPANY SHALL HAVE THE
OPTION TO PURCHASE THE MEMBERSHIP INTEREST OF THE DECEASED MEMBER, AND THE
ESTATE OF THE DECEASED MEMBER SHALL BE OBLIGATED TO SELL SUCH MEMBERSHIP
INTEREST TO THE COMPANY, IN ACCORDANCE WITH THE TERMS OF THIS SECTION 8.9. THE
COMPANY MAY EXERCISE ITS OPTION BY GIVING WRITTEN NOTICE THEREOF TO THE ESTATE
OF THE DECEASED MEMBER, OR THE APPROPRIATE REPRESENTATIVE THEREOF, WITHIN SUCH
ONE HUNDRED TWENTY (120) DAY PERIOD. THE PURCHASE PRICE FOR SUCH MEMBERSHIP
INTEREST SHALL EQUAL THE GREATER OF (A) SUCH DECEASED MEMBER'S CAPITAL ACCOUNT
BALANCE AS OF THE LAST DAY OF THE CALENDAR QUARTER MOST RECENTLY ENDED PRIOR TO
SUCH MEMBER'S DEATH, OR (B) FIVE (5) MULTIPLIED BY THE NET INCOME (AS REASONABLY
DETERMINED BY THE COMPANY'S ACCOUNTANTS) OF THE COMPANY FOR THE TWELVE (12)
MONTH PERIOD ENDING AS OF THE CALENDAR QUARTER MOST RECENTLY ENDED PRIOR TO THE
DEATH OF SUCH MEMBER MULTIPLIED BY THE PERCENTAGE MEMBERSHIP INTEREST OF SUCH
MEMBER IN THE COMPANY (THE "FORMULA PURCHASE PRICE"). THE PURCHASE PRICE SHALL
BE PAID (THE "PAYMENT METHOD") IN THREE (3) EQUAL ANNUAL INSTALLMENTS, THE FIRST
THIRD OF WHICH SHALL BE PAID UPON THE DETERMINATION OF THE PURCHASE PRICE AND
THE REMAINING TWO (2) INSTALLMENTS OF WHICH SHALL BE PAID ON THE FIRST AND
SECOND ANNIVERSARY OF SUCH DATE. THE OUTSTANDING AMOUNTS DUE FROM THE
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COMPANY TO THE ESTATE OF THE DECEASED MEMBER SHALL BEAR INTEREST AT PRIME RATE
AS OF THE DATE OF SUCH MEMBER'S DEATH. ACCRUED INTEREST SHALL BE PAID AS OF THE
DATES PAYMENTS OF PRINCIPAL ARE DUE AS PROVIDED ABOVE.
SECTION 8.10. REPURCHASE OF INTERESTS IN CERTAIN EVENT.T
(A) IN THE DISCRETION OF HHBF, THE COMPANY MAY, BUT IS NOT
OBLIGATED TO, REPURCHASE A MEMBER'S ECONOMIC INTEREST OR MEMBERSHIP
INTEREST UPON SUCH MEMBER'S BREACH OF THE MEMBER'S OBLIGATIONS
CONTAINED IN ARTICLE III, SECTIONS 5.10, 8.1(B), 8.4, 8.9, 12.1 AND
12.11 OF THIS AGREEMENT.
(B) EACH MEMBER AGREES TO SELL ITS MEMBERSHIP INTEREST TO THE
COMPANY IN THE EVENT HHBF ELECTS TO EXERCISE THE RIGHT OF REPURCHASE
GRANTED UNDER SECTION 8.10(A) AND THE PURCHASE PRICE SHALL THE LOWER OF
(X) THE CAPITAL CONTRIBUTION OF THE MEMBER LESS ALL AMOUNTS DISTRIBUTED
TO SUCH MEMBER BY THE COMPANY, AND (Y) THE FAIR MARKET VALUE OF SUCH
MEMBER'S MEMBERSHIP INTEREST DETERMINED BY AN INDEPENDENT APPRAISER
REASONABLY SELECTED BY HHBF.
SECTION 8.11. PERMISSIBLE TRANSFERS BY INVESTOR MEMBERS. NOTWITHSTANDING
ANYTHING IN THIS AGREEMENT TO THE CONTRARY, AN INVESTOR MEMBER MAY ELECT WITHIN
THIRTY (30) DAYS OF ACQUIRING A MEMBERSHIP INTEREST IN THE COMPANY TO ASSIGN ITS
MEMBERSHIP INTEREST TO A CORPORATION, LIMITED LIABILITY COMPANY OR LIMITED
PARTNERSHIP FORMED AND MAINTAINED FOR THE SOLE PURPOSE OF HOLDING SUCH
MEMBERSHIP INTEREST IF SUCH ASSIGNEE IS OWNED BY THE INVESTOR MEMBER OR SUCH
ASSIGNEE'S OWNERS ARE SUBSTANTIALLY IDENTICAL TO THE OWNERS OF SUCH INVESTOR
MEMBER AS LONG AS SUCH ASSIGNEE AND ITS AFFILIATES AGREE IN WRITING TO BE BOUND
BY ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT AND HHBF FIRST APPROVES IN
WRITING THE TERMS OF ALL DOCUMENTS CREATING AND CONSTITUTING SUCH ENTITY.
SECTION 8.12. SPECIAL PROVISIONS REGARDING WITHDRAWAL. NOTWITHSTANDING
ANYTHING ELSE CONTAINED IN THE ACT OR THIS AGREEMENT, THE WITHDRAWAL OF AN
INVESTOR MEMBER FROM THE COMPANY SHALL BE GOVERNED BY AND MADE ONLY PURSUANT TO
THE TERMS OF THIS SECTION 8.12 AND THE WITHDRAWAL OF HHBF SHALL BE GOVERNED BY
SECTION 8.1.
(A) SUBJECT TO THIS SECTION 8.12, AN INVESTOR MEMBER
MAY WITHDRAW FROM THE COMPANY BY GIVING WRITTEN NOTICE OF SUCH
WITHDRAWAL TO THE COMPANY AT LEAST SIX (6) MONTHS PRIOR TO THE
EFFECTIVE DATE OF THE WITHDRAWAL EXCEPT THAT, DURING THE FIRST THIRTY
SIX (36) MONTHS AFTER AN INVESTOR MEMBER IS FIRST ADMITTED TO THE
COMPANY AS A MEMBER, SUCH INVESTOR MEMBER SHALL NOT WITHDRAW FROM THE
COMPANY EXCEPT AS FURTHER PERMITTED IN SUBSECTIONS (B) OR (C) BELOW.
UPON THE EFFECTIVE DATE OF A WITHDRAWAL, THE INVESTOR MEMBER SHALL NO
LONGER BE A MEMBER IN THE COMPANY AND SHALL HAVE THE STATUS AS IF HE
WERE ONLY AN ASSIGNEE OF A MEMBER AND SHALL BE ONLY AN ECONOMIC
INTEREST OWNER TO THE EXTENT THE WITHDRAWING INVESTOR MEMBER RETAINS
ITS ECONOMIC INTEREST. EXCEPT AS EXPRESSLY PROVIDED BELOW, AN INVESTOR
MEMBER SHALL NOT BE ENTITLED TO ANY DISTRIBUTIONS OR TO HAVE ITS
ECONOMIC INTEREST REDEEMED OR TO
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ANY OTHER TYPE OF PAYMENT FROM THE COMPANY OR ANY OTHER MEMBER AS A
RESULT OF THE INVESTOR MEMBER'S WITHDRAWAL. EXCEPT AS OTHERWISE
EXPRESSLY PROVIDED BELOW, THE COMPANY SHALL HAVE THE OPTION TO REDEEM
THE MEMBERSHIP INTEREST OF ANY INVESTOR MEMBER WHO HAS WITHDRAWN FROM
THE COMPANY FOR AN AMOUNT EQUAL TO SUCH WITHDRAWN INVESTOR MEMBER'S
CAPITAL ACCOUNT BALANCE AS OF THE EFFECTIVE DATE OF SUCH WITHDRAWAL NET
OF DISTRIBUTIONS TO SUCH WITHDRAWN INVESTOR MEMBER AFTER THE EFFECTIVE
DATE OF SUCH WITHDRAWAL. HHBF MAY EXERCISE SUCH OPTION ON BEHALF OF THE
COMPANY BY CAUSING IT TO TENDER THE REDEMPTION PRICE TO THE WITHDRAWN
INVESTOR MEMBER WITHIN THREE (3) MONTHS OF THE EFFECTIVE DATE OF THE
WITHDRAWAL.
(B) IF, BY THE END OF THE SIXTH (6TH) MONTH AFTER AN
INVESTOR MEMBER IS FIRST ADMITTED TO THE COMPANY AS A MEMBER, THE
COMPANY HAS NOT RECEIVED A WRITTEN COMMITMENT FROM A LENDER FOR THE
FINANCING OF THE CONSTRUCTION OF THE HOSPITAL (WHICH COMMITMENT SHALL
CONTAIN COMMERCIALLY REASONABLE TERMS AND SHALL BE SUBJECT TO
NEGOTIATION OF DEFINITIVE LOAN AGREEMENTS), SUCH INVESTOR MEMBER MAY
WITHDRAW FROM THE COMPANY BY PROVIDING WRITTEN NOTICE OF SUCH
WITHDRAWAL TO THE COMPANY WITHIN TEN (10) DAYS OF THAT SIX (6) MONTH
ANNIVERSARY. IN SUCH A CASE, THE MEMBERSHIP INTEREST OF THE WITHDRAWING
INVESTOR MEMBER SHALL BE REDEEMED BY THE COMPANY FOR AN AMOUNT EQUAL TO
THE INVESTOR MEMBER'S CAPITAL CONTRIBUTIONS TO THE COMPANY NET OF ANY
PREVIOUS DISTRIBUTIONS BY THE COMPANY TO SUCH INVESTOR MEMBER.
(C) IF, BY THE END OF THE EIGHTEENTH (18TH) MONTH
AFTER AN INVESTOR MEMBER IS FIRST ADMITTED TO THE COMPANY AS A MEMBER,
THE COMPANY HAS NOT COMMENCED, OR IS NOT DILIGENTLY PURSUING,
CONSTRUCTION OF THE HOSPITAL PURSUANT TO A CONSTRUCTION CONTRACT OR
SERIES OF RELATED CONSTRUCTION CONTRACTS TO BUILD THE HOSPITAL, SUCH
INVESTOR MEMBER MAY WITHDRAW FROM THE COMPANY BY PROVIDING WRITTEN
NOTICE OF SUCH WITHDRAWAL TO THE COMPANY WITHIN TEN (10) DAYS OF THAT
EIGHTEEN (18) MONTH ANNIVERSARY. IN SUCH A CASE AND SUBJECT TO (F)
BELOW, THE MEMBERSHIP INTEREST OF THE WITHDRAWING INVESTOR MEMBER SHALL
BE REDEEMED BY THE COMPANY FOR AN AMOUNT EQUAL TO THE INVESTOR MEMBER'S
CAPITAL ACCOUNT BALANCE AS OF THAT EIGHTEEN (18) MONTH ANNIVERSARY.
(D) IF THE COMPANY RECEIVES NOTICES OF WITHDRAWAL
FROM ANY INVESTOR MEMBER PURSUANT TO SUBSECTION (C) ABOVE THAT WOULD
RESULT, WHEN AGGREGATED WITH WITHDRAWALS PREVIOUSLY MADE PURSUANT TO
SUBSECTION (B) ABOVE, IN THE WITHDRAWAL OF MEMBERS HOLDING AT LEAST
TWENTY PERCENT (20%) OF THE PERCENTAGE MEMBERSHIP INTERESTS IN THE
COMPANY HELD BY INVESTOR MEMBERS, AT THE ELECTION OF HHBF, THE COMPANY
MAY BE DISSOLVED AND LIQUIDATED AND NO INVESTOR MEMBER WILL BE ENTITLED
TO WITHDRAW OR HAVE ITS MEMBERSHIP INTEREST REDEEMED. HHBF SHALL MAKE
THIS ELECTION BY WRITTEN NOTICE TO THE INVESTOR MANAGER WITHIN THIRTY
(30) DAYS OF THE ABOVE REFERENCED WITHDRAWAL NOTICES.
(E) IN THE EVENT AN INVESTOR MEMBER WITHDRAWS FROM
THE COMPANY PURSUANT TO (B) OR (C) ABOVE AND IS NOT AND HAS NOT AS OF
THE WITHDRAWAL DATE BEEN IN
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BREACH OF THIS AGREEMENT, THERE SHALL BE NO "TAIL PERIOD" FOR THE
PURPOSES OF SECTION 5.10(B) OF THIS AGREEMENT WITH RESPECT TO THE
WITHDRAWN INVESTOR MEMBER, IT BEING ACKNOWLEDGED THAT IF AN INVESTOR
MEMBER WITHDRAWS FROM THE COMPANY PURSUANT TO SUBSECTION (A) ABOVE,
THERE SHALL BE A TAIL PERIOD AS SET FORTH IN SECTION 5.10(B).
(F) IN THE EVENT AN INVESTOR MEMBER WITHDRAWS FROM
THE COMPANY PURSUANT TO (B) OR (C) ABOVE AND HAS NOT AS OF THE
WITHDRAWAL DATE BEEN IN BREACH OF THIS AGREEMENT, THEN SUCH INVESTOR
MEMBER SHALL SIMULTANEOUSLY BE RELEASED FROM THE RESTRICTIONS SET FORTH
IN PARAGRAPH 7 OF THE HOSPITAL PROFESSIONAL SERVICES AGREEMENT ENTERED
INTO BY AND AMONG THE COMPANY, THE INVESTOR MEMBER'S MEDICAL PRACTICE
AND THE OWNERS OF SUCH MEDICAL PRACTICE.
ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
SECTION 9.1. BOOKS OF ACCOUNT. AT ALL TIMES DURING THE CONTINUANCE OF THE
COMPANY, HHBF SHALL MAINTAIN OR CAUSE TO BE MAINTAINED TRUE AND FULL FINANCIAL
RECORDS AND BOOKS OF ACCOUNT SHOWING ALL RECEIPTS AND EXPENDITURES, ASSETS AND
LIABILITIES, INCOME AND LOSSES, AND ALL OTHER RECORDS NECESSARY FOR RECORDING
THE COMPANY'S BUSINESS AND AFFAIRS INCLUDING THOSE SUFFICIENT TO RECORD THE
ALLOCATIONS AND DISTRIBUTIONS REQUIRED BY THE PROVISIONS OF THIS AGREEMENT.
SECTION 9.2. ACCESS TO RECORDS. THE BOOKS OF ACCOUNT AND ALL DOCUMENTS AND
OTHER WRITINGS OF THE COMPANY, INCLUDING THE ARTICLES OF ORGANIZATION AND ANY
AMENDMENTS THERETO, SHALL AT ALL TIMES BE KEPT AND MAINTAINED BY HHBF OR, IF
REQUIRED BY LAW, AT THE REGISTERED OFFICE OF THE COMPANY. EACH MEMBER OR ITS
DESIGNATED REPRESENTATIVES SHALL, UPON REASONABLE NOTICE TO HHBF, HAVE ACCESS TO
SUCH FINANCIAL BOOKS, RECORDS AND DOCUMENTS DURING REASONABLE BUSINESS HOURS AND
MAY INSPECT AND MAKE COPIES OF ANY OF THEM. EACH MEMBER MAY RECEIVE BY MAIL,
UPON WRITTEN REQUEST TO THE COMPANY AND AT SUCH MEMBER'S COST, A LIST OF THE
NAMES AND ADDRESSES OF THE MEMBERS AND ECONOMIC INTEREST HOLDERS AND THE
PERCENTAGE OF ECONOMIC INTEREST HELD BY EACH OF THEM OR SUCH OTHER INFORMATION
WHICH MAY BE OBTAINED PURSUANT TO REQUIREMENTS OF THE ACT.
SECTION 9.3. BANK ACCOUNTS AND INVESTMENT OF FUNDS.
(A) HHBF SHALL OPEN AND MAINTAIN, ON BEHALF OF THE COMPANY, A
BANK ACCOUNT OR ACCOUNTS IN A FEDERALLY INSURED BANK OR SAVINGS
INSTITUTION AS IT SHALL DETERMINE, IN WHICH ALL MONIES RECEIVED BY OR
ON BEHALF OF THE COMPANY SHALL BE DEPOSITED. ALL WITHDRAWALS FROM SUCH
ACCOUNTS SHALL BE MADE UPON THE SIGNATURE OF SUCH PERSON OR PERSONS AS
HHBF MAY FROM TIME TO TIME DESIGNATE.
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(B) ANY FUNDS OF THE COMPANY WHICH HHBF MAY DETERMINE ARE NOT
CURRENTLY REQUIRED FOR THE CONDUCT OF THE COMPANY'S BUSINESS MAY BE
DEPOSITED WITH A FEDERALLY INSURED BANK OR SAVINGS INSTITUTION OR
INVESTED IN SHORT-TERM DEBT OBLIGATIONS (INCLUDING OBLIGATIONS OF
FEDERAL OR STATE GOVERNMENTS AND THEIR AGENCIES, COMMERCIAL PAPER,
CERTIFICATES OF DEPOSIT OF COMMERCIAL BANKS, SAVINGS BANKS OR SAVINGS
AND LOAN ASSOCIATIONS) AS SHALL BE DETERMINED BY HHBF IN ITS SOLE
DISCRETION.
SECTION 9.4. FISCAL YEAR. THE FISCAL YEAR AND ACCOUNTING PERIOD OF THE
COMPANY SHALL END ON SEPTEMBER 30 OF EACH YEAR.
SECTION 9.5. ACCOUNTING REPORTS. AS SOON AS REASONABLY PRACTICABLE AFTER
THE END OF EACH FISCAL YEAR BUT IN NO EVENT LATER THAN 120 DAYS AFTER THE END
THEREOF, EACH MEMBER SHALL BE FURNISHED AN ANNUAL ACCOUNTING SHOWING THE
FINANCIAL CONDITION OF THE COMPANY AT THE END OF SUCH FISCAL YEAR AND THE RESULT
OF ITS OPERATIONS FOR THE FISCAL YEAR THEN ENDED, WHICH ANNUAL ACCOUNTING SHALL
BE PREPARED ON AN ACCRUAL BASIS IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES APPLIED ON A CONSISTENT BASIS AND SHALL BE DELIVERED TO EACH OF THE
MEMBERS PROMPTLY AFTER IT HAS BEEN PREPARED. IT SHALL INCLUDE A BALANCE SHEET AS
OF THE END OF SUCH FISCAL YEAR AND STATEMENTS OF INCOME AND EXPENSE, EACH
MEMBER'S EQUITY, AND CASH FLOW FOR SUCH FISCAL YEAR. AT HHBF'S ELECTION THE
COMPANY SHALL EITHER BE AUDITED OR SUCH ANNUAL ACCOUNTINGS SHALL BE EITHER
REVIEWED OR COMPILED BY A FIRM OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ENGAGED BY HHBF ON BEHALF OF THE COMPANY. THE REPORT SHALL SET FORTH THE
DISTRIBUTIONS TO THE MEMBERS FOR SUCH FISCAL YEAR AND SHALL SEPARATELY IDENTIFY
DISTRIBUTIONS FROM (I) OPERATING REVENUE DURING SUCH FISCAL YEAR, (II) OPERATING
REVENUE FROM A PRIOR PERIOD WHICH HAD BEEN HELD AS RESERVES, (III) PROCEEDS FROM
THE SALE OR REFINANCING OF THE EQUIPMENT, AND (IV) UNEXPENDED PROCEEDS RECEIVED
FROM THE SALE OF MEMBERSHIP INTERESTS. FOLLOWING THE OPENING OF THE HOSPITAL,
HHBF SHALL ALSO CAUSE TO BE PREPARED AND DISTRIBUTED TO THE MEMBERS QUARTERLY
FINANCIAL STATEMENTS FOLLOWING HHBF'S PUBLIC ANNOUNCEMENT OF ITS RESULTS FOR
SUCH QUARTER IN A FORM AND CONTAINING SUCH INFORMATION AS REASONABLY DETERMINED
BY HHBF.
SECTION 9.6. TAX RETURNS. HHBF SHALL CAUSE INCOME TAX RETURNS FOR THE
COMPANY TO BE PREPARED, AT COMPANY EXPENSE, AND TIMELY FILED WITH THE
APPROPRIATE AUTHORITIES. AS SOON AS IS REASONABLY PRACTICABLE, AND IN ANY EVENT
ON OR BEFORE THE EXPIRATION OF 75 DAYS FOLLOWING THE END OF EACH FISCAL YEAR,
EACH MEMBER SHALL BE FURNISHED WITH A STATEMENT TO BE USED IN THE PREPARATION OF
THE MEMBER'S TAX RETURNS, SHOWING THE AMOUNTS OF ANY PROFITS OR LOSSES ALLOCATED
TO THE MEMBER, AND THE AMOUNT OF ANY DISTRIBUTIONS MADE TO THE MEMBER, PURSUANT
TO THIS AGREEMENT, ALONG WITH A RECONCILIATION OF THE ANNUAL REPORT WITH
INFORMATION FURNISHED TO MEMBERS FOR INCOME TAX PURPOSES.
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ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS
SECTION 10.1. MEETINGS
(A) MEETINGS OF THE MEMBERS OF THE COMPANY FOR ANY PURPOSE MAY
BE CALLED BY HHBF, THE INVESTOR MANAGER OR BY INVESTOR MEMBERS HOLDING
IN THE AGGREGATE TEN PERCENT (10%) OF THE MEMBERSHIP INTERESTS. SUCH
REQUEST SHALL STATE THE PURPOSE OF THE PROPOSED MEETING AND THE MATTERS
PROPOSED TO BE ACTED UPON THEREAT. SUCH MEETINGS SHALL BE HELD IN THE
BAKERSFIELD, CALIFORNIA AREA.
(B) A NOTICE OF ANY SUCH MEETING SHALL BE GIVEN BY MAIL, NOT
LESS THAN FIFTEEN (15) DAYS NOR MORE THAN SIXTY (60) DAYS BEFORE THE
DATE OF THE MEETING, TO EACH MEMBER AT ITS ADDRESS AS SPECIFIED IN
SECTION 12.7. SUCH NOTICE SHALL BE IN WRITING, AND SHALL STATE THE
PLACE, DATE AND HOUR OF THE MEETING, AND SHALL INDICATE THAT IT IS
BEING ISSUED AT OR BY THE DIRECTION OF HHBF OR BY THE INVESTOR MEMBERS,
AS THE CASE MAY BE. THE NOTICE SHALL STATE THE PURPOSE OR PURPOSES OF
THE MEETING. IF A MEETING IS ADJOURNED TO ANOTHER TIME OR PLACE, AND IF
ANY ANNOUNCEMENT OF THE ADJOURNMENT OF TIME OR PLACE IS MADE AT THE
MEETING, IT SHALL NOT BE NECESSARY TO GIVE NOTICE OF THE ADJOURNED
MEETING.
(C) EACH MEMBER MAY AUTHORIZE ANY PERSON OR PERSONS TO ACT FOR
THE MEMBER BY PROXY IN ALL MATTERS IN WHICH A MEMBER IS ENTITLED TO
PARTICIPATE, WHETHER BY WAIVING NOTICE OF ANY MEETING, OR VOTING OR
PARTICIPATING AT A MEETING. EVERY PROXY MUST BE SIGNED BY THE MEMBER OR
ITS ATTORNEY-IN-FACT. NO PROXY SHALL BE VALID AFTER THE EXPIRATION OF
ELEVEN MONTHS FROM THE DATE THEREOF UNLESS OTHERWISE PROVIDED IN THE
PROXY. EVERY PROXY SHALL BE REVOCABLE AT THE PLEASURE OF THE MEMBER
EXECUTING IT.
SECTION 10.2. VOTING RIGHTS OF MEMBERS.
(A) EACH MEMBER SHALL TAKE NO PART IN OR INTERFERE IN ANY
MANNER WITH THE CONTROL, CONDUCT OR OPERATION OF THE COMPANY, AND SHALL
HAVE NO RIGHT OR AUTHORITY TO ACT FOR OR BIND THE COMPANY EXCEPT AS
PROVIDED HEREIN. VOTES OR DECISIONS, TO THE EXTENT TAKEN OR TO BE MADE,
OF THE MEMBERS MAY BE CAST AT ANY DULY CALLED MEETING OF THE COMPANY OR
IN WRITING WITHIN TEN (10) DAYS AFTER WRITTEN REQUEST THEREFOR. EACH
MEMBER SHALL BE ENTITLED TO THE NUMBER OF VOTES EQUAL TO THE PERCENTAGE
MEMBERSHIP INTEREST OF SUCH MEMBER.
(B) NO MEMBER SHALL HAVE THE RIGHT OR POWER TO VOTE TO: (I)
WITHDRAW OR REDUCE THE MEMBER'S CAPITAL CONTRIBUTIONS EXCEPT AS A
RESULT OF THE DISSOLUTION AND LIQUIDATION OF THE COMPANY OR AS
OTHERWISE PROVIDED BY LAW OR THIS AGREEMENT; (II) BRING AN ACTION FOR
PARTITION AGAINST THE COMPANY; (III) CAUSE THE TERMINATION AND
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DISSOLUTION OF THE COMPANY BY COURT DECREE OR OTHERWISE, EXCEPT AS SET
FORTH IN THIS AGREEMENT; OR (IV) DEMAND OR RECEIVE PROPERTY OTHER THAN
CASH IN RETURN FOR ITS CAPITAL CONTRIBUTIONS.
ARTICLE XI
AMENDMENTS
SECTION 11.1. AUTHORITY TO AMEND BY MANAGERS. EXCEPT AS OTHERWISE PROVIDED
BY SECTION 11.2, THIS AGREEMENT AND THE ARTICLES OF ORGANIZATION OF THE COMPANY
MAY BE AMENDED BY HHBF WITH THE APPROVAL OF THE INVESTOR MANAGER WHICH APPROVAL
SHALL NOT BE UNREASONABLY WITHHELD OR DELAYED:
(A) TO ADMIT ADDITIONAL MEMBERS OR SUBSTITUTE MEMBERS BUT
ONLY IN ACCORDANCE WITH AND IF PERMITTED BY THE OTHER TERMS OF THIS
AGREEMENT;
(B) TO PRESERVE THE LEGAL STATUS OF THE COMPANY AS A LIMITED
LIABILITY COMPANY UNDER THE ACT OR OTHER APPLICABLE STATE OR FEDERAL
LAWS IF SUCH DOES NOT CHANGE THE SUBSTANCE HEREOF, AND THE COMPANY HAS
OBTAINED THE WRITTEN OPINION OF ITS COUNSEL TO THAT EFFECT;
(C) TO CURE ANY AMBIGUITY, TO CORRECT OR SUPPLEMENT ANY
PROVISION HEREIN WHICH MAY BE INCONSISTENT WITH ANY OTHER PROVISION
HEREIN, TO CLARIFY ANY PROVISION OF THIS AGREEMENT, OR TO MAKE ANY
OTHER PROVISIONS WITH RESPECT TO MATTERS OR QUESTIONS ARISING UNDER
THIS AGREEMENT WHICH WILL NOT BE INCONSISTENT WITH THE PROVISIONS OF
THIS AGREEMENT;
(D) TO SATISFY THE REQUIREMENTS OF THE CODE AND REGULATIONS
WITH RESPECT TO LIMITED LIABILITY COMPANIES OR OF ANY FEDERAL OR STATE
SECURITIES LAWS OR REGULATIONS, PROVIDED SUCH AMENDMENT DOES NOT
ADVERSELY AFFECT THE MEMBERSHIP INTERESTS OF MEMBERS AND IS NECESSARY
OR APPROPRIATE IN THE WRITTEN OPINION OF COUNSEL. ANY AMENDMENT UNDER
THIS SUBSECTION (D) SHALL BE EFFECTIVE AS OF THE DATE OF THIS
AGREEMENT;
(E) TO THE EXTENT THAT IT CAN DO SO WITHOUT MATERIALLY
REDUCING THE ECONOMIC RETURN ON INVESTMENT IN THE COMPANY TO ANY
MEMBER, TO SATISFY ANY REQUIREMENTS OF FEDERAL OR STATE LEGISLATION OR
REGULATIONS, COURT ORDER, OR ACTION OF ANY GOVERNMENTAL ADMINISTRATIVE
AGENCY WITH RESPECT THE OPERATION OR OWNERSHIP OF THE HOSPITAL;
(F) SUBJECT TO THE TERMS OF SECTION 2.5, TO EXTEND THE TERM
OF THE COMPANY; AND
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<PAGE>
(G) UPON WRITTEN NOTICE TO ALL MEMBERS, HHBF MAY ELECT TO
EXPAND THE NUMBER OF MANAGERS UP TO NINE (9) SO THAT THE MANAGERS CAN
SERVE AS THE GOVERNING BODY OF THE HOSPITAL. IN SUCH EVENT, THE
MANAGERS SHALL INCLUDE, IN ADDITION TO HHBF OR ITS DESIGNEE, THE
PRESIDENT OR CHIEF EXECUTIVE OFFICER OF THE HOSPITAL WHO SHALL BE
DESIGNATED BY HHBF AND THREE (3) ADDITIONAL MANAGERS ELECTED FROM TIME
TO TIME BY THE INVESTOR MEMBERS ONE OF WHOM MUST BE THE MEDICAL
DIRECTOR OF THE HOSPITAL. THE REMAINING MANAGERS SHALL BE ELECTED FROM
TIME TO TIME BY HHBF. HHBF MAY DELEGATE TO SUCH GOVERNING BODY SUCH
DUTIES AND RESPONSIBILITIES OF HHBF AS HHBF DEEMS NECESSARY OR
APPROPRIATE. NOTWITHSTANDING THE FOREGOING, IN THE EVENT THE NUMBER OF
MANAGERS IS EXPANDED, THE INVESTOR MEMBERS SHALL CONTINUE TO HAVE THE
RIGHT TO ELECT AN INVESTOR MANAGER WHO SHALL BE DESIGNATED TO MAKE
DECISIONS WHICH ARE SPECIFICALLY AUTHORIZED TO BE MADE BY THE INVESTOR
MANAGER UNDER THIS AGREEMENT AND HHBF SHALL CONTINUE TO HAVE THE RIGHT
TO MAKE DECISIONS WITH RESPECT TO MATTERS WHICH ARE RESERVED FOR HHBF
AT THE TIME THE NUMBER OF MANAGERS IS SO EXPANDED.
SUBJECT TO AND IN ACCORDANCE WITH THE REQUIREMENTS OF THE
ACCREDITATION REQUIREMENTS OF JCAHO, THE GOVERNING BODY SHALL BE
RESPONSIBLE FOR ADOPTING AND APPROVING THE HOSPITAL'S AND MEDICAL
STAFF'S BYLAWS EXCEPT THAT THE GOVERNING BODY'S APPROVAL OF SUCH BYLAWS
SHALL BE CONDITIONED UPON THE APPROVAL THEREOF BY A MAJORITY OF THE
MANAGERS DESIGNATED HEREUNDER BY THE INVESTOR MEMBERS.
SECTION 11.2. RESTRICTIONS ON MANAGERS' AMENDMENTS: AMENDMENTS BY INVESTOR
MEMBERS. EXCEPT AS PROVIDED IN SECTION 11.1, AMENDMENTS TO THIS AGREEMENT SHALL
BE MADE ONLY UPON THE CONSENT OF HHBF AND WITH A MAJORITY VOTE OF INVESTOR
MEMBERS. EXCEPT AS SET FORTH IN THIS SECTION 11.2, NO AMENDMENT SHALL BE MADE
PURSUANT TO SECTION 11.1 WHICH WOULD MATERIALLY AND ADVERSELY AFFECT THE FEDERAL
INCOME TAX TREATMENT TO BE AFFORDED EACH MEMBER, MATERIALLY AND ADVERSELY AFFECT
THE MEMBERSHIP INTERESTS AND LIABILITIES OF EACH MEMBER AS PROVIDED HEREIN,
MATERIALLY CHANGE THE PURPOSES OF THE COMPANY, EXTEND OR OTHERWISE MODIFY THE
TERM OF THE COMPANY, OR MATERIALLY CHANGE THE METHOD OF ALLOCATIONS AND
DISTRIBUTIONS AS PROVIDED IN ARTICLE VI AND ARTICLE VII.
SECTION 11.3. AMENDMENTS TO CERTIFICATES. IN MAKING ANY AMENDMENTS TO THIS
AGREEMENT, THERE SHALL BE PREPARED, EXECUTED AND FILED FOR RECORDING BY HHBF
SUCH DOCUMENTS AMENDING THE ARTICLES OF ORGANIZATION AS REQUIRED UNDER THE ACT.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 LIMITED POWER OF ATTORNEY. UPON THE EXECUTION HEREOF, EACH
MEMBER HEREBY IRREVOCABLY CONSTITUTES AND APPOINTS HHBF AS ITS TRUE AND LAWFUL
ATTORNEY IN THE MEMBER'S NAME AND ON THE MEMBER'S BEHALF TO TAKE AT ANY TIME ALL
SUCH ACTION WHICH HHBF IS EXPRESSLY AUTHORIZED TO PERFORM, OR WHICH A MEMBER IS
EXPRESSLY REQUIRED TO
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<PAGE>
PERFORM, UNDER THIS AGREEMENT; PROVIDED THAT HHBF SHALL GIVE WRITTEN NOTICE AT
LEAST FIVE (5) DAYS IN ADVANCE OF EXECUTING ANY DOCUMENT ON BEHALF OF A MEMBER
PURSUANT TO THIS SECTION 12.1.
SECTION 12.2. WAIVER OF PROVISIONS. THE WAIVER OF COMPLIANCE AT ANY TIME
WITH RESPECT TO ANY OF THE PROVISIONS, TERMS OR CONDITIONS OF THIS AGREEMENT
SHALL NOT BE CONSIDERED A WAIVER OF SUCH PROVISION, TERM OR CONDITION ITSELF OR
OF ANY OF THE OTHER PROVISIONS, TERMS OR CONDITIONS HEREOF.
SECTION 12.3. INTERPRETATION AND CONSTRUCTION. THIS AGREEMENT CONTAINS THE
ENTIRE AGREEMENT AMONG THE MEMBERS AND ANY MODIFICATION OR AMENDMENT HERETO MUST
BE ACCOMPLISHED IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE XI AND ARTICLE XII.
WHERE THE CONTEXT SO REQUIRES, THE MASCULINE SHALL INCLUDE THE FEMININE AND THE
NEUTER, AND THE SINGULAR SHALL INCLUDE THE PLURAL. THE HEADINGS AND CAPTIONS IN
THIS AGREEMENT ARE INSERTED FOR CONVENIENCE AND IDENTIFICATION ONLY AND ARE IN
NO WAY INTENDED TO DEFINE, LIMIT OR EXPAND THE SCOPE AND INTENT OF THIS
AGREEMENT OR ANY PROVISION THEREOF. THE REFERENCES TO SECTION AND ARTICLE IN
THIS AGREEMENT ARE TO THE SECTIONS AND ARTICLES OF THIS AGREEMENT.
SECTION 12.4. GOVERNING LAW; JUDICIAL VENUE. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA, EXCLUSIVE OF ITS CONFLICT OF LAW RULES. THE PARTIES HEREBY AGREE TO
DESIGNATE THE STATE COURTS HAVING JURISDICTION OVER THE BAKERSFIELD, CALIFORNIA
AREA TO BE THE APPROPRIATE VENUES FOR THE RESOLUTION OF ANY DISPUTES ARISING
UNDER THIS AGREEMENT AND SPECIFICALLY SUBMIT THEMSELVES TO THOSE COURTS FOR THIS
PURPOSE.
SECTION 12.5. PARTIAL INVALIDITY. IN THE EVENT THAT ANY PART OR PROVISION
OF THIS AGREEMENT SHALL BE DETERMINED TO BE INVALID OR UNENFORCEABLE, THE
REMAINING PARTS AND PROVISIONS OF SAID AGREEMENT WHICH CAN BE SEPARATED FROM THE
INVALID OR UNENFORCEABLE PROVISION AND SHALL CONTINUE IN FULL FORCE AND EFFECT.
SECTION 12.6. BINDING ON SUCCESSORS. THE TERMS, CONDITIONS AND PROVISIONS
OF THIS AGREEMENT SHALL INURE TO THE BENEFIT OF, AND BE BINDING UPON THE PARTIES
HERETO AND THEIR RESPECTIVE HEIRS, SUCCESSORS, DISTRIBUTEES, LEGAL
REPRESENTATIVES, AND ASSIGNS. HOWEVER, NONE OF THE PROVISIONS OF THIS AGREEMENT
SHALL BE FOR THE BENEFIT OF OR ENFORCEABLE BY ANY CREDITORS OF THE COMPANY.
SECTION 12.7. NOTICES AND DELIVERY.
(A) TO MEMBERS. ANY NOTICE TO BE GIVEN HEREUNDER AT ANY TIME
TO ANY MEMBER OR ANY DOCUMENT REPORTS OR RETURNS REQUIRED BY THIS
AGREEMENT TO BE DELIVERED TO ANY MEMBER, MAY BE DELIVERED PERSONALLY OR
MAILED TO SUCH MEMBER, POSTAGE PREPAID, ADDRESSED TO THE MEMBER AT SUCH
TIMES AS THE MEMBER SHALL BY NOTICE TO THE COMPANY HAVE DESIGNATED AS
THE MEMBER'S ADDRESS FOR THE MAILING OF ALL NOTICES HEREUNDER OR, IN
THE ABSENCE OF SUCH NOTICE, TO THE ADDRESS SET FORTH IN ARTICLE
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<PAGE>
IV HEREOF. ANY NOTICE, OR ANY DOCUMENT, REPORT OR RETURN SO DELIVERED
OR MAILED SHALL BE DEEMED TO HAVE BEEN GIVEN OR DELIVERED TO SUCH
MEMBER AT THE TIME IT IS MAILED, AS THE CASE MAY BE.
(B) TO THE COMPANY. ANY NOTICE TO BE GIVEN TO THE COMPANY
HEREUNDER SHALL BE DELIVERED PERSONALLY OR MAILED TO THE COMPANY, BY
CERTIFIED MAIL, POSTAGE PREPAID, ADDRESSED TO THE COMPANY AT ITS
REGISTERED OFFICE. ANY NOTICE SO DELIVERED OR MAILED SHALL BE DEEMED TO
HAVE BEEN GIVEN TO THE COMPANY AT THE TIME IT IS DELIVERED OR MAILED,
AS THE CASE MAY BE.
SECTION 12.8.COUNTERPART EXECUTION; FACSIMILE EXECUTION. THIS AGREEMENT MAY
BE EXECUTED IN ANY NUMBER OF COUNTERPARTS WITH THE SAME EFFECT AS IF ALL OF THE
MEMBERS HAD SIGNED THE SAME DOCUMENT. SUCH EXECUTIONS MAY BE TRANSMITTED TO THE
COMPANY AND/OR THE OTHER MEMBERS BY FACSIMILE AND SUCH FACSIMILE EXECUTION SHALL
HAVE THE FULL FORCE AND EFFECT OF AN ORIGINAL SIGNATURE. ALL FULLY EXECUTED
COUNTERPARTS, WHETHER ORIGINAL EXECUTIONS OR FACSIMILE EXECUTIONS OR A
COMBINATION, SHALL BE CONSTRUED TOGETHER AND CONSTITUTE ONE AND THE SAME
AGREEMENT.
SECTION 12.9. STATUTORY PROVISIONS. ANY STATUTORY REFERENCE IN THIS
AGREEMENT SHALL INCLUDE A REFERENCE TO ANY SUCCESSOR TO SUCH STATUTE AND/OR
REVISION THEREOF.
SECTION 12.10. WAIVER OF PARTITION. EACH PARTY DOES HEREBY WAIVE ANY RIGHT
TO PARTITION OR THE RIGHT TO TAKE ANY OTHER ACTION WHICH MIGHT OTHERWISE BE
AVAILABLE TO SUCH PARTY FOR THE PURPOSE OF SEVERING ITS RELATIONSHIP WITH THE
COMPANY OR SUCH PARTY'S INTEREST IN THE EQUIPMENT HELD BY THE COMPANY FROM THE
INTERESTS OF OTHER MEMBERS UNTIL THE END OF THE TERM OF BOTH THIS COMPANY AND
ANY SUCCESSOR COMPANY FORMED PURSUANT TO THE TERMS HEREOF.
SECTION 12.11. CHANGE IN LAW. IF DUE TO ANY NEW LAW, RULE OR REGULATION, OR
DUE TO AN INTERPRETATION OR ENFORCEMENT OF ANY EXISTING LAW, RULE OR REGULATION,
HEALTH CARE COUNSEL REASONABLY SELECTED BY HHBF DETERMINES IN WRITING THAT IT IS
REASONABLY LIKELY THAT THE RELATIONSHIPS ESTABLISHED BETWEEN ANY OF THE PARTIES
TO THIS AGREEMENT INCLUDING ANY OF THEIR AFFILIATES AND/OR SUCCESSORS OR ASSIGNS
WILL NOT COMPLY WITH ANY LAW, RULE, REGULATION OR INTERPRETATION THEREOF
("APPLICABLE LAW"), THEN THE PARTIES HERETO HEREBY AGREE FIRST, TO NEGOTIATE IN
GOOD FAITH TO RESTRUCTURE THE RELATIONSHIPS ESTABLISHED UNDER THIS AGREEMENT SO
AS TO BRING THEM INTO COMPLIANCE WITH SUCH APPLICABLE LAWS WHILE AT THE SAME
TIME PRESERVING THE MATERIAL BENEFITS OF EACH OF THE PARTIES HERETO. IN THE
EVENT THAT A SPECIFIC PROPOSAL FOR THE RESTRUCTURING OF THIS AGREEMENT IS
APPROVED BY HHBF AND A MAJORITY VOTE OF INVESTOR MEMBERS, SUCH RESTRUCTURED
AGREEMENT SHALL BECOME BINDING UPON ALL MEMBERS OF THE COMPANY. SECOND, IN THE
EVENT THAT WITHIN FORTY-FIVE (45) DAYS FOLLOWING THE COMPANY'S RECEIPT OF LEGAL
ADVICE IN WRITING FROM SUCH HEALTH CARE COUNSEL REGARDING APPLICABLE LAW THE
PARTIES HERETO ARE UNABLE TO NEGOTIATE AN ACCEPTABLE RESTRUCTURING OF THEIR
RELATIONSHIP, THEN HHBF SHALL HAVE THE OPTION, WITHIN THE FOLLOWING FORTY-FIVE
(45) DAY PERIOD, TO PURCHASE THE MEMBERSHIP INTERESTS OF SOME OR ALL OF THE
INVESTOR MEMBERS WHOSE OWNERSHIP IS INVOLVED WITH SUCH NONCOMPLIANCE WITH
APPLICABLE LAW FOR A PURCHASE PRICE EQUAL TO THE GREATER OF:
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<PAGE>
(A) THE FORMULA PURCHASE PRICE OR (B) THE AMOUNT OF THE CAPITAL CONTRIBUTION
MADE BY EACH SUCH MEMBER TO THE COMPANY TOGETHER WITH INTEREST THEREON COMPUTED
AT THE PRIME RATE AS OF THE DATE OF THIS AGREEMENT FROM THE DATE OF SUCH
CONTRIBUTION THROUGH THE DATE UPON WHICH HHBF PAYS ALL AMOUNTS DUE UNDER THE
TERMS OF THIS SECTION 12.11. FOR THESE PURPOSES, DISTRIBUTIONS TO THE MEMBERS BY
THE COMPANY SHALL BE TREATED AS PAYMENTS BY HHBF. SUCH PURCHASE PRICE SHALL BE
PAID IN ACCORDANCE WITH THE PAYMENT METHOD. THIRD, IN THE EVENT THAT HHBF DOES
NOT EXERCISE ITS OPTION TO PURCHASE MEMBERSHIP INTERESTS OF A MEMBER WHOSE
OWNERSHIP CAUSES THE COMPANY NOT TO BE IN COMPLIANCE WITH APPLICABLE LAW, SUCH
MEMBERS MAY ELECT IN WRITING WITHIN THE FOLLOWING FORTY-FIVE (45) DAY PERIOD, TO
REQUIRE THAT THE COMPANY BE DISSOLVED, IN WHICH EVENT THE COMPANY SHALL BE
DISSOLVED IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
SECTION 12.12. INVESTMENT REPRESENTATIONS OF THE MEMBERS.
(A) EACH MEMBER OR INDIVIDUAL EXECUTING THIS AGREEMENT ON
BEHALF OF AN ENTITY WHICH IS A MEMBER HEREBY REPRESENTS AND WARRANTS TO
THE COMPANY AND TO THE MEMBERS THAT SUCH MEMBER HAS ACQUIRED SUCH
MEMBER'S MEMBERSHIP INTEREST IN THE COMPANY FOR INVESTMENT SOLELY FOR
SUCH MEMBER'S OWN ACCOUNT WITH THE INTENTION OF HOLDING SUCH MEMBERSHIP
INTEREST FOR INVESTMENT, WITHOUT ANY INTENTION OF PARTICIPATING
DIRECTLY OR INDIRECTLY IN ANY DISTRIBUTION OF ANY PORTION OF SUCH
MEMBERSHIP INTEREST, INCLUDING AN ECONOMIC INTEREST, AND WITHOUT THE
FINANCIAL PARTICIPATION OF ANY OTHER PERSON IN ACQUIRING SUCH
MEMBERSHIP INTEREST IN THE COMPANY.
(B) EACH MEMBER OR INDIVIDUAL EXECUTING THIS AGREEMENT ON
BEHALF OF AN ENTITY WHICH IS A MEMBER HEREBY ACKNOWLEDGES THAT SUCH
MEMBER IS AWARE THAT SUCH MEMBER'S MEMBERSHIP INTEREST IN THE COMPANY
HAS NOT BEEN REGISTERED (I) UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "FEDERAL ACT"), (II) UNDER APPLICABLE CALIFORNIA
SECURITIES LAWS, OR (III) UNDER ANY OTHER STATE SECURITIES LAWS. EACH
MEMBER OR INDIVIDUAL EXECUTING THIS AGREEMENT ON BEHALF OF AN ENTITY
WHICH IS A MEMBER FURTHER UNDERSTANDS AND ACKNOWLEDGES THAT HIS
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS SECTION ARE BEING
RELIED UPON BY THE COMPANY AND BY THE MEMBERS AS THE BASIS FOR THE
EXEMPTION OF THE MEMBERS' MEMBERSHIP INTEREST IN THE COMPANY FROM THE
REGISTRATION REQUIREMENTS OF THE FEDERAL ACT AND FROM THE REGISTRATION
REQUIREMENTS OF APPLICABLE CALIFORNIA SECURITIES LAWS AND ALL OTHER
STATE SECURITIES LAWS. EACH MEMBER OR INDIVIDUAL EXECUTING THIS
AGREEMENT ON BEHALF OF AN ENTITY WHICH IS A MEMBER FURTHER ACKNOWLEDGES
THAT THE COMPANY WILL NOT AND HAS NO OBLIGATION TO RECOGNIZE ANY SALE,
TRANSFER, OR ASSIGNMENT OF ALL OR ANY PART OF SUCH MEMBER'S MEMBERSHIP
INTEREST, INCLUDING AN ECONOMIC INTEREST IN THE COMPANY TO ANY PERSON
UNLESS AND UNTIL THE PROVISIONS OF THIS AGREEMENT HEREOF HAVE BEEN
FULLY SATISFIED.
(C) EACH MEMBER OR INDIVIDUAL EXECUTING THIS AGREEMENT ON
BEHALF OF AN ENTITY WHICH IS A MEMBER HEREBY ACKNOWLEDGES THAT PRIOR TO
HIS EXECUTION OF THIS
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<PAGE>
AGREEMENT, SUCH MEMBER RECEIVED A COPY OF THIS AGREEMENT AND THAT SUCH
MEMBER HAS EXAMINED THIS AGREEMENT OR CAUSED THIS AGREEMENT TO BE
EXAMINED BY SUCH MEMBER'S REPRESENTATIVE OR ATTORNEY. EACH MEMBER OR
INDIVIDUAL EXECUTING THIS AGREEMENT ON BEHALF OF AN ENTITY WHICH IS A
MEMBER HEREBY FURTHER ACKNOWLEDGES THAT SUCH MEMBER OR SUCH MEMBER'S
REPRESENTATIVE OR ATTORNEY IS FAMILIAR WITH THIS AGREEMENT AND WITH THE
COMPANY'S BUSINESS PLANS. EACH MEMBER OR INDIVIDUAL EXECUTING THIS
AGREEMENT ON BEHALF OF AN ENTITY WHICH IS A MEMBER ACKNOWLEDGES THAT
SUCH MEMBER OR SUCH MEMBER'S REPRESENTATIVE OR ATTORNEY HAS MADE SUCH
INQUIRIES AND REQUESTED, RECEIVED, AND REVIEWED ANY ADDITIONAL
DOCUMENTS NECESSARY FOR SUCH MEMBER TO MAKE AN INFORMED INVESTMENT
DECISION AND THAT SUCH MEMBER DOES NOT DESIRE ANY FURTHER INFORMATION
OR DATA RELATING TO THE COMPANY OR TO THE MEMBERS. EACH MEMBER OR
INDIVIDUAL EXECUTING THIS AGREEMENT ON BEHALF OF AN ENTITY WHICH IS A
MEMBER HEREBY ACKNOWLEDGES THAT SUCH MEMBER UNDERSTANDS THAT THE
PURCHASE OF SUCH MEMBER'S MEMBERSHIP INTEREST IN THE COMPANY IS A
SPECULATIVE INVESTMENT INVOLVING A HIGH DEGREE OF RISK AND HEREBY
REPRESENTS THAT SUCH MEMBER HAS A NET WORTH SUFFICIENT TO BEAR THE
ECONOMIC RISK OF SUCH MEMBER'S INVESTMENT IN THE COMPANY AND TO JUSTIFY
SUCH MEMBER'S INVESTING IN A HIGHLY SPECULATIVE VENTURE OF THIS TYPE.
SECTION 12.13. DECISIONS BY INVESTOR MANAGER. EACH OF THE INVESTOR MEMBERS
HEREBY AUTHORIZE THE INVESTOR MANAGER TO MAKE THE DECISIONS TO BE MADE BY THE
INVESTOR MANAGER HEREUNDER AND HEREBY RELEASE AND HOLD HARMLESS THE INVESTOR
MANAGER FROM ANY AND ALL CLAIMS, LIABILITIES, LOSSES OR DAMAGES WHICH ANY OF
THEM MAY HAVE NOW OR IN THE FUTURE RESULTING FROM ANY DECISION MADE BY THE
INVESTOR MANAGER HEREUNDER UNLESS DUE TO THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF THE INVESTOR MANAGER.
SECTION 12.14. REFERRALS TO HOSPITAL AND OWNERSHIP OF SHARES OF COMMON
STOCK OF MEDCATH INCORPORATED. EACH INVESTOR MEMBER TED AGREES THAT IF IN THE
REASONABLE OPINION OF HEALTH CARE COUNSEL TO HHBF, REFERRALS OF PATIENTS TO THE
HOSPITAL BY THE INVESTOR MEMBER OR OWNERSHIP OF SHARES OF COMMON STOCK IN
MEDCATH INCORPORATED BY THE INVESTOR MEMBER WOULD CAUSE OR CONSTITUTE A
VIOLATION OF ANY FEDERAL OR STATE LAW, RULE OR REGULATION, THEN, AS APPLICABLE,
(A) THE INVESTOR MEMBER SHALL NOT REFER PATIENTS TO THE HOSPITAL; AND
(B) THE INVESTOR MEMBER SHALL NOT ACQUIRE, NOR CONTINUE TO OWN ANY OF
SHARES OF COMMON STOCK OF MEDCATH INCORPORATED.
EXHIBITS. THE EXHIBITS TO THIS AGREEMENT, EACH OF WHICH IS INCORPORATED BY
REFERENCE, ARE:
EXHIBIT A: ARTICLES OF ORGANIZATION.
EXHIBIT B: INFORMATION EXHIBIT.
EXHIBIT C: GLOSSARY OF TERMS.
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<PAGE>
EXHIBIT D: DEVELOPMENT BUDGET EXHIBIT.
EXHIBIT E: REGULATORY ALLOCATIONS.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE EXECUTED THIS AGREEMENT ON
THE FOLLOWING EXECUTION PAGE(S), TO BE EFFECTIVE AS OF THE DATE DESCRIBED IN
ARTICLE II.
[EXECUTIONS APPEAR ON THE FOLLOWING PAGE(S)]
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<PAGE>
EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
[SEE ATTACHED ARTICLES OF ORGANIZATION.]
<PAGE>
EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina Limited Liability Company
MANAGERS:
HHBF, INC.
By: /s/ Charles W. Johnson
---------------------------------
Title: President
MEMBERS:
HHBR, INC.
By: /s/ Charles W. Johnson
--------------------------------
Title: President
-------------------------------------
-------------------------------------
-------------------------------------
<PAGE>
EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
INFORMATION EXHIBIT
INITIAL CAPITAL PERCENTAGE
NAME, ADDRESS & TIN CONTRIBUTION MEMBERSHIP INTEREST
HHBF, INC. $ __%
----------------
7621 LITTLE AVENUE, SUITE 106
CHARLOTTE, NC 28226
(56- )
$ __%
$ __%
$ __%
$ __%
$ __%
<PAGE>
EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
GLOSSARY OF TERMS
AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS SHALL HAVE THE FOLLOWING
DEFINITIONS (UNLESS OTHERWISE EXPRESSLY PROVIDED HEREIN).
"ACT" SHALL MEAN THE NORTH CAROLINA LIMITED LIABILITY COMPANY ACT, AS
IN EFFECT IN NORTH CAROLINA AND SET FORTH AT N.C. GEN. STAT. SS.SS. 57C-1-01
THROUGH 57C-10-07 (OR ANY CORRESPONDING PROVISIONS OF SUCCEEDING LAW).
"ADJUSTED CAPITAL ACCOUNT" MEANS, WITH RESPECT TO ANY MEMBER OR
ECONOMIC INTEREST OWNER, SUCH PERSON'S CAPITAL ACCOUNT (AS DEFINED BELOW) AS OF
THE END OF THE RELEVANT FISCAL YEAR INCREASED BY ANY AMOUNTS WHICH SUCH PERSON
IS OBLIGATED TO RESTORE, OR IS DEEMED TO BE OBLIGATED TO RESTORE PURSUANT TO THE
NEXT TO LAST SENTENCES OF REGULATIONS SECTION 1.704-2(G)(1) (SHARE OF MINIMUM
GAIN) AND REGULATIONS SECTION 1.704-2(I)(5) (SHARE OF MEMBER NONRECOURSE DEBT
MINIMUM GAIN) AND DECREASED BY THE ITEMS DESCRIBED IN REGULATIONS SECTION
1.704-1(B)(2)(II)(D)(4), (5) AND (6).
"AFFILIATE" WITH RESPECT TO A PERSON, (I) ANY RELATIVE OF SUCH PERSON;
(II) ANY OFFICER, DIRECTOR, TRUSTEE, PARTNER, MANAGER, EMPLOYEE OR HOLDER OF TEN
PERCENT (10%) OR MORE OF ANY CLASS OF THE OUTSTANDING VOTING SECURITIES OR OF AN
EQUITY INTEREST OF SUCH PERSON; OR (III) ENTITY OR HOLDER OF TEN PERCENT (10%)
OR MORE OF THE OUTSTANDING VOTING SECURITIES OR OF AN EQUITY INTEREST OF ANY
ENTITY, CONTROLLING, CONTROLLED BY, OR UNDER COMMON CONTROL WITH SUCH PERSON.
"AGREED VALUE" SHALL MEAN WITH RESPECT TO ANY NONCASH ASSET OF THE
COMPANY AN AMOUNT DETERMINED AND ADJUSTED IN ACCORDANCE WITH THE FOLLOWING
PROVISIONS:
(A) THE INITIAL AGREED VALUE OF ANY NONCASH ASSET CONTRIBUTED TO THE
CAPITAL OF THE COMPANY BY ANY MEMBER SHALL BE ITS GROSS FAIR MARKET VALUE, AS
AGREED TO BY THE CONTRIBUTING MEMBER AND THE COMPANY.
(B) THE INITIAL AGREED VALUE OF ANY NONCASH ASSET ACQUIRED BY THE
COMPANY OTHER THAN BY CONTRIBUTION BY A MEMBER SHALL BE ITS ADJUSTED BASIS FOR
FEDERAL INCOME TAX PURPOSES.
(C) THE INITIAL AGREED VALUES OF ALL THE COMPANY'S NONCASH ASSETS,
REGARDLESS OF HOW THOSE ASSETS WERE ACQUIRED, SHALL BE REDUCED BY DEPRECIATION
OR AMORTIZATION, AS THE CASE MAY BE, DETERMINED IN ACCORDANCE WITH THE RULES SET
FORTH IN REGULATIONS SECTION 1.704-1(B)(2)(IV)(F) AND (G).
<PAGE>
(D) THE AGREED VALUES, AS REDUCED BY DEPRECIATION OR AMORTIZATION, OF
ALL NONCASH ASSETS OF THE COMPANY, REGARDLESS OF HOW THOSE ASSETS WERE ACQUIRED,
SHALL BE ADJUSTED FROM TIME TO TIME TO EQUAL THEIR GROSS FAIR MARKET VALUES, AS
AGREED TO BY THE MEMBERS IN WRITING, AS OF THE FOLLOWING TIMES:
(I) THE ACQUISITION OF A MEMBERSHIP INTEREST OR AN
ADDITIONAL MEMBERSHIP INTEREST IN THE COMPANY BY ANY NEW
OR EXISTING MEMBER IN EXCHANGE FOR MORE THAN A DE
MINIMIS CAPITAL CONTRIBUTION;
(II) THE DISTRIBUTION BY THE COMPANY OF MORE THAN A DE
MINIMIS AMOUNT OF MONEY OR OTHER PROPERTY AS
CONSIDERATION FOR ALL OR PART OF A MEMBERSHIP INTEREST
IN THE COMPANY; AND
(III) THE TERMINATION OF THE COMPANY FOR FEDERAL INCOME TAX
PURPOSES PURSUANT TO CODE SECTION 708(B)(1)(B).
IF, UPON THE OCCURRENCE OF ONE OF THE EVENTS DESCRIBED IN (I), (II) OR
(III) ABOVE THE MEMBERS DO NOT AGREE IN WRITING ON THE GROSS FAIR MARKET VALUES
OF THE COMPANY'S ASSETS, IT SHALL BE DEEMED THAT THE FAIR MARKET VALUES OF ALL
THE COMPANY'S ASSETS EQUAL THEIR RESPECTIVE AGREED VALUES IMMEDIATELY PRIOR TO
THE OCCURRENCE OF THE EVENT AND THUS NO ADJUSTMENT TO THOSE VALUES SHALL BE MADE
AS A RESULT OF SUCH EVENT.
"AGREEMENT" SHALL MEAN THIS OPERATING AGREEMENT, AS AMENDED FROM TIME
TO TIME.
"ARTICLES OF ORGANIZATION." THE ARTICLES OF ORGANIZATION OF THE
COMPANY, AS FILED WITH THE SECRETARY OF STATE OF NORTH CAROLINA AS THE SAME MAY
BE AMENDED FROM TIME TO TIME.
"CAPITAL ACCOUNT" SHALL MEAN WITH RESPECT TO EACH MEMBER OR ASSIGNEE AN
ACCOUNT MAINTAINED AND ADJUSTED IN ACCORDANCE WITH THE FOLLOWING PROVISIONS:
(A) EACH PERSON'S CAPITAL ACCOUNT SHALL BE INCREASED BY PERSON'S
CAPITAL CONTRIBUTIONS, SUCH PERSON'S DISTRIBUTIVE SHARE OF PROFITS, ANY ITEMS IN
THE NATURE OF INCOME OR GAIN THAT ARE ALLOCATED PURSUANT TO THE REGULATORY
ALLOCATIONS AND THE AMOUNT OF ANY COMPANY LIABILITIES THAT ARE ASSUMED BY SUCH
PERSON OR THAT ARE SECURED BY COMPANY PROPERTY DISTRIBUTED TO SUCH PERSON.
(B) EACH PERSON'S CAPITAL ACCOUNT SHALL BE DECREASED BY THE AMOUNT OF
CASH AND THE AGREED VALUE OF ANY COMPANY PROPERTY DISTRIBUTED TO SUCH PERSON
PURSUANT TO ANY PROVISION OF THIS AGREEMENT, SUCH PERSON'S DISTRIBUTIVE SHARE OF
LOSSES, ANY ITEMS IN THE NATURE OF LOSS OR DEDUCTION THAT ARE ALLOCATED PURSUANT
TO THE REGULATORY ALLOCATIONS, AND THE AMOUNT OF ANY LIABILITIES OF SUCH PERSON
THAT ARE ASSUMED BY THE COMPANY OR THAT ARE SECURED BY ANY PROPERTY CONTRIBUTED
BY SUCH PERSON TO THE COMPANY.
IN THE EVENT ANY MEMBERSHIP INTEREST IS TRANSFERRED IN ACCORDANCE WITH
THE TERMS OF THIS AGREEMENT, THE TRANSFEREE SHALL SUCCEED TO THE CAPITAL ACCOUNT
OF THE TRANSFEROR TO THE EXTENT IT RELATES TO THE TRANSFERRED MEMBERSHIP
INTEREST.
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IN THE EVENT THE AGREED VALUES OF THE COMPANY ASSETS ARE ADJUSTED
PURSUANT TO THE DEFINITION OF AGREED VALUE CONTAINED IN THIS AGREEMENT, THE
CAPITAL ACCOUNTS OF ALL MEMBERS SHALL BE ADJUSTED SIMULTANEOUSLY TO REFLECT THE
AGGREGATE ADJUSTMENTS AS IF THE COMPANY RECOGNIZED GAIN OR LOSS EQUAL TO THE
AMOUNT OF SUCH AGGREGATE ADJUSTMENT.
THE FOREGOING PROVISIONS AND THE OTHER PROVISIONS OF THIS AGREEMENT
RELATING TO THE MAINTENANCE OF CAPITAL ACCOUNTS ARE INTENDED TO COMPLY WITH
REGULATIONS SECTION 1.704-1(B), AND SHALL BE INTERPRETED AND APPLIED IN A MANNER
CONSISTENT WITH SUCH REGULATIONS. IN THE EVENT HHBF SHALL DETERMINE THAT IT IS
PRUDENT TO MODIFY THE MANNER IN WHICH THE CAPITAL ACCOUNTS, OR ANY DEBITS OR
CREDITS THERETO, ARE COMPUTED TO COMPLY WITH SUCH REGULATION, HHBF MAY MAKE SUCH
MODIFICATION, PROVIDED THAT IT IS NOT LIKELY TO HAVE A MATERIAL EFFECT ON THE
AMOUNTS DISTRIBUTABLE TO ANY MEMBER PURSUANT TO ARTICLES VI OR VII HEREOF UPON
THE DISSOLUTION OF THE COMPANY. IN THE EVENT HHBF SHALL DETERMINE SUCH
ADJUSTMENTS ARE NECESSARY OR APPROPRIATE TO COMPLY WITH REGULATIONS SECTION
1.704-1(B)(2)(IV), HHBF SHALL ADJUST THE AMOUNTS DEBITED OR CREDITED TO CAPITAL
ACCOUNTS WITH RESPECT TO (I) ANY PROPERTY CONTRIBUTED BY THE MEMBERS OR
DISTRIBUTED TO THE MEMBERS AND (II) ANY LIABILITIES SECURED BY SUCH CONTRIBUTED
OR DISTRIBUTED PROPERTY OR ASSUMED BY THE MEMBERS. HHBF SHALL ALSO MAKE ANY
OTHER APPROPRIATE MODIFICATIONS IN THE EVENT UNANTICIPATED EVENTS MIGHT
OTHERWISE CAUSE THIS AGREEMENT NOT TO COMPLY WITH REGULATIONS SECTION
1.704-1(B). IN THE EVENT ANY MEMBERSHIP INTEREST IN THE COMPANY IS TRANSFERRED
IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, THE TRANSFEREE SHALL SUCCEED TO
THE CAPITAL ACCOUNT OF THE TRANSFEROR TO THE EXTENT IT RELATES TO THE
TRANSFERRED MEMBERSHIP INTEREST.
"CAPITAL CONTRIBUTION" SHALL MEAN WITH RESPECT TO ANY MEMBER, THE
AMOUNT OF MONEY AND THE INITIAL AGREED VALUE OF ANY PROPERTY (OTHER THAN MONEY)
CONTRIBUTED TO THE COMPANY WITH RESPECT TO THE MEMBERSHIP INTEREST OF SUCH
MEMBER.
"CASH DISTRIBUTIONS" SHALL MEAN NET CASH DISTRIBUTED TO MEMBERS
RESULTING FROM CASH FLOW FROM OPERATIONS OR CASH FROM SALES OR REFINANCING, BUT
SHALL NOT INCLUDE CASH PAYMENTS MADE TO HHBF AS ITS MANAGEMENT FEE FOR SERVICES
OR ANY AMOUNT IN REPAYMENT OF LOANS MADE BY THE MEMBERS TO THE COMPANY.
"CASH FLOW FROM OPERATIONS" SHALL MEAN NET CASH FUNDS PROVIDED FROM
OPERATIONS, EXCLUSIVE OF CASH FROM SALES OR REFINANCING, OF THE COMPANY OR
INVESTMENT OF ANY COMPANY FUNDS, WITHOUT DEDUCTION FOR DEPRECIATION, BUT AFTER
DEDUCTING CASH FUNDS USED TO PAY OR ESTABLISH A RESERVE FOR EXPENSES, DEBT
PAYMENTS, CAPITAL IMPROVEMENTS, AND REPLACEMENTS AND FOR SUCH OTHER ITEMS AS
HHBF REASONABLY DETERMINES TO BE NECESSARY OR APPROPRIATE; PROVIDED, WITHOUT THE
CONSENT OF THE INVESTOR MANAGER, HHBF SHALL NOT USE SUCH NET CASH FUNDS FOR THE
EARLY REPAYMENT OF COMPANY DEBT. IN ADDITION, HHBF SHALL NOT CAUSE THE SUM OF
THE RESERVES OF CASH FLOW FROM OPERATIONS PLUS THE RESERVES OF CASH FROM SALES
OR REFINANCING TO EXCEED $3,000,000.00, WITHOUT THE CONSENT OF THE INVESTOR
MANAGER.
"CASH FROM SALES OR REFINANCING" SHALL MEAN THE NET CASH PROCEEDS
RECEIVED BY THE COMPANY FROM OR AS A RESULT OF ANY SALE OR REFINANCING OF
PROPERTY AFTER DEDUCTING (I) ALL EXPENSES INCURRED IN CONNECTION THEREWITH, (II)
ANY AMOUNTS APPLIED BY HHBF IN ITS SOLE AND ABSOLUTE DISCRETION TOWARD THE
PAYMENT OF ANY INDEBTEDNESS AND OTHER OBLIGATIONS OF THE COMPANY THEN DUE AND
PAYABLE, INCLUDING PAYMENTS OF PRINCIPAL AND INTEREST ON MORTGAGES,
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(III) THE PAYMENT OF ANY OTHER EXPENSES OR AMOUNTS OWED BY THE COMPANY TO OTHER
PARTIES TO THE EXTENT THEN DUE AND PAYABLE, AND (IV) THE ESTABLISHMENT OF ANY
RESERVES DEEMED NECESSARY BY HHBF IN ITS SOLE AND ABSOLUTE DISCRETION. IF THE
PROCEEDS OF ANY SALE OR REFINANCING ARE PAID IN MORE THAN ONE INSTALLMENT, EACH
SUCH INSTALLMENT SHALL BE TREATED AS A SEPARATE SALE OR REFINANCING FOR THE
PURPOSES OF THIS DEFINITION. IN ADDITION, HHBF SHALL NOT CAUSE THE SUM OF THE
RESERVES OF CASH FLOW FROM OPERATIONS PLUS THE RESERVES OF CASH FROM SALES OR
REFINANCING TO EXCEED $3,000,000.00, WITHOUT THE CONSENT OF THE INVESTOR
MANAGER.
"CODE" SHALL MEAN THE INTERNAL REVENUE CODE OF 1986, AS AMENDED FROM
TIME TO TIME. ANY REFERENCE HEREIN TO A SPECIFIC SECTION(S) OF THE CODE SHALL BE
DEEMED TO INCLUDE A REFERENCE TO ANY CORRESPONDING PROVISION OF FUTURE LAW.
"COMPANY" SHALL REFER TO HEART HOSPITAL OF BK, LLC, WHICH SHALL BE
CREATED UPON THE FILING OF THE ARTICLES OF ORGANIZATION WITH THE OFFICE OF THE
SECRETARY OF STATE OF NORTH CAROLINA, TO BE OPERATED UNDER THE NAME HEART
HOSPITAL OF BK, LLC, A NORTH CAROLINA LIMITED LIABILITY COMPANY, AND TO CONTINUE
UNDER THIS AGREEMENT, AS AMENDED FROM TIME TO TIME.
"ECONOMIC INTEREST" SHALL REFER TO THAT PORTION OF THE MEMBERSHIP
INTEREST OF A MEMBER IN THE ECONOMIC RIGHTS AND BENEFITS OF THE COMPANY,
INCLUDING BUT NOT LIMITED TO ALL PROFITS, LOSSES AND CASH DISTRIBUTIONS. SUCH AN
ECONOMIC INTEREST WILL BE MEASURED BY AN AMOUNT EQUAL TO THE MEMBER'S PERCENTAGE
MEMBERSHIP INTEREST IN THE COMPANY AS THE SAME MAY BE ADJUSTED FROM TIME TO
TIME.
"ECONOMIC INTEREST OWNER" SHALL MEAN A PERSON WHO HAS VALIDLY ACQUIRED
A MEMBER'S ECONOMIC INTEREST AS PERMITTED UNDER THIS AGREEMENT BUT WHO HAS NOT
BECOME A MEMBER. SUCH PERSON SHALL BE ENTITLED TO THE ALLOCATIONS OF PROFITS AND
LOSSES AND CASH DISTRIBUTIONS UNDER ARTICLE VI AND VII TO WHICH THE PREVIOUS
OWNER OF THE ECONOMIC INTEREST WOULD HAVE BEEN ENTITLED HAD SUCH PREVIOUS OWNER
RETAINED THE ECONOMIC INTEREST. UNLESS AND UNTIL SUCH ECONOMIC INTEREST HOLDER
IS ADMITTED AS A SUBSTITUTE MEMBER, IT SHALL BE A MERE ASSIGNEE OF A MEMBER.
"ENTITY" SHALL MEAN ANY GENERAL PARTNERSHIP, LIMITED PARTNERSHIP,
LIMITED LIABILITY COMPANY, CORPORATION, JOINT VENTURE, TRUST, BUSINESS TRUST,
COOPERATIVE OR ASSOCIATION OR ANY FOREIGN TRUST OR FOREIGN BUSINESS
ORGANIZATION.
"EQUIPMENT" SHALL MEAN THE APPROPRIATE EQUIPMENT AND SUPPLIES REQUIRED
FROM TIME TO TIME IN CONNECTION WITH THE DEVELOPMENT AND OPERATION OF THE
HOSPITAL.
"FISCAL YEAR" SHALL MEAN, WITH RESPECT TO THE FIRST YEAR OF THE
COMPANY, THE PERIOD BEGINNING UPON THE FORMATION OF THE COMPANY AND ENDING ON
THE NEXT SEPTEMBER 30, WITH RESPECT TO SUBSEQUENT YEARS OF THE COMPANY, THE
TWELVE MONTH PERIOD BEGINNING OCTOBER 1 AND ENDING SEPTEMBER 30, AND, WITH
RESPECT TO THE LAST YEAR OF THE COMPANY, THE PORTION OF THE PERIOD BEGINNING
OCTOBER 1 AND ENDING WITH THE DATE OF THE FINAL LIQUIDATING DISTRIBUTIONS.
"HHBF" SHALL REFER TO HHBF, INC., WHICH SHALL SERVE AS A MANAGER OF THE
COMPANY.
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"HOSPITAL" SHALL MEAN AN ACUTE CARE HOSPITAL SPECIALIZING IN ALL
ASPECTS OF CARDIOLOGY AND CARDIOVASCULAR CARE AND SURGERY IN BAKERSFIELD,
CALIFORNIA, AS FURTHER DESCRIBED IN SECTION 2.3 OF THE AGREEMENT.
"INVESTOR MANAGER" SHALL REFER TO THE INDIVIDUAL ELECTED BY INVESTOR
MEMBERS IN ACCORDANCE WITH SECTION 5.13 WHO SHALL SERVE AS A MANAGER OF THE
COMPANY.
"INVESTOR MEMBERS" SHALL MEAN THE MEMBERS OTHER THAN HHBF LISTED ON THE
INFORMATION EXHIBIT ATTACHED HERETO.
"MAJORITY VOTE OF INVESTOR MEMBERS" SHALL REFER TO THE AFFIRMATIVE
VOTE, APPROVAL OR CONSENT OF INVESTOR MEMBERS HOLDING A MAJORITY OF THE
PERCENTAGE MEMBERSHIP INTERESTS HELD BY THE INVESTOR MEMBERS IN THE AGGREGATE.
"MANAGER" OR "MANAGERS" SHALL REFER TO ONE OR MORE MANAGERS DESIGNATED
PURSUANT TO THIS AGREEMENT. PURSUANT TO THIS AGREEMENT AND THE ARTICLES OF
ORGANIZATION, NO MEMBER SHALL AUTOMATICALLY BE A MANAGER BY VIRTUE OF SUCH
PERSON'S STATUS AS A MEMBER. SUBJECT TO SECTION 11.1(G) HEREOF, THE MANAGERS OF
THE COMPANY SHALL BE HHBF AND THE INVESTOR MANAGER. THE POWERS, RIGHTS AND
DUTIES OF EACH MANAGER TO MANAGE THE AFFAIRS OF THE COMPANY ARE SPECIFIED OR
DESIGNATED IN THIS AGREEMENT.
"MANAGEMENT FEE" SHALL MEAN THE AMOUNTS PAYABLE TO HHBF PURSUANT TO
SECTION 5.6(B)(II) FOR SERVICES RENDERED IN MANAGING THE OPERATIONS OF THE
COMPANY.
"MEMBER" SHALL REFER TO THE ORGANIZERS OF THE COMPANY (UNLESS OR UNTIL
ANY SUCH ORGANIZER HAS WITHDRAWN) AND EACH OF THE MEMBERS IDENTIFIED IN THE THEN
APPLYING INFORMATION EXHIBIT ATTACHED HERETO AND INCORPORATED HEREIN BY THIS
REFERENCE. TO THE EXTENT A MANAGER HAS PURCHASED A MEMBERSHIP INTEREST IN THE
COMPANY, SUCH PERSON WILL HAVE ALL THE RIGHTS OF A MEMBER WITH RESPECT TO SUCH
MEMBERSHIP INTEREST, AND THE TERM "MEMBER" AS USED HEREIN SHALL INCLUDE A
MANAGER TO THE EXTENT SUCH PERSON HAS PURCHASED SUCH MEMBERSHIP INTEREST IN THE
COMPANY. IF A PERSON IS ALREADY A MEMBER IMMEDIATELY PRIOR TO THE PURCHASE OR
OTHER ACQUISITION BY SUCH PERSON OF AN ECONOMIC INTEREST OR MEMBERSHIP INTEREST,
SUCH PERSON SHALL HAVE ALL THE RIGHTS OF A MEMBER WITH RESPECT TO SUCH PURCHASED
OR OTHERWISE ACQUIRED MEMBERSHIP INTEREST OR ECONOMIC INTEREST, AS THE CASE MAY
BE.
"MEMBERSHIP INTEREST" SHALL MEAN ALL OF A MEMBER'S RIGHTS IN THE
COMPANY, INCLUDING WITHOUT LIMITATION THE MEMBER'S SHARE OF PROFITS, LOSSES,
CASH DISTRIBUTIONS AND OTHER BENEFITS OF THE COMPANY, ANY RIGHT TO VOTE, ANY
RIGHT TO PARTICIPATE IN THE MANAGEMENT OF THE BUSINESS AND AFFAIRS OF THE
COMPANY, INCLUDING THE RIGHT TO VOTE ON, CONSENT TO, OR OTHERWISE PARTICIPATE IN
ANY DECISION OR ACTION OF OR BY THE MEMBERS GRANTED PURSUANT TO THIS OPERATING
AGREEMENT OR THE ACT. THE PERCENTAGE MEMBERSHIP INTEREST OF EACH MEMBER, THEIR
CAPITAL CONTRIBUTIONS AND OTHER RELATED INFORMATION SHALL BE LISTED ON THE
INFORMATION EXHIBIT. THE PERCENTAGE MEMBERSHIP INTERESTS GENERALLY SHALL BE
BASED UPON THE PRO RATA CAPITAL CONTRIBUTION OF EACH MEMBER.
"ORGANIZATION EXPENSES" SHALL MEAN THOSE EXPENSES INCURRED, EITHER BY
THE COMPANY OR FOR WHICH THE COMPANY HAS AGREED TO MAKE REIMBURSEMENT, IN
CONNECTION WITH THE
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FORMATION OF THE COMPANY INCLUDING SUCH EXPENSES AS: (I) REGISTRATION FEES,
FILING FEES, AND TAXES; AND (II) LEGAL FEES INCURRED IN CONNECTION WITH ANY OF
THE FOREGOING.
"PERSON" SHALL MEAN ANY INDIVIDUAL OR ENTITY, AND THE HEIRS, EXECUTORS,
ADMINISTRATORS, LEGAL REPRESENTATIVES, SUCCESSORS, AND ASSIGNS OF SUCH
INDIVIDUAL OR ENTITY WHERE THE CONTEXT SO PERMITS.
"PRIME RATE" MEANS THE RATE OF INTEREST AS OF THE RELEVANT DAY OR TIME
PERIOD AS ANNOUNCED BY THE FIRST UNION NATIONAL BANK, N.A. OR ITS SUCCESSOR IN
INTEREST FROM TIME TO TIME AS ITS PRIME OR REFERENCE RATE.
"PROFITS AND LOSSES" SHALL MEAN, FOR EACH FISCAL YEAR OR OTHER PERIOD,
AN AMOUNT EQUAL TO THE COMPANY'S TAXABLE INCOME OR LOSS FOR SUCH YEAR OR PERIOD,
DETERMINED IN ACCORDANCE WITH CODE SECTION 703(A) (FOR THIS PURPOSE, ALL ITEMS
OF INCOME, GAIN, LOSS, OR DEDUCTION REQUIRED TO BE STATED SEPARATELY PURSUANT TO
CODE SECTION 703(A)(L) SHALL BE INCLUDED IN TAXABLE INCOME OR LOSS), WITH THE
FOLLOWING ADJUSTMENTS:
(A) ANY INCOME OF THE COMPANY THAT IS EXEMPT FROM FEDERAL INCOME TAX
AND NOT OTHERWISE TAKEN INTO ACCOUNT IN COMPUTING PROFITS OR LOSSES SHALL BE
ADDED TO SUCH TAXABLE INCOME OR LOSS;
(B) ANY EXPENDITURES OF THE COMPANY DESCRIBED IN CODE SECTION
705(A)(2)(B) OR TREATED AS CODE SECTION 705(A)(2)(B) EXPENDITURES PURSUANT TO
REGULATIONS SECTION 1.704-1(B)(2)(IV)(I), AND NOT OTHERWISE TAKEN INTO ACCOUNT
IN COMPUTING PROFITS OR LOSSES, SHALL BE SUBTRACTED FROM SUCH TAXABLE INCOME OR
LOSS;
(C) GAIN OR LOSS RESULTING FROM DISPOSITIONS OF COMPANY ASSETS SHALL BE
COMPUTED BY REFERENCE TO THE AGREED VALUE OF THE PROPERTY DISPOSED OF,
NOTWITHSTANDING THAT THE ADJUSTED TAX BASIS OF SUCH PROPERTY DIFFERS FROM ITS
AGREED VALUE.
"REFINANCING" MEANS ANY BORROWING INCURRED OR MADE TO RECAPITALIZE THE
COMPANY OR THE EQUITY INVESTMENT IN, OR TO REFINANCE ANY LOAN USED TO FINANCE
THE ACQUISITION OF PROPERTY.
"REGULATIONS" SHALL MEAN RULES, ORDERS, AND REGULATIONS ISSUED PURSUANT
TO OR UNDER THE AUTHORITY OF THE CODE AND SHALL INCLUDE REVISIONS TO AND
SUCCEEDING PROVISIONS AS APPROPRIATE.
"REGULATORY ALLOCATIONS" SHALL MEAN THOSE ALLOCATIONS OF ITEMS OF
COMPANY INCOME, GAIN, LOSS OR DEDUCTION SET FORTH ON THE REGULATORY ALLOCATIONS
EXHIBIT AND DESIGNED TO ENABLE THE COMPANY TO COMPLY WITH THE ALTERNATE TEST FOR
ECONOMIC EFFECT PRESCRIBED IN REGULATIONS SECTION 1.704-1(B)(2)(II)(D), AND THE
SAFE-HARBOR RULES FOR ALLOCATIONS ATTRIBUTABLE TO NONRECOURSE LIABILITIES
PRESCRIBED IN REGULATIONS SECTION 1.704-2.
"SALE" MEANS THE SALE, EXCHANGE, INVOLUNTARY CONVERSION (OTHER THAN A
CASUALTY FOLLOWED BY RECONSTRUCTION), CONDEMNATION, OR OTHER DISPOSITION OF
PROPERTY BY THE COMPANY, EXCEPT FOR DISPOSITIONS OF INVENTORY ITEMS AND PERSONAL
PROPERTY IN THE ORDINARY COURSE OF BUSINESS AND IN CONNECTION WITH THE
REPLACEMENT OF SUCH PROPERTY.
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<PAGE>
"SUBSTITUTE MANAGER" SHALL MEAN A MANAGER WHO SUCCEEDS EITHER HHBF OR
THE INVESTOR MANAGER WITH ALL OF THE SPECIFIC RIGHTS AND POWERS OF SUCH MANAGER
UNDER THIS AGREEMENT.
"SUBSTITUTE MEMBER" SHALL MEAN AN ASSIGNEE OF A MEMBER WHO HAS BEEN
ADMITTED TO THE COMPANY AND GRANTED ALL THE RIGHTS OF A MEMBER IN PLACE OF ITS
ASSIGNOR PURSUANT TO THE PROVISIONS OF THIS AGREEMENT. A SUBSTITUTE MEMBER, UPON
ITS ADMISSION AS SUCH, SHALL REPLACE AND SUCCEED TO THE RIGHTS, PRIVILEGES, AND
LIABILITIES OF THE MEMBER FROM WHOM IT ACQUIRED ITS INTEREST IN THE COMPANY, TO
THE EXTENT OF THE ECONOMIC INTEREST ASSIGNED.
"SUPERMAJORITY VOTE OF THE MEMBERS" SHALL REFER TO THE AFFIRMATIVE
VOTE, APPROVAL OR CONSENT OF MEMBERS HOLDING SIXTY-SEVEN PERCENT (67%) OF THE
PERCENTAGE MEMBERSHIP INTERESTS HELD BY THE MEMBERS IN THE AGGREGATE.
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<PAGE>
EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
DEVELOPMENT BUDGET EXHIBIT
[SEE ATTACHED CAPITAL EXPENSE INFORMATION.]
<PAGE>
EXHIBIT E
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
REGULATORY ALLOCATIONS
THIS EXHIBIT CONTAINS SPECIAL RULES FOR THE ALLOCATION OF ITEMS OF
COMPANY INCOME, GAIN, LOSS AND DEDUCTION THAT OVERRIDE THE BASIC ALLOCATIONS OF
PROFITS AND LOSSES IN THE AGREEMENT TO THE EXTENT NECESSARY TO CAUSE THE OVERALL
ALLOCATIONS OF ITEMS OF COMPANY INCOME, GAIN, LOSS AND DEDUCTION TO HAVE
SUBSTANTIAL ECONOMIC EFFECT PURSUANT TO REGULATIONS SECTION 1.704-1(B) AND SHALL
BE INTERPRETED IN LIGHT OF THAT PURPOSE. SUBSECTION (A) BELOW CONTAINS SPECIAL
TECHNICAL DEFINITIONS. SUBSECTIONS (B) THROUGH (H) CONTAIN THE REGULATORY
ALLOCATIONS THEMSELVES. SUBSECTIONS (I), (J) AND (K) ARE SPECIAL RULES
APPLICABLE IN APPLYING THE REGULATORY ALLOCATIONS.
(A) DEFINITIONS APPLICABLE TO REGULATORY ALLOCATIONS. FOR PURPOSES OF
THE AGREEMENT, THE FOLLOWING TERMS SHALL HAVE THE MEANINGS INDICATED:
(I) "COMPANY MINIMUM GAIN" HAS THE MEANING OF "PARTNERSHIP
MINIMUM GAIN" SET FORTH IN REGULATIONS SECTION
1.704-2(D), AND IS GENERALLY THE AGGREGATE GAIN THE
COMPANY WOULD REALIZE IF IT DISPOSED OF ITS PROPERTY
SUBJECT TO NONRECOURSE LIABILITIES IN FULL SATISFACTION
OF EACH SUCH LIABILITY, WITH SUCH OTHER MODIFICATIONS AS
PROVIDED IN REGULATIONS SECTION 1.704-2(D). IN THE CASE
OF NONRECOURSE LIABILITIES FOR WHICH THE CREDITOR'S
RECOURSE IS NOT LIMITED TO PARTICULAR ASSETS OF THE
COMPANY, UNTIL SUCH TIME AS THERE IS REGULATORY GUIDANCE
ON THE DETERMINATION OF MINIMUM GAIN WITH RESPECT TO
SUCH LIABILITIES, ALL SUCH LIABILITIES OF THE COMPANY
SHALL BE TREATED AS A SINGLE LIABILITY AND ALLOCATED TO
THE COMPANY'S ASSETS USING ANY REASONABLE BASIS SELECTED
BY HHBF.
(II) "MEMBER NONRECOURSE DEDUCTIONS" SHALL MEAN LOSSES,
DEDUCTIONS OR CODE SECTION 705(A)(2)(B) EXPENDITURES
ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT UNDER THE
GENERAL PRINCIPLES APPLICABLE TO "PARTNER NONRECOURSE
DEDUCTIONS" SET FORTH IN REGULATIONS SECTION
1.704-2(I)(2).
(III) "MEMBER NONRECOURSE DEBT" MEANS ANY COMPANY LIABILITY
WITH RESPECT TO WHICH ONE OR MORE BUT NOT ALL OF THE
MEMBERS OR RELATED PERSONS TO ONE OR MORE BUT NOT ALL OF
THE MEMBERS BEARS THE ECONOMIC RISK OF LOSS WITHIN THE
MEANING OF REGULATIONS SECTION 1.752-2 AS A GUARANTOR,
LENDER OR OTHERWISE.
<PAGE>
(IV) "MEMBER NONRECOURSE DEBT MINIMUM GAIN" SHALL MEAN THE
MINIMUM GAIN ATTRIBUTABLE TO MEMBER NONRECOURSE DEBT AS
DETERMINED PURSUANT TO REGULATIONS SECTION
1.704-2(I)(3). IN THE CASE OF MEMBER NONRECOURSE DEBT
FOR WHICH THE CREDITOR'S RECOURSE AGAINST THE COMPANY IS
NOT LIMITED TO PARTICULAR ASSETS OF THE COMPANY, UNTIL
SUCH TIME AS THERE IS REGULATORY GUIDANCE ON THE
DETERMINATION OF MINIMUM GAIN WITH RESPECT TO SUCH
LIABILITIES, ALL SUCH LIABILITIES OF THE COMPANY SHALL
BE TREATED AS A SINGLE LIABILITY AND ALLOCATED TO THE
COMPANY'S ASSETS USING ANY REASONABLE BASIS SELECTED BY
HHBF.
(V) "NONRECOURSE DEDUCTIONS" SHALL MEAN LOSSES, DEDUCTIONS,
OR CODE SECTION 705(A)(2)(B) EXPENDITURES ATTRIBUTABLE
TO NONRECOURSE LIABILITIES (SEE REGULATIONS SECTION
1.704-2(B)(1)). THE AMOUNT OF NONRECOURSE DEDUCTIONS FOR
A FISCAL YEAR SHALL BE DETERMINED PURSUANT TO
REGULATIONS SECTION 1.704-2(C), AND SHALL GENERALLY
EQUAL THE NET INCREASE, IF ANY, IN THE AMOUNT OF COMPANY
MINIMUM GAIN FOR THAT TAXABLE YEAR, DETERMINED GENERALLY
ACCORDING TO THE PROVISIONS OF REGULATIONS SECTION
1.704-2(D), REDUCED (BUT NOT BELOW ZERO) BY THE
AGGREGATE DISTRIBUTIONS DURING THE YEAR OF PROCEEDS OF
NONRECOURSE LIABILITIES THAT ARE ALLOCABLE TO AN
INCREASE IN COMPANY MINIMUM GAIN, WITH SUCH OTHER
MODIFICATIONS AS PROVIDED IN REGULATIONS SECTION
1.704-2(C).
(VI) "NONRECOURSE LIABILITY" MEANS ANY COMPANY LIABILITY (OR
PORTION THEREOF) FOR WHICH NO MEMBER BEARS THE ECONOMIC
RISK OF LOSS UNDER REGULATIONS SECTION 1.752-2.
(VII) "REGULATORY ALLOCATIONS" SHALL MEAN ALLOCATIONS OF
NONRECOURSE DEDUCTIONS PROVIDED IN PARAGRAPH (B) BELOW,
ALLOCATIONS OF MEMBER NONRECOURSE DEDUCTIONS PROVIDED IN
PARAGRAPH (C) BELOW, THE MINIMUM GAIN CHARGEBACK
PROVIDED IN PARAGRAPH (D) BELOW, THE MEMBER NONRECOURSE
DEBT MINIMUM GAIN CHARGEBACK PROVIDED IN PARAGRAPH (E)
BELOW, THE QUALIFIED INCOME OFFSET PROVIDED IN PARAGRAPH
(F) BELOW, THE GROSS INCOME ALLOCATION PROVIDED IN
PARAGRAPH (G) BELOW, AND THE CURATIVE ALLOCATIONS
PROVIDED IN PARAGRAPH (H) BELOW.
(B) NONRECOURSE DEDUCTIONS. ALL NONRECOURSE DEDUCTIONS FOR ANY FISCAL
YEAR SHALL BE ALLOCATED TO THE MEMBERS IN ACCORDANCE WITH THEIR PERCENTAGE
MEMBERSHIP INTERESTS.
(C) MEMBER NONRECOURSE DEDUCTIONS. ALL MEMBER NONRECOURSE DEDUCTIONS
FOR ANY FISCAL YEAR SHALL BE ALLOCATED TO THE MEMBER WHO BEARS THE ECONOMIC RISK
OF LOSS UNDER REGULATIONS SECTION 1.752-2 WITH RESPECT TO THE MEMBER NONRECOURSE
DEBT TO WHICH SUCH MEMBER NONRECOURSE DEDUCTIONS ARE ATTRIBUTABLE.
(D) MINIMUM GAIN CHARGEBACK. IF THERE IS A NET DECREASE IN COMPANY
MINIMUM GAIN FOR A FISCAL YEAR, EACH MEMBER SHALL BE ALLOCATED ITEMS OF COMPANY
INCOME AND GAIN FOR SUCH YEAR (AND, IF NECESSARY, SUBSEQUENT YEARS) IN AN AMOUNT
EQUAL TO SUCH MEMBER'S
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<PAGE>
SHARE OF SUCH NET DECREASE IN COMPANY MINIMUM GAIN, DETERMINED IN
ACCORDANCE WITH REGULATIONS SECTION 1.704-2(G)(2) AND THE DEFINITION OF
COMPANY MINIMUM GAIN SET FORTH ABOVE. THIS PROVISION IS INTENDED TO COMPLY
WITH THE MINIMUM GAIN CHARGEBACK REQUIREMENT IN REGULATIONS SECTION
1.704-2(F) AND SHALL BE INTERPRETED CONSISTENTLY THEREWITH.
(E) MEMBER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK. IF THERE IS A NET
DECREASE IN MEMBER NONRECOURSE DEBT MINIMUM GAIN ATTRIBUTABLE TO A MEMBER
NONRECOURSE DEBT FOR ANY FISCAL YEAR, EACH MEMBER WHO HAS A SHARE OF THE MEMBER
NONRECOURSE DEBT MINIMUM GAIN ATTRIBUTABLE TO SUCH MEMBER NONRECOURSE DEBT AS OF
THE BEGINNING OF THE FISCAL YEAR, DETERMINED IN ACCORDANCE WITH REGULATIONS
SECTION 1.704-2(I)(5), SHALL BE ALLOCATED ITEMS OF COMPANY INCOME AND GAIN FOR
SUCH YEAR (AND, IF NECESSARY, SUBSEQUENT YEARS) IN AN AMOUNT EQUAL TO SUCH
MEMBER'S SHARE OF THE NET DECREASE IN MEMBER NONRECOURSE DEBT MINIMUM GAIN
ATTRIBUTABLE TO SUCH MEMBER NONRECOURSE DEBT, DETERMINED IN ACCORDANCE WITH
REGULATIONS SECTIONS 1.704-2(I)(4) AND (5) AND THE DEFINITION OF MEMBER
NONRECOURSE DEBT MINIMUM GAIN SET FORTH ABOVE. THIS PARAGRAPH IS INTENDED TO
COMPLY WITH THE MEMBER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK REQUIREMENT IN
REGULATIONS SECTION 1.704-2(I)(4) AND SHALL BE INTERPRETED CONSISTENTLY
THEREWITH.
(F) QUALIFIED INCOME OFFSET. IN THE EVENT ANY MEMBER UNEXPECTEDLY
RECEIVES ANY ADJUSTMENTS, ALLOCATIONS, OR DISTRIBUTIONS DESCRIBED IN REGULATIONS
SECTIONS 1.704-1(B)(2)(II)(D)(4), (5), OR (6), ITEMS OF COMPANY INCOME AND GAIN
(CONSISTING OF A PRO RATA PORTION OF EACH ITEM OF COMPANY INCOME, INCLUDING
GROSS INCOME, AND GAIN FOR SUCH YEAR) SHALL BE ALLOCATED TO SUCH MEMBER IN AN
AMOUNT AND MANNER SUFFICIENT TO ELIMINATE, TO THE EXTENT REQUIRED BY THE
REGULATIONS, ANY DEFICIT IN SUCH MEMBER'S ADJUSTED CAPITAL ACCOUNT CREATED BY
SUCH ADJUSTMENTS, ALLOCATIONS OR DISTRIBUTIONS AS QUICKLY AS POSSIBLE.
(G) GROSS INCOME ALLOCATION. IN THE EVENT ANY MEMBER HAS A DEFICIT IN
ITS ADJUSTED CAPITAL ACCOUNT AT THE END OF ANY FISCAL YEAR, EACH SUCH MEMBER
SHALL BE ALLOCATED ITEMS OF COMPANY GROSS INCOME AND GAIN, IN THE AMOUNT OF SUCH
ADJUSTED CAPITAL ACCOUNT DEFICIT, AS QUICKLY AS POSSIBLE.
(H) CURATIVE ALLOCATIONS. WHEN ALLOCATING PROFITS AND LOSSES UNDER
ARTICLE VI, SUCH ALLOCATIONS SHALL BE MADE SO AS TO OFFSET ANY PRIOR ALLOCATIONS
OF GROSS INCOME UNDER PARAGRAPH (G) ABOVE TO THE GREATEST EXTENT POSSIBLE SO
THAT OVERALL ALLOCATIONS OF PROFITS AND LOSSES SHALL BE MADE AS IF NO SUCH
ALLOCATIONS OF GROSS INCOME OCCURRED.
(I) ORDERING. THE ALLOCATIONS IN THIS EXHIBIT TO THE EXTENT THEY APPLY
SHALL BE MADE BEFORE THE ALLOCATIONS OF PROFITS AND LOSSES UNDER ARTICLE VI AND
IN THE ORDER IN WHICH THEY APPEAR ABOVE.
(J) WAIVER OF MINIMUM GAIN CHARGEBACK PROVISIONS. IF HHBF DETERMINES
THAT (I) EITHER OF THE TWO MINIMUM GAIN CHARGEBACK PROVISIONS CONTAINED IN THIS
EXHIBIT WOULD CAUSE A DISTORTION IN THE ECONOMIC ARRANGEMENT AMONG THE MEMBERS,
(II) IT IS NOT EXPECTED THAT THE COMPANY WILL HAVE SUFFICIENT OTHER ITEMS OF
INCOME AND GAIN TO CORRECT THAT DISTORTION, AND (III) THE MEMBERS HAVE MADE
CAPITAL CONTRIBUTIONS OR RECEIVED NET INCOME ALLOCATIONS THAT HAVE RESTORED ANY
PREVIOUS NONRECOURSE DEDUCTIONS OR MEMBER NONRECOURSE
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<PAGE>
DEDUCTIONS, THEN HHBF SHALL HAVE THE AUTHORITY, BUT NOT THE OBLIGATION,
AFTER GIVING NOTICE TO THE MEMBERS, TO REQUEST ON BEHALF OF THE COMPANY THE
INTERNAL REVENUE SERVICE TO WAIVE THE MINIMUM GAIN CHARGEBACK OR MEMBER
NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK REQUIREMENTS PURSUANT TO
REGULATIONS SECTIONS 1.704-2(F)(4) AND 1.704-2(I)(4). THE COMPANY SHALL PAY
THE EXPENSES (INCLUDING ATTORNEYS' FEES) INCURRED TO APPLY FOR THE WAIVER.
HHBF SHALL PROMPTLY COPY ALL MEMBERS ON ALL CORRESPONDENCE TO AND FROM THE
INTERNAL REVENUE SERVICE CONCERNING THE REQUESTED WAIVER.
(K) CODE SECTION 754 ADJUSTMENTS. TO THE EXTENT AN ADJUSTMENT TO THE
ADJUSTED TAX BASIS OF ANY COMPANY ASSET PURSUANT TO CODE SECTION 734(B) OR CODE
SECTION 743(B) IS REQUIRED, PURSUANT TO REGULATIONS SECTION
1.704-1(B)(2)(IV)(M), TO BE TAKEN INTO ACCOUNT IN DETERMINING CAPITAL ACCOUNTS,
THE AMOUNT OF SUCH ADJUSTMENT TO THE CAPITAL ACCOUNTS SHALL BE TREATED AS AN
ITEM OF GAIN (IF THE ADJUSTMENT INCREASES THE BASIS OF THE ASSET) OR LOSS (IF
THE ADJUSTMENT DECREASES SUCH BASIS), AND SUCH GAIN OR LOSS SHALL BE SPECIALLY
ALLOCATED TO THE MEMBERS IN A MANNER CONSISTENT WITH THE MANNER IN WHICH THEIR
CAPITAL ACCOUNTS ARE REQUIRED TO BE ADJUSTED PURSUANT TO SUCH SECTION OF THE
REGULATIONS.
[THE REMAINDER OF THIS PAGE INTENTIONALLY HAS BEEN LEFT BLANK.]
E-4
HEART CLINIC, P.A.
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH INCORPORATED
AND
HEART CLINIC, P.A.
JULY 31, 1996
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C> <C>
ARTICLE I-DEFINITIONS................................................................................- 1 -
SECTION 1.1 "Accounts Receivable".....................................................- 1 -
SECTION 1.2 "Assets"..................................................................- 1 -
SECTION 1.3 "Closing".................................................................- 1 -
SECTION 1.4 "Closing Date"............................................................- 1 -
SECTION 1.5 "Employment Agreements"...................................................- 2 -
SECTION 1.6 "Encumbrances"............................................................- 2 -
SECTION 1.7 "Excluded Assets".........................................................- 2 -
SECTION 1.8 "Independent Contractor Agreements".......................................- 2 -
SECTION 1.9 "PAs".....................................................................- 2 -
SECTION 1.10 "Physicians"..............................................................- 2 -
ARTICLE II-PRACTICE MANAGEMENT TRANSACTION...........................................................- 2 -
SECTION 2.1 Sale of Assets and Practice Management Transaction........................- 2 -
SECTION 2.2 Consideration for Transaction.............................................- 3 -
SECTION 2.3 The Closing...............................................................- 3 -
SECTION 2.4 Further Acts and Assurances...............................................- 3 -
ARTICLE III-REPRESENTATIONS AND WARRANTIES OF PRACTICE...............................................- 4 -
SECTION 3.1 Organization, Power, Binding Effect and Qualification.....................- 4 -
SECTION 3.2 Interests.................................................................- 4 -
SECTION 3.3 Subsidiaries, Affiliates, Affiliated Companies and Joint
Venture...................................................................- 4 -
SECTION 3.4 Financial Statements......................................................- 4 -
SECTION 3.5 Absence of Undisclosed Liabilities........................................- 5 -
SECTION 3.6 Absence of Certain Recent Changes.........................................- 5 -
SECTION 3.7 Assets....................................................................- 6 -
SECTION 3.8 Contracts and Leases......................................................- 6 -
SECTION 3.9 Defaults and Consents.....................................................- 6 -
SECTION 3.10 Litigation, Etc...........................................................- 7 -
SECTION 3.11 Court Orders, Decrees and Laws............................................- 7 -
SECTION 3.12 Taxes - 7 -
SECTION 3.14 Employee Matters..........................................................- 8 -
SECTION 3.15 Labor Matters.............................................................- 8 -
SECTION 3.16 Insurance; Malpractice....................................................- 8 -
SECTION 3.17 Books of Account, Reports.................................................- 9 -
SECTION 3.19 Inventory.................................................................- 9 -
SECTION 3.20 Equipment.................................................................- 9 -
SECTION 3.21 Accounts Receivable.......................................................- 9 -
SECTION 3.22 Employee Benefit Plans....................................................- 9 -
SECTION 3.23 Power of Attorney........................................................- 11 -
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SECTION 3.24 Bank Accounts............................................................- 11 -
SECTION 3.25 Environmental Matters....................................................- 11 -
SECTION 3.26 Fraud and Abuse..........................................................- 12 -
SECTION 3.27 Investment Representation and Access.....................................- 12 -
SECTION 3.28 Practice Disclosures.....................................................- 14 -
ARTICLE IV-REPRESENTATIONS AND WARRANTIES OF MEDCATH................................................- 14 -
SECTION 4.1 Organization and Standing of MedCath.....................................- 14 -
SECTION 4.2 Authority; Binding Effect................................................- 14 -
SECTION 4.3 No Finders or Brokers....................................................- 14 -
SECTION 4.4 Validity of Agreement....................................................- 14 -
SECTION 4.5 Defaults and Consents....................................................- 14 -
SECTION 4.6 Court Orders, Decrees and Laws...........................................- 15 -
ARTICLE V-COVENANTS OF PRACTICE.....................................................................- 15 -
SECTION 5.1 Access and Information...................................................- 15 -
SECTION 5.2 Conduct of Business......................................................- 16 -
SECTION 5.3 Confidential Information.................................................- 16 -
SECTION 5.4 Unusual Events...........................................................- 16 -
SECTION 5.5 Departmental Violations..................................................- 16 -
SECTION 5.6 Insurance Ratings........................................................- 17 -
SECTION 5.7 Independent Contractor Agreements; Employment Agreements.................- 17 -
SECTION 5.8 Working Capital..........................................................- 17 -
ARTICLE VI-COVENANTS OF MEDCATH.....................................................................- 18 -
SECTION 6.1 Information..............................................................- 18 -
SECTION 6.2 Corporate Action.........................................................- 18 -
SECTION 6.3 Confidential Handling of Documents.......................................- 18 -
SECTION 6.4 Access to or Furnishing of Information about MedCath.....................- 18 -
ARTICLE VII-CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRACTICE.....................................- 19 -
SECTION 7.1 Representations and Warranties True......................................- 19 -
SECTION 7.2 Service Agreement........................................................- 19 -
SECTION 7.3 No Obstruction Proceeding................................................- 19 -
SECTION 7.4 Proceedings And Documents Satisfactory...................................- 19 -
SECTION 7.5 Receipt of Consideration.................................................- 19 -
ARTICLE VIII-CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MEDCATH.....................................- 19 -
SECTION 8.1 Representations and Warranties True......................................- 20 -
SECTION 8.2 No Obstructive Proceeding................................................- 20 -
SECTION 8.3 Opinion of Practice's Counsel............................................- 20 -
SECTION 8.4 Proceedings and Documents Satisfactory...................................- 20 -
SECTION 8.5 No Adverse Change........................................................- 20 -
SECTION 8.6 Service Agreement........................................................- 20 -
SECTION 8.7 Independent Contractor Agreements........................................- 20 -
SECTION 8.8 Employment Agreements....................................................- 21 -
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SECTION 8.9 Bonus Agreements.........................................................- 21 -
ARTICLE IX-TERMINATION..............................................................................- 21 -
SECTION 9.1 Optional Termination.....................................................- 21 -
SECTION 9.2 Notice of Abandonment....................................................- 21 -
SECTION 9.3 Termination..............................................................- 21 -
ARTICLE X-INDEMNIFICATION...........................................................................- 22 -
SECTION 10.1 Indemnity by Practice....................................................- 22 -
SECTION 10.2 Indemnity by MedCath.....................................................- 23 -
SECTION 10.3 Rules Regarding Indemnification..........................................- 24 -
SECTION 10.4 Remedies Cumulative......................................................- 26 -
SECTION 10.5 Set-Off..................................................................- 26 -
SECTION 10.6 Definitions..............................................................- 26 -
SECTION 10.7 Survival.................................................................- 27 -
ARTICLE XI-MISCELLANEOUS............................................................................- 27 -
SECTION 11.1 Expenses.................................................................- 27 -
SECTION 11.2 Restrictive Covenant.....................................................- 27 -
SECTION 11.3 Notices..................................................................- 28 -
SECTION 11.4 Entire Agreement.........................................................- 28 -
SECTION 11.5 Governing Law............................................................- 28 -
SECTION 11.6 Section Headings.........................................................- 29 -
SECTION 11.7 Waiver...................................................................- 29 -
SECTION 11.8 Nature and Survival of Representations...................................- 29 -
SECTION 11.9 Successors and Assigns...................................................- 29 -
SECTION 11.10 Amendments...............................................................- 29 -
SECTION 11.11 Counterpart Executions; Facsimiles.......................................- 29 -
SECTION 11.12 Press Releases...........................................................- 29 -
SECTION 11.13 Access to Records After Closing..........................................- 30 -
SECTION 11.14 Disclosure of Certain Information........................................- 30 -
SECTION 11.15 Attorneys' Fees..........................................................- 30 -
SECTION 11.16 Severability.............................................................- 30 -
SECTION 11.17 Third-Party Beneficiary..................................................- 30 -
SECTION 11.18 Arbitration..............................................................- 30 -
SECTION 11.19 Contract Modifications for Prospective Legal Events......................- 30 -
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<PAGE>
MASTER TRANSACTION AGREEMENT
THIS MASTER TRANSACTION AGREEMENT (the "Agreement") is made as of the
31st day of July, 1996, by and between HEART CLINIC, P.A., a Texas professional
association (hereinafter referred to collectively as "Practice") and MEDCATH
INCORPORATED, a North Carolina corporation ("MedCath").
WHEREAS, Practice is the owner and operator of a group medical practice
in Rio Grande Valley area of Texas, with offices in the Texas cities of McAllen,
Weslaco, Harlingen and Brownsville (the "Clinic") which provides comprehensive
professional cardiology care to the general public;
WHEREAS, MedCath, through its affiliates, is in the business of
managing medical practices;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice and MedCath agree to enter into the transactions
provided for in this Agreement.
ARTICLE I
DEFINITIONS
SECTION 1.1 "Accounts Receivable" shall mean all accounts and notes
receivable, negotiable instruments and chattel paper the rights to which were
generated by the operations of the Clinic, and other evidences of indebtedness
of, and rights to receive payments from, any person which relate to the
operation of the Clinic, as such exist on the Closing Date including, without
limitation, charges for services rendered to patients prior to the Closing Date
but not yet billed.
SECTION 1.2 "Assets" shall mean all of the assets and properties,
tangible and intangible, of and pertaining to or used at or in connection with
the Clinic, and in which Practice has any right, title or interest, whether as
owner or lessee, wherever located, whether known or unknown, and whether or not
appearing on the books and records of Practice, as the same may exist on the
Closing Date.
SECTION 1.3 "Closing" shall mean the effective date of the consummation
and effectuation of the transactions contemplated herein pursuant to the terms
and conditions of this Agreement.
SECTION 1.4 "Closing Date" shall mean the 1st day of October, 1996 at
such place as is mutually agreed upon by the parties hereto.
<PAGE>
SECTION 1.5 "Employment Agreements" shall mean those employment
agreements between each of the various PAs and the Physician who is its sole
shareholder, which contracts are attached as Exhibit D.
SECTION 1.6 "Encumbrances" shall mean all security interests, liens,
pledges, claims, charges, escrows, encumbrances, encroachments, rights of first
refusal, subleases, conditional sales agreements, options, mortgages,
indentures, easements, licenses, restrictions or other covenants, agreements,
understandings, obligations, defects or irregularities affecting title to any of
the Assets.
SECTION 1.7 "Excluded Assets" shall mean the portion of the Assets not
being acquired by MedCath and which is described on Schedule 1.7.
SECTION 1.8 "Independent Contractor Agreements" shall mean those
agreements attached as Exhibit B hereto between Practice and the PAs pursuant to
which the PAs are required to provide the exclusive, full time professional
services of the Physicians to Practice and its patients.
SECTION 1.9 "PAs" shall mean those professional associations, each with
one shareholder who is one of the Physicians, that are signatories to this
Agreement.
SECTION 1.10 "Physicians" shall refer to those certain individuals
licensed to practice medicine in Texas whose services are essential to the
continued operation of Practice and who are individual signatories to this
Agreement.
ARTICLE II
PRACTICE MANAGEMENT TRANSACTION
SECTION 2.1 Sale of Assets and Practice Management Transaction.
Practice has sought MedCath's physician practice management expertise and
MedCath desires to provide physician practice management services to Practice in
accordance with the terms of this Agreement and the other agreements
contemplated hereunder. As of the date hereof, Practice shall convey to MedCath
all of its Assets other than the Excluded Assets and Practice and a wholly-owned
subsidiary of MedCath, Physician Management of McAllen, Inc., a North Carolina
corporation ("Manager") shall enter into the Service Agreement attached hereto
as Exhibit A under which Manager shall provide physician practice management
services to Practice. In consideration therefore, MedCath shall, as of the
Closing Date, deliver the Consideration (as defined below) to Practice.
Contemporaneously therewith, Practice shall enter into the Independent
Contractor Agreements with the PAs attached hereto as Exhibit B in order to
ensure the availability to Practice of the continued services of the Physicians
and Practice shall enter into the Bonus Agreements in the form attached hereto
as Exhibit C with the PAs in order to adequately compensate them for entering
into the Independent Contractor Agreements. Each PA and its related Physician
shall also enter into the appropriate Employment Agreement attached as Exhibit
D. The Assets, other than the Excluded Assets, shall be transferred to
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<PAGE>
MedCath free of all liens, claims and encumbrances and then immediately deemed
assigned by MedCath to Manager for its utilization in its management of Practice
pursuant to the Service Agreement, all without further act or written
instrument. Practice agrees to take any and all actions reasonably requested by
MedCath or Manager from time to time to effect and maintain the transfer of the
Assets to MedCath and then to Manager. The transactions contemplated by this
Section 2.1 and as otherwise set forth in this Agreement and the other
agreements and documents contemplated hereby are hereafter referred to
collectively as the "Transaction."
SECTION 2.2 Consideration for Transaction.
(a) The consideration due from MedCath to Practice for
entering into the Transaction shall equal Six Million Three Hundred
Fifty-Nine Thousand Nine Hundred Fifty-Eight Dollars ($6,359,958) plus
the Supplemental Payment (the "Consideration") which shall be composed
of the following:
(i) $6,359,958 in the form of a Convertible
Subordinated Promissory Note (the "Convertible Note") in the
form attached hereto as Exhibit E, $1,907,987 to be paid in
cash only and $4,451,971 to be paid in cash or which is
convertible, after the second (2nd) anniversary hereof as
provided in more detail in the Convertible Note, into the
Common Stock of MedCath Incorporated valued at $14.00 per
share (the "Common Stock").
(ii) The consideration also includes a possible
supplemental payment ("Supplemental Payment") as described in
Exhibit F to be represented by an additional promissory note
(the "Additional Promissory Note") in the form attached as
Exhibit G.
(b) Subject to the provisions of this Agreement, on the
Closing Date MedCath shall:
(i) Deliver the Convertible Note; and
(ii) Deliver the Additional Promissory Note.
SECTION 2.3 The Closing. The Closing shall take place on October 1,
1996 and shall be effective as of 12:01 a.m. on October 1, 1996.
SECTION 2.4 Further Acts and Assurances. Practice shall, at any time
and from time to time at and after the Closing, upon request of MedCath, take
any and all steps and will do, execute, acknowledge and deliver, or will cause
to be done, executed, acknowledged and delivered, all such further acts,
transfers, conveyances, powers of attorney and assurances as may be reasonably
required for providing to MedCath or to its designated subsidiary, the benefits
of the Transaction contemplated by this Agreement.
ARTICLE III
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<PAGE>
REPRESENTATIONS AND WARRANTIES OF PRACTICE
Practice hereby represents and warrants to MedCath as follows:
SECTION 3.1 Organization, Power, Binding Effect and Qualification.
Practice is a professional association duly organized, validly existing and in
good standing under the laws of the State of Texas and has full power to own,
lease and operate its properties and assets and to carry on its business as now
being conducted, and is duly qualified and in good standing to do business in
each jurisdiction in which the nature of the Practice's business or the
ownership or leasing of Practice's properties make such qualification necessary.
Practice has full power to enter into this Agreement and to consummate the
transactions contemplated hereby. Practice has taken all action required by law
and by Practice's Articles of Incorporation and Bylaws to authorize the
execution and delivery of this Agreement and the transactions contemplated
hereby. The execution, delivery, and performance of this Agreement and any and
all agreements being executed in connection herewith constitute the valid and
binding agreements of Practice, each PA and each Physician enforceable in
accordance with their terms. A copy of Practice's Articles of Incorporation and
Bylaws and all amendments thereto as of the date hereof, are included as
Schedule 3.1 and are true, accurate and complete as of the date hereof.
SECTION 3.2 Interests. The interests of Practice are owned in the
manner set forth in Schedule 3.2 and, except as set forth on such Schedule,
there are no outstanding options, warrants rights or commitments for the sale or
issuance of any additional interests in Practice. Except for the transactions
contemplated by this Agreement, insofar as is known to Practice, there are not
any agreements or understandings among Practice shareholders with respect to the
voting on any matter. In addition, Practice and its shareholders executing this
Agreement hereby represent and warrant that no later than immediately prior to
Closing, all interests in Practice (including any entity merged into Practice)
owned by Norman Ramirez at anytime have been reacquired by Practice and that
Practice owes no amounts and is not indebted to Norman Ramirez or Jose Perez.
SECTION 3.3 Subsidiaries, Affiliates, Affiliated Companies and Joint
Venture. Practice has no direct or indirect interest in, by way of stock
ownership or otherwise, any corporation, partnership, joint venture, association
or business enterprise.
SECTION 3.4 Financial Statements. The balance sheets of Practice at
December 31, 1994 and 1995 and for the year to date through June 30, 1996, and
the related statements of income and changes in financial position for the
periods then ended, are included as Schedule 3.4 (such financial statements and
the related notes "Financial Statements"). The Financial Statements are prepared
on the cash basis of accounting on a consistent basis throughout the periods
involved, and on that basis, the financial statements are true, complete and
accurate in all material respects and present fairly the assets, liabilities and
financial condition of Practice at the respective dates thereof and the results
of its operations for the periods ended.
SECTION 3.5 Absence of Undisclosed Liabilities. Except as and to the
extent reflected or reserved against in the Financial Statements and except for
commitments and obligations incurred in the ordinary course of business,
consistent with past practice, accruing
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<PAGE>
after the date of the Financial Statements, Practice has no liabilities, claims
or obligations which would have a material adverse effect on the operations
(whether accrued, absolute, contingent or otherwise) of the Practice.
SECTION 3.6 Absence of Certain Recent Changes. Practice has not,
since June 30, 1996, except in the ordinary course of business consistent with
past practice:
(a) incurred any indebtedness or other liabilities (whether
accrued, absolute, contingent or otherwise), guaranteed any
indebtedness or sold any of its assets;
(b) suffered any damage, destruction or loss, to any of the
tangible Assets, whether or not covered by insurance;
(c) increased the regular rate of compensation payable to any
employee or any physician; or increased such compensation by bonus,
percentage, compensation service award or similar arrangement
theretofore in effect for the benefit of any of its employees, and no
such increase is required;
(d) established or agreed to establish any pension, retirement
or welfare plan for the benefit of its employees not theretofore in
effect;
(e) suffered any change in its financial condition, assets,
liabilities or business or suffered any other event or condition of any
character which individually or in the aggregate has or might
reasonably be expected to have a material adverse effect on its
business;
(f) experienced any labor organizational efforts, strikes or
formal complaints or entered into any collective bargaining agreements
with any union;
(g) made any single capital expenditure which exceeded $2,500
or made aggregate capital expenditures which exceeded $10,000;
(h) disposed of any of the Assets or written down the value
of any of the Assets, or written off as uncollectible any Accounts
Receivable, or revalued any of the Assets;
(i) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise);
(j) canceled any debts or waived any claims or rights of
substantial value;
(k) entered into, amended or terminated any contract,
agreement or license to which it is a party;
(l) entered into a material transaction or made any change in
any method of accounting or accounting practice;
-5-
<PAGE>
(m) canceled, or failed to continue, insurance coverages; or
(n) agreed, whether in writing or otherwise, to take any
action described in this Section 3.6.
SECTION 3.7 Assets. The Assets constitute all of the non-real estate
operating assets of Practice necessary or appropriate for the continued
operation of the Clinic and all such Assets shall continue to be available to
Practice, without any increased cost therefor, at all times after September 30,
1996.
SECTION 3.8 Contracts and Leases. Schedule 3.8 is a copy of each
contract, lease, sublease, agreement and other instrument to which Practice is a
party or are bound that is for an amount in excess of $5,000 or for a term in
excess of twelve (12) months in duration. Except as noted in such Schedule, all
such contracts, leases, subleases and agreements are in full force and effect,
there has been no threatened cancellation thereof, there are no outstanding
disputes thereunder, each is with unrelated third parties and was entered into
on an arms-length basis in the ordinary course of business and, assuming the
receipt of the appropriate consents, all will continue to be binding in
accordance with their terms after consummation of the transaction contemplated
herein; except as disclosed on Schedule 3.8, and except for physician employment
contracts and the Independent Contractor Agreements, Practice is not a party to
or bound by any employment agreements or any agreements that contain any bonus,
severance or termination pay liabilities or obligations or by any agreements to
loan to or guarantee any loan to an employee. In every instance where consent is
necessary, Practice shall, on or before this Closing Date, obtain and deliver to
MedCath in writing, effective as of the Closing Date, such consents as are
necessary to effect the Transaction. The operation of the Independent Contractor
Agreements and Practice's relationship with the PAs do not cause Practice to be
in violation of any statute, rule or regulation and Practice will not be forced
to forego or relinquish any economic right or benefit due to it under or arising
out of the operation of the Independent Contractor Agreements in order to avoid
being in violation of a statute, rule or regulation.
SECTION 3.9 Defaults and Consents. Practice is not in default under,
nor has any event occurred which, with notice or the lapse of time or action by
a third party, could result in a default under, any outstanding indenture,
mortgage, contract, lease or agreement to which Practice is a party or by which
Practice may be bound or under any provision of the Articles of Incorporation,
Bylaws, or other governing documents of Practice. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement will not (a) result in a significant liability to
Practice; (b) constitute a violation of or a default under, or a conflict with,
(i) any term or provision of the Articles of Incorporation, Bylaws, or other
governing documents of Practice or (ii) any order, writ, injunction or decree of
any court, governmental agency or arbitration tribunal, or (iii) any contract,
commitment, indenture, lease, sublease or other agreement, or (iv) any other
restriction of any kind to which Practice is a party or by which Practice is
bound; (c) cause, or give any party grounds to cause (with or without notice,
the passage of time or both) the maturity of any liability or obligation of
Practice to be accelerated, or increase any such liability or obligation; or (d)
require any consent, approval or authorization of, or declaration, filing or
registration with any governmental or
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<PAGE>
regulatory authority.
SECTION 3.10 Litigation, Etc. There is no litigation, arbitration,
governmental claim, investigation or proceeding pending or, to the best
knowledge of Practice, threatened against Practice at law or in equity, before
any court, arbitration tribunal or governmental agency. Practice knows of no
facts based on which material claims may be hereafter made against it.
SECTION 3.11 Court Orders, Decrees and Laws. There are no outstanding
or, to the best of Practice knowledge, threatened orders, writs, injunctions or
decrees of any court, governmental agency or arbitration tribunal against or
affecting Practice or the Assets. Practice, including without limitation the
terms and structure of its agreements and arrangements with the PAs and the
Physicians, is in compliance with all applicable federal, state and local laws,
regulations and administrative orders which are material to the operation of the
Clinic, including, without limitation, matters relating to antitrust and
anti-competitive practices, discrimination, employment, and health and safety,
and has received no notices of alleged violations thereof. No governmental
authorities are presently conducting proceedings against Practice and no such
investigation or proceeding is pending or being threatened. Practice has all
federal, state and local permits, certificates, licenses, approvals and other
authorizations necessary in the conduct and operation of the Clinic. All such
licenses and permits of Practice are in full force and effect, and no violations
are or have been recorded in respect thereof for which a fine or penalty may be
levied, and no proceeding is pending or threatened to revoke or limit any
thereof. Practice agrees to assume responsibility for the payment, if any, of
any such future fines for activities occurring in the Clinic prior to the
Closing Date.
SECTION 3.12 Taxes. All federal, state and other tax returns of
Practice required by law to be filed have been timely filed, and Practice has
paid or adequately provided for all taxes (including taxes on properties,
income, franchises, licenses, sales and payrolls) which have become due pursuant
to such returns or pursuant to any assessment, except for any taxes and
assessments, the amount, applicability or validity of which is currently being
contested in good faith by appropriate proceedings and with respect to which
Practice has set aside on its books adequate reserves. There are no tax liens on
any of the Assets except those with respect to taxes not yet due and payable.
There are no pending tax examinations of any Practice tax return nor has
Practice received a revenue agent's report asserting a tax deficiency in the
last twelve (12) months. There are not and will not be at the Closing Date, any
claims pending or asserted against the Assets for unpaid taxes by any federal,
state or other governmental body. Practice has withheld from each payment made
directly or indirectly to its employees (including persons who under the tax
laws could be classified as its employees) the amount of all taxes (including,
but not limited to, federal, state and local income taxes and Federal Insurance
Contribution Act taxes) required to be withheld therefrom and all amounts
customarily withheld therefrom, and has set aside all other employee
contributions or payments customarily set aside with respect to such wages and
has paid or will pay the same to, or has deposited or will deposit such payment
with, the proper tax receiving officers or other appropriate authorities, except
to the extent of any liabilities, to be assumed by MedCath hereunder. Neither
Practice, any PA nor any Physician is relying on MedCath, Manager, or any of
their affiliates, employees, professional advisors or consultants regarding any
tax implications arising from or relating to the Transaction and Practice, the
PAs and the Physicians have obtained their own tax advice in that regard.
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SECTION 3.13 Authority, Binding Effect. Practice has full power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The directors, shareholders and officers of Practice have
taken all action required, whether by law, by their governing documents or
otherwise, to authorize the execution and delivery of this Agreement and the
performance of the transactions contemplated hereby. The execution, delivery,
and performance of this Agreement constitutes the valid and binding agreement of
Practice enforceable in accordance with its terms.
SECTION 3.14 Employee Matters. All compensation paid to the current
employees, officers and consultants of Practice is at a fair market value rate
and is reflected in the financial statements attached as Schedule 3.4.
SECTION 3.15 Labor Matters. Practice has no collective bargaining
agreements with any labor union and neither is currently negotiating with a
labor union. No employee of Practice has ever petitioned for a representation
election. Practice is in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and are not engaged in any unfair labor practice. There is no
unfair labor practice complaint against Practice pending before the National
Labor Relations Board or strike, dispute, slowdown or stoppage actually pending
or, to its knowledge, threatened against or affecting Practice.
SECTION 3.16 Insurance; Malpractice. Schedule 3.16(a) is a list and
brief description of all policies or binders of fire, liability, product
liability, worker's compensation, health and other forms of insurance policies
or binders currently in force insuring against risks which will remain in full
force and effect at least through the Closing Date. Schedule 3.16(b) contains a
description of all malpractice liability insurance policies of Practice since
1980. Except as set forth on Schedule 3.16(c), (i) Practice has never filed a
written application for any insurance coverage which has been denied by an
insurance agency or carrier and (ii) Practice has been continuously insured for
professional malpractice claims for at least the past seven (7) years. Schedule
3.16(c) also sets forth a list of all claims for any loss in excess of Five
Thousand Dollars ($5,000) per occurrence, filed by Practice during the three (3)
year period immediately preceding the Closing Date, including but not limit to,
worker's compensation, general liability, environmental liability and
professional malpractice liability claims. Practice is not in material default
with respect to any provision contained in any such policy and neither has
failed to give any notice or present any claim under any such policy in due and
timely fashion.
SECTION 3.17 Books of Account, Reports. The books of account of
Practice are in reasonable detail and accurately and fairly reflect its
transactions and the disposition of its assets consistent with the past
practices of Practice. Practice has filed all reports and returns required by
any law or regulation to be filed by it.
SECTION 3.18 No Finders or Brokers. Practice has not engaged any
finder or broker in connection with the transactions contemplated hereunder. No
commitments have been made to any individuals for payments or stock options in
connection with this Agreement except for payments to the PAs of Practice in
their capacities as independent contractors.
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SECTION 3.19 Inventory. All Assets consisting of inventory are of a
quality and quantity currently usable in the ordinary course of business. The
present quantity of all current and usable inventory is at a level consistent
with the past practices of Practice.
SECTION 3.20 Equipment. All Assets consisting of equipment are
located at the Clinic and are in good condition except for reasonable wear and
tear and are sufficient for the purposes for which currently used.
Such Assets are reflected in the Financial Statements at book value.
SECTION 3.21 Accounts Receivable. Except as disclosed in Schedule
3.21, all of the Accounts Receivable of Practice are bona fide and collectable,
and will be on the Closing Date, recorded in the ordinary course of business and
such Accounts Receivable have been carried on the books of Practice at values in
conformity with past practices and reflect all facts known to Practice as of the
date hereof pertaining to the valuation thereof. Schedule 3.21 contains an aging
of all Accounts Receivable.
SECTION 3.22 Employee Benefit Plans.
(a) Practice maintains no employee benefit plan other than
those listed on Schedule 3.22. Practice has delivered to MedCath true
and complete copies, in the case of documented plans, and a written
description in the case of undocumented plans, of each pension,
retirement, profit-sharing, stock purchase, stock option, severance,
vacation, deferred compensation, bonus or other incentive plan, or
other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, retiree medical or life insurance plan or
any other employee benefit plans or fringe benefit arrangements,
including, without limitation, any "employee benefit plan" as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), to which Practice contributes or is a party or by
which it is bound or under which it may have liability and under which
employees or former employees of Practice (or their beneficiaries) are
eligible to participate or derive a benefit (the 'Plans"). Each Plan
which is a "group health plan" (as such term is defined in Section
4980B(g)(2) of the Internal Revenue Code of 1986, as amended (the
"Code")) satisfies the applicable requirements in order to avoid the
imposition of tax under Section 4980B of the Code. Except as set forth
on Schedule 3.22, Practice has no formal plan or commitment, whether
legally binding or not, to create any additional plan, practice or
agreement or modify or change any existing plan, practice or agreement
that would affect any of the employees or former employees of Practice.
Benefits under all Plans are as represented and will not be increased
subsequent to the date documents are provided.
(b) The following representations are made with regard to the
Plans:
(i) any and all Plans which are pension plans
within the meaning of Section 3(2) of ERISA ("Pension Plans")
are intended to be qualified plans under Sections 401 and 501
of the Code, have remained qualified under the
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Code since inception and have been determined by the Internal
Revenue Service ("IRS") to be so qualified, and the IRS has
taken no action to revoke such determination or qualification;
(ii) Practice has, in all material respects,
performed all obligations, whether arising by operation of
law, contract, or past custom, required to be performed under
or in connection with the Plans, and Practice has no knowledge
of any default or violation by any other party with respect to
the Plans;
(iii) Practice has complied in all material
respects with ERISA and, where applicable, the Code,
regarding the Plans;
(iv) all reports and disclosures relating to the
Plans required to be filed with or furnished to governmental
agencies, plan participants or plan beneficiaries have been or
will be filed or furnished in accordance with applicable law
in a timely manner;
(v) there are no actions, suits or claims
(other than routine claims for benefits) pending, or, to the
best of Practice's knowledge, threatened, against any Plan or
against the assets funding any Plan;
(vi) no transactions have occurred with respect
to the Plans or assets thereof which could result in the
imposition on Practice, MedCath, the administrators or
trustees under the Pension Plans or the assets funding the
Pension Plan, either directly or indirectly, of taxes or
penalties imposed under Section 4975 of the Code or Section
502(i) of ERISA;
(vii) except as identified on Schedule 3.22, no
Pension Plan benefit plan" as defined in Section 3(35) of
ERISA;
(viii) other than applications for determination,
no action is pending with respect to the Plans before the IRS,
the Department of Labor, or before any state or local
governmental agency;
(ix) no act or omission constituting a breach of
fiduciary duties has occurred with respect to the Plans or the
assets thereof which could subject Practice, MedCath, or the
Assets, either directly or indirectly, to any liability;
(x) any bonding required by applicable provisions
of ERISA with respect to any of the Plans has been obtained
and is in full force and effect;
(xi) the transactions contemplated by this
Agreement will not result in liability for severance pay, or
for events occurring or expenses incurred after termination of
employment (except as required to avoid tax under Section
4980B of the Code), or any similar payment to the employees of
Practice; and
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(xii) no Plan is a "multi-employer plan" within
the meaning of Section 3(37) of ERISA.
(c) Practice has delivered to MedCath and its counsel prior to
the Closing Date, true and complete copies of (i) all documents
governing the Plans, including, without limitation, all amendments
thereto which will become effective at a later date, or if a Plan is
not documented, a written description thereof; (ii) the latest IRS
determination letter obtained with respect to each of the Pension
Plans; (iii) Form 5500 for the most recent completed plan year for each
of the Plans, together with all schedules forming a part thereof; (iv)
all summary plan descriptions relating to the Plans; (v) annuity
contracts funding obligations of any Plan; (vi) all employment manuals;
and (vii) insurance policies or contracts with respect to the Plans.
(d) Neither Practice, any PA nor any Physician is expecting or
relying on MedCath or Manager to administer or otherwise be involved
with or bear any economic cost or expense of or relating to any
qualified or nonqualified retirement plan.
SECTION 3.23 Power of Attorney. Practice has not given any power of
attorney, whether limited or general, to any person which is continuing in
effect.
SECTION 3.24 Bank Accounts. Schedule 3.24 sets forth a list of all
bank accounts and safe deposit boxes in the name of or controlled by Practice
and details about the persons having access thereto.
SECTION 3.25 Environmental Matters. Practice is in compliance with
all federal, state and local environmental laws, rules, regulations, standards
and requirements, including, without limitation, those respecting hazardous or
biomedical materials and/or wastes. Except as disclosed on Schedule 3.25,
Practice has not engaged in any storage, holding, release, emission, discharge,
generation, processing, disposition, handling or transportation of any
biomedical wastes or hazardous substances or materials, as defined in any
applicable federal or state law or regulation from, into or on any portion of
the Clinic premises.
SECTION 3.26 Fraud and Abuse. To the best of its knowledge after due
inquiry, neither Practice, its officers and directors, or persons and entities
providing professional services for the Clinic (including the PAs and the
Physicians), have engaged in any activities which are prohibited under U.S.C.
Sec. 1320a-7b, or the regulations promulgated thereunder pursuant to such
statutes, or related state or local statutes or regulations, or which are
prohibited by ruler, of professional conduct, including but not limited to the
following: (a) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (b) knowingly and willfully making or causing to be made any
false statement or representation of a material fact for use in determining
rights to any benefit or payment; (c) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit or payment; and (d) knowingly and willful,
soliciting or receiving any remuneration (including any kickback, bribe, or
rebate),
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directly or indirectly, overtly or covertly, in cash or in kind or offering to
pay or receive such remuneration (i) in return for referring an individual to a
person for the furnishing or arranging for the furnishing of any item or service
for which payment may be made in whole or in part by Medicare or Medicaid, or
(ii) in return for purchasing, leasing, or ordering or arranging for or
recommending purchasing, leasing, or ordering any good, facility, service, or
item for which payment may be made in whole or in part by Medicare or Medicaid.
SECTION 3.27 Investment Representation and Access. Practice
represents and warrants to and covenants with MedCath as follows:
(a) The Convertible Note and the Common Stock of MedCath into
which it may be converted will be acquired by Practice for its own
account for the purpose of investment only.
(b) Practice has received and reviewed the April 3, 1996
Prospectus of MedCath and its 10-Q for the period ended March 31, 1996
and recent 8-K (the "SEC Filings"). Practice confirms that MedCath has
made available to it or to its representatives, the opportunity to ask
questions of its officers and directors and to acquire such additional
information about the Common Stock and the business and financial
condition of MedCath as Practice has requested, which additional
information has been satisfactory received.
(c) In deciding to acquire the Convertible Note, Practice has
relied upon consultations with its legal, financial and tax advisers
with respect to this transaction and the nature of the investment
together with the additional information concerning MedCath set forth
in the SEC Filings, and any additional information provided under
subsection (b) above.
(d) The financial condition of Practice is such that it can
bear the risk of this investment indefinitely. Practice either alone or
with its representatives has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and
risks of an investment in MedCath.
(e) Practice will not transfer or otherwise dispose of the
Convertible Note and the Common Stock into which it may be converted or
any interest therein in such manner as to violate any registration
provision of the Securities Act of 1933, as amended (the "Securities
Act"), or of any applicable state securities law regulating the
disposition thereof. Practice is aware that the Convertible Note and
the Common Stock into which it may be converted have not been
registered under the Securities Act or any state securities laws or any
other applicable securities legislation and that the Convertible Note
and the Common Stock into which it may be converted must be held
indefinitely unless it is subsequently registered or an exemption from
such registration is available. MedCath will permit transfer of the
Convertible Note and the Common Stock into which it may be converted by
Practice either when such securities have been registered under the
Securities Act, any applicable state securities law and any other
applicable securities legislation or when the request is accompanied by
an opinion of counsel, acceptable to MedCath, to the effect that the
sale or proposed transfer does not require registration
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under the Securities Act, any state securities law or any other
applicable securities legislation. Practice agrees that the following
legend to such effect and any other legends required by applicable
state securities law will be placed on the Convertible Note and the
Common Stock into which it may be converted and a stock transfer order
shall be placed with respect thereto, for as long as MedCath deems it
necessary:
THIS CONVERTIBLE NOTE AND THE COMMON STOCK INTO WHICH
IT MAY BE CONVERTED HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH ACTS
OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MEDCATH THAT
SUCH REGISTRATION IS NOT REQUIRED.
(f) The representations, warranties and covenants of Practice
contained herein shall survive the execution and delivery of this
Agreement and the issuance of the Convertible Note and any Common Stock
into which it may be converted.
(g) To the Extent Practice is entitled to any Supplemental
Payment under the Additional Promissory Note, the representations,
warranties and provisions of (a) through (f) above shall apply thereto
as well by substituting the "Additional Promissory Note" for the
"Convertible Note" wherever it appears.
SECTION 3.28 Practice Disclosures. No representations, warranties or
disclosures of information made by Practice, including disclosures made in any
Exhibit, Schedule or certificate or other writing delivered or to be delivered
in connection with the transactions contemplated hereby, contains or will
contain any untrue statement of a material fact or omits to state any material
fact which is necessary in order to make the disclosures not misleading.
SECTION 3.29 Other Representations and Warranties. Except as
specifically provided herein, Practice, the PAs and the Physicians have made no
representations or warranties of any type or nature to MedCath or Manager.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MEDCATH
MedCath represents and warrants as follows:
SECTION 4.1 Organization and Standing of MedCath. MedCath is a
corporation duly organized, validly existing and in good standing under the laws
of the State of North Carolina and has full corporate power to own, lease and
operate its properties and assets and to carry on its business as and where it
is now being conducted, to enter into this Agreement and to
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consummate the transactions contemplated hereby.
SECTION 4.2 Authority; Binding Effect. MedCath has full power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. MedCath has taken all action required by law and by
MedCath's Articles of Incorporation and Bylaws to authorize the execution and
delivery of this Agreement and the transactions contemplated hereby. The
execution, delivery, and performance of this Agreement constitute the valid and
binding agreements of MedCath enforceable in accordance with its terms.
SECTION 4.3 No Finders or Brokers. Neither MedCath nor any officer or
director thereof has engaged any finder or broker in connection with the
transactions contemplated hereunder. MedCath will indemnify and hold Practice
harmless against claims (and expenses in the defense thereof) of any person,
firm or corporation for finder's fees, broker's fees, brokerage commission,
sales commissions or the like alleged in connection with the transactions
contemplated hereunder due to acts of MedCath.
SECTION 4.4 Validity of Agreement. Upon execution and delivery of this
Agreement and all documents executed in connection herewith, they will
constitute the valid and binding obligation of MedCath and be binding against
MedCath in accordance with its terms.
SECTION 4.5 Defaults and Consents. MedCath is not in default under,
nor has any event occurred which, with notice or the lapse of time or action by
a third party, could result in a default under, any outstanding indenture,
mortgage, contract, lease or agreement to which MedCath is a party or by which
MedCath may be bound and which is material to the operations of MedCath and its
subsidiaries taken as a whole, or under any provision of the Articles of
Incorporation, Bylaws, or other governing documents of MedCath. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated by this Agreement will not (i) constitute a violation
of or a default under, or a conflict with, (A) any term or provision of the
Articles of Incorporation, Bylaws, or other governing documents of MedCath or
(B) any order, writ, injunction or decree of any court, governmental agency or
arbitration tribunal, or (C) any contract, commitment, indenture, lease,
sublease or other agreement, or (D) any other restriction of any kind to which
MedCath is a party or by which MedCath is bound; (ii) cause, or give any party
grounds to cause (with or without notice, the passage of time or both) the
maturity of any liability or obligation of MedCath to be accelerated, or
increase any such liability or obligation or (iii) other than the consent of
bankers and filings with respect to the registration of the Common Stock,
require any consent, approval or authorization of, or declaration, filing or
registration with any governmental or regulatory authority.
SECTION 4.6 Court Orders, Decrees and Laws. There are no outstanding
or, to the best of MedCath's knowledge, threatened orders, writs, injunctions or
decrees of any court, governmental agency or arbitration tribunal against or
affecting MedCath. MedCath is in compliance with all applicable federal, state
and local laws, regulations and administrative orders which are material to the
operations of MedCath and has not received any notices of alleged violations
thereof. No governmental authorities are presently conducting proceedings
against MedCath and no such investigation or proceeding is pending or being,
threatened. MedCath has all federal, state and local permits, certificates,
licenses, approvals and other authorizations
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necessary in the conduct and operation of MedCath. All such licenses and permits
of MedCath are in full force and effect, and no violations are or have been
recorded in respect thereof for which a fine or penalty may be levied, and no
proceeding is pending or threatened to revoke or limit any thereof.
SECTION 4.7 Other Representations and Warranties. Except as
specifically provided herein, MedCath and Manager have made no representations
or warranties of any type or nature to Practice, the PAs or the Physicians.
ARTICLE V
COVENANTS OF PRACTICE
Practice hereby covenants and agrees as follows:
SECTION 5.1 Access and Information. Between the date hereof and the
Closing Date, Practice shall give to representatives of MedCath reasonable
access during normal business hours to the Clinic's premises, books, accounts
and records and all other relevant documents and will make available, and use
its best efforts to cause their independent auditors to make available, copies
of all such documents and information with respect to the business and
properties of Practice as representatives of MedCath may from time to time
reasonably request, including, without limitation, the working papers used to
prepare the Financial Statements and income tax returns filed and in
preparation, all in such manner as not unduly to disrupt Practice's normal
business activities. Such access shall include consultations with the employees
of Practice. During the period from the date of this Agreement to the Closing
Date, Practice shall confer on a regular and frequent basis with one or more
representatives of MedCath to report material operational matters and to report
the general status of on-going operations. Practice shall notify MedCath of any
material adverse change in the financial position, earnings or business of
Practice after the date hereof and prior to the Closing Date and any unexpected
emergency or other unanticipated change in the business of Practice and of any
governmental complaints, investigations or hearings or adjudicatory proceedings
(or communications indicating that the same may be contemplated) or of any other
matter which may be material to Practice or which would cause the
representations contained in Article III not to be true and correct and shall
keep MedCath fully informed of such events and permit its representatives to
participate in all discussions relating thereto.
SECTION 5.2 Conduct of Business. Between the date hereof and the
Closing Date, except as otherwise approved by MedCath or necessary to consummate
the transactions contemplated by this Agreement, Practice shall conduct its
business only in the ordinary course thereof consistent with past practice and
in such a manner that the representations and warranties contained in Article
III shall be true and correct at and as of the Closing Date (except for changes
contemplated, permitted or required by this Agreement) and so that the
conditions to be satisfied by Practice at the Closing Date shall have been
satisfied. Practice shall (a) carry on its business in the usual and ordinary
course, (b) use its best efforts to preserve its business organization intact
and conserve the good will and relationships of its patients, and others having
business relations with it, (c) conduct its business in a manner which will
cause the representations and
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warranties contained in Article III to be true and correct on the Closing Date
in each case, as if made on and as of such date, (d) not grant any increases in
wages, bonuses, benefits or other compensation to any director, officer,
employee or agent, (e) not enter into any agreement which would be a "material
contract" without MedCath's consent, (f) not waive any right or benefit or (g)
not incur any liability or obligation outside the ordinary course of business or
which involves the receipt or expenditure of more than $5,000 without MedCath's
consent.
SECTION 5.3 Confidential Information. Practice shall keep confidential
all information provided by MedCath regarding the business plan, financial
condition and operations of MedCath, which is not in the public domain, and
shall exercise the same care in handling such information as it would exercise
with similar information of its own. Practice may disclose information it deems
advisable to its physician employees provided such physician employees are
advised of the confidential nature of such information and agree to keep such
information confidential as provided herein. MedCath shall be a third party
beneficiary of such agreements.
SECTION 5.4 Unusual Events. Until the Closing Date, Practice shall
supplement or amend all relevant Exhibits and Schedules with respect to any
matter thereafter arising or discovered which, if existing or known at the date
of this Agreement, would have been required to be set forth or described in such
Exhibits or Schedules.
SECTION 5.5 Departmental Violations. Practice shall make all reasonable
attempts to comply with all notices of violations of law or municipal
ordinances, orders or requirements noted in or issued by government agencies or
departments having authority with respect to buildings, fire, labor, health, or
any other federal, state or municipal department having jurisdiction against or
affecting the operation of the Clinic or the Assets prior to the Closing Date
unless contesting the same in good faith. All such notices, after the date
hereof and prior to the Closing Date, shall be complied with by Practice prior
to the Closing Date. Upon written request, Practice shall furnish MedCath with
an authorization to make the necessary searches for such notices.
SECTION 5.6 Insurance Ratings. Practice shall take all action
reasonably requested by MedCath to enable it to succeed to the Worker's
Compensation and Unemployment Insurance ratings, insurance policies, deposits
and other interests of Practice and other ratings for insurance or other
purposes established by Practice. MedCath shall not be obligated to succeed to
any such rating, insurance policy, deposit or other interest, except as it may
elect to do so.
SECTION 5.7 Independent Contractor Agreements; Employment Agreements.
Practice, PA and each Physician shall ensure that each of the PAs execute an
Independent Contractor Agreement and each Physician shall execute an Employment
Agreement with his PA pursuant to which the exclusive, full time professional
services of the Physician who is the sole shareholder of the PA shall be
provided to Practice as an employee of the PA for at least the five (5)
consecutive year period beginning on the Closing Date subject only to the death
or permanent disability of any such Physician. Practice, the applicable PA, and
the applicable Physician shall have breached their covenants set forth in this
Section 5.7 in the event that any such Physician fails to remain employed by the
PA and provide his exclusive, full time professional services to
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Practice through the PA for at least the five (5) consecutive year period
beginning on the Closing Date notwithstanding any provision in the relevant
Independent Contractor Agreement or the Physician's Employment Agreement with
the PA or in the Service Agreement that might allow such service relationship
among Practice, the PA and the Physician to be terminated without there being a
breach of the Independent Contractor Agreement or the Employment Agreement.
Practice, the PAs and the Physicians covenant that should the operation of the
Independent Contractor Agreements or Practice's relationship with the PAs or the
Physicians cause Practice to be in violation of any statute, rule or regulation
or Practice would be forced to forego or relinquish any economic right or
benefit due to it under or arising out of the operation of the Independent
Contractor Agreements or Practice's relationship with the PAs or the Physicians
in order to avoid being in violation of a statute, rule or regulation, Practice,
the PAs and the Physicians shall take any and all actions to restructure their
relationships to avoid such violations or such a foregoence or relinquishment,
including without limitation the employment of the Physicians directly by
Practice. This Section 5.7 will not apply or be binding on Practice, the PAs or
the Physicians if MedCath fails to pay any amounts when due under this Agreement
after the expiration of the applicable grace periods or the Service Agreement
has been terminated by Practice pursuant to Section 11.2 thereof.
SECTION 5.8 Working Capital. Practice and its shareholders executing
this Agreement hereby agree that they shall cause to remain, or to be provided
to Practice, a sufficient amount of working capital, whether from proceeds of
accounts receivable or otherwise, in an amount sufficient to enable Practice to
pay all of its liabilities and obligations, including the Management Fee to
Manager under the Service Agreement, as they become due. To the extent
necessary, such shareholders shall assist Practice in obtaining loans for such
working capital, and any interest on such loans shall not be taken into account
for the purposes of determining Manager's fee under the Service Agreement.
ARTICLE VI
COVENANTS OF MEDCATH
SECTION 6.1 Information. MedCath shall promptly provide to Practice
upon request any information or documents reasonably necessary for Practice, or
its shareholders to make an informed judgment as to the advisability of
consummating the transactions contemplated hereby or to verify the
representations and warranties of MedCath herein. Until the Closing Date MedCath
shall notify Practice of any matter which may be materially adverse to MedCath
and its subsidiaries considered as a whole and shall keep Practice fully
informed of such events.
SECTION 6.2 Corporate Action. MedCath will take all necessary
corporate and other action and obtain all consents, approvals and amendments of
agreements required of them to carry out the transactions contemplated by this
Agreement and to satisfy the conditions specified herein.
SECTION 6.3 Confidential Handling of Documents. Subject to the
provisions of
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Section 11.14, MedCath shall keep confidential all information
provided by Practice pursuant to this Agreement which is not in the public
domain, and shall exercise the same care in handling such information as it
would exercise with similar information of its own.
SECTION 6.4 Access to or Furnishing of Information about MedCath.
(a) Practice, its offeree representative(s), or both, shall
have been furnished, during the course of the transactions described
herein and prior to the asset sale, by MedCath, or any person acting on
its behalf, the SEC Filings.
(b) MedCath shall make available, during the course of the
transactions described herein and prior to the asset sale, to Practice
and its advisors, the opportunity to ask questions of, and receive
answers from, MedCath or any person acting on its behalf concerning the
terms and conditions of the issuance of the Common Stock and to obtain
any additional information including regularly prepared financial
statements with notes thereto, to the extent MedCath possesses such
information or can acquire it without unreasonable effort or expense,
necessary to verify the accuracy of the information delivered to
Practice by or on behalf of MedCath.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRACTICE
All obligations of Practice which are to be discharged under this
Agreement on the Closing Date are subject to the performance, at or prior to the
Closing Date, of all covenants and agreements contained herein which are to be
performed by MedCath at or prior to the Closing Date and to the fulfillment at,
or prior to, the Closing Date, of each of the following conditions (unless
expressly waived in writing by Practice at any time at or prior to the Closing
Date):
SECTION 7.1 Representations and Warranties True. All of the
representations and warranties made by MedCath contained in Article IV of this
Agreement shall be true as of the date of this Agreement, shall be deemed to
have been made again at and as of the Closing Date, and shall be true at and as
of the Closing Date in all material respects; MedCath shall have performed and
complied in all material respects with all covenants and conditions required by
this Agreement to be performed or complied with by it prior to or on the closing
Date; and Practice shall have been furnished with a certificate of the President
or any Vice President of MedCath dated the Closing Date, in their corporate
capacities, certifying to the truth of such representations and warranties as of
the Closing Date and to the fulfillment of such covenants and conditions.
SECTION 7.2 Service Agreement. Practice and Manager shall have
entered into the Service Agreement.
SECTION 7.3 No Obstruction Proceeding. No action or proceeding shall
have been instituted against, and no order, decree or judgment of any court,
agency, commission or
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governmental authority shall be subsisting against MedCath or Practice which
seeks to, or would, render it unlawful to effect the Transaction in
accordance with the terms hereof, and no such action shall seek damages in a
material amount by reason of the transactions contemplated hereby. Also, no
substantive legal objection to the transactions contemplated by this
Agreement shall have been received from or threatened by any governmental
department or agency.
SECTION 7.4 Proceedings And Documents Satisfactory. All proceedings
in connection with the asset sale and all certificates and documents delivered
to the parties pursuant to this Agreement shall be satisfactory in form and
substance to the parties acting reasonably and in good faith.
SECTION 7.5 Receipt of Consideration. Practice shall have received
the Convertible Note and the Additional Promissory Note.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MEDCATH
All obligations of MedCath which are to be discharged under this
Agreement on the Closing Date are subject to the performance, at or prior to the
Closing Date, of all covenants and agreements contained herein which are to be
performed by Practice at or prior to the Closing Date and to the fulfillment at
or prior to the Closing Date of each of the following conditions (unless
expressly waived in writing by MedCath at any time at or prior to the Closing
Date):
SECTION 8.1 Representations and Warranties True. All of the
representations and warranties of Practice contained in Article III of this
Agreement shall be true as of the date of this Agreement, shall be deemed to
have been made again at and as of the Closing Date, and shall be true at and as
of the Closing Date in all material respects; Practice shall have performed or
complied in all material respects with all covenants and conditions required by
this Agreement to be performed or complied with by them prior to or on the
Closing Date; and MedCath shall be furnished with a certificate of the President
and Secretary of Practice, dated the Closing Date, certifying to the truth of
such representations and warranties as of the Closing Date and to the
fulfillment of such covenants and conditions.
SECTION 8.2 No Obstructive Proceeding. No action or proceedings
shall have been instituted against, and no order, decree or judgment of any
court, agency, commission or governmental authority shall be subsisting against
MedCath or Practice which seeks to, or would, render it unlawful as of the
Closing Date to effect the Transaction in accordance with the terms hereof, and
no such action shall seek damages in a material amount by reason of the
transactions contemplated hereby. Also, no substantive legal objection to the
transactions contemplated by this Agreement shall have been received from or
threatened by any governmental department or agency.
SECTION 8.3 Opinion of Practice's Counsel. Practice shall have
delivered to MedCath on the Closing Date an opinion of J. Edward Mann, Jr., Esq.
counsel to Practice, dated
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the Closing Date, in form and substance satisfactory to MedCath to the effect
set forth as Exhibit H.
SECTION 8.4 Proceedings and Documents Satisfactory. All proceedings
in connection with the asset sale and all certificates and documents delivered
to the parties pursuant to this Agreement shall be satisfactory in form and
substance to the parties acting reasonably and in good faith.
SECTION 8.5 No Adverse Change. From the date of this Agreement until
the Closing Date the operations of the Clinic shall have been conducted in the
ordinary course of business, consistent with past practice, and from the date of
the Financial Statements until the Closing Date no event shall have occurred or
have been threatened which has or would have a material and adverse effect upon
the operation of the Clinic.
SECTION 8.6 Service Agreement. Practice and Manager shall have
entered into the Service Agreement.
SECTION 8.7 Independent Contractor Agreements. Practice and each PA
shall enter into the appropriate Independent Contractor Agreement.
SECTION 8.8 Employment Agreements. Each Physician and his PA shall have
entered into the appropriate Employment Agreement.
SECTION 8.9 Bonus Agreements. The PAs and Practice shall have entered
into the Bonus Agreements.
ARTICLE IX
TERMINATION
SECTION 9.1 Optional Termination. This Agreement may be terminated and
the asset sale abandoned at any time prior to the Closing Date as follows:
(a) By the mutual consent of MedCath and Practice;
(b) By Practice, if any of the conditions set forth in
Article VII shall not have been met by the Closing Date;
(c) By MedCath, if any of the conditions set forth in
Article VIII hereof have not been
met by the Closing Date; or
(d) By either party if the Closing Date shall not have
occurred within nine (9) months from the date of execution of this
Agreement.
SECTION 9.2 Notice of Abandonment. In the event of such termination by
either MedCath or Practice pursuant to Section 9.1 above, written notice shall
forthwith be given to the
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other party or parties hereto.
SECTION 9.3 Termination. In the event this Agreement is terminated as
provided above, (a) MedCath and Practice shall deliver to the other party all
documents previously delivered (and copies thereof in its possession) concerning
one another and the transactions contemplated hereby and (b) none of the parties
nor any of their respective stockholders, partners, directors, officers, or
agents shall have any liability to the other party for costs, expenses, loss of
anticipated profits, consequential damages, or otherwise, except for any
deliberate breach or deliberate omission resulting in breach of any of the
provisions of this Agreement. Except as provided in Section 11. 14 which shall
survive termination, after termination each party shall keep confidential all
information provided by the other pursuant to this Agreement which is not in the
public domain, and shall exercise the same care in handling such information as
it would exercise with similar information of its own.
ARTICLE X
INDEMNIFICATION
SECTION 10.1 Indemnity by Practice. Subject to the conditions and
provisions herein set forth, Practice agrees to indemnify, defend and hold
harmless MedCath, its officers, directors, shareholders, subsidiaries,
affiliates and agents from and against the following, except as caused by the
acts or omissions of MedCath:
(a) Any and all damages, losses, settlement payments,
obligations, liabilities, claims, actions or causes of action,
encumbrances and reasonable costs and expenses suffered, sustained,
incurred or paid by any indemnified party because of:
(i) the claims of any broker or finder
engaged by Practice;
(ii) the untruth, inaccuracy or breach of
any representation, warranty, agreement or covenant of Practice
contained in or made in connection with this Agreement;
(iii) the assertion against MedCath of any
liability or obligation relating to the operations of Practice
prior to the Closing Date;
(iv) all claims and litigation and potential
claims and litigation against MedCath with respect to
incidents or other matters which occurred prior to the Closing
Date related to the business of Practice; and
(v) any other liabilities of Practice,
including any professional malpractice liability of Practice
or any individual physicians associated therewith, whether
absolute or contingent, known or unknown, matured or
unmatured.
(b) In recognition of the fact that MedCath is willing to
enter into this Agreement only if Practice, the PAs and the Physicians
enter into the Service Agreement,
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and the applicable Independent Contractor Agreements and Employment
Agreements and that the parties thereto fulfill their obligations
thereunder, Practice and each of the PAs and the Physicians hereby
acknowledge and agree that MedCath and Manager will incur substantial
losses and damages in the event that any of the Physicians fails to
fulfill his obligations to provide his exclusive, full time
professional services to Practice through his PA for at least the five
(5) consecutive year period beginning on the Closing Date.
Accordingly, in the event that a Physician ceases to provide his
exclusive, full time professional services to Practice through his
PA for any reason for at least the five (5) year consecutive
year period beginning on the Closing Date (other than due to the death
or permanent disability of such Physician) which shall constitute a
breach of their covenants in Section 5.7 hereof, then Practice, and
the PAs and the Physicians agree to indemnify MedCath for any losses
and damages suffered as a result of such failure. Due to the difficulty
in measuring such loss, MedCath, Practice, and each of the PAs and
the Physicians agree that upon any such Physician's failure to fulfill
his five (5) year obligation described above, Practice, such
Physician and his PA shall be jointly and severally obligated to pay to
MedCath as indemnification, liquidated damages in an amount and as
otherwise set forth in Schedule 10.1(b) hereof and MedCath shall have
such additional rights and remedies as set forth in Schedule 10.1(b).
Such amounts shall be due in full within fifteen (15) days of demand
therefore by MedCath pursuant to the terms of Schedule 10.1(b).
(c) All reasonable costs and expenses (including, without
limitation, attorneys' fees and interest) incurred by any indemnified
party in connection with any action, proceeding, demand, assessment or
judgment incident to any of the matters for which indemnity is provided
in this Section 10.1.
(d) To the extent Practice, a PA or a Physician is required to
make a payment to MedCath or Manager hereunder and the event giving
rise to the payment is the fault of another of Practice, a PA or a
Physician, such paying party shall have a right of indemnification from
such party at fault.
(e) The provisions of this Section 10.1 shall not apply and be
binding on Practice, the PAs or the Physicians if MedCath fails to pay
any amounts when due under this Agreement after the expiration of the
applicable grace periods or the Service Agreement has been terminated
by Practice pursuant to Section 11.2 thereof.
SECTION 10.2 Indemnity by MedCath. Subject to the conditions and
provisions herein set forth, MedCath agrees to indemnify, defend and hold
harmless Practice, its shareholders, subsidiaries, officers, directors and
agents, from and against the following, except as caused by the acts or omission
of Practice:
(a) Any and all damages, losses, settlement payments,
obligations, liabilities, claims, actions or causes of action,
encumbrances and reasonable costs and expenses suffered, sustained,
incurred or paid by any indemnified party because of:
(i) the claims of any broker or finder
engaged by MedCath;
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and
(ii) the untruth, inaccuracy or breach of any
representation, warranty, agreement or covenant of MedCath
contained in or made pursuant to this Agreement.
(b) All reasonable costs and expenses (including, without
limitation, attorneys' fees, interest and penalties) incurred by any
indemnified party in connection with any action, suit, proceeding,
demand, assessment or judgment incident to any of the matters for which
indemnity is provided in this Section 10.2.
SECTION 10.3 Rules Regarding Indemnification. The obligations and
liabilities of each indemnifying party hereunder with respect to claims
resulting from the assertion of liability by the other party or third parties
shall be subject to the following terms and conditions:
(a) All claims for indemnification by any Indemnified Party
under this Article X shall be asserted and resolved as provided in this
Section 10.3 except as otherwise set forth in Schedule 10.1(b). In the
event any Indemnified Party shall have a claim for indemnification
under Section 10.1 or 10.2 hereof against any Indemnifying Party, the
Indemnified Party shall deliver an Indemnity Notice to the Indemnifying
Party within a period of forty-five (45) days following the date on
which the Indemnified Party becomes aware of such claim. The failure by
any Indemnified Party to give such Indemnity Notice shall not impair
such party's rights hereunder, except to the extent that the
Indemnifying Party demonstrates that it has been irreparably prejudiced
thereby. If the Indemnifying Party notifies the Indemnified Party that
it does not dispute the claim described in such Indemnity Notice, or
fails to notify the Indemnified Party within the Dispute Period whether
the Indemnifying Party disputes the claim described in such Indemnity
Notice, the Losses in the amount specified in the Indemnity Notice will
be conclusively deemed a liability of the Indemnifying Party under
Section 10.1, hereof, as the case may be, and the Indemnifying Party
shall immediately pay the amount of such Losses to the Indemnified
Party on demand. If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that it disputes the claim described in
the Indemnity Notice, the Indemnifying Party and the Indemnified Party
will proceed in good faith to negotiate a resolution of such dispute,
and, if not resolved through negotiations within the Resolution Period,
such dispute shall be resolved by any lawful manner.
(b) If any written claim is made by a third party, or if any
suit or proceeding (including, but not limited to, an arbitration or an
audit by any taxing authority) is instituted, in each case against
Indemnified Party which, if prosecuted successfully, would, in the
judgment of Indemnified Party, be a matter for which Indemnified Party
is entitled to indemnification under this Agreement (a "Third Party
Claim"), the obligations and liabilities of the parties hereunder with
respect to such Third Party Claim shall be subject to the following
terms and conditions:
(i) Indemnified Party shall give Indemnifying
Party an Indemnity Notice of any such Third Party Claim within
twenty (20) days after
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receipt by Indemnified Party of written notice thereof,
provided, however, that the failure of Indemnified Party
to furnish written notice to Indemnifying Party of a Third
Party Claim shall not release Indemnifying Party from
Indemnifying Party's obligations under this Article X,
except to the extent Indemnifying Party is actually
prejudiced by such failure. Indemnifying Party may undertake
the defense of such Third Party Claim at its expense by
representatives of its own choosing; provided that (A) the
Indemnifying Party shall obtain the prior approval by the
Indemnified Party of such counsel, which approval shall not be
unreasonably withheld, (B) the Third Party Claim does not
involve a claim for specific performance, or injunctive or
other equitable relief (such claims being dealt with under
subsection (a) above) and (C) nothing herein shall prejudice
the right of the Indemnified Party to participate in such
defense at its own expense through counsel of its choosing.
The assumption of the defense of any Third Party Claim by
Indemnifying Party shall constitute the agreement of
Indemnifying Party to assume, without condition or
reservation, full responsibility for such Third Party Claim.
Thereafter, Indemnifying Party shall pay as and when due all
costs and expenses related to the defense of such Third Party
Claim and shall pay and satisfy in full the Final Amount of
any and all Losses arising therefrom or related thereto.
(ii) If Indemnifying Party does not so undertake
the defense of such Third Party Claim within fifteen (15) days
after written notice of such claim has been given to
Indemnifying Party by Indemnified Party, Indemnified Party
shall have the right to undertake the defense, compromise and
settlement of such Third Party Claim with counsel of its own
choosing. Under such circumstances, Indemnified Party shall,
promptly upon its assumption of the defense of such Third
Party Claim, give an Indemnity Notice which shall thereafter
be deemed to be an Indemnity Notice that is not with respect
to a Third Party Claim subject to the procedures set forth in
this Section 10.3(b).
(iii) The Indemnified Party and Indemnifying
Party shall cooperate with each other in all reasonable
respects in connection with the defense of any Third Party
Claim, including, but not limited to, making available records
relating to such claim and furnishing employees of Indemnified
Party or Indemnifying Party as may be reasonably necessary for
the preparation of the defense of any such Third Party Claim
or for testimony as witnesses in any proceeding relating to
such claim. All costs and expenses incurred by Indemnifying
Party or Indemnified Party in connection with the foregoing
shall be the responsibility of the party requesting such
cooperation.
(iv) The Indemnified Party shall have the right
to participate fully in all proceedings, including settlement
discussions, shall be provided copies of notices, orders and
all other papers, and shall be given prior notice by the
Indemnifying Party of any meetings, hearings and other
discussions in any such suit or proceeding. The Indemnifying
Party shall consult with the Indemnified Party and keep the
Indemnified Party fully advised of the progress of any such
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suit or proceeding, and shall make no admissions or otherwise
act in a manner which might be prejudicial to the Indemnified
Party's rights in connection with any such suit or proceeding.
(v) The Indemnifying Party agrees that any
controversy between it and the Indemnified Party concerning
its obligations under this indemnity may be litigated in the
same forum and concurrently with any lawsuit against the
Indemnified Party to which such controversy may relate, and
the Indemnified Party agrees to voluntarily appear in such
forum and submit to the jurisdiction thereof.
(vi) Unless Indemnifying Party has failed or
refused to undertake the defense of such third party claim, no
settlement by Indemnified Party of a Third Party Claim shall
be made without the prior written consent of Indemnifying
Party, which consent shall not be unreasonably withheld or
delayed. If Indemnifying Party has assumed the defense of a
Third Party Claim as contemplated by this Section 10.3(b), no
settlement of such Third Party Claim may be made by
Indemnifying Party without the prior written consent of
Indemnified Party, which consent shall not be unreasonably
withheld or delayed.
SECTION 10.4 Remedies Cumulative. Except as herein expressly provided,
the remedies provided in this Article X shall be cumulative and shall not
preclude assertion by any party of any other rights or the seeking of any other
rights or remedies against any other party hereto.
SECTION 10.5 Set-Off. MedCath shall be entitled to offset the amount of
any Losses to which it or Manager is entitled hereunder against any amounts or
obligations of MedCath under the Convertible Note, the Additional Promissory
Note or against any amounts owed to or held for Practice, the PAs or the
Physicians by Manager under the Service Agreement. Practice, the PAs and the
Physicians shall be entitled to offset the amount of any Losses to which they
are entitled hereunder or under the Service Agreement against any amounts or
obligations of Practice, the PAs or the Physicians under this Agreement or under
the Service Agreement. Prior to utilizing this set-off provision, a party must
give written notice to the other party of its intention to do so. If the other
party disputes the first party's right to make such a set-off, such other party
shall cause the dispute to be immediately submitted to binding arbitration and
no offset shall be made until that arbitration is resolved.
SECTION 10.6 Definitions. For purposes of this Article X the following
terms shall have the following meanings:
(a) "Dispute Period" means the period ending thirty (30) days
following receipt by an Indemnifying Party of an Indemnity Notice.
(b) "Final Amount" means the amount of any Losses or Loss
determined in accordance with this Article X.
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(c) "Indemnified Party" means any Person claiming
indemnification under any provision of Article X.
(d) "Indemnifying Party" means any Person against whom a claim
for indemnification is being asserted under any provision of this
Article X.
(e) "Indemnity Notice" means written notification pursuant to
Section 10.3 of a claim for indemnity under Article X by an Indemnified
Party, specifying the nature of and basis for such claim, together with
the amount or, if not then reasonably ascertainable, the estimated
amount, determined in good faith, of such claim.
(f) "Losses" shall mean any and all claims, liabilities,
obligations, losses, damages, deficiencies, penalties, fines,
assessments, encumbrances, judgments, costs and expenses (including,
without limitation, reasonable fees and expenses of attorneys,
consultant's and expert's fees and expenses and reasonable costs and
expenses incurred in investigating, preparing, defending against or
prosecuting any litigation or claim, action, suit, proceeding,
administrative proceeding (including informal proceeding or demand),
but not including special, indirect or consequential damages and
without giving effect to any multiple of earnings.
(g) "Person" means any natural person, corporation, general
partnership, limited partnership, trust, other business organization or
other entity and shall include, without limitation, MedCath and
Practice.
(h) "Resolution Period" means the period ending thirty (30)
days following receipt by an Indemnified Party of a written notice from
an Indemnifying Party stating that it disputes all or any portion of
the claim set forth in an Indemnity Notice.
SECTION 10.7 Survival. The representations and warranties and the
covenants of the PAs, the Physicians, Practice and MedCath contained in this
Agreement or in any Schedule or Exhibit hereto shall survive the Closing.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Expenses. All expenses of the preparation of this
Agreement and of the asset sale, including, without limitation, counsel fees,
accounting fees, sales taxes, recording fees, investment advisers' fees and
disbursements, shall be borne by the respective parties incurring such expense,
whether or not such transactions are consummated and none of such expenses shall
be treated in such a way as to reduce the Management Fee due to Manager under
the Service Agreement.
SECTION 11.2 Restrictive Covenant.
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(a) The parties recognize that the services to be provided by
Manager shall be feasible only if Practice operates an active medical
practice to which the physicians associated with Practice devote their
full time and attention. To that end, Practice agrees that it shall not
establish, operate or provide physician services at any medical office,
hospital, clinic or other health care facility providing services,
including but not limited to ancillary services, substantially similar
to those to be provided by Practice other than pursuant to the Service
Agreement for the term of the Service Agreement, including extensions
thereof, at any location within the following counties of Texas: Starr,
Hidalgo, Cameron, and Willacy. Upon the termination of the Service
Agreement, Practice shall not be bound by the above restriction unless
the Service Agreement was terminated by Manager under Section 11.3
thereof, in which case such restrictive period shall continue for an
additional twenty-four (24) months after such termination.
(b) The parties acknowledge and agree that since a remedy at
law for any breach or attempted breach of the provisions of this
restrictive covenant shall be inadequate, the aggrieved party shall be
entitled to seek specific performance and injunctive or other equitable
relief in case of any such breach or attempted breach by the other, in
addition to whatever other remedies may exist at law. The provisions of
this restrictive covenant shall be deemed to be valid to the extent of
any lesser area and for any lesser duration permitted by law if the
area and duration set forth herein is deemed to be too broad by a court
of competent jurisdiction. The invalidity or nonenforceability of this
restrictive covenant in any respect shall not affect the validity or
enforceability of the remainder nor of any other provisions of this
Agreement.
SECTION 11.3 Notices. All notices, demands and other communications
required or permitted hereunder shall be sufficiently given if delivered in
person or mailed by certified mail, postage prepaid, addressed as follows:
Practice: Heart Clinic, P.A.
2310 N. Ed Carey Drive, #1-A
Harlingen, Texas 78550
Attention: President
MedCath: MedCath Incorporated
7621 Little Avenue
Suite 106
Charlotte, North Carolina 28226
Attention: President
or to such other address as either Practice or MedCath may designate by notice
to the other.
SECTION 11.4 Entire Agreement. This Agreement, the Exhibits, and the
Schedules delivered pursuant hereto, constitute the entire contract between the
parties hereto pertaining to the subject matter hereof and supersede all prior
and contemporaneous agreements, understandings, negotiations and discussions,
whether written or oral, of the parties, and there are no representations,
warranties or other agreements between the parties in connection with the
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subject matter hereof, except as specifically set forth herein.
SECTION 11.5 Governing Law. The validity and construction of this
Agreement shall be governed by the laws of the State of Texas.
SECTION 11.6 Section Headings. The section headings are for reference
only and shall not limit or control the meaning of any provision of this
Agreement.
SECTION 11.7 Waiver. No delay or omission on the part of any party
hereto in exercising any right hereunder shall operate as a waiver of such right
or any other right under this Agreement.
SECTION 11.8 Nature and Survival of Representations. All statements
contained in any certificate delivered by or on behalf of any of the parties to
this Agreement pursuant hereto in connection with the transaction contemplated
hereby shall be deemed to be representations and warranties made by the
respective parties hereunder. The covenants, representations and warranties made
by the parties each to the other in this Agreement or pursuant hereto shall
survive the asset sale and any investigation made by MedCath or Practice.
SECTION 11.9 Successors and Assigns. This Agreement shall inure to the
benefit of and bind the respective successors and assigns of the parties hereto.
Nothing expressed or referred to in this Agreement is intended or shall be
construed to give any person other than the parties to this Agreement or their
respective successors or permitted assigns any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein, it being the intention of the parties to this Agreement that the
Agreement be for the sole and exclusive benefit of such parties or such
successors and assigns and not for the benefit of any other person.
Notwithstanding the above, neither MedCath nor Practice shall have the right to
assign their rights and obligations hereunder, except that MedCath may assign
this Agreement to any party who controls, is controlled by or is under common
control with MedCath, to First Union National Bank, N.A., or to any other
lending institution(s) with whom MedCath or MedCath Incorporated ("MedCath")
shall enter into a credit agreement or any purchaser of substantially all of the
assets of MedCath.
SECTION 11.10 Amendments. This Agreement may be amended, but only in
writing, signed by the parties hereto.
SECTION 11.11 Counterpart Executions; Facsimiles. This Agreement may be
executed in any number of counterparts with the same effect as if all of the
parties had signed the same documents. Such executions may be transmitted to the
parties by facsimile and such facsimile execution shall have the full force and
effect of an original signature. All fully executed counterparts, whether
original executions or facsimile executions or a combination, shall be construed
together and shall constitute one and the same agreement.
SECTION 11.12 Press Releases. MedCath and Practice shall each approve
any press releases regarding this Agreement and its consummation; provided,
however, MedCath shall be entitled to release any information it deems necessary
or appropriate as a public company without the consent of Practice provided
MedCath will use reasonable efforts to
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provide Practice an advance copy of any such release and the opportunity to
comment.
SECTION 11.13 Access to Records After Closing. Practice will cause its
counsel and certified public accountants to afford to the representatives of
MedCath, including its counsel and accountants, reasonable access to, and copies
of, any records not transferred to MedCath, including, but not limited to, audit
and tax work papers. MedCath will afford to the representatives of Practice
reasonable access to, and copies of, the records transferred to MedCath at the
Closing during normal business hours after the Closing Date. Copies furnished to
the party gaining such access shall be furnished at the cost of the recipient.
SECTION 11.14 Disclosure of Certain Information. Practice grants
MedCath authorization to disclose aggregate financial history and financial and
other information about Practice and about the Clinic (1) in order for MedCath
to comply with disclosure requirements in connection with the sale and
registration of its securities and (2) to lenders, investment bankers and other
officials, including parties with which MedCath might in the future discuss
entering into a joint venture or a reorganization transaction, as deemed
necessary by MedCath.
SECTION 11.15 Attorneys' Fees. If legal action is commenced to enforce
this Agreement, the prevailing party in such action shall be entitled to recover
its costs and reasonable attorneys' fees in addition to any other relief
granted.
SECTION 11.16 Severability. If any provision of this Agreement shall be
held invalid under any applicable law, such invalidity shall not affect any
other provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
SECTION 11.17 Third-Party Beneficiary. The parties acknowledge and
agree that Manager is a third-party beneficiary of this Agreement and shall be
independently entitled to the benefits hereof and shall have an independent
right to enforce the rights of MedCath and/or Manager hereunder.
SECTION 11.18 Arbitration. The parties hereto agree that any dispute
between them other than an action or proceeding for injunctive or other
equitable relief, shall be resolved by binding arbitration. Such arbitration
shall be conducted by the American Arbitration Association in accordance with
its then existing commercial rules applicable to such disputes. Such arbitration
shall be conducted in Houston, Texas. The decision of such arbitrators shall be
final and binding upon the parties hereto and may be enforced by a court with
applicable authority. Such an arbitration proceeding shall not result in an
award of punitive damages; provided, the parties agree that any amount to which
MedCath is otherwise due pursuant to Schedule 10.1(b) shall not be considered to
be "punitive."
SECTION 11.19 Contract Modifications for Prospective Legal Events. In
the event any state or federal laws or regulations, now existing or enacted or
promulgated after the effective date of this Agreement, are interpreted by
judicial decision or regulatory agency or legal counsel in such a manner as to
indicate that the structure of this Agreement may be in violation
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of such laws or regulations, MedCath and Practice shall amend this Agreement
as necessary to eliminate such violation. To the maximum extent possible, any
such amendment shall preserve the underlying economic and financial arrangements
between MedCath and Practice. To the extent the parties cannot agree on any such
amendment or changes, the matter shall be submitted to binding arbitration upon
the request of either party and through the arbitration process an equitable
modification shall be implemented or an equitable termination of the Agreement
and relationship shall be made based on all of the facts and circumstances.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) effective as of the day and year first above
written.
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EXECUTION PAGE
TO THE
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH INCORPORATED
AND
HEART CLINIC, P.A.
JULY 31, 1996
HEART CLINIC, P.A.
7/31/96 By: /s/ Hugo Blake
------- ------------------
Date Title: President
------------------
MEDCATH INCORPORATED
7/31/96 By: /s/ Stephen R. Puckett
------- ----------------------
Date Title: President
----------------------
<PAGE>
EXECUTION PAGE
TO THE
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH INCORPORATED
AND
HEART CLINIC, P.A.
JULY 31, 1996
In order to acknowledge and agree to be bound by the terms and
conditions of Sections 3.1, 3.2, 3.12, 3.22, 5.7, 5.8 and Article X, including
without limitation Schedule 10.1(b), of this Agreement, as applicable, the
undersigned hereby execute this Agreement.
ASSOCIATED PAs: PHYSICIAN SHAREHOLDERS:
HUGO BLAKE, M.D., P.A.
By: /s/ Hugo Blake, M.D. /s/ Hugo Blake, M.D.
---------------------- -------------------------
Hugo Blake, M.D. Hugo Blake, M.D.
7/31/96 7/31/96
------- -------
Date Date
SHEREEF HILMY, M.D., P.A.
By: /s/ Shereef Hilmy, M.D. /s/ Shereef Hilmy, M.D.
------------------------ -------------------------
Shereef Hilmy, M.D. Shereef Hilmy, M.D.
7/31/96 7/31/96
------- -------
Date Date
MICHAEL EVANS, M.D., P.A.
By: /s/ Michael Evans, M.D. /s/ Michael Evans, M.D.
----------------------- -------------------------
Michael Evans, M.D. Michael Evans, M.D.
7/31/96 7/31/96
------- -------
Date Date
<PAGE>
NAJI KANDALAFT, M.D., P.A.
By: /s/ Naji Kandalaft, M.D. /s/ Naji Kandalaft, M.D.
------------------------- -------------------------
Naji Kandalaft, M.D. Naji Kandalaft, M.D.
7/31/96 7/31/96
------- -------
Date Date
EDUARDO FLORES, M.D., P.A.
By: /s/ Eduardo Flores, M.D. /s/ Eduardo Flores, M.D.
------------------------- -------------------------
Eduardo Flores, M.D. Eduardo Flores, M.D.
7/31/96 7/31/96
------- -------
Date Date
CHRISTOPHER GILL, M.D., P.A.
By: /s/ Christopher Gill, M.D. /s/ Christopher Gill, M.D.
--------------------------- --------------------------
Christopher Gill, M.D. Christopher Gill, M.D.
7/31/96 7/31/96
------- -------
Date Date
CARLOS PIMENTEL, M.D., P.A.
By: /s/ Carlos Pimentel, M.D. /s/ Carlos Pimentel, M.D.
-------------------------- ---------------------------
Carlos Pimentel, M.D. Carlos Pimentel, M.D.
7/31/96 7/31/96
------- -------
Date Date
SCHEDULE 10.1(b)
TO THE
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH INCORPORATED
AND
HEART CLINIC, P.A.
July 31, 1996
Liquidated Damages.
1. The following definitions shall apply for the purposes of this Schedule
10.1(b):
"Gross Consideration Allocation" shall mean the
portion of the Consideration paid by MedCath to Practice under
Section 2.2 of the Agreement, including any interest paid on
the Convertible Note, that is allocated to the Physician as
provided in Paragraph 5 below. If there is any unpaid
principal balance of the Convertible Note or Additional
Promissory Note at the time this analysis is being performed,
such balance(s) shall be adjusted downward (and MedCath will
be relieved of the obligation to pay Practice the amount of
the adjustment) and a corresponding adjustment shall be made
to reduce the Physician's Gross Consideration Allocation, such
that the amount due to MedCath hereunder can be reduced as
much as possible.
"Management Fee Allocation" shall mean the portion of
the cumulative management fee paid by Practice to Manager
under the Service Agreement which Practice allocated through
the date of the event giving rise to application of this
Schedule 10.1(b) to the Physician's PA in determining its
compensation under its Independent Contractor Agreement with
Practice.
"Net Consideration Allocation" shall mean with
respect to a Physician, an amount equal to his Gross
Consideration Allocation minus his PA's Management Fee
Allocation.
2. In the event of a breach of Section 5.7 of the Agreement due to the
Physician's cessation of providing his exclusive, full time
professional services to Practice for any reason other than as a result
of his death or permanent disability, for purposes of Section 10.1(b)
the amount of liquidated damages due to MedCath from
Practice, the Physician and his PA shall equal the Physician's Net
Consideration Allocation. Such obligation shall be a joint and several
liability of Practice, the Physician and his PA. In the event a
Physician is not associated with Practice as contemplated by this
Agreement as of the Closing Date, and this Agreement has not been
terminated due to a default hereunder by MedCath, Section 5.7 hereof
shall have been breached and such Physician, his PA and Practice shall
be jointly and severally liable for that breach notwithstanding the
fact that the Closing has not yet occurred.
<PAGE>
MedCath will delay taking steps against Practice to collect
liquidated damages directly from Practice until Practice has collected
such amounts directly from the Physician or his PA, if all of the
following conditions are satisfied:
(a) Practice has distributed to the PAs of all of the
Physicians 100% of the cash or Common Stock received by it under the
Convertible Note and the Additional Promissory Note,
(b) Practice is utilizing its full and complete efforts to
actively enforce any rights it has to require the Physician and his PA
to pay over the liquidated damages amount either to Practice or MedCath
and continues to diligently pursue those efforts, and
(c) Practice is fully cooperating and actively assisting
MedCath in any effort it is making to recover such amounts from the
Physician and his PA.
3. In general, the Net Consideration Allocation shall be paid to MedCath
in cash and by the reduction in the principal amounts of the
Convertible Note and the Additional Promissory Note then outstanding,
and the Net Consideration Allocation shall be the Final Amount for
purposes of Article X of this Agreement and for these purposes, the
portion of the Physician's Gross Consideration Allocation that is
attributable to the principal portion of the Convertible Note and the
Additional Promissory Note shall be treated as having been paid to the
Physician in cash.
4. Notwithstanding the above provision, to the extent Practice converted
any portion of the Convertible Note or the Additional Promissory Note
into Common Stock and did not distribute that Common Stock or the
proceeds from a sale of such Common Stock to the Physician's PA,
MedCath may elect to have Practice pay a pro rata portion of the Net
Consideration Allocation to MedCath in MedCath common stock whether or
not Practice still owns any of the Common Stock; provided, if Practice
converted all or a portion of the Convertible Note or the Additional
Promissory Note into Common Stock and still retains any of those
specific shares of Common Stock, Practice shall have the right to
assign those shares of Common Stock to MedCath as a pro rata payment of
the Net Consideration Allocation. If, however, Practice distributed to
the Physician's PA Common Stock which Practice obtained upon the full
or partial conversion of the Convertible Note or the Additional
Promissory Note, or the proceeds from Practice's sale of Common Stock,
then MedCath at its election can require Practice, the Physician and
his PA to pay a portion of the Net Consideration Allocation in shares
of MedCath common stock whether or not the Physician or his PA still
owns any of the Common Stock; provided, if the PA or the Physician
still retains any of the specific shares of Common Stock received from
Practice, the PA and the Physician shall have the right to assign those
shares of Common Stock to MedCath as a pro rata payment of the Net
Consideration Allocation. If MedCath makes such an election, Practice,
the Physician and his PA, as a part of the payment to MedCath of the
Net Consideration Allocation, shall transfer to MedCath shares of
MedCath common stock equal in number to the shares of Common Stock
retained by Practice or which the PA received from Practice
2
<PAGE>
plus the number of shares of the Common Stock sold by Practice when the
proceeds from such sale were distributed by Practice to the PA
(adjusted as necessary to avoid dilution or distortion attributable to
the effects of stock dividends and stock splits). When MedCath common
stock is transferred to MedCath as a partial payment of the Net
Consideration Allocation, the shares of MedCath common stock so
transferred shall be valued based on the per share value of the Common
Stock as determined under Section 2.2(a)(i) and (ii) of the Agreement
relating to the conversion feature of the Convertible Note and
Additional Promissory Note (adjusted as necessary to avoid dilution or
distortion as described in the preceding parenthetical); such valuation
method shall be used despite the fact that at the time of such a
transfer by the Physician or his PA to MedCath the per share value of
MedCath common stock exceeds the per share value of the Common Stock as
determined by Section 2.2(a)(i) and (ii) of the Agreement.
5. Listed below is the Gross Consideration Allocation to the Physicians
as determined by Practice:
Physician Employee Gross Consideration Allocation*
Hugo Blake, M.D. $[ ]
M. Shereef Hilmy, II, M.D. $[ ]
Michael D. Evans, M.D. $[ ]
Naji Kandalaft, M.D. $[ ]
Eduardo D. Flores, M.D. $[ ]
Christopher Gill, M.D. $[ ]
Carlos Pimentel, M.D. $[ ]
* Such amounts need to be adjusted to include a pro rata share of the
interest to be paid by MedCath to Practice under the Convertible Note
that is allocable to the physician in question. The Gross Consideration
Allocation as shown above does not include and thus also shall be
adjusted as appropriate to reflect any of the Consideration paid to
Practice through the Additional Promissory Note as a Supplemental
Payment pursuant to Section 2.2(a)(ii) and Exhibit F that relates to
the Physician in question.
6. Notwithstanding the above provisions regarding Liquidated Damages,
MedCath is not obligated to pursue such Liquidated Damages as its sole
remedy for a breach of Section 5.7 but shall also be entitled to any
other equitable relief to which it is entitled under this Agreement,
the Service Agreement, or otherwise (e.g., injunctive relief).
-3-
[ ] These portions have been omitted and filed separately with the commission
pursuant to a request for confidential treatment.
LIST OF EXHIBITS
Letter Description
------ -----------
A Form of Service Agreement (filed as Exhibit 10.49
to this Report)
B Form of Independent Contractor Agreement
C Form of Bonus Agreement
D Form of Employment Agreement
E Form of Subordinated Promissory Note (filed as
Exhibit 10.50 to this Report)
F Supplemental Payment
G Form of Additional Promissory Note (filed as
Exhibit 10.51 to this Report)
H Form of Opinion of Practice's Counsel
<PAGE>
EXHIBIT B
INDEPENDENT CONTRACTOR AGREEMENT
THIS INDEPENDENT CONTRACTOR AGREEMENT is made this 30th day of
September, 1996, by and between ________________, M.D., P.A., a Professional
Association, incorporated under the law of the State of Texas (hereinafter
referred to as the "Association"), and HEART CLINIC, P.A., a Texas Professional
Association, incorporated under the laws of the State of Texas (hereinafter
referred to as the "Company").
WITNESSETH:
1. The Company desires to contract with the Association for certain
professional medical services to be provided by the Association to the Company.
The Association agrees to devote its entire time and to provide such
professional medical services exclusively (hereinafter referred to as
"services") to the Company on the terms and conditions herein. The Association
acknowledges and agrees that all revenues generated as a result of its
professional medical services shall be the exclusive property of the Company.
2. The duties of the Association shall include but are not limited to:
(a) Keeping and maintaining, or causing to be kept and
maintained, appropriate records, reports, claims and correspondence necessary
and appropriate in connection with all professional services rendered by the
Association under this Agreement. All of such records, reports, claims, and
correspondence shall belong to the Company.
(b) Promoting, to the extent permitted by law and the
applicable canons of professional ethics, the professional practice of the
Company.
(c) Attending, to the extent reasonable, professional
conventions, post-graduate seminars, and functions of professional societies by
the employees of the Association.
(d) Performing all acts reasonably necessary to maintain and
improve the professional skills of employees of the Association.
(e) Providing the exclusive, full time professional services
of ________________, M.D. (the "Physician") to the Company for the treatment of
its patients.
(f) Abiding by and causing its employees to abide by the terms
of Paragraph 12 hereof.
<PAGE>
The other duties of the Association shall be as the Company may from
time to time reasonable direct, including on duty and on call assignments at
night and on Saturdays and Sundays and holidays on a rotation schedule. The
services to be performed by the Association may be performed by any employee of
the Association assigned to such task by the Association.
3. This Agreement shall be for a period of five years beginning on
October 1, 1996 and ending September 30, 2001 and is subject to renewal
thereafter year by year by agreement of the parties.
4. For services rendered hereunder, the Association shall be entitled
to distributions which shall be determined on a monthly basis. The distribution
amounts shall be equal to the cash receipts earned from professional services
rendered to patients of the Company by employees of the Association and
collected by the Company less the Association's pro rata share of expenses
incurred in the operation of the Company. Cash receipts earned by the
Association as joint work with another association or individual doctor shall be
recorded in Combination Accounts and distributed equally to each association. A
mutual account for routine hospital work will be maintained to fund the
Company's overhead. If there are inadequate funds in the mutual account, the
Company has the right to require each association with which it contracts,
including the Association, to contribute its pro rata share to cover any such
shortage.
5. The Company agrees to provide office space, utilities, telephone
answering service, secretarial services, nursing services, accounting and
collection services to the Association. The facilities provided shall contain
such medical equipment and supplies and shall be stocked with such medicine,
drugs, dressings, and other items as are agreed on by the parties. The Company
shall furnish instruments, gloves, and items of apparel required to perform the
services under this Agreement.
6. All services rendered by the Association during the term of this
Agreement will be provided by employees of the Association. The Association will
assume full liability and responsibility for such employees' performance. The
Association agrees to operate under the name of HEART CLINIC, P.A., or any other
name as agreed with the Company. The Company assumes no liability for the
treatment of patients by the Association. The Association shall devote its full
time and best efforts to the performance of duties required under this Agreement
and shall cause its employees to do the same. During the term of this Agreement
and thereafter as applicable, the Association shall not at any time or place
engage in the practice of medicine or surgery to any extent, except under and
pursuant to this Agreement, including Paragraph 12.
7. The Association agrees to abide by the standard fees set by the
Company. Any deviation in such fees must be authorized by the Company.
8. Physician employees of the Association are encouraged and are
expected to attend scientific meetings, professional conventions, and
post-graduate courses and seminars, and other
-2-
<PAGE>
education meetings in order to improve and maintain the professional skills of
the employees of the Association.
9. Physician employees of the Association are required at their expense
to maintain membership in the American Medical Association and the Texas Medical
Association or such other similar organizations as may be required by the
Company.
10. The Company shall, as a service to the Association, arrange for
medical malpractice insurance for the Association and its physician employees.
The Association shall have prior approval of the coverage provided and the
amount of premium payment. Any such payments on behalf of the Association shall
be deducted from any distributions made by the Company to the Association set
forth in Section 4 herein. The Association and its physician employees shall
hold the Company harmless and indemnify the Company and its successors and
assigns against any and all liabilities, claims and expenses, including
attorneys' fees, which arise out of the performance of the Association or its
physician employees.
11. The parties hereto agree to comply with and ensure that their
relationship hereunder complies with all applicable laws, rules and regulations.
12. The Company has entered into a Master Transaction Agreement with
MedCath Incorporated ("MedCath") and a Service Agreement with Physician Practice
Management of McAllen, Inc. ("Manager") pursuant to which Manager will manage
certain aspects of the Company's operations and the terms of this Agreement are
subject to the terms of the Master Transaction Agreement and Service Agreement.
Both the Master Transaction Agreement and the Service Agreement contain certain
requirements of and restrictive covenants pertaining to the Company, certain
professional associations, including the Association, and certain physicians
associated with the Company, including the Physician. The Association and the
Physician hereby agree that the provisions of Section 6.8 and Article VII of the
Service Agreement and Section 5.7, Article X and Schedule 10.1 (b) of the Master
Transaction Agreement are hereby incorporated herein by reference as if fully
set forth herein and they hereby acknowledge and agree that for purposes of this
Agreement, they shall be liable to the Company for all of the obligations and
liabilities of the Association and the Physician set forth in such provisions.
The Association and the Physician agree that they shall be jointly and severally
liable for any breaches of the provisions set forth in or incorporated into this
Paragraph 12 and that MedCath and Manager are specific and intended
beneficiaries of these provisions. The termination of this Agreement shall in no
way relieve the obligations of the Association and the Physician under the
Service Agreement or the Master Transaction Agreement. which obligations shall
survive such termination of this Agreement.
In the event this Agreement is not renewed or the Physician through the
Association ceases to provide the services stated herein for any reason, the
provisions of Section 8.4 of the Service Agreement are incorporated hereby by
reference and shall apply to determine the amount of money, if any, to which the
Association is entitled to subsequently receive that relates to
-3-
<PAGE>
collections by the Company of accounts receivable generated from the direct
efforts of the Physician. In the event the Association or the Physician is in
breach of this Agreement, including but not limited to the provisions contained
in Paragraph 12 hereof, in addition to any other damages due to the Company,
MedCath or Manager from such breach, the Association shall forfeit its rights to
receive any payments under this Paragraph 12.
13. This Agreement shall be terminated upon the occurrence of any of
the following events:
(a) The expiration of its term if the Agreement has not been
renewed.
(b) The death or total disability of the Physician.
(c) The imposition of any restrictions or limitations by any
governmental or hospital authority having jurisdiction over the Association and
its employees to such an extent that the Physician cannot engage in the
professional practice required herein.
Upon termination or non-renewal of this Agreement for any
reason other than death or disability, the Association shall be entitled to
receive only the payments set out in Paragraph 12 herein.
14. In the event of the breach or threatened breach of any provision of
the contract by the Association, the Company shall be entitled to injunctions,
both preliminary and final, enjoining and restraining such breach or threatened
breach. Such remedies shall be in additional all other remedies available at law
or in equity, including the Company's right to recover from the Association any
and all damages that may be sustained as a result of the Association's breach of
contract.
In addition to any other remedies the Company may have available to it
under the terms of this contract, the Company shall be entitled to stop the
Association, by means of injunction, from violating any part of this contract.
The Company shall be entitled to recover its attorneys' fees and expenses in any
successful action by the Company to enforce this contract.
15. This Agreement supersedes any and all other agreements, either oral
or in writing, between the parties hereto with respect to the subject matter
hereof, and no other agreement, statement, or promise relating to the subject
matter of this agreement that is not contained herein shall be valid or binding
unless in writing, signed by both parties.
16. Neither this Agreement nor any duties or obligations hereunder
shall be assignable by the Association without the prior written consent of the
Company.
17. Subject to the provisions regarding assignment, this Agreement
shall be binding of the heirs, executors, administrators, successors, and
assigns of the respective parties.
-4-
<PAGE>
18. If any action at law or in equity is brought to enforce or
interpret the provisions of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees in addition to any other relief to which
he may be entitled.
19. The paragraph headings contained in the Agreement are for
convenience only and shall in no manner be construed as a part of this
Agreement.
20. In case any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provision, and this Agreement shall be construed as if such
invalid, illegal, or unenforceable provision had never been included in the
Agreement.
21. All notices by either party to terminate this contract shall be in
writing and sent by certified mail, return receipt requested, to the other party
as herein provided.
22. The waiver by the Company of breach of any provision of this
contract by the Association shall not operate or be construed as a waiver of any
subsequent breach by the Association.
23. The Association shall be responsible for all required payroll taxes
and withholding taxes and other such taxes relating to its employees, including
the Physician and shall remit such amounts to the proper governmental parties on
a timely basis. The Association and the Physician will indemnify the Company and
hold it harmless from any and all costs, expenses, liabilities and losses
resulting from or relating to such payroll taxes and withholding taxes. The
Association will also make available to the Company when required from time to
time copies of all its remittances and filings related to such matters.
24. The parties acknowledge and agree that Manager has entered into the
Service Agreement with the Company and is a third-party beneficiary of the
Master Transaction Agreement between MedCath and the Company, which contracts
were entered into by Manager and MedCath in reliance on the covenants of the
Association and the Physician contained therein and in this Agreement.
Accordingly, the parties hereto agree that Manager and MedCath are specific,
intended third-party beneficiaries of such covenants, shall be independently
entitled to the benefit thereof, and shall have an independent right to enforce
same. In addition, the parties hereto covenant and agree with Manager and
MedCath that this Agreement shall not be terminated, modified or amended without
the prior written consent of Manager and MedCath, the giving or withholding of
which shall be in the sole and absolute discretion of Manager and MedCath. This
provision shall not apply with regards to MedCath or Manager if MedCath fails to
pay amounts when due under the Master Transaction Agreement after the expiration
of the applicable grace periods or the Service Agreement is terminated by Heart
Clinic, P.A. pursuant to Section 11.2 thereof.
-5-
<PAGE>
25. The Company, the Association and the Physician all agree that the
terms and provisions of Section 10.3 of the Service Agreement shall be
incorporated herein by reference as if fully set forth herein, they will comply
with and fully satisfy those terms and provisions, and they are jointly and
severally liable for any breaches for failing to so comply and fully satisfy
those terms and provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) effective as of the day and year first above
written.
-6-
<PAGE>
EXECUTION PAGE
TO THE
INDEPENDENT CONTRACTOR AGREEMENT
ATTEST: HEART CLINIC, P.A.
______________________ By: ___________________
Authorized Officer
ATTEST:
M.D., P.A.
______________________ By: ___________________
President
The undersigned individual hereby executes this Independent Contractor Agreement
for the purposes of personally being bound by and liable for breaches of the
provisions of Paragraphs 12, 23, 24 and 25 hereof.
, M.D.
<PAGE>
EXHIBIT C
AGREEMENT
This Agreement is made and entered into by and between HEART CLINIC, P.A.,
a Texas Professional Association ("Practice") and ________________, P.A., a
Professional Association ("P.A.") which by an Independent Contractor Agreement
has associated itself and its physician employee with Practice.
RECITALS:
A. Of even date hereof, Practice is entering into an agreement with
MedCath Incorporated, a North Carolina corporation ("MedCath") and an affiliate
of MedCath, namely Physician Management of McAllen, Inc. ("Manager") pursuant
to which Practice is contracted to receive certain professional services;
B. As part of said agreement, Practice is selling certain assets to
MedCath;
C. In connection with that transaction, MedCath has requested from
Practice that each P.A. and each physician employee of such P.A.s execute those
agreements, and be bound by certain restrictions as set forth in said
agreements, and execute new Independent Contractor Agreements with Practice;
D. In order to adequately compensate P.A. and physicians for entering
into such new Independent Contractor Agreements and for executing the other
agreements with MedCath and Manager, Practice desires to enter into this
agreement with P.A. in accordance with the terms hereof.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledge, the parties hereto agree as
follow:
1. As consideration for P.A. entering into the Agreements with MedCath
and Manager, and for fulfilling its obligations to Manager, and for P.A.
entering into a new Independent Contractor Agreement with Practice and
securing the continued employment of its physician employee, for and on
behalf of Practice, Practice hereby agrees to pay to P.A. on the date of
closing with MedCath, an amount equal to the following:
(a) Dollars
($___________________), in cash to be paid as of November 1, 1996;
(b) An additional amount determined in accordance with Exhibit A
attached hereto, to be paid on or about October 1, 1998; provided, however,
P.A. shall not be entitled to or have any right to the amount reflected on
Exhibit A unless and until Practice receives or is entitled to receive
payment, pursuant to its terms, of one certain promissory note dated October,
1, 1996 executed by MedCath and payable to Practice.
2. After October 1, 1996, Practice agrees to continue to pay
<PAGE>
to P.A. compensation pursuant to the new Independent Contractor Agreement but
based on the formula for determining compensation under the current Independent
Contractor Agreement P.A. has with Practice.
3. This Agreement shall be governed by and construed in accordance with
the laws of the state of Texas. It may not be assigned, amended or terminated
by either party hereto without the written consent of each of the parties
hereto as well as the written consent of MedCath and Manager. This Agreement
contemplates the entire agreement with respect to the matters set forth herein.
4. The obligation of Practice to pay any sums hereunder to P.A. is subject
to P.A.'s not violating any of the terms of the new Independent Contractor
Agreement or the terms and conditions of the agreements with MedCath and
Manager.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s) effective as of the day and year first above
written.
DATED this 1st day of October, 1996.
HEART CLINIC, P.A.
By: ______________________
Title: ___________________
__________________________, P.A.
By: ______________________
Title: President
<PAGE>
EXHIBIT A
TO THE
AGREEMENT
Practice agrees to pay to P.A. an additional amount of cash equal to
$_________________; provided, however, if Practice should exchange and convert
one certain promissory note dated October 1, 1996 executed by MedCath and
payable to Practice, into MedCath Common Stock, Practice, at its option, may
instead elect to have all or a portion of such cash amount set out herein
reduced, and deliver to P.A. shares of Common Stock of MedCath equal to the
reduction in cash, divided by the per share price which Practice converts
the promissory note into shares of common stock of MedCath.
P.A. acknowledges that said shares in MedCath, if converted and delivered
to it, would be non-registered stock and could not be sold for at least two
(2) years thereafter.
<PAGE>
EXHIBIT D
__________________, M.D., P.A.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), is made and entered into
by and between ________________, M.D., (hereinafter "Employee"), and __________,
M.D., P.A., a Texas professional association (hereinafter "Employer") and is
effective the 1st day of October, 1996.
RECITALS:
This Agreement is made and entered into under the following
circumstances:
A. Whereas, MedCath Incorporated ("MedCath") and Heart Clinic, P.A.
("Practice") have entered into a Master Transaction Agreement pursuant to which
MedCath will pay certain consideration to Practice in exchange for certain
assets of Practice and for Practice entering into a Service Agreement with a
subsidiary of MedCath, Physician Practice Management of McAllen, Inc.
("Manager").
B. Whereas, under the Service Agreement Manager will manage certain
aspects of the business of Practice and some of the duties of Practice include
providing the exclusive, full time professional services of certain physicians
to that medical practice, including the services of Employee.
C. Whereas, in anticipation of making this Agreement with Employee,
Employer has entered into an Independent Contractor Agreement with Practice
pursuant to which Employer will provide the exclusive, full time professional
services of Employee to Practice for use in its medical practice.
D. Whereas, Employer desires, on the terms and conditions stated
herein, to employ Employee as a physician specializing in cardiology; and
E. Whereas, Employee desires, on the terms and conditions stated
herein, to be employed by Employer.
NOW, THEREFORE, in consideration of the foregoing recitals, and of the
promises, covenants, terms and conditions contained herein, the parties hereto
agree as follows:
SECTION 1. Employment and Term. Employer hereby employs Employee, and
Employee hereby accepts employment with Employer, as a cardiologist commencing
October 1, 1996 (hereinafter the "Effective Date") and continuing for a period
of five (5) years (hereinafter the "Term of Employment"). Upon the expiration
of the initial five (5) years, the Term of
<PAGE>
Employment shall automatically be renewed for successive one (1) year periods
commencing upon the fifth anniversary of the Effective Date, unless either party
gives written notice of intent not to renew not less than sixty (60), nor more
than ninety (90), days prior to the end of any term.
SECTION 2. Duties and Qualifications. Employee shall provide medical
services to patients, on behalf of Practice through Employer, at Practice's
facilities located in Texas, or such other locations as requested by Employer
(hereinafter collectively referred to as the "Facilities"), in accordance
with the laws of the State of Texas and the principles of medical ethics of
the American Medical Association. During the Term of this Agreement,
Employee's economic contribution to Employer resulting from his provision of
medical services to patients shall remain substantially the same as Employee's
historical economic contribution during the immediate past three (3) years.
To the best of his ability, Employee shall continuously provide services in a
manner calculated to produce the maximum volume of revenue which is consistent
with the professional obligation of Employee and in the best interest of the
patients.
Employee shall: (i) devote his entire professional and business time,
attention and energies exclusively to the practice of Employer; and, (ii)
faithfully and competently perform his duties hereunder using his full
professional skill and knowledge; and, (iii) not engage in any other
professional or business activity; provided, however, that Employee shall be
permitted to invest his personal assets and manage his personal investment
portfolio in such a form and manner as will not require any professional or
business services on his part to any third party.
SECTION 3. Salary. During each year of the Term of Employment, subject
to the terms of the Independent Contractor Agreement dated as of the date hereof
to which Employer is a party, Employee shall be entitled to the compensation as
described on Exhibit A hereto.
SECTION 4. Termination. Notwithstanding any other provisions of this
Agreement, the Term of Employment shall terminate upon:
(a) the death of Employee; or,
(b) upon Employee's permanent disability.
SECTION 5. Restrictive Covenants. Both Employer and Employee agree
that the terms of this Agreement are subject to the terms of the Master
Transaction Agreement and Service Agreement. Both the Master Transaction
Agreement and the Service Agreement contain certain requirements of and
restrictive covenants pertaining to Practice, certain professional associations,
including Employer, and certain physicians associated with Practice, including
Employee. Employer and Employee agree that the provisions of Article VII of
the Service Agreement and Section 5.7, Article X and Schedule 10.1 (b) of the
Master Transaction Agreement are hereby incorporated herein by reference as if
fully set forth herein and they hereby acknowledge and agree that for purposes
of this Agreement, Employee shall be liable to Practice and Employer for all
of the obligations and liabilities of Employee set forth in such provisions.
Employer and Employee agree that they shall be jointly and severally liable
for any
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<PAGE>
breaches of the provisions set forth in or incorporated into this Section 5 and
that MedCath and Manager are specific and intended beneficiaries of these
provisions. The termination of this Agreement shall in no way relieve the
obligations of Employer and Employee under the Service Agreement or the Master
Transaction Agreement, which obligations shall survive such termination of this
Agreement.
In the event of the breach or threatened breach of any
provision of the contract by Employee, Employer shall be entitled to
injunctions, both preliminary and final, enjoining and restraining such breach
or threatened breach. Such remedies shall be in additional all other remedies
available at law or in equity, including Employer's right to recover from
Employee any and all damages that may be sustained as a result of Employee's
breach of contract.
In addition to any other remedies Employer may have available
to it under the terms of this contract, Employer shall be entitled to stop
Employee, by means of injunction, from violating any part of this contract.
Employer shall be entitled to recover its attorneys' fees and expenses in any
successful action by Employer to enforce this contract.
SECTION 6. Billing Services. Practice shall have sole responsibility
and authority for preparation of billings for, and collection of income
generated from, Employee's practice of medical and the operation of the
Facilities and, pursuant to this Agreement, the delegated authority to request,
demand, collect, receive and provide receipts for all income on behalf of
Employee including any payment or reimbursement from governmental agencies and
insurance carriers on account of medical services provided to patients of the
facility. Employee will provide Employer and Practice with Employee's provider
numbers to bill on behalf of Employee for payment and reimbursement from
governmental agencies and insurance carriers. All funds collected from
operation of the facilities and from Employee's practice of medicine hereunder
shall be the sole property of Practice and shall be deposited into Practice's
account and Practice shall have sole authority to make disbursements therefrom,
including refunds and repayment of payments received in error.
SECTION 7. Representations of Employee. Employee hereby makes the
following representations to Employer, each of which is material and is being
relied on by Employer and shall be true as of the date hereof and throughout the
Term of Employment:
(a) Employee Qualifications. Employee is, and will continue to
be, duly licensed to practice medicine in the State of Texas and is
experienced in cardiology, agrees to participate and does participate
in a continuing medical education program, and agrees to obtain and
maintain an American Medical Association C.M.E. certificate or its
equivalent.
(b) Factual Information. Any and all factual information
furnished by Employee to Employer is true and accurate in every
material respect as of the date on which such information was
furnished.
-3-
<PAGE>
(c) Professional Conduct. Employee has and will continue to
conduct his professional activities in accordance and compliance with
any and all laws, regulations and ethical and professional standards
applicable thereto.
(d) Authority. Employee has full power and authority to enter
into this Agreement and perform all obligations hereunder. The
execution and performance of this Agreement by Employee will not
constitute a breach or violation of any covenant, agreement or contract
to which Employee is a party or by which Employee is bound.
SECTION 8. Books, Office Equipment, Etc.
(a) Employee's Ownership. All professional instruments, books,
office equipment and other property furnished by Employee shall remain
Employee's property. Notwithstanding the above, all patient records
shall at all times be and remain Employer's or Practice's property;
provided, however, that upon termination of this Agreement, Employer
shall provide Employee, at Employee's expense access to and copies of
such records relating to medical service performed at Employer's or
Practice's business by Employee during the term hereof, if so requested
by the patient or if required by Employee in defense of any
professional liability claim.
(b) Employer's Ownership. All instruments, equipment,
furniture, furnishings, supplies, samples, forms, charts, logs,
brochures, patient records, policies and procedures, contracts and any
other property, materials or information furnished by Practice or
Employer are and shall remain the sole property of Practice or
Employer. Upon termination of this Agreement, Employee shall return all
such property to Practice or Employer.
SECTION 9. Assignability. This Agreement and the rights and duties
created hereunder shall not be assignable or delegable by Employer or Employee.
SECTION 10. Notices. All notices or other communications provided for
herein to be given or sent to a party by the other party shall be deemed validly
given or sent if in writing and mailed, postage prepaid, by registered or
certified United States mail, addressed to the parties at their principal places
of business or at their addresses as provided from time to time to the other
party in writing, with copies to Practice, MedCath and Manager at their
principal places of business.
SECTION 11. Severability. Each section, subsection and lesser section
of this Agreement constitutes a separate and distinct undertaking, covenant or
provision hereof. In the event that any provision of this Agreement shall be
determined to be invalid or unenforceable, such provision shall be deemed
limited by construction in scope and effect to the minimum extent necessary to
render the same valid and enforceable, and, in the event such a limiting
construction is impossible, such invalid or unenforceable provision shall be
deemed severed from this Agreement, but every other provision of this Agreement
shall remain in full force and effect.
-4-
<PAGE>
SECTION 12. Effect of Termination. The termination of this Agreement,
for whatever reason, shall not extinguish those obligations of Employee
specified in the restrictive covenants, nor shall the same extinguish the right
of either party to bring an action, either in law or in equity, for breach of
this Agreement by the other party.
SECTION 13. Waiver. The failure of a party to enforce any term,
provision or condition of this Agreement at any time or times shall not be
deemed a waiver of that term, provision or condition for the future, nor shall
any specific waiver of a term, provision or condition at one time be deemed a
waiver of such term, provision or condition for any future time or times.
SECTION 14. Parties. This Agreement shall be binding upon, and shall
inure to the benefit of, the parties hereto and their heirs, personal
representatives, legal representatives, and proper successors and assigns, as
the case may be.
SECTION 15. Governing Law. The validity, interpretation and performance
of this Agreement shall be governed by the laws of the State of Texas, without
giving effect to the principles of comity or conflicts of laws thereof. Each
party hereto agrees to submit to the personal jurisdiction and venue of the
state and federal courts having jurisdiction over Texas for a resolution of all
disputes arising in connection with the interpretation, construction, and
enforcement of this Agreement, and hereby waives the claim or defense therein
that such courts constitute an inconvenient forum.
SECTION 16. Captions. The captions of this Agreement have been assigned
thereto for convenience only, and shall not be construed to limit, define or
modify the substantive terms hereof.
SECTION 17. Entire Agreement; Counterparts; Facsimiles. This Agreement
constitutes the entire agreement between the parties hereto concerning the
subject matter hereof, and supersedes all prior agreements, memoranda,
correspondence, conversations and negotiations all of which are hereby
terminated. This Agreement may be executed in any number of counterparts with
the same effect as if all of the parties had signed the same document. Such
executions may be transmitted to the parties by facsimile and such facsimile
execution shall have the full force and effect of an original signature. All
fully executed counterparts, whether original executions or facsimile executions
or a combination, shall be construed together and shall constitute one and the
same agreement.
SECTION 18. Costs of Enforcement. In the event it is necessary for any
party to retain the services of an attorney or to initiate legal proceedings to
enforce the terms of this Agreement, the prevailing party shall be entitled to
recover from the nonprevailing party, in addition to all other remedies, all
costs of such enforcement, including reasonable attorneys, fees and including
trial and appellate proceedings.
SECTION 19. Gender, Etc. Words used herein, regardless of the number
and gender specifically used, shall be deemed and construed to include any other
number, singular or
-5-
<PAGE>
plural, and any other gender, masculine, feminine or neuter, as the context
indicates is appropriate.
SECTION 20. Third-Party Beneficiary. The parties acknowledge and agree
that Manager has entered into the Service Agreement with Practice and is a
third-party beneficiary of the Master Transaction Agreement between MedCath and
Practice, which contracts were entered into by Manager and MedCath in reliance
on the covenants of Employer and Employee contained therein and in this
Agreement. Accordingly, the parties hereto agree that Manager and MedCath are
specific, intended third-party beneficiaries of such covenants, shall be
independently entitled to the benefit thereof, and shall have an independent
right to enforce same. In addition, the parties hereto covenant and agree with
Manager and MedCath that this Agreement shall not be terminated, modified or
amended without the prior written consent of Manager and MedCath, the giving or
withholding of which shall be in the sole and absolute discretion of Manager and
MedCath. This provision shall not apply with regards to MedCath or Manager if
MedCath fails to pay amounts when due under the Master Transaction Agreement
after the expiration of the applicable grace periods or the Service Agreement is
terminated by Heart Clinic, P.A. pursuant to Section 11.2 thereof.
SECTION 21. Tail Insurance Coverage. Employer and Employee all agree
that the terms and provisions of Section 10.3 of the Service Agreement shall be
incorporated herein by reference as if fully set forth herein, they will comply
with and fully satisfy those terms and provisions, and they are jointly and
severally liable for any breaches for failing to so comply and fully satisfy
those terms and provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) effective as of the day and year first written
above.
-6-
<PAGE>
EXECUTION PAGE
TO THE
EMPLOYMENT AGREEMENT
FOR
______________________, M.D., P.A.
Signed in the presence of: EMPLOYEE:
____________________________ ___________________________
EMPLOYER:
Signed in the presence of: ___________________, M.D., P.A.
a Texas professional association
ATTEST:
________________________________ By: ___________________________
Secretary
(Printed Name & Title)
<PAGE>
EXHIBIT A
TO THE
EMPLOYMENT AGREEMENT
FOR
_____________________, M.D., P.A.
COMPENSATION
[INSERT THE DESIRED COMPENSATION LANGUAGE]
<PAGE>
EXHIBIT F
TO THE
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH INCORPORATED
AND
HEART CLINIC, P.A.
July 31, 1996
Supplemental Payment
In addition to the Consideration described in Section 2.2(a)(i),
MedCath shall also pay to Practice additional Consideration through the
Supplemental Payment as described below.
To the extent the "Physician Net Production" of the applicable
Physician for calendar year 1997 exceeds the Standard "Physician Net Production"
of such Physician as indicated below, MedCath shall pay to Practice as a
Supplemental Payment of additional Consideration an amount equal to 140% of such
excess. In addition, to the extent the "Physician Net Production" of Carlos
Pimentel for calendar year 1998 exceeds the greater of his Standard "Physician
Net Production" and 1997 "Physician Net Production," MedCath shall pay to
Practice a further amount as a Supplemental Payment of additional Consideration,
equal to 140% of that excess. For these purposes, "Physician Net Production"
shall mean for the applicable calendar year the gross professional services
revenues generated as a result of the Physician's personal efforts and collected
by Practice less contractual allowances thereon and less the direct expenses of
Practice and the portion of the overhead of Practice allocated to the Physician
by Practice in accordance with normal allocation methods of Practice applied on
a consistent basis.
The Standard Physician Net Production for the relevant individuals is
as follows:
Name Standard Physician Net Production
Hugo Blake $[ ]
Shereef Hilmy [ ]
Michael Evans [ ]
Naji Kandalaft [ ]
Eduardo Flores [ ]
Christopher Gill [ ]
Carlos Pimentel [ ]
The obligation of MedCath to pay the Supplemental Payments shall be the
principal amount of the Additional Promissory Note.
[ ] These portions have been omitted and filed separately with the commission
pursuant to a request for confidential treatment.
<PAGE>
EXHIBIT G
[J. Edward Mann, Jr. Letterhead appears here]
October 1, 1996
MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Gentlemen:
This law firm is counsel to the HEART CLINIC, INC., a Texas Corporation
("HCI"), HEART CLINIC, P.A., a Texas professional association ("HCPA"), HUGO
G. BLAKE, M.D., SHEREEF HILMY II, M.D., MICHAEL D. EVANS, M.D., CHRISTOPHER
R. GILL, M.D., EDUARDO D. FLORES, M.D., NAJI KANDALAFT, M.D., and CARLOS X.
PIMENTEL, M.D. (individually a "Physician" and collectively the "Physicians")
whom are the individual shareholders of HCI and HCPA, and to the professional
associations individually owned by each of the Physicians (the "Physician
P.A.s"). All of the parties referred to above are at times referred to below
collectively as the "Heart Clinic Parties" in connection with the transactions
contemplated by the Master Transaction Agreement dated as of the date hereof
by and among MedCath Incorporated, a North Carolina corporation ("MedCath"),
HCPA and each of the Physicians (the "Master Transaction Agreement"). The
terms defined in the Master Transaction Agreement are used herein as therein
defined. Among other things, I have examined:
1. The Master Transaction Agreement;
2. The Service Agreement;
3. The Independent Contractor Agreements;
4. The Employment Agreements;
5. The Agreement;
6. The Articles of Incorporation and Bylaws of HCI, HCPA and the
Physician P.A.s;
7. The documents and instruments relating to the merger of HCI into
HCPA; and
8. The resolutions by unanimous written consent of the Board of
Directors of HCI, HCPA and Physician P.A.s.
<PAGE>
MedCath Incorporated
October 1, 1996
Page 2
"Transaction Documents."
In such examination, I have assumed the genuineness of all signatures on all
documents other than those of the Heart Clinic Parties, the authenticity of
all documents submitted to me as originals, the conformity to originals of all
documents submitted to me as certified, photostatic or conformed copies, and
the authenticity of the originals of such documents. I have also assumed the
valid existence and good standing of all parties to the Transaction Documents
other than the Heart Clinic Parties and the due authorization, execution and
delivery of the Transaction Documents to be delivered by parties other than
the Heart Clinic Parties. As to factual matters, I have relied to the extent
deemed appropriate by me upon certificates and representations of the Heart
Clinic Parties. I have also examined executed copies of the Transaction
Documents and other corporate records and certificates of public officials
as I deemed appropriate for purposes of this opinion.
Based upon the foregoing, I am of the opinion that:
1. HCPA and each of the Physician P.A.s are professional associations
duly organized, validly existing and in good standing under the laws
of the State of Texas.
2. HCI has been merged into HCPA in accordance with the laws of the
State of Texas.
3. Each of HCPA and the Physician P.A.s have the full corporate power
and authority to own their properties and carry on their business
as now conducted and to execute any of the Transaction Documents to
which they are a party and to perform their obligations thereunder.
4. All corporate action required to be taken by any of the Heart Clinic
Parties necessary to the execution, delivery and validity of the
Transaction Documents and the performance of the obligations of the
Heart Clinic Parties thereunder has been duly taken or obtained and
the Transaction Documents do not conflict with (i) any provisions of
the Articles of Incorporation or Bylaws of any of the Heart Clinic
Parties or (ii) any judgments or orders of any court or any agreements
or contracts binding on any of the Heart Clinic Parties.
5. Each of the Transaction Documents to which any of the Heart Clinic
Parties are a party has been duly executed by and is a legal, valid
and binding obligation of the applicable Heart Clinic Parties and
is enforceable in accordance with its respective terms.
<PAGE>
MedCath Incorporated
October 1, 1996
Page 3
6. The execution and delivery of the Transaction Documents by the Heart
Clinic Parties, the fulfillment by the Heart Clinic Parties of their
obligations under the Transaction Documents, the legal structure,
relationships and agreements between HCPA, the Physician P.A.s and
each of the Physicians which have been entered into on or prior to the
date hereof and the operation of the businesses contemplated thereby
do not violate any Texas or federal law, rule or regulation other than
those relating to the Medicare and Medicaid programs and other health
care laws, rules or regulations, and to the best of my knowledge, do
not violate those laws, rules or regulations.
7. There are no actions, suits or proceedings pending against or affecting
any of the Heart Clinic Parties at law or in equity before any court
or administrative office or agency except as disclosed in the
Transaction Documents.
My opinions expressed above are limited to the laws of the State of Texas and
the federal laws of the United States.
Very truly yours,
J. Edward Mann, Jr.
<PAGE>
</TABLE>
HEART CLINIC, P.A.
SERVICE AGREEMENT
BETWEEN
PHYSICIAN MANAGEMENT OF MCALLEN, INC.
AND
HEART CLINIC, P.A.
JULY 31, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I-RELATIONSHIP OF THE PARTIES.........................................................................- 1 -
SECTION 1.1 Independent Relationship..................................................- 1 -
SECTION 1.2 Responsibilities of the Parties...........................................- 1 -
SECTION 1.3 Practice's Matters........................................................- 2 -
SECTION 1.4 Patient Referrals.........................................................- 2 -
SECTION 1.5 Use of Associated PAs.....................................................- 2 -
ARTICLE II-DEFINITIONS........................................................................................- 2 -
ARTICLE III-FACILITIES TO BE PROVIDED BY PRACTICE.............................................................- 6 -
SECTION 3.1 Facilities................................................................- 6 -
SECTION 3.2 Independence of Practice..................................................- 7 -
ARTICLE IV-DUTIES OF THE EXECUTIVE COMMITTEE..................................................................- 7 -
SECTION 4.1 Composition and Operation of the Executive Committee......................- 7 -
SECTION 4.2 Duties and Responsibilities of the Executive Committee....................- 7 -
SECTION 4.3 Additional Material Decisions.............................................- 9 -
ARTICLE V-ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER...................................................- 9 -
SECTION 5.1 Performance of Management Functions.......................................- 9 -
SECTION 5.2 Financial Planning Goals.................................................- 10 -
SECTION 5.3 Financial Statements.....................................................- 11 -
SECTION 5.4 Inventory and Supplies...................................................- 11 -
SECTION 5.5 Management Services and Administration...................................- 11 -
SECTION 5.6 Executive Director.......................................................- 14 -
SECTION 5.7 Personnel................................................................- 14 -
SECTION 5.8 Events Excusing Performance..............................................- 15 -
SECTION 5.9 Compliance with Applicable Laws..........................................- 15 -
SECTION 5.10 Quality Assurance........................................................- 15 -
SECTION 5.11 Ancillary Services.......................................................- 15 -
ARTICLE VI-OBLIGATIONS OF PRACTICE...........................................................................- 16 -
SECTION 6.1 Professional Services....................................................- 16 -
SECTION 6.2 Medical Practice.........................................................- 16 -
SECTION 6.3 Employees of Practice....................................................- 16 -
SECTION 6.4 Professional Insurance Eligibility.......................................- 17 -
SECTION 6.5 Events Excusing Performance..............................................- 17 -
SECTION 6.6 Fees for Professional Services...........................................- 17 -
SECTION 6.7 Name.....................................................................- 17 -
SECTION 6.8 Services of Physician Shareholders.......................................- 17 -
i
<PAGE>
SECTION 6.9 Life Insurance...........................................................- 18 -
ARTICLE VII-RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES.....................................................- 18 -
SECTION 7.1 Restrictions on Practice.................................................- 18 -
SECTION 7.2 Restrictive Covenants By Current Physician Shareholders
and Physician Employees..................................................- 18 -
SECTION 7.3 Restrictive Covenants By Future Physician Employees......................- 19 -
SECTION 7.4 Liquidated Damages.......................................................- 20 -
SECTION 7.5 Development of Exclusive Ventures........................................- 21 -
SECTION 7.6 Enforcement..............................................................- 22 -
ARTICLE VIII-FINANCIAL ARRANGEMENTS..........................................................................- 22 -
SECTION 8.1 Management Fees..........................................................- 22 -
SECTION 8.2 Collection of Management Fee.............................................- 24 -
SECTION 8.3 Reduction of Management Fee..............................................- 24 -
SECTION 8.4 Resignation of Physician Shareholder.....................................- 24 -
ARTICLE IX-RECORDS...........................................................................................- 25 -
SECTION 9.1 Patient Records..........................................................- 25 -
SECTION 9.2 Records Owned by Manager.................................................- 25 -
SECTION 9.3 Access to Records........................................................- 25 -
ARTICLE X-INSURANCE AND INDEMNITY............................................................................- 25 -
SECTION 10.1 Insurance to be Maintained by Practice...................................- 25 -
SECTION 10.2 Insurance to be Maintained by Manager....................................- 26 -
SECTION 10.3 Tail Insurance Coverage..................................................- 26 -
SECTION 10.4 Additional Insureds......................................................- 26 -
SECTION 10.5 Indemnification..........................................................- 26 -
SECTION 10.6 Rules Regarding Indemnification..........................................- 27 -
SECTION 10.7 Offset...................................................................- 27 -
ARTICLE XI-TERM AND TERMINATION..............................................................................- 28 -
SECTION 11.1 Term of Agreement........................................................- 28 -
SECTION 11.2 Termination by Practice..................................................- 28 -
SECTION 11.3 Termination by Manager...................................................- 28 -
SECTION 11.4 Actions after Termination................................................- 29 -
SECTION 11.5 Closing of Repurchase by Practice and Effective Date of
Termination..............................................................- 29 -
ARTICLE XII-GENERAL PROVISIONS...............................................................................- 30 -
SECTION 12.1 Assignment...............................................................- 30 -
SECTION 12.2 Whole Agreement, Modification............................................- 30 -
SECTION 12.3 Notices..................................................................- 30 -
SECTION 12.4 Binding on Successors....................................................- 30 -
SECTION 12.5 Waiver of Provisions. ...................................................- 30 -
SECTION 12.6 Governing Law............................................................- 31 -
ii
<PAGE>
SECTION 12.7 Severability.............................................................- 31 -
SECTION 12.8 Additional Documents.....................................................- 31 -
SECTION 12.9 Attorneys' Fees..........................................................- 31 -
SECTION 12.10 Time is of the Essence...................................................- 31 -
SECTION 12.11 Confidentiality..........................................................- 31 -
SECTION 12.12 Contract Modifications for Prospective Legal Events......................- 31 -
SECTION 12.13 Remedies Cumulative......................................................- 32 -
SECTION 12.14 Language Construction....................................................- 32 -
SECTION 12.15 No Obligation to Third Parties...........................................- 32 -
SECTION 12.16 Communications...........................................................- 32 -
SECTION 12.17 Counterpart Executions; Facsimiles.......................................- 32 -
SECTION 12.18 Arbitration..............................................................- 33 -
</TABLE>
iii
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into this 31st day of July,
1996 by and between PHYSICIAN MANAGEMENT OF McALLEN, INC., a North Carolina
corporation ("Manager") and HEART CLINIC, P.A., a Texas professional association
("Practice") and is effective as of the 1st day of October, 1996 which shall be
the date of this Agreement. While this Agreement shall be binding on the parties
upon execution, it shall not commence until October 1, 1996.
RECITALS:
WHEREAS, Practice is a group medical practice with offices in the Texas
cities of McAllen, Harlingen, Weslaco and Brownsville, which provides medical
care to the general public;
WHEREAS, Manager is in the business of managing and administering
medical clinics, and providing support services to and furnishing medical
practices with the necessary support staff while recognizing that Practice,
through its physicians, shall retain sole responsibility for the medical care of
its patients and thereby respecting the physician-patient relationship which
shall be maintained strictly between the physicians of Practice and their
patients;
WHEREAS, Practice desires to obtain the services of Manager in
performing such management functions so as to permit Practice to devote its
efforts on a concentrated and continuous basis to the rendering of medical
services to its patients;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice hereby agrees to purchase the management and support
services herein described and Manager agrees to provide such services on the
terms and conditions provided in this Agreement commencing on October 1, 1996.
ARTICLE I
RELATIONSHIP OF THE PARTIES
SECTION 1.1 Independent Relationship. Practice and Manager
intend to act and perform as independent contractors, and the provisions hereof
are not intended to create any partnership, joint venture, agency or employment
relationship between the parties. Notwithstanding the authority granted to
Manager herein, Manager and Practice agree that Practice shall retain the
authority to direct the medical, professional, and ethical aspects of its
medical practice. Each party shall be solely responsible for and shall comply
with all state and federal laws pertaining to employment taxes, income
withholding, unemployment compensation contributions and other employment
related statutes applicable to that party.
SECTION 1.2 Responsibilities of the Parties. As more specifically set forth
herein, Manager, through the Executive Director, shall provide Practice with
professional management services and expertise, access to funds and financing
for capital needs, and day-to-day
<PAGE>
implementation of the directives of the Executive Committee. As more
specifically set forth herein, Practice shall provide all offices and
facilities, equipment, supplies, professionals, support personnel, and working
capital necessary for operation of the Clinic and shall be responsible for the
recruitment and hiring of physicians. Manager shall neither exercise control
over nor interfere with the physician-patient relationship, which shall be
maintained strictly between the physicians of Practice and their patients.
SECTION 1.3 Practice's Matters. Tax preparation, tax planning, and pension
and investment planning (and expenses relating solely to these internal business
matters) shall remain the sole responsibility of Practice and the individual
Physician Shareholders.
SECTION 1.4 Patient Referrals. The parties agree that the benefits to
Practice hereunder do not require, are not payment for, and are not in any way
contingent upon the admission, referral or any other arrangement for the
provision of any item or service offered by Manager to any of Practice's
patients in any facility or laboratory controlled, managed or operated by
Manager.
SECTION 1.5 Use of Associated PAs. Subject to the requirements and
limitations below, Practice may fulfill its obligations hereunder to provide the
services of the Physician Shareholders for the operation of the Clinic by
entering into Independent Contractor Agreements with Associated PAs provided
that all health care related revenues (and the rights to such revenues)
generated by the Associated PA or its employees are the property of Practice and
that the Associated PA will take all actions necessary to cause such revenues to
be paid to Practice. All such Independent Contractor Agreements and the written
employment agreements that the Associated PA has with the Physician Shareholder
employed by it, including but not limited to those being executed as a condition
to the Master Transaction Agreement, must be approved by Manager (and may not be
terminated or modified without the approval of Manager) to ensure that the
restrictions and obligations on the Physician Shareholders providing the
services are sufficient to preserve the benefits that Manager and Practice would
have if such individuals were direct employees of Practice pursuant to
employment agreements containing the restrictions and obligations set forth in
Article VII hereof. Practice shall not be permitted to utilize such Independent
Contractor Agreements if such relationships would cause Practice to be in
violation of any statutes, rules or regulations or if Practice would be required
to forego or relinquish any of its economic rights or benefits to avoid such a
violation. In such an instance, Practice shall secure the provision of the
services of the Physician Shareholders for the operation of the Clinic by
employing the Physician Shareholders directly.
ARTICLE II
DEFINITIONS
For the purposes of this Agreement, the following definitions
shall apply:
"Adjustments" shall mean any adjustments for uncollectible
accounts, discounts, Medicare and Medicaid disallowances, worker's
compensation, employee/dependent
2
<PAGE>
health care benefit programs, professional courtesies according to
historical practice of Practice and other activities that do not generate
a collectible fee.
"Affiliate" of a corporation means (i) any person or entity
directly or indirectly controlled by such corporation, (ii) any person
or entity directly or indirectly controlling such corporation, (iii)
any subsidiary of such corporation if the corporation has a fifty
percent (50%) or greater ownership interest in the subsidiary, or (iv)
such corporation's parent corporation if the parent has a fifty percent
(50%) or greater ownership interest in the corporation. Practice is not
an affiliate of Manager.
"Agreement" shall mean this Service Agreement between Practice
and Manager.
"Associated PA" shall mean a Texas professional association
which is (i) permitted by law to employ licensed physicians for the
provision of medical services to patients, (ii) owned entirely by an
individual who is also a Physician Shareholder, (iii) employs its sole
shareholder pursuant to an arrangement through which such individual
works full time for such professional association and provides all of
his professional medical services to Practice through such professional
association, and (iv) has a written employment agreement in place with
any physician it employs in a form satisfactory to Manager that
requires such physicians to provide medical services through the
professional association to Practice and which has a duration and
noncompete tail period and the other obligations that Practice would be
required to impose on them pursuant to Article VII hereof if they were
direct employees of Practice and which employment agreements make
Practice, Manager and Parent third party beneficiaries thereof with the
ability to enforce the rights of the Associated PA thereunder in the
event the Associated PA does not enforce those rights.
"Executive Committee" shall mean the board established
pursuant to Section 4.1.
"Executive Director" shall mean the individual hired by
Manager pursuant to Section 5.6 hereof to manage and administer all of
the day-to-day business functions of Practice.
"Independent Contractor Agreement" shall mean an agreement
entered into by Practice and an Associated PA that (i) obligates the
Associated PA to provide the exclusive, full time professional medical
services of its employees, including its sole shareholder, to Practice
such that Practice can fulfill its obligations under this Agreement,
(ii) contains provisions acceptable to Manager that require the
Associated PA to ensure that through written employment agreements the
physicians it employs are subject to an employment duration and
noncompete tail period and other obligations that Practice would be
required to impose on them pursuant to Article VII hereof if they were
employees of Practice, (iii) is in compliance with all statutes, rules
and regulations and which in performance does not cause Practice to be
in violation of any statutes, rules or regulations in its operation of
the Clinic (or cause Practice to forego or relinquish any economic
rights or advantages in order to avoid committing any such violation),
and (iv) makes Manager and Parent third party beneficiaries of such
agreement with the ability to
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enforce the rights of Practice thereunder in the event Practice does
not enforce those rights.
"Manager Expenses" shall mean, in addition to those expenses
identified elsewhere herein, all operating and non-operating expenses
of Manager incurred in the operation of Practice, including, without
limitation:
(i) Salaries, benefits and other direct
costs of all employees of Manager at
Practice, including the Executive Director;
(ii) Direct costs of all employees or
consultants of Manager (including Affiliates of Manager) or
Practice engaged by the Executive Director pursuant to the
Annual Budget or with Executive Committee approval to provide
services at or in connection with Practice or who actually
provide services at or in connection with Practice required
for improved clinic performance; provided, however, only that
portion of such employee's or consultant's costs without
mark-up by Manager that is allocable to work performed at or
for the benefit of Practice will be a Manager Expense;
(iii) Obligations of Manager, if any, under
leases or subleases relating to the operations of Practice;
(iv) Personal property and intangible taxes
assessed against Manager's assets, if any, related to and used
in substantial connection with Practice, commencing on the
date of the Service Agreement;
(v) The amount of interest on all advances
made by Manager to Practice upon their written agreement with
respect thereto at any time to provide financing or working
capital to cover Manager Expenses, Physician Expenses, capital
additions and expenditures, and the Management Fee (interest
expense will be charged for funds borrowed from outside
sources as well as from Manager; in the latter case, charges
will be computed at a floating rate that is equal to the prime
rate of interest charged by First Union National Bank plus one
percent);
(vi) Malpractice insurance expenses to the
extent provided in Article X hereof;
(vii) Other expenses incurred by Manager in
carrying out its obligations under the Service Agreement in
accordance with the budget adopted by the Executive Committee
or otherwise approved by the Executive Committee;
(viii) Payment of interest on indebtedness
incurred by Manager with Practice's consent for the use or
benefit of Practice;
(ix) Amortization or depreciation or
write-off of assets acquired by Manager for the use or benefit
of Practice;
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(x) Compensation to which Manager is
entitled pursuant to Section 4.2(i) hereof for any day or
partial day during which there is no Executive Director
(either because the initial Executive Director has not
commenced work or a replacement Executive Director has not
commenced work following the resignation or removal of an
Executive Director); and
(xi) Expenses incurred by affiliates of
Manager to the extent allocable to the operation of the
Clinic, including expenses in connection with travel, meals
and lodging of employees of such affiliates relating thereto,
Practice specifically acknowledging the benefits it will
receive from the involvement of such affiliates and their
employees (such as the President of Parent's Practice
Management Division) in the management of the Clinic;
provided, expenses for travel, meals and lodging shall only be
reimbursed to the extent they are reasonable and approved by
the Executive Committee.
Manager Expenses shall not include (A) any corporate overhead charges,
other than the kind of items listed above, from the Parent; (B) any
federal or state income taxes of Manager; (C) any expenses which are
expressly designated herein as Physician Expenses which are expenses or
responsibilities directly of Practice or (D) any costs for life
insurance Manager chooses to obtain on the life of a physician in
accordance with Section 6.9 hereof.
"Master Transaction Agreement" shall mean that certain
agreement between Parent, Practice and the physician employees of
Practice of even date herewith to which this Service Agreement is an
exhibit.
"Net Practice Revenues" shall mean all fees recorded (or
recordable) each month (net of Adjustments) after September, 1996, by
or on behalf of Practice as a result of professional medical services
personally furnished to patients by employees of Practice or of any
Associated PA and other fees or income generated by employees of
Practice or of any Associated PA in their capacity as professionals,
whether rendered in an inpatient or outpatient setting plus any other
amounts received by Practice for medical matters, including revenues
from ancillary services, medical director fees, capitation agreements
and health care related investments. Net Practice Revenues shall not
include any fees received for services performed prior to the date
Manager begins providing services to Practice hereunder.
"Parent" shall mean MedCath Incorporated, the sole shareholder
of Manager.
"Physician Expenses" shall mean all of the costs to operate
the Clinic in accordance with the Annual Budget or as otherwise
approved pursuant to the terms hereof other than Manager Expenses,
including but not limited to those expenses to be paid by Practice as
set forth in Section 3.1, Section 5.4, Section 6.3, exclusive in all
events, however, of all direct and indirect compensation, benefits and
bonuses paid by Practice on account of or to any Physician Shareholder
or any amounts paid by Practice pursuant
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to an Independent Contractor Agreement, any income taxes, and interest
payments on any loans made to Practice pursuant to Section 5.8 of the
Master Transaction Agreement. In addition, Physician Expenses also
shall not include (i) any costs incurred by Practice in connection with
the collection of fees that are not included in Net Practice Revenues,
(ii) any costs or expenses relating to periods ending prior to October
1, 1996, (iii) any costs or expenses relating to negotiating or
entering into this Agreement, the Master Transaction Agreement, or any
other agreement under the Master Transaction Agreement, including any
legal or accounting fees associated therewith, (iv) any costs or
expenses connected with the preparation, maintenance or operation of
any Independent Contractor Agreement or connected with any Associated
PA, (v) any costs or expenses relating to the merger or reorganization
of Heart Clinic, Inc. and Heart Clinic, P.A., (vi) any costs or
expenses, including rental payments, made to any Physician Shareholder
or relative of any Physician Shareholder, or any entity in which a
Physician Shareholder or his relative owns any type of interest to the
extent such costs or expenses are in excess of the reasonable fair
market value of what Practice is receiving in the transaction being
reviewed, (vii) any expenses of Practice or any other entity or person
for or relating to qualified or nonqualified retirement plans, or
(viii) any expenses, costs, interest, penalties or liabilities relating
to or associated with payroll taxes or withholdings involving Physician
Shareholders.
"Physician Shareholders" shall mean those physicians who are
shareholders of Practice at the time this Agreement is executed or at
any time thereafter.
"Practice Account" shall mean the bank account of Practice
established as described in Section 5.5(b)(ii).
"Territory" shall mean the Texas counties of Starr, Hidalgo,
Cameron and Willacy.
ARTICLE III
FACILITIES TO BE PROVIDED BY PRACTICE
SECTION 3.1 Facilities. Practice hereby agrees to provide to Manager,
at Practice's expense, the use of its offices and facilities, including
without limitation all of its furnishings, equipment, computers,
information systems, data and records, in order to enable Manager to
fulfill its obligations to Practice hereunder. Manager shall consult with
Practice regarding the condition, use and needs for the offices, facilities
and improvements thereto. Practice hereby covenants that Manager will have
the quiet enjoyment of Practice's offices and facilities during the term of
this Agreement and that Practice will not sell or convey any such offices
or facilities other than in the ordinary course of business in which event
reasonable replacements therefore first shall be obtained or leased by
Practice and made available to Manager hereunder. If Manager utilizes its
own (or any of its Affiliates') assets in this regard because Practice
lacks the necessary assets to allow Manager to fulfill its obligations
hereunder, Manager shall be reimbursed for such usage. The cost of these
facilities shall be Physician Expenses.
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SECTION 3.2 Independence of Practice. Manager and Practice agree that
Practice, as an independent contractor, is a separate organization that
retains the authority to direct the medical, professional, and ethical
aspects of its medical practice.
ARTICLE IV
DUTIES OF THE EXECUTIVE COMMITTEE
SECTION 4.1 Composition and Operation of the Executive Committee. The
Executive Committee of Heart Clinic, P.A. shall be responsible for
developing management and administrative policies for the overall operation
of Practice. The Executive Committee shall consist of the shareholders of
Heart Clinic, P.A. and two members designated by Manager from time to time.
Except as may otherwise be provided, the act of a majority of the members
of the Executive Committee shall be the act of the Executive Committee.
SECTION 4.2 Duties and Responsibilities of the Executive Committee.
The Executive Committee shall have the following duties and obligations:
(a) Capital Improvements and Expansion. Any renovation and
expansion plans and capital equipment expenditures with respect to
Practice first shall be reviewed and approved by the Executive
Committee, which for purposes of this subsection must include the
approval of at least one Executive Committee member designated by
Manager, and shall be based upon economic feasibility, physician
support, productivity and then current market conditions, provided
however, if so approved by the Executive Committee, any such plans and
expenditures shall in all events be subject to the final approval of
Practice.
(b) Annual Budgets. All annual capital and operating budgets
shall be prepared by Manager, as set forth in Section 5.2, and shall be
subject to the review and approval of the Executive Committee, provided
however, if so approved by the Executive Committee, all such budgets
shall be further subject to the final approval of Practice.
(c) Advertising. All advertising and other marketing of the
services performed at Practice, other than advertising or marketing
programs historically implemented by Practice within the budget
approved by the Executive Committee and Practice, shall be subject to
the prior review and approval of the Executive Committee, provided
however, that all advertising or marketing programs shall be further
subject to the final approval of Practice.
(d) Patient Fees. As a part of the annual operating budget, in
consultation with Practice and Manager, the Executive Committee shall
review and adopt the fee schedule for all physician and ancillary
services rendered by Practice subject to final approval of Practice.
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(e) Provider and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health
care providers and payors and approval of managed care contracts shall
be made by the Executive Committee in consultation with Practice.
(f) Strategic Planning. Manager shall develop and submit to
the Executive Committee for approval long-term strategic planning
objectives.
(g) Financing. All loans, leases and other financing obtained
or proposed to be obtained for the benefit of Practice for any reason
shall be subject to the review and approval of the Executive Committee.
(h) Physician Hiring. The Executive Committee shall determine
the number and type of physicians required for the efficient operation
of Practice; provided that Practice shall have final authority over
physician hiring and termination decisions. The approval of the
Executive Committee, which for the purposes of this subsection must
include the approval of at least one Executive Committee Member
designated by Manager, shall be required for any variations to, or any
exceptions from, the restrictive covenants in any physician employment
contract. Notwithstanding anything herein to the contrary, all
decisions with respect to hiring and terminating the employment of
physicians shall be subject to the final approval of Practice.
(i) Executive Director. The selection and retention of the
Executive Director pursuant to Section 5.6 by Manager shall be subject
to the reasonable approval of the Executive Committee, which for
purposes of this subsection must include the approval of at least one
Executive Committee member designated by Manager. If Practice is
dissatisfied with the services provided by the Executive Director,
Practice shall refer the matter to the Executive Committee. Manager and
the Executive Committee shall each in good faith determine whether the
performance of the Executive Director could be brought to acceptable
levels through counsel and assistance, or whether the Executive
Director should be terminated. Manager shall have the ultimate
authority to terminate the Executive Director. Prior to the time the
initial Executive Director commences work in connection with the Clinic
or during any time period for which there is no Executive Director,
Manager shall use its other personnel (or personnel of its affiliates)
to perform the function of the Executive Director and shall be
compensated at the rate of two hundred dollars ($200) for each eight
(8) hour day for doing so and such compensation shall be a Manager
Expense.
(j) Grievance Referrals. The Executive Committee shall
consider and make final decisions regarding grievances pertaining to
matters not specifically addressed in this Agreement as referred to it
by Practice's Board of Directors.
SECTION 4.3 Additional Material Decisions. In addition to any other
rights of Manager set forth in this Agreement, the following actions or
decisions shall be made or taken, directly or indirectly, by Practice and/or
the Physician Shareholders only with consent of at least one (1) member of the
Executive Committee designated by Manager:
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(a) Entering into any transaction pursuant to which a
material portion of the assets of Practice are sold, assigned,
encumbered, leased or conveyed;
(b) Entering into any merger or similar transaction unless
Practice is the surviving entity and after which the Physician
Shareholders as of the date of the closing of such merger own at least
fifty-one percent (51%) of the capital stock of the surviving entity or
entering into any sale or series of related sales by Practice or the
Physician Shareholders of capital stock of Practice to any party who is
not a Physician Shareholder as of the date hereof except to individual
physicians who become shareholders of Practice in the ordinary course
of Practice's operations and business;
(c) The payment of money or other property by Practice or the
Physician Shareholders for the majority of the capital stock or all or
substantially all the assets constituting a business of any person or
entity;
(d) The entering into or modification of an Independent
Contractor Agreement or of an employment agreement between a Physician
Shareholder and his Associated PA;
(e) Releasing or consenting to the release of any restrictive
covenant rights it may have with respect to any physician, whether such
physician is employed by Practice or provided to Practice pursuant to
an Independent Contractor Agreement; and
(f) The entering into or modification of any lease or other
type of agreement by Practice with a Physician Shareholder or a
relative of a Physician Shareholder, or an entity in which a Physician
Shareholder or his relative owns any kind of interest; provided, the
consent of the Executive Committee members designated by Manager shall
not be unreasonably withheld.
ARTICLE V
ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER
SECTION 5.1 Performance of Management Functions. Manager shall provide or
arrange for the services set forth in this Article V and otherwise as set forth
in this Agreement, the cost of all of which shall be included in Manager
Expenses. Manager is hereby expressly authorized to perform its services
hereunder in whatever manner it deems reasonably appropriate to meet the
day-to-day requirements of Practice operations in accordance with the decisions
of the Executive Committee, including, without limitation, performance of some
of the business office functions at locations other than Practice. It is the
intention of the parties hereto that Manager shall fulfill its obligations
hereunder through the Executive Director and his utilization of the assets and
employees of Practice and third parties to do so. Practice will not act in a
manner which would prevent Manager from efficiently managing the day-to-day
operations of Practice in a business-like manner. It is specifically agreed that
Manager shall not be in default hereunder due to the absence of an Executive
Director if Manager is diligently trying to find an individual to serve in that
position and is using other resources to manage the Clinic in the
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interim.
SECTION 5.2 Financial Planning Goals
(a) Preparation of Budgets. Annually and at least thirty (30)
days prior to the commencement of each fiscal year of Practice, Manager
shall prepare and deliver to the Executive Committee and Practice for
their approval an operational and capital budget for such fiscal year
("Annual Budget"), setting forth an estimate of the operating revenues
and expenses associated with the provision of professional services by
Practice (including, without limitation, all costs associated with the
leased premises used by Practice, equipment, supplies, and services,
used by Practice and all compensation costs associated with Practice
and Practice personnel) and sources and uses of capital expenditures.
Such Annual Budget shall separately address Physician Expenses and
Manager Expenses which are in support of Practice and which shall be in
line with historical expenses of Practice and which are reasonable and
customary for Practice. Any non-budgeted expenses must be reviewed and
approved by the Executive Committee. Any such non-budgeted expense in
excess of $5,000 per year undertaken by Practice without approval by
the Executive Committee (which for these purposes shall require the
approval of at least one Executive Committee member designated by
Manager) shall, except for emergency circumstances, be excluded from
the calculation of Physician Expenses. Any expenses which are personal
in nature that are incurred by any Physician Shareholder shall be
deducted from his compensation unless approved by the Executive
Committee (which for these purposes shall require the approval of at
least one Executive Committee member designated by Manager) and shall
not be a Physician Expense. Manager shall use its best efforts to
perform its duties and obligations under this Agreement such that the
actual revenues, costs, and expenses associated with the provision of
professional services during any applicable period of Practice's fiscal
year shall be consistent with the Annual Budget. Manager shall prepare
and submit to the Executive Committee and Practice for their approval,
and shall thereafter adopt, an Annual Budget for the current fiscal
year as soon as practicable. Manager shall specify the targeted profit
margin for Practice which shall be reflected in the Annual Budget. In
the event that the Executive Committee or Practice does not approve any
such Annual Budget, then the Annual Budget for the previous year shall
be used until the Executive Committee and Practice, using their best
efforts, approve a new Annual Budget.
(b) Service Development. Manager realizes that Practice has
opportunities to provide new services and utilize new technologies that
will require capital expenditures and Manager anticipates that such
opportunities may include new and replacement equipment as may be
economically justified and medically necessary. Development of new
services will depend on, among other factors, physician composition,
anticipated volume, reimbursement and number of physicians, physician
support, performance, and appropriate physician specialty mix, and will
require Executive Committee approval as a precondition to any capital
expenditure.
(c) Capital Investment. Manager will use its commercially
reasonable best efforts to obtain funds for all capital expenditures
approved by the Executive Committee.
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Sources of capital, including working capital, for such funds shall be
determined by the Executive Committee and may be with Practice's
consent (i) intracompany borrowings from Manager (at the rate set forth
in Article II at subparagraph (v) of the definition of Manager Expenses
or (ii) borrowings, leases or other financing methods through
independent third-party financial institutions in accordance with
Section 4.2(h) hereof. Manager shall use its reasonable efforts to make
its funds available for borrowing by Practice but Manager only shall be
obligated to make such loans as it determines in its sole and absolute
discretion on a case-by-case basis that it should make. Whenever
Manager makes such a loan, to benefit Practice's operations, the
repayment of all interest on any such indebtedness shall constitute
Manager Expenses.
SECTION 5.3 Financial Statements.
Manager shall cause to be prepared annual financial statements for the
operations of Practice. Manager shall also cause to be prepared monthly
financial statements containing a balance sheet and statements of income from
Practice operations, which shall be delivered to Practice within thirty (30)
days after the close of each calendar month. In addition, Practice shall be
solely responsible for the cost of the preparation and any audit of the
financial statements and the tax returns of Practice.
SECTION 5.4 Inventory and Supplies.
Manager shall, on behalf of Practice, order and purchase inventory and supplies,
and such other ordinary, necessary or appropriate materials of a quality
consistent with the past and customary course of conduct and manner of
operating Practice, the cost of which shall be Physician Expenses.
SECTION 5.5 Management Services and Administration.
(a) Practice hereby appoints Manager as its sole and exclusive
manager and administrator of all day-to-day business functions and
Manager hereby accepts such appointment subject to the terms of this
Agreement. Manager shall perform these duties through the Executive
Director who shall utilize the assets and employees of Practice and
third parties to do so. Practice agrees that the purpose and intent of
this Service Agreement is to relieve the Physician Shareholders, to the
maximum extent possible, of the administrative, accounting, personnel
and business aspects of its medical practice. The current business of
Practice handled by employees of Practice will be administered and
supervised by Manager, with Manager assuming responsibility and being
given all necessary authority to administer and supervise these
functions in accordance with the general standards approved by the
Executive Committee. Manager agrees that Practice and only Practice
will perform the medical functions of its medical practice. Manager
will have no authority, directly or indirectly, to perform, and will
not perform, any medical function. Manager may, however, advise
Practice as to the relationship between its performance of medical
functions and the overall administrative and business functioning of
its medical practice. To the extent that they assist Practice in
performing medical functions, all clinical personnel performing patient
care services shall be subject to the professional direction and
supervision of Practice and, in the performance of such medical
functions, shall not be subject to any direction or control by, or
liability, to, Manager, except as may be specifically authorized by
Practice.
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(b) (i) Manager shall, on behalf of Practice, bill
patients and collect the professional fees for medical
services rendered by Practice, for services performed outside
Practice for Practice's hospitalized patients, and for all
other professional and Practice services. Practice hereby
appoints Manager for the term hereof to be its true and lawful
attorney-in-fact, for the following purposes: (A) to bill
patients in Practice's name and on its behalf; (B) to collect
accounts receivable resulting from such billing in Practice's
name and on its behalf; (C) to receive payments and
prepayments from Blue Shield, insurance companies, health care
plans, Medicare, Medicaid and all other third party payors;
(D) to take possession of and endorse in the name of Practice
(and/or in the name of an individual physician providing
services on behalf of Practice, such payment intended for
purpose of payment of a physician's bill) any notes, checks,
money orders, insurance payments and other instruments
received in payment of accounts receivable; and (E) to
initiate the institution of legal proceedings in the name of
Practice to collect any accounts and monies owed to Practice
in accordance with policies and procedures adopted by the
Executive Committee, to enforce the rights of Practice as
creditors under any contract or in connection with the
rendering of any service, and to contest adjustments and
denials by governmental agencies (or their fiscal
intermediaries) as third-party payors. All Adjustments shall
be made in a reasonable manner consistent with past practice
of Practice.
(ii) Practice shall establish and control a bank
account at a bank (the "Bank") acceptable to Manager (the
"Practice Account"). In connection herewith and throughout the
term of the Agreement, Practice hereby appoints Manager as
Practice's true and lawful agent and attorney-in-fact, and
grants Manager a special power of attorney and Manager hereby
accepts such special power of attorney and appointment, to
deposit in the Practice Account all funds, fees, and revenues
generated by Practice and collected by Manager. Practice shall
execute any and all additional documents required by the Bank
where the Practice Account is held to effectuate the power of
attorney granted herein. Manager shall pay from funds in the
Practice Account all Manager Expenses and the Management Fee
as required under the terms of this Agreement and pay from
that account, on behalf of Practice, the other costs and
expenses of operating the Clinic, including the Physician
Expenses as provided under the terms of this Agreement. The
Practice Account shall have signatories a person designated
from time to time by Manager and a person designated from time
to time by Practice. Each such signatory shall have the
ability to sign checks on the Practice Account for $10,000 or
less but checks for more than $10,000 must be signed by both
signatories.
(c) Manager shall supervise and, to the extent necessary,
maintain custody of all files and records relating to the operation of
Practice, including but not limited to accounting, billing, patient
medical records, and collection records. Patient medical records shall
at all times be and remain the property of Practice and shall be
located at Practice facilities so that they are readily accessible for
patient care. The management of all files and records shall comply with
applicable state and federal statutes. Manager shall use its best
efforts consistent with the past practice of Practice to preserve the
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confidentiality of patient medical records and use information
contained in such records only for the limited purpose necessary to
perform the services set forth herein; provided, however, in no event
shall a breach of said confidentiality be deemed a default under this
Agreement.
(d) Manager shall supervise and be responsible for making sure
that Practice has the necessary clerical, accounting, bookkeeping and
computer services, printing, postage and duplication services, medical
transcribing services and any other ordinary, necessary and appropriate
service for the operation of Practice.
(e) Manager shall supervise Practice's personnel and make sure
that Practice has the data necessary for Practice to prepare its annual
income tax returns and financial statements. Except as provided above,
Manager shall have no responsibility for the preparation of Practice's
federal or state income tax returns or the payment of such income taxes
and such costs shall not be Physician Expenses.
(f) Manager shall assist Practice in recruiting additional
physicians, carrying out such administrative functions as may be
appropriate such as advertising for and identifying potential
candidates, checking credentials, and arranging interviews; provided,
however, Practice shall interview and make the ultimate decision as to
the suitability of any physician to become associated with Practice.
Candidate screening and interviewing procedures shall be consistent
with the past practice of Practice or as otherwise adopted by the
Executive Committee. All physicians recruited by Manager and accepted
by Practice shall be the sole employees of Practice, to the extent such
physicians are hired as employees. Any expenses incurred in the
recruitment of physicians, including, but not limited to, employment
agency fees, relocation and interviewing expenses shall be budgeted
Physician Expenses. Manager shall also provide certain recruiting
incentives as described in Section 5.12 below.
(g) Manager shall negotiate and administer all managed care
contracts on behalf of Practice and shall consult with Practice on all
professional or clinical matters relating thereto.
(h) Subject to the provisions of Sections 5.3 and Section
5.5(e) and the approval of the Executive Committee, Manager shall
arrange for legal and accounting services related to Practice
operations the expense for which has been incurred traditionally in the
ordinary course of business, including the cost of enforcing any
physician contract containing restrictive covenants, but any cost and
all other aspects of malpractice suits against Practice shall be
governed by Article X hereof.
(i) Manager shall be responsible for administering the proper
cleanliness of the premises in compliance with applicable federal and
state regulations, and maintenance and cleanliness of the equipment,
furniture and furnishings located upon such premises.
(j) From the Practice Account, Manager shall make payment for
the cost of professional licensure fees, board certification fees,
medical staff dues, and national organization fees required to maintain
professional licenses, all as historically paid by
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Practice in accordance with past practice.
SECTION 5.6 Executive Director. Subject to the provisions of Section
4.2(i), Manager shall hire and appoint an Executive Director to manage and
administer all of the day-to-day management functions of Practice. Manager, with
the approval of the Executive Committee, shall determine the salary and fringe
benefits, of the Executive Director consistent with the budget adopted by the
Executive Committee. The salary, benefits and other direct costs of the
Executive Director shall be a Manager Expense. At the direction, supervision and
control of Manager, the Executive Director, subject to the terms of this
Agreement, shall implement the policies established by the Executive Committee
and shall generally perform the duties and have the responsibilities of an
administrator. The Executive Director shall be responsible for organizing the
agenda for the meetings of the Executive Committee referred to in Article IV.
SECTION 5.7 Personnel. Manager shall supervise and administer all
non-physician professional support (other than those performing patient care)
and administrative personnel, clerical, secretarial, bookkeeping and collection
personnel of Practice reasonably necessary for the conduct of Practice
operations. Manager shall determine and cause to be paid the salaries and fringe
benefits of all such personnel. All such personnel shall be employees of
Practice but shall be under the supervision of Manager, with those personnel
performing patient care services subject to the professional supervision of
Practice. If Practice is dissatisfied with the services of any person, Practice
shall consult with Manager. Manager shall in good faith determine whether the
performance of that employee could be brought to acceptable levels through
counsel and assistance or whether such employee should be terminated. All of
Manager's obligations regarding staff shall be governed by the overriding
principle and goal of providing high quality medical care consistent with past
practice of Practice. Employee assignments shall be made to assure consistent
and continued rendering of high quality medical support services and to ensure
prompt availability and accessibility of individual medical support personnel to
physicians in order to develop constant, familiar and routine working
relationships between individual physicians and individual members of the
medical support personnel. Manager shall maintain established working
relationships wherever possible and Manager shall make every effort consistent
with sound business practices to honor the specific requests of Practice with
regard to the assignment of Practice's employees.
SECTION 5.8 Events Excusing Performance. So long as Manager uses its
commercially reasonable best efforts, Manager shall not be liable to Practice
for failure to perform any of the services required herein in the event of
strikes, lockouts, calamities, acts of God, unavailability of supplies or other
events over which Manager has no control for so long as such events continue,
and for a reasonable period of time thereafter.
SECTION 5.9 Compliance with Applicable Laws. Manager shall comply with
all applicable federal, state and local laws, regulations and restrictions in
the conduct under this Agreement of its obligations under this Agreement.
SECTION 5.10 Quality Assurance. Manager shall assist Practice in
fulfilling its obligations to its patients to maintain a high quality of medical
and professional services.
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SECTION 5.11 Ancillary Services. Manager shall operate such ancillary
services as approved by the Executive Committee.
SECTION 5.12 Recruiting Incentives. The decision to hire a physician
shall be made pursuant to Section 4.2(h). Manager recognizes the need for
Practice to expand its physician base of cardiologists. As such, to the extent
Manager is in agreement with the hiring of a cardiologist by Practice (as
evidenced by Manager's written notice of agreement), Manager shall extend to
Practice, through advances of funds as necessary, the ability for Practice to
guaranty to each such newly-hired cardiologist a pre-tax compensation level as
agreed to by Practice and Manager (the "Compensation Level") for each of the
first two twelve (12) month periods of such individual's employment by Practice.
The amount of such advances shall be the excess, if any, of (a) the Compensation
Level, over (b) the Net Practice Revenues generated by that cardiologist for the
applicable twelve (12) month period less the "Overhead Charge" to that
cardiologist for the applicable twelve (12) month period. The "Overhead Charge"
shall be the pro rata amount of Practice general overhead allocated to each
physician employed by Practice for the period, consistent with Practice's
customary method for charging its overhead costs among its other physicians. If
Manager makes such an advance relating to the first twenty-four (24) months of a
cardiologist's employment by Practice under the above provision, Practice shall
not thereafter increase such cardiologist's compensation without Manager's
consent until such advance has been repaid to Manager by Practice, so that
Practice shall be able to repay Manager such an advance to the extent that in a
future period, using the above formula, the amount in (b) exceeds the amount in
(a). Practice and Manager shall work together in determining when such a new
cardiologist should be eligible to become a shareholder in Practice and how the
balance of any advances that have not been repaid to Manager should be repaid.
In the event such a cardiologist leaves the employ of Practice, any remaining
unpaid portion of any advances shall be repaid only to the extent of collections
in the future of revenues from services performed by such physician while
associated with Practice. This Section 5.12 shall not be construed in any way to
limit the ability of Practice to recruit and hire a physician but rather it is
an additional incentive that Practice will be able to offer a physician in
certain cases.
ARTICLE VI
OBLIGATIONS OF PRACTICE
SECTION 6.1 Professional Services. Practice shall provide professional
services to patients in compliance at all times with ethical standards, laws and
regulations applying to the medical profession. Practice shall ensure that each
of its physicians providing medical care to patients in the State of Texas are
licensed by the State of Texas. In the event that any disciplinary actions or
medical malpractice actions are initiated against any such physician, Practice
shall immediately inform Manager of such action and the underlying facts and
circumstances. Practice shall carry out a program to monitor the quality of
medical care which it provides.
SECTION 6.2 Medical Practice. Manager shall not interfere with the
physician-patient relationship between Practice's physicians and their patients.
Practice shall provide the facilities, including equipment, materials and
supplies needed for the medical practice, and use
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and occupy its facilities exclusively for the practice, and shall comply with
all applicable local rules, ordinances and all standards of medical care. It is
expressly acknowledged by the parties that the medical practice or practices
conducted at Practice shall be conducted solely by physicians associated with
Practice, and no other physician or medical practitioner shall be permitted to
use or occupy Practice without the prior written consent of the Executive
Committee.
SECTION 6.3 Employees of Practice.
(a) Except for the Executive Director, Practice shall employ
all personnel necessary for the operation of the Clinic, including
licensed health care personnel, such as physicians, nurses, vocational
nurses and physician assistants, as Practice deems reasonably necessary
and appropriate, subject to the Annual Budget, for Practice's operation
of its medical practice and provision of professional services, each of
whom shall be subject to the applicable provisions of this Agreement,
and such clerical and administrative personnel deemed necessary by
Manager. Practice shall have the sole responsibility for paying the
salaries and fringe benefits of all personnel, and the sole
responsibility to withhold, as required by law, any sums for income
tax, unemployment insurance, social security, or any other withholding
pursuant to any applicable law or governmental requirements. Manager
shall, in the name of and on behalf of Practice, establish and
administer and pay when due the compensation with respect to such
personnel and, on behalf of Practice and out of funds available in the
Practice Account, ensure that proper tax withholdings from such
compensation are made and timely remitted to the appropriate
governmental entities. Each physician retained by Practice shall at all
times hold and maintain a valid and unlimited license to practice in
the State of Texas. Practice shall enter into and maintain with each
such physician a written agreement which shall include, without
limitation, the provisions of Section 7.2 hereof; provided, to the
extent permitted by Section 1.5 hereof and the other provisions of this
Agreement, Practice may secure the services of the Physician
Shareholders through Independent Contractor Agreements instead of
directly employing the Physician Shareholders. Practice shall ensure
that each of its physicians participates in such continuing medical
education as is consistent with past practice.
(b) Practice shall continuously and uninterruptedly, during
the term hereof, during all business hours and on such days as
businesses of like nature in the area are open for business, provide
services in a manner calculated to produce the maximum volume of
revenue which is consistent with the professional obligation of
Practice and in the best interest of Practice's patients. Practice
shall cause the work load, patient load and criteria for its
physicians, taken as a whole, to remain substantially the same as their
historical practice during the immediate past three (3) years.
(c) Practice and the Physician Shareholders and the Associated
PAs shall take all actions necessary or appropriate, including without
limitation, adjusting amounts paid or distributed to Physician
Shareholders or Associated PAs, on at least a quarterly basis, to
ensure from time to time that the compensation paid to the Physician
Shareholders or Associated PAs by Practice in the aggregate, never
exceeds Net Income (as hereafter
<PAGE>
16
defined), to the extent such payments reasonably would be expected to
leave Practice with an insufficient amount of working capital for the
normal operation of the Clinic including the payment of the Management
Fee.
SECTION 6.4 Professional Insurance Eligibility. Practice shall
cooperate in the obtaining and retaining of professional liability insurance by
assuring that its physicians are insurable, and by participating in an on-going
risk management program.
SECTION 6.5 Events Excusing Performance. Practice shall not be liable
to Manager for failure to perform any of the services required herein in the
event of strikes, lockouts, calamities, acts of God, unavailability of supplies
or other events over which Practice has no control for so long as such events
continue, and for a reasonable period of time thereafter.
SECTION 6.6 Fees for Professional Services. Practice shall be solely
responsible for legal, accounting and other professional services fees incurred
and retained by Practice, and not approved by the Executive Committee, except as
set forth in Article V herein.
SECTION 6.7 Name. Manager shall be entitled to use the name "Heart
Clinic" in connection with the operation of Practice.
SECTION 6.8 Services of Physician Shareholders. Practice shall be
obligated hereunder to secure the exclusive, full-time professional medical
services for the operation of the Clinic of each Physician Shareholder as of the
date hereof through at least the five (5) consecutive year period beginning on
the effective date hereof (regardless of whether such individual continues to
remain a Physician Shareholder). To the extent provided in this Agreement,
Practice may do so by directly employing each such Physician Shareholder or by
securing his services through a permitted Independent Contractor Agreement. Each
of the Physician Shareholders as of the date hereof agrees that he shall provide
his exclusive, full time professional services to Practice in accordance with
the terms of his employment agreement with Practice dated as of the date hereof
or through a permitted Independent Contractor Agreement between Practice and his
Associated PA, and in any case the term of such arrangement for the provision of
his services shall not be less than the five (5) consecutive year period
beginning on the effective date hereof unless attributable to the death or
permanent disability of the Physician Shareholder.
SECTION 6.9 Life Insurance. Practice shall cause each of its physician
employees to and the Physician Shareholders shall cooperate fully with any
efforts by Manager to obtain insurance policies on the life of any such
physicians under which Manager would be the owner and beneficiary. Manager will
be responsible for the costs of any such insurance and such costs shall not be
Manager Expenses.
ARTICLE VII
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
The parties recognize that Parent paid a substantial amount to Practice
in connection with
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this Agreement and that Manager is making a substantial commitment of
time and resources in providing management and services hereunder, and that
the services to be provided by Manager shall be feasible only if Practice
operates an active medical practice to which the physicians associated with
Practice devote their full time and attention. To that end:
SECTION 7.1 Restrictions on Practice. During the term of this
Agreement, Practice covenants that Practice shall not, directly or indirectly,
either as a shareholder, partner, member, manager or otherwise establish,
operate or provide physician services at any medical office, clinic or other
health care facility providing services, including but not limited to ancillary
services, substantially similar to those provided by Practice pursuant to this
Agreement anywhere within the Territory. Additionally, during the term of this
Agreement and for a period of twenty-four (24) months following the termination
hereof prior to the 40th anniversary of the date hereof due to a default by
Practice, Practice covenants that Practice shall not, directly or indirectly,
enter into any agreement or arrangement similar to this Agreement with any other
person or party (whether in a single transaction or series of related
transactions) or sell substantially all the assets of Practice or sell or issue
interests (whether through a sale, merger or otherwise) constituting ownership
of Practice (except that ownership interests in Practice may be sold or issued
to individual physicians who become shareholders of Practice in the ordinary
course of Practice's operations and business). The Physician Shareholders hereby
covenant to take all steps necessary to ensure that Practice abides by and
fulfills the covenants of this Section 7.1.
SECTION 7.2 Restrictive Covenants By Current Physician Shareholders
and Physician Employees.
(a) Practice shall obtain and enforce formal written
agreements from its physicians (whether direct employees of Practice or
employees of Associated PAs) pursuant to which the physicians agree not
to within the Territory, directly or indirectly, (i) whether as a
shareholder, partner, employee, director, consultant, agent or
otherwise establish, operate or provide, other than through Practice,
physician services or other professional medical services at any
medical office, hospital, clinic or outpatient and/or ambulatory
treatment or diagnostic facility providing services, including but not
limited to ancillary services, substantially similar to those provided
by Practice or by the Associated PAs or their employees or (ii) solicit
or employ any employee or consultant of Practice or of Manager, in all
cases of (i) or (ii) during the term of their employment by Practice
or, if applicable, service relationship with Practice through an
Independent Contractor Agreement and for a period of twelve (12) months
after any termination of such employment or, if applicable, service
relationship for any reason (unless this Agreement has been terminated
as of such date as a result of a default hereunder by Manager);
provided, after the eighth (8th) year of this Agreement, the
above-referenced twelve (12) month tail period shall be eliminated for
any physician who has provided his exclusive, full time professional
services to Practice for at least eight (8) years. By their executions
of this Agreement, the Physician Shareholders hereby agree to the above
restrictions and to abide and be bound by them and no additional
written agreement with them shall be required. The Physician
Shareholders also agree that Manager and Parent are third party
beneficiaries of such restrictions.
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(b) In addition to the other restrictions in this Article VII,
the Physician Shareholders hereby agree with Practice and Manager (and
all future Physician Shareholders of Practice shall be required to
agree in writing) and shall enter into a similar covenant with
Practice, which Practice agrees to fully enforce, that they shall
(unless this Agreement has been terminated as of such date as a result
of a default hereunder by Manager) neither accept employment to
practice medicine or become a consultant for the purpose of providing
such medical services from or with any other party or entity, or group
of affiliated parties or entities (a "New Employer") if at least
fifty-one percent (51%) of the then current Physician Shareholders of
Practice within any twelve (12) month period accept employment or enter
into any consulting or other similar arrangement with such New Employer
at the same time or in a series of related circumstances, nor engage in
any other transaction which is substantially similar to that described
in this sentence (a "Group Departure") unless such New Employer or the
Physician Shareholders personally assume all liabilities and
obligations of Practice to Manager under Article VIII with respect to
such Physician Shareholders and under other provisions herein related
to such obligations and liabilities.
(c) The parties executing this Agreement hereby agree that a
waiver of any of the restrictions in Article VII shall only be
effective if it is in writing, it is executed by Manager and Parent and
it specifically refers to this Agreement and the provision herein being
waived.
SECTION 7.3 Restrictive Covenants By Future Physician Employees.
Practice shall obtain and enforce formal agreements from each of its future
physician employees (and future Physician Shareholders who are not currently
physician employees), which contain the restrictions and covenants set forth in
Section 7.2.
SECTION 7.4 Liquidated Damages. A physician (existing or future), may
be released from his restrictive covenants by paying "Liquidated Damages" to
Practice, which Practice shall be immediately obligated to pay to Manager, in
the manner and in an amount as follows except that during the first two (2)
years of this Agreement the physician must obtain the written consent of Manager
(which consent may be given or withheld in the sole and absolute discretion of
Manager):
"Liquidated Damages" shall mean an amount equal to the gross collected
revenue generated by the efforts of the physician (including all physician
services and ancillary revenues from such physician's patients) for the most
recent ended twelve (12) month period. Notwithstanding the above provision, with
respect to any physician who was employed by Practice or whose professional
services were provided to Practice pursuant to an Independent Contractor
Agreement on the date of this Agreement, during the third, fourth and fifth year
of this Agreement such physician may be released from his restrictive covenant
without paying Liquidated Damages, provided he gives Manager and Practice
written notice at least 120 days' prior to the effective date of the termination
of the employment relationship or agreement for the provision of his services
with Practice and as long as he does not during any portion of those third,
fourth and fifth years, directly or indirectly (whether as a sole practitioner
or through his Associated PA or otherwise) enter into any service or management
agreement, employment
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relationship, income or expense guarantee relationship, or
other remuneration or compensation relationship of any kind with any person or
entity other than a professional association or partnership of licensed
physicians which is owned exclusively by physicians that devote substantially
all of their professional services to such professional association or
partnership and which receives substantially all of its revenue for services
rendered to patients and is not a recipient party to an income or expense
guarantee relationship or a party to a service or management agreement. The
above provision shall be treated as a part of such physician's employment
agreement with Practice or, if applicable, the Independent Contractor Agreement
between Practice and such physician's Associated PA, and the physician (and his
Associated PA if applicable) shall not be in breach of that employment
agreement, or if applicable, the Independent Contractor Agreement, if he
terminates his relationship with Practice in accordance with this provision;
provided such a release of restrictive covenants and termination of employment
or agreement for the provision of his services shall not relieve Practice or the
physician from any obligations they may have to make payments to Parent for a
breach of Section 5.7 of the Master Transaction Agreement due to the cessation
of the physician's provision of exclusive, full time professional services to
Practice prior to the fifth anniversary of this Agreement.
Such payment of Liquidated Damages or any recovery for breach shall be
made to Manager by Practice (after receipt from the physician or his Associated
PA or directly by the physician to Manager) simultaneously with the physician
being released from the restrictive covenants (if required to be consented to by
Manager) or any collection of a judgment. Such payment shall be first applied to
all costs incurred by Manager in the enforcement of the restrictive covenants
for that departing physician and in recruiting a replacement physician for that
departing physician. The remainder, if any, shall become an additional service
fee to be paid to Manager pursuant to Article VIII hereof.
Manager shall be entitled to designate which remedies shall be sought
by Practice for breaches of restrictive covenants or such employment agreements
or Independent Contractor Agreements and Practice shall diligently pursue those
remedies.
SECTION 7.5 Development of Exclusive Ventures.
(a) During the term of this Agreement (the "Exclusive Period")
subject to applicable law, Manager, Practice and the Physician
Shareholders, including any future shareholders of Practice may discuss
and explore the feasibility of acquiring or developing in the Territory
(i) a cardiac catheterization lab or other cardiac testing center
and/or (ii) a managed care plan or organization (e.g., a HMO, etc.)
(collectively the "Exclusive Ventures"). Subject to applicable law,
each such Exclusive Venture shall be owned by a joint venture, which in
turn would be owned fifty-one percent (51%) by Manager or its designee
and forty-nine percent (49%) by Practice and/or the Physician
Shareholders, unless, however, Manager, Practice and the Physician
Shareholders mutually agree upon different ownership percentages. Each
Exclusive Venture would be managed by Manager or its designee for a
management fee which would not exceed reasonable management fees which
are paid to other parties for managing similar facilities in bona fide
transactions involving unrelated persons or entities. Capital shall
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be contributed to the joint venture on a pro rata basis by Manager or
its designee, on the one hand, and Practice and/or the Physician
Shareholders on the other hand, in accordance with their ownership
percentages. No additional payment would be due to Manager, Practice or
the Physician Shareholders in connection with the development or
ownership of any Exclusive Venture other than pro rata distributions to
them from the joint venture. All material decisions and determinations
to be made hereunder with respect to the development, ownership and
operation of any such Exclusive Venture, subject to applicable law,
shall be made by mutual consent of Manager and/or its designee on the
one hand, and a majority of the Physician Shareholders owning an
interest in the Exclusive Venture (directly or indirectly), on the
other hand. Manager, Practice and the Physician Shareholders agree to
cooperate and negotiate with one another in good faith with respect to
the development or acquisition of the Exclusive Venture and to enter
into all such additional agreements and to take all such additional
actions as are reasonably necessary or appropriate to fulfill the
purpose and intent of this Section 7.5.
In the event that health care counsel of Manager, which is
reasonably acceptable to Practice, advises that the legal entity owning
any such health care facility or service should be owned only by
Practice, the Physician Shareholders or Affiliates thereof, then the
parties hereto shall instead enter into a management and service
agreement which will provide Manager with substantially all of the
benefits which it would have received had it been legally entitled to
be an owner of such facility or service.
(b) During the Exclusive Period, Practice and Physician
Shareholders agree that they will not, directly or indirectly, develop
or acquire an interest in any Exclusive Venture, and the Physician
Shareholders agree that they will not develop or acquire an interest in
any venture, entity or investment whose business is similar to that
which would be conducted by the Exclusive Ventures as long as such
Physician Shareholder is a shareholder of Practice and for a period of
one (1) year thereafter, other than through a joint venture between
Manager or its designee, on the one hand, and Practice and/or the
Physician Shareholders on the other hand, as provided in (a) above,
exclusive of any such interests held at the time this Agreement is
executed including interests in MedCath of McAllen Limited Partnership.
SECTION 7.6 Enforcement. Manager, Practice and the Physician
Shareholders acknowledge and agree that since a remedy at law for any breach or
attempted breach of the provisions of this Article VII shall be inadequate,
either party shall be entitled to seek specific performance and injunctive or
other equitable relief in case of any such breach or attempted breach, in
addition to whatever other remedies may exist by law. If any provision of
Article VII relating to the restrictive period, scope of activity restricted
and/or the territory described therein shall be declared by a court of competent
jurisdiction to exceed the maximum time period, scope of activity restricted or
geographical area such court deems reasonable and enforceable under applicable
law, the time period, scope of activity restricted and/or area of restriction
held reasonable and enforceable by the court shall thereafter be the restrictive
period, scope of activity restricted and/or the territory applicable to the
restrictive covenant provisions in this Article VII. The invalidity or
non-enforceability of this Article VII in any respect shall not affect the
validity or enforceability of the remainder of this Article VII or of any other
provisions of this
21
Agreement. The provisions of this Article VII will not apply or be binding on
Practice, the PAs or the Physicians if MedCath fails to pay any amounts when
due under the Master Transaction Agreement after the expiration of the
applicable grace periods or this Agreement has been terminated by Practice
pursuant to Section 11.2 thereof.
ARTICLE VIII
FINANCIAL ARRANGEMENTS
SECTION 8.1 Management Fees. Practice and Manager agree that the
compensation set forth in this Article VIII is being paid to Manager in
consideration of the substantial commitment made by Manager hereunder and that
such fees are fair and reasonable.
(a) Manager shall be paid as its management fee (the
"Management Fee") the following amounts:
(i) An amount equal to all Manager Expenses;
(ii) [ ] Dollars ($[ ])
per annum (the "Base Fee"),
to be earned and accrued in equal monthly
installments; and
(iii) The Performance Bonus (as defined
below).
(b) Practice has retained Manager to provide services
hereunder due to Manager's unique expertise and Practice desires to
provide an additional incentive to Manager with respect to Manager's
performance of its obligations under this Agreement. Practice has
established the following goals for Manager: providing efficient and
uniform management services to Practice in a manner which enables
Practice's physicians to focus on patient care and to avoid
administrative responsibilities, provide updated management systems
which Practice would not otherwise be aware from time to time, assist
the practice in providing its services in a more efficient and cost
effective manner, assist Practice in analyzing the provision of
additional services and facilities, obtaining additional financing
sources for the expansion of Practice and its facilities, developing
relationships and agreements with managed care providers and other
health care providers and developing and administering positive and
uniform employment policies. Practice acknowledges that these goals
will have been met if Manager earns the Performance Bonus as set forth
below.
In the event that the Net Practice Revenues minus Physician
Expenses, Manager Expenses and the Base Fee, ("Net Income") exceeds
[ ] Dollars ($[ ]) for the then current year (pro
rated on a monthly basis), then Manager shall be entitled to a
performance bonus (the "Performance Bonus") for such year equal to
[ ] percent ([ ]%) of Net Income in excess of [ ]
Dollars ($[ ]). The Performance Bonus shall be earned and accrued
on a monthly basis.
(c) Notwithstanding anything herein to the contrary, in no
event shall
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[ ] These portions have been omitted and filed separately with the commission
pursuant to a request for confidential treatment.
<PAGE>
Manager's Management Fee due under Section 8.1(a)(ii) and
(iii) exceed [ ] percent ([ ]%) of Net Income except as may be later
agreed to by Manager and Practice pursuant to (d) below.
(d) The Base Fee and Performance Bonus portions of the
Management Fee shall be renegotiated in good faith by Manager and
Practice effective with the eighth (8th) anniversary of the date
Manager commenced providing services to Practice pursuant to this
Agreement, based on the fair value of the services to be performed over
the remaining thirty-two (32) years of this Agreement, and considering
the amounts paid by Parent to Practice pursuant to the Master
Transaction Agreement and the quality and efficiency of Manager's
performance hereunder over the first eight (8) years of this
relationship. If the parties cannot agree on a new Base Fee amount and
Performance Bonus formula, the matter shall be submitted to binding
arbitration.
(e) Notwithstanding a termination of this Agreement, Manager
shall be entitled to receive a Management Fee with respect to the Net
Income of Practice received after such termination to the extent it
relates to collections for services performed prior to such
termination.
(f) As a way of illustrating the calculation of the Management
Fee, based on the 1995 financial information of Practice's predecessor
(Heart Clinic, Inc.) attached hereto as Exhibit A, the Management Fee
earned for 1995 had this Agreement been effective would have been
$[ ]. The calculation of the Management Fee earned under this
Agreement shall be made in accordance with the methodology of the above
example to the greatest extent possible.
SECTION 8.2 Collection of Management Fee
(a) Manager shall be paid any portion of the Management Fee
resulting from Manager Expenses upon Manager's presentation to Practice
of reasonable documentation of such Manager Expenses.
(b) The remaining amounts to be paid to Manager under this
Article VIII shall be paid by Practice with respect to a month's Base
Fee and Performance Bonus as revenues relating to that month's Base Fee
and Performance Bonus are collected by Practice. In all cases Manager
shall be paid any accrued but unpaid Management Fee as of the end of
each month from the funds of Practice then remaining after payment of
Physician Expenses and Manager Expenses. No compensation shall be paid
by Practice to any Physician Shareholder prior to the time Manager has
been paid the Management Fee attributable to the revenues from which
the Physician Shareholder is being compensated.
SECTION 8.3 Reduction of Management Fee.
In the event that the gross compensation received by a Physician Shareholder
who is an employee of Practice or by an Associated PA through which a Physician
Shareholder provides services to Practice during any calendar year, as of the
end of such calendar year would fall below the "Base Amount"(as
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[ ] These portions have been omitted and filed separately with the commission
pursuant to a request for confidential treatment.
<PAGE>
defined below), then the Management Fee otherwise due under Section 8.1(a)(ii)
and (iii) above for the last month of that calendar year shall be reduced to the
extent necessary in order to ensure that the gross compensation payment does not
fall below the Base Amount; provided, such reduction shall not exceed the amount
of the total Management Fee for the calendar year allocated to the employed
Physician Shareholder or the Associated PA by Practice in determining his or its
compensation for that calendar year in accordance with Practice's customary
method of allocating such Management Fee among the Physician Shareholders and
the Associated PAs.
For the purposes of this Section 8.3, the "Base Amount" shall mean
$[ ] per annum (except that with respect to Christopher Gill, "$[ ]"
shall be substituted for "$[ ]"), which amount shall be adjusted downward
each year by the percentage, if any, by which the median total professional
compensation received by invasive cardiologists in the U.S. as published by the
Medical Group Management Association falls as compared to their 1996 median
compensation. The Base Amount shall be pro rated as reasonably necessary to
reflect circumstances under which the Physician Shareholder did not provide his
exclusive professional services during the entire calendar year to Practice as
an employee or pursuant to an Independent Contractor Agreement or did so but at
a reduced or part-time level.
SECTION 8.4 Resignation of Physician Shareholder.
In the event that any Physician Shareholder terminates his services
relationship with Practice in a manner which is not in violation of such
Physician Shareholder's employment agreement with Practice or, if applicable,
the relevant Independent Contractor Agreement and, in either case, the terms
of this Agreement and the Master Transaction Agreement, then Manager shall pay
to such Physician Shareholder or his Associated PA on behalf of Practice from
time to time an amount equal to the proceeds of accounts receivable generated
from the direct efforts of such Physician Shareholder prior to such
termination to the extent actually collected ("Physician Collections") less
the Expense Allocation. For purposes of this Section 8.4, the "Expense
Allocation" shall equal the percentage of total collected revenues of Practice
during the calendar year most recently ended used to pay all expenses and
obligations of Practice (including the Management Fee) other than compensation
to Physician Shareholders or Associated PAs multiplied by the amount of
Physician Collections. Any amounts due to a Physician Shareholder or Associated
PA under this Section 8.4 shall be subject to the full satisfaction of the
obligations of the Associated PA, such Physician Shareholder and Practice to
Manager and/or Practice under this Agreement, any employment agreement with
Practice, any Independent Contractor Agreement and the Master Transaction
Agreement.
ARTICLE IX
RECORDS
SECTION 9.1 Patient Records. Upon termination of this Agreement,
Practice shall retain all patient medical records maintained by Practice or
Manager in the name of Practice. Practice shall, at its option, be entitled to
retain copies of financial and accounting records relating to all services
performed by Practice.
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[ ] These portions have been omitted and filed separately with the commission
pursuant to a request for confidential treatment.
<PAGE>
SECTION 9.2 Records Owned by Manager. All records relating in any way
to the operation of Practice which are not the property of Practice under the
provisions of Section 9.1 above, shall at all times be the property of Manager.
SECTION 9.3 Access to Records. During
the term of this Agreement, and thereafter, Practice or its designee shall have
reasonable access during normal business hours to Practice's and Manager's
financial records which relate to Practice, including, but not limited to,
records of collections, expenses and disbursements as kept by Manager in
performing Manager's obligations under this Agreement, and Practice may copy any
or all such records.
ARTICLE X
INSURANCE AND INDEMNITY
SECTION 10.1 Insurance to be Maintained by Practice. Throughout the
term of this Agreement, Practice shall maintain comprehensive professional
liability insurance with limits of not less than $1,000,000 per claim and with
aggregate policy limits of not less than $3,000,000 for Practice and an excess
liability policy in the amount of not less than $5,000,000, with such carrier as
is approved by the Executive Committee. Malpractice premiums, deductibles and
such accruals shall be a Physician Expense. Practice shall be responsible for
all liabilities in excess of the limits of such policies. Manager shall have the
option, with Executive Committee approval, of providing such professional
liability insurance through an alterative program, provided such program meets
the requirements of the Insurance Commissioner of the State of Texas.
SECTION 10.2 Insurance to be Maintained by Manager. Throughout the term
of this Agreement, Manager will provide and maintain, as a Manager Expense,
comprehensive professional liability insurance for all professional employees of
Manager, if any, with limits and with such carrier as provided above and
comprehensive general liability and property insurance covering Practice
premises and operations with limits and with such carrier as determined
reasonable by Manager in its national program.
SECTION 10.3 Tail Insurance Coverage. Practice will cause each
individual physician who becomes associated with Practice after the date hereof
to enter into an agreement with Practice that if upon termination of such
physician's relationship with Practice for any reason, tail insurance is not
provided for such physician under Practice's insurance policies, tail insurance
coverage will be purchased by the individual physician; provided however, in the
event that such physician's relationship with Practice is terminated due to
death or disability or due to an uncured event of default by Practice under its
agreement for the services of such physician, then Practice, rather than such
physician, shall pay the costs of such tail insurance. Such provisions may be
contained in employment agreements, Independent Contractor Agreements,
restrictive covenant agreements or other agreements entered into by Practice and
the individual physicians or the Associated PAs, and Practice hereby covenants
with Manager to enforce such provisions relating to the tail insurance coverage
or to provide such coverage at the expense of Practice. The Executive Committee
may determine to provide coverage for a physician as a
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Physician Expense on a physician by physician basis. The Executive Committee
may also decide to require other categories of physicians currently employed
by Practice to provide tail coverage upon termination of employment with
Practice.
SECTION 10.4 Additional Insureds. Practice and Manager agree to
use their reasonable efforts to have each other named as an additional insured
an the other's respective professional liability insurance programs.
SECTION 10.5 Indemnification. Practice shall indemnify, hold harmless
and defend Manager, its officers, directors, shareholders and employees, from
and against any and all liability, loss, damage, claim, causes of action, and
expenses (including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly, by or
as a result of the performance of medical services or the performance of any
intentional acts, negligent acts or omissions by Practice and/or its
shareholders, agents, employees and/or subcontractors (other than Manager,
Parent or their agents) during the term hereof. Manager shall indemnify, hold
harmless and defend Practice, its officers, shareholders, directors and
employees, from and against any and all liability, loss, damage, claim causes of
action, and expenses (including reasonable attorneys' fees), whether or not
covered by insurance, caused or asserted to have been caused, directly or
indirectly, by or as a result of the performance of any intentional acts,
negligent acts or omissions by Manager and/or its shareholders, agents,
employees and/or subcontractors (other than Practice) during the term of this
Agreement.
SECTION 10.6 Rules Regarding Indemnification. The obligations and
liabilities of each indemnifying party hereunder with respect to claims
resulting from the assertion of liability by the other party or third parties
shall be subject to the following terms and conditions:
(a) The indemnified party shall give prompt written notice to
the indemnifying party of any claim which might give rise to a claim by
the indemnified party against the indemnifying party based on the
indemnity agreement contained in Section 10.5 hereof, stating the
nature and basis of said claims and the amounts thereof, to the extent
known. If written notice is not given to the indemnifying party within
thirty (30) days from receipt of notice of the claim to be indemnified,
or such shorter time as shall otherwise prejudice the rights of the
indemnifying party, and in sufficient detail to apprise the
indemnifying party of the nature of the claim (in each instance taking
into account the facts and circumstances known by the indemnified party
with respect to such claim), the indemnifying party shall not be liable
to the party seeking indemnification. The indemnifying party shall have
the right, at its option, to compromise or defend, at its own expense
and by its own counsel, any claim involving the asserted liability of
the party seeking indemnification. If any indemnifying party shall
undertake to compromise or defend any such asserted liability, it shall
promptly notify the party seeking indemnification of its intention to
do so, and the party seeking indemnification agrees to cooperate fully
with the indemnifying party and its counsel in the compromise of, or
defense against, any such asserted liability. All costs and expenses
incurred in connection with such cooperation shall become by the
indemnifying party. In any event, the indemnified party shall have the
right, at its own expense and by its own counsel to participate in the
defense of such asserted liability.
26
<PAGE>
(b) The indemnified party shall not make any settlement of any
claims without the written consent of the indemnifying party, which
consent shall not be unreasonably withheld or delayed.
SECTION 10.7 Offset. Provided Manager or Parent is not in default under
this Agreement or the Master Transaction Agreement, Manager is hereby authorized
upon written notice to Practice to offset or apply any funds of Practice or the
Physician Shareholders or the Associated PAs which Manager holds from time to
time or which Manager or Parent owes to Practice or to the Physician
Shareholders or the Associated PAs against or to any amounts owed by Practice or
the Physician Shareholders or the Associated PAs to Manager or Parent under this
Agreement or the Master Transaction Agreement or Manager may exercise its offset
rights hereunder by reducing the principal under the Convertible Note and/or the
Additional Promissory Note under the Master Transaction Agreement; provided
however, if within ten (10) days of such written notice Practice or the
Physician Shareholders or the Associated PAs objects thereto, such objecting
party shall cause the matter to be submitted to binding arbitration and no
offset shall be made until that arbitration is resolved.
ARTICLE XI
TERM AND TERMINATION
SECTION 11.1 Term of Agreement. (a) This Agreement shall be binding on
the day and year first written above and shall commence on October 1, 1996, and
except as provided in (b) below, shall expire on the 40th anniversary its
commencement unless earlier terminated pursuant to the terms hereof. (b) At the
option of Manager, if it is not in default hereunder at the expiration of the
initial 40-year term, this Agreement may be extended for successive additional
5-year terms. If the preceding sentence would result in this Agreement being in
violation of any applicable law or would render this Agreement void or
unenforceable, such sentence shall be void and of no further force or effect.
SECTION 11.2 Termination by Practice. Practice may terminate this
Agreement as follows:
(a) In the event or the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Manager, or
upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by Manager,
except for the filing of a petition in involuntary bankruptcy against
Manager which is dismissed within ninety (90) days thereafter, Practice
may give notice of the immediate termination of this Agreement;
(b) In the event Manager shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement and such default shall continue for a period of ninety (90)
days after written notice thereof has been given to Manager by
Practice, Practice may terminate this Agreement. Termination of this
Agreement pursuant to this subsection (b) by Practice shall require the
affirmative vote of Physician Shareholders holding at least sixty-six
percent (66%) of the ownership of
<PAGE>
27
Practice; or
(c) In the event Parent shall not pay to Practice the amounts
due to Practice under Section 2.2 of the Master Transaction Agreement
after the expiration of applicable cure periods.
SECTION 11.3 Termination by Manager. Manager may terminate this
Agreement as follows:
(a) In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Practice,
or upon other action or suffered, voluntary or involuntarily, under any
federal or state law for the benefit of debtors by Practice, except for
the filing of a petition in involuntary bankruptcy against Practice
which is dismissed within thirty (30) days thereafter, Manager may give
notice of the immediate termination of this Agreement; or
(b) In the event Practice shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of ninety (90)
days after written notice thereof has been given to Practice by
Manager, Manager may give notice of the immediate termination of this
Agreement.
SECTION 11.4 Actions after Termination. Upon termination of this
Agreement by either party for any reason or upon expiration of this Agreement,
Practice, the Physician Shareholders and the Associated PAs jointly and
severally agree to:
(i) Solely if the termination is prior to the
fifth anniversary hereof and made other than by Practice
pursuant to Section 11.2, pay to Parent an amount equal to the
total price paid to Practice by Parent under the Master
Transaction Agreement net of the cumulative Management Fee
paid to Manager hereunder pursuant to Section 8.1(a)(ii) and
(iii) and purchase from Manager, at net book value, the
tangible personal property, if any, acquired by Manager and
used in the operation of Practice; and
(ii) Regardless of when the termination occurs
assume all debt and all contracts, payables and leases which
are obligations of Manager and which relate principally to the
performance of its obligations under this Agreement or any
properties leased or subleased by Manager but exclusive of
debts incurred by Parent to pay the Consideration to Practice
under the Master Transaction Agreement or by Manager without
the approval of Practice.
If the termination is made by Practice under Section 11.2, any of the above
amounts which would otherwise have been due to Manager or Parent if Manager had
then been permitted to terminate the Agreement pursuant to Section 11.3, shall
be used as an offset against any damages ultimately determined to have arisen
due to Manager's or Parent's default.
SECTION 11.5 Closing of Repurchase by Practice and Effective Date of
Termination. Practice, the Physician Shareholders and the Associated PAs shall
satisfy their
28
<PAGE>
obligation to Parent and Manager for the amounts due pursuant to
Section 11.4 above by surrendering the Convertible Note and the Additional
Promissory Note plus an amount of cash equal to the difference between the
amounts due pursuant to Section 11.4 and the principal balance of the
Convertible Note and the Additional Promissory Note, except that if Practice
received any shares of MedCath Incorporated common stock upon a conversion of
the Convertible Note or the Additional Promissory Note pursuant to the Master
Transaction Agreement, the rules of Schedule 10.1(b) of the Master Transaction
Agreement, as reasonably modified to fit this situation, shall be applied to
cause shares of MedCath Incorporated common stock to be used to pay the amount
due by Practice, the Physician Shareholders and the Associated PAs. The amount
of the purchase price shall be reduced by the amount of debt and liabilities of
Manager assumed by Practice, the Physician Shareholders and the Associated PAs.
Practice, the Associated PAs and any physician associated with Practice shall
execute such documents as may be required to assume the liabilities set forth in
Section 11.4 and to remove Manager from any liability with respect to such
repurchased assets and with respect to any property leased or subleased by
Manager, Manager will execute and deliver such documents as are customary in
asset sales with general warranties of title, and such documents to be executed
and delivered by Manager. The closing date for the repurchase shall be
determined by Practice, but shall in no event occur later than 120 days from the
date of the notice of termination. The termination of this Agreement shall
become effective upon the closing of the sale of the assets. From and after any
termination, each party shall provide the other party with reasonable access to
books and records then owned by it to permit such requesting party to satisfy
reporting and contractual obligations which may be required of it.
ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 Assignment. Manager shall have the right to assign its
rights hereunder to any person, firm or corporation controlling, controlled by
or under common control with Manager and to any lending institution, for
security purposes or as collateral, from which Parent or Manager obtains
financing, including without limitation, First Union National Bank, N.A., as
agent, or its successors and assigns under the credit agreement among Parent,
the bank parties thereto and First Union National Bank, N.A., for itself and as
agent, as amended or to any purchaser of substantially all of the assets of
Parent. Except as set forth above, neither Manager nor Practice shall have the
right to assign their respective rights and obligations hereunder without the
written consent of the other party.
SECTION 12.2 Whole Agreement, Modification. This Agreement constitutes
the entire agreement between the parties. There are no other agreements or
understandings, written or oral between the parties regarding this Agreement,
the Exhibits and the Schedules, other than as set forth herein. This Agreement
shall not be modified or amended except by a written document executed by both
parties to this Agreement, and such written modification(s) shall be attached
hereto.
SECTION 12.3 Notices. All notices required or permitted by this
Agreement shall be in writing and shall be addressed as follows:
29
<PAGE>
To Manager: Physician Management of McAllen, Inc.
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attn: Stephen R. Puckett
To Practice: Heart Clinic, P.A.
2310 N. Ed Carey Drive, #1-A
Harlingen, Texas 78550
Attn: President
or to such other address as either party shall notify the other.
SECTION 12.4 Binding on Successors.
Subject to Section 12.1, this Agreement shall be binding upon the parties
hereto, and their successors, assigns, heirs and beneficiaries.
SECTION 12.5 Waiver of Provisions.
Any waiver of any terms and conditions hereof must be in writing, and signed by
the parties hereto. The waiver of any of the terms and conditions of this
Agreement shall not be construed as a waiver of any other terms and conditions
hereof.
SECTION 12.6 Governing Law. The validity, interpretation and
performance of this Agreement shall be governed by and construed in accordance
with the laws of the State of Texas. The parties acknowledge that Manager is not
authorized or qualified to engage in any activity which may be construed or
deemed to constitute the practice of medicine. To the extent any act or service
required of Manager in this Agreement should be construed or deemed, by any
governmental authority, agency or court to constitute the practice of medicine,
the performance of said act or service by Manager shall be deemed waived and
forever unenforceable and the provisions of Section 12.12 shall be applicable.
SECTION 12.7 Severability. The provisions of this Agreement shall be
deemed severable and if any portion shall be held invalid, illegal or
unenforceable for any reason, the remainder of this Agreement shall be effective
and binding upon the parties.
SECTION 12.8 Additional Documents. Each of the parties hereto agrees
to execute any document or documents that may be requested from time to time by
the other party to implement or complete such party's obligations pursuant to
this Agreement.
SECTION 12.9 Attorneys' Fees. If legal action is commenced by either
party to enforce or defend its rights under this Agreement, the prevailing party
in such action shall be entitled to recover its costs and reasonable attorneys'
fees in addition to any other relief granted.
SECTION 12.10 Time is of the Essence. Time is hereby expressly
declared to be of the essence in this Agreement.
30
<PAGE>
SECTION 12.11 Confidentiality. Except for disclosure to its attorneys,
accountants, bankers, underwriters or lenders, or as necessary or desirable for
conduct of business, including negotiations with other acquisition candidates,
neither party hereto shall disseminate or release to any third party any
information regarding any provision of this Agreement, or any financial
information regarding the other (past, present or future) that was obtained by
the other in the course of the negotiation of this Agreement or in the course
of the performance of this Agreement, without the other party's written
approval; provided, however, the foregoing shall not apply to information which
(i) is generally available to the public other than as a result of a breach of
confidentiality provisions, (ii) becomes available on a non-confidential basis
from a source other than the other party, or its affiliates or agents, which
source was not itself bound by a confidentiality agreement, or (iii) which is
required to be disclosed by law, including securities laws or pursuant to court
order. Notwithstanding the foregoing, Practice may disclose information it
deems advisable to its physician employees provided such physician employees
are advised of the confidential nature of such information and agree to keep
such information confidential as provided herein. Manager shall be a third
party beneficiary of such agreements.
SECTION 12.12 Contract Modifications for Prospective Legal Events. In
the event any state or federal laws or regulations, now existing or enacted or
promulgated after the effective date of this Agreement, are interpreted by
judicial decision or regulatory agency or legal counsel in such a manner as to
indicate that the structure of this Agreement may be in violation of such laws
or regulations, Practice and Manager shall amend this Agreement as necessary to
eliminate such violation. To the maximum extent possible, any such amendment
shall preserve the underlying economic and financial arrangements between
Practice and Manager. To the extent the parties cannot agree on any such
amendment or changes, the matter shall be submitted to binding arbitration upon
the request of either party and through the arbitration process an equitable
modification shall be implemented or an equitable termination of the Agreement
and relationship shall be made based on all of the facts and circumstances.
SECTION 12.13 Remedies Cumulative. No remedy set forth in this
Agreement or otherwise conferred upon or reserved to any party shall be
considered exclusive of any other remedy available to any party, but the same
shall be distinct separate and cumulative and may be exercised from time to time
as often as occasion may arise or as may be deemed expedient. Pursuit of any
remedy set forth in this Agreement shall not preclude pursuit of any other
remedy provided in this Agreement or any other remedy provided for in this
Agreement constitute a waiver of any amount due from a defaulting party under
this Agreement or of any damages accruing by reason of the violation of any of
its terms, provisions and covenants. No waiver of any violation shall be deemed
or construed to constitute a waiver of any other violation or breach of any of
the terms, provisions and covenants contained in this Agreement, and forbearance
to enforce one or more of the remedies provided on an event of default shall not
be deemed or construed to constitute a waiver of such default or of any other
remedy provided for in this Agreement.
SECTION 12.14 Language Construction. The language in all parts of this
Agreement shall be construed, in all cases, according to its fair meaning, and
not for or against either party hereto. The parties acknowledge that each party
and its counsel have reviewed and revised this Agreement and that the normal
rule of construction to the effect that any ambiguities
31
<PAGE>
are to be resolved against the drafting party shall not be employed in the
interpretation of this Agreement.
SECTION 12.15 No Obligation to Third Parties. None of the obligations
and duties of Manager or Practice under this Agreement shall in any way or in
any manner be deemed to create any obligation of Manager or of Practice to, or
any rights in, any person or entity not a party to this Agreement.
SECTION 12.16 Communications. Practice and Manager agree that good
communication between the parties is essential to the successful performance of
this Agreement, and each pledges to communicate fully and clearly with the other
on matters relating to the successful operation of Practice.
SECTION 12.17 Counterpart Executions; Facsimiles. This Agreement may
be executed in any number of counterparts with the same effect as if all of the
parties had signed the same document. Such executions may be transmitted to the
parties by facsimile and such facsimile execution shall have the full force and
effect of an original signature. All fully executed counterparts, whether
original executions or facsimile executions or a combination, shall be construed
together and shall constitute one and the same agreement.
SECTION 12.18 Arbitration. The parties hereto agree that any dispute
between them other than an action or proceeding for injunctive or other
equitable relief, shall be resolved by binding arbitration. Such arbitration
shall be conducted by the American Arbitration Association in accordance with
its then existing commercial rules applicable to such disputes. Such arbitration
shall be conducted in Houston, Texas. The decision of such arbitrators shall be
final and binding upon the parties hereto and may be enforced by a court with
applicable authority.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) to be binding as of the day and year first above
written and to be effective and commence on October 1, 1996.
32
<PAGE>
EXECUTION PAGE
TO THE
SERVICE AGREEMENT
BETWEEN
PHYSICIAN MANAGEMENT OF MCALLEN, INC.
AND
HEART CLINIC, P.A.
JULY 31, 1996
PRACTICE:
HEART CLINIC, P.A.
Date: 8/8/96 By: /s/ Hugo Blake, M.D.
-------- --------------------
Title: President
--------------------
MANAGER:
PHYSICIAN MANAGEMENT OF McALLEN, INC.
Date 7/31/96 By: David Ward
----------
Title: President
----------
<PAGE>
EXECUTION PAGE
TO THE
SERVICE AGREEMENT
BETWEEN
PHYSICIAN MANAGEMENT OF MCALLEN, INC.
AND
HEART CLINIC, P.A.
JULY 31, 1996
The Physician Shareholders of Practice and the Associated PAs hereby execute
this Agreement for purposes of acknowledging and agreeing to be bound by the
terms of Section 1.5, Article II, Sections 5.5, 6.3, 6.8, 6.9, Article VII,
Sections 10.3, 10.7, 11.4 and 11.5 hereof.
ASSOCIATED PAS: PHYSICIAN SHAREHOLDERS:
HUGO BLAKE, M.D., P.A.
By: /s/ Hugo Blake, M.D. /s/ Hugo Blake, M.D.
--------------------- --------------------
Hugo Blake, M.D. Hugo Blake, M.D.
Date 7/31/96 Date 7/31/96
SHEREEF HILMY, M.D., P.A.
By: /s/ Shereef Hilmy, M.D. /s/ Shereef Hilmy, M.D.
----------------------- ------------------------
Shereef Hilmy, M.D. Shereef Hilmy, M.D.
Date 7/31/96 Date 7/31/96
MICHAEL EVANS, M.D., P.A.
By: /s/ Michael Evans, M.D. /s/ Michael Evans, M.D.
----------------------- ------------------------
Michael Evans, M.D. Michael Evans, M.D.
Date 7/31/96 Date 7/31/96
<PAGE>
NAJI KANDALAFT, M.D., P.A.
By: /s/ Naji Kandalaft, M.D. /s/ Naji Kandalaft, M.D.
------------------------ -------------------------
Naji Kandalaft, M.D. Naji Kandalaft, M.D.
Date 7/31/96 Date 7/31/96
EDUARDO FLORES, M.D., P.A.
By: /s/ Eduardo Flores, M.D. /s/ Eduardo Flores, M.D.
------------------------ -------------------------
Eduardo Flores, M.D. Eduardo Flores, M.D.
Date 7/31/96 Date 7/31/96
CHRISTOPHER GILL, M.D., P.A.
By: /s/ Christopher Gill, M.D. /s/ Christopher Gill, M.D.
-------------------------- --------------------------
Christopher Gill, M.D. Christopher Gill, M.D.
Date 7/31/96 Date 7/31/96
CARLOS PIMENTEL, M.D., P.A.
By: /s/ Carlos Pimentel, M.D. /s/ Carlos Pimentel, M.D.
------------------------- -------------------------
Carlos Pimentel, M.D. Carlos Pimentel, M.D.
Date 7/31/96 Date 7/31/96
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<PAGE>
HEART CLINIC, P.A.
PRINCIPAL AMOUNT: $6,359,958.00
DATE OF ISSUANCE: OCTOBER 1, 1996
MEDCATH INCORPORATED
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
MEDCATH INCORPORATED, a North Carolina corporation (the "Company"), for
value received hereby promises to pay to HEART CLINIC, P.A., a Texas
professional association ("Heart Clinic") at the address of the Heart Clinic as
set forth below on October 1, 1998 (the "Maturity Date"), the principal sum of
Six Million Three Hundred Fifty-Nine Thousand Nine Hundred Fifty-Eight Dollars
($6,359,958.00) upon the terms and conditions set forth herein. This Note has
been issued to the holder in accordance with and is subject to the terms of that
certain Master Transaction Agreement dated as of July 31, 1996 between the
Company and Heart Clinic (the "Master Transaction Agreement") and the related
Service Agreement dated as of July 31, 1996 by and between Heart Clinic and
Physician Management of McAllen, Inc.
RESTRICTIONS ON TRANSFERABILITY
THIS CONVERTIBLE NOTE AND THE COMMON STOCK INTO WHICH IT MAY BE
CONVERTED HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS, IN THE ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH ACTS AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MEDCATH THAT SUCH REGISTRATION IS
NOT REQUIRED.
1. Interest. The Company promises to pay interest on the principal
amount of this Note at the rate of 4% per annum. The Company will pay all
accrued interest annually on each anniversary of the Issuance Date and on the
effective date of conversion under paragraph 6 to the extent of the accrued
interest on the principal amount of this Note then converted (an "Interest
Payment Date"). Interest on this Note will accrue from the date of issuance set
forth above (the "Date of Issuance"). Interest will be computed on the basis of
a 365-day year of twelve 30-day months. Interest shall not be earned or accrued
on unpaid amount of interest which accrue hereunder unless such interest is not
paid when due. Following an Event of Default, the applicable interest rate under
this Note shall instead equal the rate announced from time to time by
NationsBank as its "prime rate" plus two percent (2%) per annum.
2. Principal. The principal amount of this Note will mature and become
due and payable in cash as follows:
(A) One Million Nine Hundred Seven Thousand Nine Hundred
Eighty-Eight Dollars ($1,907,988) shall be due and payable on November
1, 1996; and
(B) the remaining principal amount of the Note shall be due
and payable on the Maturity Date with respect to any principal amount
of this Note which has not been converted pursuant to paragraph 6.
3. Method of Payment. The Company will pay interest to the person who
is the registered holder of this Note at the close of business on the Interest
Payment Date. The Company will pay principal and interest in coin or currency of
the United States that is legal tender for payment of public and private debts
on the Interest Payment Date. The Company may, however, pay principal, and
interest by its check payable in such money delivered by
<PAGE>
regular mail to the holder's registered address. After payment of all amounts
due hereunder, the holder must thereafter surrender this Note to the Company on
the Maturity Date for cancellation.
4. Optional Redemption. In anticipation of the closing of a Major
Transaction (as defined in paragraph 6), the Company at its option upon 10 days
prior written notice may, at any time after the first anniversary of the Date of
Issuance, redeem this Note in whole or in part at any time or from time to time
at 100% of the principal amount being so redeemed plus accrued interest to the
redemption date; provided that within such 10 day period the holder of this Note
may elect in writing to convert the principal amount of this Note to Common
Stock as set forth in paragraph 6 below which shall be effective immediately
prior to the closing of a Major Transaction.
5. Notice of Redemption. Any notice of redemption will be mailed at
least 10 but not more than 60 days before the redemption date to the holder of
this Note at his registered address. On and after the redemption date, interest
shall cease to accrue on this Note or any portion of it called for redemption.
6. Conversion. The holder of this Note may convert from time to time
all or any portion of the principal amount of this Note described in Paragraph
2(B) above into shares of common stock of the Company (the "Common Stock") by
giving the Company written notice thereof no less than 10 days and no more than
45 days prior to the Maturity Date which conversion shall be effective on the
Maturity Date. The per share price of the Common Stock, for purposes of
conversion, shall be $14.00 per share (the "Conversion Price"). To determine the
number of shares issuable upon conversion of the Note, the principal amount
converted shall be divided by the Conversion Price and shall be rounded down to
the nearest whole number. The Company will deliver its check in an amount equal
to the value of any fraction (based upon the Conversion Price) which is rounded
down in determining the number of shares issuable upon conversion.
To convert this Note, the registered holder must (1) complete and sign
the conversion notice attached hereto as Exhibit A, (2) surrender the Note to
the Company, (3) furnish appropriate endorsements or transfer documents if
required by the Company and (4) pay any transfer or similar tax if required. If
the holder surrenders this Note for conversion during the period from the close
of business on the first day of the month in which an interest payment date is
due to the opening of business on such interest payment date, the Note must be
accompanied by payment of an amount equal to the interest payable on such
interest payment date on the outstanding principal amount of the Note then being
converted. The holder may only convert the principal amount of this Note. The
Conversion Price is subject to adjustment in the event it is necessary or
appropriate to take in consideration the occurrence of any of the following: (i)
the payment of a dividend in shares of Common Stock or shares of the Company's
capital stock other than Common Stock, (ii) the distribution to holders of
Common Stock of shares of the Company's capital stock other than Common Stock,
(iii) the subdivision, combination, or reclassification of outstanding shares of
Common stock, (iv) the issuance to all holders of Common Stock of rights or
warrants entitling them to acquire shares of Common Stock (or other securities
convertible into Common Stock) at a price (or having a conversion price per
share) less than the then current per share market price of the Common Stock,
and (v) the distribution to all holders of Common Stock of evidences of
indebtedness or of assets of the Company (excluding cash dividends) or of rights
or warrants (other than those referred to under (iv) above). No adjustment of
the Conversion Price shall be made for cash dividends paid out of consolidated
net income or retained earnings, or for shares issued for cash, property or
services or pursuant to any employee benefit plan, stock option, stock purchase,
stock bonus or other stock plan, now in effect or adopted by the Company in the
future.
In the case of any consolidation or merger of the Company with or into
another corporation in which the Company is not the continuing corporation, or a
merger that reclassifies or changes the outstanding Common Stock of the Company,
or in the event of any sale or transfer of all or substantially all of the
assets of the Company (any of such transactions, a "Major Transaction"), if the
closing of such Major Transaction is scheduled after the first anniversary of
the Issuance Date, the holder of this Note will have the right, upon written
notice to the Company, to convert such Note into the kind and amount of
securities or cash or other assets receivable upon the consolidation, merger,
sale or conveyance by a holder of the number of shares of Common Stock into
which such Note could have been converted immediately prior thereto.
Accordingly, if under the terms of any such merger the shareholders of the
Company do not receive common stock of the surviving corporation, but rather
receive a specified amount in cash, the holder of this Note would thereafter
have the right to convert this Note exclusively into whatever amount
-2-
<PAGE>
in cash they would have received had they converted the Note in full immediately
prior to any such merger. If the holder of this Note fails to elect to convert
this Note as set forth above, the holder thereafter shall have no further rights
to convert this Note and shall receive only cash on the Maturity Date.
If a Major Transaction is consummated prior to the first anniversary of
the Issuance Date, the Board of Directors of the Company shall take such steps
as are reasonably necessary or appropriate to enable the holder of this Note,
after such first anniversary to finally elect within fifteen (15) days after
such first anniversary either to receive the principal amount of this Note in
cash on the Maturity Date or to receive at the time of such election the amount
and types of consideration which the holder would have received had the holder
converted this Note to Common Stock immediately prior to the consummation of the
Major Transaction. After such fifteen (15) day period, the holder hereof shall
have no further rights to convert this Note and shall receive only cash on the
Maturity Date.
7. Subordination. Anything in this Note to the contrary
notwithstanding, the obligation of the Company to pay the principal and interest
on this Note, and to discharge all of its other obligations hereunder shall be
subordinate and junior and right of payment to the extent set forth in the
following paragraphs (A), (B) and (C), inclusive, to (i) all obligations of the
Company or its related legal entities to banks or other financial institutions
for borrowed money, (ii) all obligations of the Company to banks, financial
institutions or other lenders under guarantees by the Company of obligations of
related legal entities to banks, financial institutions or other lenders for
borrowed money, in each case, whether such obligations are outstanding at the
date of this Note or created or incurred after the date of this Note but prior
to the maturity of this Note and (iii) all obligations of the Company or its
related legal entities arising in connection with lease financing or for money
borrowed or securities of the Company or its related entities issued in
connection with transactions undertaken for general corporate purposes, which
with respect to any such obligation or liability listed in (i) through (ii)
above is at any time designated as Senior Indebtedness for the purposes of this
Note by the Company. The obligations of the Company to which this Note is
subordinate and junior in right of payment are sometimes herein referred to as
"Senior Indebtedness."
(A) In the event of any insolvency, bankruptcy,
liquidation, reorganization or other similar proceedings, or
any receivership proceedings in connection therewith, relative
to the Company or its creditors or its property, and in the
event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company, whether or not
involving insolvency or bankruptcy proceedings, then all
Senior Indebtedness shall first be paid in full, before any
payment on account of principal or interest is made upon this
Note.
(B) In any of the proceedings referred to in
paragraph (A) above, any payment or distribution of any kind
or character, whether in cash, property, stock or obligations
which may be payable or deliverable in respect of this Note
shall be paid or delivered directly to the holders of Senior
Indebtedness for application in payment thereof, unless and
until all Senior Indebtedness shall have been paid in full.
(C) In the event the Company shall default under any
Senior Indebtedness obligation held by any bank or other
financial institution and the effect of such default is to
accelerate the maturity of such obligation or the holder
thereof shall cause such obligation to become due prior to the
stated maturity thereof or the Company shall not pay such
obligation at maturity, the Company will not make, directly or
indirectly, to the holder of this Note any payment of any kind
of or on account of all or any part of this Note, and the
holder of this Note will not accept from the Company any
payment of any kind of or on account of all or any part of
this Note, unless and until all such Senior Indebtedness shall
have been paid in full, provided, however, that if (1) such
default shall have occurred and be continuing for 60 days or
more, (2) such default shall not have been cured or waived and
(3) if such default is related to a default under such Senior
Indebtedness other than the non-payment of principal or
interest of such Senior Indebtedness, and (4) the holder of
such Senior Indebtedness obligation shall not have made a
demand for payment and commenced an action, suit or other
proceeding against the Company (in which event the holder of
this Note may not take, demand, receive, sue for, accelerate
or commence any remedial proceedings with respect to any
amount payable under this Note), then
-3-
<PAGE>
the Company may make and the holder of this Note may accept
from the Company all past due and current payments of any kind
of or on account of this Note, and such holder may demand,
receive, retain, sue for or otherwise seek enforcement or
collection of all amounts payable on account of principal of
or interest on this Note.
By accepting delivery of this Note, the holder agrees to the foregoing
subordination provisions and authorizes the Company to give such provisions
effect. The holder agrees to execute such further evidence of the terms and
intent of this paragraph 7 upon reasonable request therefore by the Company or
its lenders.
8. Transfer; Exchange; Assignment. THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT AND THE COMPANY HAS NO PLANS TO REGISTER THIS NOTE
UNDER THE SECURITIES ACT. The holder hereof may not assign this Note or any
rights or portion hereof without the Company's written consent. In all events
any transfer or assignment of this Note or any rights hereunder is subject to
the availability of an exemption from registration under the Securities Act, the
holder of this Note may transfer or assign this Note. The Company may require
the holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law. The Company need not
transfer or exchange this Note if it has been selected for redemption, or
transfer or exchange this Note for a period of 15 days before the Company
determines to select this Note, or other notes with identical terms (except for
differing principal amounts), for redemption.
9. Person Deemed Owner. The registered holder of this Note may be
treated by the Company as its owner for all purposes.
10. Successor Corporation. In the event the Company sells all or
substantially all of its assets in a bona fide transaction with an unrelated
third party (either directly or through a sale of stock and in connection
therewith a liquidation or distribution of all or substantially all of the
Company's assets is made), the purchaser of the Company thereof shall be
required to assume the Company's liabilities under this Note. If an unrelated
third party successor corporation in a bona fide transaction assumes all the
obligations of the Company under this Note, the Company shall be released from
its obligations hereunder as long as the shareholder's equity of such purchaser
equals at least the shareholder's equity of the Company as of the date of such
transaction. If the shareholder's equity of the purchaser does not equal the
shareholder's equity of the Company as of the closing of such transaction, then
the Company shall be released from its obligations hereunder only if the holder
consents to such assumption by such purchaser, which consent shall not be
unreasonably withheld.
11. Defaults and Remedies. An Event of Default is: (i) default which
continues for 20 days in payment of interest on this Note when due and payable;
(ii) default in payment of the principal of, or premium, if any, on this Note
when due; (iii) failure by the Company for 20 days after notice to it to comply
with any of its other covenants, conditions or agreements in this Note; (iv) the
commencement by the Company of a voluntary case, consent to the entry of an
order of relief against it in an involuntary case, consent to the appointment of
custodian for all or substantially all of its property, the making of a general
assignment for the benefit of creditors, or the Company's becoming subject to
any order of relief, appointment of custodian, or order of liquidation entered
by a court of competent jurisdiction under any United States Bankruptcy law or
any state or local law for the relief of debtors, and such order remains
unstayed and in effect for 60 days. If an Event of Default occurs and is
continuing, the holder of this Note may declare it due and payable immediately.
The Company shall, within 20 days after the occurrence of an Event of Default
(not including any grace periods), give notice to the holder of this Note of all
Events of Default known to the Company.
12. No Recourse Against Others. A director, officer, employee or
shareholder, as such, of the Company shall not have any liability for any
obligations of the Company under this Note or for any claim based on, in respect
of or by reason of, such obligations or their creation. By accepting this Note,
the holder hereof waives and releases all such liability. Such waiver and
release are part of the consideration for the issuance of this Note.
13. Governing Law. This Note shall be governed by North Carolina law.
14. Notice. Any notice to be provided hereunder to the Company may be
provided via telecopy, registered U.S. Mail, return receipt requested, or by
overnight express courier to the Company as follows:
-4-
<PAGE>
To the Company: MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attention: President
To the Heart Clinic: Heart Clinic, P.A.
2310 North Ed Carey Drive, #1-A
Harlingen, Texas 78550
Attention: President
15. Collection Expenses. In the event that the holder of this Note,
after the occurrence of an Event of Default retains attorneys to institute a
legal action to enforce the Company's obligation under this Note, then the
holder shall be entitled to recover from the Company its reasonable attorney's
fees (not to exceed such attorneys' regular hourly rate) and expenses incurred
in connection with such enforcement of the Company's obligations under this
Note.
IN WITNESS WHEREOF, the Company has executed this Note under seal as of
the date of issuance first above written.
MEDCATH INCORPORATED
By: /s/ David Crane
Title: Executive Vice President
[CORPORATE SEAL]
Attest: /s/ Daniel L. Belongia
By: Daniel L. Belongia
Title: Secretary
-5-
<PAGE>
Exhibit A
NOTICE OF CONVERSION
HEART CLINIC, P.A. (the "Holder") hereby gives MEDCATH INCORPORATED
(the "Company") notice that the Holder, subject to the terms and conditions of
the Convertible Subordinated Promissory Note (the "Note") attached to this
Notice and the terms of the Master Transaction Agreement dated July 31, 1996
between the Holder and the Company, desires to exercise its rights to convert
the portion of the principal amount of the Note as set forth below to common
stock of the Company. In connection therewith, the Holder provides the following
information:
Amount of principal to be converted: $________________
Conversion price per share: $________________
Number of shares of common stock converted into: ________________
Remaining principal outstanding under the Note: $________________
The Holder agrees to take all such other steps and execute such
additional documents as may be provided for under the terms of the Note.
HEART CLINIC, P.A.
By: _____________________
Title: ____________________
Date: ____________________
<PAGE>
Exhibit 10.51
HEART CLINIC, P.A.
DATE OF ISSUANCE: OCTOBER 1, 1996
MEDCATH INCORPORATED
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
("ADDITIONAL PROMISSORY NOTE")
MEDCATH INCORPORATED, a North Carolina corporation (the "Company"), for
value received hereby promises to pay to HEART CLINIC, P.A., a Texas
professional association ("Heart Clinic") at the address of the Heart Clinic as
set forth below on March 1, 1999 (the "Maturity Date"), the principal sum which
is to be determined as set forth in paragraph 2 below upon the terms and
conditions set forth herein. This Note is the "Additional Promissory Note"
referred to and issued in accordance with the terms of that certain Master
Transaction Agreement dated as of July 31, 1996 between the Company and Heart
Clinic (the "Master Transaction Agreement") and is subject to the terms and
conditions of the Master Transaction Agreement and the related Service Agreement
dated as of July 31, 1996 between Heart Clinic and Physician Management of
McAllen, Inc.
RESTRICTIONS ON TRANSFERABILITY
THIS CONVERTIBLE NOTE AND THE COMMON STOCK INTO WHICH IT MAY BE
CONVERTED HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS, IN THE ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH ACTS AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MEDCATH THAT SUCH REGISTRATION IS
NOT REQUIRED.
1. Interest. No interest shall accrue or be paid with respect to the
principal amount of this Note. Following an Event of Default, the unpaid
principal amount of this Note shall bear interest at the interest rate announced
from time to time by NationsBank as its "prime rate" plus two percent (2%) per
annum.
2. Principal. The principal amount of this Note shall be the amount of
the "Supplemental Payment" as determined in accordance with Exhibit F to the
Master Transaction Agreement and shall be due and payable as
follows:
(A) The portion of the Supplemental Payment due to the Heart
Clinic with respect to the calendar year 1997 (the "1997 Amount") shall
be due and payable:
(i) Thirty percent (30%) of the 1997 Amount
shall be due and payable in cash on March 1, 1998; and
(ii) The remaining seventy percent (70%) of the
1997 Amount shall be due and payable in cash on October 1,
1998 subject, however, to the holder's rights to convert such
principal amount in accordance with paragraph 6; and
(B) The portion of the Supplemental Payment due to the Heart
Clinic with respect to the calendar year 1998 (the "1998 Amount") shall
be due and payable as follows:
(i) Thirty percent (30%) of the 1998 Amount
shall be due and payable in cash on March 1, 1999; and
<PAGE>
(ii) The remaining seventy percent (70%) of the
1998 Amount shall be due and payable in cash on March 1, 1999,
subject however, to the holder's right to convert such
principal amount in accordance with paragraph 6 hereof.
3. Method of Payment. The Company will pay principal in coin or
currency of the United States that is legal tender for payment of public and
private debts. The Company may, however, pay principal by its check payable in
such money delivered by regular mail to the holder's address. After payment of
all amounts due hereunder, the holder must surrender this Note to the Company on
the Maturity Date for cancellation.
4. Optional Redemption. In anticipation of the closing of a Major
Transaction (as defined in paragraph 6), the Company at its option upon 10 days
prior written notice may, at any time after the first anniversary of the Date of
Issuance, redeem this Note in whole or in part at any time or from time to time
at 100% of the principal amount being so redeemed; provided that within such 10
day period the holder of this Note may elect in writing to convert the principal
amount of this Note to Common Stock as set forth in paragraph 6 below which
shall be effective immediately prior to the closing of a Major Transaction.
5. Notice of Redemption. Any notice of redemption will be mailed at
least 10 but not more than 60 days before the redemption date to the holder of
this Note at his registered address.
6. Conversion. The holder of this Note may convert from time to time
all or any portion of the principal amounts of this Note described in paragraphs
2(A)(ii) and 2(B)(ii) above into shares of common stock of the Company (the
"Common Stock") by giving the Company written notice thereof no less than 10
days and no more than 45 days prior to October 1, 1998 with respect to the
amount set forth in paragraph 2(A)(ii) above, and March 1, 1999 with respect to
amounts set forth in paragraph 2(B)(ii) above. The per share price of the Common
Stock, for purposes of conversion, shall be the average closing price of the
Common Stock as quoted on Nasdaq during the seven trading day period ending two
days prior to December 31, 1997 with respect to amounts set forth in paragraph
2(A)(ii), and December 31, 1998 with respect to amounts set forth in paragraph
2(B)(ii) above (the "Conversion Price"). To determine the number of shares
issuable upon conversion of the Note, the principal amount converted shall be
divided by the Conversion Price and shall be rounded down to the nearest whole
number. The Company will deliver its check in an amount equal to the value of
any fraction (based upon the Conversion Price) which is rounded down in
determining the number of shares issuable upon conversion.
To convert this Note, the registered holder must (1) complete and sign
the conversion notice attached hereto as Exhibit A, (2) surrender the Note to
the Company, (3) furnish appropriate endorsements or transfer documents if
required by the Company and (4) pay any transfer or similar tax if required. If
the holder surrenders this Note for conversion during the period from the close
of business on the first day of the month in which an interest payment date is
due to the opening of business on such interest payment date, the Note must be
accompanied by payment of an amount equal to the interest payable on such
interest payment date on the outstanding principal amount of the Note then being
converted. The holder may only convert the principal amount of this Note. The
Conversion Price is subject to adjustment in the event it is necessary or
appropriate to take in consideration the occurrence of any of the following: (i)
the payment of a dividend in shares of Common Stock or shares of the Company's
capital stock other than Common Stock, (ii) the distribution to holders of
Common Stock of shares of the Company's capital stock other than Common Stock,
(iii) the subdivision, combination, or reclassification of outstanding shares of
Common stock, (iv) the issuance to all holders of Common Stock of rights or
warrants entitling them to acquire shares of Common Stock (or other securities
convertible into Common Stock) at a price (or having a conversion price per
share) less than the then current per share market price of the Common Stock,
and (v) the distribution to holders of Common Stock of evidences of indebtedness
or of assets of the Company (excluding cash dividends) or of rights or warrants
(other than those referred to under (iv) above). No adjustment of the Conversion
Price shall be made for cash dividends paid out of consolidated net income or
retained earnings, or for shares issued for cash, property or services or
pursuant to any employee benefit plan, stock option, stock purchase, stock bonus
or other stock plan, now in effect or adopted by the Company in the future.
In the case of any consolidation or merger of the Company with or into
another corporation in which the Company is not the continuing corporation, or a
merger that reclassifies or changes the outstanding Common Stock of the Company,
or in the event of any sale or transfer of all or substantially all of the
assets of the Company (any of
-2-
<PAGE>
such transactions, a "Major Transaction"), if the closing of such Major
Transaction is scheduled after the first anniversary of the Issuance Date and
after the dates on which the amounts of the Supplemental Payment can first be
determined, the holder of this Note will have the right, upon written notice to
the Company, to convert such Note into the kind and amount of securities or cash
or other assets receivable upon the consolidation, merger, sale or conveyance by
a holder of the number of shares of Common Stock into which such Note could have
been converted immediately prior thereto. Accordingly, if under the terms of any
such merger the shareholders of the Company do not receive common stock of the
surviving corporation, but rather receive a specified amount in cash, the holder
of this Note would thereafter have the right to convert this Note exclusively
into whatever amount in cash they would have received had they converted the
Note in full immediately prior to any such merger. If the holder of this Note
fails to elect to convert this Note as set forth above, the holder thereafter
shall have no further rights to convert this Note and shall receive only cash on
the Maturity Date.
If a Major Transaction is consummated prior to the first anniversary of
the Issuance Date or prior to the dates on which the Supplemental Payment
amounts can first be determined, the Board of Directors of the Company either
(x) shall take such steps as are reasonably necessary or appropriate to enable
the holder of this Note, after such first anniversary and after the dates on
which the amounts of the Supplemental Payment are first determined to finally
elect within fifteen (15) days after such first anniversary and after such other
dates either to receive the principal amount of this Note in cash on the
Maturity Date and the other dates on which principal is due hereunder, or to
receive at the time of such election by the holder the amount and types of
consideration ("Transaction Consideration") which the holder would have received
had the holder converted this Note in accordance with its terms to Common Stock
immediately prior to the consummation of the Major Transaction or (y) shall
elect to require that the holder receive only cash on the Maturity Date and the
other dates on which principal is due hereunder. If the Board of Directors has
proceeded under (x) above and if the holder has not elected to receive
Transaction Consideration within such fifteen (15) day period, the holder hereof
shall have no further rights to convert this Note and shall receive only cash on
the Maturity Date and the other dates on which principal is due hereunder. If
the Board of Directors has proceeded under (y) above, then the holder shall
receive only cash on the Maturity Date and the other dates on which principal is
due hereunder.
7. Subordination. Anything in this Note to the contrary
notwithstanding, the obligation of the Company to pay the principal and interest
on this Note, and to discharge all of its other obligations hereunder shall be
subordinate and junior and right of payment to the extent set forth in the
following paragraphs (A), (B) and (C), inclusive, to (i) all obligations of the
Company or its related legal entities to banks or other financial institutions
for borrowed money, (ii) all obligations of the Company to banks, financial
institutions or other lenders under guarantees by the Company of obligations of
related legal entities to banks, financial institutions or other lenders for
borrowed money, in each case, whether such obligations are outstanding at the
date of this Note or created or incurred after the date of this Note but prior
to the maturity of this Note and (iii) all obligations of the Company or its
related legal entities arising in connection with lease financing or for money
borrowed or securities of the Company or its related entities issued in
connection with transactions undertaken for general corporate purposes, which
with respect to any such obligation or liability listed in (i) through (ii)
above is at any time designated as Senior Indebtedness for the purposes of this
Note by the Company. The obligations of the Company to which this Note is
subordinate and junior in right of payment are sometimes herein referred to as
"Senior Indebtedness."
(A) In the event of any insolvency, bankruptcy,
liquidation, reorganization or other similar proceedings, or
any receivership proceedings in connection therewith, relative
to the Company or its creditors or its property, and in the
event of any proceedings for voluntary liquidation,
dissolution or other winding up of the Company, whether or not
involving insolvency or bankruptcy proceedings, then all
Senior Indebtedness shall first be paid in full, before any
payment on account of principal or interest is made upon this
Note.
(B) In any of the proceedings referred to in
paragraph (A) above, any payment or distribution of any kind
or character, whether in cash, property, stock or obligations
which may be payable or deliverable in respect of this Note
shall be paid or delivered directly to the holders of Senior
Indebtedness for application in payment thereof, unless and
until all Senior Indebtedness shall have been paid in full.
-3-
<PAGE>
(C) In the event the Company shall default under any
Senior Indebtedness obligation held by any bank or other
financial institution and the effect of such default is to
accelerate the maturity of such obligation or the holder
thereof shall cause such obligation to become due prior to the
stated maturity thereof or the Company shall not pay such
obligation at maturity, the Company will not make, directly or
indirectly, to the holder of this Note any payment of any kind
of or on account of all or any part of this Note, and the
holder of this Note will not accept from the Company any
payment of any kind of or on account of all or any part of
this Note, unless and until all such Senior Indebtedness shall
have been paid in full, provided, however, that if (1) such
default shall have occurred and be continuing for 60 days or
more, (2) such default shall not have been cured or waived and
(3) if such default is related to a default under such Senior
Indebtedness other than the non-payment of principal or
interest of such Senior Indebtedness, and (4) the holder of
such Senior Indebtedness obligation shall not have made a
demand for payment and commenced an action, suit or other
proceeding against the Company (in which event the holder of
this Note may not take, demand, receive, sue for, accelerate
or commence any remedial proceedings with respect to any
amount payable under this Note), then the Company may make and
the holder of this Note may accept from the Company all past
due and current payments of any kind of or on account of this
Note, and such holder may demand, receive, retain, sue for or
otherwise seek enforcement or collection of all amounts
payable on account of principal of or interest on this Note.
By accepting delivery of this Note, the holder agrees to the foregoing
subordination provisions and authorizes the Company to give such provisions
effect. The holder agrees to execute such further evidence of the terms and
intent of this paragraph 7 upon reasonable request therefore by the Company or
its lenders.
8. Transfer; Exchange; Assignment. THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT AND THE COMPANY HAS NO PLANS TO REGISTER THIS NOTE
UNDER THE SECURITIES ACT. The holder hereof may not assign this Note or any
rights or portion hereof without the Company's written consent. In all events
any transfer or assignment of this Note or any rights hereunder is subject to
the availability of an exemption from registration under the Securities Act, the
holder of this Note may transfer or assign this Note. The Company may require
the holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law. The Company need not
transfer or exchange this Note if it has been selected for redemption, or
transfer or exchange this Note for a period of 15 days before the Company
determines to select this Note, or other notes with identical terms (except for
differing principal amounts), for redemption.
9. Person Deemed Owner. The registered holder of this Note may be
treated by the Company as its owner for all purposes.
10. Successor Corporation. In the event the Company sells all or
substantially all of its assets in a bona fide transaction with an unrelated
third party (either directly or through a sale of stock and in connection
therewith a liquidation or distribution of all or substantially all of the
Company's assets is made), the purchaser of the Company thereof shall be
required to assume the Company's liabilities under this Note. If an unrelated
third party successor corporation in a bona fide transaction assumes all the
obligations of the Company under this Note, the Company shall be released from
its obligations hereunder as long as the shareholder's equity of such purchaser
equals at least the shareholder's equity of the Company as of the date of such
transaction. If the shareholder's equity of the purchaser does not equal the
shareholder's equity of the Company as of the closing of such transaction, then
the Company shall be released from its obligations hereunder only if the holder
consents to such assumption by such purchaser, which consent shall not be
unreasonably withheld.
11. Defaults and Remedies. An Event of Default is: (i) default which
continues for 20 days in payment of interest on this Note when due and payable;
(ii) default in payment of the principal of, or premium, if any, on this Note
when due; (iii) failure by the Company for 20 days after notice to it to comply
with any of its other covenants, conditions or agreements in this Note; (iv) the
commencement by the Company of a voluntary case, consent to the entry of an
order of relief against it in an involuntary case, consent to the appointment of
custodian for all or substantially all of its property, the making of a general
assignment for the benefit of creditors, or the
-4-
<PAGE>
Company's becoming subject to any order of relief, appointment of custodian, or
order of liquidation entered by a court of competent jurisdiction under any
United States Bankruptcy law or any state or local law for the relief of
debtors, and such order remains unstayed and in effect for 60 days. If an Event
of Default occurs and is continuing, the holder of this Note may declare it due
and payable immediately. The Company shall, within 20 days after the occurrence
of an Event of Default (not including any grace periods), give notice to the
holder of this Note of all Events of Default known to the Company.
12. No Recourse Against Others. A director, officer, employee or
shareholder, as such, of the Company shall not have any liability for any
obligations of the Company under this Note or for any claim based on, in respect
of or by reason of, such obligations or their creation. By accepting this Note,
the holder hereof waives and releases all such liability. Such waiver and
release are part of the consideration for the issuance of this Note.
13. Governing Law. This Note shall be governed by North Carolina law.
14. Notice. Any notice to be provided hereunder to the Company may be
provided via telecopy, registered U.S. Mail, return receipt requested, or by
overnight express courier to the Company as follows:
To the Company: MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attention: President
To the Heart Clinic: Heart Clinic, P.A.
2310 North Ed Carey Drive, #1-A
Harlingen, Texas 78550
Attention: President
15. Collection Expenses. In the event that the holder of this Note,
after the occurrence of an Event of Default retains attorneys to institute a
legal action to enforce the Company's obligation under this Note, then the
holder shall be entitled to recover from the Company its reasonable attorney's
fees (not to exceed such attorneys' regular hourly rates) and expenses incurred
in connection with such enforcement of the Company's obligations under this
Note.
-5-
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Note under seal as of
the date of issuance first above written.
MEDCATH INCORPORATED
By: /s/ David Crane
Title: Executive Vice President
[CORPORATE SEAL]
Attest: /s/ Daniel L. Belongia
By: Daniel L. Belongia
Title: Secretary
-6-
<PAGE>
Exhibit A
NOTICE OF CONVERSION
HEART CLINIC, P.A. (the "Holder") hereby gives MEDCATH INCORPORATED
(the "Company") notice that the Holder, subject to the terms and conditions of
the Additional Promissory Note (the "Note") attached to this Notice and the
terms of the Master Transaction Agreement dated July 31, 1996 between the Holder
and the Company, desires to exercise its rights to convert the portion of the
principal amount of the Note as set forth below to common stock of the Company.
In connection therewith, the Holder provides the following information:
Amount of principal to be converted: $__________________
Conversion price per share: $__________________
Number of shares of common stock converted into: ___________________
Remaining principal outstanding under the Note: $__________________
The Holder agrees to take all such other steps and execute such
additional documents as may be provided for under the terms of the Note.
HEART CLINIC, P.A.
By _____________________
Title: __________________
Date: ___________________
<PAGE>
MedCath Incorporated
Index to Exhibit 13.1
Portions of the 1996 Annual Report to Shareholders
Description Page
Selected Consolidated Financial Data 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 3-10
Report of Independent Auditors 11
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended
September 30, 1994, 1995 and 1996 12
Consolidated Balance Sheets at September 30, 1995 and 1996 13
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1994, 1995 and 1996 14
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1994, 1995 and 1996 15
Notes to Consolidated Financial Statements 16-30
1
<PAGE>
MedCath Incorporated
Selected Consolidated Financial Data
The following table sets forth selected historical financial data and other
operating information of the Company for each of the five fiscal years ending
September 30, 1996, which are derived from the consolidated financial
statements of the Company. In April 1995, the Company acquired Healthtech
Corporation in a transaction accounted for as a pooling-of-interests.
Accordingly, the financial statements of the Company, and the selected
financial data presented below, were restated to include the accounts and the
results of operations of HealthTech Corporation. All information contained in
the following table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA Year Ended September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1992 (2) 1993 1994 1995 (3) 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net revenue $ 7,697 $ 17,635 $25,892 $ 40,106 $ 66,191
Medical supplies, personnel and other operating expenses 4,325 9,113 13,239 23,586 43,502
Provision for doubtful accounts - - - - 735
Marketing, general and administrative expense 2,138 2,601 3,492 4,438 5,408
------------------------------------------------------------------
EBITDA (1) 1,234 5,921 9,161 12,082 16,546
Depreciation and amortization expense 855 2,179 2,767 3,633 6,649
------------------------------------------------------------------
Income from operations 379 3,742 6,394 8,449 9,897
Interest expense, net (319) (1,235) (1,632) (8) (523)
Minority interest in earnings of consolidated entities - (654) (893) (1,530) (979)
Equity in net earnings of unconsolidated subsidiaries - - 93 117 104
------------------------------------------------------------------
Income before income taxes and extraordinary item 60 1,853 3,962 7,028 8,499
Provision for income taxes - (551) (1,497) (2,777) (3,297)
------------------------------------------------------------------
Income before extraordinary item 60 1,302 2,465 4,251 5,202
Extraordinary loss - - - (228) -
------------------------------------------------------------------
Net income $ 60 $1,302 $2,465 $ 4,023 $ 5,202
==================================================================
Net income (loss) per share
Income (loss) before extraordinary item $ (0.06) $0.22 $0.42 $ 0.51 $0.51
Extraordinary loss - - - (0.03) -
------------------------------------------------------------------
Net income (loss) $ (0.06) $ 0.22 $0.42 $ 0.48 $0.51
==================================================================
Weighted average common shares outstanding ................ 3,571 5,832 5,918 8,381 10,193
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA September 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash and short-term investments ........................... $1,231 $3,452 $5,466 $18,525 $ 61,693
Working capital ........................................... 829 2,186 2,893 17,240 65,621
Total assets .............................................. 10,945 23,034 37,905 78,372 181,921
Long-term debt and capital leases, excluding
current maturities ................................... 5,254 5,810 13,198 15,734 45,895
Subordinated debt ......................................... -- 3,766 3,842 -- --
Redeemable convertible preferred stock .................... 3,947 6,763 6,763 -- --
Shareholders' equity ...................................... (504) 1,479 4,256 50,494 120,245
(1) EBITDA represents income from operations before depreciation, amortization,
interest, minority interests, equity in income of unconsolidated subsidiaries
and income taxes. While EBITDA should not be construed as a substitute for
income from operations or a better indicator of liquidity than cash flows from
operating activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional information
with respect to the ability of the Company to meet its future debt service,
capital expenditures and working capital requirements. EBITDA is not
necessarily a measure of the Company's ability to fund its cash needs.
(2) The net loss per common share for 1992 reflects the reduction of net income
available to common shareholders for the value assigned to shares of Common
Stock issued to holders of then outstanding shares of preferred stock in
exchange for the waiver of the right to receive cumulative accrued and future
dividends.
(3) Includes the results of operations of PhysMed Management Services, Inc.,
which was acquired in a purchase business combination effective October 1, 1994.
See Note 3 of Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and accompanying Notes thereto included elsewhere herein.
All references to 1994, 1995 and 1996 refer to the respective fiscal years ended
September 30, 1994, 1995 and 1996.
INTRODUCTION AND BUSINESS STRATEGY
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. The Company believes that a
fully-integrated network incorporating leading physicians, state-of-the-art
facilities and practice management systems designed to provide high quality,
cost-effective diagnosis and treatment of cardiovascular disease offers
significant advantages to patients, providers and payors.
Key elements of the Company's strategy are to (i) focus exclusively on
cardiology and cardiovascular services, (ii) develop and operate full-service
heart hospitals, co-owned with leading local cardiac care physicians, that are
designed to have a substantially lower cost structure than conventional acute
care hospitals ("Heart Hospitals"), (iii) acquire and manage physician group
practices which include cardiologists and cardiovascular and vascular surgeons
with leading local market positions ("Managed Practices") and (iv) acquire,
develop and operate fixed-site cardiac diagnostic and therapeutic facilities
("Fixed-Site Facilities") and mobile cardiac diagnostic centers ("Mobile Cath
Labs") in selected markets. The Company believes that its strategy will enable
it to respond proactively to the restructuring of the health care system away
from traditional fee-for-service plans and towards managed care arrangements.
With the lower cost structure of its integrated cardiac care delivery systems,
the Company believes it will be well positioned in the markets it serves to
capture a significant share of patients enrolled in HMOs and other managed care
programs.
3
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenue represented by certain
items reflected in the Company's Consolidated Statements of Income.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
---------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net Revenue:
Diagnostics Division 100.0% 75.6% 51.5%
Practice Management Division - 24.4 22.2
Hospital Division - - 26.3
------------- ------------ ------------
Total Net Revenue 100.0% 100.0% 100.0%
Operating Expenses:
Medical Supplies, Personnel & Other Operating 51.1 58.8 65.7
Depreciation and Amortization 10.7 9.1 10.0
Provision for Doubtful Accounts - - 1.1
Marketing, General and Administrative 13.5 11.0 8.2
------------- ------------ ------------
Total Operating Expenses 75.3 78.9 85.0
------------- ------------ ------------
Income From Operations 24.7 21.1 15.0
Interest Expense, Net (6.3) - (.8)
Minority Interest in Earnings of Consolidated Entities (3.5) (3.8) (1.5)
Equity in Earnings of Unconsolidated Subsidiaries .4 .2 .2
------------- ------------ ------------
Income Before Income Taxes and Extraordinary Item 15.3 17.5 12.9
Provision for Income Taxes (5.8) (6.9) (5.0)
------------- ------------ ------------
Income Before Extraordinary Item 9.5 10.6 7.9
Extraordinary Loss on Early Extinguishment of Debt - (.6) -
============= ============ ============
Net Income 9.5% 10.0% 7.9%
============= ============ ============
</TABLE>
1996 COMPARED TO 1995
THE MCALLEN HEART HOSPITAL
In January 1996, the Company opened its first Heart Hospital, the McAllen Heart
Hospital, located in McAllen, Texas. The hospital generated net revenue of $17.4
million and accounted for approximately 26% of the Company's total net revenue.
Operating expenses incurred at the McAllen Heart Hospital accounted for a
majority of the increases in total operating expenses from 1995. Loss from
operations in 1996, before interest and minority interest, was approximately
$616,000. Although the hospital experienced operating losses, EBITDA at the
hospital was approximately $2.2 million, or 12.8% of net revenue. The McAllen
Heart Hospital experienced monthly operating losses from its opening through
July 1996; however, in August and September of 1996 the hospital operated
profitably. The Company expects each of its Heart Hospitals to experience
operating losses in the first six to nine months of operations, but also expects
they will generate positive EBITDA margins. In 1996, the McAllen Heart
Hospital's total operating losses after interest and minority interest
represented approximately $.16 per share. The McAllen Heart Hospital is operated
by a limited partnership in which the Company owns an approximate 51% interest
and is general partner. Therefore, the results of operations are included in the
Company's consolidated financial statements. Because the cumulative operating
losses of the McAllen Heart Hospital exceeded the initial capitalization of the
partnership, the limited partners could not be allocated any losses
4
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
in excess of their initial capital contributions. Therefore, the Company, as the
only general partner in the partnership, was required to recognize 100% of the
operating losses that exceeded the initial capitalization of the partnership,
rather than share these losses on a pro rata basis with the limited partners.
The recognition of losses which would have otherwise been allocated to the
minority partners had a $.05 per share negative impact on net income per share
during fiscal 1996. In August and September of 1996 the hospital operated
profitably and the Company recognized 100% of the partnership's profits during
these two months. The Company will continue recognizing 100% of the
partnership's profits and losses to the extent it has previously recognized a
disproportionate share of the partnership's losses. Thereafter, the Company will
share the profits and losses of the partnership on a pro rata basis with the
limited partners based on their respective ownership percentages.
NET REVENUE
Consolidated net revenue increased 65.0% to $66.2 million in 1996 from $40.1
million in 1995. Of this $26.1 million increase, $17.4 million was attributable
to net revenues at the McAllen Heart Hospital.
Net revenue in the Practice Management Division increased 50.1% to $14.7 million
in 1996 from $9.8 million in 1995 accounting for $4.9 million of the total
increase in consolidated net revenue. This increase was attributable to the
acquisition in February 1996 of a contract to manage Mid-Atlantic Medical
Specialists, Inc., ("Mid-Atlantic") and also to an increase in net revenue
from the existing contract to manage the Arizona Medical Clinic ("AMC"). The
total number of physicians under management in the Practice Management Division
increased to 66 in 1996 compared with 51 in 1995.
Net revenue in the Diagnostics Division increased 12.5% to $34.1 million in 1996
from $30.3 million in 1995 and accounted for $3.8 million of the total increase
in net revenue. Net revenue from managing Fixed-Site Facilities increased 10.0%
as the result of higher procedure volumes at the facilities and net revenue from
operation of Mobile Cath Labs increased 13.8% as the result of an increase in
the total number of procedures performed in the labs as well as the addition of
several new hospital contracts. The number of labs operated by the Company
remained at 23 in both 1995 and 1996.
OPERATING EXPENSES AND INCOME FROM OPERATIONS
Total operating expenses increased 77.8% to $56.3 million in 1996 from $31.7
million in 1995. The increase was attributable primarily to operating expenses
at the McAllen Heart Hospital and expenses incurred in managing Mid-Atlantic.
Income from operations increased 17.1% to $9.9 million in 1996 from $8.4 million
in 1995. Operating margins decreased to 15% in 1996 from 21.1% in 1995 and this
decrease was attributable to the operating losses experienced at the McAllen
Heart Hospital during the first nine months of operations.
Income from operations in the Practice Management Division increased 49.5% to
$1.5 million in 1996 from $1.0 million in 1995. The increase is attributable to
income from managing Mid-Atlantic and increased operating income from managing
AMC. This was a result of higher net patient revenue at AMC attributable to an
increase in the number of practicing physicians to 57 in 1996 from 51 in 1995.
Operating margins in the Practice Management Division were 10.2% in both 1996
and 1995.
Income from operations in the Diagnostics Division increased 22.2% to $13.0
million in 1996 from $10.6 million in 1995. The increase is due primarily to
increased procedure volumes in the Mobile Cath Labs and at the five Fixed-Site
Facilities managed by the Company in both years. In September 1996, the Company
opened its sixth Fixed-Site Facility in Cape Cod, Massachusetts, which due to
limited operations, did not have a significant impact on income from operations
in 1996. Operating margins in the Diagnostics Division improved to 37.5% in 1996
from 34.7% in 1995 and EBITDA margins improved to
5
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
47.6% in 1996 from 45.8% in 1995. This overall improvement in margins was
due to continuing efficiencies in operating Mobile Cath Labs resulting from the
April 1995 acquisition of HealthTech.
Marketing, general and administrative expenses in 1996 increased 21.9% over 1995
primarily as a result of the Company's continued investment in corporate
infrastructure to accommodate growth. In 1996, the Company added both a Human
Resources and an Information Systems department, as well as additional
Development and Finance personnel. The remainder of the increase was
attributable to increased professional fees associated with pursuing business
development opportunities, the addition of administrative and accounting
personnel to support growth and increases in salaries.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense in 1996 increased $1.2 million over 1995 primarily as the
result of interest incurred on borrowings at the McAllen Heart Hospital.
Substantially all of the property, plant and equipment at the hospital were
financed using borrowings that bear interest at rates ranging from 8.54% to
10.19%. The increase in interest expense attributable to the McAllen Heart
Hospital was offset partially by a reduction in interest expense on capital
leases and corporate borrowings due to the retirement of these obligations in
the third quarter using a portion of the proceeds from a public offering of
common stock in April 1996. Interest income increased $635,000 in 1996 compared
with 1995 due to additional investment income earned on the remaining proceeds.
1995 COMPARED TO 1994
NET REVENUE
Consolidated net revenue increased 54.9% to $40.1 million in 1995 from $25.9
million in 1994.
In October 1994, the Company acquired PhysMed Management Services, Inc., which
owns a contract to manage AMC and was accounted for as a purchase and included
in the consolidated financial statements since the acquisition date. Net revenue
from this management contract was $9.8 million in 1995 and represented 24.4% of
the Company's total net revenue in 1995 and a majority of the increase in net
revenue in 1995.
Net revenue in the Diagnostics Division increased 17.1% to $30.3 million in 1995
from $25.9 million in 1994 and accounted for the remaining $4.4 million increase
in net revenue. Net revenue from managing Fixed-Site Facilities increased 39.9%
due partially to the fact that two of the facilities were managed for only a
portion of 1994. Higher procedure volumes at the three Fixed-Site Facilities
under management in both years accounted for the remaining increase. Net revenue
from Mobile Cath Labs also increased due to an increase in the number of
procedures performed as a result of an increase in the number of labs operated
by the Company to 23 in 1995 from 18 in 1994.
OPERATING EXPENSES AND INCOME FROM OPERATIONS
Total operating expenses increased 62.4% to $31.7 million in 1995 from $19.5
million in 1994. The increase in total operating expenses was attributable
primarily to expenses incurred in managing AMC. Income from operations increased
32.2% to $8.4 million in 1995 from $6.4 million in 1994, partially attributable
to income from managing AMC. Operating margins decreased to 21.1% in 1995 from
24.7% in 1994 due to operating margins of 10.2% in managing AMC compared with
operating margins of 34.7% in the Diagnostics Division. Under the terms of the
AMC management contract, the Company's fees include reimbursement of expenses
and a percentage of the net revenue of the practice.
6
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Income from operations in the Diagnostics Division increased 19.2% to $10.6
million in 1995 from $8.9 million in 1994. The increase is due primarily to
income from the two Fixed-Site Facilities that the Company managed for only a
portion of 1994. Income from operations of Mobile Cath Labs increased due to an
increase in the number of procedures performed as a result of an increase in the
number of labs operated by the Company. Operating margins in the Diagnostics
Division increased slightly to 34.7% in 1995 from 34.0% in 1994 and EBITDA
margins increased to 45.8% in 1995 from 44.5% in 1994. These improvements are
attributable to the profitability of the two Fixed-Site Facilities under
management for all of 1995. The increase in depreciation and amortization in the
Diagnostics Division was due to depreciation of the additional Mobile Cath Labs
in 1995 and to the full year of amortization of a contract to manage a
Fixed-Site Facility which was acquired in 1994.
Marketing, general and administrative expenses in 1995 increased 27.0% over
1994. This increase was partially attributable to transaction and other costs
associated with the acquisition of HealthTech. The remainder of the increase was
attributable to increased professional fees associated with pursuing business
development opportunities, the addition of administrative and accounting
personnel to support growth and increases in salaries.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense in 1995 decreased $776,000 compared with 1994. The decrease was
due to the retirement of outstanding subordinated and bank debt in December 1994
using a portion of the proceeds from the Company's initial public offering of
its common stock in December 1994. Interest income increased $848,000 due to
interest income earned on the remaining proceeds.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOWS
Net cash provided by operating activities was $6.1 million, $8.0 million
and $6.4 million in 1994, 1995 and 1996, respectively. Accounts receivable
increased $6.3 million in 1996, due primarily to the addition of accounts
receivable at the McAllen Heart Hospital. At September 30 1996, the Company had
working capital of $65.8 million, including $61.7 million of cash and short-term
investments and $11.2 million in accounts receivable.
INVESTING CASH FLOWS
The Company utilized $9.6 million, $31.3 million and $97.9 million in
investing activities in 1994, 1995 and 1996, respectively. In 1994, the Company
utilized $2.9 million to acquire the land and fund the initial development costs
of the McAllen Heart Hospital and $3.9 million to develop and acquire contracts
to manage Fixed-Site Facilities. In 1995, the Company utilized $15.2 million for
construction and start-up costs related to the McAllen Heart Hospital, purchased
$9.7 million of short-term investments and utilized $6.4 million to expand the
Practice Management and Diagnostics Divisions through capital expenditures,
additional investments and working capital advances. In 1996, the Company
invested $17.0 million, $21.7 million and $5.1 million in the McAllen, Arkansas
and Tucson Heart Hospitals, respectively for land and equipment acquisitions,
construction costs incurred and start-up and other development costs incurred
prior to opening the hospitals. The remaining investing activities consisted of
$8.5 million to further expand the Company's Practice Management and Diagnostics
Divisions and $45.6 million to purchase short-term investments using the
remaining proceeds of a public offering of common stock in April 1996.
7
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCING CASH FLOWS
In 1994, the Company used proceeds from a term loan and revolving facility
to retire existing debt and to acquire a contract to manage a Fixed-Site
Facility. In 1995, the Company issued 2.3 million shares of common stock through
its initial public offering and used the proceeds of approximately $28.9 million
to retire existing debt and to fund a portion of the development and
construction costs of the McAllen Heart Hospital. In addition, the Company used
proceeds of the McAllen REIT Loan (as defined herein) to fund a portion of the
land acquisition and construction costs of the McAllen Heart Hospital. In 1996,
the Company issued 2.3 million shares of common stock through a public offering
and used a portion of the net proceeds of approximately $62.5 million to retire
existing debt and obligations under capital leases. The remaining proceeds have
been and will be used to fund (i) a portion of the development, construction and
start-up costs of the Arkansas, Tucson, Austin and Bakersfield Heart Hospitals,
(ii) development of additional Heart Hospitals and Fixed-Site Facilities, (iii)
potential future acquisitions, including Managed Practices, (iv) working capital
and (v) general corporate purposes.
On January 31, 1996, the Company's revolving credit facility (the
"Revolver") was amended to increase the maximum amount available from $11
million to $20 million. Borrowings under the Revolver are available to meet
ongoing working capital requirements and to finance certain acquisitions
approved by the lender. As of September 30, 1996, approximately $18.0 million
was available under the Revolver and there were no amounts outstanding. The
Company may elect to borrow funds with an applicable interest rate based on
prime (as defined by the lender) or the 30, 60 or 90 day London Interbank
Offered Rate (LIBOR). The interest rate on prime-based borrowings can range from
prime to prime plus 1/2% and is payable quarterly. The interest rate on
LIBOR-based loans can range from LIBOR plus 1.15% to LIBOR plus 1.8% and is
payable as the 30, 60 or 90 day loans mature. The prime and LlBOR-based interest
rates vary based on the Company's attainment of certain financial objectives. On
January 31, 1998, the amount outstanding under the Revolver converts to a term
loan, payable in 16 equal installments during the period from March 31, 1998,
through December 31, 2001. The Revolver is secured by substantially all of the
assets of the Company, with the exception of the Company's interests in the
partnerships and limited liability companies that own and operate Heart
Hospitals, in which the Company serves as the general partner or managing
member.
The total cost of constructing and equipping the McAllen Heart Hospital was
$27.3 million. The land and construction costs were financed primarily by a
$13.8 million construction and term loan agreement with a REIT (the "McAllen
REIT Loan"). Upon the completion of the hospital in January 1996, the entire
$13.8 million of outstanding borrowings converted to a seven-year permanent
loan, subject to extension for an additional seven years at the option of the
Company. The McAllen REIT Loan is secured by a pledge of the Company's interest
in the partnership that owns and operates the McAllen Heart Hospital, the land
on which the hospital stands, the hospital building and fixtures and certain
other hospital assets. See Note 6 to Notes to Consolidated Financial Statements
for a summary of other material terms of this loan.
In 1996, the Company acquired substantially all of the medical and other
equipment for the McAllen Heart Hospital using proceeds of installment notes
payable to equipment lenders. Amounts borrowed of approximately $10.7 million
are payable in monthly installments of principal and interest over five to seven
year terms and are secured by the related medical and other equipment. See Note
6 to Notes to Consolidated Financial Statements.
The total cost of constructing and equipping the Arkansas Heart Hospital is
expected to be approximately $44 million. In December 1995, the Company entered
into a construction and term loan agreement with a REIT (the "Arkansas REIT
Loan") for the purpose of financing the land acquisition and construction costs
of the Arkansas Heart Hospital. The Arkansas REIT Loan provides for maximum
borrowings of $27.0 million and upon completion of the hospital, converts to a
seven-year term loan, subject to extension for an additional seven years at the
option of the Company. The hospital is expected to
8
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
open in March 1997. As of September 30, 1996 approximately $19.8 million was
outstanding under the Arkansas REIT Loan which is secured by a pledge of the
Company's membership interest in the limited liability company that owns and
will operate the Arkansas Heart Hospital, the land on which the hospital is
being constructed, the hospital building and fixtures and certain other hospital
assets. See Note 6 to Notes to Consolidated Financial Statements for other
material terms of the loan.
The total cost of constructing and equipping the Tucson Heart Hospital is
expected to be approximately $32 million. In July 1996, the Company entered into
a construction and term loan agreement with a REIT (the "Tucson REIT Loan") for
the purpose of financing the land acquisition and construction costs of the
Tucson Heart Hospital. The Tucson REIT Loan provides for maximum borrowings of
$20 million and upon completion of the hospital converts to a seven-year term
loan, subject to extension for an additional seven years, at the option of the
Company. The hospital is expected to open in October 1997. As of September 30,
1996 approximately $1.1 million was outstanding under the Tucson REIT Loan which
is secured by a pledge of the Company's membership interest in the limited
liability company that owns and will operate the Tucson Heart Hospital, the land
on which the hospital is being constructed, the hospital building and fixtures
and certain other hospital assets. See Note 6 to Notes to Consolidated Financial
Statements for other material terms of the loan.
In 1996, the Company formed ventures for the purpose of constructing and
operating the Austin and Bakersfield Heart Hospitals. The Company anticipates
the total cost of constructing and equipping the Austin and Bakersfield Heart
Hospitals will be approximately $30.0 million and $31.5 million, respectively
and that construction will begin on each hospital in fiscal 1997. Financing for
the construction of these hospitals has not been completed.
The Company expects that each of its Heart Hospitals will require working
capital advances to fund a portion of the pre-opening costs and to fund the
operations subsequent to opening in the initial start-up phase of the hospital.
In September 1996, the Company formed Physician Management of McAllen,
Inc., ("PMMI"), a management services organization. In October 1996, PMMI
entered into a 40-year contract to manage Heart Clinic, P.A. a multi-physician
cardiologist group located in McAllen, Texas. Total consideration given in
connection with the acquisition of the management contract was approximately
$6.3 million (subject to increase if certain base performance levels are
exceeded by the physicians) and consisted of fixed and contingent promissory
notes that are partially convertible into the Company's common stock.
The Company anticipates financing its future operations through a
combination of amounts available under the Revolver, financing from other real
estate lenders and various equipment lenders, capital contributions by minority
partners, cash reserves and operating cash flows. The Company believes the
combination of these sources will be sufficient to meet the Company's currently
anticipated Heart Hospital development, acquisition and working capital needs
through fiscal 1997. In addition, in order to provide funds necessary for the
continued pursuit of its business strategy, the Company expects to incur, from
time to time, additional indebtedness to banks and other financial institutions
and to issue, in public or private transactions, equity and debt securities. The
availability and terms of any such financing will depend upon market and other
conditions. There can be no assurance that such additional financing will be
available on terms acceptable to the Company.
9
<PAGE>
MEDCATH INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL TRENDS AND BUSINESS OUTLOOK
REVENUE TRENDS
Future trends for revenue and profitability are difficult to predict;
however, the Company believes that there will be continuing pressure to reduce
costs and develop integrated delivery systems with geographically concentrated
service capabilities. The largest disease category is cardiovascular disease
which according to the American Heart Association, in 1995 accounted for
approximately $117 billion in total medical treatment costs. The Company
believes that the demand for cardiology and cardiovascular services will
increase in the future as people age 55 and older, the primary users of such
services, represent a growing proportion of the total population. By focusing on
cardiovascular disease, through the operation of Heart Hospitals, Fixed-Site
Facilities, Mobile Cath Labs and Managed Practices, the Company believes it to
be well positioned to adapt to these demands by providing fully-integrated cost
effective networks focused on cardiovascular disease.
HEALTH CARE REFORM
In recent years, there have been intense national, state and private
industry efforts to reform the healthcare delivery and payment systems and as
such, the healthcare industry faces increased uncertainty. While the Company is
unable to predict which, if any, proposals for healthcare reform will be
adopted, it continues to monitor their progress and analyze their potential
impacts in order to formulate its future business strategies.
SEASONALITY
The Company's business experiences some degree of seasonality due to the
location of significant operations. Several of the Company's Fixed-Site
Facilities as well as the McAllen Heart Hospital are located in regions subject
to seasonal population shifts to and from warmer climates. In addition, because
patients and physicians have some discretion in scheduling elective diagnostic
or therapeutic procedures, volumes are generally affected by vacation schedules
of both the patients and the physicians. Consequently, the Company's third and
fourth fiscal quarter procedure volumes and net revenues tend to be lower at
these facilities due to these seasonality factors.
TECHNOLOGICAL ADVANCES
The market for cardiovascular care is rapidly growing and subject to
technological change. As pressures from third party payors to contain costs
continue, technological advances in the delivery of cardiac care will impact the
Company's strategy. The Company believes that cash flows generated by the
Company's operations together with available credit under the Revolver will be
sufficient to meet the Company's cash needs to adapt to any major technological
changes.
10
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
MedCath Incorporated
We have audited the accompanying consolidated balance sheets of MedCath
Incorporated as of September 30, 1995 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
consolidated financial statements of HealthTech Corporation for the year ended
December 31, 1994. As discussed in Note 3, HealthTech Corporation was acquired
by the Company in a merger accounted for as a pooling of interests. The
consolidated financial statements of HealthTech Corporation reflect total
revenues of $5,805,243 for the year ended December 31, 1994. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for HealthTech Corporation, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits, and the report of other auditors, provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of MedCath Incorporated at September 30,
1995 and 1996, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended September 30, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Charlotte, North Carolina
November 8, 1996
11
<PAGE>
MedCath Incorporated
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1994 1995 1996
---------------------------------------------------------
<S> <C>
Net Revenue $ 25,891,819 $ 40,105,772 $ 66,190,538
Operating expenses:
Medical supplies and other 8,665,688 14,611,351 25,192,044
Personnel costs 4,573,626 8,975,136 18,309,839
Depreciation 2,275,034 2,885,543 4,542,564
Amortization 491,781 747,189 2,106,381
Provision for doubtful accounts - - 734,803
Marketing, general and administrative 3,492,146 4,437,366 5,407,697
---------------------------------------------------------
Total operating expenses 19,498,275 31,656,585 56,293,328
---------------------------------------------------------
Income from operations 6,393,544 8,449,187 9,897,210
Interest expense (1,727,598) (956,292) (2,107,157)
Interest income 95,357 948,554 1,583,739
Minority interest in earnings of consolidated entities (893,350) (1,530,118) (979,215)
Equity in net earnings of unconsolidated joint venture 93,482 116,694 104,317
---------------------------------------------------------
Income before income taxes and extraordinary item 3,961,435 7,028,025 8,498,894
Provision for income taxes (1,496,915) (2,776,962) (3,296,469)
---------------------------------------------------------
Income before extraordinary item 2,464,520 4,251,063 5,202,425
Extraordinary loss, net of tax (Note 9) - (227,951) -
---------------------------------------------------------
Net income $ 2,464,520 $ 4,023,112 $5,202,425
=========================================================
Net income per share:
Income before extraordinary item $ 0.42 $ 0.51 $ 0.51
Extraordinary loss - (0.03) -
---------------------------------------------------------
Net income $ 0.42 $ 0.48 $ 0.51
=========================================================
Weighted average number of common and common
equivalent shares outstanding 5,917,638 8,381,241 10,192,941
</TABLE>
See accompanying notes.
12
<PAGE>
MedCath Incorporated
Consolidated Balance Sheets
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------------
1995 1996
---------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,821,728 $ 5,026,305
Short-term investments 11,703,019 56,667,244
Accounts receivable, net of allowance of $64,000 and $417,000
in 1995 and 1996, respectively (Note 5) 4,086,146 11,155,477
Medical supplies 365,191 1,549,029
Deferred income taxes (Note 8) 205,000 240,000
Prepaid expenses and other current assets 221,579 610,137
---------------------- ---------------------
Total current assets 23,402,663 75,248,192
Property, plant and equipment, net of accumulated depreciation (Note 4) 29,468,644 72,303,824
Other assets 1,347,215 1,910,092
Start-up and organization costs, net of accumulated amortization of
$224,705 and $1,469,518 in 1995 and 1996, respectively 2,489,156 7,628,018
Advances to physician groups 3,370,236 5,609,178
Intangible assets, net of accumulated amortization of $1,132,910 and
$1,780,519 in 1995 and 1996, respectively (Note 3) 18,293,782 19,221,414
---------------------- ---------------------
Total assets $ 78,371,696 $ 181,920,718
====================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 947,569 $ 2,861,343
Distribution payable to minority interests 811,484 629,352
Accrued liabilities (Note 5) 2,265,567 3,623,704
Current portion of long-term debt (Note 6) 526,402 1,931,455
Current portion of obligations under capital leases (Note 7) 1,612,165 392,713
---------------------- ---------------------
Total current liabilities 6,163,187 9,438,567
Deferred income taxes (Note 8) 2,113,800 2,864,535
Long-term debt (Note 6) 13,317,861 43,841,641
Obligations under capital leases (Note 7) 2,415,733 2,053,797
---------------------- ---------------------
Total liabilities 24,010,581 58,198,540
Minority interests in equity of consolidated entities 3,866,823 3,477,085
Shareholders' equity (Note 9):
Common stock, $.01 par value, 20,000,000 shares authorized,
and 8,684,543 and 11,121,326 shares issued and outstanding
at September 30, 1995 and 1996, respectively 86,845 111,213
Paid-in capital 44,373,923 108,897,931
Retained earnings 6,033,524 11,235,949
---------------------- ---------------------
Total shareholders' equity 50,494,292 120,245,093
---------------------- ---------------------
Total liabilities, minority interests and shareholders' equity $ 78,371,696 $ 181,920,718
====================== =====================
</TABLE>
See accompanying notes.
13
<PAGE>
MedCath Incorporated
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Paid- in Retained
Stock Capital Earnings Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1993 $ 9,594 $ 1,144,013 $ 325,312 $ 1,478,919
Net income -- -- 2,464,520 2,464,520
Issuance of Common Stock -
(2,000 shares) 20 46,980 -- 47,000
Issuance of common stock by pooled entity 10,000 -- 10,000
Pro forma tax provision of pooled entity -- -- 255,915 255,915
Adjustment to reflect 3.5308-for-1 split 24,332 (24,332) -- --
---------------------------------------------------------------------
Balance at September 30, 1994 33,946 1,176,661 3,045,747 4,256,354
Net income -- -- 4,023,112 4,023,112
Issuance of Common Stock
(650,425 shares) 6,504 6,993,496 -- 7,000,000
Issuance of Common Stock
(2,300,000 shares) 23,000 28,904,360 -- 28,927,360
Conversion of redeemable convertible preferred stock
(2,287,525 shares) 22,875 6,740,431 -- 6,763,306
Exercise of stock options
(52,020 shares) 520 188,303 -- 188,823
Equity distribution of pooled entity -- -- (318,385) (318,385)
Pro forma tax provision of pooled entity -- -- 211,962 211,962
Adjustments to conform fiscal year end and
accounting policies of pooled entity -- -- (558,240) (558,240)
Transfer of undistributed S Corporation earnings
of pooled entity to paid-in capital -- 370,672 (370,672) -
---------------------------------------------------------------------
Balance at September 30, 1995 86,845 44,373,923 6,033,524 50,494,292
Net income -- -- 5,202,425 5,202,425
Issuance of Common Stock
(96,062 shares) 961 1,899,039 -- 1,900,000
Issuance of Common Stock
(2,300,000 shares) 23,000 62,467,205 -- 62,490,205
Exercise of stock options
(40,721 shares) 407 157,764 -- 158,171
=====================================================================
Balance at September 30, 1996 $ 111,213 $108,897,931 $ 11,235,949 $ 120,245,093
=====================================================================
</TABLE>
See accompanying notes.
14
<PAGE>
MedCath Incorporated
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------
1994 1995 1996
------------------- ------------------- -------------
<S> <C> <C> <C>
Operating activities
Income before extraordinary item $ 2,464,520 $ 4,251,063 $ 5,202,425
Adjustments to reconcile income before extrordinary item to
net cash provided by operating activities:
Depreciation and amortization 2,884,531 3,731,844 6,771,092
Equity in net earnings of unconsolidated joint venture (93,482) (116,695) (104,317)
Minority interest - - (765,228)
Deferred income taxes 672,570 483,000 327,216
Current tax benefit of extraordinary loss - 139,700 -
Pro forma tax provision of pooled entity 255,915 211,962 -
(Increase) decrease in current assets:
Accounts receivable (1,067,708) (1,280,911) (6,283,937)
Medical supplies (78,229) 126,259 (1,137,135)
Prepaid expenses and other current assets (127,603) 149,877 (365,807)
Increase (decrease) in current liabilities:
Accounts payable 149,188 274,253 1,896,827
Distribution payable to minority interest 138,700 471,266 (182,132)
Accrued liabilities 1,081,971 (300,609) 1,067,351
Other (219,680) (177,669) (64,981)
----------- ------------------- -------------------
Net cash provided by operating activities 6,060,693 7,963,340 6,361,374
Investing activities
Purchases of property, plant and equipment (3,975,574) (16,232,971) (44,978,033)
Proceeds from sale of assets 6,500 352,817 803,439
Start-up and organization costs (160,155) (2,368,565) (6,561,562)
Advances to physicians groups - (2,692,612) (2,701,972)
Repayments of advances to physicians groups - - 463,030
Net purchases of short-term investments (1,990,000) (9,703,019) (44,964,225)
Acquisition of management contracts (3,452,320) (654,800) -
----------- ------------------- -------------------
Net cash used in investing activities (9,571,549) (31,299,150) (97,939,323)
Financing activities
Proceeds from issuance of long-term debt 11,398,012 11,824,056 38,180,417
Repayments of long-term debt (2,753,662) (9,915,366) (6,251,585)
Repayments of obligations under capital leases (5,140,789) (1,875,554) (4,193,534)
Proceeds from issuance of common stock 57,000 29,116,183 62,648,376
Investments by minority partners 480,892 2,445,000 375,490
Payment of loan acquisition costs and deferred loan fees (516,445) (472,402) (976,638)
Repayments of subordinated debt - (4,225,000) -
Distributions to shareholders of pooled entity - (318,385) -
Distributions to minority partners - (82,500) -
------------------------------------------------------
Net cash provided by financing activities 3,525,008 26,496,032 89,782,526
----------- ------------------- ------------------
Net (decrease) increase in cash and equivalents 14,152 3,160,222 (1,795,423)
Adjustment for the effect on cash flows of pooled
entity's different fiscal year - 195,701 -
Cash and cash equivalents, beginning of period 3,451,653 3,465,805 6,821,728
----------- ------------------- ------------------
Cash and cash equivalents, end of period $ 3,465,805 $ 6,821,728 $ 5,026,305
=========== =================== ==================
</TABLE>
See accompanying notes.
15
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements
1. Organization
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. Key elements of the Company's
strategy are to (i) focus exclusively on cardiology and cardiovascular services,
(ii) develop and operate full-service heart hospitals, co-owned with leading
local cardiac care physicians, that are designed to have a substantially lower
cost structure than conventional acute care hospitals ("Heart Hospitals"), (iii)
acquire and manage physician group practices which include cardiologists and
cardiovascular and vascular surgeons with leading local market positions
("Managed Practices") and (iv) acquire, develop and operate fixed-site cardiac
diagnostic and therapeutic facilities ("Fixed-Site Facilities") and mobile
cardiac diagnostic centers ("Mobile Cath Labs") in selected markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its 50% or greater owned subsidiaries which the Company controls. All
intercompany accounts and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates in which the Company owns 20% or more
are accounted for using the equity method of accounting and other investments
are stated at cost.
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments with maturities
of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are recorded at fair value and consist of investments in
pooled investment accounts, managed by financial institutions, which invest
primarily in government-backed debt securities. On October 1, 1994, the Company
adopted Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). In accordance
with the provisions of SFAS 115, such securities would be classified as
"available for sale" and, accordingly, would be reflected at estimated market
value, with a corresponding adjustment to shareholders' equity. The difference
between the estimated market value and cost for these securities at September
30, 1995 and 1996, was not significant.
Medical Supplies
Medical supplies consist primarily of laboratory and surgical supplies, contrast
media and catheters and are stated at the lower of first-in, first-out (FIFO)
cost or market.
16
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided for
on the straight-line method over estimated useful lives of three to nine years
for equipment and forty years for buildings and improvements.
Interest expense incurred in connection with the construction of Heart Hospitals
is capitalized as part of the cost of the building until the facility is
operational, at which time depreciation begins using the straight-line method
over the life of the building.
Other Assets
Other assets consist primarily of the costs associated with obtaining long-term
financing, net of accumulated amortization, and are amortized to interest
expense over the life of the related debt agreements.
Organization and Start-Up Costs
Organization costs are amortized using the straight-line method over five years.
Start-up costs incurred prior to the opening of Heart Hospitals and other new
facilities are capitalized and amortized using the straight-line method over two
to three years beginning with the commencement of operations.
Advances to Physician Groups
Advances to physician groups consist of working capital advances made to
unconsolidated physician groups managed by the Company in accordance with the
terms of the related management agreements.
Intangible Assets
Intangible assets consist of amounts paid to acquire certain contracts to manage
Fixed-Site Facilities and Managed Practices and the value assigned to a
Certificate of Need ("CON") exemption. Amortization is provided for using the
straight-line method. Intangible assets relating to management contracts are
amortized over the terms of the respective contracts, which range from 30 to 40
years, and the CON exemption is amortized over eight years. The carrying value
of intangible assets is reviewed if the facts and circumstances suggest that the
asset may be impaired. If this review indicates that the value of the intangible
asset will not be recoverable, as determined based on the undiscounted cash
flows of the entity or management agreement acquired over the remaining
amortization period, the Company's carrying value of the intangible asset is
reduced by the estimated shortfall of cash flows. In addition, the Company
assesses long-lived assets for impairment under Statement of Financial
Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". Under those rules, intangibles
associated with assets acquired in a purchase business combination are included
in impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable.
Income Taxes
Deferred income taxes are provided for under the liability method based on
temporary differences that arise due to differences between tax bases of assets
or liabilities and their reported amounts in the financial statements.
17
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Revenue Recognition
The Company's Mobile Cath Labs, Fixed-Site Facilities and Managed Practices
operate under various fixed-price and cost-reimbursement-plus-fee contracts.
Revenue on fixed-price contracts is recognized as services are rendered based on
contracted rates. Revenue on cost-reimbursement-plus-fee contracts is recognized
on the basis of costs incurred during the period plus the fee earned.
The Company's Heart Hospitals have agreements with third party payors that
provide for payments to the hospitals at amounts different from their
established rates. Payment arrangements include prospectively determined rates
per discharge, reimbursed costs, and discounted charges. Net patient service
revenue is reported at the estimated net realizable amounts from patients,
third-party payors, and others as services are rendered, including estimated
retroactive adjustments under reimbursement agreements with third-party payors.
Retroactive adjustments are accrued on an estimated basis in the period that the
related services are rendered and adjusted in future periods as final
settlements are determined. In 1996, net revenues from Medicare and Medicaid
patients represented approximately 19% of total consolidated net patient
revenue.
Net Income Per Share
The computation of primary and fully diluted net income per share is based upon
the weighted average number of common shares and common equivalent shares, if
dilutive, outstanding during the period. The computation of fully diluted net
income per share also takes into consideration the use of market price at the
end of the period, when higher than the average market price for the period.
Common stock equivalents represent the dilutive effect of the exercise of all
outstanding stock options. Options granted and shares issued during the year
ended September 30, 1994 at prices below the initial public offering (the "IPO")
price of $14 are assumed to have been outstanding for the year ended September
30, 1994 in accordance with the requirements of the Securities and Exchange
Commission. Fully diluted net income per share is not presented because it does
not differ from primary net income per share.
Newly Issued Accounting Standards
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), was issued which, if
elected, would require companies to use a new fair value method of valuing
stock-based compensation plans in years beginning after December 15, 1995. The
Company has elected to continue following present accounting rules under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" which uses an intrinsic value method and often results in no
compensation expense. However, in 1997, in accordance with SFAS 123, the Company
will provide pro forma disclosure of what net income and net income per share
would have been had the new fair value method been used.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal 1996
presentation.
18
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
3. Business Combinations and New Operations
Fiscal 1994
In January 1994, the Company acquired a contract to manage a Fixed-Site Facility
in Tucson, Arizona for an initial term of 40 years. The purchase price of the
contract consisted of $2.8 million for the right to manage the facility in the
future and $400,000 to acquire an existing management contract. For managing the
facility, the Company receives a management fee equal to its reimbursable costs
plus a percentage of operating income. The transaction was financed with
borrowings under the Revolver (see Note 6).
In August 1994, the Company formed a partnership, MedCath of McAllen Limited
Partnership ("the McAllen Partnership"), for the purpose of constructing and
operating the McAllen Heart Hospital. The Company contributed $750,000 to the
McAllen Partnership representing an approximate 51% ownership interest and
serves as general partner. Accordingly, the McAllen Partnership is included in
the Company's consolidated financial statements. Operations began in January
1996 at the McAllen Heart Hospital. Because the cumulative operating losses of
the McAllen Heart Hospital exceeded the initial capitlaization of the
partnership, the limited partners could not be allocated any losses in excess of
their initial capital contributions. Therefore, the Company, as the only general
partner in the partnership, was required to recognize 100% of the operating
losses that exceeded the initial capitalization of the partnership, rather than
share these losses on a pro rata basis with the limited partners. The
recognition of losses which would have otherwise been allocated to the limited
partners reduced net income and net income per share by approximately $550,000
and $.05 per share during fiscal 1996. In August and September of 1996 the
hospital operated profitably and the Company recognized 100% of the
partnership's profits during these two months. The Company will continue
recognizing 100% of the partnership's profits and losses to the extent it has
previously recognized a disproportionate share of the partnership's losses.
Thereafter, the Company will share the profits and losses of the partnership on
a pro rata basis with the limited partners based on their respective ownership
percentages.
Fiscal 1995
In October 1994, the Company acquired all the outstanding stock of PhysMed
Management Services Inc. ("PhysMed"), a newly formed management services
organization, in exchange for 650,424 shares of the Company's common stock
valued at approximately $7 million. PhysMed has a 40-year contract to manage
the Arizona Medical Clinic ("AMC"), a multi-physician practice which includes
several cardiologists serving the Sun City, Arizona area. Under the terms of the
management contract, the Company's fees include reimbursement of expenses plus a
percentage of the net revenue of AMC. This acquisition has been accounted for
under the purchase method of accounting, and the results of operations have been
included in the consolidated financial statements since the acquisition date.
If the acquisition of PhysMed had occurred and the related management contract
had been consummated on October 1, 1993, unaudited pro forma consolidated net
revenue, net income and net income per share for the year ended September 30,
1994 would have been $34,734,500, $2,854,700 and $.43, respectively.
In April 1995, the Company acquired all of the outstanding shares of HealthTech
Corporation ("HealthTech"), which operated ten Mobile Cath Labs in exchange for
1 million shares of the Company's common stock in a transaction accounted for as
a pooling-of-interests. Accordingly, the accompanying financial statements for
the year ended September 30, 1994 were restated to include the accounts and
results of operations of HealthTech for all periods prior to the merger. Prior
to the pooling, HealthTech used a fiscal year ending on December 31. The
restated 1994 financial statements combine the September 30, 1994 financial
statements of the Company with the December 31, 1994 financial statements of
HealthTech.
19
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Net revenue, net income and net income per share for the Company and HealthTech
for periods presented prior to the pooling are as follows:
<TABLE>
<CAPTION>
Year Ended September Six Months Ended
30, 1994 March 31, 1995
---------------------------------------------
(unaudited)
<S> <C> <C>
Net revenue:
MedCath $ 20,086,576 $ 16,076,314
HealthTech 5,805,243 3,979,450
---------- ----------
Combined $ 25,891,819 $ 20,055,764
========== ==========
Net income:
MedCath $ 2,046,974 $ 1,493,614
HealthTech 673,461 555,293
Pro forma tax provisions (255,915) (211,012)
--------- ---------
Combined $ 2,464,520 $ 1,837,895
========= =========
Combined primary and fully diluted net income per share:
Income before extraordinary item $ 0.42 $ 0.26
Net Income $ 0.42 $ 0.23
</TABLE>
Prior to the pooling, HealthTech was an S Corporation and was therefore not
subject to U.S. Federal and State income taxes. Pro forma income tax provisions
are reflected to provide for additional federal and state income taxes which
would have been incurred had HealthTech been taxed as a C Corporation.
The results of operations and cash flows of HealthTech for the three month
period ending December 31, 1994 are included in both the 1994 and 1995 financial
statements. Net revenue, expenses, and net income of HealthTech for the three
month period ending December 31, 1994 were $1,946,221, $1,687,981, and $258,240,
respectively. To conform the fiscal years of the Company and HealthTech, the net
income of HealthTech for the three month period has been reflected as an
adjustment to retained earnings in 1995.
Additionally, an adjustment to retained earnings of $300,000 was recorded in
1995 to conform accounting policies by recording deferred taxes upon
HealthTech's termination of S Corporation status.
Costs and other expenses related to the pooling amounting to approximately
$315,000 were charged to expense and decreased net income and net income per
share for the year ended September 30, 1995 by approximately $190,000 and $.02,
respectively.
In July 1995, the Company formed a limited liability company, MedCath of Little
Rock L.L.C. (the "Little Rock Company"), for the purpose of constructing and
operating the Arkansas Heart Hospital. The Company serves as managing member and
contributed $1,530,000 representing an approximate 51% interest in the
Little Rock Company. Accordingly, the Little Rock Company is included in the
Company's consolidated financial statements. The Company currently
anticipates that construction of the Arkansas Heart Hospital will be
completed in fiscal 1997.
In September 1995, the Company formed a limited liability company, MedCath of
Tucson L.L.C. (the "Tucson Company"), for the purpose of constructing and
operating the Tucson Heart Hospital. The Company serves as managing member
and contributed $1,020,000, currently representing an approximate 60%
interest in the Tucson Company. Accordingly, the Tucson Company is included
in the Company's consolidated financial statements.
20
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
The Company currently anticipates that construction of the Tucson
Heart Hospital will be completed in fiscal 1997.
Cardiac catheterization laboratories to be operated on the premises of the
Tucson Heart Hospital will be separately owned and operated by CCT, L.L.C.
(the "Tucson Cath Lab Company"). The Company manages and owns a majority
interest in the Tucson Cath Lab Company. Accordingly, the Tucson Cath Lab
Company is included in the Company's consolidated financial statements.
Fiscal 1996
In February 1996, the Company acquired all of the outstanding stock of MedCath
Physician Management of Virginia, Inc. ("MPMV"), a newly formed management
services organization. In connection with this acquisition the Company issued
common stock valued at approximately $1.9 million for assets with a fair value
of approximately $2.3 million and assumed liabilities of approximately $400,000.
MPMV has a 40-year contract to manage Mid-Atlantic Medical Specialists, Inc.
("Mid-Atlantic"), a multi-physician practice which includes two cardiologists
located in southwest Virginia. Under the terms of the management agreement, MPMV
receives a fee based on the net income of Mid-Atlantic. This acquisition has
been accounted for under the purchase method of accounting, and the results of
operations have been included in the consolidated financial statements since the
acquisition date.
If the acquisition of MPMV had occurred and the related management contract had
been consummated on October 1, 1994, unaudited pro forma consolidated net
revenue, net income and net income per share for the year ended September 30,
1995 would have been $43,372,427, $4,233,541 and $.50, respectively, Unaudited
pro forma consolidated net revenue, net income and net income per share for the
year ended September 30, 1996 would have been $69,914,943, $5,329,672 and $.52,
respectively.
In September 1996, the Company formed Physician Management of McAllen, Inc.,
("PMMI"), a management services organization. In October 1996, PMMI entered into
a 40-year contract to manage Heart Clinic, P.A. a multi-physician cardiologist
group located in McAllen, Texas. Total consideration given in connection with
the acquisition of the management contract was approximately $6.3 million
(subject to increase if certain base performance levels are exceeded by the
physicians) and consisted of fixed and contingent promissory notes that are
partially convertible into the Company's common stock.
Property, plant and equipment consisted of the following:
September 30,
-----------------------------------
1995 1996
-----------------------------------
Land $ 2,101,223 $ 8,057,040
Building - 15,732,965
Mobile Cath Labs and medical
equipment 16,035,891 39,232,956
Equipment held under capital leases
(Note 7) 5,568,479 2,446,510
Office equipment 584,938 1,758,856
Construction in progress 13,694,200 17,072,151
-----------------------------------
37,984,731 84,300,478
Less accumulated depreciation (8,516,087) (11,996,654)
===================================
$ 29,468,644 $ 72,303,824
===================================
Substantially all of the Company's property, plant and equipment is pledged as
collateral for various long-term obligations as described in Note 6.
21
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Effective May 1, 1995, the Company changed its estimate of the remaining useful
lives of certain lab and x-ray equipment acquired through the
pooling-of-interests with HeathTech from five years to nine years. The Company
believes this change better reflects the actual economic life of the assets,
conforms to American Hospital Association guideline lives for these assets and
is consistent with the lives used for similar equipment by the Company. This
change in estimate increased income before extraordinary item and net income for
the year ended September 30, 1995 by approximately $182,000 ($.02 per share).
5. Supplementary Information
Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------------
1995 1996
------------------------------------
<S> <C> <C>
Receivables, principally from billings to hospitals for various
cardiology procedures $ 2,199,941 $ 2,169,691
Receivables, principally from patients and third party payors - 5,084,786
Amounts under management contracts 1,672,042 2,623,897
Other 214,163 1,277,103
------------------------------------
$ 4,086,146 $ 11,155,477
====================================
Accrued Liabilities
Accrued liabilities consisted of the following:
September 30,
------------------------------------
1995 1996
------------------------------------
Compensation and other payroll related benefits $ 1,125,879 $ 2,513,737
Other 1,139,688 1,109,967
------------------------------------
$ 2,265,567 $ 3,623,704
====================================
6. Long-Term Debt
Long-term debt consisted of the following:
September 30,
------------------------------------
1995 1996
------------------------------------
McAllen REIT Loan (as defined below) $ 12,467,339 $ 13,750,000
Arkansas REIT Loan (as defined below) 19,757,558
Tucson REIT Loan (as defined below) - 1,062,531
Notes payable to various equipment lenders - 10,689,071
Other notes payable
1,376,924 513,936
------------------------------------
13,844,263 45,773,096
Less current portion (526,402) (1,931,455)
------------------------------------
$ 13,317,861 $ 43,841,641
====================================
</TABLE>
22
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
On January 31, 1996, the Company's revolving credit facility (the
"Revolver") was amended to increase the maximum amount available from $11
million to $20 million. The proceeds of the Revolver have been and are to be
used to meet ongoing working capital requirements and to finance certain
acquisitions approved by the lender. The portion of the Revolver that is
available to the Company cannot exceed the Borrowing Base (as defined in the
Credit Agreement) which includes a multiple of the Company's cash flows less the
amount of outstanding funded debt. The commitment fee on the unused portion of
the Revolver is 1/4% per annum. As of September 30, 1996, approximately $18.0
million was available under the Revolver and there were no amounts outstanding.
The Company may elect to borrow funds with an applicable interest rate based on
prime (as defined by the lender) or the 30, 60 or 90 day London Interbank
Offered Rate (LIBOR). The interest rate on prime-based borrowings can range from
prime to prime plus 1/2% and is payable quarterly. The interest rate on
LIBOR-based loans can range from LIBOR plus 1.15% to LIBOR plus 1.8% and is
payable as the 30, 60 or 90 day loans mature. The prime and LlBOR-based interest
rates vary based on the Company's attainment of certain financial objectives. On
January 31, 1998, the amount outstanding under the Revolver converts to a term
loan, payable in 16 equal installments during the period from March 31, 1998,
through December 31, 2001. The Revolver is secured by substantially all of the
assets of the Company, with the exception of the assets of the Company's
interests in the limited partnerships and limited liability companies that own
and operate Heart Hospitals in which the Company serves as the general partner
or managing member.
In August 1994, the McAllen Partnership entered into a construction and term
loan agreement with a REIT for the purpose of financing the land acquisition and
construction costs of the McAllen Heart Hospital (the "McAllen REIT Loan"). The
McAllen REIT Loan provided for borrowings of $13.75 million which, in December
1995, converted to a seven-year term loan, subject to extension for an
additional seven years, at the option of the McAllen Partnership. Beginning on
February 1, 1998 and continuing through January 1, 2003, the principal becomes
due in monthly installments using a 25-year amortization schedule with a balloon
payment due on February 1, 2003. Interest is payable monthly on the outstanding
borrowings. As of September 30, 1996, the interest rate was 10.19% and will
increase by 22 basis points per year beginning in January 1997. Borrowings under
the McAllen REIT Loan are secured by a pledge of the Company's interest in the
McAllen Partnership, the land on which the hospital stands, the hospital
building and fixtures and certain other hospital assets.
In December 1995, the Little Rock Company entered into a construction and term
loan agreement with a REIT for the purpose of financing the land acquisition and
construction costs of the Arkansas Heart Hospital (the "Arkansas REIT Loan").
The Arkansas REIT Loan provides for maximum borrowings of $27 million and, upon
completion of the hospital, converts to a seven-year term loan, subject to
extension for an additional seven years, at the option of the Little Rock
Company. As of September 30, 1996, the interest rate was 10.90%. On the date
of conversion, the interest rate changes to a fixed rate of 4 1/2% above a
rate index tied to seven-year U.S. Treasury Notes, and subsequently increases
by 22 basis points per year. Interest is payable monthly on the outstanding
borrowings. Borrowings under the Arkansas REIT Loan are secured by a pledge of
the Company's membership interest in the Little Rock Company, the land on which
the hospital stands, the hospital building and fixtures and certain other
hospital assets.
In July 1996, the Tucson Company entered into a construction and term loan
agreement with a REIT for the purpose of financing the land acquisition and
construction costs of the Tucson Heart Hospital (the "Tucson REIT Loan").
The Tucson REIT Loan provides for maximum borrowings of $20 million and,
upon completion of the hospital, converts to a seven-year term loan,
subject to extension for an additional seven years at the option of the
Tucson Company. As of September 30, 1996, the interest rate on the Tucson
REIT Loan was 9.25%. On the date of conversion, the interest rate changes to
a fixed rate of 3 1/2% above a rate index tied to seven-year U.S. Treasury
Notes, and subsequently increases by 27 basis points per year. Interest is
payable monthly on outstanding borrowings. Borrowings under the Tucson REIT
Loan are secured by a pledge of the Company's membership interest in the
Tucson Company, the land on which the hospital stands, the hospital building
and fixtures and certain other hospital assets.
23
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
The bank and REIT loan agreements contain certain restrictive covenants which
prohibit the payment of dividends and require the maintenance of specific
financial ratios and amounts. The Company was in compliance with these covenants
at September 30, 1996.
In 1996, the Company acquired substantially all of the medical and other
equipment for the McAllen Heart Hospital under installment notes payable to
equipment lenders secured by the related equipment. Amounts borrowed under these
notes are payable in monthly installments of principal and interest over five to
seven year terms. Interest is at fixed rates ranging from 8.54% to 10%.
Future maturities of long-term debt as of September 30, 1996 are as follows:
Fiscal Year
1997 $ 1,931,455
1998 2,011,763
1999 2,146,688
2000 2,392,596
2001 1,896,635
2002 and thereafter 35,393,959
-------------------
$45,773,096
===================
7. Commitments and Contingencies
In September 1996, the Company entered into a capital lease with a computer
software vendor for the acquisition of license fees, software and hardware to be
used in the Company's Heart Hospitals. The obligation bears interest at 9.89%
and payments of principal and interest are due monthly, expiring in 2001.
Amortization of the capitalized amounts are included in depreciation and
amortization expense in the accompanying consolidated financial statements
through the retirement date of the leases.
The Company currently leases several Mobile Cath Labs, one Fixed Site Facility,
office space and certain vehicles under noncancelable operating leases expiring
through fiscal 2002. Some of these leases contain provisions for annual rental
adjustments based on increases in the consumer price index, renewal options and
options to purchase during the lease terms.
Total future minimum payments under leases with initial terms of one year
or more as of September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Capital Operating
<S> <C> <C>
Fiscal Year
1997 $ 612,215 $ 698,975
1998 634,606 577,535
1999 634,606 506,727
2000 609,594 244,698
2001 606,734 151,170
2002 and thereafter - 65,702
------------- --------------
Total future minimum lease payments 3,097,755 $ 2,244,807
Less: amounts representing interest (651,245) ==============
-------------
Present value of net minimun lease payments 2,446,510
Less: current portion (392,713)
-------------
$ 2,053,797
=============
</TABLE>
24
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Rent expense under all operating leases was $1,505,000, $1,159,000 and
$1,262,000 for the years ended September 30, 1994, 1995 and 1996, respectively.
The Company has entered into agreements to provide networks of hospitals with
Mobile Cath Labs and related catheterization services through 2000. In addition,
the Company leases several Mobile Cath Labs to hospitals under lease agreements
of various lengths. These are accounted for as operating leases, and the rental
income is included in net revenue in the consolidated statements of income when
earned.
Total future minimum revenue to be earned under these agreements as of September
30, 1996 is as follows:
Fiscal Year
1997 $ 9,446,524
1998 2,740,010
1999 1,205,170
2000 2,000
===================
$ 13,393,704
===================
At September 30, 1996, the Company was contingently liable for outstanding
letters of credit of $2,038,000 relating to the McAllen and Arkansas REIT Loans.
In 1994, the Company entered into a development agreement with a cardiology
consulting firm providing for joint marketing of the Company's physician
management services to cardiologists. If the Company enters into any management
services agreements as a result of these efforts, the Company will be obligated
to issue shares of common stock to the principals of the consulting firm as
compensation for their services. As of September 30, 1996, no shares had been
issued under the provisions of this agreement.
8. Income Taxes
The components of the provision for income taxes were as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1994 1995 1996
------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 500,630 $ 1,732,000 $ 2,296,025
State 67,800 350,000 673,228
Deferred tax expense:
Federal 586,340 443,000 253,026
State 86,230 40,000 74,190
Pro forma tax provision of pooled entity 255,915 211,962 -
------------------------------------------------------
1,496,915 2,776,962 3,296,469
Tax benefit of extraordinary loss - (139,700) -
------------------------------------------------------
Net provision for income taxes $1,496,915 $2,637,262 $3,296,469
======================================================
</TABLE>
25
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
The components of net deferred taxes were as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------
1995 1996
------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of book over tax bases of property, plant
and equipment $ (1,626,000) $ (1,700,187)
Tax over book amortization (445,000) (696,817)
Other (42,800) (467,531)
Deferred tax assets:
Nondeductible reserves 205,000 120,000
State net operating loss carryforward - 120,000
====================================
Net deferred tax liability $ (1,908,800) $ (2,624,535)
====================================
The differences between the U.S. federal statutory tax rate and the Company's effective rate were as follows:
Year Ended September 30,
------------------------------------------------------
1994 1995 1996
------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 2.3 4.1 4.5
Tax benefit of utilizing net operating loss
carryforwards (13.5) - -
Effect of alternative minimum tax 11.9 - -
Tax exempt interest income - - (3.3)
Other 3.1 1.4 3.6
------ ------ ------
Effective income tax rate before extraordinary item 37.8% 39.5% 38.8%
====== ====== ======
</TABLE>
9. Shareholders' Equity and Stock Options
In 1995, the Company completed an initial public offering of 2.3 million shares
of its common stock netting proceeds of approximately $28.9 million. A portion
of the proceeds was used to repay $4.2 million of subordinated debt and $9.6
million of bank financing. The remainder of the proceeds were used to fund (i)
the development of new Heart Hospitals and Fixed-Site Facilities and (ii)
ongoing capital expenditures.
Upon the retirement of subordinated debt, the Company incurred a $227,951
extraordinary loss on the early extinguishment of debt (net of the income tax
benefit of $139,700), which represented the unamortized portion of the original
issue debt discount. Assuming the Company had issued the necessary shares of
common stock and used the proceeds to retire the debt on October 1, 1994, the
pro forma net income per share would not have differed from the reported amount.
In April 1996, the Company completed a public offering of 2.3 million shares of
its common stock netting proceeds of approximately $62.5 million. A portion of
the proceeds was used to repay $5.0 million outstanding under the Revolver and
$3.3 million was used to retire obligations under capital leases. The remainder
of the proceeds will be used to fund (i) a portion of the construction and
start-up costs of Heart Hospitals and Fixed-Site Facilities, (ii) potential
future acquisitions, (iii) working capital and (iv) general corporate purposes.
26
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Assuming the Company had issued the necessary shares of common stock and used
the net proceeds to retire the Revolver and the obligations under capital leases
on October 1, 1995, the pro forma net income per share for the year ended
September 30, 1996, would not have differed from the reported amount.
On October 2, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan under which common shareholders have the right to purchase Series A
Participating Preferred Stock in the event of an accumulation of or tender offer
for 15% of the Company's common stock. The rights will expire on October 15,
2006, unless redeemed or exchanged earlier by the Company. The rights will be
represented by existing common stock certificates until they become exercisable
and no rights are exercisable under the plan.
In August 1992, the Company adopted an Incentive Stock Option Plan (the "ISO
Plan") for key employees. The Company has reserved 296,587 shares of common
stock for issuance under the ISO Plan.
In October 1994, the Board of Directors adopted the 1994 Omnibus Stock Plan (the
"Omnibus Plan"). The Omnibus Plan is intended to encourage high levels of
performance from key employees and enable the Company to retain their services
on a basis competitive with industry practices. Through September 30, 1996,
awards under the Omnibus Plan consisted of options to purchase common stock. The
Company has reserved 800,000 shares of common stock for issuance under the
Omnibus Plan.
In October 1994, the Board of Directors adopted the Outside Directors' Stock
Option Plan (the "Directors' Plan"). Under the Directors' Plan, each outside
director joining the Board will automatically be granted a non-qualified option
to purchase 2,000 shares of common stock at fair market value on the date of
grant. On each anniversary of an outside director's election to the Board, an
additional option to purchase 2,000 shares of common stock will be granted at
the then fair market value. The Company has reserved 50,000 shares of common
stock for issuance under the Directors' Plan.
Option plan activity for the years ended September 30, 1994, 1995 and 1996 is
set forth below:
<TABLE>
<CAPTION>
Number of Shares Price Per Share
---------------------------------------
---------------------------------------
<S> <C> <C> <C>
Outstanding options, September 30, 1993 289,526 $ 3.54
Granted 28,246 7.51
Exercised - -
Canceled (17,654) 3.54
--------------------
Outstanding options, September 30, 1994 300,118 $ 3.54 - 7.51
Granted 310,000 12.00 - 14.00
Exercised (52,020) 3.54 - 7.51
Canceled - -
--------------------
Outstanding options, September 30, 1995 558,098 $ 3.54 - 14.00
Granted 475,448 12.00 - 34.50
Exercised (40,721) 3.54 - 7.51
Canceled (92,500) 13.50 - 34.50
====================
Outstanding options, September 30, 1996 900,325 $ 3.54 - 19.11
====================
</TABLE>
Options to purchase 25,422, 26,481 and 105,455 shares of common stock were
exercisable as of September 30, 1994, 1995 and 1996 respectively.
Total common shares reserved for future issuance under these plans were 289,526,
844,567 and 1,053,846 as of September 30, 1994, 1995 and 1996, respectively.
27
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
10. Supplemental Cash Flow Information
Interest paid (net of amounts capitalized) during the years ended September 30,
1994, 1995 and 1996 was $1,111,424, $1,671,550 and $1,976,366 respectively.
Total interest capitalized during the years ended September 30, 1995 and 1996
was $610,074 and $1,252,577, respectively.
Income taxes paid, net of refunds, during the years ended September 30, 1994,
1995 and 1996 were $50,152, $2,406,606 and $3,366,314, respectively.
The Company entered into capital lease obligations during the years ended
September 30, 1994, 1995 and 1996 totaling $4,871,170, $166,146 and $2,446,510,
respectively.
11. Malpractice Insurance Coverage
The Company is subject to claims arising in the course of providing services.
The Company maintains malpractice insurance coverage on a "claims made" basis,
with coverage being contingent on a policy being in effect when a claim is made,
regardless of when the events which gave rise to the claim occurred.
12. Employee Benefit Plan
In January 1994, the Company adopted a defined contribution retirement savings
plan (the "401(k) Plan") which covers all employees who meet minimum service
requirements. The 401(k) Plan allows eligible employees to contribute from 1% to
15% of their annual compensation on a pre-tax basis. The Company, at its
discretion, may make an annual contribution of up to 25% of an employee's
pre-tax contribution, up to a maximum of 6% of compensation. The Company's
contributions to the 401(k) Plan for the years ended September 30, 1994, 1995
and 1996 were $34,133, $ 37,851 and $53,550, respectively.
13. Disclosures About Fair Values of Financial Instruments
The Company considers the carrying amounts of significant classes of financial
instruments on the consolidated balance sheets, including cash, short-term
investments, loans to affiliates, long-term debt and obligations under capital
leases to be reasonable estimates of fair value. Fair value of the Company's
debt was estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of arrangements.
28
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial results were as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1995:
Net revenue 9,913 10,143 10,368 9,682
Operating expenses 7,858 7,775 8,240 7,784
Income from operations 2,055 2,368 2,128 1,898
Income before extraordinary item 836 1,229 1,136 1,050
Extraordinary item (228) - - -
Net income 608 1,229 1,136 1,050
Income per share before
extraordinary item .12 .14 .13 .12
Net income per share .09 .14 .13 .12
Fiscal 1996:
Net revenue 11,209 17,284 18,376 19,322
Operating expenses 8,846 14,631 16,108 16,709
Income from operations 2,363 2,653 2,268 2,613
Net income 1,226 1,302 1,172 1,502
Net income per share .14 .14 .10 .13
</TABLE>
Quarterly financial data for the first and second quarters of fiscal 1995 were
restated to include the accounts and results of operations of HealthTech, which
was acquired in a pooling-of-interests transaction (see Note 3).
29
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
15. Segment Information
The Company provides cardiology and cardiovascular services through the
development, operation and management of heart hospitals (the "Hospital
Division"), the development, operation and management of Fixed-Site Facilities
and Mobile Cath Labs (the "Diagnostics Division") and provides physician
practice management services (the "Practice Management Division"). In 1996, in
connection with the commencement of hospital operations, the Company
reorganized into separately managed operating divisions which are based on the
manner in which cardiac and cardiovascular care is delivered. Therefore, the
segment information for the fiscal years ended September 30, 1994 and 1995 have
been restated to conform to the 1996 presentation. Financial information
concerning the Company's operations by business segment as of and for the
periods indicated below were restated to include the accounts and operations
of HealthTech (see Note 3) and are as follows:
<TABLE>
<CAPTION>
Year Ended September 30
------------------------------------------------------
1994 1995 1996
------------------------------------------------------
<S> <C> <C> <C>
Net revenue:
Diagnostics Division $ 25,892 $ 30,308 $ 34,085
Practice Management Division - 9,798 14,706
Hospital Division - - 17,400
-------------- -------------- --------------
Consolidated totals $ 25,892 $ 40,106 $ 66,191
============== ============== ==============
Income from operations:
Diagnostics Division $ 8,901 $ 10,611 $ 12,972
Practice Management Division - 1,003 1,499
Hospital Division - - (616)
Corporate and other (2,507) (3,165) (3,958)
-------------- -------------- --------------
Consolidated totals $ 6,394 $ 8,449 $ 9,897
============== ============== ==============
Depreciation and amortization:
Diagnostics Division $ 2,727 $ 3,405 $ 3,474
Practice Management Division - 184 251
Hospital Division - - 2,838
Corporate and other 40 43 86
-------------- -------------- --------------
Consolidated totals $ 2,767 $ 3,632 $ 6,649
============== ============== ==============
Capital expenditures:
Diagnostics Division $ 1622 $ 3,020 $ 6,611
Practice Management Division - - 72
Hospital Division 2,283 13,043 37,978
Corporate and other 71 170 317
-------------- -------------- --------------
Consolidated totals $ 3,976 $ 16,233 $ 44,978
============== ============== ==============
Aggregate identifiable assets:
Diagnostics Division $ 29,874 $ 31,378 $ 37,641
Practice Management Division - 10,289 15,089
Hospital Division 2,829 21,947 68,740
Corporate and other 5,202 14,758 60,451
-------------- -------------- --------------
Consolidated totals $ 37,905 $ 78,372 $ 181,921
============== ============== ==============
</TABLE>
The amounts presented for "Corporate and other" include, general overhead
expenses, certain cash and cash equivalents, short-term investments, deferred
income tax benefits, prepaid expenses and other assets.
30
<PAGE>
Exhibit 21.1
MEDCATH INCORPORATED
Subsidiaries
State of Incorporation
Name or Organization
100% OWNED SUBSIBIARIES
HHBF, Inc. North Carolina
HealthTech Corporation North Carolina
Hospital Management IV, Inc. North Carolina
MedCath of Arizona, Inc. North Carolina
MedCath of Arkansas, Inc. North Carolina
MedCath of Kingman, Inc. North Carolina
MedCath of Massachusetts, Inc. North Carolina
MedCath of Michigan, Inc. North Carolina
MedCath of New Jersey, Inc. North Carolina
MedCath of Texas, Inc. North Carolina
MedCath Physician Management of Virginia, Inc. North Carolina
Physician Practice Management of McAllen, Inc. North Carolina
PhysMed Management Services, Inc. Arizona
SLM Corporation North Carolina
Southern Arizona Heart, Inc. North Carolina
Venture Holdings, Inc. North Carolina
50% OR GREATER OWNER, PARTNERSHIP INTEREST OR MEMBERSHIP INTEREST
Arizona Medical Development Company, L.L.C. North Carolina
CCT, L.L.C. North Carolina
Cape Cod Cardiology Services, L.P. North Carolina
<PAGE>
Cardiac Services, Inc. North Carolina
Gaston Cardiology Services, L.L.C. North Carolina
Heart Hospital IV, L.P. North Carolina
Heart Hospital of BK, L.L.C. North Carolina
Heart South Imaging II L.L.C. North Carolina
MedCath of Little Rock L.L.C. North Carolina
MedCath of McAllen Limited Partnership North Carolina
MedCath of New Jersey CTC Limited Partnership New Jersey
MedCath of Tucson L.L.C. North Carolina
Sun City Cardiac Center Associates Arizona
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of MedCath Incorporated of our report dated November 8, 1996, included in the
1996 Annual Report to Shareholders of MedCath Incorporated.
Our audits also included the financial statement schedule of MedCath
Incorporated listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-92664) pertaining to the MedCath Incorporated 1992 Incentive
Stock Option Plan, the MedCath Incorporated Omnibus Stock Plan and the MedCath
Incorporated Outside Directors' Stock Option Plan and in the Registration
Statement (Form S-3 No. 333-1216) of our report dated November 8, 1996, with
respect to the consolidated financial statements incorporated herein by
reference, and our report included in the preceding paragraph with respect to
the financial statement schedule included in the Annual Report (Form 10-K) of
MedCath Incorporated.
/s/ Ernst & Young LLP
Charlotte, North Carolina
December 18, 1996
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report on the financial statements of
HealthTech Corporation dated April 24, 1995, for the year ended December 31,
1994 and to the incorporation by reference of our report into the Company's
previously filed registration statement on Form S-8 (File No. 33-92664) and on
Form S-3 (File No. 333-1216).
/s/ Arthur Anderson LLP
Charlotte, North Carolina,
December 20, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1996
and the Condensed Consolidated Statement of Income for the twelve months ended
September 30, 1996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000931782
<NAME> MedCath Incorporated
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Sep-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,026,305
<SECURITIES> 56,667,244
<RECEIVABLES> 11,572,477
<ALLOWANCES> (417,000)
<INVENTORY> 1,549,029
<CURRENT-ASSETS> 75,248,192
<PP&E> 84,300,478
<DEPRECIATION> (11,996,654)
<TOTAL-ASSETS> 181,920,718
<CURRENT-LIABILITIES> 9,438,567
<BONDS> 45,895,438
0
0
<COMMON> 111,213
<OTHER-SE> 120,133,880
<TOTAL-LIABILITY-AND-EQUITY> 181,920,718
<SALES> 0
<TOTAL-REVENUES> 66,190,538
<CGS> 0
<TOTAL-COSTS> 43,501,883
<OTHER-EXPENSES> 12,056,642
<LOSS-PROVISION> 734,803
<INTEREST-EXPENSE> 2,107,157
<INCOME-PRETAX> 8,498,894
<INCOME-TAX> 3,296,469
<INCOME-CONTINUING> 5,202,425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,202,425
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.51
</TABLE>
