UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
---------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
Commission file number 0-25176
MEDCATH INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina 56-1635096
- ---------------------------------- -------------------
( State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
7621 Little Avenue, Suite 106, Charlotte, North Carolina 28226
(Address of principal executive officers)
(Zip Code)
(704) 541-3228
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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_____
As of April 21, 1997, there were 11,152,634 Common Shares outstanding.
<PAGE>
MEDCATH INCORPORATED
FORM 10-Q
March 31, 1997
Table of Contents
Page
No.
PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Condensed consolidated financial statements
Condensed consolidated statements of income 3
Condensed consolidated balance sheets 4
Condensed consolidated statements of cash flows 5
Notes to condensed consolidated financial statements 6-8
Item 2. Management's discussion and analysis of
financial condition and results of operations 9-13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
<PAGE>
<TABLE>
<CAPTION>
MedCath Incorporated
Unaudited Condensed Consolidated Statements of Income
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------------------------------------------------
1996 1997 1996 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 17,283,929 $ 26,709,491 $ 28,492,562 $ 49,563,944
Operating expenses:
Medical supplies and other 6,813,138 10,814,237 11,003,071 19,409,566
Personnel costs 4,747,845 6,992,562 7,124,210 13,136,990
Depreciation 1,106,632 1,782,856 1,838,790 3,273,009
Amortization 566,418 931,581 753,327 1,681,739
Provision for doubtful accounts 132,675 486,879 132,675 937,846
Marketing, general and administrative 1,263,780 1,797,103 2,624,027 3,699,314
---------------------------------------------------------------------
Total operating expenses 14,630,488 22,805,218 23,476,100 42,138,464
---------------------------------------------------------------------
Income from operations 2,653,441 3,904,273 5,016,462 7,425,480
Interest expense (562,858) (833,992) (729,955) (1,536,405)
Interest income 70,925 581,460 254,054 1,256,621
Minority interest in earnings of consolidated entities (30,053) (269,976) (392,174) (840,171)
Equity in net earnings of unconsolidated joint venture 39,266 - 65,951 -
---------------------------------------------------------------------
Income before income taxes 2,170,721 3,381,765 4,214,338 6,305,525
Provision for income taxes (868,288) (1,284,454) (1,685,735) (2,453,958)
=====================================================================
Net income $ 1,302,433 $ 2,097,311 $ 2,528,603 $ 3,851,567
=====================================================================
Net income per share $ 0.14 $ 0.18 $ 0.28 $ 0.33
=====================================================================
Weighted average number of common and common
equivalent shares outstanding 9,132,538 11,664,220 9,061,070 11,666,776
<FN>
See accompanying notes.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MedCath Incorporated
Condensed Consolidated Balance Sheets
September 30, March 31,
--------------------- --------------------
1996 1997
--------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,026,305 $ 10,876,192
Short-term investments 56,667,244 37,568,003
Accounts receivable, net of allowance 11,155,477 19,658,661
Medical supplies 1,549,029 2,656,109
Deferred income taxes 240,000 240,000
Prepaid expenses and other current assets 610,137 876,902
--------------------- --------------------
Total current assets 75,248,192 71,875,867
Property, plant and equipment, net of accumulated depreciation 72,303,824 108,187,050
Other assets 1,910,092 1,837,484
Start-up and organization costs, net of accumulated amortization 7,628,018 11,249,394
Advances to physician groups 5,609,178 6,059,209
Intangible assets, net of accumulated amortization 19,221,414 25,172,116
===================== ====================
Total assets $ 181,920,718 $ 224,381,120
===================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,861,343 $ 3,273,077
Distribution payable to minority interests 629,352 1,393,125
Accrued liabilities 3,623,704 7,704,933
Current portion of long-term debt 1,931,455 1,829,873
Current portion of obligations under capital leases 392,713 536,635
--------------------- --------------------
Total current liabilities 9,438,567 14,737,643
Deferred income taxes 2,864,535 2,943,445
Long-term debt 43,841,641 73,985,626
Obligations under capital leases 2,053,797 2,348,744
--------------------- --------------------
Total liabilities 58,198,540 94,015,458
Minority interests in equity of consolidated entities 3,477,085 6,179,005
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, and 11,121,326
and 11,146,749 shares issued and outstanding
at September 30, 1996 and March 31, 1997, respectively 111,213 111,467
Paid-in capital 108,897,931 108,987,674
Retained earnings 11,235,949 15,087,516
--------------------- --------------------
Total shareholders' equity 120,245,093 124,186,657
--------------------- --------------------
Total liabilities, minority interests and shareholders' equity $ 181,920,718 $ 224,381,120
===================== ====================
<FN>
See accompanying notes.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MedCath Incorporated
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended
March 31,
-------------------------------------
1996 1997
------------------ -----------------
<S> <C> <C>
Operating activities
Net Income $ 2,528,603 $ 3,851,567
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,651,385 5,039,864
Equity in net earnings of unconsolidated joint venture (65,951) -
Minority interest (598,111) (404,443)
Deferred income taxes 175,000 78,910
(Increase) decrease in current assets:
Accounts receivable (6,598,611) (8,503,187)
Medical supplies (662,523) (1,107,080)
Prepaid expenses and other current assets (153,438) (266,765)
Increase (decrease) in current liabilities:
Accounts payable 1,307,041 411,734
Distribution payable to minority interest 177,158 763,773
Accrued liabilities 1,469,618 4,081,229
Other (136,316) (42,662)
------------------ ------------------
Net cash provided by operating activities 93,855 3,902,940
Investing activities
Purchases of property, plant and equipment (22,348,514) (38,495,627)
Start-up and organization costs (5,202,116) (4,852,247)
Advances to physician groups (1,751,972) (1,114,094)
Repayments of advances to physician groups 195,014 664,062
Net sale of short-term investments 7,985,177 19,099,241
------------------ -----------------
Net cash used in investing activities (21,122,411) (24,698,665)
Financing activities
Proceeds from issuance of long-term debt 21,982,481 26,670,629
Repayments of long-term debt (304,188) (2,988,184)
Repayments of obligations under capital leases (844,155) (233,194)
Proceeds from issuance of common stock 131,652 89,997
Investments by minority partners 285,490 3,106,364
Payment of loan acquisition costs and deferred loan fees (398,399) -
------------------ -----------------
Net cash provided by financing activities 20,852,881 26,645,612
------------------ -----------------
Net increase (decrease) in cash and equivalents (175,675) 5,849,887
Cash and cash equivalents, beginning of period 6,821,728 5,026,305
------------------ -----------------
Cash and cash equivalents, end of period $ 6,646,053 $ 10,876,192
================== =================
<FN>
See accompanying notes.
</FN>
</TABLE>
5
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three and Six Month Periods Ended March 31, 1997
Note 1- General
The accompanying unaudited condensed consolidated financial statements of
MedCath Incorporated (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the statements of the unaudited interim periods
include all adjustments necessary for fair presentation of results for the
periods and all such adjustments are of a normal recurring nature. The
accompanying unaudited condensed consolidated results of operations for the
three and six month periods ended March 31, 1997 are not necessarily indicative
of the results that may be expected for the year ending September 30, 1997. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1996. Unless otherwise specified, capitalized terms
used herein are used as defined in such Annual Report on Form 10-K.
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 and assumptions.
Note 2 - 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 and the assumed conversion of all outstanding
convertible debt. Fully diluted net income per share is not presented because it
does not differ from primary net income per share.
Note 3 - Long-Term Debt
Long term debt consisted of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1996 1997
--------------------------------------
<S> <C> <C>
McAllen REIT Loan $ 13,750,000 $ 13,750,000
Arkansas REIT Loan 19,757,558 29,000,000
Tucson REIT Loan 1,062,531 8,135,110
Convertible subordinated debt - 4,451,971
Notes payable to equipment lenders 10,689,071 19,738,721
Other notes payable 513,936 739,697
--------------------------------------
45,773,096 75,815,499
Less current portion (1,931,455) (1,829,873)
======================================
$ 43,841,641 $ 73,985,626
======================================
</TABLE>
As of March 31, 1997, approximately $18.0 million was available under the
Company's $20 million Revolver, as computed in accordance with the borrowing
base, and there were no amounts outstanding. 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.
6
<PAGE>
Note 3 - Long - Term Debt (continued)
The Revolver 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 March 31, 1997.
In March 1997, the Company obtained a financing commitment for up to $30 million
for the purpose of financing the land acquisition, construction and a portion of
the working capital costs of the Arizona Heart Hospital. The interest rate will
be at a premium above LIBOR and the outstanding principal balance will be due
and payable in full three years from the closing of the note, if the Company's
optional extension of one year is not exercised.
In December 1996, the Company obtained financing of up to $16 million in
installment notes payable to equipment lenders for the purpose of purchasing
equipment for the Arkansas Heart Hospital. At March 31, 1997 there was $9.9
million outstanding under these notes. The notes bear interest at rates ranging
from 9.62% to 10.25% and are payable in monthly installments of principal and
interest over five years.
In October 1996, the Company issued a convertible subordinated promissory note
in the amount of $6.4 million in connection with the acquisition of a contract
to manage Heart Clinic, P.A. (See Note 4). In November 1996, $1.9 million of the
outstanding principal balance was paid in accordance with the terms of the note.
The remaining principal amount of the note is due and payable on October 1,
1998, in cash or in shares of common stock of the Company at a conversion price
of $14 per share. Interest is payable annually at a rate of 4% on the
outstanding principal. A contingent convertible subordinated promissory note was
also issued in October 1996 and the amount of the note will be based on
performance levels of the Heart Clinic physicians for the 1997 calendar year.
Note 4 - Business Combinations and New Operations
On March 3, 1997, the Arkansas Heart Hospital received Medicare certification
from the Arkansas Department of Health and opened slightly earlier than
anticipated. The Company serves as the managing member with an approximate 51%
interest in the limited liability company that operates the Arkansas Heart
Hospital.
In January 1997, the Company announced it had formed a venture for the purpose
of constructing and operating the Arizona Heart Hospital to be located in
Phoenix, Arizona. The Arizona Heart Hospital will be owned and operated by a
limited liability company in which the Company owns a majority interest and
serves as manager. The Company expects the total cost of constructing and
equipping the Arizona Heart Hospital to be approximately $44 million and plans
to open the hospital in fiscal year 1998.
In September 1996, the Company formed PMMI. 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 in 1997 by
the physicians) and consisted of fixed and contingent promissory notes that are
partially convertible into the Company's common stock (see Note 3).
7
<PAGE>
Note 5 - Newly Issued Accounting Standards
In February 1997, the Financial Accounting Standard Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is expected to result in an increase
in primary earnings per share, for the first quarters ended March 31, 1996 and
March 31, 1997, of $.01 per share, respectively. The impact is expected to
result in an increase in primary earnings per share, for the six months ended
March 31, 1996 and March 31, 1997, of $.01 per share and $.02 per share,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be material.
8
<PAGE>
MedCath Incorporated Management's
Discussion and Analysis of Financial Condition and Results of Operations
For the Three and Six Month Periods Ended March 31, 1997
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Unaudited Condensed Consolidated
Financial Statements and accompanying notes. All References to a "Note" are to
the "Notes to Unaudited Condensed Consolidated Financial Statements" contained
herein. Unless otherwise specified, capitalized terms used herein are used as
defined in the Company's Annual Report on Form 10-K for the year ended September
30, 1996.
Acquisitions and New Operations
On March 3, 1997, the Arkansas Heart Hospital received Medicare certification
from the Arkansas Department of Health and opened slightly earlier than
anticipated. The Company serves as the managing member with an approximate 51%
interest in the limited liability company that operates the Arkansas Heart
Hospital.
Results of Operations
The following table sets forth, for the periods presented, the percentage of the
Company's net revenue represented by the net revenue of each of the Company's
three divisions and by certain items reflected in the Unaudited Condensed
Consolidated Statements of Income:
<TABLE>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------------
1996 1997 1996 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue:
Diagnostics Division 53.3% 36.8% 61.7% 38.7%
Practice Management Division 23.2 18.4 23.6 19.7
Hospital Division 23.5 44.8 14.7 41.6
-------------------------------------------------------------
Total net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical supplies, personnel & other operating expense 66.8 66.7 63.6 65.6
Depreciation and amortization expense 9.7 10.2 9.1 10.0
Provision for doubtful accounts .8 1.8 .5 1.9
Marketing, general and administrative expense 7.3 6.7 9.2 7.5
-------------------------------------------------------------
Total operating expenses 84.6 85.4 82.4 85.0
-------------------------------------------------------------
Income from operations 15.4 14.6 17.6 15.0
Interest expense (3.3) (3.1) (2.5) (3.1)
Interest income .4 2.2 .9 2.5
Minority interest in earnings of consolidated entities (.2) (1.0) (1.4) (1.7)
Equity in earnings of unconsolidated subsidiaries .2 - .2 -
-------------------------------------------------------------
Income before income taxes 12.5 12.7 14.8 12.7
Provision for income taxes (5.0) (4.8) (5.9) (4.9)
-------------------------------------------------------------
Net income 7.5% 7.9% 8.9% 7.8%
=============================================================
</TABLE>
9
<PAGE>
Results of Operations (continued)
Net revenue
Consolidated net revenue for the second quarter and six months ended March 31,
1997 increased $9.4 million or 54.5% and $21.1 million or 74.0%, respectively,
over the comparable prior year periods. These increases are primarily a result
of net revenue generated at the McAllen and Arkansas Heart Hospitals. The
remainder of the increase in net revenue is the result of new operations in both
the Practice Management Division and the Diagnostics Division, as well as
increases in net revenue of existing operations.
Net revenue in the Diagnostics Division for the second quarter and six months
ended March 31, 1997 increased $622,000 or 6.8% and $1.6 million or 9.1%,
respectively, over the comparable prior year periods. Net revenue for the
division increased primarily as the result of three new Fixed-Site Facilities
which opened within the last nine months. The number of Fixed-Site Facilities
and Mobile Cath Labs either owned or operated by the Company increased from 28
in fiscal year 1996 to 31 in fiscal year 1997.
Net revenue in the Practice Management Division for the second quarter and six
months ended March 31, 1997 increased $890,000 or 22.2% and $3.0 million or
45.4%, respectively, over the comparable prior year periods. These increases
were attributable to the acquisition of contracts to manage two additional
physician groups, one in February 1996 and the second in October 1996. Also
contributing to the total increase in both periods is the increase in net
revenue from an existing management contract. The total number of physicians
under management in the Practice Management Division at this quarter end is 76
compared with 64 at the same time last year.
Net revenue in the Hospital Division for the second quarter and six months ended
March 31, 1997 increased $7.9 million or 195.0% and $16.4 million or 391.0%,
respectively, over the comparable prior year periods. These increases are
primarily attributable to revenues at the McAllen Heart Hospital which opened in
January of 1996. Due to the initial ramp-up of operations at the McAllen Heart
Hospital during the first few months subsequent to opening, the three and six
month increases over the comparable prior year periods are substantial. Also
contributing to the Hospital Division increases is one month of net revenue
generated at the Company's second Heart Hospital, the Arkansas Heart Hospital
located in Little Rock, Arkansas, which opened in March of this year.
Operating Expenses and Income from Operations
Total operating expenses for the second quarter and six months ended March 31,
1997 increased $8.2 million or 55.9% and $18.7 million or 79.5%, respectively,
over the comparable prior year periods. Income from operations for the second
quarter and six months ended March 31, 1997 increased $1.3 million or 47.1% and
$2.4 million or 48.0%, respectively, over the comparable prior year periods.
These increases are attributable to increased revenue at the McAllen and
Arkansas Heart Hospitals, revenue from managing two additional physician
practices and added revenue in the Diagnostic Division for three new Fixed-Site
Facilities. Operating margins decreased for the second quarter and six months
ended March 31, 1997 to 14.6% from 15.4% and to 15.0% from 17.6%, respectively.
EBITDA margins for the second quarter and six months ended March 31, 1997
decreased to 24.8% from 25.0% and to 25.0% from 26.7%, respectively, over the
comparable prior year periods. These operating and EBITDA margin decreases were
primarily due to the operating expenses associated with the McAllen and Arkansas
Heart Hospitals and the growth in the Practice Management Division, which
operates at lower margins than those realized in the Diagnostics Division.
10
<PAGE>
Results of Operations (continued)
Income from operations in the Diagnostics Division for the second quarter and
six months ended March 31, 1997 increased $125,000 or 3.5% and $441,000 or 6.8%,
respectively, over the comparable prior year periods. Operating margins
decreased slightly for the second quarter and six months ended March 31, 1997
and 1996 to 37.2% from 38.3% and 36.3% from 37.0%, respectively. EBITDA margins
for the second quarter and six months ended March 31, 1997 increased slightly in
the Diagnostics Division to 48.2% from 47.9% and 47.1% from 47.0%, respectively.
These changes are due primarily to the results of operations of three new
Fixed-Site Facilities that have commenced operation since September 1996.
Income from operations in the Practice Management Division for the second
quarter and six months ended March 31, 1997 increased $229,000 or 55.1% and
$450,000 or 62.1%, respectively, over the comparable prior year periods.
Operating margins in the Practice Management Division for the second quarter and
six months ended March 31, 1997 increased to 13.1% from 10.3% and 12.0% from
10.8%, respectively, over the comparable prior year periods. EBITDA margins in
the Practice Management Division for the second quarter and six months ended
March 31, 1997 also increased to 15.5% from 11.7% and 14.4% from 12.3%,
respectively, over the same comparable prior year periods. These increases are
attributable to operating income from the management of two new physician
groups, one in February 1996 and the second in October 1996, as well as
increased operating income from an existing management contract.
Income from operations in the Hospital Division for the second quarter and six
months ended March 31, 1997 increased $1.3 million or 286.7% and $2.3 million or
497.5%, respectively, over the comparable prior year periods. EBITDA margins in
the Hospital Division for the second quarter and six months ended March 31, 1997
increased to 19.3% from 6.7% and 21.5% from 6.0%, respectively, over the same
comparable prior year periods. The increases for the two periods are
attributable to the results of operations at the McAllen Heart Hospital since
opening in January of 1996. The Arkansas Heart Hospital, which opened in March
1997, experienced operating losses as expected in its first month of operations
and impacted the margins.
Marketing, general and administrative expenses for the second quarter and six
months ended March 31, 1997 increased $533,000 or 42.2% and $1.1 million or
41.0%, respectively, over the comparable prior periods. These increases were
primarily a result of the Company's continued investment in corporate
infrastructure to facilitate growth. The Company has continued to add additional
development and finance personnel, as well as personnel for new operations and
acquisitions. 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 for the second quarter and six months ended March 31, 1997
increased $271,000 or 48.2% and $806,000 or 110.5%, respectively, over the
comparable prior year periods. These increases are primarily the result of
interest incurred on borrowings used to finance the McAllen and Arkansas Heart
Hospitals. Substantially all of the property, plant and equipment at the
hospitals was financed using borrowings that bear interest at rates ranging from
8.54% to 11.54%. Interest income for the second quarter and six months ended
March 31, 1997 increased $511,000 or 719.8% and $1.0 million or 394.6%,
respectively, over the comparable prior year periods due to additional
investment income earned on cash and short-term investments.
11
<PAGE>
Results of Operations (continued)
Minority Interest in Earnings of Consolidated Entities
Minority interest in earnings of consolidated entities for the quarter and six
months ended March 31, 1997 increased $240,000 and $448,000, respectively, over
the comparative prior year periods. In developing certain Fixed-Site Facilities,
Heart Hospitals and Mobile Cath Labs the Company has entered into several
partnerships and limited liability companies ("LLC's"). The full results of
operations of these partnerships and LLC's are included in the Company's income
before income taxes. Any increase or decrease in the minority interest in these
entities earnings is directly attributable to the results of operations of these
entities.
Liquidity and Capital Resources
Operating Cash Flows
Net cash provided by operating activities was $3.9 million for the six months
ended March 31, 1997. Accounts receivable increased $8.5 million and accrued
liabilities increased $4.1 million during the six month period. The increase in
receivables is the result of additional receivables from the opening of the
Arkansas Heart Hospital, additional receivables from new operations and
increased revenues in each of the Company's three operating divisions. The
increase in accrued liabilities is also a result of the opening of the Arkansas
Heart Hospital and in conjunction with increased income taxes payable due to
timing of payments. At March 31, 1997, the Company had working capital of $57.1
million, including $48.4 million of cash and short-term investments and $19.7
million in accounts receivable.
Investing Cash Flows
During the six months ended March 31, 1997, the Company utilized a net of $24.7
million in investing activities. A total of $39.7 million was utilized in the
Hospital Division and consisted of land acquisition, construction, equipment and
start-up costs for the Company's Heart Hospitals. A net of $4.1 million was
utilized in the Company's other operations. Offsetting these outflows was $19.1
million provided from the sale of short term investments which were used to fund
a portion of the aforementioned investing activities.
Financing Cash Flows
Financing activities provided a net of $26.6 million during the six month period
ended March 31, 1997. A total of $26.2 million was provided by loan proceeds for
construction and equipment costs at the Arkansas and Tucson Heart Hospitals and
$3.1 million was provided by investments from minority partners in the
Bakersfield and Arizona Heart Hospitals during the six months. Offsetting these
proceeds was the repayment of a portion of the convertible subordinated debt,
long term debt and capital leases.
In March 1997, the Company obtained a financing commitment for up to $30 million
for the purpose of financing the land acquisition, construction and a portion of
the working capital costs of the Arizona Heart Hospital. The interest rate will
be at a fixed premium above LIBOR and the outstanding principal balance will be
due and payable in full three years from closing of the note, if the Company's
optional extension of one year is not exercised.
In January 1997, the Company formed a venture for the purpose of constructing
and operating the Arizona Heart Hospital. The Company anticipates the total cost
of constructing and equipping the Arizona Heart Hospital will be approximately
$44.0 million and that construction will begin on the hospital in fiscal year
1997.
12
<PAGE>
Liquidity and Capital Resources (continued)
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.
Substantial investments will be required during the development phase, and
operating losses and negative cash flow will be incurred during the initial
operation of each Heart Hospital.
In September 1996, the Company formed PMMI, which in October 1996, 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 in 1997 by
the physicians) and consisted of fixed and contingent promissory notes that are
partially convertible into the Company's common stock (see Note 3).
As of March 31, 1997, approximately $18.0 million was available under the
Company's $20 million Revolver, as computed in accordance with the borrowing
base, and there were no amounts outstanding. 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 Company anticipates financing its future operations through a combination of
amounts available under the Revolver, financing other real estate lenders and
various equipment lenders, capital contributions by minority partners, cash
reserves, short-term investments 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 year 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.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on February 19, 1997.
(b) The matters voted upon and the results of the voting were as follows:
(1) The shareholders voted 10,220,036 in the affirmative and none
in the negative to re-elect the Chairman of the Board to the
Board of Directors and 10,268,036 in the affirmative and none
in the negative to re-elect the additional five Board members.
There were 64,789 votes withheld in the re-election of the
Chairman of the Board and 16,789 votes withheld in the
re-election of the additional five Board members.
(2) The shareholders voted 9,369,774 shares in the affirmative and
568,792 shares in the negative to increase the number of shares
of Common Stock reserved for issuance under the Company's
Omnibus Stock Plan. There were 58,875 votes withheld.
(3) The shareholders voted 10,035,686 shares in the affirmative and
8,382 shares in the negative to ratify the Board of Director's
selection of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending September 30, 1997. There
were 27,257 votes withheld.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Operating Agreement of the Arizona Heart Hospital, LLC
dated as of January 6, 1997, by and among AHH
Management, Inc. and several other parties thereto.
27 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K filed during the three months ended
March 31, 1997 are as follows:
Date of Report Items Reported
January 10, 1997 Item 5. OTHER EVENTS
January 27, 1997 Item 5. OTHER EVENTS
February 11, 1997 Item 5. OTHER EVENTS
March 4, 1997 Item 5. OTHER EVENTS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDCATH INCORPORATED
Date Signature and Title
April 22, 1997 /s/ Richard J. Post
-----------------------
Richard J. Post
Chief Financial Officer,
Secretary and Treasurer
15
OPERATING AGREEMENT
OF
ARIZONA HEART HOSPITAL, LLC
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OPERATING AGREEMENT
OF
ARIZONA HEART HOSPITAL, LLC
An Arizona Limited Liability Company
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE ARIZONA 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 Arizona Heart Hospital,
LLC (the "Company"), an Arizona Limited Liability Company is made and entered
into as of the 6th day of January, 1997, by and among the Company and AHH
Management, Inc., a North Carolina corporation ("AHH Management"), 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 an acute
care hospital which hospital shall be located in or near Phoenix, Arizona and
shall specialize in all aspects of cardiology and cardiovascular care and
surgery which AHH Management 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 Phoenix metropolitan 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.
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ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).
I.1 "Act" shall mean the Arizona Limited Liability Company Act, as in
effect in Arizona (or any corresponding provisions of succeeding law).
I.2 "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).
I.3 "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.
I.4 "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).
(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:
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(i) the acquisition of a Membership Interes
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.
I.5 "Agreement" shall mean this Operating Agreement, as amended from
time to time.
I.6 "AHI" shall mean the Arizona Heart Institute, Ltd.
I.7 "Articles of Organization." The Articles of Organization of the
Company, as filed with the Secretary of State of Arizona as the same may be
amended from time to time.
I.8 "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 AHH Management 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, AHH
Management 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 AHH
Management shall determine such adjustments are necessary or appropriate to
comply with Regulations Section 1.704-1(b)(2)(iv), AHH Management 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. AHH Management 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.
I.9 "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.
I.10 "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 distributed to AHH Management as its Management Fee for
services or any amount in repayment of loans made by the Members to the Company.
I.11 "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 AHH Management reasonably determines to
be necessary or appropriate.
I.12 "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 AHH Management 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 reasonably deemed necessary by AHH Management. 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.
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I.13 "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.
I.14 "Company" shall refer to Arizona Heart Hospital, LLC, which shall
be created upon the filing of the Articles of Organization with the Office of
the Secretary of State of Arizona, to be operated under the name Arizona Heart
Hospital, an Arizona limited liability company, and to continue under this
Agreement, as amended from time to time.
I.15 "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 percentage of the
Member's percentage Membership Interest in the Company as the same may be
adjusted from time to time.
I.16 "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.
I.17 "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.
I.18 "Equipment" shall mean the appropriate equipment and supplies
required from time to time in connection with the development and operation of
the Hospital.
I.19 "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.
I.20 "Hospital" shall have the meaning provided in Section 2.3 hereof.
I.21 "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.
I.22 "Investor Members" shall mean the Members other than AHH
Management listed on Schedule A attached hereto.
I.23 "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.
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I.24 Intentionally omitted.
I.25 "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 AHH Management 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.
I.26 "Management Fee" shall mean the amounts payable to AHH Management
pursuant to Article V for services rendered in managing the operations of the
Company.
I.27 "Material Agreement" shall refer to 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
One Hundred Thousand Dollars ($100,000.00) 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, purchases of supplies
and routine services and the like.
I.28 "Material Decision" shall refer to any decisions regarding
approvals of the development and operating budgets for the Hospital, the
selection of the site for the Hospital, the design of the Hospital, the
selection of the Hospital's senior administrator, strategic planning, the
execution of managed care contracts, the execution of exclusive contracts to
provide physician services to the Hospital and the selection of items of
Equipment the individual cost of which exceeds One Hundred Thousand Dollars
($100,000.00) or any other significant piece of medical Equipment which the
Investor Manager specifically designates in writing as material.
I.29 "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.
I.30 "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 then
applying Schedule A. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.
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I.31 "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.
I.32 "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.
I.33 "AHH Management" shall refer to AHH Management, Inc., an Arizona
corporation, who shall serve as a Manager of the Company.
I.34 "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.
I.35 "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.
I.36 "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.
I.37 "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.
I.38 "Regulatory Allocations" shall mean those allocations of items of
Company income, gain, loss or deduction set forth on Schedule B 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.
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I.39 "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.
I.40 "Substitute Manager" shall mean a Manager who succeeds either AHH
Management or the Investor Manager with all of the specific rights and powers of
such Manager under this Agreement.
I.41 "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.
I.42 "Super-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.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
II.1 Company Formation. The Company will be formed upon the execution
by AHH Management 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
Arizona in accordance with the provisions of the Act. AHH Management 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 Arizona, and other documents to reflect the admission of additional
Members to the Company. Any costs incurred by AHH Management in connection with
the foregoing shall be reimbursed promptly upon the completion of such action.
II.2 Name of Company. The name of the Company is Arizona Heart
Hospital, LLC, an Arizona limited liability company.
II.3 Purposes and Investment Objectives. The principal purposes of
the Company 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 Phoenix, Arizona (the "Hospital") which would include, but
not be limited to, the following:
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(i) Services and facilities to meet all
requirements of the State of Arizona, 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 therefore;
(ii) Approximately seventy-four thousand (74,000)
square feet in a building to be constructed in accordance
with plans and specifications approved by the Company;
(iii) Approximately sixty (60) medical/surgical
beds;
(iv) Three (3) heart catheterization laboratories
with available space for one additional heart catheterization
lab;
(v) One (1) electrophysiology laboratory;
(vi) Three (3) heart surgical suites with space
for the development of one additional heart surgical suite;
(vii) All appropriate support services and
systems; and
(viii) 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, electrophysiology and atherectomy, and cardiac
surgery which would include, but not be limited to, bypass
grafts, endovascular surgery and valve surgery;
The size, number and scope of facilities of the Hospital shall
finally be determined by the Manager and the Investor Manager.
(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.
II.4 Registered Office; Agent. The registered office of the Company is
2632 North 20th Street, Phoenix, Arizona 85006. The statutory agent of the
Company shall be MHVRB Service Corp. whose address is 3003 North Central Avenue,
Suite 1200, Phoenix, Arizona 85012-2915. AHH Management shall promptly notify
the Members of any changes in the principal place of business, the registered
office, or the registered agent of the Company.
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II.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 Arizona,
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 AHH Management. In the
event AHH Management does not elect to extend the term hereof, the Investor
Manager may instead elect to extend the term hereof, subject to AHH Management's
consent.
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
III.1 Contributions of Members. The Members shall contribute capital as
follows:
(a) AHH Management shall own 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 ($1,530,000.00).
(b) The Investor Members shall own in the aggregate a
forty-nine percent (49%) Membership Interest and shall contribute to
the Company for their Membership Interests an amount, in the aggregate,
One Million Four Hundred Seventy Thousand Dollars ($1,470,000.00). The
Membership Interests of the Investor Members shall be owned 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 Act. The Members shall
not be required to contribute any additional capital to the Company
except as provided in Section 3.5. The final percentage Membership
Interest of each Member shall be based on his/its pro rata Capital
Contribution to the Company.
III.2 Liability of Members - For Capital. The liability of each Member,
as such, shall be limited to the amount of his agreed Capital Contribution as a
Member.
III.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. No Member shall be entitled to withdraw from the Company
unless such right is expressly provided herein. No Member shall be entitled to
make demand for withdrawal or redemption of any part of its Capital Account or
to receive any distribution except as provided herein.
III.4 Interest on Capital Contributions. 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.
III.5 Additional Funding. If from time to time, AHH Management
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:
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(a) First, AHH Management shall use commercially reasonable
efforts to borrow such funds from a bank or other lender on terms and
conditions reasonably acceptable to AHH Management, or AHH Management
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 therefor. 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, AHH Management 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 AHH Management 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. AHH Management may then elect to contribute amounts which
the Investor Members, in the aggregate, have not so contributed.
Thereafter, AHH Management shall reasonably adjust the 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 AHH Management may elect to dissolve the Company.
III.6 Guarantees. Except as expressly provided in Section 5.9(b) of
this Agreement, the Investor Members shall not be required to provide personal
guarantees of any indebtedness incurred by the Company in connection with the
construction or operation of the Hospital or otherwise.
ARTICLE IV
NAMES AND ADDRESSES OF INITIAL MEMBERS
IV.1 The names and addresses of the Members are as follows:
Name Address
o AHH Management, Inc. 7621 Little Avenue, Suite 106
Charlotte, NC 28226
o See the Members listed on Schedule A attached hereto.
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ARTICLE V
MANAGEMENT OF THE COMPANY
V.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. Subject to the terms and conditions of this Agreement and except
as otherwise provided herein, all Material Agreements and Material Decisions
with respect to the business and affairs of the Company shall be approved or
made by AHH Management and the Investor Manager in accordance with Section 5.16
hereof. 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 below with
respect to the authority and actions of AHH Management.
The day-to-day management of the business and affairs of the Company,
including those agreements and decisions which are not Material Agreements or
Material Decisions, shall be the responsibility of AHH Management, provided,
however, decisions relating to medical and clinical practice at the Hospital
including, without limitation, establishing standardized clinical pathways shall
be made exclusively by the qualified medical personnel of the Hospital in
accordance with the Hospital and medical staff bylaws. Subject in all cases to
the foregoing, AHH Management 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;
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(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
to be adopted for the Hospital. It is acknowledged and agreed that the
establishment of an internal review board and of standards for
physician credentialing shall be accomplished pursuant to the medical
staff bylaws and appointment procedures of the Hospital in which the
Investor Manager shall participate through his membership on the
governing body of the Hospital and or the medical staff of 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;
(g) To employ or retain on such terms and for such
compensation as AHH Management may reasonably determine, such persons,
firms, or corporations as AHH Management 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 AHH Management,
provided that the selection of the senior administrator of the Hospital
shall be a Material Decision. It is further acknowledged and agreed
that the Hospital shall include on the full-time staff a director of
managed care/business development, two admission coordinators, two
clinical coordinators, ACT program, two research nurses, a vice
president-clinical services, a vice president-finance, a vice
president-managed care, a catheterization laboratory director,
catheterization laboratory nurses and technicians, an operating room
director, operating room nurses and technicians, a half-time director
of professional relations and referral coordinator and a quarter-time
medical writer and director of marketing, the selection, retention,
removal and compensation of which personnel shall be Material
Decisions;
Either of the Managers may initiate the process to determine
whether or not the employment of any of the above individuals shall be
terminated by providing to the other a written report which documents
the reasons why the individual'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 Manager shall cause the Company to take
such recommended action; provided, such action shall be consistent with
the established disciplinary procedures of the Company with respect to
employees, which 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.
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(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
AHH Management deems necessary or appropriate for the protection of the
Company and AHH Management, for the conservation of the Company or its
assets, or for any purpose beneficial to the Company; however, neither
AHH Management 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;
(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;
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(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 AHH Management 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.
(z) To propose and implement a marketing plan for the Hospital
which for the first year of operation shall have a budget of not less
than five hundred thousand dollars ($500,000.00) (such marketing plan
and related budget shall be a Material Decision); provided, however,
that if after the first year of operations the Hospital does not have
net income before taxes calculated in accordance with generally
accepted accounting principles during any six-month period, such
marketing budget may be lowered in future years and in all events will
be subject to the agreement and approval of the Managers. It is further
acknowledged and agreed that the Investor Manager may elect to be
actively involved in the design and implementation of the marketing
plan, and that the marketing plan and marketing budget shall be a
Material Decision in all years.
In the event that substantially all of the assets of MedCath
Incorporated ("MedCath") are sold to, or fifty-one percent (51%) or more of the
capital stock of MedCath is acquired by, a third party who is not an Affiliate
of MedCath but who is, directly or indirectly, an owner or operator of a
hospital within thirty (30) miles of the Hospital, then following the closing of
such transaction, the Investor Manager shall have the right to manage the day to
day business and affairs of the Company in lieu of AHH Management (subject to
the other terms of this Agreement) unless the senior management of MedCath after
such transaction is and remains for at least one (1) year substantially the same
as the senior management of MedCath prior to such transaction.
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V.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;
(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;
(j) Sell all or any substantial part of the assets of
the Company or merge the Company without the approval of a Super-
Majority Vote of the Members.
V.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 and, in the case of AHH Management, to perform
the duties for which it will receive a Management Fee as provided in
Section 5.6(b), or otherwise, 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 AHH Management 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;
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(d) In the case of AHH Management 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;
(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; and
(f) In the case of AHH Management deliver to the Secretary of
State of Arizona for filing an annual report in accordance with the Act
and deliver to the Arizona Secretary of State a qualification as a
foreign limited liability company.
V.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 respective
responsibilities and obligations under this Agreement or under the laws of the
State of Arizona nor will it make any such person a Member or Manager of the
Company.
V.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.
V.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.
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(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); the maintenance of the Hospital and its
Equipment may be performed by AHH Management 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) In addition to reimbursements and other
amounts due hereunder, a Management Fee equal to Two Hundred
Thousand Dollars ($200,000.00) per year due to AHH Management
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 Company), 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 Company or by a third
party who shall in turn lease such building to the Company)
which fees shall be increased annually in proportion to annual
increases in the Consumer Price Index for all Urban Consumers
(All Items) published by the U.S. Department of Commerce,
Bureau of Labor Statistics ("CPI"), as reasonably applied by
AHH Management on January 1st of each year;
(iii) A medical director's fee equal to Two
Hundred Thousand Dollars ($200,000.00) per year to be paid to
the medical director of the Hospital selected by the Investor
Manager and approved by AHH Management which fee shall first
accrue commencing as of the Completion Date and which fee
shall be increased annually by the CPI reasonably applied by
AHH Management on January 1st of each year;
(iv) 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
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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 AHH Management 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 Hospital or the Equipment.
V.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, AHH Management, 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.
V.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.
V.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 in the
Company, and for a period of three (3) years after a Member ceases for
any reason (whether due to death, disability, retirement or otherwise)
to own a Membership Interest in the Company, such Member and all of its
respective Affiliates shall not 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
or interventional procedures or services, in any case within a thirty
(30) mile radius of the Hospital (the "Territory"), provided that (i)
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no Member who is a physician shall be prohibited from maintaining his
or her staff privileges at any other hospital; (ii) nothing herein
shall prohibit a Member from owning up to two percent (2%) 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, or (iii) owning an interest
in the two existing cardiac catheterization labs owned by AHI as long
as only diagnostic catheterizations are performed therein, or (iv)
nothing herein shall prohibit AHI or Edward B. Diethrich, M.D. ("EBD")
from acquiring an ownership or other equity interest in any health care
facility located north and east of the intersection of Doubletree Ranch
Road and Tatum Boulevard, Scottsdale, Arizona, which acquisition would
otherwise violate the provisions of this subsection (b), provided that
AHI provides to the Company upon the Company's written request therefor
a guaranty of payment of ten percent (10%) of the original principal
balance (determined assuming such mortgage loan has been fully funded
by the lender but reduced by the amount of any principal payments which
have been made as of the date such guaranty is required hereunder) of
the first mortgage loan upon the Hospital. In addition, AHH Management
or its Affiliates may separately operate a mobile catheterization
laboratory within the Territory, but only if either AHH Management 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 the Investor Manager has elected not to have such
service provided by the Company.
(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) 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 AHH Management 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 AHH Management or the Company and nothing herein is intended to
prohibit any party from practicing medicine at any other facility.
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(f) If the Investor Member is a legal entity and not an
individual, such Investor Member shall cause each of its existing and
future equity owners to agree in writing to be personally bound by the
terms of this Section 5.09.
V.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.
V.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.
V.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 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.
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V.13 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.
V.14 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.
V.15 Purchase of Goods and Services from AHH ManagementV.15 Purchase of
Goods and Services from AHH Management. Goods and services purchased from AHH
Management or its Affiliates shall be of substantially the same quality and
price as could be obtained from an unrelated third party.
V.16 Decisions by ManagersV.16 Decisions by Managers. 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 AHH Management and the Investor Manager. In the event a decision, approval or
consent is requested of the Investor Manager by AHH Management prior to the date
which is sixty (60) days after the opening of the Hospital, 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 AHH
Management, provided however, if a decision, approval or consent is requested of
the Investor Manager by AHH Management after the date which is sixty (60) days
after the opening of the Hospital, such decision, approval or consent shall be
deemed to have been affirmatively made if the Investor Manager fails to respond
to any such written request therefor within ten (10) days of notice thereof by
AHH Management. 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 AHH Management and shall be subject to the consent of the Investor
Manager, which consent shall not be unreasonably withheld;
The development and annual operating budgets to be proposed by AHH
Management shall be approved by the Managers as provided above subject to the
following:
(a) The Investor Manager shall be deemed to have approved a
development budget which is substantially consistent with the attached
Development Budget Schedule attached hereto as Schedule C to this
Agreement;
(b) 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
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(c) In the event that the Managers are unable to approve an
annual budget, AHH Management 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.
ARTICLE VIARTICLE VI
DISTRIBUTIONS AND ALLOCATIONS
VI.1 Distributions of Cash Flow from Operations and Cash from Sales or
RefinancingVI.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.
VI.2 Profits. Except as provided in Schedule B, Profits shall
be allocated as follows:
(a) First, 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(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(a) 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.
VI.3 Losses. Except as provided in Schedule B, Losses shall
be allocated as follows:
(a) First, Losses shall be allocated to the Members with
positive Adjusted Capital Account balances in proportion to those
balances.
(b) All remaining Losses shall be allocated to the
Members in accordance with their percentage Membership Interests.
VI.4 Code Section 704(c) Tax Allocations. VI.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
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.
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Any elections or other decisions relating to allocations under this
Section shall be determined by AHH Management. Absent a determination by AHH
Management, 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.
VI.5 Miscellaneous. VI.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 AHH Management 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 VIIARTICLE VII
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
VII.1 No Termination by Certain Acts of MemberVII.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.
VII.2 DissolutionVII.2 Dissolution. The Company shall be dissolved upon
the happening of any of the following events, whichever shall first occur:
(a)The election by AHH Management 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 AHH Management
under this Agreement (which Substitute Manager accepts such election);
(c) Upon the written agreement of AHH Management 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 Super-Majority 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
(i) At the election of AHH Management or of the Investor
Manager, in the event that by March 1, 1997 (unless such date is
extended by the consent by the Manager and the Investor Manager)
Investor Members reasonably acceptable to AHH Management and the
Investor Manager have not been admitted as Members subscribing for at
least ninety-three percent (93%) of the Membership Interests described
in Section 3.1(b).
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VII.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
Super-Majority 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 AHH Management or any Affiliate thereof, on such
terms and for such consideration as shall be consistent with obtaining
the fair market value thereof, as such fair market value is approved by
a Super-Majority Vote of the Members.
(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 Arizona 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, 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
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(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.
VII.4 TerminationVII.4 Termination. Upon completion of the dissolution,
winding up, distribution of the liquidation proceeds and any other Company
assets, the Company shall terminate.
VII.5 Payment in CashVII.5 Payment in Cash. Any payments made to any
Member pursuant to this Article VII shall be made only in cash.
VII.6 Goodwill and Trade NameVII.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 AHH Management,
provided that distributions and allocations otherwise due to AHH Management
shall not be reduced as a result of AHH Management becoming entitled to such
assets.
VII.7 Termination of Noncompetition CovenantsVII.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 5.9(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 and any actions for a breach of this Agreement,
including a breach of Section 5.9(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
VIII.1 Manager - Transfers.
(a) Except as provided in this Section 8.1, without the
consent of a Majority Vote of Investor Members, AHH Management 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 AHH Management may assign its Membership
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Interest in the Company and its rights to be a Manager either to any
party who directly or indirectly purchases all or substantially all of
MedCath Incorporated's assets or more than fifty percent (50%) of its
capital stock (in either event, a "MedCath Sale") if such purchaser
assumes in writing the obligations of AHH Management hereunder or to a
party under control of, common control, or which controls, AHH
Management. AHH Management 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 AHH Management or its Affiliates. In the event that AHH Management
desires to sell any of its Membership Interest, or in the event of a
sale of more than fifty percent (50%) of the capital stock with AHH
Management, and in both such cases such sale is not in connection with
a MedCath Sale, 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) The Investor Manager may not assign his 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.
(c) Any resignation or withdrawal by a Manager as a
manager shall not constitute such Manager's withdrawal as a Member.
VIII.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 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 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 AHH Management harmless against all future liabilities of the Company.
VIII.3 Relationship with Substitute Manager. The relationship of the
Members to any person or entity that has acquired the Membership Interest of
either AHH Management 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.
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VIII.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 AHH Management to comply with requirements imposed by any Federal or state
securities regulatory authority and unless AHH Management' 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 AHH Management, 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. AHH Management
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
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.
In the event that an Investor Member who is an Entity (x) sells or
attempts to sell fifty percent (50%) or more of its assets, determined using
such assets' then current value, (y) if the owners of such Entity as of the date
hereof cease to own in the aggregate fifty-one percent (51%) or more of such
Entity, or (z) if the Entity is a medical practice, it enters into a Transaction
(as defined in the Supplemental Agreement between AHH Management, EBD, AHI and
ACS), then unless such sale, transfer or Transaction was to other Members of the
Company or to individuals who are owners of an Investor Member as of the date
hereof, such transfer by the Entity shall constitute a transfer of such Entity's
Membership Interest for purposes of this Section 8.4 giving rise to the Right of
First Refusal of the other Members and the Company set forth above, except that
the purchase price for the Membership Interest acquired pursuant to this
sentence shall be determined using the Fair Market Appraisal Procedure described
in Section 8.11 which shall be paid pursuant to the payment method also
described in Section 8.11.
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VIII.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 AHH Management that the transfer will not violate
any of the foregoing restrictions.
VIII.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:
(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 AHH Management 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 AHH Management to such substitution
is obtained, which consent may be withheld in AHH Management' 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.
VIII.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
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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 AHH Management, 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 AHH
Management 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 AHH Management 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.
VIII.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 AHH Management' 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 interest of assignees as
well as Members.
VIII.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 AHH Management 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.
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VIII.10 Repurchase of Interests in Certain Event.
(a) In the discretion of AHH Management, 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 5.09, 8.1(b), 8.4, 8.9,
8.11, 12.1 and 12.11 of this Agreement.
(b) Each Member agrees to sell its Membership Interest to the
Company in the event AHH Management 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 AHH Management.
VIII.11 Option to Sell Membership Interest. Notwithstanding anything in
this Agreement to the contrary, at any time after the fifth (5th) anniversary
and before the twentieth (20th) anniversary of the Completion Date, AHI shall
have the option to cause AHH Management to purchase up to an aggregate of fifty
percent (50%) of AHI's Membership Interest; provided that:
(a) Prior the tenth (10th) anniversary of the Completion Date,
AHH Management shall not be required to purchase more than five percent
(5%) of AHI's Membership Interest during each twelve (12) month period
which follows the fifth (fifth) anniversary of the Completion Date
(determined on a cumulative basis);
(b) Prior to the death or retirement of EBD from the practice
of medicine in the Phoenix, Arizona area, EBD directly, or through AHI,
shall continue to own at least twenty-five percent (25%) of AHI's
Membership Interest which AHI acquired as of the date hereof;
(c) AHH Management's obligation to purchase AHI's Membership
Interest from time to time hereunder shall be conditioned upon the
simultaneous purchase (at the same purchase price, on a pro rata basis,
as will be paid by AHH Management and on such other terms and
conditions to be negotiated by AHI at the time), on each occasion, of
an equal percentage of AHI's Membership Interest by physicians who
constitute a majority of the physicians of AHI and of AHI
Cardiovascular Surgeons, Ltd. ("ACS") then practicing full-time with
AHI and ACS at their main or primary offices and who must agree to be
bound by the terms and conditions of this Agreement; and
(d) The purchase price of such Membership Interest then being
sold by AHI to AHH Management and the physicians of AHI and ACS
hereunder shall be its fair market value determined using the appraisal
procedure ("Fair Market Appraisal Procedure") set forth in paragraph 3
of the Supplemental Agreement entered into as of the date hereof
between AHI, ACS and AHH Management (the costs of which shall be paid
in accordance with the terms of the Supplemental Agreement procedures).
The purchase price may at the election of AHH Management be paid in
cash or by a twenty percent (20%) cash down payment with a deferred
balance of such a purchase price bearing interest at eight percent (8%)
per annum and amortized in equal monthly installments over a five year
period. The note evidencing any deferred balance shall be guaranteed by
AHH Management and shall be secured by a pledge of the Membership
Interest which has been sold by AHI to AHH Management pursuant to this
Section 8.11. The closing of any purchase by AHH Management hereunder
shall occur within ninety (90) days of the date of AHI's request to AHH
Management to purchase its Membership Interest pursuant to this Section
8.11 or if later, within thirty (30) days of the determination of the
fair market value hereunder.
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ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
IX.1 Books of Account. At all times during the continuance of the
Company, AHH Management 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.
IX.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 AHH Management, 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
Act.
IX.3 Bank Accounts and Investment of Funds.
(a) AHH Management 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 AHH Management may from time to time designate.
(b) Any funds of the Company which AHH Management 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 AHH
Management in its sole discretion.
IX.4 Fiscal Year. The Fiscal Year and accounting period of the
Company shall end on September 30 of each year.
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IX.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 AHH Management' 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 AHH Management 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. AHH Management 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
AHH Management.
IX.6 Tax Returns. AHH Management 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 investors for income tax purposes.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS
X.1 Meetings.
(a) Meetings of the Members of the Company for any purpose may
be called by AHH Management, 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 Phoenix 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 his address as specified in
Section 12.8. 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 AHH Management 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.
50
<PAGE>
(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.
X.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
XI.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 AHH Management with the approval of the Investor Manager:
(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;
51
<PAGE>
(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;
(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
Hospital;
(f) Subject to the terms of Section 2.5, to extend the term of
the Company; and
(g) Upon written notice to all Members, AHH Management 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 AHH Management or its
designee, the president or chief executive officer of the Hospital who
shall be designated by AHH Management 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 AHH Management. AHH Management may
delegate to such governing body such duties and responsibilities of AHH
Management as AHH Management 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 AHH Management shall continue to have the
right to make decisions with respect to matters which are reserved for
AHH Management at the time the number of Managers is so expanded.
XI.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 AHH Management and 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.
XI.3 Amendments to Certificates. In making any amendments to this
Agreement, there shall be prepared, executed and filed for recording by AHH
Management such documents amending the Articles of Organization as required
under the Act.
52
<PAGE>
ARTICLE XII
MISCELLANEOUS
XII.1 Limited Power of Attorney. Upon the execution hereof, each Member
hereby irrevocably constitutes and appoints AHH Management 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 AHH Management is expressly authorized to perform, or
which a Member is expressly required to perform, under this Agreement.
XII.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.
XII.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.
XII.4 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 Phoenix, Arizona. The decision of such arbitrators shall be final
and binding upon the parties hereto and may be enforced by a court with
applicable authority.
XII.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Arizona, exclusive of its conflict
of law rules.
XII.6 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.
XII.7 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.
53
<PAGE>
XII.8 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
times 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.
XII.9 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.
XII.10 Statutory Provisions. Any statutory reference in this Agreement
shall include a reference to any successor to such statute and/or revision
thereof.
XII.11 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.
XII.12 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 AHH Management 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 AHH Management 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 AHH Management shall have
54
<PAGE>
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 AHH Management 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 AHH
Management 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.
XII.13 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 Arizona, as amended (the "Uniform Securities Act") in
reliance upon an exemption contained in 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 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
55
<PAGE>
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.
XII.14 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.
XII.15 Ownership of Shares of MedCath. Each Investor Member 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 Member,
would cause or constitute a violation of any federal or state law, rule or
regulation.
XII.16 Consents or Approvals. Whenever this Agreement requires that the
consent or approval of any Manager or Member be given or obtained, then unless
specifically provided otherwise herein, the decision to give or withhold such
approval or consent shall be made reasonably and without unreasonable delay.
XII.17 Subscriptions by Entities. In the event an Investor Member is an
Entity which was formed by individuals for the purpose of becoming an Investor
Member of the Company, the agreements relating to the ownership of such Entity
and amendments thereto shall be subject to the reasonable approval of AHH
Management.
56
<PAGE>
EXECUTION PAGE
OF
OPERATING AGREEMENT
IN WITNESS WHEREOF, the parties hereto have hereunto set their
respective hands and seals as of the day and year first above written.
AHH MANAGEMENT, INC.:
By: /s/ Stephen R. Puckett
--------------------------
Stephen R. Puckett,
Vice President
57
<PAGE>
SCHEDULE B
TO THE
OPERATING AGREEMENT
OF
ARIZONA HEART HOSPITAL, LLC
an Arizona limited liability company
REGULATORY ALLOCATIONS
This Schedule 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 AHH Management.
(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.
(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
AHH Management.
58
<PAGE>
(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 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.
59
<PAGE>
(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 Schedule 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 AHH Management
determines that (i) either of the two minimum gain chargeback provisions
contained in this Schedule 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 Deductions,
then AHH Management 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. AHH Management shall promptly
copy all Members on all correspondence to and from the Internal Revenue Service
concerning the requested waiver.
60
<PAGE>
(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.]
61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at March 31, 1997
(Unaudited) and the Condensed Consolidated Statements of Income for the
six months ended March 31, 1997 (Unaudited) 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> 6-Mos
<FISCAL-YEAR-END> Sep-30-1997
<PERIOD-END> Mar-31-1997
<EXCHANGE-RATE> 1
<CASH> 10,876,192
<SECURITIES> 37,568,003
<RECEIVABLES> 20,542,775
<ALLOWANCES> (884,114)
<INVENTORY> 2,656,109
<CURRENT-ASSETS> 71,875,867
<PP&E> 124,197,857
<DEPRECIATION> (16,010,807)
<TOTAL-ASSETS> 224,381,120
<CURRENT-LIABILITIES> 14,737,643
<BONDS> 73,985,626
0
0
<COMMON> 111,467
<OTHER-SE> 124,075,190
<TOTAL-LIABILITY-AND-EQUITY> 224,381,120
<SALES> 0
<TOTAL-REVENUES> 49,563,944
<CGS> 0
<TOTAL-COSTS> 32,546,556
<OTHER-EXPENSES> 8,654,062
<LOSS-PROVISION> 937,846
<INTEREST-EXPENSE> (1,536,405)
<INCOME-PRETAX> 6,305,525
<INCOME-TAX> 2,453,958
<INCOME-CONTINUING> 3,851,567
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,851,567
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
