<PAGE>
FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended September 30, 1997
Commission File Number: 0-25176
MedCath Incorporated
(Exact name of Registrant as specified in its charter)
North Carolina 56-1635096
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
(Address of Principal Executive Offices) (Zip Code)
(704) 541-3228
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the Company's Common Stock (its only voting
stock) held by non-affiliates of the Registrant, as of December 15, 1997, was
$139,023,621. (Reference is made to the final paragraph of Part I herein for a
statement of the assumptions upon which the calculation is based.)
As of December 15, 1997, there were 11,669,359 shares of the
Registrant's Common Stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended September 30, 1997 (the "1997 Annual Report to Shareholders")
are incorporated by reference in Part II. Portions of the Registrant's Proxy
Statement for the Annual Meeting of Shareholders to be held February 18, 1998
are incorporated by reference in Part III.
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MedCath Incorporated
Index to Form 10-K
For the Year Ended September 30, 1997
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Part I
Item 1 - Business 3
Item 2 - Properties 18
Item 3 - Legal Proceedings 19
Item 4 - Submission of Matters to a Vote of Security Holders 20
Part II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 21
Item 6 - Selected Financial Data 22
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of 22
Operations
Item 8 - Financial Statements and Supplementary Data 22
Item 9 - Changes in and Disagreements with Accountants or Accounting and Financial 22
Disclosure
Part III
Item 10 - Directors and Executive Officers of the Registrant 23
Item 11 - Executive Compensation 23
Item 12 - Security Ownership of Certain Beneficial Owners and Management 23
Item 13 - Certain Relationships and Related Transactions 23
Part IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 24
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Item 1 - Business
Overview
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
practice management services. The Company affiliates with leading cardiologists
and cardiovascular and vascular surgeons in targeted geographic markets in the
U.S. and provides state-of-the-art facilities, financial resources and
management services. The Company's strategy is to establish and maintain
localized, fully-integrated networks to provide comprehensive diagnostic and
therapeutic cardiac care services. The Company believes that a fully-integrated
network incorporating leading physicians, state-of-the-art facilities and
practice management systems designed to provide high quality, cost-effective
diagnosis and treatment of cardiovascular disease offers significant advantages
to patients, providers and payors.
As part of its strategy, the Company partners with cardiologists and
cardiovascular and vascular surgeons to develop, co-own and operate specialty
heart hospitals ("Heart Hospitals") dedicated to providing comprehensive
professional services to diagnose and treat heart disease. MedCath operates
Heart Hospitals in McAllen, Texas (since January 1996); Little Rock, Arkansas
(since March 1997), and Tucson, Arizona (since October 1997). In addition,
MedCath plans to open Heart Hospitals in Phoenix, Arizona; Austin, Texas;
Bakersfield, California; and in Dayton, Ohio over the next two fiscal years. The
Company has long-term contracts to manage four physician group practices, which
include leading cardiologists and cardiovascular surgeons ("Managed Practices"),
located in Arizona, Virginia and Texas. In addition, MedCath manages seven
fixed-site cardiac diagnostic and therapeutic facilities ("Fixed-Site
Facilities") located in Arizona, New Jersey, Massachusetts and North Carolina
and operates 24 mobile cardiac diagnostic centers ("Mobile Cath Labs"),
principally serving networks of hospitals located in smaller communities
throughout the Unites States.
Business Strategy
MedCath's objective is to remain a leader in the delivery of cardiology and
cardiovascular services by developing affiliations with cardiologists and
cardiovascular and vascular surgeons and providing management services and
state-of-the-art facilities in order to provide high quality, cost-effective
patient care. The Company is achieving this objective by:
o Focusing exclusively on cardiology and cardiovascular services and
remaining a leader in cardiovascular disease management;
o Targeting new geographic markets based largely on the opportunities for
affiliation with leading local cardiologists and cardiovascular and
vascular surgeons;
o Developing, co-owning with local physicians and operating Heart Hospitals
dedicated to providing a comprehensive range of care required to diagnose
and treat heart disease, from outpatient non-invasive diagnostic tests to
sophisticated surgical procedures such as coronary artery bypass graft
surgery. The Company intends to continue to develop Heart Hospitals through
affiliations with cardiologists and cardiovascular and vascular surgeons
who will practice at the hospitals;
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o Operating these Heart Hospitals with a substantially lower cost structure
than conventional acute care hospitals while achieving equivalent or more
favorable outcomes. The majority of medical treatment costs for
cardiovascular disease are incurred in hospitals, therefore the Company
believes that the lower cost structure of its Heart Hospitals will provide
significant competitive advantages;
o Acquiring contracts to provide services to Managed Practices having leading
local market positions. The Company's physician practice management
services include, among others, financing, strategic planning, staffing,
billing and collections, purchasing and marketing and assisting in the
negotiation of managed care contracts.
o Developing, owning or co-owning with leading local physicians or medical
facilities and operating Fixed-Site Facilities and Mobile Cath Labs in
selected markets; and
The Company believes that its fully-integrated networks for cardiac care
will be highly attractive to HMOs and other third-party payors and will be well
positioned to meet the demands of HMOs and other managed care plans for high
quality, cost-effective patient care. Moreover, the Company believes its
strategy reflects future trends in integrated health care delivery systems.
Business Segments
Financial information about the Company's operations by business segment at
September 30, 1995, 1996 and 1997 and for the years then ended is set forth in
Note 15 of Notes to Consolidated Financial Statements, which information is
incorporated herein by reference.
Diagnostic and Therapeutic Procedures
As a result of rapid technological developments during the past 35 years, a
wide range of diagnostic and therapeutic treatment options exists today for
patients suffering from heart disease. While heart disease has many forms, by
far the most common form is atherosclerosis, which accounts for the vast
majority of the cases of heart disease. Atherosclerosis causes the inside lining
of arteries that supply blood to the heart to become thickened and hardened by
fatty deposits commonly referred to as plaque.
A brief description of each of the principal cardiac diagnostic and therapeutic
procedures is provided below.
Diagnostic Procedures--Non-Invasive
Standard Treadmill Exercise Test. During this test, a patient is exercised
on a motorized treadmill while the electrical activity of the patient's heart is
measured using electrodes attached to the patient's chest.
Nuclear Treadmill Exercise Test. In addition to performing a standard
treadmill exercise test, a low level radioactive tracer isotope such as thallium
or technesium is injected into the patient's bloodstream during exercise. After
exercise, a nuclear scanning camera and computer produce an image of the
coronary blood flow to the heart muscle.
Echocardiogram with Color Flow Doppler (Ultrasound Test). In this test,
ultrasound technology is used to produce real time images of the interior of the
heart muscle and valves.
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Diagnostic Procedures--Invasive
Cardiac Catheterization. A narrow, flexible tube, or catheter, is inserted
through a main artery in the leg or arm and guided into the patient's coronary
arteries, where a physician can use the catheter to perform various tests. A
non-toxic dye, or contrast agent, is released through the catheter, mixes with
the patient's blood and becomes visible on a screen.
Invasive Therapeutic Procedures
Percutaneous Transluminal Coronary Angioplasty ("PTCA"). A catheter is
inserted through a main artery in the arm or leg and guided to the coronary
arteries. A second catheter tipped with a deflated balloon is then threaded
through the first catheter into the coronary arteries and inflated to compress
the plaque against the inner walls of the artery. This procedure is also
commonly used to clear blockages in arteries supplying blood to other parts of
the body and is referred to as a peripheral angioplasty.
Installation of Stents. The effectiveness of PTCA is limited by the
tendency of treated arteries to restenose or abruptly close after treatment. To
help prevent restenosis, a tiny metal sleeve called a "stent," which serves as a
scaffold to keep clogged arteries open, is placed into a coronary artery when a
patient undergoes PTCA as an adjunct treatment.
Installation of Pacemakers. To install a pacemaker, a generator is placed
just under the patient's skin by a small incision in the upper left part of the
chest. Lead wires are then threaded to the heart via needle puncture in a large
vein in the upper chest and then threaded to the heart under x-ray
visualization.
Atherectomy. Atherectomy utilizes the techniques of cardiac catheterization
and a variation of angioplasty to remove concentrations of plaque from coronary
arteries. A catheter tipped with a deflated balloon and a rotary shaver is
guided to the area of blockage and used to extract the plaque build-up in the
artery.
Coronary Artery Bypass Graft Surgery ("CABG"). CABG is an open heart
surgical procedure through which the flow of blood to the heart is bypassed
around sections of one or more coronary arteries that have become clogged with
plaque by using vein or artery grafts taken from other areas of the body.
Valve Replacement Surgery. Valve replacement is an open heart surgical
procedure involving the replacement of valves that regulate the flow of blood
between chambers in the heart which have become narrowed or ineffective due to
the build-up of calcium or scar tissue or the presence of some other physical
damage.
Minimally Invasive Coronary Artery Bypass ("MIDCAB"). Like CABG, MIDCAB is
done to bypass blood around clogged arteries and improve the flow of blood and
oxygen to the heart. However, small incisions in the chest are made rather than
accessing the heart by opening the chest with the sternum saw, and the procedure
is performed without the usual stoppage of the heart.
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Heart Hospitals
General
A key part of the Company's strategy is developing, co-owning with
physicians and operating Heart Hospitals dedicated to providing comprehensive
professional services to diagnose and treat heart disease. The Company
structures its ownership of Heart Hospitals through limited liability companies
and limited partnerships with local cardiologists, cardiovascular and vascular
surgeons and other physicians. MedCath owns a majority interest in the
respective limited liability company or partnership and serves as its manager.
The Company believes that these Heart Hospitals are well positioned to promote
the national policy to contain health care costs by operating with a
substantially lower cost structure than most general acute care hospitals that
offer similar care as just one of many other health care services. The Company
achieves substantially lower costs by:
o Designing the Heart Hospitals to improve patient flow, incorporate advanced
technology and create efficiencies in the performance of services by nurses
and technical personnel;
o Cross-training nursing, technical and other hospital staff members to the
greatest extent possible, enabling administrators to utilize staff
resources more productively and reduce both direct and indirect labor costs
per procedure;
o Capturing efficiencies and economies available within a facility designed
for the diagnosis and treatment of a single disease category by eliminating
unnecessary overhead frequently associated with conventional hospitals
providing a wide range of health care services; and
o Aligning the interests of the cardiologists, cardiovascular and vascular
surgeons and other physicians practicing at the Heart Hospital with the
hospital's interests to achieve the operating efficiencies required to
deliver cost-effective patient care.
The Company organizes an integrated delivery system for cardiology and
cardiovascular services in each market in which it develops a Heart Hospital.
The system is designed to permit the Company and the affiliated physicians to
respond proactively to the restructuring of the health care system away from
traditional fee-for-service based benefit plans and toward managed care
contractual arrangements under which health care providers must accept more of
the risk for the cost of care. With a substantially lower cost structure, the
Company's Heart Hospitals and related integrated delivery systems will continue
to be well positioned in their local markets to capture a significant share of
patients enrolled in HMOs and other managed care programs. By concentrating on
providing comprehensive diagnostic and therapeutic services to patients
suffering from cardiovascular diseases, the Company also believes the hospitals
will improve the quality of outcomes for patients and achieve positive marketing
benefits.
Each of the Company's Heart Hospitals is fully equipped to enable
cardiologists and cardiovascular and vascular surgeons to perform a
comprehensive range of diagnostic and therapeutic procedures from outpatient
non-invasive diagnostic tests to sophisticated surgical procedures, such as
coronary artery bypass graft surgery. In addition, the Heart Hospitals are fully
equipped to provide clinical laboratory services and diagnostic x-ray services.
The Company owns a majority interest in each of the Heart Hospitals with the
remaining investors consisting of area cardiologists, cardiovascular and
vascular surgeons and other physicians who practice at the hospital. The Company
serves as manager and employs full-time nursing, technical and administrative
and other support personnel. MedCath or a third-party lender generally provides
a new Heart Hospital with working capital advances through intercompany lending
or a revolving line of credit. The advances are repaid as soon as possible using
the cash flows of the respective hospital.
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Each of the Company's Heart Hospitals has been and will be subject to
various federal and state licensing requirements, including those related to the
Medicare and Medicaid programs, that must be satisfied in order to operate the
hospital. The Company does not expect any delays in obtaining the licenses and
certification necessary in operating its Heart Hospitals. See
"Business--Regulation."
McAllen Heart Hospital
The Company's McAllen Heart Hospital is owned and operated by MedCath of
McAllen Limited Partnership (the "McAllen Partnership"), in which MedCath owns a
majority interest and serves as the general partner. The hospital, which was
completed in December 1995 and opened in January 1996 after a Medicare and
Medicaid certification survey was completed, is a 60-bed hospital with three
surgery suites and three cardiac catheterization laboratories. A number of the
physicians who hold ownership interests in the McAllen Partnership have built a
three story medical office building which is connected to the hospital by a
covered walkway.
The total cost of developing the McAllen Heart Hospital, including land
acquisition, construction and equipment costs, was approximately $28 million.
Land and construction costs were financed primarily by a $13.8 million
seven-year mortgage loan, renewable for an additional seven years at the option
of the McAllen Partnership. Most of the equipment for the hospital, with an
aggregate cost of approximately $11 million, was acquired through five to seven
year financing arrangements with two equipment lenders.
Arkansas Heart Hospital
The Arkansas Heart Hospital, located in Little Rock, Arkansas, is owned and
operated by MedCath of Little Rock, L.L.C. (the "Little Rock Company"), in which
MedCath owns a majority interest and serves as manager. The hospital, which was
completed in February 1997, and opened in March 1997 after a Medicare and
Medicaid certification survey was completed, is an 84-bed hospital with three
surgery suites and six cardiac catheterization laboratories.
The total cost of developing the Arkansas Heart Hospital, including land
acquisition, construction and equipment costs was approximately $45 million.
Land and construction costs were financed primarily by a $29 million seven-year
mortgage loan, renewable for an additional seven years at the option of the
Little Rock Company. Most of the equipment for the hospital, with an aggregate
cost of approximately $14 million, was acquired through a five year financing
arrangement with an equipment lender.
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Tucson Heart Hospital
The Tucson Heart Hospital, located in Tucson, Arizona, is owned and
operated by MedCath of Tucson L.L.C. (the "Tucson Company"), in which MedCath
owns a majority interest and serves as manager. The Tucson Heart Hospital, which
was completed and opened in October 1997 after a Medicare and Medicaid
certification survey was completed, is a 66-bed hospital with three surgery
suites. The Tucson Heart Hospital has four cardiac catheterization laboratories
that are separately owned and operated by CCT, L.L.C. (the "Tucson Cath Lab
Company"). The Company owns a majority interest in and manages the Tucson Cath
Lab Company. The remaining interests in the Tucson Cath Lab Company are owned by
local cardiologists.
Five of the 23 physicians who own membership interests in the Tucson
Company were the owners of the Heart Institute of Tucson, a Fixed-Site Facility
managed by the Company that was located in Tucson immediately adjacent to a
general acute care hospital. See "Business--Diagnostic Services--Fixed-Site
Facilities." In February 1996, the hospital filed a civil action against the
Company alleging the Company unlawfully interfered with the hospital's
contractual rights by inducing these physicians to violate noncompetition
covenants in their agreement with the hospital. See "Business--Legal
Proceedings."
The total cost of developing the Tucson Heart Hospital, including land
acquisition, construction and equipment costs, and acquisition payments made by
the Company to the owners of, and costs incurred in connection with the closing
of, the Heart Institute of Tucson, was approximately $35 million. Land and
construction costs was financed primarily by a $20 million seven-year mortgage
loan, renewable for an additional seven years at the option of the Tucson
Company. Most of the equipment for the hospital, with an aggregate cost of
approximately $14 million, was acquired through a seven-year financing
arrangement with an equipment lender.
Arizona Heart Hospital
The Arizona Heart Hospital, to be located in Phoenix, Arizona, will be
owned and operated by a limited liability company, Arizona Heart Hospital,
L.L.C. (the "Phoenix Company") in which MedCath owns a majority interest and
serves as manager. The Arizona Heart Hospital, on which the Phoenix Company
commenced construction in May 1997, is expected to open in February 1998 and
will be a 58-bed hospital with three surgery suites and four cardiac
catheterization laboratories.
The total cost of developing the Arizona Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $52 million. Land and construction costs are being financed
primarily by a $28 million three-year mortgage loan, renewable for an additional
year at the option of the Phoenix Company. Most of the equipment for the Arizona
Heart Hospital will be acquired through financing arrangements with equipment
lenders.
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Heart Hospital of Austin
The Heart Hospital of Austin, to be located in Austin, Texas, will be owned
and operated by a limited partnership, Hospital Management IV, L.P. (the "Austin
Partnership") in which MedCath owns a majority interest and serves as the
general partner. The Heart Hospital of Austin, on which the Austin Partnership
commenced construction in August 1997, is expected to open in fiscal year 1999
and will be a 58-bed hospital with three surgery suites and four cardiac
catheterization laboratories.
The total cost of developing the Heart Hospital of Austin, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $49 million. Land and construction costs are being financed
primarily by a $35 million seven-year mortgage loan, renewable for an additional
seven years at the option of the Austin Partnership. Most of the equipment for
the Heart Hospital of Austin will be acquired through financing arrangements
with equipment lenders.
Bakersfield Heart Hospital
The Bakersfield Heart Hospital, to be located in Bakersfield, California,
will be owned and operated by a limited liability company, Heart Hospital of BK,
L.L.C. (the "Bakersfield Company") in which MedCath owns a majority interest and
serves as manager. The Bakersfield Heart Hospital, on which the Bakersfield
Company commenced construction in November 1997, is expected to open in fiscal
year 1999 and will be a 54-bed hospital with three surgery suites and four
cardiac catheterization laboratories.
The total cost of developing the Bakersfield Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $43 million. The Company has purchased approximately 11 acres of
land in Bakersfield as a site for the Bakersfield Heart Hospital and expects to
be able to obtain third-party financing for the land acquisition, construction
and other development costs of the hospital. The Company expects that most of
the equipment for the Bakersfield Heart Hospital will be acquired through
financing arrangements with equipment lenders.
Dayton Heart Hospital
The Dayton Heart Hospital, to be located in Dayton, Ohio, will be owned and
operated by a limited liability company, Heart Hospital of DTO, L.L.C. (the
"Dayton Company") in which MedCath owns a majority interest and serves as
manager. The Dayton Heart Hospital, on which the Dayton Company will commence
construction in fiscal year 1998, is expected to open in fiscal year 1999 and
will be a 48-bed hospital with three surgery suites and four cardiac
catheterization laboratories.
The total cost of developing the Dayton Heart Hospital, including land
acquisition, construction and equipment costs, currently is anticipated to be
approximately $38 million. The Company has entered into an option to purchase
approximately 10 acres of land in Dayton as a site for the Dayton Heart Hospital
and expects to be able to obtain third-party financing for the land acquisition,
construction and other development costs of the hospital. The Company expects
that most of the equipment for the Dayton Heart Hospital will be acquired
through financing arrangements with equipment lenders.
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Other Heart Hospitals
The Company is currently seeking to develop additional Heart Hospitals in
conjunction with leading cardiologists, cardiovascular and vascular surgeons and
other physicians serving targeted geographic markets. The complete development
cycle, from initial discussions with physicians through execution of agreements,
obtaining the financing for and completing construction of a hospital, can be
complex and lengthy. The Company expects to encounter opposition from
established hospitals in many of the markets in which it seeks to establish
Heart Hospitals.
Physician Practice Management
As part of the Company's strategy of establishing and maintaining fully
integrated cardiac care networks, the Company enters into long-term management
services agreements with established physician groups that include leading local
cardiologists and cardiovascular and vascular surgeons. MedCath believes the
management of established cardiology group practices will help lay the
groundwork for the Company to develop additional Heart Hospitals, diagnostic
services, and/or cardiac managed care products in selected markets.
As managed care programs continue to penetrate the market for health care
services, physicians are becoming increasingly aware of the importance of
positioning themselves to adapt to the demands of the managed care market by
associating with a business partner that has managed care skills. These skills
focus on increasing market presence, both in scope of services and geographic
breadth, improving operating efficiencies, improving the utilization of existing
clinical facilities and equipment and installing appropriate financial and
management information systems. If successful in negotiating management services
agreements, the Company anticipates that it will perform the principal financial
and administrative functions for physician groups, including billing,
recruiting, record keeping, and negotiating with HMOs and other managed care
plans for the services of the physicians.
Under the terms of the management services agreements, the Company's fees
include reimbursement of operating expenses incurred in managing the practice
plus a percentage of practice operating income, or in one instance, a percentage
of net revenue. MedCath provides most non-physician personnel required to
operate the practice, offers strategic direction, prepares financial information
regarding the operations of the practice, negotiates managed care contracts,
provides billing and collection and other management and administrative services
as well as capital for expanded and new services. The Company also agrees to
provide working capital advances to the Managed Practices, repayable from time
to time with interest from the cash flows of the respective practice. The
physicians under management are responsible for all aspects of the medical
practice at the clinic, including the hiring of physicians and the supervision
of non-physician personnel when they perform patient care services. The Managed
Practices and MedCath are required to provide insurance for themselves and their
employees and to name the other party as co-insured, and each party has agreed
to indemnify the other for losses resulting from the acts or omissions of their
respective employees.
Arizona Medical Clinic. In October 1994, MedCath acquired PhysMed
Management Services, Inc. ("PhysMed"), which, under a 40-year agreement, manages
the Arizona Medical Clinic ("AMC"), a 57-physician multi-specialty medical
clinic that serves the Sun City, Arizona area. Included in the group are three
cardiologists who are leading providers of cardiology services in the Sun City
area.
Approximately one-half of the physicians at AMC are primary care
specialists, and the balance practice various medical and surgical specialties.
The group represents approximately one half of all primary care physicians in
the Sun City market. Two AMC cardiologists were among the founders of the Sun
City Cardiac Center, a Fixed-Site Facility that the Company has managed since
November 1992.
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Mid-Atlantic Medical Specialists. In January 1996, the Company acquired
MedCath Physician Management of Virginia, Inc. ("MPMV"), which, under a 40-year
agreement manages Mid-Atlantic Medical Specialists, Inc. ("Mid-Atlantic"), a
12-physician practice that includes two cardiologists and is located in
southwest Virginia. Mid-Atlantic provides invasive cardiology, gastroenterology
and internal medicine services and since 1990, one of the physician owners of
Mid-Atlantic has been performing cardiac catheterizations in one of the
Company's Mobile Cath Labs.
Heart Clinic. In October 1996, the Company acquired a 40-year contract to
manage Heart Clinic, P.A. ("Heart Clinic") a nine member cardiologist group
located in McAllen, Texas that has four offices throughout the Rio Grande Valley
of South Texas. The Heart Clinic is the largest cardiologist group in the Rio
Grande Valley.
Pima Heart Associates. In October 1997, the Company acquired a management
service organization which changed its name to MedCath Physician Management,
Inc., ("MPM"). MPM has a 40-year contract to manage Pima Heart Associates
("Pima"), a 17-member cardiologist group located in Tucson, Arizona. Pima is a
full service cardiology group that comprises more than half of the cardiologists
in the Tucson market place.
Diagnostic Services
Fixed-Site Facilities
The Company, through affiliations with physician groups or medical
facilities, either manages or co-owns seven Fixed-Site Facilities located in
targeted geographic markets. Physicians practicing in each Fixed-Site Facility
may perform either invasive or non-invasive diagnostic procedures, and two of
the facilities also offer a broad range of invasive therapeutic procedures.
Information concerning the Fixed-Site Facilities is presented in the table
below:
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Commencement
Year of Operations Managed
Name of Fixed-Site Facility Location Founded or Management or co-owned
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Sun City Cardiac Center Sun City, AZ 1985 November 1992 Managed
Cardiac Testing Centers New Providence, NJ 1986 July 1992 Managed
Cardiac Testing Centers Summit, NJ 1994 January 1994 Managed
Heart Institute of Northern Arizona Kingman, AZ 1994 August 1994 Managed
Cape Cod Cardiology Services Hyannis, Mass 1996 September 1996 Co-owned
Cardiac Diagnostic Center Raleigh, NC 1996 October 1996 Managed
Gaston Cardiology Services Gastonia, NC 1996 November 1996 Co-owned
</TABLE>
The Company expects to open its eighth Fixed-Site Facility to be located in
Montgomery Alabama in fiscal year 1998.
MedCath serves as manager in all of the Fixed-Site Facilities and the
management services include providing all non-physician personnel required to
deliver patient care at these Fixed-Site Facilities and the administrative,
management and support functions required in their operation. The support
functions MedCath performs include purchasing, accounting and billing services,
hiring, scheduling and providing for the maintenance of equipment and
facilities. The physicians who practice at the Fixed-Site Facilities have
complete control over the delivery of medical services.
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MedCath co-owns two Fixed-Site Facilities through limited liability
companies and limited partnerships with acute care hospitals. MedCath owns a
majority interest in the respective venture and serves as manager. Each
Fixed-Site Facility has an agreement to provide cardiology and cardiovascular
services to the hospital investor under agreements having initial terms of 20 to
32 years, subject to extension at the option of the investors.
The Fixed-Site Facilities managed by MedCath operate under management
agreements having extended initial terms of 30 years or more and also typically
include several renewal options ranging from five to ten years each. The
physicians with whom the Company has contracted to operate the Fixed-Site
Facilities typically may terminate the agreements only for cause. In most cases
the Company may terminate the agreements for cause or upon the occurrence of
specified material adverse changes in the business of the facilities.
Sun City Cardiac Center. The Sun City Cardiac Center has two cardiac
catheterization laboratories, offers invasive diagnostic and therapeutic
services and is located in Sun City, Arizona on the campus of a nonprofit,
general acute care community hospital. By deed restriction, no other hospital
may operate in Sun City. When first established in 1985, the Sun City Cardiac
Center entered into an agreement with this hospital to provide cardiology
diagnostic and therapeutic services to its patients. The Sun City Cardiac Center
derives substantially all of its revenue from the hospital for inpatient
procedures. This center is owned by a small group of physicians, two of whom are
cardiologists affiliated with AMC, which is managed by the Company.
Heart Institute of Tucson. The Heart Institute of Tucson was located in
Tucson, Arizona adjacent to a general acute care hospital from which it derived
substantially all if its revenues. In August of 1997, in anticipation of the
opening of the Tucson Cath Lab Company, the Heart Institute of Tucson was
closed. See "Business - Heart Hospitals - Tucson Heart Hospital." In February
1996, the adjacent hospital filed a civil action against the Company and the
Tucson Company. See "Business - Legal Proceedings"
Cardiac Testing Centers. Cardiac Testing Centers consists of two facilities
located approximately 10 miles apart in northern New Jersey which are owned by a
cardiology group practice. At each facility, Cardiac Testing Centers provides
non-invasive diagnostic procedures, including nuclear imaging tests and
echocardiograms.
The Heart Institute of Northern Arizona. The Heart Institute of Northern
Arizona is located in Kingman, Arizona and provides cardiac catheterization
procedures as well as nuclear imaging tests. There are five invasive
cardiologists practicing in Kingman, two of whom perform most of their cardiac
diagnostic procedures at the Heart Institute of Northern Arizona.
Cape Cod Cardiology Services. Cape Cod Cardiac Cath is located in Hyannis,
Massachusetts in a building attached to Cape Cod Hospital ("CCH"). MedCath and
CCH co-own this Fixed-Site Facility which under the terms of a 20-year agreement
with CCH, provides invasive cardiology and cardiovascular services to patients
at CCH. Cape Cod Cardiac Cath commenced operations in September 1996 and
replaces those previously provided to CCH through the use of one of the
Company's Mobile Cath Labs. CCH has certain rights to terminate this agreement
prior to the end of its term.
Cardiac Diagnostic Center. Cardiac Diagnostic Center is located in Raleigh,
North Carolina in a medical office building adjacent to an acute care hospital.
The Cardiac Diagnostic Center is owned by Wake Heart Associates, P.A., a group
of ten cardiologists, and provides cardiac catheterization procedures. The
Cardiac Diagnostic Center commenced operations in October 1996.
12
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Gaston Cardiology Services. Gaston Cardiology Services is located in
Gastonia, North Carolina in Gaston Memorial Hospital ("GMH"). MedCath and GMH
co-own this Fixed-Site Facility which provides invasive cardiology and
cardiovascular services to patients at GMH. Gaston Cardiology Services commenced
operations in November 1996 and replaces those previously provided to GMH
through the use of one of the Company's Mobile Cath Labs. GMH has certain rights
to terminate this agreement prior to the end of its term.
Mobile Cath Labs
The Company owns or operates 24 Mobile Cath Labs that serve networks of
hospitals throughout the United States or are leased to hospitals and other
medical facilities that directly operate such laboratories on their campuses.
The Mobile Cath Labs operated by the Company to service hospital networks
are moved, usually on a daily basis, from one hospital to another within each
network and are fully equipped and operated by highly skilled, non-physician
MedCath technologists and nurses to enable cardiologists to perform cardiac
catheterization procedures for hospital patients. The cardiac catheterization
procedures are performed by cardiologists located in the communities served by
the hospitals or, in some instances, by cardiologists with whom MedCath has
contracted or arranged to perform, as independent contractors, such procedures.
These Mobile Cath Labs permit a group of hospitals located in geographic
proximity to one another, each with a limited patient volume, to offer cardiac
catheterization services through shared access to equipment and personnel that
allows them to avoid substantial outlays of capital and increases in operating
expenses. Under the Company's existing contracts, the hospitals typically pay
for the use of the Mobile Cath Labs on a fixed-fee-per-procedure basis and
reimburse MedCath for certain costs incurred in performing procedures. In most
instances, the hospitals are obligated to pay a minimum monthly amount,
regardless of the number of procedures performed, while the Mobile Cath Lab is
made available to the hospital.
The Company also provides Mobile Cath Labs to hospitals or medical
facilities on an interim basis under operating leases that provide for monthly
lease payments to the Company over the terms of the respective contracts. The
interim rentals will allow hospitals to support increased demand or to refurbish
existing catheterization labs. The hospital utilizes its staff and does not rely
on MedCath to provide non-physician personnel or management and technical
expertise in the operation of the Mobile Cath Labs leased on an interim basis.
All of the Company's current contracts expire at various times prior to the
end of fiscal year 2001. While MedCath believes it will be successful in
negotiating renewals or extensions of contracts with most of the hospitals
within its Mobile Cath Lab networks or negotiating new contracts with suitable
alternate hospitals, there can be no assurance that it will be able to do so or
that newly negotiated rates will be as favorable to MedCath as those that exist
under most of its current contracts.
13
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PART I
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Regulation
The Company's business and the health care industry in general are subject
to extensive federal and state regulation. The Company believes it and its
affiliated physicians are in compliance with the laws and regulations applicable
to MedCath's business. The Company also believes that its business relationships
with physicians affiliated with the Company's operating divisions comply with
federal law which, subject to certain statutory exceptions, prohibits physicians
who have a financial relationship with an entity providing health care services
from referring or admitting patients to that entity for the furnishing of
certain designated services (the "Stark II Legislation"). However, there can be
no assurance that the enactment of future legislation or amendments to or
differing interpretations of existing laws and regulations will not restrict or
otherwise adversely affect the Company's business.
Federal Anti-Referral Laws. The Stark II Legislation prohibits, with
certain statutory exceptions, physicians who have a financial relationship with
an entity providing health care services from referring or admitting patients to
that entity for the furnishing of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state health
care programs. Possible sanctions for violations of the Stark II Legislation
include civil monetary penalties, exclusion from the Medicare and Medicaid
programs, and forfeiture of all amounts collected in violation of such
prohibition.
The Company believes the Stark II Legislation does not apply to MedCath
with respect to its physician practice management, Mobile Cath Lab activities
and certain of its Fixed-Site Facilities but that such legislation does have
potential application to its Heart Hospitals and the balance of its Fixed-Site
Facilities. MedCath believes that the physician investors in its Heart Hospitals
are not and will not be subject to the referral prohibitions of the Stark II
Legislation because they qualify for a statutory exception available to
physicians holding an ownership or investment interest in a hospital in which
they are authorized to perform services. MedCath believes the ownership
structures of the Fixed-Site Facilities with which it is affiliated and to which
the prohibitions to the Stark II prohibitions apply also comply with a statutory
exception to the prohibitions of the Stark II Legislation. Failure of the
Company, or the physician owners of facilities managed by the Company, to comply
with the Stark II Legislation could have a material adverse effect on the
Company, not only because of the potential for sanctions but also due to the
potential revenue loss from the prohibitions on physician referrals. In
addition, particularly in light of prevailing governmental policies against
physician self-referral, the Company's strategic objective of establishing
relationships with physicians, including physician ownership of health care
facilities, entails the risk that new laws or regulations will be enacted which
will require further restructuring of operations or otherwise have a material
adverse effect on the Company.
State Anti-Referral Laws. Certain states in which the Company operates or
may operate in the future have anti-referral laws similar to the Stark II
Legislation which are in some cases more restrictive than the Stark II
Legislation. Depending on their scope, these laws may restrict the ability of
the Company to expand into certain states. Although the Company has attempted to
structure its business relationships with physician groups in accordance with
these anti-referral laws, there can be no assurance that such laws ultimately
will be interpreted in a manner consistent with the Company's practices.
14
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Federal Fraud and Abuse Laws. With certain exceptions, federal law
prohibits activities and arrangements which are designed to provide "kickbacks"
or to induce the referral of business under Medicare and Medicaid programs.
Violations of anti-kickback laws are felonies punishable by monetary fines,
civil and criminal penalties and exclusion from participation in Medicare or
Medicaid programs. The federal government has published exemptions, or "safe
harbors," for business transactions that will be deemed not to violate the
anti-kickback statute. Although satisfaction of the requirements of any of these
safe harbors generally provides a guarantee of compliance with the law, failure
to meet the safe harbor does not mean necessarily that a transaction violates
the prohibitions. These laws impose an intent-based standard of culpability, and
if the arrangement is not intended to induce referrals, there is generally no
violation.
The federal fraud and abuse laws have a sweeping scope, with potential
application to virtually all business transactions between participants in the
health care industry, which may include all of the Company's current and planned
activities. MedCath believes its physician practice management and Mobile Cath
Lab activities entail minimal risk of violation by the Company of the fraud and
abuse laws because, in carrying out such activities, MedCath neither refers
patients to other health care providers nor obtains reimbursement for its
services from Medicare or Medicaid. Although the Company has attempted to
structure its operations of Fixed-Site Facilities and Heart Hospitals to avoid
any violations of these fraud and abuse laws, there can be no assurance that
such laws ultimately will be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted which
will have a material adverse effect on the Company.
State Illegal Remuneration Laws. Certain states in which the Company
operates or may operate in the future have "illegal remuneration" laws similar
to the federal anti-kickback laws which are in some cases more restrictive than
the anti-kickback legislation and are not limited to the Medicare and Medicaid
programs. Although the Company has attempted both to structure its business
relationships with physician groups and establish its policies and procedures in
accordance with these remuneration laws, there can be no assurance that such
laws ultimately will be interpreted in a manner consistent with the Company's
practices.
Corporate Practice of Medicine. The laws of certain states in which the
Company operates or may operate in the future prohibit non-physician entities
from practicing medicine, exercising control over physicians or engaging in
certain practices such as fee-splitting with physicians. The Company has
structured its affiliations with physician groups and medical facilities so that
the physicians maintain exclusive authority regarding the delivery of medical
care, and MedCath believes its activities do not constitute the corporate
practice of medicine as contemplated by these statutes. There can be no
assurance, however, that these laws ultimately will be interpreted in a manner
consistent with the Company's practices or that other laws or regulations will
not be enacted in the future which will have a material adverse effect on the
Company.
15
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PART I
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Certificate of Need, Licensing and Medicare Certification Requirements.
Certain states in which the Company operates or may operate in the future
prohibit the establishment, expansion or modification of certain health care
facilities or services without obtaining a CON from the appropriate state
regulatory agency. Approximately two-thirds of the states have CON laws that
apply to certain of the Company's businesses. Obtaining CONs in those states is
typically an expensive and lengthy process and may involve adversarial
proceedings brought by competing facilities. The existence of these laws will
make it more difficult for the Company to build Heart Hospitals and Fixed-Site
Facilities. The inability of the Company to obtain CONs for facilities it wishes
to operate in the future could have a material adverse effect on its business.
In addition to any CON requirements which may apply, each Heart Hospital
developed by the Company will be required to comply with other licensing
requirements which vary from state to state. There can be no assurance that any
applications for the Heart Hospitals currently under development or other future
hospitals will be approved on a timely basis, or at all. Failure to obtain such
regulatory approval could have a material adverse effect on the Company.
In order to participate in the Medicare and Medicaid programs, the
Company's Heart Hospitals must obtain Medicare and Medicaid certification, a
process which cannot commence until a facility opens. Lengthy delays in the
certification process could have an adverse impact on the Company's cash flows.
In order to avoid any potential delays and to mitigate cash flow problems, the
Company intends to schedule the certification of Heart Hospitals as soon as
possible following the commencement of operations.
Historically, an agency of the government of the state in which a new
hospital or other medical facility is located has conducted the initial survey
required for the facility's Medicare and Medicaid certification in accordance
with rules established by the Health Care Financing Administration ("HCFA"), an
agency of the Department of Health and Human Services within the federal
government that sets guidelines for Medicare. In June 1996, the Department of
Human Services and HCFA agreed to accept the successful completion of an initial
survey by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), a private hospital accreditation organization, for Medicare and
Medicaid certification of a new medical facility as an alternative to successful
completion of a survey done by a state government agency. This agreement gives
the Company an alternative source for obtaining Medicare and Medicaid
certification if the applicable state agency is unable to conduct its survey
when the Company is ready to open a new Heart Hospital.
16
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PART I
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Medicare Payment System. Substantially all of the Company's revenue is
derived directly or indirectly from payments made under Medicare or other
third-party payors. During 1997, the McAllen and Arkansas Heart Hospitals each
derived over 60% of their net revenue from patients enrolled in the Medicare and
Medicaid programs, and the Company expects that its other Heart Hospitals will
derive from 40% to 80% of their net revenue from patients enrolled in these
programs. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, retroactive and prospective rate adjustments, administrative
rulings and funding restrictions, all of which could have the effect of limiting
or reducing reimbursement levels for the hospital's services. Although the
Company's Heart Hospitals are planned to operate profitably under current levels
of reimbursement, there can be no assurance that payments under governmental
programs will remain comparable to present levels.
Health care system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for the federal and certain state
governments. In 1996, the President vetoed legislation approved by the Congress
that would have reshaped the Medicare and Medicaid programs through significant
reductions in the overall rate of spending growth in both programs. The impact
on the Company of the outcome of future negotiations between the President and
Congress over reducing the overall rate of spending growth in these programs is
not readily determinable. However, if legislation implementing reductions in the
rate of spending growth in the Medicare and Medicaid programs of substantially
the same magnitude as was vetoed by the President in 1996 is enacted into law,
such reductions could have a material adverse effect on the Company.
Competition
The fundamental restructuring of the health care system currently underway
in the United States is leading to consolidation of the existing, highly
fragmented health care delivery system into larger and more organized groups and
networks of health care service providers. In executing its business strategy,
MedCath competes with other management services organizations, PPMs, hospitals,
HMOs and others, some of which are seeking to form strategic alliances with
cardiologists and cardiovascular surgeons or provide management services to
physicians or to diagnostic and therapeutic facilities owned by them. An
increasing number of PPMs offer services similar to those the Company provides
to its Managed Practices and plans to provide to cardiology group practices or
other multi-specialty group practices with practicing cardiologists. The Company
is not aware of any other company actively pursuing a strategy of establishing
fully integrated cardiac care delivery systems incorporating specialty heart
hospitals, affiliations with cardiologists and cardiovascular surgeons and
physician practice management services.
The Company expects to encounter competition from general acute care
hospitals and free-standing cardiac diagnostic and therapeutic facilities
serving the same markets the Company operates in or seeks to enter, but believes
it will have substantial cost advantages over these competitors. In addition,
the Company believes that to compete successfully in the delivery of low cost,
high quality cardiology and cardiovascular services requires the establishment
of capital intensive facilities, such as its Heart Hospitals, which imposes a
significant barrier to entry for new competitors. Furthermore, the Company
believes that it would have a significant lead over any competitor adopting a
similar strategy.
17
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PART I
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Medical Malpractice Insurance
While the Company's employees are not physicians and do not practice
medicine, certain of the employees are or will be involved in the delivery of
health care services to the public under the supervision of physicians. To
protect the Company from medical malpractice claims, including claims associated
with its employees' activities, the Company, and each of its majority or
wholly-owned subsidiaries, maintain professional liability and general liability
insurance in amounts deemed appropriate by management based upon the nature and
risks of the Company's business.
Such policies provide primary general and malpractice coverage in the
amount of $1.0 million per occurrence with $2.0 million aggregate limit and
$25.0 million of umbrella coverage. The cost and availability of such coverage
has varied widely in recent years. While the Company believes its insurance
policies are adequate in amount and coverage for its current operations, there
can be no assurance that the coverage maintained by the Company is sufficient to
cover all future claims or will continue to be available in adequate amounts or
at a reasonable cost.
Employees
As of December 15, 1997, the Company employed 1630 people, of which 175
were engaged in managing and operating the Company's Mobile Cath Labs and
Fixed-Site Facilities, 198 in managing physician practices, 1169 in operating or
developing the Company's five Heart Hospital projects and the remainder in
management, development, finance and administrative capacities. None of the
Company's employees are represented by a labor union.
Item 2 - Properties
The Company leases approximately 16,000 square feet of space in Charlotte,
North Carolina, where its executive offices are located. The lease expires in
2002, and the Company is evaluating its continued occupancy of this space in
light of anticipated growth.
The Company currently operates the McAllen, Arkansas and Tucson Heart
Hospitals and has under construction the Arizona and Bakersfield Heart
Hospitals. The Company owns the real property for each of these hospitals and
the sites range from 6 to 12 acres. Each of these facilities is subject to a
mortgage, and substantially all the real estate and equipment located at these
facilities is pledged as collateral to secure long-term debt. The Company leases
the five acres of land on which the Heart Hospital of Austin is being
constructed. The Company expects to own the property on which the Dayton and any
future Heart Hospitals will be constructed.
The four physician group practices that are managed by the Company each own
or lease the office space in which they are located. The Company has no
ownership interest in these facilities. The Company owns or leases certain
medical and office equipment used in the practices.
The Company co-owns two Fixed-Site Facilities through limited liability
companies or partnerships with general acute care hospitals. These hospitals
lease the building space in which the facility is located to the limited
liability companies or partnerships through operating leases.
The Company manages five Fixed-Site Facilities and in connection with the
management of these facilities, the Company leases certain of the facilities and
office space through operating leases.
18
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PART I
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Item 3 - Legal Proceedings
In February 1996, Hospital Corporation of Arizona, the owner of the
hospital at which the Heart Institute of Tucson is located in Tucson, Arizona,
instituted an action against the Company and the Tucson Company. The plaintiff
claims that MedCath and the Tucson Company interfered with its contractual
rights by inducing the physician owners of the Heart Institute of Tucson to
violate noncompetition covenants between those individuals and the plaintiff.
The physician owners of the Heart Institute of Tucson are five of the 23
physician members of the Tucson Company. In November 1995, the Heart Institute
of Tucson notified the hospital, in accordance with the terms of the applicable
agreements giving the Heart Institute of Tucson the right to do so, that the
Heart Institute of Tucson is terminating its relationship with the hospital
effective in July 1997. The lawsuit is pending in Superior Court of Pima County,
Arizona, and seeks unspecified monetary damages, costs and attorneys' fees.
Management believes that there is no basis for these claims, and MedCath and the
Tucson Company are defending this action vigorously. In the opinion of
management of the Company, it is unlikely that the ultimate outcome of this
litigation will have a material adverse effect on the Company's plans to develop
the Tucson Heart Hospital, the Tucson Cath Lab Company, the Company's operations
or its financial condition. There can be no assurance, however, that an adverse
outcome of any such litigation would not have a material adverse effect on the
Company, the Tucson Company or the Tucson Cath Lab Company.
On July 18, 1997, Murray Michael, filing individually and as the President
of South Texas Extracorporeal Professionals, Inc., and South Texas
Extracorporeal Professionals, Inc., filed suit in the 93rd District Court in
Hidalgo County, Texas, against the McAllen Partnership, the McAllen Heart
Hospital, McAllen Perfusion Associations, Inc. and several physicians. The
Plaintiff's Original Petition alleges that South Texas Extracorporeal
Professionals, Inc. contracted to be the exclusive provider of perfusion
services for all heart surgeries performed at the McAllen Heart Hospital for a
three year term. Plaintiff's Original Petition alleges that the named physicians
and McAllen Perfusion Associates, Inc. tortiously interfered with that contract.
The Plaintiff's Original Petition asserts other causes of action against the
defendant, including libel. Against the McAllen Heart Hospital and the McAllen
Partnership Plaintiff's Original petition alleges breach of that contract.
Plaintiff's Original Petition seeks compensatory and punitive damages as well
as an accounting. The litigation is currently pending in the 93rd District
Court, Hidalgo County, Texas. The McAllen Partnership and McAllen Heart
Hospital have retained counsel to defend this litigation and are defending it.
No trial date has been set. The litigation is proceeding through the discovery
and pretrial motion process. In the opinion of management of the Company, it
is unlikely that the ultimate outcome of this litigation will have a material
adverse effect on the Company's operations or its financial condition. There
can be no assurance, however, that an adverse outcome of any such litigation
would not have a material adverse effect on the Company, the McAllen
Partnership, or the McAllen Heart Hospital.
There are no other pending legal proceedings to which the Company is a
party, which the Company believes, if adversely determined, would have a
material adverse effect on the Company.
19
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PART I
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Item 4 - Submission of Matters to a Vote of Security Holders
None.
* * * * * * *
For the purposes of calculating the aggregate market value of the shares of
Common Stock of the Company held by non-affiliates, as shown on the cover page
of this report, it has been assumed that all the outstanding shares were held by
non-affiliates except for shares outstanding that are beneficially owned by
directors and executive officers of the Company. However, this should not be
deemed to constitute an admission that all directors and executive officers of
the Company are, in fact, affiliates of the Company, or that there are not other
persons who may be deemed to be affiliates of the Company. Further information
concerning shareholdings of directors, executive officers and principal
shareholders is included in the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held February 18, 1998 and incorporated herein by
reference, such Proxy Statement having been or to be filed with the Securities
and Exchange Commission not later than 120 days after the close of the Company's
fiscal year ended September 30, 1997.
20
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PART II
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Item 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
The Common Stock of MedCath is traded on the Nasdaq Stock Market's National
Market under the symbol MCTH. The following table sets forth for the fiscal
periods indicated the high and low sale prices for the Company's Common
Stock as reported by the Nasdaq National Market.
Price Range
--------------------------------
High Low
---- ---
1996
First Quarter $25 3/4 $17
Second Quarter $30 $18 1/2
Third Quarter $42 5/8 $10 3/4
Fourth Quarter $19 1/4 $7 3/4
1997
First Quarter $17 1/2 $12 1/8
Second Quarter $16 $14
Third Quarter $16 $12 3/8
Fourth Quarter $20 1/4 $14 5/8
(b) Holders
As of December 15, 1997, there were 245 holders of record of the Company's
Common Stock and approximately 4,540 persons or entities holding in nominee
name.
(c) Dividends on the Company's Common Stock.
No cash dividends have ever been paid, and the Company does not intend to
pay any cash dividends in the foreseeable future. In October 1996, the
Company paid a dividend in the form of one Preferred Share Purchase Right
issued for each outstanding share of common stock. The Company does not
intend to pay any additional stock dividends in the foreseeable future.
21
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PART II
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Item 6 - Selected Financial Data
The information in response to this item is incorporated by reference from
the 1997 Annual Report to Shareholders, which portion of the 1997 Annual Report
to Shareholders is filed as Exhibit 13.1.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information in response to this item is incorporated by reference from
the 1997 Annual Report to Shareholders, which portion of the 1997 Annual Report
to Shareholders is filed as Exhibit 13.1.
Item 8 - Financial Statements and Supplementary Data
The information in response to this item is incorporated by reference from
the 1997 Annual Report to Shareholders, which portion of the 1997 Annual Report
to Shareholders is filed as Exhibit 13.1.
Item 9 - Changes in and Disagreements with Accountants or Accounting and
Financial Disclosure
None.
22
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PART III
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Item 10 - Directors and Executive Officers of the Registrant
Reference is made to the information set forth in the sections entitled
"Election of Directors" and "Management" in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held February 18, 1998, which
information is incorporated herein by reference, such Proxy Statement having
been or to be filed with the Securities and Exchange Commission not later than
120 days after the close of the Company's fiscal year ended September 30, 1997.
Item 11 - Executive Compensation
Reference is made to the information set forth in the section entitled
"Management-Executive Compensation" in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held February 18, 1998, which information
is incorporated herein by reference, such Proxy Statement having been or to be
filed with the Securities and Exchange Commission not later than 120 days after
the close of the Company's fiscal year ended September 30, 1997.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement for the Annual Meeting of Shareholders to be held
February 18, 1998, which information is incorporated herein by reference, such
Proxy Statement having been or to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the Company's fiscal year
ended September 30, 1997.
Item 13 - Certain Relationships and Related Transactions
Reference is made to the information set forth in the sections entitled
"Election of Directors" and "Certain Transactions" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held February 18, 1998,
which information is incorporated herein by reference, such Proxy Statement
having been or to be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year ended September 30,
1997.
23
<PAGE>
PART IV
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Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Included with this 10-K Report are the following Consolidated Financial
Statements:
o Report of Independent Auditors
o Consolidated Statements of Income -- For the Years Ended September 30,
1995, 1996 and 1997 are incorporated herein by reference from the 1997
Annual Report to Shareholders, which portion of the 1997 Annual Report to
Shareholders is filed as Exhibit 13.1.
o Consolidated Balance Sheets as of September 30, 1996 and 1997 are
incorporated herein by reference from the 1997 Annual Report to
Shareholders, which portion of the 1997 Annual Report to Shareholders is
filed as Exhibit 13.1.
o Consolidated Statements of Shareholders' Equity -- For the Years Ended
September 30, 1995, 1996 and 1997. are incorporated herein by reference
from the 1997 Annual Report to Shareholders, which portion of the 1997
Annual Report to Shareholders is filed as Exhibit 13.1.
o Consolidated Statements of Cash Flows -- For the Years Ended September 30,
1995, 1996 and 1997 are incorporated herein by reference from the 1997
Annual Report to Shareholders, which portion of the 1997 Annual Report to
Shareholders is filed as Exhibit 13.1.
o Notes to Consolidated Financial Statements -- For the Years Ended September
30, 1995, 1996 and 1997 are incorporated herein by reference from the 1997
Annual Report to Shareholders, which portion of the 1997 Annual Report to
Shareholders is filed as Exhibit 13.1.
(a)(2) Included with this 10-K Report is the following Consolidated Financial
Statement schedule:
Page
o Report of Independent Auditors on Supplemental Schedule (included -
in Consent of Ernst & Young LLP, independent auditors, filed as
Exhibit 23.1 herewith)
o Schedule II - Valuation and Qualifying Accounts for the years 31
ended September 30, 1995, 1996 and 1997
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
24
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PART IV
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(b) No reports on Form 8-K were filed during the three months ended September
30, 1997.
(c) Exhibits
<TABLE>
<CAPTION>
Previously Filed
With File Number
0-25176 *
----------------------
Exhibit No. In As
No. Document Exhibit Exhibit Description
<C> <C> <C> <S>
3.1 (1) 3.1 Articles of Incorporation of the Company, as amended and restated.
3.2 (1) 3.2 Bylaws of the Company, as amended and restated.
4.1 (1) 4.1 Form of Common Stock Certificate.
4.2 (1) 4.2A First Amendment and Restatement of Amended and Restated Shareholders Agreement dated as of
October 31, 1994 by and among the Company, the shareholders of the Company, parties
thereto and FUNB as Trustee.
4.3 (6) 99.1 Rights Agreement dated October 15, 1996 between MedCath incorporated and First Union
National Bank of North Carolina, which includes the Articles of Amendment to the amended
and Restated Articles of Incorporation of the Company setting forth the terms of the
Series A Junior Participating Preferred Stock as Exhibit A.
4.4 (10) 99.2 Appointment Agreement and First Amendment to Rights Agreement, by and among the Company,
First Union National Bank of North Carolina and LaSalle National Bank, as successor Rights
Agent.
10.1 (1) 10.1A First Amendment and Restatement of Amended and Restated Shareholders Agreement dated as of
October 31, 1994 by and among the Company, the shareholders of the Company, parties
thereto and FUNB as Trustee
10.2 (1) 10.9 Asset Purchase Agreement dated as of October 31, 1992 by and between MedCath of Arizona,
Inc. and Sun City Cardiac Center, Inc.
10.3 (1) 10.10 Partnership Agreement dated as of October 31, 1992 by and between MedCath of Arizona, Inc.
and Sun City Cardiac Center, Inc.
10.4 (1) 10.11 Management Agreement dated as of October 31, 1992 by and between Sun City Cardiac Center,
Inc. and Sun City Cardiac Center Associates.
10.5 (1) 10.26 Restated and Amended Agreement of Limited Partnership dated as of June 1, 1994 by and
among MedCath of Texas, Inc., Hugo G. Blake, M.D., Shereef Hilmy, II, M.D., Michael D.
Evans, M.D., Norman M. Ramirez, M.D., Eduardo D. Flores, M.D., Naji Kandalaft, M.D., Paul
Manoharan, M.D., Benjamin Robalino, M.D., Harish Koolwal, M.D., Augusto Villa, M.D.,
Filiberto S. Rodriguez, M.D. and Jorge L. De La Garza, M.D. and Amendment thereto dated as
of August 16, 1994.
10.6 (1) 10.27 Loan Agreement dated as of August 19, 1994 by and between the McAllen Partnership and
Health Care REIT, Inc.
10.7 (1) 10.28 Note dated as of August 19, 1994 from the McAllen Partnership to Health Care REIT, Inc. in
the amount of $13,750,000.
10.8 (1) 10.30 Unconditional and Continuing Limited Guaranty dated as of August 19, 1994 by the Company
in favor of Health Care REIT, Inc.
</TABLE>
25
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
Previously Filed
With File Number
0-25176 *
----------------------
Exhibit No. In As
No. Document Exhibit Exhibit Description
<C> <C> <C> <S>
10.9** (1) 10.35 MedCath Incorporated 1992 Incentive Stock Option Plan.
10.10** (1) 10.36 MedCath Incorporated 1994 Omnibus Stock Plan.
10.11** (1) 10.37 MedCath Incorporated Outside Director's Stock Option Plan.
10.12** (1) 10.38 Option granted by the Company to W. Jack Duncan, dated September 8, 1994.
10.13 (1) 10.39 Stock Purchase Agreement dated as of October 1, 1994 by and among the Company and each of
the shareholders of PhysMed Management Services, Inc.
10.14 (1) 10.41 Shareholders' Agreement dated as of October 1, 1994 by and among the Company and the
shareholders of PhysMed Management Services, Inc. parties thereto.
10.15 (1) 10.42 Amended and Restated Management Agreement dated as of October 1, 1994 by and between AMC
and PhysMed Management Services, Inc.
10.16 (1) 10.43 Security Agreement dated as of October 1, 1994 by and between AMC and PhysMed Management
Services, Inc.
10.17 (1) 10.44 Guaranty Agreement dated as of October 1, 1994 by the Company extended to AMC for the
benefit of PhysMed Management Services, Inc.
10.18 (1) 10.45 Limited Guaranty Agreement dated as of October 1, 1994 by the shareholders of PhysMed
Management Services, Inc. extended to PhysMed Management Services, Inc. for the benefit of
AMC.
10.19 (3) 2.1 Share Exchange Agreement and Plan of Reorganization dated as of April 7, 1995 by and among
the Company, HealthTech and the shareholders of HealthTech parties thereto.
10.20 (5) 10.51 Operating Agreement of the Little Rock Company dated as of July 11, 1995 by and among
MedCath of Arkansas, Inc. and the several other parties thereto.
10.21 (5) 10.51A1 First Amendment to Operating Agreement of the Little Rock Company dated as of September
21, 1995 by and among MedCath of Arkansas, Inc. and the several other parties thereto.
10.22 (5) 10.51A2 Second Amendment to Operating Agreement of the Little Rock Company dated as of December 6,
1995 by and among MedCath of Arkansas, Inc. and the several other parties thereto.
10.23 (4) 10.1 Construction and Term Loan Agreement dated December 7, 1995 between the Little Rock
Company and Health Care REIT, Inc.
10.24 (4) 10.2 Note dated as of December 7, 1995 from the Little Rock Company to Health Care REIT, Inc.
in the amount of $27,000,000.
10.25 (4) 10.3 Unconditional and Continuing Limited Guaranty dated as of December 7, 1995 by the Company
in favor of Health Care REIT, Inc.
</TABLE>
26
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
Previously Filed
With File Number
0-25176 *
----------------------
Exhibit No. In As
No. Document Exhibit Exhibit Description
<C> <C> <C> <S>
10.26 (5) 10.52 Operating Agreement of the Tucson Company dated as of September 14, 1995 by and among
Southern Arizona Heart, Inc. and the several other parties thereto.
10.27 (7) 10.42 Operating Agreement of the Tucson Cath Lab Company dated as of January 15, 1996 by and
among Southern Arizona Heart, Inc. and the several other parties thereto.
10.28 (7) 10.43 Loan Agreement dated July 18, 1996 between the Tucson Company and Capstone Capital
Corporation.
10.29 (7) 10.44 Promissory note dated July 18, 1996 from the Tucson Company and Capstone Capital
Corporation in the amount of $17,800,000.
10.30 (7) 10.45 Guaranty Agreement dated July 18, 1996 between the Company and Capstone Capital
Corporation
10.31 (7) 10.46 Agreement of Limited Partnership for the Austin Partnership dated as of February 22, 1996
by and among Hospital Management IV, Inc. and the several other parties thereto.
10.32 (7) 10.47 Operating Agreement of the Bakersfield Company dated as of June 14, 1996 by and among
HHBF, Inc. and the several other parties thereto.
10.33*** (7) 10.48 Master Transaction Agreement dated July, 31, 1996 by and between MedCath Incorporated and
Heart Clinic, P.A.
10.34*** (7) 10.49 Service Agreement dated July 31, 1996 by and between Physician Management of McAllen, Inc.
and Heart Clinic, P.A.
10.35 (7) 10.50 Convertible Subordinated Promissory Note from MedCath Incorporated to Heart Clinic, P.A.
in the amount of $6,359,958.
10.36 (7) 10.51 Convertible Subordinated Promissory Note from MedCath Incorporated to Heart Clinic, P.A.
10.37 (8) 10 Operating Agreement of the Phoenix Company dated January 6, 1997 by and among AHH
Management, Inc. and several other parties thereto.
10.38 (9) 10.1 Standard Form of Agreement between Owner and Contractor dated as of May 5, 1997, by and
between the Phoenix Company and Chanen Construction Company.
10.39 Standard Form of Agreement between Owner and Contractor dated as of September 9, 1997, by
and between the Bakersfield Company and S.C. Anderson, Inc. (In accordance with Rule 202
of Regulation S-T, this exhibit is being filed in paper pursuant to a continuing hardship
exemption.)
10.40 Standard Form of Agreement between Owner and Contractor dated as of August 26, 1997, by
and between the Austin Partnership and Faulkner Construction Company (In accordance
with Rule 202 of Regulation S-T, this exhibit is being filed in paper pursuant to a
continuing hardship exemption.)
</TABLE>
27
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
Previously Filed
With File Number
0-25176 *
----------------------
Exhibit No. In As
No. Document Exhibit Exhibit Description
<C> <C> <C> <S>
10.41 Operating Agreement of the Dayton Company dated March 20, 1997 by and among DTO
Management, Inc. and several other parties thereto.
10.42 Credit Agreement dated as of July 28, 1997 by and among the Company and NationsBank, N.A.,
as agent for several other lenders thereto.
10.43 Note dated as of July 28, 1997 from the Company to NationsBank, N.A., as agent for several
other lenders thereto in the amount of $20,000,000.
10.44 Loan Agreement dated as of August 7, 1997 by and among the Phoenix Company and
NationsBank, N.A, as agent for several other lenders thereto.
10.45 Construction Loan Notes dated as of August 7, 1997 from the Phoenix Company to
NationsBank, N.A. and several other lenders thereto in the amount of $27,545,000 in the
aggregate.
10.46 Working Capital Loan Notes dated as of August 7, 1997 from the Phoenix Company to
NationsBank, N.A. and several other lenders thereto in the amount of $2,500,000 in the
aggregate.
10.47 Share Exchange Agreement and Plan of Reorganization dated as of June 30, 1997 by and among
Shareholders of Pima Heart Associates and the Company.
10.48**** Service Agreement dated as of June 30, 1997 between Pima Heart Associates and the Company.
10.49**** Liquidated Damages Agreement dated as of June 30, 1997 by and among Shareholders of
Pima Heart Associates and the Company.
10.50 Services and Billing Agreement dated as of October 1, 1997 between the Tucson Company and
the Tucson Cath Lab Company.
10.51 Lease Agreement dated as of October 1, 1997 between the Tucson Company and the Tucson Cath
Lab Company.
10.52 ** Employment Agreement dated as of October 1, 1997 by and between the Company and Stephen R.
Puckett.
10.53 ** Employment Agreement dated as of October 1, 1997 by and between the Company and David
Crane.
10.54 ** Employment Agreement dated as of April 29, 1997 by and between the Company and Richard J.
Post.
10.55 ** Employment Agreement dated as of October 1, 1997 by and between the Company and Charles W.
Johnson.
10.56 ** Employment Agreement dated as of March 9, 1994 by and between the Company and R. William
Moore, Jr.
10.57 ** Employment Agreement dated as of August 28, 1995 by and between the Company and Thomas K.
Hearn.
10.58 ** Employment Agreement dated as of August 7, 1997 by and between the Company and Kenneth
Petronis.
</TABLE>
28
<PAGE>
PART IV
================================================================================
<TABLE>
<CAPTION>
Previously Filed
With File Number
0-25176 *
----------------------
Exhibit No. In As
No. Document Exhibit Exhibit Description
<C> <C> <C> <S>
10.59 First Amendment dated February 4, 1997, to the Construction and Term Loan Agreement dated
December 7, 1995 between the Little Rock Company and Health Care REIT, Inc.
11 Statement re-computation of per share earnings
13.1 Such portion of the 1997 Annual Report to Shareholders that is being incorporated by
reference to the Form 10-K.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule (included in the EDGAR filing only.)
</TABLE>
- -----------------------------
* Incorporated herein by reference.
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
*** Portions of these agreements have been deleted pursuant to a previously
approved request for confidential treatment.
**** Portions of these agreements have been deleted pusuant to a request for
confidential treatment made under rule 24b-2 under the securities
exchange act of 1934, as amended.
- -----------------------------
(1) Registration Statement on Form S-1.
(2) Form 10-Q for the quarterly period ended December 31, 1994.
(3) Form 8-K dated April 9, 1995.
(4) Form 10-Q for the quarterly period ended December 31, 1995.
(5) Form 10-K for the year ended September 30, 1995
(6) Form 8-A dated October 18, 1996.
(7) Form 10-K for the year ended September 30, 1996
(8) Form 10-Q for the quarterly period ended March 31, 1997.
(9) Form 10-Q for the quarterly period ended June 30, 1997.
(10) Form 8-A/A Amendment No. 1 dated September 12, 1997
29
<PAGE>
PART IV
================================================================================
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDCATH INCORPORATED
By /s/ Stephen R. Puckett
----------------------------------
Stephen R. Puckett, Chairman of
the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the 23rd day of December, 1997.
Signature Title
- --------- -----
/s/ Stephen R. Puckett Chairman of the Board and President
- ----------------------- and Chief Executive Officer
Stephen R. Puckett
/s/ David Crane Executive Vice President, Chief
- ----------------------- Operating Officer and Director
David Crane
/s/ Richard J. Post Chief Financial Officer, Secretary
- ----------------------- and Treasurer
Richard J. Post (Principle Accounting Officer)
Director
- -----------------------
Patrick J. Welsh
/s/ Andrew M. Paul Director
- -----------------------
Andrew M. Paul
/s/ W. Jack Duncan Director
- -----------------------
W. Jack Duncan
/s/ John B. McKinnon Director
- -----------------------
John B. McKinnon
30
<PAGE>
MedCath Incorporated
Schedule II - Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other Accounts Deductions End of
Description Period Expenses (Describe) (Describe) Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Deducted from assets:
Allowance for losses in collection of current
accounts receivable
Year ended September 30, 1995 $ 40 $ 24 - - $ 64
Year ended September 30, 1996 $ 64 $ 735 - $ 382(1) $ 417
Year ended September 30, 1997 $417 $2,083 - $1,011(1) $1,489
(1) Uncollectible accounts written off.
</TABLE>
31
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit Description
10.39 Standard Form of Agreement between Owner and Contractor dated as
of September 9, 1997, by and between the Bakersfield Company and
S.C. Anderson, Inc. (In accordance with Rule 202 of Regulation
S-T, this exhibit is being filed in paper pursuant to a
continuing hardship exemption.)
10.40 Standard Form of Agreement between Owner and Contractor dated as
of August 26, 1997, by and between the Austin Partnership and
Faulkner Construction Company. (In accordance with Rule 202 of
Regulation S-T, this exhibit is being filed in paper pursuant to
a continuing hardship exemption.)
10.41 Operating Agreement of the Dayton Company dated March 20, 1997
by and among DTO Management, Inc. and several other parties
thereto.
10.42 Credit Agreement dated as of July 28, 1997 by and among the
Company and NationsBank, N.A., as agent for several other
lenders thereto.
10.43 Note dated as of July 28, 1997 from the Company to NationsBank,
N.A., as agent for several other lenders thereto in the amount
of $20,000,000.
10.44 Loan Agreement dated as of August 7, 1997 by and among the
Phoenix Company and NationsBank, N.A, as agent for several other
lenders thereto.
10.45 Construction Loan Notes dated as of August 7, 1997 from the
Phoenix Company to NationsBank, N.A. and several other lenders
thereto in the amount of $27,545,000 in the aggregate.
10.46 Working Capital Loan Notes dated as of August 7, 1997 from the
Phoenix Company to NationsBank, N.A. and several other lenders
thereto in the amount of $2,500,000 in the aggregate.
10.47 Share Exchange Agreement and Plan of Reorganization dated as of
June 30, 1997 by and among Shareholders of Pima Heart Associates
and the Company.
10.48** Service Agreement dated as of June 30, 1997 between Pima Heart
Associates and the Company.
10.49** Liquidated Damages Agreement dated as of June 30, 1997 by and
among Shareholders of Pima Heart Associates and the Company.
10.50 Services and Billing Agreement dated as of October 1, 1997
between the Tucson Company and the Tucson Cath Lab Company.
10.51 Lease Agreement dated as of October 1, 1997 between the Tucson
Company and the Tucson Cath Lab Company.
10.52* Employment Agreement dated as of October 1, 1997 by and
between the Company and Stephen R. Puckett.
10.53* Employment Agreement dated as of October 1, 1997 by and
between the Company and David Crane.
10.54* Employment Agreement dated as of April 29, 1997 by and between
the Company and Richard J. Post.
10.55* Employment Agreement dated as of October 1, 1997 by and
between the Company and Charles W. Johnson.
10.56* Employment Agreement dated as of March 9, 1994 by and between
the Company and R. William Moore, Jr.
10.57* Employment Agreement dated as of August 28, 1995 by and
between the Company and Thomas K. Hearn.
10.58* Employment Agreement dated as of August 7, 1997 by and between
the Company and Kenneth Petronis.
10.59 First Amendment dated February 4, 1997, to the Construction and
Term Loan Agreement dated December 7, 1995 between the Little
Rock Company and Health Care REIT, Inc.
<PAGE>
11 Statement re-computation of per share earnings
13.1 Such portion of the 1997 Annual Report to Shareholders that is
being incorporated by reference to the Form 10-K.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, independent auditors.
27 Financial Data Schedule (included in the EDGAR filing only.)
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
** Portions of these agreements have been deleted pursuant to a request
for confidential treatment made under rule 24b-2 under the securities
exchange act of 1934, as amended.
<PAGE>
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
<PAGE>
TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
<TABLE>
<S> <C> <C>
ARTICLE I.........................................................................................................2
ARTICLE II........................................................................................................2
SECTION 2.1. Company Formation; Effective Date...........................................................2
SECTION 2.2. Name of Company.............................................................................2
SECTION 2.3. Purposes and Investment Objectives..........................................................2
SECTION 2.4. Registered Agent and Office; Principal Place of Business....................................3
SECTION 2.5. Commencement and Term.......................................................................3
ARTICLE III.......................................................................................................4
SECTION 3.1. Initial Capital Contributions of Members....................................................4
SECTION 3.2. Liability of Members - For Capital..........................................................4
SECTION 3.3. Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the
Company.................................................................................................4
SECTION 3.4. Interest on Capital Contributions or Capital Accounts.......................................5
SECTION 3.5. Additional Funding..........................................................................5
SECTION 3.6. Enforcement of Commitments..................................................................7
ARTICLE IV........................................................................................................7
ARTICLE V.........................................................................................................7
SECTION 5.1. General Authority and Powers of Managers....................................................7
SECTION 5.2. Restrictions on Authority of the Managers..................................................11
SECTION 5.3. Duties of the Managers.....................................................................12
SECTION 5.4. Delegation by the Managers.................................................................12
SECTION 5.5. Right to Rely Upon the Authority of the Managers...........................................13
SECTION 5.6. Company Expenses...........................................................................13
SECTION 5.7. No Management by Members...................................................................15
SECTION 5.8. Consent by Members to Exercise of Certain Rights and Powers by Managers....................15
SECTION 5.9. Other Business of Members..................................................................16
SECTION 5.10. Managers' Standard of Care................................................................17
SECTION 5.11. Limitation of Liability...................................................................17
SECTION 5.12. Indemnification of the Managers...........................................................18
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 5.13. Election and Replacement of Investor Manager..............................................18
SECTION 5.14. Role of Investor Manager..................................................................18
SECTION 5.15. Purchase of Goods and Services from MedCath...............................................18
SECTION 5.16. Decisions by Managers.....................................................................18
ARTICLE VI.......................................................................................................20
SECTION 6.1. Distributions of Cash Flow from Operations and Cash from Sales or Refinancing..............20
SECTION 6.2. Profits....................................................................................20
SECTION 6.3. Losses.....................................................................................20
SECTION 6.4. Code Section 704(c) Tax Allocations........................................................20
SECTION 6.5. Miscellaneous..............................................................................21
ARTICLE VII......................................................................................................22
SECTION 7.1. No Termination by Certain Acts of Member...................................................22
SECTION 7.2. Dissolution................................................................................22
SECTION 7.3. Dissolution and Final Liquidation..........................................................23
SECTION 7.4. Termination................................................................................24
SECTION 7.5. Payment in Cash............................................................................24
SECTION 7.6. Goodwill and Trade Name....................................................................24
SECTION 7.7. Termination of Noncompetition Covenants....................................................24
ARTICLE VIII.....................................................................................................25
SECTION 8.1. Manager - Transfers........................................................................25
SECTION 8.2. Members' Right to Continue When Company has no Manager.....................................26
SECTION 8.3. Relationship with Substitute Manager.......................................................26
SECTION 8.4. Members Who Are Not Managers - Restriction on Transfer.....................................26
SECTION 8.5. Condition Precedent to Transfer of Economic Interest and/or Membership Interest............27
SECTION 8.6. Substitute Member - Conditions to Fulfill..................................................28
SECTION 8.7. Allocations Between Transferor and Transferee..............................................28
SECTION 8.8. Rights, Liabilities of, and Restrictions on Assignee.......................................29
SECTION 8.9. Death of a Member..........................................................................29
SECTION 8.10. Repurchase of Interests in Certain Event..................................................30
SECTION 8.11. Permissible Transfers by Investor Members.................................................30
ARTICLE IX.......................................................................................................31
SECTION 9.1. Books of Account...........................................................................31
SECTION 9.2. Access to Records..........................................................................31
SECTION 9.3. Bank Accounts and Investment of Funds......................................................31
SECTION 9.4. Fiscal Year................................................................................31
SECTION 9.5. Accounting Reports.........................................................................31
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 9.6. Tax Returns................................................................................32
ARTICLE X........................................................................................................32
SECTION 10.1. Meetings..................................................................................32
SECTION 10.2. Voting Rights of Members..................................................................33
ARTICLE XI.......................................................................................................33
SECTION 11.1. Authority to Amend by Managers............................................................33
SECTION 11.2. Restrictions on Managers' Amendments: Amendments by Investor Members......................34
SECTION 11.3. Amendments to Certificates................................................................35
ARTICLE XII......................................................................................................35
SECTION 12.1. Limited Power of Attorney.................................................................35
SECTION 12.2. Waiver of Provisions......................................................................35
SECTION 12.3. Interpretation and Construction...........................................................35
SECTION 12.4. Governing Law.............................................................................35
SECTION 12.5. Partial Invalidity........................................................................36
SECTION 12.6. Binding on Successors.....................................................................36
SECTION 12.7. Notices and Delivery......................................................................36
SECTION 12.8. Counterpart Execution; Facsimile Execution................................................36
SECTION 12.9. Statutory Provisions......................................................................36
SECTION 12.10. Waiver of Partition......................................................................36
SECTION 12.11. Change In Law............................................................................37
SECTION 12.12. Investment Representations of the Members................................................38
SECTION 12.13. Decisions by Investor Manager............................................................39
SECTION 12.14. Referrals to Hospital and Ownership of Shares of Common Stock of MedCath
Incorporated...................................................................................39
SECTION 12.15. Exhibits.................................................................................39
EXHIBIT A: Information Exhibit.
EXHIBIT B: Glossary of Terms.
EXHIBIT C: Development Budget Exhibit.
EXHIBIT D: Regulatory Allocations.
</TABLE>
iii
<PAGE>
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE OHIO SECURITIES ACT IN
RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
THIS OPERATING AGREEMENT (the "Agreement") of Heart Hospital of DTO, LLC
(the "Company"), a North Carolina Limited Liability Company is made and entered
into by and among Persons whose names addresses and taxpayer identification
number are listed on the Information Exhibit.
RECITALS
A. The Company has been formed to develop, own and operate an acute care
hospital which hospital shall be located in or near Dayton, Ohio and shall
specialize in all aspects of cardiology and cardiovascular care and surgery
which DTO Management and the Investor Manager may agree upon;
B. It is intended that the hospital will be a low-cost, high quality
provider of medical services within the Dayton, Ohio area in a manner which is
consistent with the national health care policy of lowering the costs of health
care;
C. The Capital Contributions and active involvement of the Investor Members
are necessary to enable the Company to achieve its objectives.
<PAGE>
ARTICLE I
DEFINITIONS
Unless otherwise indicated, capitalized words and phrases in this Operating
Agreement shall have the meanings set forth in the attached Glossary of Terms.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
SECTION 2.1. Company Formation; Effective Date. The Company shall be upon
the filing of the Articles of Organization with the Secretary of State of North
Carolina in accordance with the provisions of the Act. Upon the Effective Date
of this Agreement, the Persons listed on the attached Information Exhibit shall
be admitted to the Company as Members and the Persons who executed the Articles
shall be withdrawn as Members (unless they are listed on the Information
Exhibit), all without the necessity of any further act or instrument and without
causing the dissolution of the Company. DTO 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
North Carolina, and other documents to reflect the admission of additional
Members to the Company. Any costs incurred by DTO Management in connection with
the foregoing shall be reimbursed promptly upon the completion of such action.
The Agreement shall be effective as of the date (the "Effective Date") the
Company was formed.
SECTION 2.2. Name of Company. The name of the Company is Heart Hospital of
DTO, LLC.
SECTION 2.3. Purposes and Investment Objectives. The principal purposes of
the Company are as follows:
(a) To develop, own and operate the Hospital which would include, but
not be limited to, the following:
(i) Services and facilities to meet all requirements of the State
of Ohio, Medicare, JCAHO and other credentialling or licensing bodies
or agencies in order to have the Hospital licensed as a general acute
care hospital and to perform cardiology and cardiovascular surgical
services of every type or nature and to be eligible to obtain
appropriate reimbursements therefore;
(ii) Approximately 53,000 square feet in a building to be
constructed in accordance with plans and specifications approved by
the Company;
2
<PAGE>
(iii) Approximately 40 medical/surgical beds;
(iv) 3 heart catheterization laboratories with available space
for one additional heart catheterization lab;
(v) 3 heart surgical suites with space for the development of one
additional heart surgical suite;
(vi) All appropriate support services and systems; and
(vii) Appropriate Equipment and services with respect to the
facilities described above and as otherwise reasonably necessary or
appropriate for the diagnosis and treatment of cardiovascular disease,
including but not limited to invasive and non-invasive cardiac
testing, interventional treatment including percutaneous transluminal
coronary angioplasty and atherectomy, and cardiac surgery which would
include, but not be limited to, bypass grafts and valve surgery.
The above size, number and scope of facilities of the Hospital are
only preliminary estimates. The Managers are authorized to finally make all
determinations with respect thereto.
(b) To lease or acquire the real property, and if appropriate to
construct a suitable building, in which the Hospital shall be located;
(c) Any other purpose reasonably related to (a) and (b) above.
SECTION 2.4. Registered Agent and Office; Principal Place of Business. The
registered agent and office of the Company shall be as indicated in the Articles
of Organization, as amended from time to time. The principal place of business
of the Company shall be at such location in North Carolina as selected by DTO
Management from time to time. DTO Management shall promptly notify the Members
of any changes in the Company's registered agent, registered office, or
principal place of business.
SECTION 2.5. Commencement and Term. The Company commenced on the filing of
the Articles of Organization in the Office of the Secretary of State of North
Carolina, as required by Section 2.1 hereof, and shall continue until December
31, 2037, 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 DTO Management. In
the event DTO Management does not elect to extend the term hereof, the Investor
Manager may instead elect to extend the term hereof, subject to DTO Management's
consent which shall not be unreasonably withheld or delayed.
3
<PAGE>
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
SECTION 3.1. Initial Capital Contributions of Members. The Members shall
make the following initial Capital Contributions:
(a) DTO Management shall own at least a fifty-one percent (51%)
Membership Interest in the Company and shall contribute to the Company for
its Membership Interest One Million Five Hundred Thirty Thousand Dollars
($1,530,000).
(b) The Investor Members shall own in the aggregate up to a forty-nine
percent (49%) Membership Interest and shall contribute to the Company for
their Membership Interests an amount, in the aggregate, of up to One
Million Four Hundred Seventy Thousand Dollars ($1,470,000). The Membership
Interests of the Investor Members shall be owned as shown on the
Information Exhibit attached hereto.
In connection with the initial offering and admission of Investor Members
to the Company, in the event that additional portions of the Membership
Interests described in this Section 3.1(b) have not been subscribed for, the
Investor Members who become Members on or about the Effective Date shall be
entitled to acquire on a pro rata basis such remaining Member Interests if DTO
Management and the Investor Manager have agreed to offer such remaining
interests to any such original Investor Member.
The Members may be liable to the Company for amounts distributed to them as
a return of capital as provided by the Act. The Members shall not be required to
contribute any additional capital to the Company except as provided in Section
3.5.
SECTION 3.2. Liability of Members - For Capital. The liability of each
Member for capital shall be limited to the amount of its agreed Capital
Contribution as a Member as provided in Section 3.1 and Section 3.5, except that
the Members may be liable to the Company for amounts distributed to them as a
return of capital as provided by the Act. The Members shall not be required to
contribute any additional capital to the Company except as provided in Section
3.5.
SECTION 3.3. Maintenance of Capital Accounts; Withdrawals of Capital;
Withdrawals from the Company. An individual Capital Account shall be maintained
for each Member in accordance with requirements of the Code and the Regulations
promulgated thereunder. No Member shall be entitled to withdraw or to make
demand for withdrawal of any part of its Capital Account or to receive any
distribution except as provided herein. Except as otherwise provided in this
Agreement, each Member shall look solely to the assets of the Company for the
return of its Capital Contributions and shall have no right or power to demand
or receive property other than cash from the Company. No Member shall have
priority over
4
<PAGE>
any other Member as to the return of its Capital Contributions, distributions or
allocations, except as provided in this Agreement.
Except as otherwise provided herein, a Member may not withdraw from the
Company without the written consent of DTO Management and the Supermajority Vote
of the Members and in no case shall a Member have the right to have its Interest
redeemed by the Company unless approved by DTO Management and by the
Supermajority Vote of the Members.
SECTION 3.4. Interest on Capital Contributions or Capital Accounts. No
interest shall be paid to any Member based solely on its Capital Contributions
or Capital Account. The preceding sentence shall not prevent the Company from
earning interest on its bank accounts and investments and distributing such
earnings to the Member in accordance with Articles VI and VII.
SECTION 3.5. Additional Funding. If from time to time, DTO 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:
(a) Subject to the terms hereof, if additional funds are required by
the Company to enable it to pay its liabilities during its development or
startup phase, DTO Management agrees to loan the Company up to Three
Million Dollars ($3,000,000) for such purpose at the Prime Rate plus one
percent (1%) per annum which loan shall be secured by the Company's assets.
Interest on such loan shall be payable monthly and the principal shall be
repaid as the Company has funds available therefore. Provided, however, if
the Company's losses as calculated by the Company's accountants under
Generally Accepted Accounting Principles ("GAAP") exceed the initial
Capital Contributions made pursuant to Section 3.1, DTO Management shall
not be required to make any such loan to the Company hereunder unless it is
still needed after the Members and Economic Interest Holders make
additional Capital Contributions pursuant to the terms of Section
3.5(b)(ii) below.
(b) Thereafter, if additional funds are required by the Company to
enable it to pay its obligations, subject to the requirements set forth in
(ii) below, then:
(i) DTO Management shall use commercially reasonable efforts to
borrow such funds from a bank or other lender on terms and conditions
reasonably acceptable to DTO Management, or DTO 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
therefore. All loans obtained hereunder shall be subject to the
approval of the Investor Manager which approval shall not be
unreasonably withheld or delayed;
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(ii) If the Company has losses (after the application of the
delay in earning and accrual of the fees provided for in Section
5.6(b)(ii), (iii) and (iv)) in excess of the amount of the initial
Capital Contributions, DTO Management may from time to time, subject
to the terms below, upon at least fifteen (15) days prior written
notice require that the Members and Economic Interest Holders
contribute additional capital to the Company pro rata according to
their respective Membership Interests and Economic Interests, provided
however, a Member's or Economic Interest Holder=s maximum obligation
for such additional Capital Contributions shall be limited to an
amount equal to two (2) times the Member=s initial Capital
Contribution pursuant to Section 3.1 (or in the case of an Economic
Interest Holder, the initial Capital Contribution obligation under
Section 3.1 of the Person who first acquired that Economic Interest
from the Company). DTO Management shall determine from time to time
when such a mandatory Capital Contribution is needed and shall give
written notice to the Investor Member(s) and the Investor Manager of
the need for the Capital Contribution. This mandatory Capital
Contribution shall be subject to the consent of the Investor Manager;
however, said consent may not be unreasonably withheld by the Investor
Manager. It is further acknowledged and agreed that in the event that
after the Manager has fully advanced its loan pursuant to Section
3.5(a) that for any reason the Company requires additional funds to
meet debts that become due or because of a lack of reasonable
operating reserves, those shall be acceptable reasons for the
mandatory Capital Contribution which shall not be objected to by the
Investor Manager.
(iii) If additional Capital Contributions are needed beyond the
loans described in (a) and (b)(i) above and beyond the mandatory
amount indicated in (b)(ii) above, each Member may elect whether or
not to contribute its pro rata portion thereof of these optional
Capital Contributions. The other Investor Members may elect to
contribute optional Capital Contributions not contributed by any
Investor Member hereunder. DTO Management may then elect to contribute
amounts which the Investor Members, in the aggregate, have not so
contributed as optional Capital Contributions. Thereafter, DTO
Management shall reasonably adjust the percentage Membership Interest
of each Member (based on the relative aggregate Capital Contributions
made by the Members in accordance with this Agreement) in the event
any Member elected not to make optional Capital Contributions pursuant
to this Section 3.5 within; and
(iv) If funds are not available in accordance with (a) and (b),
(i), (ii) or (iii) above, then DTO Management may elect to dissolve
the Company.
SECTION 3.6. Enforcement of Commitments. In the event any Members (a
"Delinquent Member") fails to make a mandatory Capital Contribution as provided
in Section 3.1 or Section 3.5 or an optional Capital Contribution as agreed to
by the Member under Section 3.5 (the "Commitment"), DTO Management shall give
the Delinquent Member a Notice of the failure to meet the Commitment. If the
Delinquent Member fails to perform the Commitment (including
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any costs associated with the failure to meet the Commitment and interest on
such obligation at the Default Interest Rate) within ten (10) business days of
the giving of Notice, DTO Management may take such action, including but not
limited to enforcing the Commitment in the court of appropriate jurisdiction in
the state in which the principal office of the Company is located or the state
of the Delinquent Member=s address as then reflected in the Agreement. Each
Member expressly agrees to the jurisdiction of such courts but only for the
enforcement of Commitments. The other Member=s may elect to contribute
additional amounts equal to any amount of the Commitment not contributed by such
Delinquent Member. The contributing Member shall be entitled at its election to
treat the amounts contributed pursuant to this Section either as a Capital
Contribution or as a loan from the contributing Member bearing interest at the
Default Rate secured by the Delinquent Member=s Interest in the Company. If the
contributing Member elects to contribute such amount as a Capital Contribution,
the percentage Membership Interests of the Members shall be adjusted
proportionately. Until the contributing Member is fully repaid for such loan
made as a result of the default by the Delinquent Member and only if the
contributing Member agrees to accept repayment of such amount, the contributing
Member shall be entitled to all distributions to which the Delinquent Member
would have been entitled had such Commitment been fulfilled thereby.
Notwithstanding the foregoing, no Commitment or other obligation to make an
additional Capital Contribution may be enforced by a creditor of the Company
unless the Member expressly consents to such enforcement or to the assignment of
the obligation to such creditor.
ARTICLE IV
NAMES AND ADDRESSES OF MEMBERS
The names and addresses of the Members are as indicated on the Information
Exhibit, attached hereto and as amended from time to time.
ARTICLE V
MANAGEMENT OF THE COMPANY
SECTION 5.1. General Authority and Powers of Managers. Except as set forth
in those provisions of this Agreement that specifically require the vote,
consent, approval or ratification of the Members, the Managers shall have
complete authority and exclusive control over the management of the business and
affairs of the Company. 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 the Managers 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
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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 DTO Management.
The day-to-day management of the business and affairs of the Company shall
be the responsibility of DTO Management, which management shall be subject to
decisions, guidelines and policies made or established by the Managers
hereunder, provided, however, decisions relating to medical and clinical
practice at the Hospital shall be made exclusively by the qualified medical
personnel of the Hospital. Subject in all cases to the foregoing, DTO 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;
(e) To establish procedures for quality assurance, peer review and
granting privileges to physicians with other specialties at the Hospital,
subject to the terms of the Hospital and medical staff bylaws adopted for
the Hospital;
(f) To expend all or portions of the Company's capital and income in
furtherance of or relating to the Company's business and purposes,
including, but not limited to, payment of all ongoing operational expenses,
payment of commissions, organization expenses, professional fees, rental
fees, and management fees, and to invest in short-term debt obligations
(including, but not limited to, obligations of federal and state
governments and their agencies, commercial paper, and certificates of
deposit of commercial banks, or savings banks or savings and loan
associations) such of the Company's funds as are temporarily not required
for the development or operation of the Company and the payment of Company
obligations; provided, that the Managers shall establish cash management
guidelines to be followed by DTO Management;
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(g) To employ or retain on such terms and for such compensation as DTO
Management may reasonably determine, such persons, firms, or corporations
as DTO 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
DTO Management, provided that the selection of the senior administrator of
the Hospital shall be a Material Decision;
(h) To execute leases, deeds, contracts, rental agreements,
construction contracts, sales agreements, and management contracts;
(i) To exercise all rights, powers, and privileges of the Company as
lessee with respect to the Hospital or rights held by the Company;
(j) To consent to the modification, renewal, or extension of any
obligations to the Company of any Person or of any agreement to which the
Company is a party or of which it is a beneficiary;
(k) To execute in furtherance of any or all of the purposes of the
Company, any deed, lease, deed of trust, security interest, mortgage,
promissory note, bill of sale, assignment, contract, or other instrument
purporting to purchase or convey or encumber in whole or in part the
Equipment or the Hospital or other real or personal property of the
Company;
(l) To prepay in whole or in part, refinance, recast, increase,
modify, or extend any security interest, deed of trust, or mortgage
affecting the Hospital and in connection therewith to execute any
extensions or renewals thereof on the Hospital and to grant security
interests in any of the Equipment or the Hospital;
(m) To adjust, compromise, settle, or refer to arbitration any claim
against or in favor of the Company, and to institute, prosecute, and defend
any actions or proceedings relating to the Company, its business, and
properties;
(n) To acquire and enter into any contract of insurance which DTO
Management deems necessary or appropriate for the protection of the Company
and DTO Management, for the conservation of the Company or its assets, or
for any purpose beneficial to the Company; however, neither DTO 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;
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(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;
(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 DTO Management and approved by the Investor Manager,
which approval shall be given or withheld in the sole and absolute
discretion of the Investor Manager;
(y) To sell assets of the Company, subject to the restrictions
contained in this Agreement;
(z) Subject to the Governing Body and Medical Staff By-Laws, and with
the written consent of the Investor Manager, to provide exclusive
cardiology and cardiovascular surgery professional service agreements to
Investor Members who will be integral to the successful development of the
Hospital; and
(aa) Acquire equipment and other related tangible assets appropriate
for the operation of a cardiac rehabilitation service from third parties or
from Investor Members based on the fair market value therefor.
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SECTION 5.2. Restrictions on Authority of the Managers. The Managers shall
not do any of the following:
(a) Act in contravention of this Agreement;
(b) Act in any manner which would make it impossible to carry on the
express business purposes of the Company;
(c) Commingle the Company funds with those of any other Person;
(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; or
(j) Sell all or substantially all of the assets of the Company or
merge the Company with or into any other Entity without the approval of a
Supermajority Vote of the Members.
SECTION 5.3. 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 DTO 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 partnership and not as an
association taxable as a corporation;
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(c) In the case of DTO 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;
(d) In the case of DTO 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 as DTO Management 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 DTO Management, deliver to the Secretary of State
of North Carolina for filing an annual statement in accordance with the Act
and make any similar filings required under Ohio law.
SECTION 5.4. Delegation by the Managers. Subject to restrictions otherwise
provided herein, the Managers may at any time employ any other Person, including
Persons and Entities employed by, affiliated with, or related to the Managers to
perform services for the Company and its business, and may delegate all or part
of their authority or control to any such other Persons, provided that such
employment or delegation shall not relieve the Managers of their respective
responsibilities and obligations under this Agreement or under the laws of the
State of North Carolina nor will it make any such Person a Member or Manager of
the Company.
SECTION 5.5. 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.
SECTION 5.6. Company Expenses.
(a) In general, the Company's expenses shall be billed directly to and
paid by the Company. The Company shall reimburse the Managers or their
Affiliates for: (i) all
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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 parties specifically recognize that DTO
Management and its Affiliates have incurred legal fees, filing fees, and
other out-of-pocket costs for the benefit of the Company, including costs
connected with the preparation of securities law and health care law
compliance documentation and filings, real estate acquisition matters and
formation and registration of the Company, and agree that DTO Management
shall be reimbursed for these amounts. The reimbursement for expenses
provided for in this Section 5.6(a) shall be made to the Managers or their
Affiliates regardless of whether any distributions are made to the Members
under Article VI and Article VII.
(b) The Company shall also pay the following expenses of the Company:
(i) All development and operational expenses of the Company,
which may include, but are not limited to: the salary and related
expenses of employees and staff of the Hospital, all costs of borrowed
money, taxes, and assessments on the Hospital, and other taxes
applicable to the Company; expenses in connection with the
acquisition, maintenance, leasing, refinancing, operation, and
disposition of the Equipment, furniture and fixtures of the Hospital
(including legal, accounting, audit, commissions, engineering,
appraisal, and the other fees); and the maintenance of the Hospital
and its Equipment, which may be performed by DTO 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 shall be paid to DTO Management, which for
periods prior to the opening of the Hospital for business shall equal
One Hundred Thousand Dollars ($100,000.00) per year and shall first
accrue commencing with the month during which the Company receives the
Capital Contributions described in Section 3.1(b), and shall be
payable monthly on the last day of each month, and for periods after
the opening of the Hospital for business shall equal two percent (2%)
of the Hospital's collected gross revenues for a month, and shall be
payable monthly on or before the tenth (10th) day following the end of
each month but which amount shall be no less than One Hundred Fifty
Thousand Dollars ($150,000.00) per annum;
(iii) An annual medical director's fee of Fifty Thousand Dollars
($50,000) commencing with the beginning of the design process for the
Hospital which annual fee shall be increased to One Hundred Thousand
Dollars ($100,000) commencing as of the date on which the first of the
following occurs: (X) the
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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) and shall be payable
monthly on the last day of each month, which fee shall be increased
annually by the Consumer Price Index reasonably applied by DTO
Management on January 1st of each year;
(iv) As compensation for (X) the substantial efforts of the
Investor Manager in assisting in the organization and development of
the Company and the Hospital, (Y) for such Investor Manager's
substantial and ongoing involvement in connection with the design,
development and initial operations of the Hospital after the date
hereof, and (Z) for serving as the Investor Manager in accordance with
the terms of this Agreement and taking all reasonable efforts to
ensure that the other Investor Members are adequately represented
hereunder, the Investor Manager shall be paid a fee equal to Fifty
Thousand Dollars ($50,000.00) per annum commencing with the beginning
of the design process for the Hospital for the two (2) year period
commencing as of such date, which annual fee shall be Twenty-Five
Thousand Dollars ($25,000.00) per year thereafter;
(v) All fees and expenses paid to third parties for accounting,
legal, documentation, professional, and reporting services to the
Company, which may include, but are not limited to: preparation and
documentation of Company bookkeeping, accounting and audits;
preparation and documentation of budgets, cash flow projections, and
working capital requirements; preparation and documentation of Company
state and federal tax returns; and taxes incurred in connection with
the issuance, distribution, transfer, registration, and recordation of
documents evidencing ownership of a Membership Interest or Economic
Interest in the Company or in connection with the business of the
Company; expenses in connection with preparing and mailing reports
required to be furnished to the Members or Economic Interest Owners
for tax reporting or other purposes, including reports, if any, that
may be required to be filed with any federal or state regulatory
agencies, or expenses associated with furnishing reports to Members
which DTO 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; and the costs of
preparing and disseminating informational material and documentation
relating to a potential sale, refinancing, or other disposition of the
Hospital or the Equipment; and
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(vi) In the event that DTO Management and the Investor Member
reasonably agree that it would be beneficial to the Company to have
the advice of a third party consultant when making a Material
Decision, the reasonable expenses of the third party consultant shall
be an expense of the Company.
(c) Notwithstanding anything herein to the contrary, no amounts shall
be earned, accrued or due from the Company under (b)(ii), (iii) or (iv)
above to the extent that the Company has losses which (i) would be greater
as a result of such amounts being earned, and (ii) which are resulting in
additional Capital Contributions being required under Section 3.5(b)(ii).
SECTION 5.7. No Management by Members. Other than the Managers, the Members
shall take no part in, or at any time interfere in any manner with, the
management, conduct, or control of the Company's business and operations and
shall have no right or authority to act for or bind the Company except as set
forth in this Agreement. The rights and powers of such Members shall not extend
beyond those set forth in this Agreement and those granted under the Articles of
Organization and any attempt to participate in the control of the Company in a
manner contrary to the rights and powers granted herein and under the Articles
of Organization shall be null and void and without force and effect. Subject to
the decisions and judgment with respect to all professional medical or clinical
matters of qualified medical personnel, DTO Management, in conjunction with the
Investor Manager when applicable, shall have the right to determine when and how
the operations of the Company shall be conducted. The exercise by any other
Member of any of the rights granted to the Member hereunder shall not be deemed
to be taking part in the control of the business of the Company and shall not
constitute a violation of this Section.
SECTION 5.8. 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.
SECTION 5.9. Other Business of Members.
(a) Subject to (b) below, any Member, including any Manager, may
engage independently or with others in other business ventures of every
nature and description, including without limitation the purchase of
medical equipment, the rendering of medical services of any kind, and the
making or management of other investments and neither the Company nor any
Member shall have any right by virtue of this Agreement or the relationship
created hereby in or to such other ventures or activities or to the income
or proceeds derived therefrom, and the pursuit of such ventures.
(b) As long as any Member owns a Membership Interest in the Company,
and for a period of five (5) years after a Member ceases for any reason to
own a Membership Interest in the Company, neither a Member nor any of its
respective Affiliates, shall hold, directly or indirectly, an investment,
ownership or other beneficial interest in (i) any
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hospital or (ii) other Entity (including a sole proprietorship) which
provides any of the following services or facilities: cardiac
catheterization, angioplasty, peripheral angioplasty, atherectomy, stenting
and PTCA or other cardiac surgical procedures or services, in any case
within a fifty (50) mile radius of the Hospital (the "Territory"), provided
that (i) no Member or Affiliate who is a physician shall be prohibited from
maintaining his or her staff privileges at any other hospital and (ii)
nothing herein shall prohibit a Member or Affiliate from owning up to three
percent (3%) of the outstanding capital stock of a company whose stock is
publicly traded and listed on a nationally recognized securities exchange
or from investing in a publicly traded mutual fund. In addition, DTO
Management or its Affiliates may separately operate a mobile
catheterization laboratory within the Territory, but only if either DTO
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 DTO
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 DTO Management or the Company
and nothing herein is intended to prohibit any party from practicing
medicine at any other facility.
(f) If an Investor Member is a legal entity and not an individual,
such Investor Member shall cause each of its existing and future Affiliates
to agree in writing to be personally bound by the terms of this Section
5.9.
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SECTION 5.10. Managers' Standard of Care. Each Manager shall act in a
manner it believes in good faith to be in the best interest of the Company and
with such care as an ordinarily prudent Person in a like position would use
under similar circumstances. In discharging its duties, each Manager shall be
fully protected in relying in good faith upon the records required to be
maintained under this Agreement and upon such information, opinions, reports and
statements by any of its other Managers, Members, or agents, or by any other
Person as to matters each Manager reasonably believes are within such other
Person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Company, including information, opinions,
reports or statements as to the value and amount of the assets, liabilities,
income or losses of the Company or any other facts pertinent to the existence
and amount of assets from which distributions to members might properly be paid.
Notwithstanding anything herein to the contrary, a Manager or Member shall
have the right to vote or approve Company matters in accordance with the terms
of this Agreement regardless of the personal interest of any Member or Manager
in the outcome of any vote, decision or matter.
SECTION 5.11. 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 it performs the duty of 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 share of income 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.
SECTION 5.12. Indemnification of the Managers.
(a) Each Manager and its Agents (as defined in Section 5.11) 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.
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(b) If at any time, the Company has insufficient funds to furnish
indemnification as herein provided, it shall provide such indemnification
if and as it generates sufficient funds and prior to any cash
distributions, pursuant to Article VI or Article VII hereof, to the
Members.
SECTION 5.13. 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 a successor is
duly elected. At any time, in accordance with Section 10.1, the Investor Members
may replace the Investor Manager and elect a new Investor Manager.
SECTION 5.14. 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.
SECTION 5.15. Purchase of Goods and Services from DTO Management. Goods and
services purchased from DTO Management or its Affiliates shall be of
substantially the same quality and price as could be obtained from an unrelated
third party.
SECTION 5.16. 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 DTO Management and the
Investor Manager. If there is more than one Investor Manager, the decision of
the Investor Manager shall be determined by the decision of a majority of such
Investor Managers. In the event a decision, approval or consent is requested of
the Investor Manager by DTO Management, 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 DTO 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 DTO Management and shall be subject to the consent of the Investor Manager,
which consent shall not be unreasonably withheld; provided, the application of
the Company=s funds toward the repayment of all or a portion of any financing of
the Company in excess of amounts then required to be paid (i.e., voluntary
prepayments) shall be made only with the consent of DTO Management and the
Investor Manager. The Investor Manager shall be deemed to have specifically
approved all expenditures proposed by DTO Management that are substantially
consistent with the Development Budget Exhibit or an approved operating budget
when funded from additional Capital Contributions made to the Company by the
Members pursuant to Section 3.5 above.
The development and annual operating budgets to be proposed by DTO
Management shall be approved by the Managers as provided above subject to the
following:
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(a) The Investor Manager shall be deemed to have approved a
development budget which is substantially consistent with the attached
Development Budget Exhibit to this Agreement;
(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
(c) In the event that the Managers are unable to approve an annual
budget, DTO 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 VI
DISTRIBUTIONS AND ALLOCATIONS
SECTION 6.1. Distributions of Cash Flow from Operations and Cash from Sales
or Refinancing. Prior to the dissolution of the Company, Cash Flow from
Operations and Cash from Sales or Refinancing, if any, remaining after repayment
of any amounts then due on loans made by the Members to the Company shall be
distributed quarterly by the Managers as Cash Distributions according to the
relative percentage Membership Interests of the Members and Economic Interest
Owners. Notwithstanding anything herein to the contrary, no distributions shall
be made to Members if prohibited by the Act.
SECTION 6.2. Profits. Except as provided in the Regulatory Allocations
Exhibit, Profits shall be allocated as follows:
(a) First, to the Members who have been allocated Losses pursuant to
Subsection 6.3(c) below until the cumulative Profits allocated pursuant to this
Subsection 6.2(a) equal the cumulative prior allocations of Losses under that
Subsection.
(b) Next, to the Members who have been allocated Losses pursuant to
Subsection 6.3(b) below until the cumulative Profits allocated pursuant to this
Subsection 6.2(b) equal the cumulative prior allocations of Losses under that
Subsection.
(c) All remaining Profits shall be allocated to the Members in accordance
with their percentage Membership Interests.
SECTION 6.3. Losses. Except as provided in the Regulatory Allocations
Exhibit, Losses shall be allocated as follows:
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(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.
SECTION 6.4. Code Section 704(c) Tax Allocations. Income, gain, loss, and
deduction with respect to any property contributed to the capital of the Company
shall, solely for tax purposes, be allocated among the Members so as to take
account of any variation between the adjusted basis of such property to the
Company for federal income tax purposes and its initial Agreed Value pursuant to
any method allowable under Code Section 704(c) and the Regulations promulgated
thereunder.
In the event the Agreed Value of any Company asset is adjusted after its
contribution to the Company, subsequent allocations of income, gain, loss and
deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and its
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.
Any elections or other decisions relating to allocations under this Section
shall be determined by DTO Management. Absent a determination by DTO 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.
SECTION 6.5. Miscellaneous.
(a) Allocations Attributable to Particular Periods. For purposes of
determining Profits, Losses or any other items allocable to any period, such
items shall be determined on a daily, monthly, or other basis, as determined by
DTO 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
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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.
ARTICLE VII
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
SECTION 7.1. No Termination by Certain Acts of Member. Neither the transfer
of interest, withdrawal from the Company, bankruptcy, insolvency, dissolution,
liquidation or other disability, nor the legal incompetency of any Member shall
result in the termination or dissolution of the Company or affect its
continuance in any manner whatsoever.
SECTION 7.2. Dissolution. The Company shall be dissolved upon the happening
of any of the following events, whichever shall first occur:
(a) The election by DTO 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 DTO Management
under this Agreement (which Substitute Manager accepts such election);
(c) Upon the written agreement of DTO Management and the Investor
Manager;
(d) The expiration of the term of the Company as provided in Section
2.5 hereof;
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(e) The adjudication of bankruptcy of the Company;
(f) Upon the written consent of a Supermajority Vote of the Members;
(g) In accordance with Section 12.11 hereof; and
(h) The entry of a decree of judicial dissolution or the
administrative dissolution of the Company as provided in the Act.
(i) At the election of the Manager, in the event that by September 30,
1997 (unless such date is extended by the consent by the Manager and the
Investor Manager) Investor Members reasonably acceptable to Manager have
not been admitted as Members subscribing for at least sixty-seven (67%)
percent of the Membership Interests described in Section 3.1(b).
SECTION 7.3. Dissolution and Final Liquidation
(a) Upon any dissolution of the Company, the Company shall not
terminate, but shall cease to engage in further business except to the
extent necessary to perform existing contracts and preserve the value of
its assets. Its assets shall be liquidated and its affairs shall be wound
up as soon as practical thereafter by the Managers, or if for any reason
there is no Manager, by another Person designated by a Supermajority Vote
of the Members. In winding up the Company and liquidating assets, the
Managers, or other Person so designated for such purpose, may arrange,
either directly or through others, for the collection and disbursement to
the Members of any future receipts from the Hospital or other sums to which
the Company may be entitled, and shall sell the Company's interest in the
Hospital and the Equipment to any Person, including DTO 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 Supermajority 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
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(iii) The balance to the Members with positive Capital Account
balances after taking into account all other adjustments during the
Fiscal Year in which liquidation occurs.
(c) The Members shall look solely to the assets, if any, of the
Company for any return of their Capital Contributions and, if the assets of
the Company remaining after payment or discharge of the Company's debts and
liabilities, or provision therefor, are insufficient to return all or any
part of the Capital Contributions, no Member shall have any right of
recourse against the Managers or other Members or to charge the Managers or
other Members for any amounts except as provided herein and except to the
extent otherwise provided by the Act and/or North Carolina law.
(d) Upon such dissolution, reasonable time shall be allowed for the
orderly liquidation of the assets of the Company and the discharge of
liabilities to creditors so as to minimize the losses normally attendant to
a liquidation.
(e) The Capital Accounts of the Members, as adjusted, shall be
utilized by the Company for the purpose of making distributions to those
Members with positive balances in their respective Capital Accounts
pursuant to Section 7.3(b). In making such distributions, the Managers or
the Person winding up the affairs of the Company shall distribute all funds
available for distribution to the Members and Economic Interest Owners
(after establishing any reserves that the Managers deem or the Person
winding up the affairs of the Company deems reasonably necessary pursuant
to Section 7.3(b)) prior to the later of (a) the end of the taxable year in
which the event occurs which caused the termination and dissolution of the
Company, or (b) ninety (90) days after the occurrence of such event. The
Managers in their sole discretion, or the Person winding up the affairs of
the Company, in its discretion, may elect to have the Company retain any
installment obligations owed to the Company until collected in full so long
as any portion of the reserves which are later determined to be
unnecessary, and all collections on such installment obligations which are
not deemed to be reasonably necessary by the Managers or the Person winding
up the affairs of the Company to add to such reserves are distributed as
soon as practicable in accordance with the provisions of Section 7.3(b) as
modified by this Section.
(f) Each Economic Interest Owner shall be entitled to the
distributions to which its predecessor in interest would have been entitled
pursuant to this Article VII had it retained the Economic Interest acquired
by the Economic Interest Owner.
SECTION 7.4. Termination. Upon completion of the dissolution, winding up,
distribution of the liquidation proceeds and any other Company assets, the
Company shall terminate.
SECTION 7.5. Payment in Cash. Any payments made to any Member pursuant to
this Article VII shall be made only in cash.
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SECTION 7.6. Goodwill and Trade Name. Upon the dissolution of the Company,
the firm or trade name of the Company and any goodwill associated therewith
shall become the sole property of DTO Management, provided that distributions
and allocations otherwise due to DTO Management shall not be reduced as a result
of DTO Management becoming entitled to such assets.
SECTION 7.7. Termination of Noncompetition Covenants. Upon the later of the
dissolution of the Company and the completion of the liquidation process, the
Members shall have no continuing liability, or obligation under Section 5.9(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
SECTION 8.1. Manager - Transfers.
(a) Except as provided in this Section 8.1, without the consent of a
Majority Vote of Investor Members, DTO 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 DTO Management may assign its Membership Interest in the Company and
its rights to be a Manager to any party who purchases all or substantially
all of MedCath Incorporated's and its subsidiaries' assets or capital stock
if such purchaser assumes in writing the obligations of DTO Management
hereunder or to a party under control of, common control, or which
controls, DTO Management. DTO 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 MedCath Incorporated or its Affiliates. In the event that
DTO Management desires to sell any Membership Interest and such sale is not
in connection with the sale of all or substantially all of the assets or
capital stock of MedCath Incorporated and its subsidiaries, then the other
Members shall first have an option to purchase such Membership Interest in
accordance with the Right of First Refusal provided in Section 8.4. If upon
any transfer of DTO Management's Membership Interest, DTO Management is not
permitted to assign its rights as Manager under this Section 8.1(a), DTO
Management shall not continue as Manager after said transfer, and the
provisions of Section 8.2 shall apply.
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(b) The Investor Manager may not assign its rights to be a Manager
herein. Upon the withdrawal or resignation of the Investor Manager, a
substitute therefore who must be an Investor Member may be elected by a
Majority Vote of Investor Members.
(c) Any resignation or withdrawal by a Manager as a manager shall not
constitute such Manager's withdrawal as a Member.
(d) The Manager will not, without the consent of the Investor Manager,
pledge the assets of the Hospital except for the benefit of the Hospital.
SECTION 8.2. Members' Right to Continue When Company has no Manager. If at
any time there is no remaining Manager, a meeting of the Members shall be held
at the principal place of business of the Company within forty-five (45) days
after the happening of such event to consider whether to continue the Company on
the same terms and conditions as are contained in this Agreement (except that
the Managers may be different) and to select a Manager for the Company, or
whether to wind up the affairs of the Company, liquidate its assets and
distribute the proceeds therefrom in accordance with Article VII hereof. The
Company may be continued and a new Manager (who accepts such appointment)
selected by the Members within ninety (90) days of the occurrence of the event
described in Section 7.2(b) with respect to the last Manager. The new Manager
shall execute, acknowledge, file or record (as appropriate) Articles of
Organization and an Operating Agreement, or amendments to those documents, and
such other documents as may be required by the Act. The continuance of the
Company pursuant to the terms of this Section 8.2 is conditioned upon (i) any
amendment required by the Act of the Articles of Organization to reflect the
foregoing change and, if applicable, compliance by the Company with any notice
provisions of the Act and (ii) delivery to the withdrawing Manager of an
indemnification agreement by the Company, in form and substance reasonably
satisfactory to the withdrawing Manager, indemnifying and holding the
withdrawing Manager harmless against all future liabilities of the Company.
SECTION 8.3. Relationship with Substitute Manager. The relationship of the
Members to any Person that has either acquired the Membership Interest of DTO
Management or has been elected as a successor Manager as provided herein shall
be governed by this Agreement. If such Person was not previously a Manager, then
such Person, as Substitute Manager, shall have all the rights and powers of its
predecessor Manager under this Agreement; provided, such Person assumes in
writing the obligations of such Manager under this Agreement and any arising
thereafter, and accepts and adopts all the terms and provisions of this
Agreement in writing. The withdrawing Manager shall be liable for all of its
covenants and obligations under this Agreement for all periods prior to its
withdrawal until such liability is assumed by a Substitute Manager.
SECTION 8.4. Members Who Are Not Managers - Restriction on Transfer. Except
as otherwise set forth in this Section or in this Agreement, no Economic
Interest and/or Membership Interest of an Investor Member or any portion
thereof, shall be validly sold or assigned whether voluntarily, involuntarily or
by operation of law, and no purported assignee shall be recognized by the
Company for any purpose, unless such Economic Interest and/or
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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 DTO Management to comply with requirements imposed by any
federal or state securities regulatory authority and unless DTO Management's
consent is obtained. In no event, however, shall an Investor Member transfer or
sell all or any of its Economic Interest and/or Membership Interest to any party
which, if a Member, would be in violation of Section 5.9(b) hereof. Except as
otherwise set forth in this Section or in this Agreement, an Investor Member may
transfer, sell or assign its entire Economic Interest and/or Membership Interest
if it has received the approval of DTO 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 it meets the investor suitability
standards established by the appropriate state of residence, or, in the absence
thereof, the investor suitability standards established by the Company. DTO
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 that assigns all its
Membership Interest shall cease to be a Member of the Company. Any Membership
Interests acquired by the Company pursuant to Section 8.4 shall, subject to
applicable law, be re-offered by the Company to suitable investors.
Any dissolution, liquidation, merger (unless Investor Members or their
Affiliates as of the Effective Date and existing prior to such merger own at
least fifty-one percent (51%) of the surviving entity after the merger or unless
both parties to such merger are majority owned by parties who are Investor
Members or their Affiliates as of the Effective Date and prior to such merger)
or sale of an Investor Member which is an Entity (a sale shall include a
transfer of fifty percent (50%) or more of its ownership interests or of fifty
(50%) percent or more of its assets or any other transaction or series of
related transactions intended to accomplish, in substance, a sale of such
Entity) shall constitute an offer by such Investor Member to sell such Investor
Member's Interest pursuant to Section 8.4 for the Formula Purchase Price (as
defined in Section 8.9 below). The Investor Members who are Entities as of the
Effective Date have provided copies to DTO Management of the documents and
agreements related to the creation and governance thereof. These documents and
agreements have not been amended since they were provided to DTO Management and
shall not be amended without DTO Management's written consent. The restriction
of the foregoing sentence shall not apply to Entities which have historically
been dedicated solely to the practice of medicine and continue to be dedicated
solely to the practice of medicine in the future.
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SECTION 8.5. Condition Precedent to Transfer of Economic Interest and/or
Membership Interest. Notwithstanding anything herein to the contrary, no
transfer of an Economic Interest and/or Membership Interest may be made if such
transfer (a) constitutes a violation of the registration provisions of the
Securities Act of 1933, as amended, or the registration provisions of any
applicable state securities laws; (b) if after such transfer the Company will
not be classified as a partnership for federal income tax purposes; and (c) if
when taken together with other prior transfers, results in a "termination" of
the Company for federal income tax purposes. The Company may require, as a
condition precedent to transfer 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 DTO Management that the transfer will not violate any of the
foregoing restrictions.
SECTION 8.6. Substitute Member - Conditions to Fulfill. No assignee of a
Member's Membership Interest in the Company shall have the right to become a
Substitute Member in place of its assignor unless, in addition to any other
requirement herein, all of the following conditions are satisfied:
(a) The Company has waived its right pursuant to Section 8.4 to
purchase the Membership Interest held by the assignee;
(b) The duly executed and acknowledged written instrument of
assignment which has been filed with the Company sets forth that the
assignee becomes a Substitute Member in place of the assignor;
(c) The assignor and assignee execute and acknowledge such other
instruments as DTO 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 DTO Management and the Investor Manager to
such substitution is obtained, which consent may be reasonably withheld by
DTO Management or the Investor Manager; and
(e) The payment by the assignee of all costs to the Company associated
with the transaction, including but not limited to legal fees, transfer
fees, and filing fees.
SECTION 8.7. Allocations Between Transferor and Transferee. Upon the
transfer of a Member's Economic Interest or Membership Interest, all items of
income, gain, loss, deduction and credit attributable to the Economic Interest
or Membership Interest so transferred shall be allocated between the transferor
and the transferee in such manner as the transferor and transferee agree at the
time of transfer; provided such allocation does not violate federal or state
income tax law. If DTO 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
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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 DTO 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 DTO 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 made in good faith to such assignor in
reliance on the Company records as they exist until such time as the written
assignment has been received by, and recorded on the books of the Company. For
purposes of this Article VIII, the effective date of an assignment of any
Economic Interest or Membership Interest shall be the last day of the month
specified in the written instrument of assignment.
SECTION 8.8. Rights, Liabilities of, and Restrictions on Assignee. No
assignee of a Member's Economic Interest or Membership Interest shall have the
right to participate in the Company, inspect the books of account of the Company
or exercise any other right of a Member unless and until admitted as a
Substitute Member. Notwithstanding DTO Management's failure or refusal to admit
an assignee as a Substitute Member, such assignee shall be entitled to receive
the share of income, credit, gain, expense, loss and deduction and cash
distributions provided hereunder that is assigned to it, and, upon demand, may
receive copies of all reports thereafter delivered pursuant to the requirements
of this Agreement; provided, the Company shall have first received notice of
such assignment and all required consents thereto shall have been obtained and
other conditions precedent to transfer thereof shall have been satisfied. The
Company's tax returns shall be prepared to reflect the interests of assignees as
well as Members.
SECTION 8.9. Death of a Member. If any Member is an individual, heirs of
such a Member 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 DTO 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 net income (as reasonably determined by the Company's
accountants) of the Company for the twelve (12) month period ending as of the
calendar quarter most recently ended prior to the death of such Member
multiplied by the percentage Membership Interest of such Member in the Company
(the "Formula Purchase Price"). The purchase price shall be paid (the "Payment
Method") in three (3) equal annual installments,
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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. If the Investor Member is
an Entity, the agreements for the formation and the governance of such Entity
shall provide for the disposition of the membership interest of a deceased
member of the Investor Member Entity, which disposition shall be subject to DTO
Management's approval.
SECTION 8.10. Repurchase of Interests in Certain Event
(a) In the discretion of DTO 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 5.9, 8.1(b), 8.4, 8.9, 12.1 and 12.11 of this
Agreement.
(b) Each Member agrees to sell its Membership Interest to the Company
in the event DTO 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 Contributions of the Member less all amounts distributed to
such Member by the Company, (y) the fair market value of such Member's
Membership Interest determined by an independent appraiser reasonably
selected by DTO Management, and (z) the formula Purchase Price; provided
however, in the event that the Company elects to purchase any Membership
Interest due to a Member's failure to make a required Capital Contribution
pursuant to Section 3.5, the purchase price therefor shall be determined
solely under (x) above.
SECTION 8.11. Permissible Transfers by Investor Members. Notwithstanding
anything in this Agreement to the contrary, an Investor Member may elect within
ninety (90) days of acquiring a Membership Interest in the Company to assign its
Membership Interest to a corporation, limited liability company or limited
partnership formed and maintained for the purpose of holding such Membership
Interest, or for additional purposes approved by DTO Management by advance
written consent, if such assignee is owned by the Investor Member or such
assignee's owners are substantially identical to the owners of such Investor
Member as long as such assignee and its Affiliates agree in writing to be bound
by all the terms and conditions of this Agreement and DTO Management first
approves in writing the terms of all documents creating and constituting such
Entity.
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ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
SECTION 9.1. Books of Account. At all times during the continuance of the
Company, DTO 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, income and losses, and all other records necessary for
recording the Company's business and affairs including those sufficient to
record the allocations and distributions required by the provisions of this
Agreement.
SECTION 9.2. Access to Records. The books of account and all documents and
other writings of the Company, including the Articles of Organization and any
amendments thereto, shall at all times be kept and maintained by DTO Management
or, if required by law, at the registered office of the Company. Each Member or
its designated representatives shall, upon reasonable notice to DTO Management,
have access to such financial books, records and documents during reasonable
business hours and may inspect and make copies of any of them.
SECTION 9.3. Bank Accounts and Investment of Funds
(a) DTO 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 DTO
Management may from time to time designate.
(b) Any funds of the Company which DTO 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 DTO Management in its sole discretion.
SECTION 9.4. Fiscal Year. The Fiscal Year and accounting period of the
Company shall end on September 30 of each year.
SECTION 9.5. Accounting Reports. As soon as reasonably practicable after
the end of each fiscal year but in no event later than 120 days after the end
thereof, each Member shall be furnished an annual accounting showing the
financial condition of the Company at the end of such fiscal year and the result
of its operations for the fiscal year then ended, which annual accounting shall
be prepared on an accrual basis in accordance with generally accepted accounting
principles applied on a consistent basis and shall be delivered to each of the
Members promptly after it has been prepared. It shall include a balance sheet as
of the end of such Fiscal Year and statements of income and expense, each
Member's equity, and cash flow for such Fiscal Year.
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The Company shall be audited on an annual basis by a firm of independent
certified public accountants engaged by DTO 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.
Following the opening of the Hospital, DTO Management shall also cause to be
prepared and distributed to the Members quarterly financial statements following
DTO Management's public announcement of its results for such quarter in a form
and containing such information as reasonably determined by DTO Management.
SECTION 9.6. Tax Returns. DTO 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 Members for income tax purposes.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS
SECTION 10.1. Meetings.
(a) Meetings of the Members of the Company for any purpose may be
called by DTO 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 Dayton, Ohio area.
(b) A notice of any such meeting shall be given by mail, not less than
fifteen (15) days nor more than sixty (60) days before the date of the
meeting, to each Member at its address as specified in Section 12.7. Such
notice shall be in writing, and shall state the place, date and hour of the
meeting, and shall indicate that it is being issued at or by the direction
of DTO 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.
(c) Each Member may authorize any Person or Persons to act for the
Member by proxy in all matters in which a Member is entitled to
participate, whether by waiving
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notice of any meeting, or voting or participating at a meeting. Every proxy
must be signed by the Member or its attorney-in-fact. No proxy shall be
valid after the expiration of eleven months from the date thereof unless
otherwise provided in the proxy. Every proxy shall be revocable at the
pleasure of the Member executing it.
SECTION 10.2. Voting Rights of Members.
(a) Each Member shall take no part in or interfere in any manner with
the control, conduct or operation of the Company, and shall have no right
or authority to act for or bind the Company except as provided herein.
Votes or decisions, to the extent taken or to be made, of the Members may
be cast at any duly called meeting of the Company or in writing within ten
(10) days after written request therefor. Each Member shall be entitled to
the number of votes equal to the percentage Membership Interest of such
Member.
(b) No Member shall have the right or power to vote to: (i) withdraw
or reduce the Member's Capital Contributions except as a result of the
dissolution and liquidation of the Company or as otherwise provided by law
or this Agreement; (ii) bring an action for partition against the Company;
(iii) cause the termination and dissolution of the Company by court decree
or otherwise, except as set forth in this Agreement; or (iv) demand or
receive property other than cash in return for its Capital Contributions.
ARTICLE XI
AMENDMENTS
SECTION 11.1. Authority to Amend by Managers. Except as otherwise provided
by Section 11.2, this Agreement and the Articles of Organization of the Company
may be amended by DTO Management with the approval of the Investor Manager which
approval shall not be unreasonably withheld or delayed:
(a) To admit additional Members or Substitute Members but only in
accordance with and if permitted by the other terms of this Agreement;
(b) To preserve the legal status of the Company as a limited liability
company under the Act or other applicable state or federal laws if such
does not change the substance hereof, and the Company has obtained the
written opinion of its counsel to that effect;
(c) To cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, to
clarify any provision of this Agreement, or to make any other provisions
with respect to matters or questions arising
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under this Agreement which will not be inconsistent with the provisions of
this Agreement;
(d) To satisfy the requirements of the Code and Regulations with
respect to limited liability companies or of any federal or state
securities laws or regulations, provided such amendment does not adversely
affect the Membership Interests of Members and is necessary or appropriate
in the written opinion of counsel and any amendment under this subsection
(d) shall be effective as of the date of this Agreement;
(e) To the extent that it can do so without materially reducing the
economic return on investment in the Company to any Member, to satisfy any
requirements of federal or state legislation or regulations, court order,
or action of any governmental administrative agency with respect the
operation or ownership of the Hospital;
(f) Subject to the terms of Section 2.5, to extend the term of the
Company; and
(g) Upon written notice to all Members, DTO 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 DTO Management or its designee, the president or
chief executive officer of the Hospital who shall be designated by DTO
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 DTO
Management. DTO Management may delegate to such governing body such duties
and responsibilities of DTO Management as DTO 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 DTO Management shall continue to have the right to make
decisions with respect to matters which are reserved for DTO Management at
the time the number of Managers is so expanded.
SECTION 11.2. Restrictions on Managers' Amendments: Amendments by
Investor Members. Except as provided in Section 11.1, amendments to this
Agreement shall be made only upon the consent of DTO Management and with a
Majority Vote of Investor Members. Except as set forth in this Section
11.2, no amendment shall be made pursuant to Section 11.1 which would
materially and adversely affect the federal income tax treatment to be
afforded each Member, materially and adversely affect the Membership
Interests and liabilities of each Member as provided herein, materially
change the purposes of the Company, extend or otherwise modify the term of
the Company, or materially change the method of allocations and
distributions as provided in Article VI and Article VII.
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SECTION 11.3. Amendments to Certificates. In making any amendments to this
Agreement, there shall be prepared, executed and filed for recording by DTO
Management such documents amending the Articles of Organization as required
under the Act.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1. Limited Power of Attorney. Upon the execution hereof, each
Member hereby irrevocably constitutes and appoints DTO Management as its true
and lawful attorney in the Member=s name and on the Member's behalf to take and
perform at any time all such action which DTO Management is expressly authorized
to perform under this Agreement, administrative actions which a Member is
expressly required to perform under this Agreement, or actions required or
reasonably necessary following the breach of this Agreement by a Member provided
said breach remains uncured for a continuous period of fifteen (15) days after
written notice by DTO Management to the breaching Member.
SECTION 12.2. Waiver of Provisions. The waiver of compliance at any time
with respect to any of the provisions, terms or conditions of this Agreement
shall not be considered a waiver of such provision, term or condition itself or
of any of the other provisions, terms or conditions hereof.
SECTION 12.3. Interpretation and Construction. This Agreement contains the
entire agreement among the Members and any modification or amendment hereto must
be accomplished in accordance with the provisions of Article XI and Article XII.
Where the context so requires, the masculine shall include the feminine and the
neuter, and the singular shall include the plural. The headings and captions in
this Agreement are inserted for convenience and identification only and are in
no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.
SECTION 12.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina, exclusive
of its conflict of law rules.
SECTION 12.5. Partial Invalidity. In the event that any part or provision
of this Agreement shall be determined to be invalid or unenforceable, the
remaining parts and provisions of said Agreement which can be separated from the
invalid or unenforceable provision and shall continue in full force and effect.
SECTION 12.6. Binding on Successors. The terms, conditions and provisions
of this Agreement shall inure to the benefit of, and be binding upon the parties
hereto and their respective heirs, successors, distributees, legal
representatives, and assigns. However, none of the
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<PAGE>
provisions of this Agreement shall be for the benefit of or enforceable by any
creditors of the Company.
SECTION 12.7. Notices and Delivery.
(a) To Members. Any notice to be given hereunder at any time to any
Member or any document reports or returns required by this Agreement to be
delivered to any Member, may be delivered personally or mailed to such
Member, postage prepaid, addressed to the Member at such times as the
Member shall by notice to the Company have designated as the Member=s
address for the mailing of all notices hereunder or, in the absence of such
notice, to the address set forth in Article IV hereof. Any notice, or any
document, report or return so delivered or mailed shall be deemed to have
been given or delivered to such Member at the time it is mailed, as the
case may be.
(b) To the Company. Any notice to be given to the Company hereunder
shall be delivered personally or mailed to the Company, by certified mail,
postage prepaid, addressed to the Company at its registered office. Any
notice so delivered or mailed shall be deemed to have been given to the
Company at the time it is delivered or mailed, as the case may be.
SECTION 12.8. Counterpart Execution; Facsimile Execution. This Agreement
may be executed in any number of counterparts with the same effect as if all of
the Members had signed the same document. Such executions may be transmitted to
the Company and/or the other Members by facsimile and such facsimile execution
shall have the full force and effect of an original signature. All fully
executed counterparts, whether original executions or facsimile executions or a
combination, shall be construed together and constitute one and the same
agreement.
SECTION 12.9. Statutory Provisions. Any statutory reference in this
Agreement shall include a reference to any successor to such statute and/or
revision thereof.
SECTION 12.10. Waiver of Partition. Each party does hereby waive any right
to partition or the right to take any other action which might otherwise be
available to such party for the purpose of severing its relationship with the
Company or such party's interest in the assets held by the Company from the
interests of other Members until the end of the term of both this Company and
any successor company formed pursuant to the terms hereof.
SECTION 12.11. Change In Law. If due to any new law, rule or regulation, or
due to an interpretation or enforcement of any existing law, rule or regulation,
health care counsel reasonably selected by DTO 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
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<PAGE>
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 DTO 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 DTO
Management shall have the option, within the following forty-five (45) day
period, to purchase the Membership Interests of some or all of the Investor
Members whose ownership is involved with such noncompliance with Applicable Law
for a purchase price equal to the greater of: (a) the Formula Purchase Price or
(b) the amount of the Capital Contributions made by each such Member to the
Company together with interest thereon computed at the Prime Rate as of the date
of this Agreement from the date of such contribution through the date upon which
DTO Management pays all amounts due under the terms of this Section 12.11. For
these purposes, distributions to the Members by the Company after the effective
date of this Agreement (and whether before or after health care counsel
determined there was a problem under an Applicable Law or before or after the
exercise of the purchase option) shall be treated as payments by DTO Management.
Such purchase price shall be paid in accordance with the Payment Method. Third,
in the event that DTO 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.
SECTION 12.12. Investment Representations of the Members.
(a) Each Member or individual executing this Agreement on behalf of an
Entity which is a Member hereby represents and warrants to the Company and
to the Members that such Member has acquired such Member's Membership
Interest in the Company for investment solely for such Member's own account
with the intention of holding such Membership Interest for investment,
without any intention of participating directly or indirectly in any
distribution of any portion of such Membership Interest, including an
Economic Interest, and without the financial participation of any other
Person in acquiring such Membership Interest in the Company.
(b) Each Member or individual executing this Agreement on behalf of an
entity which is a Member hereby acknowledges that such Member is aware that
such Member's Membership Interest in the Company has not been registered
(i) under the Securities Act of 1933, as amended (the "Federal Act"), (ii)
under applicable Ohio securities laws, or (iii) under any other state
securities laws. Each Member or individual executing this Agreement on
behalf of an Entity which is a Member further understands and acknowledges
that his representations and warranties contained in this Section are being
relied upon by the Company and by the Members as the basis for the
exemption of the Members' Membership Interest in the Company from the
registration requirements of the Federal Act and from the registration
requirements of applicable Ohio securities laws and
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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 this Agreement to be examined
by such Member's representative or attorney. Each Member or individual
executing this Agreement on behalf of an Entity which is a Member hereby
further acknowledges that such Member or such Member's representative or
attorney is familiar with this Agreement and with the Company's business
plans. Each Member or individual executing this Agreement on behalf of an
Entity which is a Member acknowledges that such Member or such Member's
representative or attorney has made such inquiries and requested, received,
and reviewed any additional documents necessary for such Member to make an
informed investment decision and that such Member does not desire any
further information or data relating to the Company or to the Members. Each
Member or individual executing this Agreement on behalf of an Entity which
is a Member hereby acknowledges that such Member understands that the
purchase of such Member's Membership Interest in the Company is a
speculative investment involving a high degree of risk and hereby
represents that such Member has a net worth sufficient to bear the economic
risk of such Member's investment in the Company and to justify such
Member's investing in a highly speculative venture of this type.
SECTION 12.13. Decisions by Investor Manager. Each of the Investor Members
hereby authorize the Investor Manager to make the decisions to be made by the
Investor Manager hereunder and hereby release and hold harmless the Investor
Manager from any and all claims, liabilities, losses or damages which any of
them may have now or in the future resulting from any decision made by the
Investor Manager hereunder unless due to the gross negligence or willful
misconduct of the Investor Manager.
SECTION 12.14. Referrals to Hospital and Ownership of Shares of Common
Stock of MedCath Incorporated. Each Investor Member agrees that if in the
reasonable opinion of health care counsel to DTO Management, referrals of
patients to the Hospital by the Investor Member or ownership of shares of common
stock in MedCath Incorporated by the Investor Member would cause or constitute a
violation of any federal or state law, rule or regulation, then, as applicable,
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(a) the Investor Member shall not refer patients to the Hospital; or
(b) the Investor Member shall not acquire, nor continue to own any of
shares of common stock of MedCath Incorporated.
SECTION 12.15. Exhibits. The Exhibits to this Agreement, each of which is
incorporated by reference, are:
EXHIBIT A: Information Exhibit.
EXHIBIT B: Glossary of Terms.
EXHIBIT C: Development Budget Exhibit.
EXHIBIT D: Regulatory Allocations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s), to be effective as of the date described in Article
II.
[EXECUTIONS APPEAR ON THE FOLLOWING PAGE(S)]
38
<PAGE>
EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
MANAGER:
DTO MANAGEMENT, INC.
By: /s/ Charles W. Johnson
----------------------------------------
Title: Vice President
-----------------------------------------
MEMBERS:
DTO MANAGEMENT, INC.
By: /s/ Charles W. Johnson
----------------------------------------
Title: Vice President
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
<PAGE>
For the purpose of acknowledging and agreeing to be bound by the terms of
Section 5.9, 8.4 and 8.9 hereof, the undersigned Affiliates of the Members other
than DTO Management hereby execute this Operating Agreement.
-----------------------------------------
By:
-----------------------------------------
Title:
-----------------------------------------
-----------------------------------------
By:
-----------------------------------------
Title:
-----------------------------------------
-----------------------------------------
Signature
[Name of physician and address]
-----------------------------------------
Signature
[Name of physician and address]
-----------------------------------------
Signature
[Name of physician and address]
<PAGE>
EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
<TABLE>
INFORMATION EXHIBIT
<CAPTION>
Maximum
Mandatory
Additional
Initial Capital Capital Percentage
Name, Address & TIN Contribution Contributions Membership Interest
- ------------------- ------------ ------------- -------------------
<S> <C> <C>
DTO Management, Inc. $1,530,000 $3,060,000 __%
7621 Little Avenue, Suite 106
Charlotte, NC 28226
(56-________________)
$ $ __%
- ----------------------------- ---------------- ----------------
$ $ __%
- ----------------------------- ---------------- ----------------
$ $ __%
- ----------------------------- ---------------- ----------------
$ $ __%
- ----------------------------- ---------------- ----------------
$ $ __%
- ----------------------------- ---------------- ----------------
</TABLE>
<PAGE>
EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
GLOSSARY OF TERMS
As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).
"Act" means the North Carolina Limited Liability Company Act, as in effect
in North Carolina and set forth at N.C. Gen. Stat.ss" 57C-1-01 through 57C-10-07
(or any corresponding provisions of succeeding law).
"Adjusted Capital Account" means, with respect to any Member or Economic
Interest Owner, such Person's Capital Account (as defined below) as of the end
of the relevant Fiscal Year increased by any amounts which such Person is
obligated to restore, or is deemed to be obligated to restore pursuant to the
next to last sentences of Regulations Section 1.704-2(g)(1) (share of minimum
gain) and Regulations Section 1.704-2(i)(5) (share of member nonrecourse debt
minimum gain) and decreased by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
"Affiliate" means with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) Entity or holder of
ten percent (10%) or more of the outstanding voting securities or of an equity
interest of any Entity, controlling, controlled by, or under common control with
such Person.
"Agreed Value" means with respect to any noncash asset of the Company an
amount determined and adjusted in accordance with the following provisions:
(a) The initial Agreed Value of any noncash asset contributed to the
capital of the Company by any Member shall be its gross fair market value, as
agreed to by the contributing Member and the Company.
(b) The initial Agreed Value of any noncash asset acquired by the Company
other than by contribution by a Member shall be its adjusted basis for federal
income tax purposes.
(c) The initial Agreed Values of all the Company's noncash assets,
regardless of how those assets were acquired, shall be reduced by depreciation
or amortization, as the case may be, determined in accordance with the rules set
forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
<PAGE>
(d) The Agreed Values, as reduced by depreciation or amortization, of all
noncash assets of the Company, regardless of how those assets were acquired,
shall be adjusted from time to time to equal their gross fair market values, as
agreed to by the Members in writing, as of the following times:
(i) the acquisition of a Membership Interest or an additional Membership
Interest in the Company by any new or existing Member in exchange for
more than a de minimis Capital Contribution;
(ii) the distribution by the Company of more than a de minimis amount of
money or other property as consideration for all or part of a
Membership Interest in the Company; and
(iii) the termination of the Company for federal income tax purposes
pursuant to Code Section 708(b)(1)(B).
If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company's assets, it shall be deemed that the fair market values of all
the Company's assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be made
as a result of such event.
"Agreement" means this Operating Agreement, as amended from time to time.
"Articles of Organization" means the Articles of Organization of the
Company, as filed with the Secretary of State of North Carolina as the same may
be amended from time to time.
"Capital Account" means 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.
B-2
<PAGE>
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 DTO 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, DTO
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 DTO
Management shall determine such adjustments are necessary or appropriate to
comply with Regulations Section 1.704-1(b)(2)(iv), DTO 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. DTO 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.
"Capital Contribution" means with respect to any Member, the amount of
money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.
"Cash Distributions" means net cash distributed to Members resulting from
Cash Flow from Operations or Cash from Sales or Refinancing, but shall not
include cash payments made to DTO Management as its Management Fee for services
or any amount in repayment of loans made by the Members to the Company.
"Cash Flow from Operations" means net cash funds provided from operations,
exclusive of Cash from Sales or Refinancing, of the Company or investment of any
Company funds, without deduction for depreciation, but after deducting cash
funds used to pay or establish a reserve for expenses, debt payments, capital
improvements, and replacements and for such other items as DTO Management
reasonably determines to be necessary or appropriate; provided, without the
consent of the Investor Manager, DTO Management shall not use such net cash
funds for the early repayment of Company debt.
"Cash from Sales or Refinancing" means 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 DTO Management in its sole and absolute discretion toward the payment
of any indebtedness and other obligations of the Company then due and payable,
including payments of principal and interest on mortgages, (iii) the payment of
any other expenses or amounts owed by the Company to other parties to the extent
then due and payable, and (iv) the establishment of any reserves deemed
necessary by DTO Management in its
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<PAGE>
sole and absolute discretion. If the proceeds of any sale or refinancing are
paid in more than one installment, each such installment shall be treated as a
separate Sale or Refinancing for the purposes of this definition.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time. Any reference herein to a specific section(s) of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"Company" means and shall refer to Heart Hospital of DTO, LLC, which was
created upon the filing of the Articles of Organization with the Office of the
Secretary of State of North Carolina, to be operated under the name Heart
Hospital of DTO, LLC, a North Carolina limited liability company, and to
continue under this Agreement, as amended from time to time.
"Default Rate" means a per annum rate of return on a specified principal
sum, compounded monthly, equal to the greater of (a) the Prime Rate plus 500
basis points, or (b) 18%, but in no event greater than the highest rate allowed
by law.
"DTO Management" means and shall refer to DTO Management, Inc., which shall
serve as a Manager of the Company.
"Economic Interest" means and shall refer to that portion of the Membership
Interest of a Member in the economic rights and benefits of the Company,
including but not limited to all Profits, Losses and Cash Distributions. Such an
Economic Interest will be measured by an amount equal to the Member's percentage
Membership Interest in the Company as the same may be adjusted from time to
time.
"Economic Interest Owner" means 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.
"Effective Date" means the date on which the Company's Articles of
Organization were filed with the Secretary of State of North Carolina in
accordance with the Act.
"Entity" means any general partnership, limited partnership, limited
liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
"Equipment" means the appropriate equipment and supplies required from time
to time in connection with the development and operation of the Hospital.
"Fiscal Year" means, 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
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<PAGE>
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.
"Hospital" means an acute care hospital specializing in all aspects of
cardiology and cardiovascular care and surgery in Dayton, Ohio, as further
described in Section 2.3 of the Agreement.
"Investor Manager" means an individual elected by Investor Members in
accordance with Section 5.13 who shall serve as a Manager of the Company.
"Investor Members" means the Members other than DTO Management and its
Affiliates listed on the Information Exhibit attached hereto.
"Majority Vote of Investor Members" means and shall refer to the
affirmative vote, approval or consent of Investor Members holding a majority of
the percentage Membership Interests held by the Investor Members in the
aggregate.
"Manager" or "Managers" means and 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 DTO 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.
"Management Fee" means the amounts payable to DTO Management pursuant to
Section 5.6(b)(ii) for services rendered in managing the operations of the
Company.
"Material Agreement" means any binding agreement which may not be canceled
upon less than ninety (90) days notice and which calls for the expenditure of
funds, or involves an obligation for financing, in excess of $100,000 exclusive
of agreements or obligations contemplated by any budget, development plan,
financing or construction contract approved by the Managers or agreements
incurred in the ordinary course of business such as employment agreements,
purchases of supplies and routine services and the like. Upon ten (10) days
advance written notice to DTO Management, the Investor Manager may notify DTO
Management that the threshold amount for purposes of this definition of Material
Agreement shall be reduced from $100,000 to $75,000. The reduced threshold
amount shall not apply to expenditures or contracts which were already approved,
under negotiation, or completed by DTO Management as Manager as of the date of
said notice.
"Material Decision" means 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 if requested by the Investor Manager in the future, the
purchase by the Company of goods and services from DTO Management other than for
repayment of loans, amounts set forth in an approved budget, reimbursement for
personnel who work full time at the Hospital, those
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<PAGE>
expenditures governed by Sections 5.6(b), or expenditures pursuant to Section
5.15 which do not exceed $25,000 in the aggregate.
"Member" means and shall refer to the organizers of the Company (unless or
until any such organizer has withdrawn) and each of the Persons identified as
"Members" in the then applying Information Exhibit attached hereto and
incorporated herein by this reference. If a Person is already a Member
immediately prior to the purchase or other acquisition by such Person of an
Economic Interest or Membership Interest, such Person shall have all the rights
of a Member with respect to such purchased or otherwise acquired Membership
Interest or Economic Interest, as the case may be.
"Membership Interest" means all of a Member's rights in the Company,
including without limitation the Member's share of Profits, Losses, Cash
Distributions and other benefits of the Company, any right to vote, any right to
participate in the management of the business and affairs of the Company,
including the right to vote on, consent to, or otherwise participate in any
decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the
Information Exhibit. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.
"Organization Expenses" means those expenses incurred, either by the
Company, on behalf of 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.
"Person" means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.
"Prime Rate" means the rate of interest as of the relevant day or time
period as announced by the First Union National Bank, N.A. or its successor in
interest from time to time as its prime or reference rate.
"Profits and Losses" means, 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;
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<PAGE>
(c) Gain or loss resulting from dispositions of Company assets shall be
computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.
"Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.
"Regulations" means rules, orders, and regulations issued pursuant to or
under the authority of the Code and shall include revisions to and succeeding
provisions as appropriate.
"Regulatory Allocations" means those allocations of items of Company
income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit
and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the
safe-harbor rules for allocations attributable to nonrecourse liabilities
prescribed in Regulations Section 1.704-2.
"Sale" means the sale, exchange, involuntary conversion (other than a
casualty followed by reconstruction), condemnation, or other disposition of
property by the Company, except for dispositions of inventory items and personal
property in the ordinary course of business and in connection with the
replacement of such property.
"Substitute Manager" means a Manager who succeeds either DTO Management or
the Investor Manager with all of the specific rights and powers of such Manager
under this Agreement.
"Substitute Member" means an assignee of a Member who has been admitted to
the Company and granted all the rights of a Member in place of its assignor
pursuant to the provisions of this Agreement. A Substitute Member, upon its
admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Member from whom it acquired its interest in the Company, to
the extent of the Economic Interest assigned.
"Supermajority Vote of the Members" means and shall refer to the
affirmative vote, approval or consent of Members holding sixty-seven percent
(67%) of the percentage Membership Interests held by the Members in the
aggregate.
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<PAGE>
EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
DEVELOPMENT BUDGET EXHIBIT
[SEE ATTACHMENT]
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<PAGE>
EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
a North Carolina limited liability company
REGULATORY ALLOCATIONS
This Exhibit contains special rules for the allocation of items of Company
income, gain, loss and deduction that override the basic allocations of Profits
and Losses in the Agreement to the extent necessary to cause the overall
allocations of items of Company income, gain, loss and deduction to have
substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall
be interpreted in light of that purpose. Subsection (a) below contains special
technical definitions. Subsections (b) through (h) contain the Regulatory
Allocations themselves. Subsections (i), (j) and (k) are special rules
applicable in applying the Regulatory Allocations.
(a) Definitions Applicable to Regulatory Allocations. For purposes of the
Agreement, the following terms shall have the meanings indicated:
(i) "Company Minimum Gain" means the same as 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 DTO Management.
(ii) "Member Nonrecourse Deductions" means 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" means the minimum gain
attributable to Member Nonrecourse Debt as determined pursuant to
<PAGE>
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 DTO Management.
(v) "Nonrecourse Deductions" means 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" means 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
D-2
<PAGE>
intended to comply with the minimum gain chargeback requirement in Regulations
Section 1.704-2(f) and shall be interpreted consistently therewith.
(e) Member Nonrecourse Debt Minimum Gain Chargeback. If there is a net
decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of
the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
(f) Qualified Income Offset. In the event any Member unexpectedly receives
any adjustments, allocations, or distributions described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, any deficit in such Member's Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible.
(g) Gross Income Allocation. In the event any Member has a deficit in its
Adjusted Capital Account at the end of any Fiscal Year, each such Member shall
be allocated items of Company gross income and gain, in the amount of such
Adjusted Capital Account deficit, as quickly as possible.
(h) Curative Allocations. When allocating Profits and Losses under Article
VI, such allocations shall be made so as to offset any prior allocations of
gross income under Paragraph (g) above to the greatest extent possible so that
overall allocations of Profits and Losses shall be made as if no such
allocations of gross income occurred.
(i) Ordering. The allocations in this Exhibit to the extent they apply
shall be made before the allocations of Profits and Losses under Article VI and
in the order in which they appear above.
(j) Waiver of Minimum Gain Chargeback Provisions. If DTO Management
determines that (i) either of the two minimum gain chargeback provisions
contained in this Exhibit would cause a distortion in the economic arrangement
among the Members, (ii) it is not expected that the Company will have sufficient
other items of income and gain to correct that distortion, and (iii) the Members
have made Capital Contributions or received net income allocations that have
restored any previous Nonrecourse Deductions or Member Nonrecourse Deductions,
then DTO 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
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<PAGE>
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. DTO Management shall promptly copy all Members on all correspondence to
and from the Internal Revenue Service concerning the requested waiver.
(k) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis), and such gain or loss shall be specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
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<PAGE>
================================================================================
CREDIT AGREEMENT
dated as of July 28, 1997
by and among
MEDCATH INCORPORATED,
as Borrower,
the Lenders referred to herein,
and
NATIONSBANK, N.A.
as Agent
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS......................................1
SECTION 1.1 Definitions.........................................1
SECTION 1.2 General............................................14
SECTION 1.3 Other Definitions and Provisions...................15
ARTICLE II
REVOLVING CREDIT FACILITY.......................15
SECTION 2.1 Commitment.........................................15
SECTION 2.2 Procedure for Advances of Loans....................15
SECTION 2.3 Repayment of Loans.................................16
Section 2.4 Notes..............................................17
SECTION 2.5 Permanent Reduction of the Aggregate Commitment....17
SECTION 2.6 Termination of Credit Facility.....................17
SECTION 2.7 Use of Proceeds....................................17
ARTICLE IIA
LETTER OF CREDIT FACILITY........................18
SECTION 2A.1 Commitment........................................18
SECTION 2A.2 Procedure for Issuance of Letters of Credit.......18
SECTION 2A.3 Commissions and Other Charges.....................19
SECTION 2A.4 L/C Participations................................19
SECTION 2A.5 Reimbursement Obligation of the Borrower..........20
SECTION 2A.6 Obligations Absolute..............................20
SECTION 2A.7 Effect of Application..............................21
ARTICLE III
GENERAL LOAN PROVISIONS.........................21
SECTION 3.1 Interest...........................................21
SECTION 3.2 Notice and Manner of Conversion or
Continuation of Loans.......................................22
SECTION 3.3 Unused Fee.........................................22
SECTION 3.4 Payment............................................23
SECTION 3.5 Right of Set-off; Adjustments......................23
SECTION 3.6 Nature of Obligations of Lenders Regarding
Extensions of Credits; Assumption by the Agent..............24
SECTION 3.7 Indemnity..........................................25
SECTION 3.8 Increased Cost and Reduced Return..................25
SECTION 3.9 Limitation on Types of Loans.......................27
SECTION 3.10 Illegality.........................................27
SECTION 3.11 Treatment of Affected Loans........................28
SECTION 3.12 Compensation.......................................28
SECTION 3.13 Taxes..............................................28
<PAGE>
SECTION 3.14 Replacement of Lenders.............................30
ARTICLE IV
CLOSING; CONDITIONS OF CLOSING AND BORROWINGS............31
SECTION 4.1 Closing............................................31
SECTION 4.2 Conditions to Closing and Initial
Extension of Credit.........................................31
SECTION 4.3 Conditions to All Loans............................34
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
SECTION 5.1 Representations and Warranties.....................34
SECTION 5.2 Survival of Representations and Warranties, Etc....41
ARTICLE VI
FINANCIAL INFORMATION AND NOTICES........................41
SECTION 6.1 Financial Statements and Projections...............41
SECTION 6.2 Officer's Compliance Certificate...................42
SECTION 6.3 Accountants' Certificate...........................42
SECTION 6.4 Other Reports......................................42
SECTION 6.5 Notice of Litigation and Other Matters.............43
SECTION 6.6 Accuracy of Information............................44
ARTICLE VII
AFFIRMATIVE COVENANTS.....................................44
SECTION 7.1 Preservation of Corporate Existence and
Related Matters.............................................44
SECTION 7.2 Maintenance of Property............................44
SECTION 7.3 Insurance..........................................44
SECTION 7.4 Accounting Methods and Financial Records...........44
SECTION 7.5 Payment and Performance of Obligations.............45
SECTION 7.6 Compliance With Laws and Approvals.................45
SECTION 7.7 Environmental Laws.................................45
SECTION 7.8 Compliance with ERISA..............................45
SECTION 7.9 Compliance With Agreements.........................46
SECTION 7.10 Conduce of Business................................46
SECTION 7.11 Visits and Inspections..............................46
SECTION 7.12 Additional Subsidiaries............................46
SECTION 7.13 Further Assurances.................................46
ARTICLE VIII
FINANCIAL COVENANTS.........................................47
SECTION 8.1 Current Ratio......................................47
SECTION 8.2 Debt to Capitalization Ratio.......................47
SECTION 8.3 Leverage Ratio.....................................47
SECTION 8.4 Fixed Charge Ratio.................................47
<PAGE>
SECTION 8.5 Consolidated Net Worth.............................47
ARTICLE IX
NEGATIVE COVENANTS.....................................47
SECTION 9.1 Limitations on Debt................................47
SECTION 9.2 Limitations on Contingent Obligations..............48
SECTION 9.3 Limitations on Liens...............................48
SECTION 9.4 Limitations on Loans, Advances and investments.....49
SECTION 9.5 Limitations on Mergers and Liquidation.............50
SECTION 9.6 Limitations on Sale of Assets......................50
SECTION 9.7 Limitations on Dividends and Distributions.........51
SECTION 9.8 Prohibited Transactions............................51
SECTION 9.9 Certain Accounting Changes.........................51
SECTION 9.10 Amendments; Payments and Prepayments of
Subordinated Debt...........................................51
SECTION 9.11 Restrictive Agreements.............................51
SECTION 9.12 Subsidiaries......................................51
ARTICLE X
DEFAULT AND REMEDIES...............................52
SECTION 10.1 Events of Default..................................52
SECTION 10.2 Remedies...........................................54
SECTION 10.3 Rights and Remedies Cumulative; Non-Waiver; etc....55
ARTICLE XI
THE AGENT...........................................55
SECTION 11.1 Appointment, Powers, and immunities................55
SECTION 11.2 Reliance by Agent..................................56
SECTION 11.3 Defaults...........................................56
SECTION 11.4 Rights as Lender...................................56
SECTION 11.5 Indemnification....................................57
SECTION 11.6 Non-Reliance on Agent and Other Lenders............57
SECTION 11.7 Resignation of Agent...............................57
ARTICLE XII
MISCELLANEOUS........................................58
SECTION 12.1 Notices............................................58
SECTION 12.2 Expenses; Indemnity................................60
SECTION 12.3 Set-off............................................60
SECTION 12.4 Governing Law......................................61
SECTION 12.5 Consent to Jurisdiction............................61
SECTION 12.6 Waiver of Jury Trial...............................61
SECTION 12.7 Mandatory Arbitration..............................61
SECTION 12.8 Reversal of Payments...............................62
SECTION 12.9 Injunctive Relief; Punitive Damages................63
<PAGE>
SECTION 12.10 Accounting Matters.................................63
SECTION 12.11 Assignments and Participations.....................63
SECTION 12.12 Confidentiality....................................65
SECTION 12.13 Amendments and Waivers.............................65
SECTION 12.14 Performance of Duties..............................66
SECTION 12.15 All Powers Coupled with Interest...................66
SECTION 12.16 Survival of Indemnities............................66
SECTION 12.17 Titles and Captions................................66
SECTION 12.18 Severability of Provisions.........................66
SECTION 12.19 Counterparts.......................................66
SECTION 12.20 Term of Agreement..................................66
<PAGE>
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Notice of Prepayment
Exhibit D - Form of Notice of Conversion/Continuation
Exhibit E - Form of Officer's Compliance Certificate
Exhibit F - Form of Assignment and Acceptance
Exhibit G - Borrowing Base Certificate
Exhibit H - Guaranty Agreement
SCHEDULES
Schedule 1 - Lenders and Commitments
Schedule 5.1(b) - Subsidiaries and Capitalization
Schedule 5.1(i) - ERISA Plans
Schedule 5.1(s) - Debt and Contingent Obligations
Schedule 5.1(t) - Litigation
Schedule 9.3 - Existing Liens
Schedule 9.8 - Prohibited Transactions
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of the 28th day of July, 1997, by and among
MEDCATH INCORPORATED, a corporation organized under the laws of North Carolina
(the "Borrower"), the Lenders who are or may become a party to this Agreement,
and NATIONSBANK, N.A., as administrative and collateral agent for the Lenders
(the "Agent").
STATEMENT OF PURPOSE
The Borrower has requested, and the Lenders have agreed, to extend certain
credit facilities to the Borrower on the terms and conditions of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, such parties
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following terms when used in this Agreement
shall have the meanings assigned to them below:
"Account Debtor" means any Person who is or may become obligated to the
Borrower under, with respect to, or on account of, an Account.
"Accounts" means all "accounts" (as defined in the UCC) now or hereafter
owned or acquired by the Borrower or in which the Borrower now or hereafter has
or acquires any right or interest, and, in any event, shall also include,
without limitation, all accounts receivable, contract rights, notes, drafts and
other obligations or indebtedness owing to the Borrower arising from the
performance of services by it, or to be performed, and all of the Borrower's
rights to any goods, services or other property represented by any of the
foregoing and all monies due to or to become due to the Borrower under all
contracts for the sale of goods or other property or the performance of services
by it (whether or not yet earned by performance on the part of the Borrower), in
each case whether now in existence or hereafter arising or acquired, including,
without limitation, the right to receive the proceeds of such contracts and all
collateral security and guarantees of any kind given by any Person with respect
to any of the foregoing.
"Adjusted Eurodollar Rate" means, for any Interest Period, the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by
the Agent to be equal to the quotient obtained by dividing (a) the Eurodollar
Rate for such Interest Period by (b) 1 minus the Reserve Requirement for such
Interest Period.
"Affiliate" means, with respect to any Person, any other Person (other than
a Subsidiary) which directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is
<PAGE>
under common control with, such first Person or any of its Subsidiaries. The
term "control" means (a) the power to vote fifty percent (50%) or more of the
securities or other equity interests of a Person having ordinary voting power,
or (b) the possession, directly or indirectly, of any other power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise, exclusive in all
events of medical practices or health care facilities managed by the Borrower or
its Subsidiaries.
"Agent" means NationsBank in its capacity as Agent hereunder, and any
successor thereto appointed pursuant to Section 11.7.
"Agent's Office" means the office of the Agent specified in or determined
in accordance with the provisions of Section 12.1.
"Aggregate Commitment" means the aggregate amount of the Lenders'
Commitments hereunder, as such amount may be reduced or modified at any time or
from time to time pursuant to the terms hereof. On the Closing Date, the
Aggregate Commitment shall be Twenty Million Dollars ($20,000,000).
"Agreement" means this Credit Agreement, as amended or modified from time
to time.
"Applicable Law" means all applicable provisions of constitutions,
statutes, laws, rules, treaties, regulations and orders of all Governmental
Authorities and all orders and decrees of all courts and arbitrators.
"Applicable Lending Office" means, for each Lender and for each Type of
Loan, the "Lending Office" of such Lender (or of an affiliate of such Lender)
designated for such Type of Loan on the signature pages hereof or such other
office of such Lender (or an affiliate of such Lender) as such Lender may from
time to time specify to the Agent and the Borrower by written notice in
accordance with the terms hereof as the office by which its Loans of such Type
are to be made and maintained.
"Application" means an application, in the form specified by the Issuing
Lender from time to time, requesting the Issuing Lender to issue a Letter of
Credit.
"Assignment and Acceptance" shall have the meaning assigned thereto in
Section 12.10.
"Available Commitment" means, as to any Lender at any time, an amount equal
to the excess, if any, of (a) such Lender's Commitment over (b) such Lender's
Extensions of Credit.
"Base Rate" means, for any day, the rate per annum equal to the higher of
(a) the Federal Funds Rate for such day plus one-half of one percent (.5%) and
(b) the Prime Rate for such day. Any change in the Base Rate due to a change in
the Prime Rate or the Federal Funds Rate shall be effective on the effective
date of such change in the Prime Rate or Federal Funds Rate.
"Base Rate Loan" means any Loan bearing interest at a rate based upon the
Base Rate as provided in Section 3.1(a).
"Borrower" means MedCath Incorporated, in its capacity as borrower
hereunder.
<PAGE>
"Borrowing Base" means an amount equal to the sum of (i) 80% of the face
amount of all Eligible Accounts plus (ii) 100% of all Eligible Advances to
Affiliates (provided that the maximum advance against Eligible Advances to
Affiliates shall not exceed 25% of the total Borrowing Base) plus (iii) provided
the Leverage Ratio is less than 3.0 to 1.0, an overadvance (the "Overadvance")
of $5,000,000.
"Borrowing Base Certificate" shall have the meaning assigned thereto in
Section 6.4.
"Business Day" means (a) for all purposes other than as set forth in clause
(b) below, any day other than a Saturday, Sunday or legal holiday on which banks
in Charlotte, North Carolina and New York, New York, are open for the conduct of
their commercial banking business, and (b) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
any Eurodollar Loan, any day that is a Business Day described in clause (a) and
that is also a day for trading by and between banks in Dollar deposits in the
London interbank market.
"Capital Asset" means, with respect to the Borrower and its Subsidiaries,
any asset that should, in accordance with GAAP, be classified and accounted for
as a capital asset on a Consolidated balance sheet of the Borrower and its
Subsidiaries.
"Capital Lease" means, with respect to the Borrower and its Subsidiaries,
any lease of any property that should, in accordance with GAAP, be classified
and accounted for as a capital lease on a Consolidated balance sheet of the
Borrower and its Subsidiaries.
"Change in Control" shall have the meaning assigned thereto in Section
10.1(i).
"Closing Date" means the date of this Agreement or such later Business Day
upon which each condition described in Article IV shall be satisfied or waived
in all respects in a manner acceptable to the Agent, in its sole discretion.
"Code" means the Internal Revenue Code of 1986, and the rules and
regulations thereunder, each as amended or supplemented from time to time.
"Commitment" means, as to any Lender, the obligation of such Lender to make
Loans to the Borrower hereunder in an aggregate principal or face amount at any
time outstanding not to exceed the amount set forth opposite such Lender's name
on Schedule 1 hereto, as the same may be reduced or modified at any time or from
time to time pursuant to the terms hereof.
"Commitment Percentage" means, as to any Lender at any time, the ratio of
(a) the amount of the Commitment of such Lender to (b) the Aggregate Commitment
of all of the Lenders.
"Consolidated" means, when used with reference to financial statements or
financial statement items of the Borrower and its Subsidiaries, such statements
or items on a consolidated basis in accordance with applicable principles of
consolidation under GAAP.
<PAGE>
"Consolidated Senior Funded Debt" means, as of any date, all Senior Debt of
the Borrower and its Subsidiaries, determined on a consolidated basis, which
would as of such date, in accordance with GAAP, be classified as "funded
indebtedness" or "long-term indebtedness."
"Consolidated Tangible Net Worth" means, as of any date of determination,
the amount of assets shown on the consolidated balance sheet of the Borrower
(but excluding from such assets, debt discount and expense, goodwill, patents,
trademarks, copyrights, franchises, licenses, amounts due from officers,
directors, stockholders and Affiliates, and any other items which would be
treated as intangibles under GAAP), less all liabilities of the Borrower and its
Subsidiaries, all computed in accordance with GAAP applied on a consistent
basis. For purposes of this definition, assets shall include sums due from (i)
physicians or medical practices managed by the Borrower or any of its
Subsidiaries, (ii) health care facilities owned or managed by the Borrower or
any of its Subsidiaries, or (iii) physicians with whom Borrower is affiliated,
including, without limitation, the Arizona Heart Institute, to the extent that
(A) the repayment of such sums constitutes valid and enforceable obligations of
such Persons and (B) such Persons have not defaulted in the repayment of such
sums.
"Contingent Obligation" means, with respect to the Borrower, without
duplication, any obligation, contingent or otherwise, of the Borrower pursuant
to which Borrower has directly or indirectly guaranteed any Debt or other
obligation of any other Person, provided, the term Contingent Obligation shall
not include endorsements for collection or deposit in the ordinary course of
business.
"Continue", "Continuation", and "Continued" shall refer to the continuation
pursuant to Section 3.2 hereof of a Eurodollar Loan as a Eurodollar Loan from
one Interest Period to the next Interest Period.
"Convert", "Conversion", and "Converted" shall refer to a conversion
pursuant to Sections 3.2 or 3.8 of one Type of Loan into another Type of Loan.
"Credit Facility" means the revolving credit facility established pursuant
to Article II hereof.
"Current Assets" means Consolidated current assets of the Borrower and its
Subsidiaries determined in accordance with GAAP.
"Current Liabilities" means Consolidated current liabilities of the
Borrower and its Subsidiaries determined in accordance with GAAP.
"Debt" means, with respect to any Person at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the deferred
purchase price of property or services of any such Person, except trade payables
arising in the ordinary course of business not more than ninety (90) days past
due (c) all obligations of any such Person as lessee under Capital Leases, (d)
all obligations, contingent or otherwise, of any such Person relative to the
face amount of letters of credit, whether or not drawn, and banker's
<PAGE>
acceptances issued for the account of any such Person and (e) all obligations
incurred by any such Person pursuant to Hedging Agreements.
"Default" means any of the events specified in Section 10.1 which with the
passage of time, the giving of notice or any other condition, would constitute
an Event of Default.
"Defaulting Lender" shall have the meaning assigned thereto in Section 3.6.
"Dollars" or "$" means, unless otherwise qualified, dollars in lawful
currency of the United States.
"EBITDA" means, with respect to the Borrower and its Subsidiaries for any
period, the sum of, without duplication, (a) Consolidated Net Income of the
Borrower and its Subsidiaries for such period, plus (b) the sum of the following
to the extent deducted in the determination of Consolidated Net Income: (i)
Interest Expense, (ii) income and franchise taxes, and (iii) amortization,
depreciation and other non-cash charges (including amortization of good will and
other intangible assets).
"Eligible Accounts" means all Accounts created by the Borrower or any of
its Subsidiaries in the ordinary course of its business which satisfy and
continue to satisfy the following requirements:
(i) The Accounts are bona fide existing obligations of the named Account
Debtors arising from the rendering of services to such Account Debtor in the
ordinary course of the business of the Borrower or any of its Subsidiaries and
(A) are actually and absolutely owing to the Borrower or such Subsidiary, (B)
are not contingent for any reason and (C) the Borrower or such Subsidiary has
lawful and absolute title to such Accounts;
(ii) The Accounts are valid, legally enforceable obligations of the Account
Debtors and no offset (including, without limitation, discounts other than as
permitted by GAAP, or counterclaims) or other defense on the part of any such
Account Debtor or any claim on the part of any such Account Debtor denying
liability thereunder has been asserted in writing;
(iii) The Accounts are not subject to any lien or security interest
whatsoever, except for any security interests permitted under Section 9.3(g);
(iv) No account has remained unpaid for a period exceeding one hundred
twenty (120) days from the date payment is due thereunder;
(v) Each Account Debtor is solvent and not the subject of any bankruptcy or
insolvency proceeding of any kind;
(vi) The Accounts do not arise out of transactions with an employee,
officer, agent, director or other Affiliate of the Borrower; and
(vii) No Account is due from any Account Debtor more than fifty percent
(50%) of whose Accounts are ineligible for any reason.
<PAGE>
"Eligible Advances to Affiliates" means all advances by the Borrower or any
Subsidiary thereof to (i) physician or medical practices managed by the Borrower
or any of its Subsidiaries, (ii) physicians with whom the Borrower is
affiliated, including, without limitation, Arizona Heart Institute or (iii)
health care facilities owned or managed by the Borrower or any of its
Subsidiaries which satisfy and continue to satisfy the following requirements:
(i) (A) the advances are actually and absolutely owing to the Borrower
or any Subsidiary, (B) payment of the advances is not contingent for any
reason and (C) the Borrower or such Subsidiary is the owner and holder of
the promissory note evidencing each such advance;
(ii) the advances are not subject to any Lien or security interest
whatsoever, except for any security interest in favor of the Borrower or
its Subsidiaries;
(iii) the advances are not in default; and
(iv) each obligor with respect to each advance is solvent and not the
subject of any bankruptcy or insolvency proceeding of any kind.
"Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender;
(iii) a financial institution or other entity that is an "accredited investor"
(as defined in Rule 501 under the Securities Act of 1933, as amended) having (A)
total assets of at least $10,000,000,000 (B) a long-term unsecured debt rating
of at least BBB by S&P (or an equivalent rating by another nationally recognized
statistical ratings organization) and (C) an office in the United States; and
(iv) any other insurance company or other financial institution which in the
ordinary course of business extends credit of the type extended hereunder and
which is approved by the Agent and, unless an Event of Default has occurred and
is continuing at the time any assignment is effected in accordance with Section
12.10, the Borrower, such approval not to be unreasonably withheld or delayed by
the Borrower and such approval to be deemed given by the Borrower if no
objection is received by the assigning Lender and the Agent from the Borrower
within five (5) Business Days after written notice of such proposed assignment
has been provided by the assigning Lender to the Borrower; provided, however,
that neither the Borrower nor an Affiliate of the Borrower shall qualify as an
Eligible Assignee.
"Employee Benefit Plan" means any employee benefit plan within the meaning
of Section 3(3) of ERISA which (a) is maintained for employees of the Borrower
or any ERISA Affiliate or (b) has at any time within the preceding six years
been maintained for the employees of the Borrower or any current or former ERISA
Affiliate.
"Environmental Laws" means any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations and orders of courts or Governmental Authorities, relating to
the protection of human health or the environment, including, but not limited
to, requirements pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling, reporting, licensing,
permitting, investigation or remediation of Hazardous Materials.
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, and the
rules and regulations thereunder, each as amended or modified from time to time.
"ERISA Affiliate" means any Person who together with the Borrower is
treated as a single employer within the meaning of Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"Eurodollar Loan" means any Loan that bears interest at a rate based upon
the Adjusted Eurodollar Rate.
"Eurodollar Rate" means, for any Eurodollar Loan for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period. If for any reason such
rate is not available, the term "Eurodollar Rate" shall mean, for any Eurodollar
Loan for any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term comparable to such Interest Period; provided, that if more
than one rate is specified on Reuters Screen LIBO Page, the applicable rate
shall be the arithmetic mean of all such rates (rounded upwards, if necessary,
to the nearest 1/100 of 1%).
"Event of Default" means any of the events specified in Section 10.1;
provided, that any requirement for passage of time, giving of notice, or any
other condition, has been satisfied.
"Extensions of Credit" means, as to any Lender at any time, an amount equal
to the sum of (a) the aggregate principal amount of all Loans made by such
Lender then outstanding and (b) such Lender's Commitment Percentage of the
Letter of Credit Obligations then outstanding.
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
thereto.
"Federal Funds Rate" means, the rate per annum (rounded upwards, if
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds as quoted by the Agent and confirmed in Federal Reserve Board
Statistical Release H.15 (519) or any successor or substitute publication
selected by Agent. If, for any reason, such rate is not available, then "Federal
Funds Rate" shall mean a daily rate which is determined, in the opinion of the
Agent, to be the rate at which federal funds are being offered for sale in the
national federal funds market at 9:00 a.m. (Charlotte time). Rates for weekends
or holidays shall be the same as the rate for the most immediate preceding
Business Day.
"Fiscal Year" means the fiscal year of the Borrower and its Subsidiaries
ending on September 30.
"Funded Debt" means, with respect to the Borrower and its Subsidiaries at
any date and without duplication, the sum of the following calculated in
accordance with GAAP: (a) all liabilities, obligations and indebtedness for
borrowed money including but not limited to
<PAGE>
obligations evidenced by bonds, debentures, notes or other similar instruments
of any such Person, (b) all obligations to pay the deferred purchase price of
property or services of any such Person, except trade payables arising in the
ordinary course of business, (c) all obligations of any such Person as lessee
under Capital Leases, (d) all Debt of any other Person secured by a Lien on any
asset of any such Person, (e) all Contingent Obligations of any such Person, (f)
all obligations, contingent or otherwise, of any such Person relative to the
face amount of letters of credit, whether or not drawn, and banker's acceptances
issued for the account of any such Person and (g) all obligations incurred by
any such Person pursuant to Hedging Agreements.
"GAAP" means generally accepted accounting principles, as recognized by the
American Institute of Certified Public Accountants and the Financial Accounting
Standards Board, consistently applied and maintained on a consistent basis for
the Borrower and its Subsidiaries throughout the period indicated and consistent
with the prior financial practice of the Borrower and its Subsidiaries.
"Governmental Approvals" means all authorizations, consents, approvals,
licenses and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
"Governmental Authority" means any nation, province, state or political
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Guaranty Agreement" means the agreement pursuant to which each Guarantor
unconditionally guaranties the payment and/or performance of the Obligations,
substantially in the form of Exhibit H hereto, as amended, restated or otherwise
modified.
"Guarantor" means each Wholly-Owned Subsidiary of the Borrower who has
executed the Guaranty Agreement on the Closing Date or becomes a signatory
thereto in accordance with Section 7.12.
"Hazardous Materials" means any substances or materials (a) which are or
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
Environmental Law, (b) which are toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human
health or the environment and are or become regulated by any Governmental
Authority, (c) the presence of which require investigation or remediation under
any Environmental Law or common law, (d) the discharge or emission or release of
which requires a permit or license under any Environmental Law or other
Governmental Approval, (e) which are deemed to constitute a nuisance, a trespass
or pose a health or safety hazard to persons or neighboring properties, (f)
which are materials consisting of underground or aboveground storage tanks,
whether empty, filled or partially filled with any substance, or (g) which
contain, without limitation, asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
"Hedging Agreement" means any agreement with respect to an interest rate
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate
<PAGE>
risk exposure executed in connection with hedging the interest rate exposure of
the Borrower under this Agreement, and any confirming letter executed pursuant
to such hedging agreement, all as amended, restated or otherwise modified.
"Interest Expense" means, for any period, total interest expense of the
Borrower (including, without limitation, interest expense attributable to the
Loans, Capital Leases and all equipment financing), whether paid or accrued,
and, to the extent not included therein, amortization of fees and other charges
payable with respect to all Debt of the Borrower and its Subsidiaries,
determined for such period in accordance with GAAP.
"Interest Period" means each period of thirty (30) days, hereunder, with
respect to which the Eurodollar Rate shall be determined; provided, that:
(a) each Interest Period shall commence on the date of advance of or
Conversion to any Eurodollar Loan and, in the case of immediately successive
Interest Periods, each successive Interest Period shall commence on the date on
which the next preceding Interest Period expires;
(b) if any Interest Period would otherwise expire on a day that is not a
Business Day, such Interest Period shall expire on the next succeeding Business
Day; provided, that if any Interest Period would otherwise expire on a day that
is not a Business Day but is a day of the month after which no further Business
Day occurs in such month, such Interest Period shall expire on the next
preceding Business Day;
(c) any Interest Period that begins on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the last
Business Day of the relevant calendar month at the end of such Interest period;
(d) no Interest Period shall be permitted to extend beyond the Termination
Date; and
(e) there shall be no more than five (5) Interest Periods outstanding at
any time.
"Issuing Lender" means NationsBank, in its capacity as issuer of any Letter
of Credit, or any successor thereto.
"L/C Commitment" means Five Million Dollars ($5,000,000).
"L/C Participants" means the collective reference to all the Lenders other
than the Issuing Lender.
"Lease Expense" means all obligations of the Borrower and its Subsidiaries
for payments under leases of real or personal property, whether such leases
presently exist or are hereafter entered into by the Borrower or any Subsidiary.
"Lender" means each Person executing this Agreement as a Lender set forth
on the signature pages hereto and each Person that hereafter becomes a party to
this Agreement as a Lender pursuant to Section 12.10.
<PAGE>
"Letter of Credit Obligations" means at any time, an amount equal to the
sum of (a) the aggregate undrawn and unexpired amount of the then outstanding
Letters of Credit and (b) the aggregate amount of drawings under Letters of
Credit which have not then been reimbursed pursuant to Section 2A.5.
"Letters of Credit" shall have the meaning assigned thereto in Section
2A.1(a).
"Leverage Ratio" means the ratio of (x) Consolidated Senior Funded Debt
less Debt incurred to construct a new hospital (herein, "New Hospital Debt"),
such New Hospital Debt to be excluded for the period commencing with the
incurrence of such New Hospital Debt and ending one year after the issuance of a
certificate of occupancy for such new hospital to (y) EBITDA for the four
previous calendar quarters.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Loan" means any revolving loan made to the Borrower pursuant to Section
2.1, and all such Loans collectively as the context requires.
"Loan Documents" means, collectively, this Agreement, the Notes, any
Hedging Agreement executed by any Lender, any Guaranty Agreement, any
Application, and each other document, instrument and agreement executed and
delivered by the Borrower, its Subsidiaries or their counsel in connection with
this Agreement or otherwise referred to herein or contemplated hereby, all as
may be amended, restated or otherwise modified.
"Loan Parties" means the Borrower, the Guarantors, and any Person who
becomes a Guarantor pursuant to Section 7.12.
"Material Adverse Effect" means, with respect to the Borrower or any of its
Subsidiaries, a material adverse effect on the properties, business, operations
or condition (financial or otherwise) of any such Person taken as a whole or the
ability of any such Person to perform its obligations under the Loan Documents
or Material Contracts, in each case to which it is a party.
"Material Contract" means (a) any contract or other agreement, written or
oral, of the Borrower or any of its Subsidiaries involving monetary liability of
or to the Borrower or any such Subsidiary in an amount in excess of $1,000,000
with respect to the Borrower and $375,000 with respect to any Subsidiary and
which by its terms may not be cancelled within ninety (90) days, or (b) any
other contract or agreement, written or oral, of the Borrower or any of its
Subsidiaries the failure to comply with which could reasonably be expected to
have a Material Adverse Effect on the Borrower or any of its Subsidiaries.
"Modified Consolidated Senior Funded Debt" means Consolidated Senior Funded
Debt inclusive of the greater of (x) percentage ownership of a Wholly-Owned
Subsidiary in any Person
<PAGE>
which owns a hospital facility (herein, a "Hospital Subsidiary") times the Debt
of such Hospital Subsidiary or (y) the portion of the Debt of each such
Subsidiary guaranteed by the Borrower.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions within the preceding six years.
"NationsBank" means NationsBank, N.A., a national banking association, and
its successors.
"Net Income" means, for any period, the Consolidated net income (or loss)
of the Borrower and its Subsidiaries for such period determined in accordance
with GAAP; provided, that there shall be excluded from Consolidated net income
(or loss): (a) the income (or loss) of any Person accrued prior to the date it
became a Subsidiary of the Borrower or is merged into or consolidated with the
Borrower and (b) extraordinary items.
"Notes" means the separate revolving credit notes made by the Borrower
payable to the order of each Lender, substantially in the form of Exhibit A
hereto, evidencing the Credit Facility, and any amendments and modifications
thereto, any substitutes therefor, and any replacements, restatements, renewals
or extension thereof, in whole or in part; "Note" means any of such Notes.
"Notice of Borrowing" shall have the meaning assigned thereto in Section
2.2(a).
"Notice of Conversion/Continuation" shall have the meaning assigned thereto
in Section 3.2.
"Notice of Prepayment" shall have the meaning assigned thereto in Section
2.3(c).
"Obligations" means, in each case, whether now in existence or hereafter
arising: (a) the principal of and interest on (including interest accruing after
the filing of any bankruptcy or similar petition) the Loans, (b) the Letter of
Credit Obligations, (c) all payment and other obligations owing by the Borrower
to any Lender or the Agent under any Hedging Agreement to which a Lender is a
party and (d) all other fees and commissions (including attorney's fees),
charges, indebtedness, loans, liabilities, financial accommodations,
obligations, covenants and duties owing by the Borrower to the Lenders or the
Agent, of every kind, nature and description, direct or indirect, absolute or
contingent, due or to become due, contractual or tortious, liquidated or
unliquidated, and whether or not evidenced by any note, and whether or not for
the payment of money under or in respect of this Agreement, any Note, or any of
the other Loan Documents.
"Officer's Compliance Certificate" shall have the meaning assigned thereto
in Section 6.2.
"Other Taxes" shall have the meaning assigned thereto in Section 3.11(b).
"Overadvance" shall have the meaning assigned thereto in Section 1.1 in the
definition of "Borrowing Base."
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
agency.
<PAGE>
"Pension Plan" means any Employee Benefit Plan, other than a Multiemployer
Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of
the Code and which (a) is maintained for employees of the Borrower or any ERISA
Affiliates or (b) has at any time within the preceding six years been maintained
for the employees of the Borrower or any of their current or former ERISA
Affiliates.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust, business trust, joint venture, joint stock
company, pool, syndicate, sole proprietorship, unincorporated organization,
Governmental Authority or any other form of entity or group thereof.
"Prime Rate" means the per annum rate of interest established from time to
time by NationsBank as its prime rate, which rate may not be the lowest rate of
interest charged by NationsBank to its customers.
"Register" shall have the meaning assigned thereto in Section 12.10(b).
"Reimbursement Obligation" means the obligation of the Borrower to
reimburse the Issuing Lender pursuant to Section 2A.5 for amounts drawn under
Letters of Credit.
"Required Lenders" means, at any date, any combination of holders of at
least sixty-six and two-thirds percent (66-2/3%) of the aggregate unpaid
principal amount of the Notes, or if no amounts are outstanding under the Notes,
any combination of Lenders whose Commitment Percentages aggregate at least
sixty-six and two-thirds percent (66-2/3%).
"Replacement Capital Expenditures" means, with respect to the Borrower, all
capital expenditures to replace existing fixed assets.
"Reserve Requirement" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against, in the case of
Eurodollar Loans, "Eurocurrency liabilities" (as such term is used in Regulation
D). Without limiting the effect of the foregoing, the Reserve Requirement shall
reflect any other reserves required to be maintained by such member banks with
respect to (i) any category of liabilities which includes deposits by reference
to which the Adjusted Eurodollar Rate is to be determined, or (ii) any category
of extensions of credit or other assets which include Eurodollar Loans. The
Adjusted Eurodollar Rate shall be adjusted automatically on and as of the
effective date of any change in the Reserve Requirement.
"Senior Debt" means, at any date of determination, all Debt other than
Subordinated Debt, both determined on a consolidated basis.
"Solvent" means, as to the Borrower and its Subsidiaries on a particular
date, that any such Person (a) has capital sufficient to carry on its business
and transactions and all business and transactions in which it is about to
engage and is able to pay its debts as they mature, (b) owns
<PAGE>
property having a value, both at fair valuation and at present fair saleable
value, greater than the amount required to pay its probable liabilities
(including contingencies as they mature and come due), and (c) does not believe
that it will incur debts or liabilities beyond its ability to pay such debts or
liabilities as they mature in the ordinary course of business.
"Subordinated Debt" means the collective reference to Debt on Schedule
5.1(t) hereof designated as Subordinated Debt and any other Debt of the Borrower
or any Subsidiary subordinated in right and time of payment to the Obligations
on terms satisfactory to the Required Lenders.
"Subsidiary" means as to any Person, any corporation, partnership or other
entity of which more than fifty percent (50%) of the outstanding capital stock
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity is at the time, directly or indirectly, owned by or the management
is otherwise controlled by such Person (irrespective of whether, at the time,
capital stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency). Unless
otherwise qualified references to "Subsidiary" or "Subsidiaries" herein shall
refer to those of Borrower. For purposes of financial statement preparation or
determining compliance with the financial covenants in this Agreement,
"Subsidiary" shall have the meaning given to such term under GAAP.
"Taxes" shall have the meaning assigned thereto in Section 3.13(a).
"Termination Date" means the earliest of the dates referred to in Section
2.6.
"Termination Event" means: (a) a "Reportable Event" described in Section
4043 of ERISA, or (b) the withdrawal of the Borrower or any ERISA Affiliate from
a Pension Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, or (c) the termination of a Pension
Plan, the filing of a notice of intent to terminate a Pension Plan or the
treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA, or (d) the institution of proceedings to terminate, or the appointment of
a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event
or condition which would constitute grounds under Section 4042(a) of ERISA for
the termination of, or the appointment of a trustee to administer, any Pension
Plan, or (f) the partial or complete withdrawal of the Borrower or any ERISA
Affiliate from a Multiemployer Plan, or (g) the imposition of a Lien pursuant to
Section 412 of the Code or Section 302 of ERISA, or (h) any event or condition
which results in the reorganization or insolvency of a Multiemployer Plan under
Sections 4241 or 4245 of ERISA, or (i) any event or condition which results in
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.
"Total Capitalization" means Modified Consolidated Senior Funded Debt plus
the Consolidated equity of the Borrower and its Subsidiaries.
"Type" shall mean any type of Loan (i.e., a Base Rate Loan or Eurodollar
Loan).
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"Uniform Customs" the Uniform Customs and Practice for Documentary Credits
(1994 Revision), International Chamber of Commerce Publication No. 500.
"UCC" means the Uniform Commercial Code as in effect in the State of North
Carolina.
"United States" means the United States of America.
"Wholly-Owned" means, with respect to a Subsidiary, a Subsidiary all of the
shares of capital stock or other ownership interests of which are, directly or
indirectly, owned or controlled by the Borrower and/or one or more of its
Wholly-Owned Subsidiaries.
SECTION 1.2 General. Unless otherwise specified, a reference in this
Agreement to a particular section, subsection, Schedule or Exhibit is a
reference to that section, subsection, Schedule or Exhibit of this Agreement.
Wherever from the context it appears appropriate, each term stated in either the
singular or plural shall include the singular and plural, and pronouns stated in
the masculine, feminine or neuter gender shall include the masculine, the
feminine and the neuter. Any reference herein to "Charlotte time" shall refer to
the applicable time of day in Charlotte, North Carolina.
SECTION 1.3 Other Definitions and Provisions.
(a) Use of Capitalized Terms. Unless otherwise defined therein, all
capitalized terms defined in this Agreement shall have the defined meanings when
used in this Agreement, the Notes and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(b) Miscellaneous. The words "hereof", "herein" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.
ARTICLE II
REVOLVING CREDIT FACILITY
SECTION 2.1 Commitment. Subject to the terms and conditions of this
Agreement, each Lender severally agrees to make Loans to the Borrower from time
to time from the Closing Date through the Termination Date as requested by the
Borrower in accordance with the terms of Section 2.2; provided, that (a) the
aggregate principal amount of all outstanding Loans (after giving effect to any
amount requested) shall not exceed an amount equal to the lesser of (i) the
Aggregate Commitment less the Letter of Credit Obligations and (ii) the
Borrowing Base, and (b) the principal amount of outstanding Loans from any
Lender to the Borrower plus such Lender's Commitment Percentage of the Letter of
Credit Obligations then outstanding shall not at any time exceed such Lender's
Commitment. Each Loan by a Lender shall be in a principal amount equal to such
Lender's Commitment Percentage of the aggregate principal amount of Loans
requested
<PAGE>
on such occasion. Subject to the terms and conditions hereof, the Borrower may
borrow, repay and reborrow Loans hereunder until the Termination Date.
SECTION 2.2 Procedure for Advances of Loans.
(a) Requests for Borrowing. The Borrower shall give the Agent irrevocable
prior written notice in the form attached hereto as Exhibit B (a "Notice of
Borrowing") not later than 11:00 a.m. (Charlotte time) (i) at least two (2)
Business Days prior to each Base Rate Loan and (ii) at least three (3) Business
Days prior to each Eurodollar Loan, of its intention to borrow, specifying (A)
the date of such borrowing, which shall be a Business Day, (B) the amount of
such borrowing, which shall be (x) with respect to Base Rate Loans in an
aggregate principal amount of $500,000 or a whole multiple of $100,000 in excess
thereof and (y) with respect to Eurodollar Loans in an aggregate principal
amount of $1,000,000 or a whole multiple of $500,000 in excess thereof, and (C)
whether the Loans are to be Eurodollar Loans or Base Rate Loans. Notices
received after 11:00 a.m. (Charlotte time) shall be deemed received on the next
Business Day. The Agent shall promptly notify the Lenders of each Notice of
Borrowing.
(b) Disbursement of Loans. Not later than 2:00 p.m. (Charlotte time) on the
proposed borrowing date, each Lender will make available to the Agent, for the
account of the Borrower, at the office of the Agent in funds immediately
available to the Agent, such Lender's Commitment Percentage of the Loans to be
made on such borrowing date. The Borrower hereby irrevocably authorizes the
Agent to disburse the proceeds of each borrowing requested pursuant to this
Section 2.2 in immediately available funds by crediting such proceeds to a
deposit account of the Borrower maintained with the Agent or by wire transfer to
such account as may be agreed upon by the Borrower and the Agent from time to
time. Unless the Agent shall have received notice from a Lender that such Lender
will not make available to the Agent such Lender's Commitment Percentage of the
requested Loans, the Agent shall disburse such Lender's Commitment Percentage of
the Loans.
SECTION 2.3 Repayment of Loans.
(a) Repayment on Termination Date. The Borrower shall repay the outstanding
principal amount of all Loans in full, together with all accrued but unpaid
interest thereon, on the Termination Date.
(b) Mandatory Repayment of Excess Loans. If at any time the outstanding
principal amount of all Loans exceeds the lesser of (i) the Aggregate Commitment
less the Letter of Credit Obligations or (ii) the Borrowing Base, the Borrower
shall repay immediately upon notice from the Agent, by payment to the Agent for
the account of the Lenders, the Loans in an amount equal to such excess. Each
such repayment shall be accompanied by any amount required to be paid pursuant
to Section 3.12 hereof.
(c) Optional Repayments. The Borrower may at any time and from time to time
repay the Loans, in whole or in part, upon at least three (3) Business Days'
irrevocable notice to the Agent with respect to Eurodollar Loans and one (1)
Business Day irrevocable notice with respect to Base Rate Loans, in the form
attached hereto as Exhibit C (a "Notice of Prepayment") specifying the date and
amount of repayment and whether the repayment is of Eurodollar Loans,
<PAGE>
Base Rate Loans, or a combination thereof, and, if of a combination thereof, the
amount allocable to each. Upon receipt of such notice, the Agent shall promptly
notify each Lender. If any such notice is given, the amount specified in such
notice shall be due and payable on the date set forth in such notice. Partial
repayments shall be in an aggregate amount of $500,000 or a whole multiple of
$100,000 in excess thereof with respect to Base Rate Loans and $1,000,000 or a
whole multiple of $500,000 in excess thereof with respect to Eurodollar Loans.
Each such repayment shall be accompanied by any amount required to be paid
pursuant to Section 3.12 hereof.
(d) Limitation on Repayment of Eurodollar Loans. The Borrower may not repay
any Eurodollar Loan on any day other than on the last day of the Interest Period
applicable thereto unless such repayment is accompanied by any amount required
to be paid pursuant to Section 3.12 hereof.
SECTION 2.4 Notes. Each Lender's Loans and the obligation of the Borrower
to repay such Loans shall be evidenced by a Note executed by the Borrower
payable to the order of such Lender representing the Borrower's obligation to
pay such Lender's Commitment or, if less, the aggregate unpaid principal amount
of all Loans made and to be made by such Lender to the Borrower hereunder, plus
interest and all other fees, charges and other amounts due thereon. Each Note
shall be dated the date hereof and shall bear interest on the unpaid principal
amount thereof at the applicable interest rate per annum specified in Section
3.1.
SECTION 2.5 Permanent Reduction of the Aggregate Commitment.
(a) The Borrower shall have the right at any time and from time to time,
upon at least five (5) Business Days prior written notice to the Agent, to
permanently reduce, in whole at any time or in part from time to time, without
premium or penalty, the Aggregate Commitment in an aggregate principal amount
not less than $500,000 or any whole multiple of $100,000 in excess thereof. The
amount of each partial permanent reduction shall be applied pro rata to reduce
the remaining mandatory reduction amounts required under Section 2.5(b).
(b) Each permanent reduction permitted or required pursuant to this Section
2.5 shall be accompanied by a payment of principal sufficient to reduce the
aggregate outstanding Extensions of Credit of the Lenders after such reduction
to the Aggregate Commitment as so reduced. Any reduction of the Aggregate
Commitment to zero shall be accompanied by payment of all outstanding
Obligations and, if such reduction is permanent, termination of the Commitments
and Credit Facility. Such cash collateral shall be applied in accordance with
Section 10.2(b). If the reduction of the Aggregate Commitment requires the
repayment of any Eurodollar Loan, such reduction may be made only on the last
day of the then current Interest Period applicable thereto unless such repayment
is accompanied by any amount required to be paid pursuant to Section 3.12
hereof.
SECTION 2.6 Termination of Credit Facility. The Credit Facility shall
terminate on the earliest of (a) the second anniversary of the Closing Date (b)
the date of termination by the Borrower pursuant to Section 2.5(a), and (c) the
date of termination by the Agent on behalf of the Lenders pursuant to Section
10.2(a).
<PAGE>
SECTION 2.7 Use of Proceeds. The Borrower shall use the proceeds of the
Loans (exclusive of the proceeds of the Overadvance) for working capital and
general corporate requirements of the Borrower and its Subsidiaries, including
the funding of acquisitions and the payment of certain fees and expenses
incurred in connection with this transaction. The Borrower shall use the
proceeds of the Overadvance solely to fund the acquisition of physician
practices.
ARTICLE IIA
LETTER OF CREDIT FACILITY
SECTION 2A.1 Commitment. Subject to the terms and conditions hereof, the
Issuing Lender, in reliance on the agreements of the other Lenders set forth in
Section 2A.4(a), agrees to issue standby letters of credit ("Letters of Credit")
for the account of the Borrower on any Business Day from the Closing Date
through but not including the date which is sixty (60) days prior to the
Termination Date in such form as may be approved from time to time by the
Issuing Lender; provided, that the Issuing Lender shall have no obligation to
issue any Letter of Credit if, after giving effect to such issuance, (a) the
Letter of Credit Obligations would exceed the L/C Commitment or (b) the sum of
the aggregate principal amount of all outstanding Loans and Letter of Credit
Obligations would exceed the Aggregate Commitment. Each Letter of Credit shall
(i) be denominated in Dollars, (ii) be a standby letter of credit issued to
support obligations of the Borrower, contingent or otherwise, incurred in the
ordinary course of business, (iii) expire on a date not more than one year later
in the case of a standby letter of credit but in no event later than the
Termination Date and (iv) be subject to the Uniform Customs and Practice for
Documentary Credits and, to the extent not inconsistent therewith, the laws of
the State of North Carolina. The Issuing Lender shall not issue any Letter of
Credit hereunder if such issuance would conflict with, or cause the Issuing
Lender or any L/C Participant to exceed any limits imposed by any Applicable
Law. References herein to "issue" and derivations thereof with respect to
Letters of Credit shall also include extensions, modifications or confirmations
of any existing Letters of Credit, unless the context otherwise requires.
SECTION 2A.2 Procedure for Issuance of Letters of Credit. The Borrower may
from time to time request that the Issuing Lender issue a Letter of Credit by
delivering to the Issuing Lender at the Agent's Office an Application therefor,
completed to the reasonable satisfaction of the Issuing Lender, and such other
certificates, documents and other papers and information as the Issuing Lender
may reasonably request. Upon receipt of any Application, the Issuing Lender
shall process such Application and the certificates, documents and other papers
and information delivered to it in connection therewith in accordance with its
customary procedures and shall, subject to Section 2A.1 and Article IV hereof,
promptly issue the Letter of Credit requested thereby (but in no event shall the
Issuing Lender be required to issue any Letter of Credit earlier than three
Business Days after its receipt of the Application therefor and all such other
certificates, documents and other papers and information relating thereto) by
issuing the original of such Letter of Credit to the beneficiary thereof or as
otherwise may be agreed by the Issuing Lender and the Borrower. The Issuing
Lender shall furnish to the Borrower a copy of such Letter of Credit and furnish
to each Lender a copy of such Letter of Credit and the amount of each
<PAGE>
Lender's participation therein in accordance with Section 2A.4(a), all promptly
following the issuance of such Letter of Credit.
SECTION 2A.3 Commissions and Other Charges.
(a) The Borrower shall pay to the Agent, for the account of the Issuing
Lender and the L/C Participants, a letter of credit commission in an amount
equal to 1.00% of the face amount of each Letter of Credit. Such commission
shall be payable quarterly in advance on the first Business Day of each fiscal
quarter of the Borrower and on the Termination Date.
(b) In addition to the foregoing commission, the Borrower shall pay the
Issuing Lender an issuance fee of one-quarter percent (1/4%) per annum on the
face amount of each Letter of Credit, which fees shall be fully earned and be
payable upon the issuance of each Letter of Credit.
(c) The Agent shall, promptly following its receipt thereof, distribute to
the Issuing Lender and the L/C Participants all commissions received by the
Agent in accordance with their respective Commitment Percentages.
SECTION 2A.4 L/C Participations.
(a) The Issuing Lender irrevocably agrees to grant and hereby grants to
each L/C Participant, and, to induce the Issuing Lender to issue Letters of
Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase
and hereby accepts and purchases from the Issuing Lender, on the terms and
conditions hereinafter stated, for such L/C Participant's own account and risk
an undivided interest equal to such L/C Participant's Commitment Percentage in
the Issuing Lender's obligations and rights under each Letter of Credit issued
hereunder and the amount of each draft paid by the Issuing Lender thereunder.
Each L/C Participant unconditionally and irrevocably agrees with the Issuing
Lender that, if a draft is paid under any Letter of Credit for which the Issuing
Lender is not reimbursed in full by the Borrower in accordance with the terms of
this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand
at the Issuing Lender's address for notices specified herein an amount equal to
such L/C Participant's Commitment Percentage of the amount of such draft, or any
part thereof, which is not so reimbursed.
(b) Upon becoming aware of any amount required to be paid by any L/C
Participant to the Issuing Lender pursuant to Section 2A.4(a) in respect of any
unreimbursed portion of any payment made by the Issuing Lender under any Letter
of Credit, the Issuing Lender shall notify each L/C Participant of the amount
and due date of such required payment and such L/C Participant shall pay to the
Issuing Lender the amount specified on the applicable due date. If any such
amount is paid to the Issuing Lender after the date such payment is due, such
L/C Participant shall pay to the Issuing Lender on demand, in addition to such
amount, the product of (i) such amount, times (ii) the daily average Federal
Funds Rate as determined by the Agent during the period from and including the
date such payment is due to the date on which such payment is immediately
available to the Issuing Lender, times (iii) a fraction the numerator of which
is the
<PAGE>
number of days that elapse during such period and the denominator of which is
360. A certificate of the Issuing Lender with respect to any amounts owing under
this Section shall be conclusive in the absence of manifest error. With respect
to payment to the Issuing Lender of the unreimbursed amounts described in this
Section 2A.4(b), if the L/C Participants receive notice that any such payment is
due (A) prior to 1:00 p.m. (Charlotte time) on any Business Day, such payment
shall be due that Business Day, and (B) after 1:00 p.m. (Charlotte time) on any
Business Day, such payment shall be due on the following Business Day.
(c) Whenever, at any time after the Issuing Lender has made payment under
any Letter of Credit and has received from any L/C Participant its Commitment
Percentage of such payment in accordance with this Section 2A.4, the Issuing
Lender receives any payment related to such Letter of Credit (whether directly
from the Borrower or otherwise, or any payment of interest on account thereof,
the Issuing Lender will promptly distribute to such L/C Participant its pro rata
share thereof; provided, that in the event that any such payment received by the
Issuing Lender shall be required to be returned by the Issuing Lender, such L/C
Participant shall return to the Issuing Lender the portion thereof previously
distributed by the Issuing Lender to it.
SECTION 2A.5 Reimbursement Obligation of the Borrower. The Borrower agrees
to reimburse the Issuing Lender on each date on which the Issuing Lender
notifies the Borrower of the date and amount of a draft paid under any Letter of
Credit for the amount of (a) such draft so paid and (b) any taxes, fees, charges
or other costs or expenses incurred by the Issuing Lender in connection with
such payment. Each such payment shall be made to the Issuing Lender at its
address for notices specified herein in lawful money of the United States and in
immediately available funds. Interest shall be payable on any and all amounts
remaining unpaid by the Borrower under this Article IIA from the date such
amounts become payable (whether at stated maturity, by acceleration or
otherwise) until payment in full at the rate which would be payable on any
outstanding Base Rate Loans which were then overdue. If the Borrower fails to
timely reimburse the Issuing Lender on the date the Borrower receives the notice
referred to in this Section 2A.5, the Borrower shall be deemed to have timely
given a Notice of Borrowing hereunder to the Agent requesting the Lenders to
make a Base Rate Loan on such date in an amount equal to the amount of such
drawing and, subject to the satisfaction or waiver of the conditions precedent
specified in Article IV, the Lenders shall make Base Rate Loans in such amount,
the proceeds of which shall be applied to reimburse the Issuing Lender for the
amount of the related drawing and costs and expenses.
SECTION 2A.6 Obligations Absolute. The Borrower's obligations under this
Article IIA (including without limitation the Reimbursement Obligation) shall be
absolute and unconditional under any and all circumstances and irrespective of
any set-off, counterclaim or defense to payment which the Borrower may have or
have had against the Issuing Lender or any beneficiary of a Letter of Credit.
The Borrower also agrees with the Issuing Lender that the Issuing Lender shall
not be responsible for, and the Borrower's Reimbursement Obligation under
Section 2A.5 shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, even though such
documents shall in fact prove to be invalid, fraudulent or forged, or any
dispute between or among the Borrower and any beneficiary of any Letter of
Credit or any other party to which such Letter of Credit may be transferred or
any claims whatsoever of a Borrower against any beneficiary of such Letter of
Credit or any such transferee. The Issuing Lender shall not be liable for any
error, omission, interruption or delay in
<PAGE>
transmission, dispatch or delivery of any message or advice, however
transmitted, in connection with any Letter of Credit, except for errors or
omissions caused by the Issuing Lender's gross negligence or willful misconduct.
The Borrower agrees that any action taken or omitted by the Issuing Lender under
or in connection with any Letter of Credit or the related drafts or documents,
if done in the absence of gross negligence or willful misconduct and in
accordance with the standards of care specified in the Uniform Customs and, to
the extent not inconsistent therewith, the UCC shall be binding on the Borrower
and shall not result in any liability of the Issuing Lender to the Borrower. The
responsibility of the Issuing Lender to the Borrower in connection with any
draft presented for payment under any Letter of Credit shall, in addition to any
payment obligation expressly provided for in such Letter of Credit, be limited
to determining that the documents (including each draft) delivered under such
Letter of Credit in connection with such presentment are in conformity with such
Letter of Credit.
SECTION 2A.7 Effect of Application. To the extent that any provision of any
Application related to any Letter of Credit is inconsistent with the provisions
of this Article IIA, the provisions of this Article IIA shall apply.
ARTICLE III
GENERAL LOAN PROVISIONS
SECTION 3.1 Interest.
(a) Interest Rate Options. Subject to the provisions of this Section 3.1,
at the election of the Borrower in accordance with Article II, the unpaid
principal balance of any Loan shall bear interest at (A) the Base Rate or (B)
the Adjusted Eurodollar Rate plus 1.50%. The Borrower shall select the type of
interest rate applicable to any Loan at the time a Notice of Borrowing is given
pursuant to Section 2.2(a) or at the time a Notice of Conversion/Continuation is
given pursuant to Section 3.2. Any Loan as to which the Borrower has not duly
specified an interest rate as provided herein shall be deemed a Base Rate Loan.
(b) Default Rate. Upon the occurrence and during the continuance of an
Event of Default, (i) the Borrower shall no longer have the option to request
Eurodollar Loans, (ii) all outstanding Eurodollar Loans shall bear interest at a
rate per annum two percent (2%) in excess of the rate then applicable to
Eurodollar Loans until the end of the applicable Interest Period and thereafter
at a rate equal to two percent (2%) in excess of the rate then applicable to
Base Rate Loans, and (iii) all outstanding Base Rate Loans shall bear interest
at a rate per annum equal to two percent (2%) in excess of the rate then
applicable to Base Rate Loans. Interest shall continue to accrue on the Notes
after the filing by or against the Borrower of any petition seeking any relief
in bankruptcy or under any act or law pertaining to insolvency or debtor relief,
whether state, federal or foreign.
<PAGE>
(c) Interest Payment and Computation. Interest on each Base Rate Loan shall
be payable in arrears on the last Business Day of each month, commencing August
31, 1997; and on the Termination Date. All interest rates, fees and commissions
provided for hereunder shall be computed on the basis of a 360-day year and
assessed for the actual number of days elapsed.
(d) Maximum Rate. In no contingency or event whatsoever shall the aggregate
of all amounts deemed interest hereunder or under any of the Notes charged or
collected pursuant to the terms of this Agreement or pursuant to any of the
Notes exceed the highest rate permissible under any Applicable Law which a court
of competent jurisdiction shall, in a final determination, deem applicable
hereto. In the event that such a court determines that the Lenders have charged
or received interest hereunder in excess of the highest applicable rate, the
rate in effect hereunder shall automatically be reduced to the maximum rate
permitted by Applicable Law and the Lenders shall at the Agent's option promptly
refund to the Borrower any interest received by Lenders in excess of the maximum
lawful rate or shall apply such excess to the principal balance of the
Obligations. It is the intent hereof that the Borrower not pay or contract to
pay, and that neither the Agent nor any Lender receive or contract to receive,
directly or indirectly in any manner whatsoever, interest in excess of that
which may be paid by the Borrower under Applicable Law.
SECTION 3.2 Notice and Manner of Conversion or Continuation of Loans.
Provided that no Event of Default has occurred and is then continuing, the
Borrower shall have the option to (a) convert at any time all or any portion of
its outstanding Base Rate Loans in a principal amount equal to $1,000,000 or any
whole multiple of $500,000 in excess thereof into one or more Eurodollar Loans,
or (b) upon the expiration of any Interest Period, (i) convert all or any part
of its outstanding Eurodollar Loans in a principal amount equal to $500,000 or a
whole multiple of $100,000 in excess thereof into Base Rate Loans or (ii)
continue such Eurodollar Loans as Eurodollar Loans. Whenever the Borrower
desires to convert or continue Loans as provided above, the Borrower shall give
the Agent irrevocable prior written notice in the form attached as Exhibit D (a
"Notice of Conversion/ Continuation") not later than 11:00 a.m. (Charlotte time)
three (3) Business Days before the day on which a proposed conversion or
continuation of such Loan is to be effective specifying (A) the Loans to be
converted or continued, and, in the case of any Eurodollar Loan to be converted
or continued, the last day of the Interest Period thereof, (B) the effective
date of such conversion or continuation (which shall be a Business Day), and (C)
the principal amount of such Loans to be converted or continued. The Agent shall
promptly notify the Lenders of such Notice of Conversion/Continuation.
SECTION 3.3 Unused Fee. Commencing on the Closing Date, the Borrower shall
pay to the Agent, for the account of the Lenders, a non-refundable fee at a rate
per annum equal to .25% on the average daily unused portion of the Aggregate
Commitment less the Letter of Credit Obligations. The fee shall be payable in
arrears on the last day of each quarter during the term of this Agreement,
commencing September 30, 1997, and on the Termination Date. Such commitment fee
shall be distributed by the Agent to the Lenders pro rata in accordance with the
Lenders' respective Commitment Percentages.
SECTION 3.4 Payment.
(a) Manner of Payment. Each payment by the Borrower on account of the
principal of
<PAGE>
or interest on the Loans or of any fee, commission or other amounts payable to
the Lenders under this Agreement or any Note shall be made not later than 2:00
p.m. (Charlotte time) on the date specified for payment under this Agreement to
the Agent at the Agent's Office for the account of the Lenders (other than as
set forth below) pro rata in accordance with their respective Commitment
Percentages, in Dollars, in immediately available funds and shall be made
without any set-off, counterclaim or deduction whatsoever. Any payment received
after such time but before 2:00 p.m. (Charlotte time) on such day shall be
deemed a payment on such date for the purposes of Section 10.1, but for all
other purposes shall be deemed to have been made on the next succeeding Business
Day. Any payment received after 2:00 p.m. (Charlotte time) shall be deemed to
have been made on the next succeeding Business Day for all purposes. Upon
receipt by the Agent of each such payment, the Agent shall distribute to each
Lender at its address for notices set forth herein its pro rata share of such
payment in accordance with such Lender's Commitment Percentage and shall wire
advice of the amount of such credit to each Lender. Each payment to the Agent of
Agent's fees or expenses shall be made for the account of the Agent. Each
payment to the Agent of the Issuing Lender's fees or L/C Participants'
commissions shall be made in like manner, but for the account of the Issuing
Lender or the L/C Participants, as the case may be. Any amount payable to any
Lender under Sections 3.7, 3.8, 3.12 or 12.2 shall be paid to the Agent for the
account of the applicable Lender.
(b) Crediting of Payments and Proceeds. In the event that the Borrower
shall fail to pay any of the Obligations when due and the Obligations have been
accelerated pursuant to Section 10.2, all payments received by the Lenders upon
the Notes and the other Obligations and all net proceeds from the enforcement of
the Obligations shall be applied first to all expenses then due and payable by
the Borrower hereunder, then to all indemnity obligations then due and payable
by the Borrower hereunder, then to all fees of the Agent or Issuing Lender then
due and payable, then to all commitment and other fees and commissions then due
and payable, then to accrued and unpaid interest on the Notes and any
termination payments due in respect of a Hedging Agreement with any Lender (pro
rata in accordance with all such amounts due), and then to the principal amount
of the Notes.
SECTION 3.5 Right of Set-off; Adjustments.
(a) Upon the occurrence and during the continuance of any Event of Default,
and upon the exercise by the Agent of the remedy provided for in Section
10.2(a), each Lender (and each of its affiliates) is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by such
Lender (or any of its affiliates) to or for the credit or the account of the
Borrower against any and all of the obligations of the Borrower now or hereafter
existing under this Agreement and the Note held by such Lender, irrespective of
whether such Lender shall have made any demand under this Agreement or such Note
and although such obligations may be unmatured. Each Lender agrees promptly to
notify the Borrower after any such set-off and application made by such Lender;
provided, that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of each Lender under this Section are
in addition to other rights and remedies (including, without limitation, other
rights of set-off) that such Lender may have.
<PAGE>
(b) If any Lender (a "Benefitted Lender") shall at any time receive any
payment of all or part of the Loans owing to it, or interest thereon, or receive
any collateral in respect thereof (whether voluntarily or involuntarily, by
set-off, or otherwise), in a greater proportion than any such payment to or
collateral received by any other Lender, if any, in respect of such other
Lender's Loans owing to it, or interest thereon, such Benefitted Lender shall
purchase for cash from the other Lenders a participating interest in such
portion of each such other Lender's Loans owing to it, or shall provide such
other Lenders with the benefits of any such collateral, or the proceeds thereof,
as shall be necessary to cause such Benefitted Lender to share the excess
payment or benefits of such collateral or proceeds ratably with each of the
Lenders; provided, that if all or any portion of such excess payment or benefits
is thereafter recovered from such Benefitted Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest. The Borrower agrees that any Lender so
purchasing a participation from a Lender pursuant to this Section 3.5 may, to
the fullest extent permitted by law, exercise all of its rights of payment
(including the right of set-off) with respect to such participation as fully as
if such Person were the direct creditor of the Borrower in the amount of such
participation.
SECTION 3.6 Nature of Obligations of Lenders Regarding Extensions of
Credit; Assumption by the Agent. The obligations of the Lenders under this
Agreement to make the Loans and issue or participate in Letters of Credit are
several and are not joint or joint and several. Unless the Agent shall have
received notice from a Lender prior to a proposed borrowing date that such
Lender will not make available to the Agent such Lender's ratable portion of the
amount to be borrowed on such date (which notice shall not release such Lender
of its obligations hereunder), the Agent may assume that such Lender has made
such portion available to the Agent on the proposed borrowing date in accordance
with Section 2.2(b) and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If such amount is
made available to the Agent on a date after such borrowing date, such Lender
shall pay to the Agent on demand an amount, until paid, equal to the product of
(a) the amount of such Lender's Commitment Percentage of such borrowing, times
(b) the daily average Federal Funds Rate during such period as determined by the
Agent, times (c) a fraction, the numerator of which is the number of days that
elapse from and including such borrowing date to the date on which such Lender's
Commitment Percentage of such borrowing shall have become immediately available
to the Agent, and the denominator of which is 360. A certificate of the Agent
with respect to any amounts owing under this Section shall be conclusive, absent
manifest error. If such Lender's Commitment Percentage of such borrowing is not
made available to the Agent by such Lender within three (3) Business Days of
such borrowing date, the Agent shall be entitled to recover such amount made
available by the Agent with interest thereon at the rate per annum applicable to
Base Rate Loans hereunder, on demand, from the Borrower. The failure of any
Lender (a "Defaulting Lender") to make its Commitment Percentage of any Loan
available shall not relieve it or any other Lender of its obligation, if any,
hereunder to make its Commitment Percentage of such Loan available on such
borrowing date, but no Lender shall be responsible for the failure of any other
Lender to make its Commitment Percentage of such Loan available on the borrowing
date.
SECTION 3.7 Indemnity. The Borrower hereby indemnifies each of the Lenders
against any loss or expense which may arise or be attributable to each Lender's
obtaining, liquidating or employing deposits or other funds acquired to effect,
fund or maintain any Loan (a) as a
<PAGE>
consequence of any failure by the Borrower to make any payment when due of any
amount due hereunder in connection with a Loan, (b) due to any failure of the
Borrower to borrow on a date specified therefor in a Notice of Borrowing or (c)
due to any payment or prepayment of any Loan on a date other than the date
specified for such payment in the applicable Notice of Prepayment. The amount of
such loss or expense shall be determined, in the applicable Lender's sole
discretion, based upon the assumption that such Lender funded its Commitment
Percentage of the Loans in the London interbank market and using any reasonable
attribution or averaging methods which such Lender deems appropriate and
practical. A certificate of such Lender setting forth the basis for determining
such amount or amounts necessary to compensate such Lender shall be forwarded to
the Borrower through the Agent and shall be conclusively presumed to be correct
save for manifest error. (Amounts payable under this Section 3.7 shall be
without duplication of amounts payable under Section 3.8 or 3.12.)
SECTION 3.8 Increased Cost and Reduced Return. The Borrower hereby
indemnifies each of the Lenders against any loss or expense which may arise or
be attributable to each Lender's obtaining, liquidating or employing deposits or
other funds acquired to effect, fund or maintain any Loan (a) as a consequence
of any failure by the Borrower to make any payment when due of any amount due
hereunder in connection with a Eurodollar Loan, (b) due to any failure of the
Borrower to borrow on a date specified therefor in a Notice of Borrowing or
Notice of Continuation/Conversion or (c) due to any payment, prepayment or
conversion of any Eurodollar Loan on a date other than the last day of the
Interest Period therefor. The amount of such loss or expense shall be
determined, in the applicable Lender's sole discretion, based upon the
assumption that such Lender funded its Commitment Percentage of the Eurodollar
Loans in the London interbank market and using any reasonable attribution or
averaging methods which such Lender deems appropriate and practical. A
certificate of such Lender setting forth the basis for determining such amount
or amounts necessary to compensate such Lender shall be forwarded to the
Borrower through the Agent and shall be conclusively presumed to be correct save
for manifest error.
(a) If, after the date hereof, the adoption of any applicable law,
rule, or regulation, or any change in any applicable law, rule, or
regulation, or any change in the interpretation or administration thereof
by any governmental authority, central bank, or comparable agency charged
with the interpretation or administration thereof, or compliance by any
Lender (or its Applicable Lending Office) with any request or directive
(whether or not having the force of law) of any such governmental
authority, central bank, or comparable agency:
(i) shall subject such Lender (or its Applicable Lending Office)
to any tax, duty, or other charge with respect to any Eurodollar
Loans, Letter of Credit or Application, its Note, or its obligation to
make Eurodollar Loans, or change the basis of taxation of any amounts
payable to such Lender (or its Applicable Lending Office) under this
Agreement or its Note in respect of any Eurodollar Loans (other than
taxes imposed on the overall net income of such Lender by the
jurisdiction in which such Lender has its principal office or such
Applicable Lending Office);
(ii) shall impose, modify, or deem applicable any reserve,
special deposit, assessment or similar requirement (other than the
Reserve Requirement
<PAGE>
utilized in the determination of the Adjusted Eurodollar Rate)
relating to any extensions of credit or other assets of, or any
deposits with or other liabilities or commitments of, such Lender (or
its Applicable Lending Office), including the Commitment of such
Lender hereunder; or
(iii) shall impose on such Lender (or its Applicable Lending
Office) or on the United States market for certificates of deposit or
the London interbank market any other condition affecting this
Agreement or its Note or any of such extensions of credit or
liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such Lender
(or its Applicable Lending Office) of making, Converting into, Continuing, or
maintaining any Eurodollar Loans or Letter of Credit or Application or to reduce
any sum received or receivable by such Lender (or its Applicable Lending Office)
under this Agreement or its Note with respect to any Eurodollar Loans, then the
Borrower shall pay to such Lender on demand such amount or amounts as will
compensate such Lender for such increased cost or reduction. If any Lender
requests compensation by the Borrower under this Section 3.8, the Borrower may,
by notice to such Lender (with a copy to the Agent), suspend the obligation of
such Lender to make or Continue Eurodollar Loans or to Convert Base Rate Loans
into Eurodollar Loans until the event or condition giving rise to such request
ceases to be in effect (in which case the provisions of Section 3.11 shall be
applicable); provided, that such suspension shall not affect the right of such
Lender to receive the compensation so requested.
(b) If, after the date hereof, any Lender shall have reasonably determined
that the adoption of any applicable law, rule, or regulation regarding capital
adequacy or any change therein or in the interpretation or administration
thereof by any governmental authority, central bank, or comparable agency
charged with the interpretation or administration thereof, or any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such governmental authority, central bank, or comparable agency, has or
would have the effect of reducing the rate of return on the capital of such
Lender or any corporation controlling such Lender as a consequence of such
Lender's obligations hereunder to a level below that which such Lender or such
corporation could have achieved but for such adoption, change, request, or
directive (taking into consideration its policies with respect to capital
adequacy), then from time to time upon demand the Borrower shall pay to such
Lender such additional amount or amounts as will compensate such Lender for such
reduction.
(c) Each Lender shall promptly notify the Borrower and the Agent of any
event of which it has knowledge, occurring after the date hereof, which will
entitle such Lender to compensation pursuant to this Section and will designate
a different Applicable Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the judgment of
such Lender, be otherwise disadvantageous to it. Any Lender claiming
compensation under this Section shall furnish to the Borrower and the Agent a
statement setting forth the additional amount or amounts to be paid to it
hereunder which shall be conclusive in the absence of manifest error. In
determining such amount, such Lender may use any reasonable averaging and
attribution methods.
<PAGE>
(d) Amounts payable under this Section 3.8 shall be without duplication of
amounts payable under Sections 3.7 and 3.12.
SECTION 3.9 Limitation on Types of Loans. If on or prior to the first day
of any Interest Period for any Eurodollar Loan:
(a) the Agent reasonably determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar
Rate for such Interest Period; or
(b) the Required Lenders determine (which determination shall be
conclusive) and notify the Agent that the Adjusted Eurodollar Rate will not
adequately and fairly reflect the cost to the Lenders of funding Eurodollar
Loans for such Interest Period;
then the Agent shall give the Borrower prompt notice thereof specifying the
relevant Eurodollar Loans and the relevant amounts or periods, and so long as
such condition remains in effect, the Lenders shall be under no obligation to
make additional Eurodollar Loans, Continue Eurodollar Loans or to Convert Base
Rate Loans into Eurodollar Loans and the Borrower shall, on the last day(s) of
the then current Interest Period(s) for the outstanding Eurodollar Loans either
prepay such Loans or Convert such Loans into Base Rate Loans in accordance with
the terms of this Agreement.
SECTION 3.10 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to make, maintain, or fund Eurodollar Loans hereunder,
then such Lender shall promptly notify the Borrower thereof and such Lender's
obligation to make or Continue Eurodollar Loans and to Convert Base Rate Loans
into Eurodollar Loans shall be suspended until such time as such Lender may
again make, maintain, and fund Eurodollar Loans (in which case the provisions of
Section 3.11 shall be applicable).
SECTION 3.11 Treatment of Affected Loans. If the obligation of any Lender
to make Eurodollar Loans or to Continue, or to Convert Base Rate Loans into,
Eurodollar Loans shall be suspended pursuant to Section 3.9 or 3.10 hereof,
unless and until such Lender gives notice as provided below that the
circumstances specified in Section 3.9 or 3.10 hereof no longer exist:
(a) to the extent that such Lender's Eurodollar Loans have been so
Converted into Base Rate Loans, all payments and prepayments of principal
that would otherwise be applied to the Eurodollar Loans shall be applied
instead to its Base Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such Lender
as Eurodollar Loans shall be made or Continued instead as Base Rate Loans,
and all Loans of such Lender that would otherwise be Converted into
Eurodollar Loans shall instead remain as Base Rate Loans.
<PAGE>
If such Lender gives notice to the Borrower (with a copy to the Agent) that the
circumstances specified in Section 3.9 or 3.10 hereof no longer exist (which
such Lender agrees to do promptly upon such circumstances ceasing to exist),
such Lender's Base Rate Loans may be Converted to Eurodollar Loans.
SECTION 3.12 Compensation. Upon the request of any Lender, the Borrower
shall pay to such Lender such amount or amounts as shall be sufficient (in the
reasonable opinion of such Lender) to compensate it for any loss, cost, or
expense (including loss of anticipated profits) incurred by it as a result of:
(a) any payment, prepayment, or Conversion of a Eurodollar
Loan for any reason (including, without limitation, the acceleration
of the Loans pursuant to Section 10.2) on a date other than the last
day of the Interest Period for such Loan; or
(b) any failure by the Borrower for any reason (including,
without limitation, the failure of any condition precedent specified
in Article IV to be satisfied) to borrow, Convert, Continue, or
prepay a Eurodollar Loan on the date for such borrowing, Conversion,
Continuation, or prepayment specified in the relevant Notice of
Borrowing, prepayment, Continuation, or Conversion under this
Agreement.
Amounts payable under this Section 3.12 shall be without duplication of amounts
payable under Sections 3.7 or 3.8.
SECTION 3.13 Taxes.
(a) Any and all payments by the Borrower to or for the account of any
Lender or the Agent hereunder or under any other Loan Document shall be made
free and clear of and without deduction for any and all present or future taxes,
duties, levies, imposts, deductions, charges or withholdings, and all
liabilities with respect thereto, excluding, in the case of each Lender and the
Agent, taxes imposed on its income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Lender (or its Applicable Lending
Office) or the Agent (as the case may be) is organized or any political
subdivision thereof (all such non-excluded taxes, duties, levies, imposts,
deductions, charges, withholdings, and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable under this Agreement or any other Loan Document
to any Lender or the Agent, (i) the sum payable shall be increased as necessary
so that after making all required deductions (including deductions applicable to
additional sums payable under this Section 3.13) such Lender or the Agent
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions, (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law, and (iv) the Borrower
shall furnish to the Agent, at its address referred to in Section 12.1, the
original or a certified copy of a receipt evidencing payment thereof.
(b) In addition, the Borrower agrees to pay any and all present or future
stamp or documentary taxes and any other excise or property taxes or charges or
similar levies which arise from any payment made under this Agreement or any
other Loan Document or from the execution
<PAGE>
or delivery of, or otherwise with respect to, this Agreement or any other Loan
Document (hereinafter referred to as "Other Taxes").
(c) The Borrower agrees to indemnify each Lender and the Agent for the full
amount of Taxes and Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 3.13) paid by such Lender or the Agent (as the case may be) and any
liability (including penalties, interest, and expenses) arising therefrom or
with respect thereto.
(d) Each Lender organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Lender listed on the signature pages hereof and on
or prior to the date on which it becomes a Lender in the case of each other
Lender, and from time to time thereafter if requested in writing by the Borrower
or the Agent (but only so long as such Lender remains lawfully able to do so),
shall provide the Borrower and the Agent with (i) Internal Revenue Service Form
1001 or 4224, as appropriate, or any successor form prescribed by the Internal
Revenue Service, certifying that such Lender is entitled to benefits under an
income tax treaty to which the United States is a party which reduces the rate
of withholding tax on payments of interest or certifying that the income
receivable pursuant to this Agreement is effectively connected with the conduct
of a trade or business in the United States, (ii) Internal Revenue Service Form
W-8 or W-9, as appropriate, or any successor form prescribed by the Internal
Revenue Service, and (iii) any other form or certificate required by any taxing
authority (including any certificate required by Sections 871(h) and 881(c) of
the Internal Revenue Code), certifying that such Lender is entitled to an
exemption from or a reduced rate of tax on payments pursuant to this Agreement
or any of the other Loan Documents.
(e) For any period with respect to which a Lender has failed to provide the
Borrower and the Agent with the appropriate form pursuant to Section 3.13(d)
(unless such failure is due to a change in treaty, law, or regulation occurring
subsequent to the date on which a form originally was required to be provided),
such Lender shall not be entitled to indemnification under Section 3.13(a) or
3.13(b) with respect to Taxes imposed by the United States; provided, that
should a Lender, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Taxes because of its failure to deliver a
form required hereunder, the Borrower shall take such steps as such Lender shall
reasonably request to assist such Lender to recover such Taxes.
(f) If the Borrower is required to pay additional amounts to or for the
account of any Lender pursuant to this Section 3.13, then such Lender will agree
to use reasonable efforts to change the jurisdiction of its Applicable Lending
Office so as to eliminate or reduce any such additional payment which may
thereafter accrue if such change, in the judgment of such Lender, is not
otherwise disadvantageous to such Lender.
(g) Within thirty (30) days after the date of any payment of Taxes, the
Borrower shall furnish to the Agent the original or a certified copy of a
receipt evidencing such payment.
(h) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 3.13 shall survive the termination of the Commitments and the
payment in full of the Notes.
<PAGE>
SECTION 3.14 Replacement of Lenders. If deposits in eurodollars shall not
be available to any Lender, or it shall be unlawful or impossible for any Lender
to make or maintain any Eurodollar Loan or the cost to any Lender of making or
maintaining Eurodollar Loans is increased by reason of any circumstance
specified in Section 3.8(a) and (b) or if any Lender asserts the right to
indemnity under Section 3.13 or the Borrower is required to pay additional
amounts to or for the account of any Lender pursuant to Section 3.13, or with
respect to any Defaulting Lender, the Borrower shall have the right, if no
Default exists or will exist immediately after giving effect to the respective
replacement, to replace such affected Lender or Defaulting Lender (the "Replaced
Lender"), upon ten (10) days' written notice to the Agent, with one or more
other Eligible Assignee or Assignees (collectively, the "Replacement Lender");
provided, that no assignment shall be required if the consummation of such
assignment conflicts with any Applicable Law. Neither the Agent nor any Lender
shall be obligated to assist the Borrower in identifying any Eligible Assignees
that are willing to become a Replacement Lender. At the time of any replacement
pursuant to this Section 3.14, the Replacement Lender shall enter into an
Assignment and Acceptance (with all fees payable pursuant to Section 12.10 to be
paid by the Replacement Lender) pursuant to which the Replacement Lender shall
acquire all of the Commitment and outstanding Extensions of Credit of the
Replaced Lender and in connection therewith, shall pay on the effective date of
the corresponding Assignment and Acceptance to the Replaced Lender an amount
equal to the sum of (i) the principal of, and all accrued interest on, all
outstanding Loans of the Replaced Lender and (ii) all accrued but unpaid fees
owing to the Replaced Lender pursuant to Section 3.3 and (iii) all other
obligations of the Borrower owing to the Replaced Lender. Upon the execution of
such Assignment and Acceptance, the payment of amounts referred to in clauses
(i), (ii) and (iii) above and delivery to the Replacement Lender of a new Note
executed by the Borrower, the Replacement Lender shall become a Lender hereunder
and the Replaced Lender shall cease to constitute a Lender hereunder, except
with respect to the indemnification provisions under this Agreement, which shall
survive as to such Replaced Lender and in the case of a replacement of a
Replaced Lender with an existing Lender, the Commitment Percentage of such
Lender shall be automatically adjusted at such time to give effect to such
replacement.
ARTICLE IV
CLOSING; CONDITIONS OF CLOSING AND BORROWING
SECTION 4.1 Closing. The closing shall take place at the offices of Kennedy
Covington Lobdell & Hickman, L.L.P., 100 North Tryon Street, Suite 4200,
Charlotte, North Carolina 28202 at 10:00 a.m. on July 28, 1997.
SECTION 4.2 Conditions to Closing and Initial Extensions of Credit. The
obligation of the Lenders to close this Agreement and to make the initial Loan
or issue the Letters of Credit is subject to the satisfaction of each of the
following conditions:
(a) Executed Loan Documents. This Agreement, the Notes and the
Guaranty Agreement shall have been duly authorized, executed and delivered
to the Agent by the
<PAGE>
parties thereto, shall be in full force and effect and no default shall
exist thereunder, and the Borrower shall have delivered original
counterparts thereof to the Agent.
(b) Closing Certificates; etc.
(i) Officer's Certificate of the Borrower. The Agent shall have
received a certificate from the chief executive officer or chief
financial officer of the Borrower, in form and substance satisfactory
to the Agent, to the effect that, to the best of his or her knowledge:
all representations and warranties of the Borrower and its
Subsidiaries contained in this Agreement and the other Loan Documents
are true, correct and complete; the Borrower and its Subsidiaries are
not in violation of any of the covenants contained in this Agreement
and the other Loan Documents; and after giving effect to the
transactions contemplated by this Agreement, no Default or Event of
Default has occurred and is continuing.
(ii) Certificate of Secretary of the Borrower and the Guarantors.
The Agent shall have received a certificate of the secretary or
assistant secretary of the Borrower and each Guarantor certifying that
attached thereto is a true and complete copy of resolutions duly
adopted by the Board of Directors of such Person authorizing the
borrowings contemplated hereunder and the execution, delivery and
performance of this Agreement and the other Loan Documents to which it
is a party; and as to the incumbency and genuineness of the signature
of each officer of such Person executing Loan Documents to which it is
a party. The certificate to be delivered on behalf of the Borrower
shall also certify that attached thereto is a true and complete copy
of the articles of incorporation (or other applicable organizational
document) of the Borrower and all amendments thereto, certified as of
a recent date by the appropriate Governmental Authority in its
jurisdiction of incorporation, together with a true and complete copy
of the bylaws (or other applicable document) of the Borrower as in
effect on the date of such certification.
(iii) Certificates of Good Standing. The Agent shall have
received long-form certificates as of a recent date of the good
standing of the Borrower and each of the Guarantors as are reasonably
requested by the Agent.
(iv) Opinions of Counsel. The Agent shall have received favorable
opinions of counsel to the Borrower addressed to the Agent and the
Lenders with respect to the Borrower and the Guarantors, the Loan
Documents and such other matters as the Lenders shall request.
(v) Payoff Letter. The Agent shall have received a payoff letter
in form and substance satisfactory to the Agent from First Union
National Bank.
(vi) Tax Forms. The Agent shall have received copies of the
United States Internal Revenue Service forms required by Section
3.13(e) hereof.
(vii) Borrowing Base Certificate. The Agent shall have received a
Borrowing Base Certificate properly completed and executed by the
Borrower.
<PAGE>
(c) Consents; Defaults.
(i) Governmental and Third Party Approvals. All necessary
approvals, authorizations and consents, if any be required, of any
Person and of all Governmental Authorities and courts having
jurisdiction with respect to the transactions contemplated by this
Agreement and the other Loan Documents shall have been obtained.
(ii) No Injunction, Etc. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or
proposed before any Governmental Authority to enjoin, restrain, or
prohibit, or to obtain substantial damages in respect of, or which is
related to or arises out of this Agreement or the other Loan Documents
or the consummation of the transactions contemplated hereby or
thereby, or which, in the Agent's discretion, would make it
inadvisable to consummate the transactions contemplated by this
Agreement and such other Loan Documents.
(iii) No Event of Default. No Default or Event of Default shall
have occurred and be continuing.
(d) Financial Matters.
(i) Financial Statements. The Agent shall have received the most
recent audited Consolidated financial statements of the Borrower and
its Subsidiaries, all in form and substance satisfactory to the Agent
and prepared in accordance with GAAP. Without limitation of the
foregoing, the Agent and each Lender shall have received audited
financial statements for the Fiscal Year ended September 30, 1996, and
unaudited financial statements for the six month period ending March
31, 1997.
(ii) Financial Condition Certificate. The Borrower shall have
delivered to the Agent a certificate, in form and substance
satisfactory to the Agent, and certified as accurate to the best of
his knowledge by the chief executive officer or chief financial
officer of the Borrower, that the Borrower and each of its
Wholly-Owned Subsidiaries are Solvent and evidencing compliance by the
Borrower on a pro forma basis with the covenants contained in Articles
VIII and IX hereof.
(iii) Payment at Closing; Fee Letters. All legal fees and
expenses of Agent's counsel, which shall not exceed $17,500, shall
have been paid. The Agent shall have received duly authorized and
executed copies of the fee letter agreement referred to in Section
3.3(b).
(e) Miscellaneous.
(i) Notice of Borrowing. The Agent shall have received a Notice
of Borrowing from the Borrower in accordance with Section 2.2(a), and
written
<PAGE>
notice specifying the account or accounts to which the proceeds of any
Loans made after the Closing Date are to be disbursed.
(ii) Proceedings and Documents. All opinions, certificates and
other instruments and all proceedings in connection with the
transactions contemplated by this Agreement shall be satisfactory in
form and substance to the Lenders. The Lenders shall have received
copies of all other instruments and other evidence as the Lenders may
reasonably request, in form and substance satisfactory to the Lenders,
with respect to the transactions contemplated by this Agreement and
the taking of all actions in connection therewith.
(iii) Due Diligence and Other Documents. The Borrower shall have
delivered to the Agent such other documents, certificates and opinions
as the Agent reasonably requests, including without limitation copies
of each document evidencing or governing the Subordinated Debt,
certified by a secretary or assistant secretary of the Borrower as a
true and correct copy thereof.
SECTION 4.3 Conditions to All Loans. The obligation of the Lenders to make
any Loan or of the Issuing Lender to issue any Letter of Credit is subject to
the satisfaction of the following conditions precedent on the relevant borrowing
date, as applicable:
(a) Continuation of Representations and Warranties. The
representations and warranties made by the Borrower contained in Article V
shall be true and correct in all material respects as of the date made;
provided, however, that the Borrower shall notify the Agent (and the Agent
shall notify each Lender) of any material adverse change in the
representations and warranties made in this Agreement at the time of or
prior to any future Extension of Credit, such notice to be given promptly
following such material adverse change. Absent any such notice from the
Borrower, each Notice of Borrowing shall be deemed a certification of the
foregoing representations and warranties, after giving effect to any
notices of material subsequent changes, both before and after giving effect
to the requested Extension of Credit.
(b) No Existing Default. No Default or Event of Default shall have
occurred and be continuing hereunder (i) on the borrowing date with respect
to such Loan or after giving effect to the Loans to be made on such date or
(ii) on the issue date with respect to any Letter of Credit or after giving
effect to such Letter of Credit on such date.
(c) Officer's Compliance Certificate. The Agent shall have received
the current Officer's Compliance Certificate.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
SECTION 5.1 Representations and Warranties. To induce the Agent to enter
into this
<PAGE>
Agreement and the Lenders to make the Loans or issue or participate in the
Letters of Credit, the Borrower hereby represents and warrants to the Agent and
Lenders that:
(a) Organization; Power; Qualification. Each of the Borrower and its
Subsidiaries (i) is duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or formation, (ii) has the
power and authority to own its properties and to carry on its business as now
being and hereafter proposed to be conducted and (iii) is duly qualified and
authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business requires such qualification and
authorization, except, in each case where the failure to do so could not
reasonably be expected to result in a Material Adverse Effect.
(b) Ownership. Each Subsidiary of the Borrower is listed on Schedule
5.1(b). All outstanding shares have been duly authorized and validly issued and
are fully paid and nonassessable. There are no outstanding stock purchase
warrants, subscriptions, options, securities, instruments or other rights of any
type or nature whatsoever, which are convertible into, exchangeable for or
otherwise provide for or permit the issuance of capital stock of the Borrower or
its Subsidiaries, except those granted in the ordinary course of business.
(c) Authorization of Agreement, Loan Documents and Borrowing. Each of the
Borrower and its Subsidiaries has the right, power and authority and has taken
all necessary corporate and other action to authorize the execution, delivery
and performance of this Agreement and each of the other Loan Documents to which
it is a party in accordance with their respective terms. This Agreement and each
of the other Loan Documents have been duly executed and delivered by the duly
authorized officers of the Borrower and each of its Subsidiaries party thereto,
and each such document constitutes the legal, valid and binding obligation of
the Borrower or its Subsidiary party thereto, enforceable in accordance with its
terms, except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar state or federal debtor relief laws from
time to time in effect which affect the enforcement of creditors' rights in
general and the availability of equitable remedies.
(d) Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc.
The execution, delivery and performance by the Borrower and its Subsidiaries of
the Loan Documents to which each such Person is a party, in accordance with
their respective terms, the borrowings hereunder and the transactions
contemplated hereby do not and will not, by the passage of time, the giving of
notice or otherwise, (i) to the best knowledge of the Borrower, require any
Governmental Approval or violate any Applicable Law relating to the Borrower or
any of its Subsidiaries; (ii) conflict with, result in a breach of or constitute
a default under the articles of incorporation, bylaws or other organizational
documents of the Borrower or any of its Subsidiaries or any indenture, agreement
or other instrument to which such Person is a party or by which any of its
properties may be bound or, to the best knowledge of the Borrower, any
Governmental Approval relating to such Person; or (iii) result in or require the
creation or imposition of any Lien upon or with respect to any property now
owned or hereafter acquired by such Person other than Liens arising under the
Loan Documents.
<PAGE>
(e) Compliance with Law; Governmental Approvals. Each of the Borrower and
its Subsidiaries (i) has all Governmental Approvals required by any Applicable
Law for it to conduct its business, each of which is in full force and effect,
is final and not subject to review on appeal and is not the subject of any
pending or, to the best of its knowledge, threatened attack by direct or
collateral proceeding, and (ii) is in compliance with each Governmental Approval
applicable to it and in compliance with all other Applicable Laws relating to it
or any of its respective properties, except in each case where failure to have
or comply with such Governmental Approval could not reasonably be expected to
result in a Material Adverse Effect.
(f) Tax Returns and Payments. To the best of its knowledge, each of the
Borrower and its Subsidiaries has duly filed or caused to be filed all federal,
state, local and other tax returns required by Applicable Law to be filed, and
has paid, or made adequate provision for the payment of, all federal, state,
local and other taxes, assessments and governmental charges or levies upon it
and its property, income, profits and assets which are due and payable. No
Governmental Authority has asserted any Lien or other claim against the Borrower
or Subsidiary thereof with respect to unpaid taxes which has not been discharged
or resolved. The charges, accruals and reserves on the books of the Borrower and
any of its Subsidiaries in respect of federal, state, local and other taxes for
all Fiscal Years and portions thereof since the organization of the Borrower and
any of its Subsidiaries are in the judgment of the Borrower adequate, and the
Borrower does not anticipate any additional taxes or assessments for any of such
years.
(g) Intellectual Property Matters. Each of the Borrower and its
Subsidiaries owns or possesses rights to use all franchises, licenses,
copyrights, copyright applications, patents, patent rights or licenses, patent
applications, trademarks, trademark rights, trade names, trade name rights,
copyrights and rights with respect to the foregoing which are required to
conduct its business, except where failure to own or possess such rights could
not reasonably be expected to result in a Material Adverse Effect. No event has
occurred which permits, or after notice or lapse of time or both would permit,
the revocation or termination of any such rights, and neither the Borrower nor
any Subsidiary thereof is liable to any Person for infringement under Applicable
Law with respect to any such rights as a result of its business operations,
except where the existence of such event or liability could not reasonably be
expected to result in a Material Adverse Effect.
(h) Environmental Matters.
(i) The properties of the Borrower and its Subsidiaries do not
contain, and to their knowledge have not previously contained, any
Hazardous Materials in amounts or concentrations which (A) constitute or
constituted a violation of, or (B) could give rise to liability under,
applicable Environmental Laws;
(ii) Such properties of the Borrower and its Subsidiaries and all
operations conducted in connection therewith while owned by the Borrower
and its Subsidiaries are in compliance, and have been in compliance, with
all applicable Environmental Laws, except where failure to so comply could
not reasonably be
<PAGE>
expected to result in a Material Adverse Effect, and to the best of the
Borrower's knowledge there is no contamination at, under or about such
properties or such operations which could interfere with the continued
operation of such properties or impair the fair saleable value thereof;
(iii) Neither the Borrower nor any Subsidiary thereof has received any
notice of violation, alleged violation, noncompliance, liability or
potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of their properties or the operations
conducted in connection therewith, nor does the Borrower or any Subsidiary
thereof have knowledge or reason to believe that any such notice will be
received or is being threatened;
(iv) Hazardous Materials have not been transported or disposed of from
the properties of the Borrower and its Subsidiaries in violation of, or in
a manner or to a location which could give rise to liability under,
Environmental Laws, nor have any Hazardous Materials been generated,
treated, stored or disposed of at, on or under any of such properties in
violation of any applicable Environmental Laws;
(v) No judicial proceedings or governmental or administrative action
is pending, or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary thereof is or
will be named as a party with respect to such properties or operations
conducted in connection therewith, nor are there any consent decrees or
other decrees, consent orders, administrative orders or other orders, or
other administrative or judicial requirements outstanding under any
Environmental Law with respect to such properties or such operations; and
(vi) There has been no release by Borrower or any of its Subsidiaries,
or to the best of the Borrower's knowledge, the threat of release, of
Hazardous Materials at or from such properties, in violation of or in
amounts or in a manner that could give rise to liability under
Environmental Laws.
(i) ERISA.
(i) Neither the Borrower nor any ERISA Affiliate maintains or
contributes to, or has any obligation under, any Employee Benefit Plans
other than those identified on Schedule 5.1(i);
(ii) the Borrower and each ERISA Affiliate is in compliance with all
applicable provisions of ERISA and the regulations and published
interpretations thereunder with respect to all Employee Benefit Plans
except for any required amendments for which the remedial amendment period
as defined in Section 401(b) of the Code has not yet expired and except
where failure to comply could not reasonably be expected to result in a
Material Adverse Effect. Each Employee Benefit Plan that is intended to be
qualified under Section 401(a) of the Code has been determined by the
Internal Revenue Service to be so qualified, and each trust related to such
plan has been determined to be exempt under Section 501(a) of the
<PAGE>
Code, except where the failure to so qualify or so determine could not
reasonably be expected to result in a Material Adverse Effect. No liability
has been incurred by the Borrower or any ERISA Affiliate which remains
unsatisfied for any taxes or penalties with respect to any Employee Benefit
Plan or any Multiemployer Plan, except where the existence of such
liability could not reasonably be expected to result in a Material Adverse
Effect;
(iii) No Pension Plan has been terminated, nor has any accumulated
funding deficiency (as defined in Section 412 of the Code) been incurred
(without regard to any waiver granted under Section 412 of the Code), nor
has any funding waiver from the Internal Revenue Service been received or
requested with respect to any Pension Plan, nor has the Borrower or any
ERISA Affiliate failed to make any contributions or to pay any amounts due
and owing as required by Section 412 of the Code, Section 302 of ERISA or
the terms of any Pension Plan prior to the due dates of such contributions
under Section 412 of the Code or Section 302 of ERISA, nor has there been
any event requiring any disclosure under Section 4041(c)(3)(C) or 4063(a)
of ERISA with respect to any Pension Plan;
(iv) Neither the Borrower nor any ERISA Affiliate has: (A) engaged in
a nonexempt prohibited transaction described in Section 406 of the ERISA or
Section 4975 of the Code, (B) incurred any liability to the PBGC which
remains outstanding other than the payment of premiums and there are no
premium payments which are due and unpaid, (C) failed to make a required
contribution or payment to a Multiemployer Plan, or (D) failed to make a
required installment or other required payment under Section 412 of the
Code;
(v) No Termination Event has occurred or is reasonably expected to
occur; and
(vi) No proceeding, claim, lawsuit and/or investigation is existing
or, to the best knowledge of the Borrower after due inquiry, threatened
concerning or involving any (A) employee welfare benefit plan (as defined
in Section 3 (1) of ERISA) currently maintained or contributed to by the
Borrower or any ERISA Affiliate, (B) Pension Plan or (C) Multiemployer
Plan.
(j) Margin Stock. Neither the Borrower nor any Subsidiary thereof is
engaged principally or as one of its activities in the business of
extending credit for the purpose of "purchasing" or "carrying" any "margin
stock" (as each such term is defined or used in Regulations G and U of the
Board of Governors of the Federal Reserve System). No part of the proceeds
of any of the Loans or Letters of Credit will be used for purchasing or
carrying margin stock or for any purpose which violates, or which would be
inconsistent with, the provisions of Regulation G, T, U or X of such Board
of Governors.
(k) Government Regulation. Neither the Borrower nor any Subsidiary
thereof is an "investment company" or a company "controlled" by an
"investment company" (as each such term is defined or used in the
Investment Company Act of 1940, as amended) and neither the Borrower nor
any Subsidiary thereof is, or after giving effect to any Loan
<PAGE>
will be, subject to regulation under the Public Utility Holding Company Act
of 1935 or the Interstate Commerce Act, each as amended, or any other
Applicable Law which limits its ability to incur or consummate the
transactions contemplated hereby.
(l) Material Contracts. Each Material Contract is, and after giving
effect to the consummation of the transactions contemplated by the Loan
Documents will be, in full force and effect in accordance with the terms
thereof.
(m) Employee Relations. Each of the Borrower and its Subsidiaries has
a stable work force in place and is not party to any collective bargaining
agreement nor has any labor union been recognized as the representative of
its employees. The Borrower knows of no pending, threatened or contemplated
strikes, work stoppage or other collective labor disputes involving its
employees or those of its Subsidiaries.
(n) Financial Statements. The (i) Consolidated balance sheets of the
Borrower and its Subsidiaries as of September 30, 1996 and the related
statements of income and retained earnings and cash flows for the Fiscal
Years then ended and (ii) unaudited Consolidated balance sheet of the
Borrower and its Subsidiaries as of March 31, 1997 and related unaudited
interim statements of revenue and retained earnings, copies of which have
been furnished to the Agent and each Lender, are complete and correct and
fairly present, in all material respects, the assets, liabilities and
financial position of the Borrower and its Subsidiaries taken as a whole as
at such dates, and the results of the operations and changes of financial
position for the periods then ended. All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP. The Borrower and its Subsidiaries have no Debt or
obligation which is not fairly reflected in the foregoing financial
statements or in the notes thereto, to the extent required by GAAP.
(o) No Material Adverse Change. Since September 30, 1996, there has
been no material adverse change in the properties, business, operations or
condition (financial or otherwise) of the Borrower and its Subsidiaries and
no event has occurred or condition arisen that could reasonably be expected
to have a Material Adverse Effect.
(p) Solvency. As of the Closing Date and after giving effect to each
Loan made hereunder, the Borrower and each of its Subsidiaries will be
Solvent.
(q) Titles to Properties. Each of the Borrower and its Subsidiaries
has such title to the real property owned by it as is necessary or
desirable to the conduct of its business and valid and legal title to all
of its personal property and assets, including, but not limited to, those
reflected on the balance sheets of the Borrower and its Subsidiaries
delivered pursuant to Section 5.1(o), except those which have been disposed
of by the Borrower or its Subsidiaries subsequent to such date which
dispositions have been in the ordinary course of business or as otherwise
expressly permitted hereunder, and except where the failure to have such
title could not reasonably be expected to result in a Material Adverse
Effect.
<PAGE>
(r) Liens. None of the properties and assets of the Borrower or any
Subsidiary thereof is subject to any Lien, except Liens permitted pursuant
to Section 9.3, except where the existence of such a Lien could not
reasonably be expected to result in a Material Adverse Effect. No financing
statement under the Uniform Commercial Code of any state which names the
Borrower or any Subsidiary thereof or any of their respective trade names
or divisions as debtor and which has not been terminated, has been filed in
any state or other jurisdiction and neither the Borrower nor any Subsidiary
thereof has signed any such financing statement or any security agreement
authorizing any secured party thereunder to file any such financing
statement, except to perfect those Liens permitted by Section 9.3 hereof.
(s) Debt and Contingent Obligations. Schedule 5.1(s) is a complete and
correct listing of all Debt and Contingent Obligations of the Borrower and
its Subsidiaries in excess of $500,000. The Borrower and its Subsidiaries
have performed and are in material compliance with all of the terms of such
Debt and Contingent Obligations and all instruments and agreements relating
thereto, and no default or event of default, or event or condition which
with notice or lapse of time or both would constitute such a default or
event of default on the part of the Borrower or its Subsidiaries exists
with respect to any such Debt or Contingent Obligation.
(t) Litigation. Except as set forth on Schedule 5.1(t), there are no
actions, suits or proceedings pending nor, to the knowledge of the
Borrower, threatened against or in any other way relating adversely to or
affecting the Borrower or any Subsidiary thereof or any of their respective
properties in any court or before any arbitrator of any kind or before or
by any Governmental Authority, except where such an action, suit or
proceeding, if adversely determined, could reasonably be expected to result
in a Material Adverse Effect.
(u) Absence of Defaults. No event has occurred or is continuing which
constitutes a Default or an Event of Default, or which constitutes, or
which with the passage of time or giving of notice or both would
constitute, a material default or event of default by the Borrower or any
Subsidiary thereof under any Material Contract or judgment, decree or order
to which the Borrower or its Subsidiaries is a party or by which the
Borrower or its Subsidiaries or any of their respective properties may be
bound or which would require the Borrower or its Subsidiaries to make any
payment thereunder prior to the scheduled maturity date therefor.
(v) Accuracy and Completeness of Information. All written information,
reports and other papers and data produced by or on behalf of the Borrower
or any Subsidiary thereof and furnished to the Lenders were, at the time
the same were so furnished, complete and correct in all material respects
to the extent necessary to give the recipient a true and accurate knowledge
of the subject matter. No document furnished or written statement made to
the Agent or the Lenders by the Borrower or any Subsidiary thereof in
connection with the negotiation, preparation or execution of this Agreement
or any of the Loan Documents contains or will contain any untrue statement
of a fact material to the creditworthiness of the Borrower or its
Subsidiaries or omits or will omit to state a fact necessary in order to
make the statements contained therein not materially misleading.
<PAGE>
The Borrower is not aware of any facts which it has not disclosed in
writing to the Agent having a Material Adverse Effect.
SECTION 5.2 Survival of Representations and Warranties, Etc. All
representations and warranties set forth in this Article V and all
representations and warranties contained in any certificate, or any of the Loan
Documents (including but not limited to any such representation or warranty made
in or in connection with any amendment thereto) shall constitute representations
and warranties made under this Agreement. All representations and warranties
made under this Agreement shall be made or deemed to be made at and as of the
Closing Date, shall survive the Closing Date and shall not be waived by the
execution and delivery of this Agreement, any investigation made by or on behalf
of the Lenders or any borrowing hereunder.
ARTICLE VI
FINANCIAL INFORMATION AND NOTICES
Until all the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, unless consent has been
obtained in the manner set forth in Section 12.11 hereof, the Borrower will
furnish or cause to be furnished to the Agent at the Agent's Office at the
address set forth in Section 12.1 hereof, or such other office as may be
designated by the Agent from time to time:
SECTION 6.1 Financial Statements and Projections.
(a) Quarterly Financial Statements. As soon as practicable and in any event
within forty-five (45) days after the end of each fiscal quarter, an unaudited
Consolidated balance sheet of the Borrower and its Subsidiaries as of the close
of such fiscal quarter and unaudited Consolidated statements of income, retained
earnings and cash flows for the fiscal quarter then ended and that portion of
the Fiscal Year then ended, all in reasonable detail setting forth in
comparative form the corresponding figures for the preceding Fiscal Year and
prepared by the Borrower in accordance with GAAP and, if applicable, containing
disclosure of the effect on the financial position or results of operations of
any change in the application of accounting principles and practices during the
period, and certified, to the best of his knowledge, by the chief financial
officer of the Borrower to present fairly in all material respects the financial
condition of the Borrower and its Subsidiaries as of their respective dates and
the results of operations of the Borrower and its Subsidiaries for the
respective periods then ended, subject to normal year end adjustments. (Delivery
by the Borrower to each Lender of the Borrower's quarterly report on Form 10Q
with respect to any fiscal quarter within forty-five (45) days after the end of
such fiscal quarter shall be deemed to be compliance by the Borrower with this
Section 6.1(a).)
(b) Annual Financial Statements. As soon as practicable and in any event
within one hundred twenty (120) days after the end of each Fiscal Year,
commencing with Fiscal Year ending September 30, 1997, an audited consolidated
balance sheet of the Borrower and its Subsidiaries as of the close of such
Fiscal Year and audited consolidated statements of income and expenses, retained
earnings and cash flows for the Fiscal Year then ended, including the notes
thereto, all in
<PAGE>
reasonable detail and prepared in accordance with GAAP and
accompanied by a report thereon prepared by Ernst & Young LLP, or another
independent certified public accounting firm reasonably acceptable to the Agent
that such financial statements not qualified with respect to scope limitations
imposed by the Borrower and its Subsidiaries or with respect to accounting
principles followed by the Borrower and its Subsidiaries not in accordance with
GAAP. (Delivery by the Borrower to each Lender of the Borrower's annual report
on Form 10K with respect to any fiscal year within one hundred twenty (120) days
after the end of each such fiscal year shall be deemed to be compliance by the
Borrower with this Section 6.1(b).)
SECTION 6.2 Officer's Compliance Certificate. At each time financial
statements are delivered pursuant to Sections 6.1(a) or (b) and at such other
times as the Agent shall reasonably request, a certificate of the chief
financial officer or the treasurer of the Borrower in the form of Exhibit E
attached hereto (an "Officer's Compliance Certificate").
SECTION 6.3 Accountants' Certificate. At each time financial statements are
delivered pursuant to Section 6.1(b), a certificate of the independent public
accountants certifying such financial statements addressed to the Agent for the
benefit of the Lenders stating that in making the examination necessary for the
certification of such financial statements, they obtained no knowledge of any
Default or Event of Default that has occurred and is continuing as a result of
non-compliance with the financial covenants contained in Article VIII hereof or,
if such is not the case, specifying such Default or Event of Default and its
nature and period of existence.
SECTION 6.4 Other Reports.
(a) A Borrowing Base Certificate in the form of Exhibit G attached hereto
(a "Borrowing Base Certificate"). Such Borrowing Base Certificate shall be
provided, during any period when the aggregate principal amount outstanding
hereunder is (i) less than or equal to $7,500,000, as soon as practicable and in
any event within thirty (30) days after the end of each quarter, or (ii) greater
than $7,500,000, as soon as practicable and in any event within thirty (30) days
after the end of each calendar month.
(b) As soon as practicable, and in any event (i) within forty-five (45)
days after the end of each quarter, the most recent 10Q report as filed with the
Securities and Exchange Commission ("SEC") and (ii) within one hundred and
twenty (120) days after the end of each Fiscal Year, the most recent 10K report
as filed with the SEC.
(c) Such other information regarding the operations, business affairs and
financial condition of the Borrower or any of its Subsidiaries as the Agent or
any Lender may reasonably request.
(d) The form of monthly, quarterly and annual financial statements
previously furnished by Parent to Agent are acceptable to Agent.
SECTION 6.5 Notice of Litigation and Other Matters. Prompt (but in no event
later than ten (10) days after an officer of the Borrower obtains knowledge
thereof telephonic and written notice of:
<PAGE>
(a) the commencement of all proceedings and investigations by or before any
Governmental Authority and all actions and proceedings in any court or before
any arbitrator against or involving the Borrower or any Subsidiary thereof or
any of their respective properties, assets or businesses, except where such
proceedings and investigations, if adversely determined, could not reasonably be
expected to have a Material Adverse Effect;
(b) any written notice of any violation received by the Borrower or any
Subsidiary thereof from any Governmental Authority including, without
limitation, any written notice of violation of Environmental Laws which in any
such case could reasonably be expected to have a Material Adverse Effect;
(c) any labor controversy that has resulted in, or threatens to result in,
a strike or other work action against the Borrower or any Subsidiary thereof
which could reasonably be expected to result in a Material Adverse Effect;
(d) any attachment, judgment, lien or levy exceeding $500,000 is assessed
against or threatened in writing against the Borrower or any Subsidiary thereof;
(e) any Default or Event of Default, or any material event which
constitutes or which with the passage of time or giving of notice or both would
constitute a default or event of default under any Material Contract to which
the Borrower or any of its Subsidiaries is a party or by which the Borrower or
any Subsidiary thereof or any of their respective properties may be bound;
(f) (i) any unfavorable determination letter from the Internal Revenue
Service regarding the qualification of an Employee Benefit Plan under Section
401(a) of the Code (along with a copy thereof), (ii) all notices received by the
Borrower or any ERISA Affiliate of the PBGC's intent to terminate any Pension
Plan or to have a trustee appointed to administer any Pension Plan, (iii) all
notices received by the Borrower or any ERISA Affiliate from a Multiemployer
Plan sponsor concerning the imposition or amount of withdrawal liability
pursuant to Section 4202 of ERISA and (iv) the Borrower obtaining knowledge or
reason to know that the Borrower or any ERISA Affiliate has filed or intends to
file a notice of intent to terminate any Pension Plan under a distress
termination within the meaning of Section 4041(c) of ERISA; and
(g) any event which makes any of the representations set forth in Section
5.1 inaccurate in any material respect.
SECTION 6.6 Accuracy of Information. All written information, reports,
statements and other papers and data furnished by or on behalf of the Borrower
to the Agent or any Lender (other than financial forecasts) whether pursuant to
this Article VI or any other provision of this Agreement, or any of the Guaranty
Agreements, shall be, at the time the same is so furnished, complete and correct
in all material respects to the extent necessary to give the Agent or any Lender
complete, true and accurate knowledge of the subject matter based on the
Borrower's knowledge thereof.
<PAGE>
ARTICLE VII
AFFIRMATIVE COVENANTS
Until all of the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, unless consent has been
obtained in the manner provided for in Section 12.11, the Borrower will, and
will cause each of its Subsidiaries to:
SECTION 7.1 Preservation of Corporate Existence and Related Matters. Except
as permitted by Section 9.5, preserve and maintain its separate corporate
existence and all rights, franchises, licenses and privileges necessary to the
conduct of its business, and qualify and remain qualified as a foreign
corporation and authorized to do business in each jurisdiction in which the
failure to so qualify would have a Material Adverse Effect.
SECTION 7.2 Maintenance of Property. Protect and preserve all properties
useful in and material to its business, including copyrights, patents, trade
names and trademarks; maintain in good working order and condition all
buildings, equipment and other tangible real and personal property; and from
time to time make or cause to be made all renewals, replacements and additions
to such property necessary for the conduct of its business, so that the business
carried on in connection therewith may be properly and advantageously conducted
at all times, except in each case where failure to do so could not reasonably be
expected to result in a Material Adverse Effect.
SECTION 7.3 Insurance. Maintain insurance with financially sound and
reputable insurance companies against such risks and in such amounts as are
customarily maintained by similar businesses and as may be required by
Applicable Law, and on the Closing Date and from time to time thereafter deliver
to the Agent upon its request a detailed list of the insurance then in effect,
stating the names of the insurance companies, the amounts and rates of the
insurance, the dates of the expiration thereof and the properties and risks
covered thereby.
SECTION 7.4 Accounting Methods and Financial Records. Maintain a system of
accounting, and keep such books, records and accounts (which shall be true and
complete in all material respects) as may be required or as may be necessary to
permit the preparation of financial statements in accordance with GAAP and in
material compliance with the regulations of any Governmental Authority having
jurisdiction over it or any of its properties.
SECTION 7.5 Payment and Performance of Obligations. Pay and perform all
Obligations under this Agreement and the other Loan Documents, and pay or
perform (a) all taxes, assessments and other governmental charges that may be
levied or assessed upon it or any of its property, and (b) all other
indebtedness, obligations and liabilities in accordance with customary trade
practices; provided, that the Borrower or such Subsidiary may contest any item
described in
<PAGE>
this Section 7.5 in good faith so long as adequate reserves are maintained with
respect thereto in accordance with GAAP.
SECTION 7.6 Compliance With Laws and Approvals. Observe and remain in
compliance with all Applicable Laws and maintain in full force and effect all
Governmental Approvals, in each case applicable to the conduct of its business,
except where failure to so observe or comply could not reasonably be expected to
result in a Material Adverse Effect.
SECTION 7.7 Environmental Laws. In addition to and without limiting the
generality of Section 7.6, (a) comply with, and ensure such compliance by all
tenants and subtenants, if any, with, all applicable Environmental Laws, (b)
obtain, comply with and maintain, any and all licenses, approvals,
notifications, registrations or permits required by applicable Environmental
Laws, in each case where the failure to so obtain or comply with could
reasonably be expected to have a Material Adverse Effect upon the Borrower and
its Subsidiaries, (c) conduct and complete all investigations, studies, sampling
and testing, and all remedial, removal and other actions required under
Environmental Laws, (d) promptly comply with all lawful orders and directives of
any Governmental Authority regarding Environmental Laws, where the failure to so
could reasonably be expected to have a Material Adverse Effect upon the Borrower
and its Subsidiaries, and (e) defend, indemnify and hold harmless the Agent and
the Lenders, and their respective parents, Subsidiaries, Affiliates, employees,
agents, officers and directors, from and against any claims, demands, penalties,
fines, liabilities, settlements, damages, costs and expenses of whatever kind or
nature known or unknown, contingent or otherwise, arising out of, or in any way
relating to the violation of, noncompliance with or liability under any
Environmental Laws applicable to the operations of the Borrower or such
Subsidiary, or any orders, requirements or demands of Governmental Authorities
related thereto, including, without limitation, reasonable attorney's and
consultant's fees, investigation and laboratory fees, response costs, court
costs and litigation expenses, except to the extent that any of the foregoing
directly result from the gross negligence or willful misconduct of the party
seeking indemnification therefor.
SECTION 7.8 Compliance with ERISA. In addition to and without limiting the
generality of Section 7.6, (a) comply with all applicable provisions of ERISA
and the regulations and published interpretations thereunder with respect to all
Employee Benefit Plans where the failure to so comply could reasonably be
expected to have a Material Adverse Effect upon the Borrower and its
Subsidiaries, (b) not take any action or fail to take action the result of which
could be a liability to the PBGC or to a Multiemployer Plan, (c) not participate
in any prohibited transaction that could result in any civil penalty under ERISA
or tax under the Code, (d) operate each Employee Benefit Plan in such a manner
that will not incur any tax liability under Section 4980B of the Code or any
liability to any qualified beneficiary as defined in Section 4980B of the Code
and (e) furnish to the Agent upon the Agent's request such additional
information about any Employee Benefit Plan as may be reasonably requested by
the Agent.
SECTION 7.9 Compliance With Agreements. Comply in all respects with each
term, condition and provision of all leases, agreements and other instruments
entered into in the conduct of its business including, without limitation, any
Material Contract, except where the failure to so comply could not reasonably be
expected to result in a Material Adverse Effect; provided, that the Borrower or
such Subsidiary may contest any such lease, agreement or other instrument in
good
<PAGE>
faith through applicable proceedings so long as adequate reserves are
maintained in accordance with GAAP.
SECTION 7.10 Conduct of Business. Engage only in businesses in
substantially the same fields as the businesses conducted on the Closing Date
and in lines of business reasonably related thereto.
SECTION 7.11 Visits and Inspections. Permit representatives of the Agent or
any Lender, from time to time and upon reasonable notice, to visit and inspect
its properties; inspect, audit and make extracts from its books, records and
files, including, but not limited to, management letters prepared by independent
accountants; and discuss with its principal officers, and its independent
accountants, its business, assets, liabilities, financial condition, results of
operations and business prospects.
SECTION 7.12 Additional Subsidiaries. The Borrower will within fifteen (15)
Business Days of the capitalization of any newly formed or acquired Wholly-Owned
Subsidiary execute and deliver or cause to be executed and delivered by such
newly formed or acquired Wholly-Owned Subsidiary to the Agent (i) a Guaranty
Agreement supplement, (ii) the closing documents and certificates required to be
delivered by each Guarantor on the Closing Date pursuant to Sections 4.2(b)(ii),
(iii) and (iv) and (iii) such other documents reasonably requested by the Agent
in order that such Wholly-Owned Subsidiary shall become bound by all of the
terms, covenants and agreements contained any Loan Document and applicable to
any other Guarantor as if signatory thereto on the Closing Date.
SECTION 7.13 Further Assurances. Make, execute and deliver all such
additional and further acts, things, deeds and instruments as the Agent or any
Lender may reasonably require to document and consummate the transactions
contemplated hereby and to vest completely in and insure the Agent and the
Lenders their respective rights under this Agreement, the Notes, the Letters of
Credit and the other Loan Documents.
ARTICLE VIII
FINANCIAL COVENANTS
Until all of the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, unless consent has been
obtained in the manner set forth in Section 12.11 hereof, the Borrower and its
Subsidiaries on a Consolidated basis will not:
SECTION 8.1 Current Ratio. As of the end of any quarter, permit the ratio
of its (a) Current Assets to (b) Current Liabilities to be less than 1.35 to
1.00.
SECTION 8.2 Debt to Capitalization Ratio. As of the end of any quarter,
permit the ratio of its (a) Modified Consolidated Funded Senior Debt to (b)
Total Capitalization to exceed .65 to 1.00.
<PAGE>
SECTION 8.3 Leverage Ratio. As of the end of any quarter, permit the
Leverage Ratio to exceed 3.50 to 1.0.
SECTION 8.4 Fixed Charge Ratio. As of the end of any quarter, permit the
ratio of (a) EBITDA plus Lease Expense for the period of four consecutive
quarters ending on such quarter-end date to (b) the sum of (x) for such
four-quarter period (A) Interest Expense, (B) Lease Expense and (C) Replacement
Capital Expenditures plus (y) as of such quarter end, current maturities of
long-term Debt (excluding all balloon payments with respect to any loan to any
Subsidiary of the Borrower, the proceeds of which are or have been used to
construct a hospital facility (collectively, the "Hospital Loans")) and the
current portion due under Capital Leases to be less than 1.35 to 1.0.
SECTION 8.5 Consolidated Net Worth. As of the end of any quarter, permit
Consolidated Tangible Net Worth to be less than the sum of (a) $50,000,000 plus
(b) fifty percent (50%) of cumulative Consolidated Net Income (if positive)
after the Closing Date.
ARTICLE IX
NEGATIVE COVENANTS
Until all of the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, unless consent has been
obtained in the manner set forth in Section 12.11 hereof, the Borrower will not:
SECTION 9.1 Limitations on Debt. Create, incur, assume or suffer to exist
any Debt except:
(a) the Obligations;
(b) Debt incurred in connection with a Hedging Agreement with a
counterparty and upon terms and conditions reasonably satisfactory to the Agent;
(c) Subordinated Debt;
(d) Debt existing on the Closing Date and not otherwise permitted under
this Section 9.1, as set forth on Schedule 5.1(s) and the renewal and
refinancing (but not the increase) thereof;
(e) Debt incurred in connection with Capital Leases and purchase money Debt
incurred in connection with the purchase of equipment, provided that the
aggregate amount of such Debt under this Section 9.1(e) shall not exceed an
aggregate of $10,000,000, cumulatively; and
<PAGE>
(f) (i) Debt consisting of Contingent Obligations permitted by Section 9.2;
(ii) Debt secured by Liens permitted by Section 9.3(h); and (iii) Debt secured
by Liens permitted by Section 9.3(i).
SECTION 9.2 Limitations on Contingent Obligations. Create, incur, assume or
suffer to exist, or permit any of its Subsidiaries to create, incur, assume or
suffer to exist, any Contingent Obligations except Contingent Obligations in
favor of the Agent for the benefit of the Agent and the Lenders except as set
forth on Schedule 5.1(s).
SECTION 9.3 Limitations on Liens. Create, incur, assume or suffer to exist,
any Lien on or with respect to any of its assets or properties (including
without limitation shares of capital stock or other ownership interests), real
or personal, whether now owned or hereafter acquired, except:
(a) Liens for taxes, assessments and other governmental charges or
levies (excluding any Lien imposed pursuant to any of the provisions of
ERISA or Environmental Laws) not yet due or as to which the period of grace
(not to exceed thirty (30) days) , if any, related thereto has not expired
or which are being contested in good faith and by appropriate proceedings
if adequate reserves are maintained to the extent required by GAAP;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred
in the ordinary course of business, (i) which are not overdue for a period
of more than thirty (30) days or (ii) which are being contested in good
faith and by appropriate proceedings or which have been bonded off;
(c) Liens consisting of deposits or pledges made in the ordinary
course of business in connection with, or to secure payment of, obligations
under workers' compensation, unemployment insurance or similar legislation;
(d) Liens constituting encumbrances in the nature of zoning
restrictions, easements and rights or restrictions of record on the use of
real property, which in the aggregate are not substantial in amount and
which do not, in any case, detract from the value of such property or
impair the use thereof in the ordinary conduct of business;
(e) Liens not otherwise permitted by this Section 9.3 and in existence
on the Closing Date and described on Schedule 9.3;
(f) Liens securing Debt permitted under Section 9.1(e); provided, that
(i) such Liens shall be created substantially simultaneously with the
acquisition of the related asset, (ii) such Liens do not at any time
encumber any property other than the property financed by such Debt, (iii)
the amount of Debt secured thereby is not increased and (iv) the principal
amount of Debt secured by any such Lien shall at no time exceed the
original purchase price of such property at the time it was acquired;
<PAGE>
(g) Liens on the Accounts of any Subsidiary of the Borrower in
favor of the Borrower securing Subordinated Debt owed to the Borrower
by such Subsidiary;
(h) Liens on the Accounts of the Subsidiaries of the Borrower as
described on Schedule 9.3;
(i) Liens securing Debt incurred to purchase Equipment to be
leased by the Borrower to other Persons, provided that such Liens do
not at any time encumber any property other than the property whose
purchase is financed by such Debt and provided further that the
aggregate principal amount of such Debt at any time outstanding shall
not exceed $5,000,000; and
(j) Liens not otherwise permitted under this Section 9.3,
provided that the Debt secured thereby shall not exceed an aggregate
of $10,000,000 outstanding at any time.
SECTION 9.4 Limitations on Loans, Advances and Investments. Make or permit
to exist, directly or indirectly, any loans, advances or extensions of credit
to, or any investment in cash or by delivery of property in, any Person, or
enter into, directly or indirectly, any commitment in respect of the foregoing
except for the following:
(a) Loans and advances to Subsidiaries;
(b) Loans to physician groups in an aggregate amount not to
exceed $10,000,000; and
(c) Investments in (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any
agency thereof maturing within 120 days from the date of acquisition
thereof, (ii) commercial paper maturing no more than 120 days from the
date of creation thereof and currently having the highest rating
obtainable from either S&P or Moody's, (iii) certificates of deposit
maturing no more than 120 days from the date of creation thereof
issued by commercial banks incorporated under the laws of the United
States of America, each having combined capital, surplus and undivided
profits of not less than $500,000,000 and having a rating of "A" or
better by a nationally recognized rating agency, or (iv) time deposits
maturing no more than 30 days from the date of creation thereof with
commercial banks or savings banks or savings and loan associations
each having membership either in the FDIC or the deposits of which are
insured by the FDIC and in amounts not exceeding the maximum amounts
of insurance thereunder; and repurchase agreements issued by any
Lender having a maturity of less than one year.
SECTION 9.5 Limitations on Mergers and Liquidation. Merge,
consolidate or enter into any similar combination with any other
Person or liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution), or permit any Subsidiary to take any of
such actions, except:
(a) any Wholly-Owned Subsidiary of the Borrower may merge into
the Borrower or with any other Wholly-Owned Subsidiary of the
Borrower; and
<PAGE>
(b) any Wholly-Owned Subsidiary of the Borrower may wind-up into the
Borrower or any other Wholly-Owned Subsidiary of the Borrower.
(c) any other merger; provided, that the Borrower shall be the
surviving entity and after giving effect to such merger no Default or Event
of Default exists and is continuing.
SECTION 9.6 Limitations on Sale of Assets. Convey, sell, lease, assign,
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, the sale of any receivables and leasehold
interests and any sale-leaseback or similar transaction), whether now owned or
hereafter acquired, or permit any Subsidiary to take any of such actions with
respect to the property, business or assets of such Subsidiary, except:
(a) the sale of inventory in the ordinary course of business;
(b) the sale of obsolete assets no longer used or usable in the
business of the Borrower or any of its Subsidiaries;
(c) the transfer of assets to the Borrower or any Wholly-Owned
Subsidiary of the Borrower pursuant to Section 9.5(b);
(d) the sale or discount without recourse of accounts receivable
arising in the ordinary course of business in connection with the
compromise or collection thereof;
(e) the lease of cardiac catheterization laboratories in the ordinary
course of business; and
(f) the sale of other assets, the fair market value of which shall not
exceed $500,000 with respect to any transaction and $5,000,000 in the
aggregate for all such transactions during the term of this Agreement.
SECTION 9.7 Limitations on Dividends and Distributions. Declare or pay any
dividends upon any of its capital stock; purchase, redeem, retire or otherwise
acquire, directly or indirectly, any shares of its capital stock, or make any
distribution of cash, property or assets among the holders of shares of its
capital stock, or make any change in its capital structure that could reasonably
be expected to have a Material Adverse Effect; provided, that the Borrower may
pay dividends in shares of its own capital stock.
SECTION 9.8 Prohibited Transactions. Except as disclosed on Schedule 9.8
attached hereto, directly or indirectly (a) make any loan or advance to, or
purchase or assume any note or other obligation to or from, any of its officers,
directors, shareholders, or other Affiliates, or to or from any member of the
immediate family of any of its officers, directors, shareholders, or other
Affiliates, or subcontract any operations to any of its Affiliates, other than
in the ordinary course of business, or (b) enter into, or be a party to, any
transaction with any of its Affiliates, in each case other than in the ordinary
course of business. (This Section shall also be applicable to each Subsidiary of
the Borrower.)
<PAGE>
SECTION 9.9 Certain Accounting Changes. Change its Fiscal Year end, or make
any change in its accounting treatment and reporting practices except as
required by GAAP or the Securities and Exchange Commission.
SECTION 9.10 Amendments; Payments and Prepayments of Subordinated Debt.
Amend or modify (or permit the modification or amendment of) any of the terms or
provisions of any Subordinated Debt in any manner adverse to any Lender, or
cancel or forgive, make any voluntary or optional payment or prepayment on, or
redeem or acquire for value (including without limitation by way of depositing
with any trustee with respect thereto money or securities before due for the
purpose of paying when due) any Subordinated Debt. (This Section shall also be
applicable to each Subsidiary of the Borrower.)
SECTION 9.11 Restrictive Agreements. Enter into any Debt which contains any
negative pledge on assets or any covenants more restrictive than the provisions
of Articles VIII and IX hereof, or which restricts, limits or otherwise
encumbers its ability to incur Liens on or with respect to any of its assets or
properties other than the assets or properties securing such Debt. (This Section
shall also be applicable to each Subsidiary of the Borrower.)
SECTION 9.12 Subsidiaries. Create or acquire any new Subsidiary owned
directly by the Borrower which is not a Wholly-Owned Subsidiary without the
prior written consent of the Required Lenders; provided, that nothing herein
shall prevent a Wholly-Owned Subsidiary from creating a Person and having the
percentage ownership therein which such Wholly-Owned Subsidiary deems
appropriate.
ARTICLE X
DEFAULT AND REMEDIES
SECTION 10.1 Events of Default. Each of the following shall constitute an
Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans. The Borrower shall
default in any payment of principal of any Loan or Note when and as due
(whether at maturity, by reason of acceleration or otherwise) and such
Default shall continue unremedied for two (2) Business Days.
(b) Other Payment Default. The Borrower shall default in the payment
when and as due (whether at maturity, by reason of acceleration or
otherwise) of interest on any Loan, Note or the payment of any other
Obligation, and such default shall continue unremedied for five (5)
Business Days.
<PAGE>
(c) Misrepresentation. Any representation or warranty made or deemed
to be made by the Borrower or any of its Subsidiaries under this Agreement,
any Loan Document or any amendment hereto or thereto, shall at any time
prove to have been incorrect or misleading in any material respect when
made or deemed made.
(d) Default in Performance of Certain Covenants. The Borrower shall
default in the performance or observance of any covenant or agreement
contained in Articles VIII or IX of this Agreement.
(e) Default in Performance of Other Covenants and Conditions. The
Borrower or any Subsidiary thereof shall default in the performance or
observance of any term, covenant, condition or agreement contained in this
Agreement (other than as specifically provided for otherwise in this
Section 10.1) or any other Loan Document and such default shall continue
for a period of thirty (30) days after written notice thereof has been
given to the Borrower by the Agent.
(f) Hedging Agreement. Any termination payment shall be due by the
Borrower under any Hedging Agreement and such amount is not paid within ten
(10) Business Days of the due date thereof.
(g) Debt Cross-Default. The Borrower or any of its Subsidiaries shall
(i) default in the payment of any Debt (other than the Notes or any
inter-company Debt), the aggregate outstanding amount of which Debt is in
excess of $250,000, beyond the period of grace, if any, provided in the
instrument or agreement under which such Debt was created, or (ii) default
in the observance or performance of any other agreement or condition
relating to any Debt (other than the Notes) the aggregate outstanding
amount of which Debt is in excess of $500,000 with respect to the Borrower
and in excess of $250,000 with respect to any Subsidiary or contained in
any instrument or agreement evidencing, securing or relating thereto or any
other event shall occur or condition exist, the effect of which default or
other event or condition is to cause, or to permit the holder or holders of
such Debt (or a trustee or agent on behalf of such holder or holders) to
cause, with the giving of notice if required, any such Debt to become due
prior to its stated maturity (any applicable grace period having expired).
(h) Other Cross-Defaults. The Borrower or any of its Subsidiaries
shall default in the payment when due, or in the performance or observance,
of any obligation or condition of any Material Contract and such default
shall continue beyond the period of grace, if any, provided in such
Material Contract unless, but only as long as, the existence of any such
default is being contested by the Borrower or such Subsidiary in good faith
by appropriate proceedings and adequate reserves in respect thereof have
been established on the books of the Borrower or such Subsidiary to the
extent required by GAAP.
(i) Change in Control. Any person or group of persons (within the
meaning of Section 13 (d) of the Securities Exchange Act of 1934, as
amended) other than the existing management as of the Closing Date, shall
as of the Closing Date obtain ownership or control in one or more series of
transactions of more than fifty percent (50%) of the common stock or more
than fifty percent (50%) of the voting power of the Borrower
<PAGE>
entitled to vote in the election of members of the board of directors of
the Borrower (any such event, a "Change in Control").
(j) Voluntary Bankruptcy Proceeding. The Borrower or any Subsidiary
thereof shall (i) commence a voluntary case under the federal bankruptcy
laws (as now or hereafter in effect), (ii) file a petition seeking to take
advantage of any other laws, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, winding up or composition for adjustment of
debts, (iii) consent to or fail to contest in a timely and appropriate
manner any petition filed against it in an involuntary case under such
bankruptcy laws or other laws, (iv) apply for or consent to, or fail to
contest in a timely and appropriate manner, the appointment of, or the
taking of possession by, a receiver, custodian, trustee, or liquidator of
itself or of a substantial part of its property, domestic or foreign, (v)
admit in writing its inability to pay its debts as they become due, (vi)
make a general assignment for the benefit of creditors, or (vii) take any
corporate action for the purpose of authorizing any of the foregoing.
(k) Involuntary Bankruptcy Proceeding. A case or other proceeding
shall be commenced against the Borrower or any Subsidiary thereof in any
court of competent jurisdiction seeking (i) relief under the federal
bankruptcy laws (as now or hereafter in effect) or under any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization,
winding up or adjustment of debts, or (ii) the appointment of a trustee,
receiver, custodian, liquidator or the like for the Borrower or any
Subsidiary thereof or for all or any substantial part of their respective
assets, domestic or foreign, and such case or proceeding shall continue
without dismissal or stay for a period of sixty (60) consecutive days, or
an order granting the relief requested in such case or proceeding
(including, but not limited to, an order for relief under such federal
bankruptcy laws) shall be entered.
(l) Failure of Agreements. Any provision of this Agreement or of any
other Loan Document shall for any reason cease to be valid and binding on
the Borrower or any Guarantor or any such Person shall so state in writing.
(m) Termination Event. The occurrence of any of the following events:
(i) the Borrower or any ERISA Affiliate fails to make full payment when due
of all amounts which, under the provisions of any Pension Plan or Section
412 of the Code, the Borrower or any ERISA Affiliate is required to pay as
contributions thereto, (ii) an accumulated funding deficiency in excess of
$250,000 occurs or exists, whether or not waived, with respect to any
Pension Plan, (iii) a Termination Event or (iv) the Borrower or any ERISA
Affiliate as employers under one or more Multiemployer Plan makes a
complete or partial withdrawal from any such Multiemployer Plan and the
plan sponsor of such Multiemployer Plans notifies such withdrawing employer
that such employer has incurred a withdrawal liability requiring payments
in an amount exceeding $250,000.
(n) Judgment. A judgment or order for the payment of money which
causes the aggregate amount of all such judgments entered against the
Borrower by any court in any Fiscal Year to exceed $1,000,000 or against
the Subsidiaries to exceed $500,000 and such judgments or orders shall
continue without discharge or stay for a period of sixty (60) days.
<PAGE>
SECTION 10.2 Remedies. Upon the occurrence of an Event of Default, with the
consent of the Required Lenders, the Agent may, or upon the request of the
Required Lenders, the Agent shall, by notice to the Borrower:
(a) Acceleration; Termination of Facility. Declare the principal of
and interest on the Loans and the Notes at the time outstanding, and all
other amounts owed to the Lenders and to the Agent under this Agreement or
any of the other Loan Documents (including, without limitation, all Letter
of Credit Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder) and all other Obligations, to be forthwith due and payable,
whereupon the same shall immediately become due and payable without
presentment, demand, protest or other notice of any kind, all of which are
expressly waived, anything in this Agreement or the other Loan Documents to
the contrary notwithstanding, and terminate the Credit Facility and any
right of the Borrower to request borrowings or the issuance of Letters of
Credit hereunder; provided, that upon the occurrence of an Event of Default
specified in Section 10.1(j) or (k), the Credit Facility and the L/C
Commitment shall be automatically terminated and all Obligations shall
automatically become due and payable.
(b) Letters of Credit. With respect to all Letters of Credit with
respect to which presentment for honor shall not have occurred at the time
of an acceleration pursuant to the preceding paragraph, require the
Borrower at such time to deposit in a cash collateral account opened by the
Agent an amount equal to the aggregate then undrawn and unexpired amount of
such Letters of Credit. Amounts held in such cash collateral account shall
be applied by the Agent to the payment of drafts drawn under such Letters
of Credit, and the unused portion thereof after all such Letters of Credit
shall have expired or been fully drawn upon, if any, shall be applied to
repay the other Obligations. After all such Letters of Credit shall have
expired or been fully drawn upon, the Reimbursement Obligation shall have
been satisfied and all other Obligations shall have been paid in full, the
balance, if any, in such cash collateral account shall be returned to the
Borrower.
(c) Exercise of Rights of Collection. Exercise on behalf of the
Lenders all of its other rights and remedies under this Agreement, the
other Loan Documents and Applicable Law, in order to satisfy all of the
Borrower's Obligations.
SECTION 10.3 Rights and Remedies Cumulative; Non-Waiver; etc. The
enumeration of the rights and remedies of the Agent and the Lenders set forth in
this Agreement is not intended to be exhaustive and the exercise by the Agent
and the Lenders of any right or remedy shall not preclude the exercise of any
other rights or remedies, all of which shall be cumulative, and shall be in
addition to any other right or remedy given hereunder or under the Loan
Documents or that may now or hereafter exist in law or in equity or by suit or
otherwise. No delay or failure to take action on the part of the Agent or any
Lender in exercising any right, power or privilege shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
privilege preclude other or further exercise thereof or the exercise of any
other right, power or privilege or shall be construed to be a waiver of any
Event of Default. No course of dealing between the Borrower, the Agent and the
Lenders or their respective agents or
0
<PAGE>
employees shall be effective to change, modify or discharge any provision of
this Agreement or any of the other Loan Documents or to constitute a waiver of
any Event of Default.
ARTICLE XI
THE AGENT
SECTION 11.1 Appointment, Powers, and Immunities. Each Lender hereby
irrevocably appoints and authorizes the Agent to act as its agent under this
Agreement and the other Loan Documents with such powers and discretion as are
specifically delegated to the Agent by the terms of this Agreement and the other
Loan Documents, together with such other powers as are reasonably incidental
thereto. The Agent (which term as used in this sentence and in Section 11.5 and
the first sentence of Section 11.6 hereof shall include its affiliates and its
own and its affiliates' officers, directors, employees, and agents): (a) shall
not have any duties or responsibilities except those expressly set forth in this
Agreement and shall not be a trustee or fiduciary for any Lender; (b) shall not
be responsible to the Lenders for any recital, statement, representation, or
warranty (whether written or oral) made in or in connection with any Loan
Document or any certificate or other document referred to or provided for in, or
received by any of them under, any Loan Document, or for the value, validity,
effectiveness, genuineness, enforceability, or sufficiency of any Loan Document,
or any other document referred to or provided for therein or for any failure by
any Loan Party or any other Person to perform any of its obligations thereunder;
(c) shall not be responsible for or have any duty to ascertain, inquire into, or
verify the performance or observance of any covenants or agreements by any Loan
Party or the satisfaction of any condition or to inspect the property (including
the books and records) of any Loan Party or any of its Subsidiaries or
affiliates; (d) shall not be required to initiate or conduct any litigation or
collection proceedings under any Loan Document; and (e) shall not be responsible
for any action taken or omitted to be taken by it under or in connection with
any Loan Document, except for its own gross negligence or willful misconduct.
The Agent may employ agents and attorneys-in-fact and shall not be responsible
for the negligence or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care.
SECTION 11.2 Reliance by Agent. The Agent shall be entitled to rely upon any
certification, notice, instrument, writing, or other communication (including,
without limitation, any thereof by telephone or telecopy) believed by it to be
genuine and correct and to have been signed, sent or made by or on behalf of the
proper Person or Persons, and upon advice and statements of legal counsel
(including counsel for any Loan Party), independent accountants, and other
experts selected by the Agent. The Agent may deem and treat the payee of any
Note as the holder thereof for all purposes hereof unless and until the Agent
receives and accepts an Assignment and Acceptance executed in accordance with
Section 12.10 hereof. As to any matters not expressly provided for by this
Agreement, the Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
the Required Lenders, and such instructions shall be binding on all of the
Lenders; provided, that the Agent shall not be required to take any action that
exposes the Agent to personal liability or that is contrary to any Loan Document
or applicable law or unless it shall first be indemnified to its
<PAGE>
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking any such action.
SECTION 11.3 Defaults. The Agent shall not be deemed to have knowledge or
notice of the occurrence of a Default or Event of Default unless the Agent has
received written notice from a Lender or the Borrower specifying such Default or
Event of Default and stating that such notice is a "Notice of Default". In the
event that the Agent receives such a notice of the occurrence of a Default or
Event of Default, the Agent shall give prompt notice thereof to the Lenders. The
Agent shall (subject to Section 11.2 hereof) take such action with respect to
such Default or Event of Default as shall reasonably be directed by the Required
Lenders, provided that, unless and until the Agent shall have received such
directions, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interest of the Lenders.
SECTION 11.4 Rights as Lender. With respect to its Commitment and the Loans
made by it, NationsBank (and any successor acting as Agent) in its capacity as a
Lender hereunder shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not acting as the Agent, and
the term "Lender" or "Lenders" shall, unless the context otherwise indicates,
include the Agent in its individual capacity. NationsBank (and any successor
acting as Agent) and its affiliates may (without having to account therefor to
any Lender) accept deposits from, lend money to, make investments in, provide
services to, and generally engage in any kind of lending, trust, or other
business with any Loan Party or any of its Subsidiaries or affiliates as if it
were not acting as Agent, and NationsBank (and any successor acting as Agent)
and its affiliates may accept fees and other consideration from any Loan Party
or any of its Subsidiaries or affiliates for services in connection with this
Agreement or otherwise without having to account for the same to the Lenders.
SECTION 11.5 Indemnification. The Lenders agree to indemnify the Agent (to
the extent not reimbursed under Section 3.7 hereof, but without limiting the
obligations of the Borrower under such Section) ratably in accordance with their
respective Commitments, for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses (including
attorneys' fees), or disbursements of any kind and nature whatsoever that may be
imposed on, incurred by or asserted against the Agent (including by any Lender)
in any way relating to or arising out of any Loan Document or the transactions
contemplated thereby or any action taken or omitted by the Agent under any Loan
Document; provided, that no Lender shall be liable for any of the foregoing to
the extent they arise from the gross negligence or willful misconduct of the
Person to be indemnified. Without limitation of the foregoing, each Lender
agrees to reimburse the Agent promptly upon demand for its ratable share of any
costs or expenses payable by the Borrower under Section 12.2, to the extent that
the Agent is not promptly reimbursed for such costs and expenses by the
Borrower. The agreements contained in this Section shall survive payment in full
of the Loans and all other amounts payable under this Agreement.
SECTION 11.6 Non-Reliance on Agent and Other Lenders. Each Lender agrees
that it has, independently and without reliance on the Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Loan Parties and their
Subsidiaries and decision to issue or participate in Letters of Credit
<PAGE>
hereunder and enter into this Agreement and that it will, independently and
without reliance upon the Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own analysis and decisions in taking or not taking action under the Loan
Documents. Except for notices, reports, and other documents and information
expressly required to be furnished to the Lenders by the Agent hereunder, the
Agent shall not have any duty or responsibility to provide any Lender with any
credit or other information concerning the affairs, financial condition, or
business of any Loan Party or any of its Subsidiaries or affiliates that may
come into the possession of the Agent or any of its affiliates.
SECTION 11.7 Resignation of Agent. Agent may resign at any time by giving
prior written notice thereof to Lenders and Borrower. Upon any such resignation,
the Required Lenders shall have the right to appoint a successor Agent, which
successor Agent shall, so long as no Default shall have occurred, be subject to
the approval of MedCath, which approval shall not be unreasonably withheld. If
no successor Agent shall have been so appointed by the Required Lenders and
shall have accepted such appointment within thirty (30) days after retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of Lenders, appoint a successor Agent which shall be an Eligible Assignee having
total assets of at least $25,000,000,000. Upon the acceptance of any appointment
as Agent under this Agreement by a successor, such successor shall thereupon
succeed to and become vested with all the rights, powers, discretion,
privileges, and duties of the retiring Agent upon written notice thereof to
Borrower, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement excepting with respect to its willful
misconduct or gross negligence occurring prior to its discharge. After any
retiring Agent's resignation under this Agreement as Agent, the provisions of
this Article 10 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as Agent.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Notices.
(a) Method of Communication. Except as otherwise provided in this
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to be
received by a party hereto (i) on the date of delivery if delivered by hand or
sent by telecopy, (ii) on the next Business Day if sent by recognized overnight
courier service and (iii) on the third Business Day following the date sent by
certified mail, return receipt requested.
(b) Addresses for Notices. Notices to any party shall be sent to it at the
following addresses, or any other address as to which all the other parties are
notified in writing.
If to the Borrower: MedCath Incorporated
7621 Little Avenue
Charlotte, North Carolina 28226
Attention: Richard J. Post
Telephone No.: (704) 541-3228
Telecopy No.: (704) 541-2615
<PAGE>
If to Guarantors: c/o MedCath Incorporated
at above address
With copies to: AHH Management, Inc.
7621 Little Avenue
Charlotte, North Carolina 28266
Attention: Richard Post
Telephone No.: (704) 541-3228
Telecopy No.: (704) 541-2615
Moore & Van Allen, PLLC
47th Floor
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28202
Attention: Hal A. Levinson
Telephone No.: 704/331-1050
Telecopy No.: 704/331-1159
If to NationsBank as
Agent: NationsBank Plaza, NC1-002-03-10
101 South Tryon Street
Charlotte, North Carolina 28255
Attention: Charles R. Dickerson, Jr.
Telephone No.: (704) 386-5514
Telecopy No.: (704) 386-1023
With copies to: Kennedy Covington Lobdell & Hickman
NationsBank Corporate Center, Suite 4200
100 North Tryon Street
Charlotte, North Carolina 28202-4006
Attention: J. Donnell Lassiter, Esq.
Telephone No.: 704/331-7444
Telecopy No.: 704/331-7598
If to any Lender: To the Address set forth on Schedule 1 hereto
(c) Agent's Office. The Agent hereby designates its office
located at the address set forth above, or any subsequent office
which shall have been specified for such
<PAGE>
purpose by written notice to the Borrower and Lenders, as the Agent's
Office referred to herein, to which payments due are to be made and at
which Loans will be disbursed and Letters of Credit issued.
SECTION 12.2 Expenses; Indemnity.
(a) The Borrower agrees to pay on demand all costs and expenses of the
Agent in connection with the syndication, preparation, execution, delivery,
administration, modification, and amendment of this Agreement, the other Loan
Documents, and the other documents to be delivered hereunder, including, without
limitation, the reasonable fees and expenses of counsel for the Agent with
respect thereto (such fees not to exceed $17,500 in connection with the
negotiation, preparation and execution of this Agreement and the other Loan
Documents) and with respect to advising the Agent as to its rights and
responsibilities under the Loan Documents. The Borrower further agrees to pay on
demand all costs and expenses of the Agent and the Lenders, if any (including,
without limitation, reasonable attorneys' fees and expenses and the cost of
internal counsel), in connection with the enforcement (whether through
negotiations, legal proceedings, or otherwise) of the Loan Documents and the
other documents to be delivered hereunder.
(b) The Borrower agrees to indemnify and hold harmless the Agent and each
Lender and each of their affiliates and their respective officers, directors,
employees, agents, and advisors (each, an "Indemnified Party") from and against
any and all claims, damages, losses, liabilities, costs, and expenses
(including, without limitation, reasonable attorneys' fees) that may be incurred
by or asserted or awarded against any Indemnified Party, in each case arising
out of or in connection with or by reason of (including, without limitation, in
connection with any investigation, litigation, or proceeding or preparation of
defense in connection therewith) the Loan Documents, any of the transactions
contemplated herein or the actual or proposed use of the proceeds of the Loans
except to the extent such claim, damage, loss, liability, cost, or expense is
found in a final, non-appealable judgment by a court of competent jurisdiction
to have resulted from such Indemnified Party's gross negligence or willful
misconduct. In the case of an investigation, litigation or other proceeding to
which the indemnity in this Section 12.2 applies, such indemnity shall be
effective whether or not such investigation, litigation or proceeding is brought
by the Borrower, its directors, shareholders or creditors or an Indemnified
Party or any other Person or any Indemnified Party is otherwise a party thereto
and whether or not the transactions contemplated hereby are consummated. The
Borrower agrees not to assert any claim against the Agent, any Lender, any of
their affiliates, or any of their respective directors, officers, employees,
attorneys, agents, and advisers, on any theory of liability, for special,
indirect, consequential, or punitive damages arising out of or otherwise
relating to the Loan Documents, any of the transactions contemplated herein or
the actual or proposed use of the proceeds of the Loans.
(c) Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 12.2 shall survive the payment in full of the Loans and all other
amounts payable under this Agreement.
SECTION 12.3 Set-off. In addition to any rights now or hereafter granted
under Applicable Law and not by way of limitation of any such rights, upon and
after the occurrence of any Event of Default and during the continuance thereof,
the Lenders and any assignee or
<PAGE>
participant of a Lender in accordance with Section 12.10 are hereby authorized
by the Borrower at any time or from time to time, without notice to the Borrower
or to any other Person, any such notice being hereby expressly waived, to set
off and to appropriate and to apply any and all deposits (general or special,
time or demand, including, but not limited to, indebtedness evidenced by
certificates of deposit, whether matured or unmatured) and any other
indebtedness at any time held or owing by the Lenders, or any such assignee or
participant to or for the credit or the account of the Borrower against and on
account of the Obligations irrespective of whether or not (a) the Lenders shall
have made any demand under this Agreement or any of the other Loan Documents or
(b) the Agent shall have declared any or all of the Obligations to be due and
payable as permitted by Section 10.2 and although such Obligations shall be
contingent or unmatured.
SECTION 12.4 Governing Law. This Agreement, the Notes and the other Loan
Documents, unless otherwise expressly set forth therein, shall be governed by,
construed and enforced in accordance with the laws of the State of North
Carolina, without reference to the conflicts or choice of law principles
thereof.
SECTION 12.5 Consent to Jurisdiction. The Borrower hereby irrevocably
consents to the personal jurisdiction of the state and federal courts located in
Mecklenburg County, North Carolina, in any action, claim or other proceeding
arising out of any dispute in connection with this Agreement, the Notes and the
other Loan Documents, any rights or obligations hereunder or thereunder, or the
performance of such rights and obligations. The Borrower hereby irrevocably
consents to the service of a summons and complaint and other process in any
action, claim or proceeding brought by the Agent or any Lender in connection
with this Agreement, the Notes or the other Loan Documents, any rights or
obligations hereunder or thereunder, or the performance of such rights and
obligations, on behalf of itself or its property, in the manner specified in
Section 12.1. Nothing in this Section 12.5 shall affect the right of the Agent
or any Lender to serve legal process in any other manner permitted by Applicable
Law or affect the right of the Agent or any Lender to bring any action or
proceeding against the Borrower or its properties in the courts of any other
jurisdictions.
SECTION 12.6 Waiver of Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE
AGENT, EACH LENDER, THE BORROWER AND EACH OF THE BORROWER'S SUBSIDIARIES HEREBY
IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY
ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH
THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS
HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS.
SECTION 12.7 Mandatory Arbitration. Any controversy or claim between or
among the parties hereto including but not limited to those arising out of or
relating to this Agreement or any related agreements or instruments, including
any claim based on or arising from an alleged tort, shall be determined by
binding arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Rules of Practice and Procedure for
the Arbitration of Commercial Disputes of Endispute, Inc., doing business as
J.A.M.S./Endispute ("J.A.M.S."), and the "Special Rules" set forth below. In the
event of any inconsistency, the Special Rules shall control. Judgment upon any
arbitration award may be
<PAGE>
entered in any court having jurisdiction. Any party to this Agreement may bring
an action, including a summary or expedited proceeding, to compel arbitration of
any controversy or claim to which this Agreement applies in any court having
jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the city of
Borrower's domicile at the time of this Agreement's execution and
administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is
unable or legally precluded from administering the arbitration, then the
American Arbitration Association will serve. All arbitration hearings will
be commenced within 90 days of the demand for arbitration; further, the
arbitrator shall only, upon a showing of cause, be permitted to extend the
commencement of such hearing for up to an additional 60 days.
(b) Reservations of Rights. Nothing in this Agreement shall be deemed
to (i) limit the applicability of any otherwise applicable statutes of
limitation or repose and any waivers contained in this Agreement; or (ii)
be a waiver by Lenders of the protection afforded to it by 12 U.S.C. Sec.
91 or any substantially equivalent state law; or (iii) limit the right of
Lenders (A) to exercise self help remedies such as (but not limited to)
setoff, or (B) to foreclose against any real or personal property
collateral, or (C) to obtain from a court provisional or ancillary remedies
such as (but not limited to) injunctive relief or the appointment of a
receiver. Lenders may exercise such self help rights, foreclose upon such
property, or obtain such provisional or ancillary remedies before, during
or after the pendency of any arbitration proceeding brought pursuant to
this Agreement. At Lenders' option, foreclosure under a deed of trust or
mortgage may be accomplished by any of the following: the exercise of a
power of sale under the deed of trust or mortgage, or by judicial sale
under the deed of trust or mortgage, or by judicial foreclosure. Neither
the exercise of self help remedies nor the institution or maintenance of an
action for foreclosure or provisional or ancillary remedies shall
constitute a waiver of the right of any party, including the claimant in
any such action, to arbitrate the merits of the controversy or claim
occasioning resort to such remedies.
No provision in the Loan Documents regarding submission to jurisdiction and/or
venue in any court is intended or shall be construed to be in derogation of the
provisions in any Loan Document for arbitration of any controversy or claim.
SECTION 12.8 Reversal of Payments. To the extent the Borrower makes a
payment or payments to the Agent for the ratable benefit of the Lenders or the
Agent receives any payment or proceeds of the collateral which payments or
proceeds or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside and/or required to be repaid to a trustee,
receiver or any other party under any bankruptcy law, state or federal law,
common law or equitable cause, then, to the extent of such payment or proceeds
repaid, the Obligations or part thereof intended to be satisfied shall be
revived and continued in full force and effect as if such payment or proceeds
had not been received by the Agent.
SECTION 12.9 Injunctive Relief; Punitive Damages.
(a) The Borrower recognizes that, in the event the Borrower fails to
perform, observe or discharge any of its obligations or liabilities under this
Agreement, any remedy of law may
<PAGE>
prove to be inadequate relief to the Lenders. Therefore, the Borrower agrees
that the Lenders, at the Lenders' option, may be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
(b) The Agent, Lenders and Borrower (on behalf of itself and its
Subsidiaries) hereby agree that no such Person shall have a remedy of punitive
or exemplary damages against any other party to a Loan Document and each such
Person hereby waives any right or claim to punitive or exemplary damages that
they may now have or may arise in the future in connection with any dispute,
whether such dispute is resolved through arbitration or judicially.
(c) The parties agree that they shall not have a remedy of punitive or
exemplary damages against any other party in any dispute and hereby waive any
right or claim to punitive or exemplary damages they have now or which may arise
in the future in connection with any dispute whether the dispute is resolved by
arbitration or judicially.
SECTION 12.10 Accounting Matters. All financial and accounting
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by the
Borrower or any Subsidiary thereof to determine compliance with any covenant
contained herein, shall, except as otherwise expressly contemplated hereby or
unless there is an express written direction by the Agent to the contrary agreed
to by the Borrower, be performed in accordance with GAAP as in effect on the
Closing Date. In the event that changes in GAAP shall be mandated by the
Financial Accounting Standards Board, or any similar accounting body of
comparable standing, or shall be recommended by the Borrower's certified public
accountants, to the extent that such changes would modify such accounting terms
or the interpretation or computation thereof, such changes shall be followed in
defining such accounting terms only from and after the date the Borrower and the
Lenders shall have amended this Agreement to the extent necessary to reflect any
such changes in the financial covenants and other terms and conditions of this
Agreement.
SECTION 12.11 Assignments and Participations.
(a) Each Lender may assign to one or more Eligible Assignees all or a
portion of its rights and obligations under this Agreement (including, without
limitation, all or a portion of its Loans, its Note, and its Commitment);
provided, that
(i) each such assignment shall be to an Eligible Assignee;
(ii) except in the case of an assignment to another Lender or an
assignment of all of a Lender's rights and obligations under this
Agreement, any such partial assignment shall be in an amount at least equal
to $5,000,000 and in increments of $1,000,000 in excess thereof;
(iii) each such assignment by a Lender shall be of a constant, and not
varying, percentage of all of its rights and obligations under this
Agreement and the Note; and
<PAGE>
(iv) the parties to such assignment shall execute and deliver to the
Agent for its acceptance an Assignment and Acceptance in the form of
Exhibit F hereto, together with any Note subject to such assignment and a
processing fee of $2,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance, the
assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender hereunder and
the assigning Lender shall, to the extent of such assignment, relinquish its
rights and be released from its obligations under this Agreement. Upon the
consummation of any assignment pursuant to this Section, the assignor, the Agent
and the Borrower shall make appropriate arrangements so that, if required, new
Notes are issued to the assignor and the assignee. If the assignee is not
incorporated under the laws of the United States of America or a state thereof,
it shall deliver to the Borrower and the Agent certification as to exemption
from deduction or withholding of Taxes in accordance with Section 3.12.
(b) The Agent shall maintain at its address referred to in Section 12.1 a
copy of each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Lenders and the
Commitment of, and principal amount of the Loans owing to, each Lender from time
to time (the "Register"). The entries in the Register shall be conclusive and
binding for all purposes, absent manifest error, and the Borrower, the Agent and
the Lenders may treat each Person whose name is recorded in the Register as a
Lender hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Borrower or any Lender at any reasonable time
and from time to time upon reasonable prior notice.
(c) Upon its receipt of an Assignment and Acceptance executed by the
parties thereto, together with any Note subject to such assignment and payment
of the processing fee, the Agent shall, if such Assignment and Acceptance has
been completed and is in substantially the form of Exhibit F hereto, (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in
the Register and (iii) give prompt notice thereof to the parties thereto.
(d) Each Lender may sell participations to one or more Persons in all or a
portion of its rights and obligations under this Agreement (including all or a
portion of its Commitment and its Loans); provided, that (i) such Lender's
obligations under this Agreement shall remain unchanged, (ii) such Lender shall
remain solely responsible to the other parties hereto for the performance of
such obligations, (iii) the participant shall be entitled to the benefit of the
yield protection provisions contained in Article III and the right of set-off
contained in Section 3.5, and (iv) the Borrower shall continue to deal solely
and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement, and such Lender shall retain the sole right to
enforce the obligations of the Borrower relating to its Loans and its Note and
to approve any amendment, modification, or waiver of any provision of this
Agreement (other than amendments, modifications, or waivers decreasing the
amount of principal of or the rate at which interest is payable on such Loans or
Note, extending any scheduled principal payment date or date fixed for the
payment of interest on such Loans or Note, or extending its Commitment).
(e) Notwithstanding any other provision set forth in this Agreement, any
Lender may at any time assign and pledge all or any portion of its Loans and its
Note to any Federal Reserve Bank as collateral security pursuant to Regulation A
and any Operating Circular issued by such
<PAGE>
Federal Reserve Bank. No such assignment shall release the assigning Lender from
its obligations hereunder.
(f) Any Lender may furnish any information concerning the Borrower or any
of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants),
subject, however, to the provisions of Section 12.11 hereof.
SECTION 12.12 Confidentiality. The Agent and each Lender (each, a "Lending
Party") agrees to keep confidential any information furnished or made available
to it by the Borrower pursuant to this Agreement that is marked confidential;
provided that nothing herein shall prevent any Lending Party from disclosing
such information (a) to any other Lending Party or any affiliate of any Lending
Party, or any officer, director, employee, agent, or advisor of any Lending
Party or affiliate of any Lending Party, (b) to any other Person if reasonably
incidental to the administration of the credit facility provided herein, (c) as
required by any law, rule, or regulation, (d) upon the order of any court or
administrative agency, (e) upon the request or demand of any regulatory agency
or authority, (f) that is or becomes available to the public or that is or
becomes available to any Lending Party other than as a result of a disclosure by
any Lending Party prohibited by this Agreement, (g) in connection with any
litigation to which such Lending Party or any of its affiliates may be a party,
(h) to the extent necessary in connection with the exercise of any remedy under
this Agreement or any other Loan Document, and (i) subject to provisions
substantially similar to those contained in this Section, to any actual or
proposed participant or assignee.
SECTION 12.13 Amendments and Waivers. Any provision of this Agreement or
any other Loan Document may be amended or waived if, but only if, such amendment
or waiver is in writing and is signed by the Borrower and the Required Lenders
(and, if Article XI or the rights or duties of the Agent are affected thereby,
by the Agent); provided that no such amendment or waiver shall, unless signed by
all the Lenders, (i) increase the Commitments of the Lenders, (ii) extend the
time of the obligation of the Lenders to make Loans or to issue or participate
in Letters of Credit, (iii) reduce the principal of or rate of interest on any
Loan or any fees or other amounts payable hereunder, (iv) postpone any date
fixed for the payment of any scheduled installment of principal of or interest
on any Loan or Reimbursement Obligation or any fees or other amounts payable
hereunder or for termination of any Commitment, (v) amend the definition of
"Borrowing Base" so as to increase any percentage amount therein, (vi) change
the percentage of the Commitments or of the unpaid principal amount of the
Notes, or the number of Lenders, which shall be required for the Lenders or any
of them to take any action under this Section or any other provision of this
Agreement or (vii) release any Guarantor. In addition, no amendment, waiver or
consent to the provisions of Article IIA shall be made without the written
consent of the Issuing Lender.
SECTION 12.14 Performance of Duties. The Borrower's obligations under this
Agreement and each of the Loan Documents shall be performed by the Borrower at
its sole cost and expense.
SECTION 12.15 All Powers Coupled with Interest. All powers of attorney and
other authorizations granted to the Lenders, the Agent and any Persons
designated by the Agent or any
<PAGE>
Lender pursuant to any provisions of this Agreement or any of the other Loan
Documents shall be deemed coupled with an interest and shall be irrevocable so
long as any of the Obligations remain unpaid or unsatisfied or the Credit
Facility has not been terminated.
SECTION 12.16 Survival of Indemnities. Notwithstanding any termination of
this Agreement, the indemnities to which the Agent and the Lenders are entitled
under the provisions of this Article XII and any other provision of this
Agreement and the Loan Documents shall continue in full force and effect and
shall protect the Agent and the Lenders against events arising after such
termination as well as before.
SECTION 12.17 Titles and Captions. Titles and captions of Articles,
Sections and subsections in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
SECTION 12.18 Severability of Provisions. Any provision of this Agreement
or any other Loan Document which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating the remainder of
such provision or the remaining provisions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdiction.
SECTION 12.19 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and shall be binding
upon all parties, their successors and assigns, and all of which taken together
shall constitute one and the same agreement.
SECTION 12.20 Term of Agreement. This Agreement shall remain in effect from
the Closing Date through and including the date upon which all Obligations shall
have been indefeasibly and irrevocably paid and satisfied in full. No
termination of this Agreement shall affect the rights and obligations of the
parties hereto arising prior to such termination.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, all as of the day and year first
written above.
[CORPORATE SEAL] MEDCATH INCORPORATED
By: /s/ Richard J.Post
Name: Richard J. Post
Title: Chief Financial Officer
NATIONSBANK, N.A., as Agent and Lender
By: /s/ Michael G. Mayer
Name: Michael G. Mayer
Title: Senior Vice President
<PAGE>
TABLE OF CONTENTS
NOTE
$20,000,000 July 28, 1997
FOR VALUE RECEIVED, the undersigned, MEDCATH INCORPORATED, a North Carolina
corporation (the "Borrower"), hereby promises to pay to the order of
NationsBank, N.A., a national banking association (the "Bank"), at the times, at
the place and in the manner provided in the Credit Agreement hereinafter
referred to, the principal sum of up to Twenty Million Dollars ($20,000,000),
or, if less, the aggregate unpaid principal amount of all Loans disbursed by the
Bank under the Credit Agreement referred to below, together with interest at the
rates as in effect from time to time with respect to each portion of the
principal amount hereof, determined and payable as provided in the Credit
Agreement.
This Note is a Revolving Credit Note referred to in, and is entitled to the
benefits of, the Credit Agreement dated as of July 28, 1997 (as amended,
restated or otherwise modified, the "Credit Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Credit Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Credit Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed under
seal by a duly authorized officer as of the day and year first above written.
MEDCATH INCORPORATED
[CORPORATE SEAL]
By: /s/ Richard J. Post
-------------------------------
Name: Richard J. Post
--------------------------
Title: Chief Financial
Officer
--------------------------
<PAGE>
- --------------------------------------------------------------------------------
LOAN AGREEMENT
Dated As of August 7, 1997,
by and among
LENDERS PARTY TO THIS AGREEMENT,
NATIONSBANK, N.A.,
As Agent for Lenders,
ARIZONA HEART HOSPITAL, LLC,
As Borrower
and
MEDCATH INCORPORATED, a North Carolina Corporation,
and the Subsidiary Guarantors,
As Guarantors
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
ARTICLE I - DEFINITIONS........................................................1
1.1 Definitions.........................................................1
1.2 General............................................................15
1.3 Other Definitions and Provisions...................................16
ARTICLE II - THE CONSTRUCTION LOAN............................................16
2.1 General Information and Purpose....................................16
2.2 Commitment to Lend.................................................16
2.3 Disbursement of Construction Loans.................................16
2.4 Construction Loan Notes............................................17
2.5 Budget and Amendments..............................................17
2.6 Equity Account.....................................................17
2.7 Project Deposit....................................................18
2.8 Principal Payments.................................................18
2.9 Option to Extend...................................................19
2.10 Optional Prepayments...............................................19
ARTICLE III - WORKING CAPITAL FACILITY........................................19
3.1 Working Capital Loans..............................................19
3.2 Procedure for Advances of Working Capital Loans....................20
3.3 Working Capital Notes..............................................20
3.4 Repayment of Working Capital Loans.................................20
3.5 Termination of Working Capital Facility............................21
3.6 Use of Proceeds....................................................21
3.7 Security...........................................................22
ARTICLE IV - GENERAL LOAN PROVISIONS..........................................22
4.1 Interest...........................................................22
4.2 Notice and Manner of Conversion or Continuation of Loans...........22
4.3 Fees...............................................................23
4.4 Manner of Payment..................................................23
4.5 Right of Set-off; Adjustments......................................23
4.6 Adjustments........................................................24
<PAGE>
4.7 Nature of Obligations of Lenders Regarding Loans; Assumption
by Agent.........................................................24
4.8 Indemnity..........................................................25
4.9 Increased Cost and Reduced Return..................................25
4.10 Limitation on Types of Loans.......................................27
4.11 Illegality.........................................................27
4.12 Treatment of Affected Loans........................................28
4.13 Compensation.......................................................28
4.14 Taxes..............................................................29
4.15 Replacement of Lenders.............................................30
ARTICLE V - FINANCIAL INFORMATION AND REPORTS.................................31
5.1 Financial Statements and Projections...............................31
5.2 Officer's Compliance Certificate...................................32
5.3 Other Reports......................................................33
5.4 Accuracy of Information............................................33
ARTICLE VI - COVENANTS AND AGREEMENTS.........................................34
6.1 Plans..............................................................34
6.2 Contracts..........................................................34
6.3 Construction of the Improvements...................................34
6.4 Changes............................................................35
6.5 Storage of Materials...............................................35
6.6 Inspection.........................................................35
6.7 Notice to Lender...................................................35
6.8 Assignment of Contracts and Plans..................................36
6.9 Advertising by Lenders.............................................36
6.10 Annual Appraisal...................................................36
6.11 Construction Consultant............................................37
6.12 Reports and Vouchers...............................................37
6.13 Representations and Warranties.....................................37
6.14 Ownership of Borrower..............................................38
6.15 Equipment Financing................................................38
ARTICLE VII - FINANCIAL COVENANTS OF GUARANTORS...............................38
7.1 Fixed Charge ratio.................................................38
7.2 Debt to Capitalization Ratio.......................................39
7.3 Leverage Ratio.....................................................39
<PAGE>
7.4 Consolidated Net Worth.............................................39
7.5 Liquid Assets......................................................39
ARTICLE VIII - NEGATIVE COVENANTS.............................................39
8.1 Debt Service Coverage Ratio........................................39
8.2 Limitations on Debt................................................40
8.3 Limitations on Contingent Obligations..............................40
8.4 Limitations on Liens...............................................40
8.5 Limitations on Loans, Advances, Investments and Acquisitions.......41
8.6 Limitations on Liquidation.........................................41
8.7 Limitations on Sale of Assets......................................41
8.8 Limitations on Distributions.......................................41
8.9 Amendments; Payments and Prepayments of Subordinated Debt..........43
8.10 Prohibited Transactions............................................43
8.11 Restrictive Agreements.............................................44
ARTICLE IX - DEFAULT AND REMEDIES.............................................44
9.1 Events of Default..................................................44
9.2 Remedies...........................................................46
ARTICLE X - AGENT.............................................................47
10.1 Appointment........................................................47
10.2 Delegation of Duties...............................................47
10.3 Exculpatory Provisions.............................................47
10.4 Reliance by Agent..................................................48
10.5 Notice of Default..................................................48
10.6 Non-Reliance on Agent and Other Lenders............................48
10.7 Indemnification....................................................49
10.8 Agent in Its Individual Capacity...................................49
10.9 Resignation of Agent...............................................49
ARTICLE XI - GUARANTY.........................................................50
11.1 Guaranty of Payment................................................50
11.2 Guaranty of Performance............................................50
11.3 Nature of Guaranty.................................................51
11.4 Demand by Agent....................................................52
<PAGE>
11.5 Waivers............................................................52
11.6 Benefits of Guaranty...............................................52
11.7 Modification of Loan Documents, etc................................53
11.8 Reinstatement......................................................53
11.9 No Subrogation.....................................................54
11.10 Remedies...........................................................54
11.11 Limit of Liability.................................................54
ARTICLE XII - GENERAL TERMS AND CONDITIONS....................................54
12.1 Usury Laws.........................................................54
12.2 Lenders' Consent...................................................55
12.3 Miscellaneous......................................................56
12.4 Notices............................................................56
12.5 Termination........................................................58
12.6 Capital Requirements and Yield Maintenance.........................58
12.7 Costs and Expenses.................................................58
12.8 Further Assurances.................................................59
12.9 No Assignment......................................................59
12.10 Inducement to Lenders..............................................59
12.11 Forum..............................................................60
12.12 Interpretation.....................................................60
12.13 No Partnership, etc................................................60
12.14 Records............................................................60
12.15 Exhibits...........................................................61
12.16 Mandatory Arbitration..............................................61
12.17 Set-off............................................................62
12.18 Successors and Assigns; Participations.............................62
12.19 Amendments; Waivers and Consents...................................65
12.20 All Powers Coupled with Interest...................................66
12.21 Survival of Indemnities............................................66
12.22 Term of Agreement..................................................66
12.23 Entire Agreement...................................................66
<PAGE>
SCHEDULES
Schedule 1 - Lenders and Commitments
Schedule 2 - Subsidiary Guarantors
Schedule 8.10 - Transactions with Affiliates
EXHIBITS
Exhibit A - Land
Exhibit B - Reserved
Exhibit C - Conditions Precedent to Closing and First Advance
Exhibit D - Budget
Exhibit E - Plans
Exhibit F - Advances of Construction Loans
Exhibit F-1 - Draw Request
Exhibit G - Reserved
Exhibit H - Officer's Compliance Certificate
Exhibit I - Assignment and Acceptance
Exhibit J - Notice of Working Capital Borrowing
Exhibit K - Notice of Working Capital Loan Prepayment
Exhibit L - Notice of Conversion/Continuation
Exhibit M - Notice of Construction Loan Prepayment
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement") is made this 7th day of August, 1997 by
the Lenders who are or may become a party to this Agreement (collectively,
"Lenders"), NATIONSBANK, N.A. as Agent for Lenders, ARIZONA HEART HOSPITAL, LLC,
a limited liability company organized under the laws of Arizona ("Borrower"),
and MEDCATH INCORPORATED, a North Carolina corporation ("MedCath") and the
wholly-owned Subsidiaries of MedCath set forth on Schedule 2 hereto
(collectively, with MedCath, the "Guarantors"), who agree as follows:
STATEMENT OF PURPOSE
Guarantors and Borrower have requested, and the Lenders have agreed, to
extend certain credit facilities to Borrower on the terms and conditions of this
Agreement. Borrower is a Subsidiary of MedCath. All extensions of credit to
Borrower will inure to the benefit of Guarantors, directly or indirectly.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, such parties
hereby agree as follows:
ARTICLE I - DEFINITIONS
1.1 Definitions. The following terms when used in this Agreement shall have
the meanings assigned to them below:
"Adjusted Debt Service" means, with respect to Borrower for any quarterly
period, the sum of (i) all Interest Expense plus (ii) $907,000.
"Adjusted EBITDA" means, with respect to each quarter, (i) EBITDA less (ii)
a capital expenditure reserve in the amount of $200,000 less (iii) a management
fee reserve in an amount equal to (x) two percent (2%) of the Net Revenues of
Borrower for such period less (y) the management fees paid by Borrower to AHH
Management, Inc. during such period.
"Adjusted Eurodollar Rate" means, for any Interest Period, the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) determined by
Agent to be equal to the quotient obtained by dividing (a) the Eurodollar Rate
for such Interest Period by (b) 1 minus the Reserve Requirement for such
Interest Period.
"Advance Termination Date" means the date which is twenty (20) months after
the Closing Date.
"Affiliate" means, with respect to any Person, any other Person (other than
a Subsidiary) which directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is
<PAGE>
under common control with, such first Person or any of its Subsidiaries. The
term "control" means (a) the power to vote fifty percent (50%) or more of the
securities or other equity interests of a Person having ordinary voting power,
or (b) the possession, directly or indirectly, of any other power to direct or
cause the direction of the management and policies of a Person, whether through
ownership of voting securities, by contract or otherwise, exclusive in all
events of medical practices or health care facilities managed by Parent or its
wholly-owned Subsidiaries.
"Agent" means NationsBank, N.A. in its capacity as Agent hereunder, and any
successor thereto appointed pursuant to Section 10.9.
"Agent's Office" means the office of Agent specified on the signature pages
to this Agreement.
"Aggregate Project Cost" is defined in Section 2.5.
"Agreement" means this Credit Agreement, as amended, restated, supplemented
or otherwise modified from time to time.
"Amortization Date" means the second anniversary of the Closing Date.
"Applicable Law" means all applicable provisions of constitutions,
statutes, laws, rules, treaties, regulations and orders of all Governmental
Authorities and all orders and decrees of all courts and arbitrators.
"Applicable Lending Office" means, for each Lender, the "Lending Office" of
such Lender (or of an affiliate of such Lender) designated on the signature
pages hereof or such other office of such Lender (or an affiliate of such
Lender) as such Lender may from time to time specify to Agent and Borrower by
written notice in accordance with the terms hereof as the office by which its
Loans are to be made and maintained.
"Applicable Margin" shall be (i) 3.25% until the Initial Adjustment Date
and (ii) 2.75% at all times on or after the Initial Adjustment Date; provided
that if Borrower elects to extend the Construction Loan Facility pursuant to the
provisions hereof, the Applicable Margin shall be increased by .20% during the
period from the original Construction Loan Maturity Date through and including
the Extension Maturity Date.
"Appraised Value" means $36,730,000.
"Assignment and Acceptance" shall have the meaning assigned thereto in
Section 12.18.
"Base Rate" means, at any time, the higher of (a) the rate per annum equal
to the rate announced by NationsBank as its "prime rate" or (b) the Federal
Funds Rate plus 0.5% for such day. Any change in the Base Rate due to a change
in the prime rate shall be effective on the effective date of such change in the
prime rate.
"Base Rate Loan" means any Loan that bears interest at the Base Rate.
"Borrower" means Arizona Heart Hospital, LLC, an Arizona limited liability
company, in its capacity as borrower hereunder.
2
<PAGE>
"Budget" means the budget and cost itemization for the Project attached as
Exhibit D.
"Business Day" means (a) for all purposes other than as set forth in clause
(b) below, any day other than a Saturday, Sunday or legal holiday on which banks
in Charlotte, North Carolina and New York, New York, are open for the conduct of
their commercial banking business, and (b) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
any Loan, any day that is a Business Day described in clause (a) and that is
also a day for trading by and between banks in Dollar deposits in the London
interbank market.
"Capital Expenditures" means, with respect to Borrower for any period, the
aggregate cost of all capital assets, as classified in accordance with GAAP,
acquired by Borrower during such period.
"Capital Lease" means, with respect to Borrower, any lease of any property
that should, in accordance with GAAP, be classified and accounted for as a
capital lease on a balance sheet of Borrower.
"Cash Flow Available For Distribution" means, with respect to Borrower for
any period, (i) EBITDA of Borrower for such period less (ii) all principal and
interest payments required to be paid by Borrower with respect to Senior Debt
during such period less (iii) unfinanced Capital Expenditures.
"Change in Control" means the consummation of any sale, issuance or other
disposition of ownership or other equity interests in Borrower as a result of
which MedCath Incorporated beneficially owns less than fifty-one percent (51%)
of the equity interest in Borrower.
"Closing Date" means the date of this Agreement.
"Collateral Assignment of Life Insurance Policy" means the Collateral
Assignment of Life Insurance Policy and the related life insurance questionnaire
executed by Edward B. Diethrich and Borrower on the Closing Date in favor of
Agent for the benefit of Agent and Lenders, as amended, restated, supplemented
or otherwise modified from time to time.
"Commitment" means, as to any Lender, the sum of (a) the Construction Loan
Commitment of such Lender and (b) the Working Capital Commitment of such Lender.
"Commitment Percentage" means, as to any Lender at any time, the ratio of
(a) the amount of the Commitment of such Lender to (b) all such Commitments of
all of Lenders.
"Completion Date" means the date upon which Borrower has received the final
certificate of occupancy for the Improvements and Medicare Certification with
respect to the heart hospital facility which is part of the Improvements, which
date shall be not later than the Advance Termination Date.
"Consolidated" means, when used with reference to financial statements or
financial statement items of the Parent and its Subsidiaries, such statements or
items on a consolidated basis in accordance with applicable principles of
consolidation under GAAP.
3
<PAGE>
"Consolidated Senior Funded Debt" means, as of any date, all Senior Debt of
the Parent and its Subsidiaries, determined on a consolidated basis, which would
as of such date, in accordance with GAAP, be classified as "funded indebtedness"
or "long-term indebtedness."
"Consolidated Tangible Net Worth" means, as of any date of determination,
the amount of assets shown on the consolidated balance sheet of the Parent (but
excluding from such assets, debt discount and expense, goodwill, patents,
trademarks, copyrights, franchises, licenses, amounts due from officers,
directors, stockholders and Affiliates, and any other items which would be
treated as intangibles under GAAP), less all liabilities of the Parent and its
Subsidiaries, all computed in accordance with GAAP applied on a consistent
basis. For purposes of this definition, assets shall include sums due from (i)
physicians or medical practices managed by the Parent or any of its
Subsidiaries, (ii) health care facilities owned or managed by the Parent or any
of its Subsidiaries, and (iii) physicians with whom Borrower is affiliated,
including, without limitation, the Arizona Heart Institute, to the extent that
(x) the repayment of such sums constitutes valid and enforceable obligations of
such Persons and (y) such Persons have not defaulted in the repayment of such
sums.
"Construction Consultant" means the construction consultant, if any,
engaged by Lender with respect to the Project.
"Construction Contract" means the contract for construction dated
[___________], 1997 between Borrower and the General Contractor for the
construction of the Improvements.
"Construction Loan Commitment" means (a) as to any Lender, the obligation
of such Lender to make Construction Loans to Borrower hereunder in an aggregate
principal or face amount at any time outstanding not to exceed the amount set
forth opposite such Lender's name on Schedule 1 hereto, as the same may be
reduced or modified at any time or from time to time pursuant to the terms
hereof and (b) as to all Lenders, the aggregate commitment of all Lenders to
make Construction Loans. On the Closing Date, the Construction Loan Commitment
of all Lenders shall be Twenty-Seven Million Five Hundred Forty-Five Thousand
and No/00 Dollars ($27,545,000); provided, however, in the event the Appraised
Value of the Property as shown by the appraisal of the Property delivered by
Borrower to Agent is less than $36,730,000, the Construction Loan Commitment
shall be reduced to an amount equal to seventy-five percent (75%) of the
appraised value as shown by such appraisal, provided Borrower shall have placed
in the Project Deposit an amount equal to the difference between seventy-five
percent (75%) of the appraised value as shown by such appraisal and an amount
equal to eighty percent (80%) of the Total Project Cost.
"Construction Loan Facility" means the construction loan facility
established pursuant to Article II hereof.
"Construction Loan Maturity Date" shall have the meaning assigned to such
term in Section 2.8.
"Construction Loan Notes" means the separate Construction Loan Notes made
by Borrower payable to the order of each Lender, evidencing the Construction
Loan Facility, and any amendments and modifications thereto, any substitutes
therefor, and any replacements, restatements, renewals or extension thereof, in
whole or in part; "Construction Loan Note" means any of such Construction Loan
Notes.
4
<PAGE>
"Construction Loans" means the advances under the Construction Loan
Facility pursuant to Section 2.2.
"Contingent Obligation" means, with respect to Borrower, without
duplication, any obligation, contingent or otherwise, of Borrower pursuant to
which Borrower has directly or indirectly guaranteed any Debt or other
obligation of any other Person, provided, the term Contingent Obligation shall
not include endorsements for collection or deposit in the ordinary course of
business.
"Convert," "Conversion" and "Converted" shall refer to a conversion
pursuant to the terms of this Agreement of one Type of Loan into another Type of
Loan.
"Cost Savings" means either (i) the completion of any line item in the
Budget without the expenditure of all amounts allocated to such line item in the
Budget or (ii) demonstration by Borrower to Agent's reasonable satisfaction that
a Cost Savings has been realized with respect to any uncompleted line item in
the Budget.
"Credit Facilities" means the collective reference to the Construction Loan
Facility and the Working Capital Facility.
"Credit Parties" means the collective reference to Borrower and each
Guarantor.
"Debt" means, with respect to any Person at any date and without
duplication, the sum of the following calculated in accordance with GAAP: (a)
all liabilities, obligations and indebtedness for borrowed money including but
not limited to obligations evidenced by bonds, debentures, notes or other
similar instruments of any such Person, (b) all obligations to pay the deferred
purchase price of property or services of any such Person, except trade payables
arising in the ordinary course of business not more than ninety (90) days past
due, (c) all obligations of any such Person as lessee under Capital Leases, (d)
all obligations, contingent or otherwise, of any such Person relative to the
face amount of letters of credit, whether or not drawn, and banker's acceptances
issued for the account of any such Person and (e) all obligations incurred by
any such Person pursuant to Hedging Agreements.
"Default" is defined in Section 9.1.
"Defaulting Lender" shall have the meaning assigned thereto in Section 4.7.
"Draw Request" means a written request for any disbursement of Construction
Loan proceeds, which shall be submitted for each requested disbursement in
accordance with the terms of this Agreement.
"EBITDA" means, with respect to Borrower for any period, Net Income of
Borrower for such period plus the sum of the following deducted in determining
Net Income: (a) Interest Expense, (b) income taxes and (c) amortization,
depreciation and other non-cash charges, in each case determined in accordance
with GAAP for such period.
"Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender;
(iii) a financial institution or other entity that is an "accredited investor"
(as defined in Rule 501 under the
5
<PAGE>
Securities Act of 1933, as amended) having (A) total assets of at least
$10,000,000,000 (B) a long-term unsecured debt rating of at least BBB by S&P (or
an equivalent rating by another nationally recognized statistical ratings
organization) and (C) an office in the United States; and (iv) any other
insurance company or financial institution which in the ordinary course of
business extends credit of the type extended hereunder and which is approved by
Agent and, unless an Event of Default has occurred and is continuing at the time
any assignment is effected in accordance with Section 12.18, Borrower, such
approval not to be unreasonably withheld or delayed by Borrower and such
approval to be deemed given by Borrower if no objection is received by the
assigning Lender and Agent from Borrower within five (5) Business Days after
written notice of such proposed assignment has been provided by the assigning
Lender to Borrower; provided, however, that neither Borrower nor an Affiliate of
Borrower shall qualify as an Eligible Assignee.
"Equipment Lender" shall have the meaning assigned to such term in Section
6.15.
"Equipment Lender Agreement" means a written agreement from each Equipment
Lender pursuant to which such Equipment Lender must (i) notify Agent of any
default under any Loan made by such Equipment Lender to Borrower and (ii) give
Agent and Lenders the right to cure such default within thirty (30) days.
"Equity Account" shall have the meaning given to such term in Section 2.6.
"Eurodollar Loan" means any Loan that bears interest at a rate based on the
Adjusted Eurodollar Rate.
"Eurodollar Rate" means for any Interest Period, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on
Telerate Page 3750 (or any successor page) as the London interbank offered rate
for deposits in Dollars at approximately 11:00 a.m. (London time) two Business
Days prior to the first day of such Interest Period for a term of thirty (30)
days. If for any reason such rate is not available, the term "Eurodollar Rate"
shall mean, for any Interest Period, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as
the London interbank offered rate for deposits in Dollars at approximately 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period for a term of thirty (30) days; provided, however, if more than one rate
is specified on Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates (rounded upwards, if necessary, to the nearest
1/100 of 1%).
"Excusable Delays" means unusually adverse weather conditions which have
not been taken into account in the construction schedule, fire, earthquake or
other acts of God, strike, lockout, acts of public enemy, any Governmental
Authority having jurisdiction over the operation of the hospital which is part
of the Project ceases to operate in the ordinary course, riot or insurrection or
any unforeseen circumstances or events (except financial circumstances or events
or matters which may be resolved by the payment of money) beyond the control of
Borrower, not to exceed a total of thirty (30) days, provided Borrower shall
notify Agent in writing within ten (10) days after such occurrence, but no
Excusable Delay shall extend the Completion Date or suspend or abate any
obligation of Borrower or any Guarantor or any other Person to pay any money.
"Extension Maturity Date" means the first anniversary after the
Construction Loan Maturity Date.
6
<PAGE>
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
thereto.
"Federal Funds Rate" means, the rate per annum (rounded upwards, if
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds as quoted by Agent and confirmed in Federal Reserve Board
Statistical Release H.15 (519) or any successor or substitute publication
selected by Agent. If, for any reason, such rate is not available, then "Federal
Funds Rate" shall mean a daily rate which is determined, in the opinion of
Agent, to be the rate at which federal funds are being offered for sale in the
national federal funds market at 9:00 a.m. (Charlotte time). Rates for weekends
or holidays shall be the same as the rate for the most immediate preceding
Business Day.
"Financing Statements" means the UCC financing statements filed in order to
perfect the Lien of Agent and Lenders on certain personal property and fixtures
as more particularly described therein.
"Fiscal Year" means the fiscal year of Borrower ending on September 30.
"Force Majeure" means strikes, lock-outs, riots or other labor troubles,
unavailability of materials, a national emergency, any rule, order or regulation
of Governmental Authorities, tornados, floods, hurricanes or other natural
disasters, or other similar causes not within Borrower's control.
"GAAP" means generally accepted accounting principles, as recognized by the
American Institute of Certified Public Accountants and the Financial Accounting
Standards Board, consistently applied and maintained on a consistent basis for
Borrower throughout the period indicated and consistent with the prior financial
practice of Borrower.
"General Contractor" means Chanen Construction Company, Inc.
"Governmental Approvals" means all authorizations, consents, approvals,
licenses and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
"Governmental Authority" means any nation, province, state or political
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Guarantors" means the collective reference to the Parent and the
Subsidiary Guarantors.
"HCFA" means the Health Care Finance Administration or any successor
agency.
"Hedging Agreement" means any agreement with respect to an interest rate
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection with
hedging the interest rate exposure of Borrower under this Agreement, and any
confirming letter executed pursuant to such hedging agreement, all as amended,
restated or otherwise modified.
"Hospital Loans" shall have the meaning given to such term in Section 7.1.
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"Improvements" means all on-site and off-site improvements to the Land for
a heart hospital, to be constructed on the Land, together with all fixtures,
tenant improvements, and appurtenances now or later to be located on the Land
and/or in such improvements.
"Indebtedness" means any and all indebtedness to Lenders evidenced,
governed or secured by, or arising under, any of the Loan Documents, including
the Loans.
"Initial Adjustment Date" means the fifth Business Day after the end of the
previous two calendar quarters (which calendar quarters shall be after the
Completion Date) during which the ratio of (A) the Adjusted EBITDA to (B)
Adjusted Debt Service is greater than 1.0 to 1.0; provided that (i) Borrower has
delivered to Agent written evidence, in form and substance satisfactory to
Agent, that Borrower has satisfied the requirements with respect to the minimum
ratio of Adjusted EBITDA to Adjusted Debt Service and (ii) no Default has
occurred and is continuing as of such date.
"Interest Expense" means, for any period, total interest expense of
Borrower with respect to the Project (including without limitation, interest
expense attributable to the Loans, Capital Leases and all equipment financing),
whether paid or accrued, and, to the extent not included therein, fees and other
charges payable with respect to all Debt of Borrower determined for such period
in accordance with GAAP.
"Interest Period" means each period of thirty (30) days, hereunder, with
respect to which the Eurodollar Rate shall be determined; provided that:
(a) each Interest Period shall commence on the date of advance of or
Conversion to any Eurodollar Loan and, in the case of immediately
successive Interest Periods, each successive Interest Period shall commence
on the date on which the next preceding Interest Period expires;
(b) if any Interest Period would otherwise expire on a day that is not
a Business Day, such Interest Period shall expire on the next succeeding
Business Day; provided, that if any Interest Period would otherwise expire
on a day that is not a Business Day but is a day of the month after which
no further Business Day occurs in such month, such Interest Period shall
expire on the next preceding Business Day;
(c) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on
the last Business Day of the relevant calendar month at the end of such
Interest Period;
(d) no Interest Period with respect to the Construction Loan shall be
permitted to extend beyond the Construction Loan Maturity Date and no
Interest Period with respect to the Working Capital Loans shall be
permitted to extend beyond the Working Capital Termination Date; and
(e) there shall be no more than five (5) Interest Periods outstanding
at any time.
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"Land" means the real property located in Maricopa County, Arizona and
described in Exhibit A hereto, owned or to be acquired by Borrower and to be
encumbered by the Mortgage.
"Lender" means each Person executing this Agreement as a Lender set forth
on the signature pages hereto and each Person that hereafter becomes a party to
this Agreement as a Lender pursuant to Section 12.18.
"Lease Expense" means all obligations of Borrower for payments under leases
of real or personal property, whether such leases presently exist or are
hereafter entered into by Borrower.
"Leverage Ratio" means the ratio of (x) Consolidated Senior Funded Debt
less Debt incurred to construct a new hospital (herein, "New Hospital Debt"),
such New Hospital Debt to be excluded for the period commencing with the
incurrence of such New Hospital Debt and ending one year after the issuance of a
certificate of occupancy for such new hospital to (y) EBITDA for the four
previous fiscal quarters.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Liquid Assets" means cash or near-cash instruments that are unencumbered
and readily marketable, including, without limitation, securities listed and
traded on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market System.
"Loan" means any Construction Loan and any Working Capital Loan made to
Borrower pursuant to Articles II and III, and all such Loans collectively as the
context requires.
"Loan Documents" means this Agreement (including all exhibits), the
Security Documents, the Notes, the Budget, each Draw Request, and such other
documents evidencing, securing or pertaining to the Loans as shall, from time to
time, be executed and/or delivered by Borrower, Guarantors, or any other party
to Agent for the benefit of Lenders pursuant to this Agreement.
"Material Adverse Effect" means, with respect to Borrower and its
Subsidiaries, a material adverse effect on the properties, business, operations
or condition (financial or otherwise) of such Persons on a Consolidated basis
taken as a whole or the ability of any such Person to perform the payment or
other material obligations under the Loan Documents to which it is a party or
which would materially impair the enforceability of any of the Loan Documents
against any Person party thereto, other than Agent or any of the Lenders or
their Affiliates.
"Material Contract" means (a) any contract or other agreement, written or
oral, of Borrower or any Guarantor involving monetary liability of or to
Borrower or such Guarantor in an amount in excess of $375,000 with respect to
Borrower and any Guarantor, other than Parent, and $1,000,000 with respect to
Parent, and which by its terms may not be cancelled within ninety (90) days, or
(b) any other contract or agreement, written or oral, of Borrower or any
Guarantor the failure to comply with which could reasonably be expected to have
a Material Adverse Effect on Borrower or such Guarantor.
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"Medicare Certification" means certification by the HCFA or a Governmental
Authority under contract with the HCFA that a health care operation is entitled
to reimbursement under the Medicare Regulations.
"Medicare Regulations" means, collectively, all federal statutes (whether
set forth in Title XVIII of the Social Security Act or elsewhere) affecting the
health insurance program for the aged and disabled established by Title XVIII of
the Social Security Act (42 U.S.C. ss.ss. 1395 et seq.) and any statutes
succeeding thereto; together with all applicable provisions of all rules,
regulations, manuals and orders and administrative, reimbursement and other
guidelines having the force of law of all Governmental Authorities (including
without limitation, Health and Human Services ("HHS"), Health Care Finance
Administration, the Office of the Inspector General for HHS, or any Person
succeeding to the functions of any of the foregoing) promulgated pursuant to or
in connection with any of the foregoing having the force of law, as each may be
amended or supplemented.
"Modified Consolidated Senior Funded Debt" means Consolidated Senior Funded
Debt calculated by including only the greater of (x) percentage ownership of a
Wholly-Owned Subsidiary in any Person which owns a hospital facility (herein, a
"Hospital Subsidiary") times the Debt of such Hospital Subsidiary or (y) the
portion of the Debt of each such Hospital Subsidiary guaranteed by Parent.
"Mortgage" means the Deed of Trust, Assignment, Security Agreement and
Financing Statement of even date executed by Borrower in favor of Agent for the
benefit of Agent and Lenders securing the Land, the Improvements and the other
property and fixtures described therein, as amended, restated, supplemented or
otherwise modified from time to time.
"NationsBank" means NationsBank, N.A., a national banking association, and
its successors.
"Net Income" means, for any period, the Consolidated net income (or loss)
of the Parent and its Subsidiaries for such period determined in accordance with
GAAP; provided, that there shall be excluded from Consolidated net income (or
loss): (a) the income (or loss) of any Person accrued prior to the date it
became a Subsidiary of the Parent or was merged into or consolidated with the
Parent and (b) extraordinary items.
"Net Revenues" means net operating revenues of Borrower determined in
accordance with GAAP.
"Notes" means the Construction Loan Notes or the Working Capital Notes, or
any combination thereof, made by Borrower payable to the order of each of the
Lenders, and any amendments and modifications thereto, any substitutes therefor,
and any replacements, restatements, renewals or extension thereof, in whole or
in part; "Note" means any of such Notes.
"Notice of Working Capital Borrowing" shall have the meaning assigned
thereto in Section 3.2.
"Obligations" means, in each case, whether now in existence or hereafter
arising: (a) the principal of and interest on (including interest accruing after
the filing of any bankruptcy or similar
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petition) the Loans, (b) all payment and other obligations owing by Borrower to
any Lender or Agent under any Hedging Agreement to which a Lender is a party and
(c) all other fees and commissions (including attorney's fees), charges,
indebtedness, loans, liabilities, financial accommodations, obligations,
covenants and duties owing by Borrower to Lenders or Agent, of every kind,
nature and description, direct or indirect, absolute or contingent, due or to
become due, contractual or tortious, liquidated or unliquidated, and whether or
not evidenced by any note, and whether or not for the payment of money under or
in respect of this Agreement, any Note or any of the other Loan Documents.
"Officer's Compliance Certificate" shall have the meaning assigned thereto
in Section 5.2.
"Other Taxes" shall have the meaning assigned thereto in Section 4.14(b).
"Parent" means MedCath Incorporated, a North Carolina corporation.
"Permitted Changes" means changes to the Plans or Improvements and related
changes to the Construction Contract (including those resulting from the final
agreement with the General Contractor on the contract sum), provided the cost of
any single change or extra does not exceed $100,000 and the aggregate amount of
all such changes and extras (whether positive or negative) does not exceed
$1,000,000.
"Person" means an individual, corporation, limited liability company,
partnership, association, trust, business trust, joint venture, joint stock
company, pool, syndicate, sole proprietorship, unincorporated organization,
Governmental Authority or any other form of entity or group thereof.
"Plans" means the detailed plans and specifications for the construction of
the Improvements currently being prepared by the Architect and to be approved by
Agent, and including such amendments thereto as may from time to time be made by
Borrower pursuant to the terms of the Agreement, which plans and specifications
are listed on Exhibit E attached hereto, provided that Agent shall approve such
plans and specifications as long as they are consistent with the plans shown to
Agent prior to the date hereof.
"Pledge Agreement" means the Pledge Agreement executed by the Parent on the
Closing Date in favor of Agent for the benefit of Agent and Lenders, as amended,
restated, supplemented or otherwise modified from time to time.
"Pre-Opening Operating Expenses" means any operating expenses incurred by
Borrower , determined in accordance with GAAP.
"Project" means construction, development and operation of Improvements
which shall consist of a three-story Medicare-certified hospital specializing in
cardiovascular procedures, of at least 138,000 square feet and at least 59
licensed beds, located on approximately 7.6 acres located at the intersection of
Thomas Road and Squaw Peak Parkway, Phoenix, Arizona.
"Project Deposit" shall have the meaning given to such term in Section 2.7.
"Project Equity" means the $6,886,000 equity investment or subordinated
loan made or to be made in or to Borrower to partially fund the cost of the
Project.
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"Property" means the Land, the Improvements, the Tangible Personalty and
all other property constituting the "Mortgaged Property," as described in the
Mortgage, or subject to a right, lien or security interest to secure the Loan
pursuant to any other Loan Document.
"Register" shall have the meaning assigned thereto in Section 12.18.
"Replacement Capital Expenditures" means, with respect to Borrower, all
Capital Expenditures to replace existing fixed assets.
"Required Lenders" means, at any date, any combination of holders of at
least sixty-six and two-thirds percent (66-2/3%) of the aggregate unpaid
principal amount of the Notes, exclusive of Notes held by Defaulting Lenders, or
if no amounts are outstanding under the Notes, any combination of Lenders, other
than Defaulting Lenders, whose Commitment Percentages would aggregate at least
sixty-six and two-thirds percent (66-2/3%) if the Commitments of each Defaulting
Lender were excluded from the Aggregate Commitment.
"Reserve Requirement" means, at any time, the maximum rate at which
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against "Eurocurrency
liabilities" (as such term is used in Regulation D). Without limiting the effect
of the foregoing, the Reserve Requirement shall reflect any other reserves
required to be maintained by such member banks with respect to (i) any category
of liabilities which includes deposits by reference to which the Adjusted
Eurodollar Rate is to be determined, or (ii) any category of extensions of
credit or other assets which include Eurodollar Loans. The Adjusted Eurodollar
Rate shall be adjusted automatically on and as of the effective date of any
change in the Reserve Requirement.
"Security Agreement" means the Security Agreement of even date executed by
Borrower, as debtor, in favor of Agent for the benefit of Agent and Lenders, as
amended, restated, supplemented or otherwise modified from time to time.
"Security Documents" means the collective reference to the Mortgage, the
Security Agreement, the Financing Statements, the Pledge Agreement, the Parent
Guaranty Agreement, the Subsidiary Guaranty Agreement, the Collateral Assignment
of Architect's Contract, the Collateral Assignment of Construction Contract, the
Collateral Assignment of Life Insurance Policy and each other agreement or
writing pursuant to which Borrower or any other Person party thereto pledges or
grants a security interest in any property or assets securing the Obligations or
any such Person guaranties the payment and/or performance of the Obligations.
"Senior Debt" means, at any date of determination, all Debt other than
Subordinated Debt, both determined on a consolidated basis.
"Solvent" means, as to Borrower on a particular date, that any such Person
(a) has capital sufficient to carry on its business and transactions and all
business and transactions in which it is about to engage and is able to pay its
debts as they mature, (b) owns property having a value, both at fair valuation
and at present fair saleable value, greater than the amount required to pay its
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probable liabilities (including contingencies), and (c) does not believe that it
will incur debts or liabilities beyond its ability to pay such debts or
liabilities as they mature.
"Subordinated Debt" means the Debt of Borrower which (i) is, with respect
to principal, subordinated to the Obligations with respect to right and time of
payment, remedies and covenants, (ii) has a scheduled maturity date more than
one (1) year after the Extension Maturity Date, (iii) has a coupon rate not to
exceed thirteen percent (13%), (iv) is not subject to any scheduled amortization
or mandatory redemption feature of any kind, (v) is assigned to Agent and
Lenders, (vi) is unsecured (except that the loan to Borrower by Parent in the
original principal amount of $6,500,000, the proceeds of which shall be used to
fund Borrower's working capital, may be secured by a second priority security
interest in Borrower's accounts receivable) and (vii) is otherwise subordinated
to the reasonable satisfaction of the Required Lenders.
"Subsidiary" means as to any Person, any corporation, partnership or other
entity of which more than fifty percent (50%) of the outstanding capital stock
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity is at the time, directly or indirectly, owned by or the management
is otherwise controlled by such Person (irrespective of whether, at the time,
capital stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency). Unless
otherwise qualified references to "Subsidiary" or "Subsidiaries" herein shall
refer to those of Borrower. For purposes of financial statement preparation or
determining compliance with the financial covenants in this Agreement,
"Subsidiary" shall have the meaning given to such term under GAAP.
"Subsidiary Guarantors" means the Subsidiaries of Borrower set forth on
Schedule 2 hereto.
"Tangible Personalty" means all fixtures, equipment, furnishings and other
articles of personal property now or hereafter owned by Borrower and attached to
or contained in and used in connection with the Land and Improvements and all
renewals or replacements thereof or articles in substitution thereof, whether or
not the same are or shall be attached to the Land and Improvements in any
manner.
"Taxes" shall have the meaning assigned thereto in Section 4.14(a).
"Title Insurance" means the title insurance described in Exhibit C.
"Title Insurer" means Lawyers Title Insurance Corporation.
"Title Policy" means the mortgagee title policy meeting the requirements of
this Agreement and the Mortgage.
"Total Capitalization" means Modified Consolidated Senior Funded Debt plus
the Consolidated equity of the Parent and its Subsidiaries.
"Total Project Cost" shall have the meaning given such term in Exhibit D.
"Type" means either type of Loan (i.e., a Base Rate Loan or Eurodollar
Loan).
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"UCC" means the Uniform Commercial Code as in effect in the State of North
Carolina.
"Uniform Customs" the Uniform Customs and Practice for Documentary Credits
(1994 Revision), International Chamber of Commerce Publication No. 500.
"United States" means the United States of America.
"Working Capital Commitment" means (a) as to any Lender, the obligation of
such Lender to make Working Capital Loans to Borrower hereunder in an aggregate
principal or face amount at any time outstanding not to exceed the amount set
forth opposite such Lender's name on Schedule 1 to this Agreement, as the same
may be reduced or modified at any time or from time to time pursuant to the
terms hereof and (b) as to all Lenders, the aggregate commitment of all Lenders
to make Working Capital Loans. On the Closing Date, the Working Capital Loan
Commitment of all Lenders shall be Two Million Five Hundred Thousand and No/00
Dollars ($2,500,000).
"Working Capital Facility" means the working capital facility established
pursuant to Article III hereof.
"Working Capital Loans" means the working capital loans to be made to
Borrower pursuant to Section 3.1.
"Working Capital Notes" means the separate Working Capital Notes made by
Borrower payable to the order of each Lender, evidencing the Working Capital
Facility, and any amendments and modifications thereto, any substitutes
therefor, and any replacements, restatements, renewals or extension thereof, in
whole or in part; "Working Capital Note" means any of such Working Capital
Notes.
"Working Capital Termination Date" means the earliest of the dates referred
to in Section 3.5.
1.2 General. Unless otherwise specified, a reference in this Agreement to a
particular section, subsection, Schedule or Exhibit is a reference to that
section, subsection, Schedule or Exhibit of this Agreement. Wherever from the
context it appears appropriate, each term stated in either the singular or
plural shall include the singular and plural, and pronouns stated in the
masculine, feminine or neuter gender shall include the masculine, the feminine
and the neuter. Any reference herein to "Charlotte time" shall refer to the
applicable time of day in Charlotte, North Carolina.
1.3 Other Definitions and Provisions.
(a) Use of Capitalized Terms. Unless otherwise defined therein, all
capitalized terms defined in this Agreement shall have the defined meanings when
used in this Agreement, the Notes and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
1.4 Miscellaneous. The words "hereof", "herein" and "hereunder" and words
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.
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ARTICLE II - THE CONSTRUCTION LOAN
2.1 General Information and Purpose. The Exhibits, which are made a part of
this Agreement and incorporated herein by reference, contain terms, provisions,
and conditions applicable to the Construction Loan. The proceeds of the
Construction Loan shall be used by Borrower to pay the cost of the construction
of the Improvements on the Land, and other costs regarding the Property if and
to the extent that such costs are specifically provided for in the Loan
Allocation column in the Budget, including repayment of an interim land loan by
AHH Management, Inc. The Loan Documents, which must be in form, detail and
substance satisfactory to Agent, evidence the agreements of Borrower, Guarantors
and Lenders with respect to the Loans. Borrower and Guarantors shall comply with
all Loan Documents to which they are party.
2.2 Commitment to Lend. Each Lender severally agrees to make the
Construction Loan to Borrower in advances subject to and in accordance with
Exhibit F and the other terms and conditions of this Agreement. Lenders'
commitment to lend shall expire and terminate (a) automatically on the Advance
Termination Date; (b) automatically if the Construction Loan is prepaid in full;
and (c) at the option of the Required Lenders in the event of a Default. The
Construction Loan is not revolving. An amount repaid may not be reborrowed. The
principal amount of outstanding advances from any Lender shall not exceed such
Lender's Construction Loan Commitment. Each Construction Loan by a Lender shall
be in a principal amount equal to such Lender's Commitment Percentage of the
aggregate principal amount of the Construction Loan to be made on such occasion.
2.3 Disbursement of Construction Loans. Not later than 2:00 p.m. (Charlotte
time) on each proposed Construction Loan borrowing date, each Lender will make
available to Agent, for the account of Borrower, at the office of Agent in funds
immediately available to Agent, such Lender's Commitment Percentage of the
Construction Loans to be made on such borrowing date. Borrower hereby
irrevocably authorizes Agent to disburse the proceeds of each Draw Request in
immediately available funds by crediting such proceeds to a deposit account of
Borrower maintained with Agent or as otherwise provided herein or as may be
agreed upon by Borrower and Agent from time to time. Unless Agent shall have
received notice from a Lender that such Lender will not make available to Agent
such Lender's Commitment Percentage of the requested Construction Loan, Agent
shall disburse such Lender's Commitment Percentage of such Construction Loan.
2.4 Construction Loan Notes. Each Lender's Construction Loans and the
obligation of Borrower to repay such Construction Loans shall be evidenced by a
Construction Loan Note executed by Borrower payable to the order of such Lender
representing Borrower's obligation to pay such Lender's Construction Loan
Commitment or, if less, the aggregate unpaid principal amount of all
Construction Loans made and to be made by such Lender to Borrower hereunder,
plus interest and all other fees, charges and other amounts due thereon. Each
Construction Loan Note shall be dated the date hereof and shall bear interest on
the unpaid principal amount thereof at the applicable interest rate per annum
specified in the Draw Request.
2.5 Budget and Amendments. The Construction Loan funds are allocated for
the costs of the Project shown in the Loan Allocation column in the Budget
attached as Exhibit D. The
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Budget has been prepared by Borrower and Borrower represents to Lenders that it
includes all costs and expenses (the "Aggregate Project Cost") incident to the
Construction Loan and the Project, through the Construction Loan Maturity Date,
after taking into account the requirements of this Agreement. Lenders shall not
be required to (a) make any advance for any cost not set forth in the Budget,
other than costs in connection with Permitted Changes, (b) make any advance for
any line item in the Budget that, when added to all prior advances for that line
item, would exceed the lesser of (i) the actual cost incurred by Borrower for
such line item or (ii) the sum allocated in the Loan Allocation column in the
Budget for that line item (which shall include any Cost Savings that have been
allocated to that line item pursuant to this Section 2.5), (c) make any advance
for any contingency line item except for Permitted Changes or unless Agent
consents to such advance, which consent shall not be unreasonably withheld or
(d) make any advance for interest on the Construction Loan after commencement of
operations in the Improvements if and to the extent that there is sufficient net
operating income from the Property to cover any such advances. Lenders may make
advances allocated to line items in the Budget for other purposes or in
different proportions as Agent in its sole discretion deems reasonably necessary
or advisable. Borrower may reallocate Cost Savings from one line item to another
line item in the Budget as long as the amount of such reallocation does not
exceed the lesser of (i) the amount of the applicable line item; and (ii)
$100,000 per line item increased or $500,000 in the aggregate. Borrower shall
(i) not, except as provided in the immediately preceding sentence, reallocate
Construction Loan funds from one Budget line item to another or otherwise amend
the Budget without the prior written consent of Agent, not to be unreasonably
withheld, other than changes resulting from Permitted Changes; and (ii) notify
Lender promptly whenever Borrower becomes aware that the Budget is, or might be,
inaccurate in any material respect, and submit to Agent a new Budget setting
forth the original Budget and all amendments.
2.6 Equity Account. $6,886,000 of the Project Equity, to be contributed or
loaned to Borrower less all sums previously invested by Borrower in the Project
(which investments shall be documented to Agent's reasonable satisfaction),
shall be deposited in an interest-bearing account to be maintained by Borrower
with Agent (the "Equity Account"). Interest earned on the Equity Account shall
be part of the Equity Account and shall be paid currently from time to time to
Parent. The Equity Account is hereby pledged as additional collateral for the
Construction Loan, and Parent and Borrower hereby grant and convey to Agent for
the benefit of the Lenders a security interest in all funds in the Equity
Account as additional collateral for the Construction Loan. Eighty percent (80%)
of each advance by Agent shall consist of Construction Loan proceeds and twenty
percent (20%) of funds from the Equity Account (other than unexpended sums
allocated for Pre-Opening Operating Costs). Upon a Default, Agent may (but shall
have no obligation to) apply all or any part of the Equity Account (other than
unexpended sums allocated for the payment of the Pre-Opening Operating Costs)
against the unpaid Indebtedness in such order as the Required Lenders determine.
Any funds remaining in the Equity Account upon the issuance of the certificate
of occupancy (other than sums allocated for Pre-Opening Operating Costs to be
paid after the issuance of the Medicare Certification) shall be used to prepay
the Construction Loan to the extent necessary to ensure that the outstanding
principal amount of the Construction Loan shall at no time exceed an amount
equal to the lesser (x) eighty percent (80%) of the Total Project Cost or (y)
seventy-five percent (75%) of the Appraised Value. The balance, if any, shall be
returned to Parent.
2.7 Project Deposit. If at any time Agent determines that the sum of (i)
the unadvanced portion of the Construction Loan to which Borrower is entitled,
plus (ii) the amounts of the Aggregate Project Cost which are scheduled to be
paid by Borrower from other funds which
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are available, set aside and committed, to Agent's reasonable satisfaction, is
or will be insufficient to pay the unpaid actual Aggregate Project Cost, Parent
shall, within seven (7) days after written notice from Agent, deposit with Agent
for the benefit of Lenders the amount of the deficiency (the "Project Deposit")
in an interest-bearing account with interest earned thereon to be part of the
Project Deposit. The Project Deposit is hereby pledged as additional collateral
for the Construction Loan, and Parent and Borrower hereby grant and convey to
Agent for the benefit of Lenders a security interest in all funds so deposited
with Agent, as additional collateral for the Construction Loan. Upon a Default,
Agent may (but shall have no obligation to) apply all or any part of the Project
Deposit (other than unexpended sums allocated for the payment of the Pre-Opening
Operating Costs) against the unpaid Indebtedness in such order as the Required
Lenders determine. All funds remaining in the Project Deposit upon the issuance
of the certificate of occupancy (other than sums allocated for Pre-Opening
Operating Costs to be paid after the issuance of the Medicare Certification)
shall be used to prepay the Construction Loan to the extent necessary to ensure
that the outstanding principal amount of the Construction Loan shall at no time
exceed an amount equal to the lesser (x) eighty percent (80%) of the Total
Project Cost or (y) seventy-five percent (75%) of the Appraised Value. The
balance, if any, shall be returned to Parent.
2.8 Principal Payments. The principal amount of the Construction Loan
outstanding on the Completion Date shall be paid in consecutive monthly
installments commencing on September 10, 1999 and continuing on the same day of
each month thereafter. Each monthly payment shall be in an amount to fully
amortize the principal balance of the Construction Loan outstanding on the
Completion Date over a supposed 240-month term; provided that the outstanding
unpaid principal balance of the Construction Loan shall be due and payable in
full on the tenth (10th) day of the thirty-seventh (37th) month following the
Closing Date (as such date may be extended pursuant to Section 2.9) (the
"Construction Loan Maturity Date").
2.9 Option to Extend. Not earlier than the one hundred twentieth (120th)
day and not later than the ninetieth (90th) day prior to the Construction Loan
Maturity Date, Borrower may, by written notice (the "Construction Loan Extension
Notice") given to Agent, extend the Construction Loan Maturity Date for one (1)
year, provided the following conditions are met:
(a) No Default shall have occurred and be continuing;
(b) The principal balance of the Construction Loan shall be
$22,000,000 or less; and
(c) Borrower shall pay to Agent, for the account of Lenders, the
extension fee provided for in Section 4.3(b).
Agent shall promptly advise each Lender of its receipt of the Construction Loan
Extension Notice and furnish each Lender with a copy thereof. Borrower shall
continue to make monthly installment payments of principal, plus accrued
interest, during the one (1) year extension period, each monthly principal
installment to be in the same amount as prior to the Construction Loan Maturity
Date.
2.10 Optional Prepayments. Borrower may at any time and from time to time
repay (without cost except for payment of any compensation due under Section
4.13) the Construction
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Loan, in whole or in part, by giving Agent irrevocable notice in the form
attached hereto as Exhibit M (a "Notice of Construction Loan Prepayment") not
later than 11:00 a.m. (Charlotte time) at least three (3) Business Days before
each prepayment of a Construction Loan specifying the date and amount of
repayment; provided, however, that Borrower may not repay any Eurodollar Loan on
any day other than the last day of the Interest Period applicable thereto unless
such payment is accompanied by any amount required to be paid pursuant to
Section 4.13 hereof. Upon receipt of such notice, Agent shall promptly notify
each Lender. If any such notice is given, the amount specified in such notice
shall be due and payable on the date set forth in such notice. Partial
repayments shall be in an aggregate amount of $100,000 or a whole multiple of
$10,000 in excess thereof and shall be applied against the installments due on
the Construction Loan in the inverse order of their maturity.
ARTICLE III - WORKING CAPITAL FACILITY
3.1 Working Capital Loans. Subject to the terms and conditions of this
Agreement, each Lender severally agrees to make Working Capital Loans to
Borrower from time to time from the Completion Date through the Working Capital
Termination Date as requested by Borrower in accordance with the terms of
Section 3.2; provided, that (a) the aggregate principal amount of all
outstanding Working Capital Loans (after giving effect to any amount requested)
shall not exceed the total Working Capital Commitment and (b) the principal
amount of outstanding Working Capital Loans from any Lender to Borrower shall
not at any time exceed such Lender's Working Capital Commitment. Each Working
Capital Loan by a Lender shall be in a principal amount equal to such Lender's
Commitment Percentage of the aggregate principal amount of Working Capital Loans
requested on such occasion. Subject to the terms and conditions hereof, Borrower
may borrow, repay and reborrow hereunder until the Working Capital Termination
Date.
3.2 Procedure for Advances of Working Capital Loans.
(a) Requests for Borrowing. Borrower shall give Agent irrevocable prior
written notice in the form attached hereto as Exhibit J (a "Notice of Working
Capital Borrowing") not later than 11:00 a.m. (Charlotte time) (i) on the same
Business Day as each Base Rate Loan and (ii) at least three (3) Business Days
before each Eurodollar Loan of its intention to borrow, specifying (i) the date
of such borrowing, which shall be a Business Day , (ii) the amount of such
borrowing, which shall be in an aggregate principal amount of $100,000 or a
whole multiple of $10,000 in excess thereof and (iii) whether such Working
Capital Loan is to be a Eurodollar Loan or a Base Rate Loan. Notices received
after 11:00 a.m. (Charlotte time) shall be deemed received on the next Business
Day. Agent shall promptly notify Lenders of each Notice of Working Capital
Borrowing.
(b) Disbursement of Working Capital Loans. Not later than 2:00 p.m.
(Charlotte time) on the proposed borrowing date, each Lender will make available
to Agent, for the account of Borrower, at the office of Agent in funds
immediately available to Agent, such Lender's Commitment Percentage of the
Working Capital Loans to be made on such borrowing date. Borrower hereby
irrevocably authorizes Agent to disburse the proceeds of each borrowing
requested pursuant to this Section 3.2 in immediately available funds by
crediting such proceeds
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to a deposit account of Borrower maintained with Agent or by wire transfer to
such account as may be agreed upon by Borrower and Agent from time to time.
Unless Agent shall have received notice from a Lender that such Lender will not
make available to Agent such Lender's Commitment Percentage of the requested
Working Capital Loan, Agent shall disburse such Lender's Commitment Percentage
of such Working Capital Loan.
3.3 Working Capital Notes. Each Lender's Working Capital Loans and the
obligation of Borrower to repay such Working Capital Loans shall be evidenced by
a Working Capital Note executed by Borrower payable to the order of such Lender
representing Borrower's obligation to pay such Lender's Working Capital Loan
Commitment or, if less, the aggregate unpaid principal amount of all Working
Capital Loans made and to be made by such Lender to Borrower hereunder, plus
interest and all other fees, charges and other amounts due thereon. Each Working
Capital Note shall be dated the date hereof and shall bear interest on the
unpaid principal amount thereof at the applicable interest rate per annum
specified in Section 3.2(a).
3.4 Repayment of Working Capital Loans.
(a) Repayment on Working Capital Termination Date. Borrower shall repay the
outstanding principal amount of all Working Capital Loans in full, together with
all accrued but unpaid interest thereon, on the Working Capital Termination
Date.
(b) Mandatory Repayment of Working Capital Loans. If at any time the
outstanding principal amount of all Working Capital Loans exceeds the total
Working Capital Commitment, Borrower shall repay immediately upon notice from
Agent, by payment to Agent for the account of Lenders, the Working Capital Loans
in an amount equal to such excess.
(c) Optional Prepayments. Borrower may at any time and from time to time
repay (without cost except for payment of any compensation due under Section
4.13) the Working Capital Loans, in whole or in part, by giving Agent
irrevocable notice in the form attached hereto as Exhibit K (a "Notice of
Working Capital Loan Prepayment") not later than 11:00 a.m. (Charlotte time) at
least three (3) Business Days before each prepayment of a Working Capital Loan
specifying the date and amount of repayment; provided, however, that Borrower
may not repay any Eurodollar Loan on any day other than the last day of the
Interest Period applicable thereto unless such payment is accompanied by any
amount required to be paid pursuant to Section 4.13 hereof. Upon receipt of such
notice, Agent shall promptly notify each Lender. If any such notice is given,
the amount specified in such notice shall be due and payable on the date set
forth in such notice. Partial repayments shall be in an aggregate amount of
$100,000 or a whole multiple of $10,000 in excess thereof. Each such repayment
shall be accompanied by any amount required to be paid pursuant to Section 4.13
hereof.
3.5 Termination of Working Capital Facility. The Working Capital Facility
shall terminate on the earliest of (a) the date which is twenty-five (25) months
following the Closing Date and (b) the date of termination by Agent on behalf of
Lenders pursuant to Section 9.2; provided, that not earlier than the one hundred
and twentieth (120th) day and not later than the ninetieth (90th) day prior to
the date set forth in clause (a) above (the "Working Capital Extension Date"),
Borrower may, by written notice (a "Working Capital Extension Request") given to
Agent, request that the date set forth in clause (a) above be extended for one
(1) year. Agent shall promptly advise each Lender of its receipt of any Working
Capital Extension Request and furnish each Lender with a copy thereof. Each
Lender may, in its sole discretion, consent to the requested
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extension by giving written notice thereof to Agent not later than the Business
Day (the "Working Capital Extension Confirmation Date") immediately preceding
the date which is thirty (30) days after receipt of the Working Capital
Extension Request. No Lender shall be under any obligation or commitment to
extend such date and no such obligation or commitment on the part of any Lender
shall be inferred from the provisions of this Section 3.5. Failure on the part
of any Lender to respond to a Working Capital Extension Request by the
applicable Working Capital Extension Confirmation Date shall be deemed to be a
denial of such request by such Lender. The requested extension shall not be
granted unless one hundred percent (100%) of Lenders shall have consented in
writing to such extension. In the event that Agent determines, in its sole and
absolute discretion, to approve the requested extension, Agent shall use its
best efforts to assist Borrower in obtaining the approval of one hundred percent
(100%) of Lenders; provided, that Agent shall incur no liability whatsoever for
the failure of any Lender to approve such extension.
3.6 Use of Proceeds. Borrower shall use the proceeds of the Working Capital
Loan to provide working capital and to finance other expenditures incurred in
the ordinary course of business.
3.7 Security. The Obligations of Borrower under the Working Capital Loan
Facility shall be secured as provided in the Security Documents.
ARTICLE IV - GENERAL LOAN PROVISIONS
4.1 Interest.
(a) Interest Rate Options. The outstanding principal balance of the Loans
shall bear interest from the Closing Date until the Initial Adjustment Date at a
rate of interest per annum equal to (A) the Adjusted Eurodollar Rate plus the
Applicable Margin or (B) the Base Rate. Borrower shall select the type of
interest rate applicable to any Loan at the time a Draw Request is submitted for
a Construction Loan advance or a Notice of Borrowing is given pursuant to
Section 3.2(a) for a Working Capital Loan or at the time a Notice of
Conversion/Continuation is given pursuant to Section 4.2. Any Loan as to which
Borrower has not duly specified an interest rate as provided herein shall be
deemed to bear interest at the Base Rate. Interest on the Loans shall be payable
in arrears on the tenth day of each month and upon payment in full of the Notes.
All interest payable hereunder shall be computed on the basis of a 360-day year.
(b) Interest Payments. Whenever any payment hereunder, including, without
limitation, principal or interest, shall be due on a day which is not a Business
Day, the date for payment thereof shall be extended to the next Business Day and
interest shall continue to accrue on any principal amount for which the payment
date is so extended. Provided no Default shall have occurred and be continuing,
interest prior to the Advance Termination Date shall be paid from the proceeds
of the Construction Loan up to the maximum amount provided therefor in the
Budget.
(c) Default Rate. Upon the occurrence and during the continuance of a
Default, (i) Borrower shall no longer have the option to request or Convert to
Eurodollar Loans, (ii) all outstanding Eurodollar Loans may at the option of
Agent and shall at the direction of the Required Lenders, bear interest at a
rate per annum which shall be two percent (2%) in excess of the rate
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then applicable to Eurodollar Loans, until the end of the applicable Interest
Period and thereafter at a rate equal to two percent (2%) in excess of the rate
then applicable to Base Rate Loans, and (iii) all outstanding Base Rate Loans
shall bear interest at a rate per annum equal to two percent (2%) in excess of
the rate then applicable to Base Rate Loans (the "Default Rate"). To the extent
permitted by law, interest shall continue to accrue on the Notes after the
filing by or against Borrower of any petition seeking any relief in bankruptcy
or under any act or law pertaining to insolvency or debtor relief, whether
state, federal or foreign.
4.2 Notice and Manner of Conversion or Continuation of Loans. Provided that
no Default has occurred and is then continuing, Borrower shall have the option
to (a) Convert at any time all or any portion of its outstanding Base Rate Loans
in a principal amount equal to $500,000 or any whole multiple of $100,000 in
excess thereof into one or more Eurodollar Loans, and (b) upon the expiration of
any Interest Period, (i) Convert all or any part of its outstanding Eurodollar
Loans in a principal amount equal to $500,000 or a whole multiple of $100,000 in
excess thereof into Base Rate Loans or (ii) continue such Eurodollar Loans as
Eurodollar Loans. Whenever Borrower desires to Convert or continue Loans as
provided above, Borrower shall give Agent irrevocable prior written notice in
the form attached as Exhibit L (a "Notice of Conversion/Continuation") not later
than 11:00 a.m. (Charlotte time) three (3) Business Days before the day on which
a proposed Conversion or continuation of such Loan is to be effective specifying
(A) the Loans to be Converted or continued, and, in the case of any Eurodollar
Loan to be Converted or continued, the last day of the Interest Period therefor,
(B) the effective date of such Conversion or continuation (which shall be a
Business Day) and (C) the principal amount of such Loans to be Converted or
continued. Agent shall promptly notify Lenders of such Notice of
Conversion/Continuation.
4.3 Fees.
(a) Underwriting Fee. Borrower agrees to pay to Agent, for its account, the
fees set forth in the separate fee letter agreement executed by Borrower and
Agent dated August 6, 1997.
(b) Extension Fee. In order to compensate Agent and Lenders for extending
the Construction Loan Maturity Date, if applicable, Borrower shall pay to Agent,
for the account of Lenders, an extension fee equal to .35% of the outstanding
principal balance of the Construction Loans as of the original Construction Loan
Maturity Date. The extension fee shall be payable on the original Construction
Loan Maturity Date and shall be distributed pro rata in accordance with Lenders'
respective Commitment Percentages.
4.4 Manner of Payment. Each payment by Borrower on account of the principal
of or interest on the Loans or of any fee, commission or other amounts payable
to Lenders under this Agreement or any Note shall be made not later than 2:00
p.m. (Charlotte time) on the date specified for payment under this Agreement to
Agent at Agent's Office for the account of Lenders (other than as set forth
below) pro rata in accordance with their respective Commitment Percentages, in
Dollars, in immediately available funds and shall be made without any set-off,
counterclaim or deduction whatsoever. Any payment received after such time shall
be deemed to have been made on the next succeeding Business Day. Upon receipt by
Agent of each such payment, Agent shall distribute to each Lender at its address
for notices set forth herein its pro rata share of such payment in accordance
with such Lender's Commitment Percentage and shall wire advice of the amount of
such credit to each Lender. Each payment to Agent of Agent's fees or expenses
shall be made for the account of Agent.
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4.5 Right of Set-off; Adjustments.
(a) Upon the occurrence and during the continuance of any Event of Default,
and upon the exercise by Agent of the remedy provided for in Section 9.2, each
Lender (and each of its Affiliates) is hereby authorized at any time and from
time to time, to the fullest extent permitted by law, to set off and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held and other indebtedness at any time owing by such Lender (or any of
its Affiliates) to or for the credit or the account of Borrower against any and
all of the obligations of Borrower now or hereafter existing under this
Agreement and the Note held by such Lender, irrespective of whether such Lender
shall have made any demand under this Agreement or such Note and although such
obligations may be unmatured. Each Lender agrees promptly to notify Borrower
after any such set-off and application made by such Lender; provided, that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of each Lender under this Section are in addition to
other rights and remedies (including, without limitation, other rights of
set-off) that such Lender may have.
(b) In the event that Borrower shall fail to pay any of the Obligations
when due and the Obligations have been accelerated pursuant to Section 9.2, all
payments received by Lenders upon the Notes and the other Obligations and all
net proceeds from the enforcement of the Obligations shall be applied first to
all expenses then due and payable by Borrower hereunder, then to all indemnity
obligations then due and payable by Borrower hereunder, then to all of Agent's
fees then due and payable, then to all commitment and other fees and commissions
then due and payable, then to accrued and unpaid interest on the Notes and any
termination payments due in respect of a Hedging Agreement with any Lender (pro
rata in accordance with all such amounts due), then to the principal amount of
the Notes, in such order as Required Lenders shall elect.
4.6 Adjustments. If any Lender (a "Benefitted Lender") shall at any time
receive any payment of all or part of its Loans, or interest thereon, or if any
Lender shall at any time receive any collateral in respect to its Loans (whether
voluntarily or involuntarily, by set-off or otherwise) in a greater proportion
than any such payment to and collateral received by any other Lender, if any, in
respect of such other Lender's Loans, or interest thereon, such Benefitted
Lender shall purchase for cash from the other Lenders such portion of each such
other Lender's Loans, or shall provide such other Lenders with the benefits of
any such collateral, or the proceeds thereof, as shall be necessary to cause
such Benefitted Lender to share the excess payment or benefits of such
collateral or proceeds ratably with each of Lenders; provided, that if all or
any portion of such excess payment or benefits is thereafter recovered from such
Benefitted Lender, such purchase shall be rescinded, and the purchase price and
benefits returned to the extent of such recovery, but without interest. Borrower
agrees that each Lender so purchasing a portion of another Lender's Loans may
exercise all rights of payment (including, without limitation, rights of
set-off) with respect to such portion as fully as if such Lender were the direct
holder of such portion.
4.7 Nature of Obligations of Lenders Regarding Loans; Assumption by Agent.
The obligations of Lenders under this Agreement to make the Loans are several
and are not joint or joint and several. Unless Agent shall have received notice
from a Lender prior to a proposed borrowing date that such Lender will not make
available to Agent such Lender's ratable portion of the amount to be borrowed on
such date (which notice shall not release such Lender of its obligations
hereunder), Agent may assume that such Lender has made such portion available to
Agent on the proposed borrowing date in accordance with the terms hereof, as
applicable, and
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Agent may, in reliance upon such assumption, make available to Borrower on such
date a corresponding amount. If such amount is made available to Agent on a date
after such borrowing date, such Lender shall pay to Agent on demand an amount,
until paid, equal to the product of (a) the amount of such Lender's Commitment
Percentage of such borrowing, times (b) the daily average Federal Funds Rate
during such period as determined by Agent, times (c) a fraction the numerator of
which is the number of days that elapse from and including such borrowing date
to the date on which such Lender's Commitment Percentage of such borrowing shall
have become immediately available to Agent and the denominator of which is 360.
A certificate of Agent with respect to any amounts owing under this Section 4.7
shall be conclusive, absent manifest error. If such Lender's Commitment
Percentage of such borrowing is not made available to Agent by such Lender
within three (3) Business Days of such borrowing date, Agent shall be entitled
to recover such amount made available by Agent with interest thereon at the rate
per annum applicable to Base Rate Loans hereunder, on demand, from Borrower. The
failure of any Lender (herein, a "Defaulting Lender") to make its Commitment
Percentage of any Loan available shall not relieve it or any other Lender of its
obligation, if any, hereunder to make its Commitment Percentage of such Loan
available on such borrowing date, but no Lender shall be responsible for the
failure of any other Lender to make its Commitment Percentage of such Loan
available on the borrowing date.
4.8 Indemnity. Borrower hereby indemnifies each of the Lenders against any
loss or expense which may arise or be attributable to each Lender's obtaining,
liquidating or employing deposits or other funds acquired to effect, fund or
maintain any Loan (a) as a consequence of any failure by Borrower to make any
payment when due of any amount due hereunder in connection with a Loan, (b) due
to any failure of Borrower to borrow on a date specified therefor in a Notice of
Borrowing or (c) due to any payment or prepayment of any Loan on a date other
than the date specified for such payment in the applicable Notice of Prepayment.
The amount of such loss or expense shall be determined, in the applicable
Lender's sole discretion, based upon the assumption that such Lender funded its
Commitment Percentage of the Loans in the London interbank market and using any
reasonable attribution or averaging methods which such Lender deems appropriate
and practical. A certificate of such Lender setting forth the basis for
determining such amount or amounts necessary to compensate such Lender shall be
forwarded to Borrower through Agent and shall be conclusively presumed to be
correct save for manifest error. (Amounts payable under this Section 4.8 shall
be without duplication of amounts payable under Section 4.9 or 4.13.)
4.9 Increased Cost and Reduced Return. Borrower hereby indemnifies each
Lender against any loss or expense which may arise or be attributable to each
Lender's obtaining, liquidating or employing deposits or other funds acquired to
effect, fund or maintain any Loan (a) as a consequence of any failure by
Borrower to make any payment when due of any amount due hereunder in connection
with a Eurodollar Loan, (b) due to any failure of Borrower to borrow on a date
specified therefor in a Notice of Borrowing or Notice of Continuation/Conversion
or (c) due to any payment, prepayment or conversion of any Eurodollar Loan on a
date other than the last day of the Interest Period therefor. The amount of such
loss or expense shall be determined, in the applicable Lender's sole discretion,
based upon the assumption that such Lender funded its Commitment Percentage of
the Eurodollar Loans in the London interbank market and using any reasonable
attribution or averaging methods which such Lender deems appropriate and
practical. A certificate of such Lender setting forth the basis for determining
such amount or amounts necessary to compensate such Lender shall be forwarded to
Borrower through Agent and shall be conclusively presumed to be correct save for
manifest error.
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(a) If, after the date hereof, the adoption of any applicable law,
rule, or regulation, or any change in any applicable law, rule, or
regulation, or any change in the interpretation or administration thereof
by any governmental authority, central bank, or comparable agency charged
with the interpretation or administration thereof, or compliance by any
Lender (or its Applicable Lending Office) with any request or directive
(whether or not having the force of law) of any such governmental
authority, central bank, or comparable agency:
(i) shall subject such Lender (or its Applicable Lending Office)
to any tax, duty, or other charge with respect to any Eurodollar
Loans, its Note, or its obligation to make Eurodollar Loans, or change
the basis of taxation of any amounts payable to such Lender (or its
Applicable Lending Office) under this Agreement or its Note in respect
of any Eurodollar Loans (other than taxes imposed on the overall net
income of such Lender by the jurisdiction in which such Lender has its
principal office or such Applicable Lending Office);
(ii) shall impose, modify, or deem applicable any reserve,
special deposit, assessment or similar requirement (other than the
Reserve Requirement utilized in the determination of the Adjusted
Eurodollar Rate) relating to any extensions of credit or other assets
of, or any deposits with or other liabilities or commitments of, such
Lender (or its Applicable Lending Office), including the Commitment of
such Lender hereunder; or
(iii) shall impose on such Lender (or its Applicable Lending
Office) or on the United States market for certificates of deposit or
the London interbank market any other condition affecting this
Agreement or its Note or any of such extensions of credit or
liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such
Lender (or its Applicable Lending Office) of making, Converting into,
Continuing, or maintaining any Eurodollar Loans or to reduce any sum
received or receivable by such Lender (or its Applicable Lending Office)
under this Agreement or its Note with respect to any Eurodollar Loans, then
Borrower shall pay to such Lender on demand such amount or amounts as will
compensate such Lender for such increased cost or reduction. If any Lender
requests compensation by Borrower under this Section 4.9, Borrower may, by
notice to such Lender (with a copy to Agent), suspend the obligation of
such Lender to make or Continue Eurodollar Loans or to Convert Base Rate
Loans into Eurodollar Loans until the event or condition giving rise to
such request ceases to be in effect (in which case the provisions of
Section 4.12 shall be applicable); provided, that such suspension shall not
affect the right of such Lender to receive the compensation so requested.
(b) If, after the date hereof, any Lender shall have reasonably
determined that the adoption of any applicable law, rule, or regulation
regarding capital adequacy or any change therein or in the interpretation
or administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation or administration
thereof, or any request or directive regarding capital adequacy (whether or
not having the force of law) of any such governmental authority, central
bank, or comparable agency, has or would have the effect of reducing the
rate of return on the
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capital of such Lender or any corporation controlling such Lender as a
consequence of such Lender's obligations hereunder to a level below that
which such Lender or such corporation could have achieved but for such
adoption, change, request, or directive (taking into consideration its
policies with respect to capital adequacy), then from time to time upon
demand Borrower shall pay to such Lender such additional amount or amounts
as will compensate such Lender for such reduction.
(c) Each Lender shall promptly notify Borrower and Agent of any event
of which it has knowledge, occurring after the date hereof, which will
entitle such Lender to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will
avoid the need for, or reduce the amount of, such compensation and will
not, in the judgment of such Lender, be otherwise disadvantageous to it.
Any Lender claiming compensation under this Section shall furnish to
Borrower and Agent a statement setting forth the additional amount or
amounts to be paid to it hereunder which shall be conclusive in the absence
of manifest error. In determining such amount, such Lender may use any
reasonable averaging and attribution methods.
(d) Amounts payable under this Section 4.9 shall be without
duplication of the amounts payable under 4.8 or 4.13.
4.10 Limitation on Types of Loans. If on or prior to the first day of any
Interest Period for any Eurodollar Loan:
(a) Agent reasonably determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Eurodollar
Rate for such Interest Period; or
(b) the Required Lenders determine (which determination shall be
conclusive) and notify Agent that the Adjusted Eurodollar Rate will not
adequately and fairly reflect the cost to Lenders of funding Eurodollar
Loans for such Interest Period;
then Agent shall give Borrower prompt notice thereof specifying the relevant
Eurodollar Loans and the relevant amounts or periods, and so long as such
condition remains in effect, Lenders shall be under no obligation to make
additional Eurodollar Loans, Continue Eurodollar Loans or to Convert Base Rate
Loans into Eurodollar Loans and Borrower shall, on the last day(s) of the then
current Interest Period(s) for the outstanding Eurodollar Loans either prepay
such Loans or Convert such Loans into Base Rate Loans in accordance with the
terms of this Agreement.
4.11 Illegality. Notwithstanding any other provision of this Agreement, in
the event that it becomes unlawful for any Lender or its Applicable Lending
Office to make, maintain, or fund Eurodollar Loans hereunder, then such Lender
shall promptly notify Borrower thereof and such Lender's obligation to make or
Continue Eurodollar Loans and to Convert Base Rate Loans into Eurodollar Loans
shall be suspended until such time as such Lender may again make, maintain, and
fund Eurodollar Loans (in which case the provisions of Section 4.12 shall be
applicable).
4.12 Treatment of Affected Loans. If the obligation of any Lender to make
Eurodollar Loans or to Continue, or to Convert Base Rate Loans into, Eurodollar
Loans shall be suspended
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pursuant to Section 4.10 or 4.11 hereof, unless and until such Lender gives
notice as provided below that the circumstances specified in Section 4.10 or
4.11 hereof no longer exist:
(a) to the extent that such Lender's Eurodollar Loans have been so
Converted into Base Rate Loans, all payments and prepayments of principal
that would otherwise be applied to the Eurodollar Loans shall be applied
instead to its Base Rate Loans; and
(b) all Loans that would otherwise be made or Continued by such Lender
as Eurodollar Loans shall be made or Continued instead as Base Rate Loans,
and all Loans of such Lender that would otherwise be Converted into
Eurodollar Loans shall instead remain as Base Rate Loans.
If such Lender gives notice to Borrower (with a copy to Agent) that the
circumstances specified in Section 4.10 or 4.11 hereof no longer exist (which
such Lender agrees to do promptly upon such circumstances ceasing to exist),
such Lender's Base Rate Loans may be Converted to Eurodollar Loans.
4.13 Compensation. Upon the request of any Lender, Borrower shall pay to
such Lender such amount or amounts as shall be sufficient (in the reasonable
opinion of such Lender) to compensate it for any loss, cost, or expense
(including loss of anticipated profits) incurred by it as a result of:
(a) any payment, prepayment, or Conversion of a Eurodollar Loan for
any reason (including, without limitation, the acceleration of the Loans
pursuant to Section 9.2) on a date other than the last day of the Interest
Period for such Loan; or
(b) any failure by Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in Article IV
to be satisfied) to borrow, Convert, Continue, or prepay a Eurodollar Loan
on the date for such borrowing, Conversion, Continuation, or prepayment
specified in the relevant Notice of Borrowing, prepayment, Continuation, or
Conversion under this Agreement.
Amounts payable under this Section 4.13 shall be without duplication of amounts
payable under Section 4.8 or 4.9.
4.14 Taxes.
(a) Any and all payments by Borrower to or for the account of any Lender or
Agent hereunder or under any other Loan Document shall be made free and clear of
and without deduction for any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and all liabilities with respect
thereto, excluding, in the case of each Lender and Agent, taxes imposed on its
income, and franchise taxes imposed on it, by the jurisdiction under the laws of
which such Lender (or its Applicable Lending Office) or Agent (as the case may
be) is organized or any political subdivision thereof (all such non-excluded
taxes, duties, levies, imposts, deductions, charges, withholdings, and
liabilities being hereinafter referred to as "Taxes"). If Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable under
this Agreement or any other Loan Document to any Lender or Agent, (i) the sum
payable shall be increased as necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 4.14) such Lender or Agent receives an
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amount equal to the sum it would have received had no such deductions been made,
(ii) Borrower shall make such deductions, (iii) Borrower shall pay the full
amount deducted to the relevant taxation authority or other authority in
accordance with applicable law, and (iv) Borrower shall furnish to Agent, at its
address referred to in Section 12.4, the original or a certified copy of a
receipt evidencing payment thereof.
(b) In addition, Borrower agrees to pay any and all present or future stamp
or documentary taxes and any other excise or property taxes or charges or
similar levies which arise from any payment made under this Agreement or any
other Loan Document or from the execution or delivery of, or otherwise with
respect to, this Agreement or any other Loan Document (hereinafter referred to
as "Other Taxes").
(c) Borrower agrees to indemnify each Lender and Agent for the full amount
of Taxes and Other Taxes (including, without limitation, any Taxes or Other
Taxes imposed or asserted by any jurisdiction on amounts payable under this
Section 4.14) paid by such Lender or Agent (as the case may be) and any
liability (including penalties, interest, and expenses) arising therefrom or
with respect thereto.
(d) Each Lender organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Lender listed on the signature pages hereof and on
or prior to the date on which it becomes a Lender in the case of each other
Lender, and from time to time thereafter if requested in writing by Borrower or
Agent (but only so long as such Lender remains lawfully able to do so), shall
provide Borrower and Agent with (i) Internal Revenue Service Form 1001 or 4224,
as appropriate, or any successor form prescribed by the Internal Revenue
Service, certifying that such Lender is entitled to benefits under an income tax
treaty to which the United States is a party which reduces the rate of
withholding tax on payments of interest or certifying that the income receivable
pursuant to this Agreement is effectively connected with the conduct of a trade
or business in the United States, (ii) Internal Revenue Service Form W-8 or W-9,
as appropriate, or any successor form prescribed by the Internal Revenue
Service, and (iii) any other form or certificate required by any taxing
authority (including any certificate required by Sections 871(h) and 881(c) of
the Internal Revenue Code), certifying that such Lender is entitled to an
exemption from or a reduced rate of tax on payments pursuant to this Agreement
or any of the other Loan Documents.
(e) For any period with respect to which a Lender has failed to provide
Borrower and Agent with the appropriate form pursuant to Section 4.14(d) (unless
such failure is due to a change in treaty, law, or regulation occurring
subsequent to the date on which a form originally was required to be provided),
such Lender shall not be entitled to indemnification under Section 4.14(a) or
4.14(b) with respect to Taxes imposed by the United States; provided, that
should a Lender, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Taxes because of its failure to deliver a
form required hereunder, Borrower shall take such steps as such Lender shall
reasonably request to assist such Lender to recover such Taxes.
(f) If Borrower is required to pay additional amounts to or for the account
of any Lender pursuant to this Section 4.14, then such Lender will agree to use
reasonable efforts to change the jurisdiction of its Applicable Lending Office
so as to eliminate or reduce any such additional payment which may thereafter
accrue if such change, in the judgment of such Lender, is not otherwise
disadvantageous to such Lender.
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(g) Within thirty (30) days after the date of any payment of Taxes,
Borrower shall furnish to Agent the original or a certified copy of a receipt
evidencing such payment.
(h) Without prejudice to the survival of any other agreement of Borrower
hereunder, the agreements and obligations of Borrower contained in this Section
4.14 shall survive the termination of the Commitments and the payment in full of
the Notes.
4.15 Replacement of Lenders. If deposits in eurodollars shall not be
available to any Lender, or it shall be unlawful or impossible for any Lender to
make or maintain any Eurodollar Loan or the cost to any Lender of making or
maintaining Eurodollar Loans is increased by reason of any circumstance
specified in Section 4.9(a) or (b) or if any Lender asserts the right to
indemnity under Section 4.14 or Borrower is required to pay additional amounts
to or for the account of any Lender pursuant to Section 4.14, or with respect to
any Defaulting Lender, Borrower shall have the right, if no Default exists or
will exist immediately after giving effect to the respective replacement, to
replace such affected Lender or Defaulting Lender (the "Replaced Lender"), upon
ten (10) days' written notice to Agent, with one or more other Eligible Assignee
or Assignees (collectively, the "Replacement Lender"); provided, that no
assignment shall be required if the consummation of such assignment conflicts
with any Applicable Law. Neither Agent nor any Lender shall be obligated to
assist Borrower in identifying any Eligible Assignees that are willing to become
a Replacement Lender. At the time of any replacement pursuant to this Section
4.15, the Replacement Lender shall enter into an Assignment and Acceptance (with
all fees payable pursuant to Section 12.18 to be paid by the Replacement Lender)
pursuant to which the Replacement Lender shall acquire all of the Commitment and
outstanding Extensions of Credit of the Replaced Lender and in connection
therewith, shall pay on the effective date of the corresponding Assignment and
Acceptance to the Replaced Lender an amount equal to the sum of (i) the
principal of, and all accrued interest on, all outstanding Loans of the Replaced
Lender and (ii) all accrued but unpaid fees owing to the Replaced Lender
pursuant to Section 4.3 and (iii) all other obligations of Borrower owing to the
Replaced Lender. Upon the execution of such Assignment and Acceptance, the
payment of amounts referred to in clauses (i), (ii) and (iii) above and delivery
to the Replacement Lender of a new Note executed by Borrower, the Replacement
Lender shall become a Lender hereunder and the Replaced Lender shall cease to
constitute a Lender hereunder, except with respect to the indemnification
provisions under this Agreement, which shall survive as to such Replaced Lender
and in the case of a replacement of a Replaced Lender with an existing Lender,
the Commitment Percentage of such Lender shall be automatically adjusted at such
time to give effect to such replacement.
ARTICLE V - FINANCIAL INFORMATION AND REPORTS
Until all the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, the Credit Parties will
furnish or cause to be furnished to Agent at Agent's Office at the address set
forth on the signature page of this Agreement and to Lenders at their respective
addresses as set forth on the signature page to this Agreement or such other
office as may be designated by Agent and Lenders from time to time:
5.1 Financial Statements and Projections.
(a) Monthly or Quarterly Financial Statements.
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(i) Monthly Financial Statements. Commencing with the first full month
after the Completion Date and continuing for the first twelve months after
the Completion Date, as soon as practicable and in any event within thirty
(30) days after the end of each month, an unaudited balance sheet of
Borrower as of the close of such month and unaudited statements of income
and expenses and cash flow for the month then ended and that portion of the
Fiscal Year then ended, all in reasonable detail and prepared by Borrower
in accordance with GAAP (without footnotes) and certified by an executive
officer of Borrower to present fairly in all material respects the
financial condition of Borrower as of their respective dates and the
results of operations of Borrower for the respective periods then ended,
subject to normal year end adjustments.
(ii) Quarterly Financial Statements. With respect to each quarter
ending after the date which is twelve months after the Completion Date, as
soon as practicable and in any event within forty-five (45) days after the
end of each quarter, an unaudited consolidated balance sheet of the Parent
and its Subsidiaries as of the close of such quarter and unaudited
consolidated statements of income and expenses and cash flow for the
quarter then ended and that portion of the Fiscal Year then ended, all in
reasonable detail and prepared by the Parent and its Subsidiaries in
accordance with GAAP (without footnotes) and certified by an executive
officer of Parent to present fairly in all material respects the financial
condition of the Parent and its Subsidiaries as of their respective dates
and the results of operations of the Parent and its Subsidiaries for the
respective periods then ended, subject to normal year end adjustments.
(Delivery to each Lender of the Parent's quarterly report on Form 10Q with
respect to any fiscal quarter within forty-five (45) days after the end of
such fiscal quarter shall be deemed to be compliance with this Section
5.1(a)(ii).)
(b) Annual Financial Statements. As soon as practicable and in any event
within one hundred twenty (120) days after the end of each Fiscal Year,
commencing with Fiscal Year ending September 30, 1997, an audited consolidated
balance sheet of the Parent and its Subsidiaries as of the close of such Fiscal
Year and audited consolidated statements of income and expenses, retained
earnings and cash flows for the Fiscal Year then ended, including the notes
thereto, all in reasonable detail and prepared in accordance with GAAP and
accompanied by a report thereon prepared by Ernst & Young LLP, or another
independent certified public accounting firm reasonably acceptable to Agent,
that such financial statements are not qualified with respect to scope
limitations imposed by the Parent and its Subsidiaries or with respect to
accounting principles followed by the Parent and its Subsidiaries not in
accordance with GAAP. (Delivery to each Lender of the Parent's annual report on
Form 10K with respect to any Fiscal Year within one hundred twenty (120) days
after the end of such Fiscal Year shall be deemed to be compliance with this
Section 5.1(b).)
(c) Clinical Procedures Report. At each time financial statements are
delivered pursuant to Sections 5.1(a) or (b) and at such other times as Agent
shall reasonably request, a certificate of an executive officer of Borrower
setting forth the types of clinical procedures performed during such period, the
number of the clinical procedures performed during such period, the patient days
related to the clinical procedures performed during such period and any other
operating statistics reasonably requested by Agent, in a form prepared by
Borrower in the ordinary course of its business.
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(d) SEC Reports. Promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials filed
with the Securities and Exchange Commission, or any Governmental Authority
succeeding to any or all of the functions of said Commission, or with any
national securities exchange.
(e) Other Information. Such other information regarding the operations,
business affairs and financial condition of Borrower as Agent may reasonably
request. The form of monthly, quarterly and annual financial statements
previously furnished by Parent to Agent are acceptable to Agent.
5.2 Officer's Compliance Certificate. At each time financial statements are
delivered pursuant to Sections 5.1(a)(ii) or (b) and at such other times as
Agent shall reasonably request, a certificate of the chief financial officer or
the treasurer of Parent in the form of Exhibit H attached hereto (an "Officer's
Compliance Certificate"):
(a) stating that such officer has reviewed such financial statements
and, to the best of his knowledge, such financial statements fairly present
the financial condition of the Parent and its Subsidiaries as of the dates
indicated and the results of its operations and cash flows for the periods
indicated;
(b) stating that to such officer's knowledge, based on a reasonable
examination, no Default exists, or, if such is not the case, specifying
such Default and its nature, when it occurred, whether it is continuing and
the steps being taken by Borrower and the Guarantors with respect to such
Default;
(c) stating that Parent, Borrower and each of the Guarantors was in
compliance with the covenants and restrictions set forth in Articles VI,
VII and VIII of this Agreement applicable to Parent, Borrower or the
Guarantors; and
(d) setting forth any other information reasonably required by Agent
to ensure compliance with this Agreement.
5.3 Other Reports.
(a) Permitted Payment Certificate. Within forty-five (45) days after the
end of each quarter with respect to which Borrower desires to make any permitted
distribution pursuant to Section 8.8 or (B) any permitted payment pursuant to
Section 8.9, a certificate of the chief financial officer or the treasurer of
Borrower:
(i) stating that such officer has reviewed the most recent financial
statements of Borrower and such financial statements fairly present the
financial condition of Borrower as of the dates indicated and the results
of its operations and cash flows for the periods indicated;
(ii) setting forth as at the end of such quarter or Fiscal Year, as
the case may be, the calculations required to establish whether or not
Borrower was in compliance with the requirements set forth in such Sections
8.8 and 8.9, as of the end of such period; and
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(iii) setting forth any other information reasonably required by Agent
to ensure compliance with this Agreement.
(b) Other Reports. Such other information regarding the operations,
business affairs and financial condition of Borrower as Agent or any Lender may
reasonably request.
5.4 Accuracy of Information. All written information, reports, statements
and other papers and data furnished by or on behalf of Borrower to Agent or any
Lender pursuant to this Agreement, or any of the Security Documents, shall be,
at the time the same is so furnished, complete and correct in all material
respects to the extent necessary to give Agent or any Lender complete, true and
accurate knowledge of the subject matter based on Borrower's knowledge thereof.
ARTICLE VI - COVENANTS AND AGREEMENTS
6.1 Plans. Borrower assumes full responsibility for the compliance of the
Plans and the Property with all laws, governmental requirements and sound
building and engineering practices. No construction shall be undertaken on the
Land except as shown in the Plans, as revised to reflect Permitted Changes. No
plans or specifications, or any changes thereto, shall be included as part of
the Plans until consented to by Agent in its discretion reasonably exercised,
and reasonably approved by Construction Consultant, all applicable governmental
authorities, and all parties required under the Loan Documents.
6.2 Contracts. Without Agent's prior written reasonable approval as to
parties, terms and all other matters, Borrower shall not (a) enter into any
Material Contract for the performance of any work or the supplying of any labor,
materials, or services for the design or construction of the Improvements other
than the contract with Chanen Construction Company, Inc. or the contract for
architectural services with Henningson, Durham & Richardson, Inc., (b) enter
into any management or leasing contract pertaining to the Property not described
in clause (a) preceding that is not unconditionally terminable by Borrower or
any successor owner without penalty or payment on not more than thirty (30) days
notice to the other party thereunder, or (c) materially modify, amend, or
terminate any such contracts except for Permitted Changes. All such contracts
shall provide that all liens of the applicable contractor, architect, supplier,
surveyor or other party and any right to remove removable Improvements are or
will be subordinate to rights of Agent and Lenders, and shall provide that no
change order shall be effective without the prior written reasonable consent of
Agent except for Permitted Changes. Borrower shall not default under any
Material Contract, Borrower shall not permit any Material Contract to terminate
by reason of any failure of Borrower to perform thereunder, and Borrower shall
promptly notify Agent of any material default thereunder. Borrower will deliver
to Agent, upon request of Agent, the names of all persons or entities with whom
each contractor has contracted or intends to contract for the construction of
the Improvements or for the furnishing of labor or materials therefor.
6.3 Construction of the Improvements. Borrower shall prosecute the
construction of the Improvements with diligence and continuity, in a good and
workmanlike manner, and in accordance with sound building and engineering
practices, all applicable laws and governmental
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requirements, the Loan Documents, and the Plans. Borrower shall not permit
cessation of work for a period in excess of twenty (20) days (whether or not
consecutive), except for Excusable Delays. Borrower shall complete construction
of the Improvements, and shall obtain a permanent unconditional certificate of
occupancy and all other permits, licenses, and approvals for the occupancy, use
and operation of the Improvements from all applicable governmental authorities
on or before the Completion Date, free and clear of all Liens except (i) as
granted under the Loan Documents and (ii) other Liens for an aggregate amount of
not more than $250,000 and which are dismissed, discharged, stayed, bonded off
or quashed within thirty (30) days of issuance. Borrower shall correct promptly
(a) any material defect in the Improvements, (b) any material departure from the
Plans,except with respect to Permitted Changes, or governmental requirements, or
(c) any encroachment by any Improvements or structure on any building setback
line, easement, property line or restricted area. All increases in the cost of
constructing the Improvements which result from Permitted Changes shall be
applied against the $1,000,000 building contingency in the Budget and, to the
extent such increases exceed $1,000,000, shall be paid by Borrower from its own
funds.
6.4 Changes. Without Agent's prior written consent, not to be unreasonably
withheld, Borrower shall not change or modify the Plans, agree to any change
order, or allow any extras to any contractor or any subcontractor, except with
respect to Permitted Changes. Agent shall not be obligated to review a proposed
change which requires Agent's consent unless it has received all documents
necessary to review such change, such as the change order, cost estimates, plans
and specifications, and evidence that all approvals by all applicable parties
have been obtained.
6.5 Storage of Materials. Except as provided in Exhibit F, Borrower shall
cause all materials supplied for, or intended to be utilized in the construction
of the Improvements, but not yet affixed to or incorporated into the
Improvements on the Land, to be stored on the Land with adequate safeguards as
required by Agent to prevent loss, theft, damage or commingling with other
materials or projects.
6.6 Inspection. Agent may enter upon the Property to inspect the Property
and any materials at any reasonable time and provided no uncured Default exists,
upon reasonable notice to Borrower. Borrower will furnish to Agent at any time
for inspection and copying all Plans, shop drawings, specifications, books and
records, and other documents and information required by Lenders. Agent will use
its best efforts not to unreasonably interfere with the construction of the
Improvements. Borrower and Construction Consultant will cooperate with the
General Contractor in the performance of such inspections in order to use their
best efforts to keep construction on schedule.
6.7 Notice to Lender. Borrower shall promptly notify Lenders in writing of
any of the following events, specifying in each case the action Borrower has
taken or will take with respect thereto: (a) any violation of any law or
governmental requirement, the violation of which could reasonably be expected to
have a Material Adverse Effect; (b) any litigation, arbitration or governmental
investigation or proceeding instituted or threatened in writing against Borrower
or any Guarantor or the Property or any material development therein which if
adversely determined could reasonably be expected to have a Material Adverse
Effect; (c) any actual or threatened condemnation of any portion of the
Property, any negotiations with respect to any such taking, or any loss of or
substantial damage to the Property; (d) any labor controversy pending or
threatened against Borrower or any contractor or any material development in any
labor controversy which if adversely determined could reasonably be expected to
have a Material Adverse Effect; (e) any
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notice received by Borrower with respect to the cancellation, alteration or
non-renewal of any insurance coverage maintained with respect to the Property;
or (f) any failure by Borrower or any contractor to perform any material
obligation under any construction contract, any event or condition which would
permit termination of a construction contract or suspension of work thereunder,
or any notice given by Borrower or any contractor with respect to any of the
foregoing.
6.8 Assignment of Contracts and Plans. As additional security for the
payment of the Loan, Borrower hereby transfers and assigns to Agent for the
benefit of Lenders all of Borrower's rights and interest, but not its liability,
in, under, and to all construction, architectural and design contracts, and the
Plans, and agrees that all of the same are covered by the security agreement
provisions of the Mortgage. Borrower represents and warrants that the copy of
any contract furnished or to be furnished to Lenders is and shall be a true and
complete copy thereof, that the copies of the Plans delivered to Lenders are and
shall be true and complete copies of the Plans, that there have been no
modifications thereof which are not fully set forth in the copies delivered, and
that, to Borrower's knowledge, Borrower's interest therein is not subject to any
claim, setoff, or encumbrance. Neither this assignment nor any action by Agent
or Lenders shall constitute an assumption by Agent or Lenders of any obligation
under any contract or with respect to the Plans (unless expressly done so
pursuant to the Collateral Assignment of Construction Contract and the Consent
of Contractor to Collateral Assignment of Construction Contract attached thereto
as Exhibit B or the Collateral Assignment of Architect's Contract and the
Consent of Architect to Collateral Assignment of Architect's Contract attached
thereto as Exhibit B), and Borrower shall continue to be liable for all
obligations of Borrower with respect thereto, Borrower hereby agreeing to
perform all of its obligations under any contract when and if due. Agent, on
behalf of Lenders shall have the right at any time (but shall have no
obligation) to take in its name or in the name of Borrower such action Lender
may determine necessary to cure any default under any contract or with respect
to the Plans or to protect the rights of Borrower or Lenders with respect
thereto. Neither Agent nor Lenders shall incur any liability if any action so
taken by Agent or on its behalf shall prove to be inadequate or invalid.
Borrower indemnifies and holds Agent and Lenders harmless against and from any
loss, cost, liability or expense (including, but not limited to, attorneys' fees
and expenses) incurred in connection with Borrower's failure to perform such
contracts or any action taken by Agent absent gross negligence or willful
misconduct. Lender may use the Plans for any purpose relating to the
Improvements, subject to the terms of this Agreement, Collateral Assignment of
Construction Contract and the Consent of Contractor to Collateral Assignment of
Construction Contract attached thereto and Collateral Assignment of Architect's
Contract and Consent of Architect to Collateral Assignment of Architect's
Contract attached thereto. Borrower irrevocably constitutes and appoints Lender
as Borrower's attorney-in-fact, which power of attorney shall be irrevocable and
coupled with an interest, in Borrower's name or in Lender's name to enforce,
during the period any uncured Default, all rights of Borrower under any contract
or with respect to the Plans.
6.9 Advertising by Lenders. At Lenders' request and expense, Borrower shall
erect and maintain on the Property one or more advertising signs approved by
Agent and Borrower indicating that the construction financing for the Property
has been provided by Lenders.
6.10 Annual Appraisal. During the period of any uncured Default and at any
other time required by any Governmental Authority having jurisdiction over Agent
or any Lender, Agent may obtain at Borrower's expense once in each calendar year
an appraisal of any part of the Property prepared in accordance with written
instructions from Agent by a third-party appraiser
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engaged directly by Agent. Each such appraiser and appraisal shall be
satisfactory to Agent (including satisfaction of applicable regulatory
requirements). The cost of each such appraisal shall be due and payable by
Borrower on demand and shall be secured by the Loan Documents.
6.11 Construction Consultant. Borrower shall cooperate with Construction
Consultant and will furnish Construction Consultant whatever Construction
Consultant considers necessary or useful to perform its duties. The duties of
Construction Consultant run solely to Agent and Lenders, and Construction
Consultant shall have no obligations or responsibilities whatsoever to Borrower,
Borrower's architect, engineer, General Contractor or to any of their agents or
employees. Construction Consultant may, among other duties, perform construction
cost analyses, review the Plans, all proposed changes in them, observe work in
place, and review Draw Requests. Unless prohibited by applicable law, the fees,
costs, and expenses of Construction Consultant shall be paid by Borrower,
subject to the limitations of Section 12.7. Agent shall use its best efforts to
ensure that the Construction Consultant acts promptly in the discharge of his
duties in order to facilitate construction as scheduled.
6.12 Reports and Vouchers. Borrower shall (a) promptly deliver to Agent
copies of all reports, studies, inspections and tests made on the Land, the
Improvements or the materials to be incorporated into the Improvements; (b) make
additional tests Agent reasonably requires; and (c) deliver to Agent, on demand,
any contracts, bills of sale, statements, receipted vouchers or agreements under
which Borrower claims title to any materials, fixtures or articles incorporated
or to be incorporated in the Improvements or otherwise subject to a lien or
security interest in favor of Agent for the benefit of Lenders. Borrower shall
immediately notify Agent of such report, study, inspection or test that
indicates any material adverse condition in the Land or the Improvements.
6.13 Representations and Warranties. To induce Lenders to make the Loans,
Borrower hereby represents and warrants to Lenders that (a) the Mortgage, and
the rights of Agent and Lenders thereunder will have priority over all other
Liens on the Land or Improvements, including, without limitation, any mechanic's
or materialman's lien or similar lien; (b) to the extent required by applicable
law, Borrower and Guarantors have filed all necessary tax returns and reports
and have paid all taxes and governmental charges thereby shown to be owing; (c)
the Plans are being finalized and when completed will contain all detail
necessary and are adequate for the construction of the Improvements, and will
comply with the Loan Documents, all applicable laws, restrictive covenants, and
governmental requirements, rules, and regulations; (d) the Land is not part of a
larger tract of land owned by Borrower or its affiliates or any Guarantor and is
not otherwise included under any unity of title or similar covenant with other
lands not encumbered by the Mortgage, and Borrower has obtained a separate tax
lot or lots with a separate tax assessment or assessments for the Land and
Improvements, independent of any other lands or improvements; (e) the Land and
Improvements comply with all laws and governmental requirements, including all
subdivision and platting requirements, without reliance on any adjoining or
neighboring property, the violation of which could reasonably be expected to
have a Material Adverse Effect; (f) the Plans do and the Improvements when
constructed will comply with all legal requirements regarding access and
facilities for handicapped or disabled persons; (g) Borrower has not directly or
indirectly conveyed, assigned or otherwise disposed of or transferred (or agreed
to do so) any development rights, air rights or other similar rights, privileges
or attributes with respect to the Property, including those arising under any
zoning or land use ordinance or other law or governmental requirement; (h) the
construction schedule for the Project is realistic and the Completion Date is a
reasonable estimate of the time required to complete the
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Project; and (i) the Financial Statements delivered to Agent are true and
correct, and there has been no material change of Borrower's financial condition
from the financial condition of Borrower indicated in such Financial Statements.
6.14 Ownership of Borrower. AHH Management, Inc., a wholly-owned Subsidiary
of Parent, shall own fifty-one percent (51%) of Borrower and shall act as the
general, managing member of Borrower, Arizona Heart Institute, an Arizona
professional association, wholly-owned by Edward R. Diethrich, M.D., shall own
not less than twenty-five percent (25%) of Borrower and shall be a limited
member of Borrower and other individuals, principally physicians associated with
or employed by the Arizona Heart Institute, shall, directly or indirectly, own
the remaining equity interest in Borrower and shall be limited members of
Borrower.
6.15 Equipment Financing. Borrower shall secure a binding commitment from a
third party lender (an "Equipment Lender") to finance the purchase or lease by
Borrower of the equipment to be included within the Project, such commitment to:
(a) Be secured by Borrower in writing within nine (9) months following
the Closing Date;
(b) Provide for an interest rate not to exceed the Five Year US
Treasury Yield plus 6%;
(c) Provide for financing for a term of not less than thirty-six (36)
months or more than one hundred twenty (120) months; and
(d) Provide for financing in an amount equal to not less than eighty
percent (80%) or more than one hundred percent (100%) of the cost of the
equipment.
ARTICLE VII - FINANCIAL COVENANTS OF GUARANTORS
Until all of the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, the Guarantors will not:
7.1 Fixed Charge Ratio. As of the end of any quarter, permit the ratio of
(a) EBITDA plus Lease Expense for the period of four consecutive quarters ending
on such quarter-end date to (b) the sum of (x) for such four-quarter period (A)
Interest Expense, (B) Lease Expense and (C) Replacement Capital Expenditures
plus (y) as of such quarter end, current maturities of long-term Debt (excluding
all balloon payments with respect to any loan to any Subsidiary of the Parent,
the proceeds of which are or have been used to construct a hospital facility
(collectively, the "Hospital Loans") and the current portion due under Capital
Leases to be less than 1.35 to 1.0. (Compliance with this covenant shall be
determined on a consolidated basis for the Parent and its Consolidated
Subsidiaries).
7.2 Debt to Capitalization Ratio. As of the end of any quarter, permit the
ratio of (a) Modified Consolidated Senior Funded Debt to (b) Total
Capitalization to exceed .65 to 1.0.
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7.3 Leverage Ratio. As of the end of any quarter, permit the Leverage Ratio
to exceed 3.50 to 1.0.
7.4 Consolidated Net Worth. As of the end of any quarter, permit
Consolidated Tangible Net Worth to be less than the sum of (a) $50,000,000 plus
(b) fifty percent (50%) of cumulative Consolidated Net Income (if positive)
after the Closing Date.
7.5 Liquid Assets. As of any quarter end, permit their Liquid Assets to be
less than $20,000,000 prior to the issuance of a final certificate of occupancy
with respect to the Improvements or less than $15,000,000 thereafter.
ARTICLE VIII - NEGATIVE COVENANTS
Until all of the Obligations have been finally and indefeasibly paid and
satisfied in full and the Commitments terminated, Borrower will not:
8.1 Debt Service Coverage Ratio. As of the end of each quarter, commencing
on the first full quarter following the Completion Date, permit the ratio of
Borrower's (a) Adjusted EBITDA for such fiscal quarter to (b) Adjusted Debt
Service for such fiscal quarter to be less than the corresponding ratio set
forth below:
Period Ratio
------ -----
First Full Quarter following 0.20 to 1.00
the Completion Date
Second Full Quarter following 0.65 to 1.00
the Completion Date
Third Full Quarter following 1.00 to 1.00
the Completion Date
Fourth Full Quarter following 1.30 to 1.00
the Completion Date and
Thereafter
8.2 Limitations on Debt. Create, incur, assume or suffer to exist any Debt
except:
(a) the Obligations;
(b) Debt to the Equipment Lenders in an aggregate principal amount not
to exceed $20,000,000; provided that if requested, Borrower shall deliver
to Agent an Equipment Lender Agreement in form and substance acceptable to
Agent.
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(c) Debt incurred in connection with a Hedging Agreement with a
counterparty and upon terms and conditions reasonably satisfactory to
Agent;
(d) Subordinated Debt to the Parent evidencing the loan by the Parent
to Borrower of the Project Equity in an aggregate principal amount of not
less than $6,886,000; and
(e) Subordinated Debt to the Parent incurred for short-term working
capital purposes in an aggregate principal amount not to exceed $6,500,000
less outstanding Working Capital Loans.
8.3 Limitations on Contingent Obligations. Create, incur, assume or
suffer to exist any Contingent Obligations except Contingent Obligations in
favor of Agent for the benefit of Agent and Lenders.
8.4 Limitations on Liens. Create, incur, assume or suffer to exist,
any Lien on or with respect to any of Borrower's assets or properties, real or
personal, whether now owned or hereafter acquired, except:
(a) Liens for taxes, assessments and other governmental charges or
levies (excluding any Lien imposed pursuant to any of the provisions of
Environmental Laws) not yet due or as to which the period of grace (not to
exceed thirty (30) days), if any, related thereto has not expired;
(b) Liens consisting of deposits or pledges made in the ordinary
course of business in connection with, or to secure payment of, obligations
under workers' compensation, unemployment insurance or similar legislation;
(c) Liens in favor of Agent for the benefit of Agent and Lenders;
(d) encumbrances on and exceptions to title contained in the Title
Policy;
(e) Liens securing Debt permitted under Section 8.2(b);
(f) Liens in favor of Parent securing Subordinated Debt owed to Parent
to the extent permitted hereunder; and
(g) other Liens which are being contested by Borrower in good faith
and which are dismissed, discharged, stayed, bonded off or quashed within
thirty (30) days of issuance.
8.5 Limitations on Loans, Advances, Investments and Acquisitions. Purchase,
own, invest in or otherwise acquire, directly or indirectly, any capital stock,
interests in any partnership, limited liability company or joint venture,
evidence of Debt or other obligation or security, substantially all or a portion
of the business or assets of any other Person or any other investment or
interest whatsoever in any other Person, or make or permit to exist, directly or
indirectly, any loans, advances or extensions of credit to, or any investment in
cash or by delivery of property in, any Person, or enter into, directly or
indirectly, any commitment or option in respect of the foregoing except
investments in (i) marketable direct obligations issued or unconditionally
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guaranteed by the United States of America or any agency thereof maturing within
120 days from the date of acquisition thereof, (ii) commercial paper maturing no
more than 120 days from the date of creation thereof and currently having the
highest rating obtainable from either Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. or Moody's Investors Service, Inc.,
(iii) certificates of deposit maturing no more than 120 days from the date of
creation thereof issued by commercial banks incorporated under the laws of the
United States of America, each having combined capital, surplus and undivided
profits of not less than $500,000,000 and having a rating of "A" or better by a
nationally recognized rating agency; provided, that the aggregate amount
invested in such certificates of deposit shall not at any time exceed $5,000,000
for any one such certificate of deposit and $10,000,000 for any one such bank,
or (iv) time deposits maturing no more than 30 days from the date of creation
thereof with commercial banks or savings banks or savings and loan associations
each having membership either in the FDIC or the deposits of which are insured
by the FDIC and in amounts not exceeding the maximum amounts of insurance
thereunder.
8.6 Limitations on Liquidation. Consolidate or enter into any similar
combination with any other Person or liquidate, wind-up or dissolve itself (or
suffer any liquidation or dissolution).
8.7 Limitations on Sale of Assets. Convey, sell, lease, assign, transfer or
otherwise dispose of any of its property, business or assets (including, without
limitation, the sale of any receivables and leasehold interests and any
sale-leaseback or similar transaction), whether now owned or hereafter acquired
except (i) the sale of obsolete assets no longer used or usable in the business
of Borrower and (ii) assets which are replaced in the ordinary course of
business and other assets the fair market value of which shall not exceed
$500,000 with respect to any transaction and $2,000,000 in the aggregate for all
such transactions during the term of this Agreement.
8.8 Limitations on Distributions. Purchase, redeem, retire or otherwise
acquire, directly or indirectly, any of its ownership or equity interests, or
make any distribution of cash, property or assets among the holders of its
ownership or equity interests or make any payment of principal on any
Subordinated Debt; provided that:
(a) So long as no Default shall have occurred and be continuing,
Borrower may make distributions to its equityholders, not otherwise
permitted hereunder, in an aggregate amount not to exceed $200,000 during
the term of this Agreement and provided such distributions are documented
to Agent;
(b) so long as no Default shall have occurred and be continuing,
Borrower may make quarterly distributions to its equityholders who are
required to pay taxes on their pro rata share of the income of Borrower in
an aggregate amount to an equityholder not to exceed in any year the amount
of the income tax liability incurred by such equityholder as a result of
the reporting of Borrower's income, deductions, gains or losses on such
equityholder's federal or state income tax return and based on the highest
combined federal and state tax rate, such distributions to be documented to
Agent; and
(c) Borrower may declare or make distributions to its equityholders to
the extent not otherwise permitted hereunder or redeem the membership
interests of its equityholders to the extent provided for in the Operating
Agreement of Borrower, as in
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effect on the date of this Agreement or as subsequently amended with the
prior written consent of the Required Lenders, not to be unreasonably
withheld, upon satisfaction of the following conditions:
(i) no such distributions or payments shall be permitted prior to
the date which is nine (9) months following the Completion Date;
(ii) no Default shall have occurred and be continuing;
(iii) Borrower shall have a cash balance of at least $2,000,000
as of the end of the Business Day on which any such distribution is
made (herein, the "Permitted Distribution Date") (such cash balance to
exist after the disbursement of (i) all operating expenses due and
payable as of the Permitted Distribution Date, (ii) principal and
interest on any Senior Debt due and payable as of the Permitted
Distribution Date, (iii) principal and interest on any Subordinated
Debt due and payable as of the Permitted Distribution Date and (iv)
any other permitted distributions due and payable as of such date);
(iv) the aggregate amount of distributions made or declared
pursuant to this Section 8.8 and the payments distributed pursuant to
Section 8.9 during any quarter of Borrower shall not exceed the Cash
Flow Available for Distribution less (i) the amount by which Cash Flow
Available for Distribution was negative and (ii) all prior
distributions; and
(v) Borrower shall deliver to Agent, as required by Section
5.3(a), a certificate in form and substance satisfactory to Agent
demonstrating compliance by Borrower with the requirements set forth
in this Section 8.8.
8.9 Amendments; Payments and Prepayments of Subordinated Debt. Amend or
modify (or permit the modification or amendment of) any of the terms or
provisions of any Subordinated Debt if less favorable to Borrower, or cancel or
forgive, make any voluntary or optional payment or prepayment on, or redeem or
acquire for value (including without limitation by way of depositing with any
trustee with respect thereto money or securities before due for the purpose of
paying when due) any Subordinated Debt except that Borrower may make scheduled
interest payments on Subordinated Debt provided no Default shall have occurred
and be continuing and may, upon satisfaction of the following conditions, make
other payments on Subordinated Debt:
(a) no such payments shall be permitted prior to date which is nine
(9) months following the Completion Date;
(b) no Default shall have occurred and be continuing;
(c) Borrower shall have a cash balance of at least $2,000,000 as of
the end of the Business Day on which any such payment is made (herein, the
"Permitted Payment Date") (such cash balance to exist after the
disbursement of (i) all operating expenses due and payable as of the
Permitted Payment Date, (ii) principal and interest on any Senior Debt due
and payable as of the date of such payment, (iii) principal and interest on
any Subordinated Debt due and payable as of the Permitted Payment Date,
(iv) distributions
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permitted under this Agreement and distributed as of the Permitted Payment
Date, and (v) any other permitted distributions due and payable as of such
date);
(d) the aggregate amount of payments distributed pursuant to this
Section 8.9 and the payments distributed pursuant to Section 8.8 during the
during any fiscal quarter of Borrower shall not exceed the Cash Flow
Available for Distribution less (i) the amount by which Cash Flow Available
for Distribution was negative and (ii) all prior distributions; and
(e) Borrower shall deliver to Agent, as required pursuant to Section
5.3(a), a certificate in form and substance satisfactory to Agent and
demonstrating compliance by Borrower with the requirements set forth in
this Section 8.9.
8.10 Prohibited Transactions. Except as disclosed on Schedule 8.10 attached
hereto, directly or indirectly: (a) make any loan or advance to, or purchase or
assume any note or other obligation to or from, any of its officers, members,
managers or other Affiliates, or to or from any member of the immediate family
of any of its officers, members, managers, shareholders or other Affiliates, or
subcontract any operations to any of its Affiliates, other than in the ordinary
course of business, or (b) enter into, or be a party to, any transaction with
any of its Affiliates, other than in the ordinary course of business.
8.11 Restrictive Agreements. Enter into any Debt which contains any
negative pledge on assets or any covenants more restrictive than the provisions
hereof, or which restricts, limits or otherwise encumbers its ability to incur
Liens on or with respect to any of its assets or properties other than the
assets or properties securing such Debt.
ARTICLE IX - DEFAULT AND REMEDIES
9.1 Events of Default. Each of the following shall constitute a default
under this Agreement ("Default"), whatever the reason for such event and whether
it shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment or order of any court or any order, rule or regulation
of any Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans. Borrower shall default
in any payment of principal of any Loan or Note when and as due (whether at
maturity, by reason of acceleration or otherwise), and such Default shall
continue unremedied for two (2) Business Days.
(b) Other Payment Default. Borrower shall default in the payment of
any interest on any Loan or Note when and as due (whether at maturity, by
reason of acceleration or otherwise), and such Default shall continue
unremedied for five (5) Business Days.
(c) Misrepresentation. Any representation or warranty made or deemed
to be made by Borrower or any Guarantor under this Agreement, any Loan
Document or any
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amendment hereto or thereto, shall at any time prove to have been incorrect
or misleading in any material respect when made or deemed made, if such
default shall continue for a period of thirty (30) days after written
notice thereof has been given to Borrower by Agent.
(d) Default in Performance of Covenants and Conditions. Borrower or
any Guarantor shall default in the performance or observance of any term,
covenant, condition or agreement contained in this Agreement (other than as
specifically provided for otherwise in this Section 9.1) or any other Loan
Document and such default shall continue for a period of thirty (30) days
after written notice thereof has been given to Borrower by Agent.
(e) Change in Control. The occurrence of a Change in Control.
(f) Debt Cross-Default. Borrower or any Guarantor shall (i) default in
the payment of any Debt (other than the Notes or any Debt of Borrower or
any Guarantor with respect to any Hospital Loan or any Subordinated Debt or
any inter-company Debt) beyond the period of grace if any, provided in the
instrument or agreement under which such Debt was created and provided that
with respect to Parent only, such Debt exceeds an aggregate of $500,000 and
with respect to any other Guarantor, such Debt exceeds an aggregate of
$250,000, or (ii) default in the observance or performance of any other
agreement or condition relating to any Debt (other than the Notes) or
contained in any instrument or agreement evidencing, securing or relating
thereto or any other event shall occur or condition exist, the effect of
which default or other event or condition is to cause, or to permit the
holder or holders of such Debt (or a trustee or agent on behalf of such
holder or holders) to cause, with the giving of notice if required, any
such Debt to become due prior to its stated maturity (any applicable grace
period having expired).
(g) Other Cross-Defaults. Borrower or any Guarantor shall default in
the payment when due, or in the performance or observance, of any
obligation or condition of any Material Contract and such default shall
continue beyond the period of grace, if any, provided in such Material
Contract unless, but only as long as, the existence of any such default is
being contested by Borrower or such Guarantor in good faith by appropriate
proceedings and adequate reserves in respect thereof have been established
on the books of Borrower or such Guarantor to the extent required by GAAP.
(h) Voluntary Bankruptcy Proceeding. Borrower or any Guarantor shall
(i) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (ii) file a petition seeking to take advantage of any
other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii)
consent to or fail to contest in a timely and appropriate manner any
petition filed against it in an involuntary case under such bankruptcy laws
or other laws, (iv) apply for or consent to, or fail to contest in a timely
and appropriate manner, the appointment of, or the taking of possession by,
a receiver, custodian, trustee, or liquidator of itself or of a substantial
part of its property, domestic or foreign, (v) admit in writing its
inability to pay its debts as they become due, (vi) make a general
assignment for the benefit of creditors, or (vii) take any corporate action
for the purpose of authorizing any of the foregoing.
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(i) Involuntary Bankruptcy Proceeding. A case or other proceeding
shall be commenced against Borrower or any Guarantor in any court of
competent jurisdiction seeking (i) relief under the federal bankruptcy laws
(as now or hereafter in effect) or under any other laws, domestic or
foreign, relating to bankruptcy, insolvency, reorganization, winding up or
adjustment of debts, or (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like for Borrower or any Guarantor or for all
or any substantial part of their respective assets, domestic or foreign,
and such case or proceeding shall continue undismissed or unstayed for a
period of sixty (60) consecutive days, or an order granting the relief
requested in such case or proceeding (including, but not limited to, an
order for relief under such federal bankruptcy laws) shall be entered.
(j) Failure of Agreements. Any provision of this Agreement or of any
other Loan Document shall for any reason cease to be valid and binding on
Borrower or other Person party thereto or any such Person shall so state in
writing, or this Agreement or any other Loan Document shall for any reason
cease to create a valid and perfected priority Lien on, or security
interest in, any of the collateral purported to be covered thereby, in each
case other than in accordance with the express terms hereof or thereof, the
priority of which shall be subject only to Permitted Liens.
(k) Judgment. A judgment or order for the payment of money which
causes the aggregate amount of all such judgments entered against Borrower
or any Guarantor (other than Parent) by any court in any Fiscal Year to
exceed $500,000 and in excess of an aggregate amount of $1,000,000 with
respect to Parent and such judgment or order shall continue unpaid,
undischarged or unstayed for a period of sixty (60) days.
(l) Certificate of Occupancy; Medicare Certification. Borrower shall
fail to obtain a final certificate of occupancy and Medicare Certification
within sixteen (16) months after the Closing Date or after the receipt
thereof, the Medicare Certification shall expire, terminate, be cancelled
or otherwise lost.
9.2 Remedies. Upon a Default, with the consent of the Required Lenders,
Agent may, and upon the request of the Required Lenders, Agent shall, do any one
or more of the following: (a) terminate the commitment to lend and any
obligation to disburse any sum from the Equity Account or Project Deposit
hereunder; (b) institute an action to reduce any claim to judgment; (c) exercise
any and all rights and remedies afforded by this Agreement, the other Loan
Documents, law, equity or otherwise; (d) set-off and apply, to the extent
thereof and to the maximum extent permitted by law, any and all deposits, funds,
or assets at any time held and any and all other indebtedness at any time owing
by Lenders to or for the credit or account of Borrower against any Indebtedness;
or (e) in its own name or in the name of Borrower, enter into possession of the
Property, perform all work necessary to complete the construction of the
Improvements substantially in accordance with the Plans, Loan Documents, laws,
and governmental requirements, and continue to employ Borrower's architect,
engineer, and any contractor pursuant to the applicable contracts or otherwise;
provided, upon the occurrence of a Default specified in Section 9.1(h) or (i),
the commitment to lend and any obligation to disburse any sum from the Equity
Account or Project Deposit shall be automatically terminated and all Obligations
shall automatically become due and payable. Borrower hereby appoints Agent as
the attorney-in-fact of Borrower, which power of attorney is irrevocable and
coupled with an interest, with full power of substitution and in the name of
Borrower, if Agent elects to do so, upon the occurrence of a Default, to (i) use
such sums as are necessary, including any proceeds of the Loan, Equity Account
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and Project Deposit, make such changes or corrections in the Plans and employ
such architects, engineers, and contractors as may be required for the purpose
of completing the construction of the Improvements substantially in accordance
with the Plans, Loan Documents, laws and governmental requirements, or as
otherwise may be necessary or desirable for purposes of completing such
construction; (ii) execute all applications and certificates in the name of
Borrower which may be required for completion of construction of the
Improvements; (iii) endorse the name of Borrower on any checks or drafts
representing proceeds of any insurance policies, or other checks or instruments
payable to Borrower with respect to the Property; (iv) do every act with respect
to the construction of the Improvements which Borrower may do; (v) prosecute or
defend any action or proceeding incident to the Property, (vi) pay, settle, or
compromise all bills and claims so as to clear title to the Property; and (vii)
take over and use all or any part of the labor, materials, supplies and
equipment contracted for, owned by, or under the control of Borrower, whether or
not previously incorporated into the Improvements. Any amounts expended by Agent
or Lenders shall be a demand obligation owing by Borrower to Lenders. Lenders
shall have no liability to Borrower for the sufficiency or adequacy of any such
actions taken by Agent or Lender unless such actions constitute gross negligence
or willful misconduct on the part of Agent or Lenders.
ARTICLE X - AGENT
10.1 Appointment. Each of Lenders hereby irrevocably designates and
appoints NationsBank as Agent of such Lender under this Agreement and the other
Loan Documents and each such Lender irrevocably authorizes NationsBank as Agent
for such Lender, to take such action on its behalf under the provisions of this
Agreement and the other Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to Agent by the terms of this Agreement
and such other Loan Documents, together with such other powers as are reasonably
incidental thereto. Notwithstanding any provision to the contrary elsewhere in
this Agreement or such other Loan Documents, Agent shall not have any duties or
responsibilities, except those expressly set forth herein and therein, or any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or the other Loan Documents or otherwise exist against Agent.
10.2 Delegation of Duties. Agent may execute any of its respective duties
under this Agreement and the other Loan Documents by or through agents or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys-in-fact selected by Agent
with reasonable care.
10.3 Exculpatory Provisions. Neither Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact, Subsidiaries or Affiliates
(including, without limitation, NationsBanc Capital Markets, Inc.) shall be (a)
liable for any action lawfully taken or omitted to be taken by it or such Person
under or in connection with this Agreement or the other Loan Documents (except
for actions occasioned solely by its or such Person's own gross negligence or
willful misconduct), or (b) responsible in any manner to any of Lenders for any
recitals, statements, representations or warranties made by Borrower or any
officer thereof contained in this Agreement or the other Loan Documents or in
any certificate, report, statement or other document referred to or provided for
in, or received by Agent under or in connection with, this
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Agreement or the other Loan Documents or for the value, validity, effectiveness,
genuineness, enforceability or sufficiency of this Agreement or the other Loan
Documents or for any failure of Borrower to perform its obligations hereunder or
thereunder. Agent shall not be under any obligation to any Lender to ascertain
or to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement, or to inspect the properties,
books or records of Borrower.
10.4 Reliance by Agent. Agent shall be entitled to rely, and shall be
fully protected in relying, upon any note, writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to Borrower), independent accountants and other experts
selected by Agent. Agent may deem and treat the payee of any Note as the owner
thereof for all purposes unless such Note shall have been transferred in
accordance with Section 12.18 hereof. Agent shall be fully justified in failing
or refusing to take any action under this Agreement and the other Loan Documents
unless it shall first receive such advice or concurrence of the Required Lenders
(or, when expressly required hereby or by the relevant other Loan Document, all
Lenders) as it deems appropriate or it shall first be indemnified to its
satisfaction by Lenders against any and all liability and expense which may be
incurred by it by reason of taking or continuing to take any such action except
for its own gross negligence or willful misconduct. Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Agreement
and the Notes in accordance with a request of the Required Lenders (or, when
expressly required hereby, all Lenders), and such request and any action taken
or failure to act pursuant thereto shall be binding upon all Lenders and all
future holders of the Notes.
10.5 Notice of Default. Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder unless it
has received notice from a Lender or Borrower referring to this Agreement,
describing such Default and stating that such notice is a "notice of default".
In the event that Agent receives such a notice, it shall promptly give notice
thereof to Lenders. Agent shall take such action with respect to such Default or
Event of Default as shall be reasonably directed by the Required Lenders;
provided that unless and until Agent shall have received such directions, Agent
may (but shall not be obligated to) take such action, or refrain from taking
such action, with respect to such Default as it shall deem advisable in the best
interests of Lenders.
10.6 Non-Reliance on Agent and Other Lenders. Each Lender expressly
acknowledges that neither Agent nor any of its respective officers, directors,
employees, agents, attorneys-in-fact, Subsidiaries or Affiliates (including,
without limitation, NationsBanc Capital Markets, Inc.) has made any
representations or warranties to it and that no act by Agent hereinafter taken,
including any review of the affairs of Borrower, shall be deemed to constitute
any representation or warranty by Agent to any Lender. Each Lender represents to
Agent that it has, independently and without reliance upon Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own appraisal of and investigation into the business,
operations, property, financial and other condition and creditworthiness of
Borrower and made its own decision to make its Loans. Each Lender also
represents that it will, independently and without reliance upon Agent or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement and the other
Loan Documents, and to make
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such investigation as it deems necessary to inform itself as to the business,
operations, property, financial and other condition and creditworthiness of
Borrower. Except for notices, reports and other documents expressly required to
be furnished to Lenders by Agent hereunder or by the other Loan Documents, Agent
shall not have any duty or responsibility to provide any Lender with any credit
or other information concerning the business, operations, property, financial
and other condition or creditworthiness of Borrower which may come into the
possession of Agent or any of its respective officers, directors, employees,
agents, attorneys-in-fact, Subsidiaries or Affiliates (including, without
limitation, NationsBanc Capital Markets, Inc.).
10.7 Indemnification. Lenders agree to indemnify Agent in its capacity as
such and (to the extent not reimbursed by Borrower and without limiting the
obligation of Borrower to do so), ratably according to the respective amounts of
their Commitment Percentages, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against Agent in any way relating to or
arising out of this Agreement or the other Loan Documents, or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by Agent under or
in connection with any of the foregoing; provided that no Lender shall be liable
for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from Agent's bad faith, gross negligence or willful misconduct.
The agreements in this Section 10.7 shall survive the payment of the Notes and
all other amounts payable hereunder and the termination of this Agreement.
10.8 Agent in Its Individual Capacity. Agent and its respective
Subsidiaries and Affiliates may make loans to, accept deposits from and
generally engage in any kind of business with Borrower as though Agent were not
an Agent hereunder. With respect to any Loans made or renewed by it and any Note
issued to it, Agent shall have the same rights and powers under this Agreement
and the other Loan Documents as any Lender and may exercise the same as though
it were not an Agent, and the terms "Lender" and "Lenders" shall include Agent
in its individual capacity.
10.9 Resignation of Agent. Agent may resign at any time by giving prior
written notice thereof to Lenders and Borrower. Upon any such resignation, the
Required Lenders shall have the right to appoint a successor Agent, which
successor Agent shall, so long as no Default has occurred and is continuing, be
acceptable to MedCath, which acceptance shall not be unreasonably withheld. If
no successor Agent shall have been so appointed by the Required Lenders and
shall have accepted such appointment within thirty (30) days after retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of Lenders, appoint a successor Agent which shall be an Eligible Assignee having
total assets of at least $25,000,000,000. Upon the acceptance of any appointment
as Agent under this Agreement by a successor, such successor shall thereupon
succeed to and become vested with all the rights, powers, discretion,
privileges, and duties of the retiring Agent upon written notice thereof to
Borrower, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement excepting with respect to its willful
misconduct or gross negligence occurring prior to its discharge. After any
retiring Agent's resignation under this Agreement as Agent, the provisions of
this Article 10 shall continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as Agent.
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ARTICLE XI - GUARANTY
11.1 Guaranty of Payment. Subject to Section 11.11 hereof, each Guarantor
hereby unconditionally guarantees to Agent for the ratable benefit of Agent and
Lenders, and their respective successors, endorsees, transferees and assigns,
the prompt payment (whether at stated maturity, by acceleration or otherwise) of
all Obligations of Borrower, whether primary or secondary (whether by way of
endorsement or otherwise), whether now existing or hereafter arising, whether or
not from time to time reduced or extinguished (except by payment thereof) or
hereafter increased or incurred, whether or not recovery may be or hereafter
become barred by the statute of limitations, whether enforceable or
unenforceable as against Borrower, whether or not discharged, stayed or
otherwise affected by any bankruptcy, insolvency or other similar law or
proceeding, whether created directly with Agent or any Lender or acquired by
Agent or any Lender through assignment, endorsement or otherwise, whether
matured or unmatured, whether joint or several, as and when the same become due
and payable (whether at maturity or earlier, by reason of acceleration,
mandatory repayment or otherwise), in accordance with the terms of any such
instruments evidencing any such obligations, including all renewals, extensions
or modifications thereof.
11.2 Guaranty of Performance. Subject to Section 11.11, each Guarantor
additionally unconditionally guarantees to Agent for the ratable of Agent and
Lenders, and their respective successors, endorsees, transferees and assigns,
the timely performance of all other obligations of Borrower under the Loan
Documents, including, without limiting the generality of the foregoing, that:
(a) the Improvements will be constructed upon the Land in accordance
with this Agreement and the Plans; and
(b) the Improvements will be completed and ready for occupancy,
including delivery of any certificates required by law or this Agreement,
on or before the date required in this Agreement.
In the event the foregoing conditions are not complied with in any respect
whatsoever, Guarantors agree to (i) assume all responsibility for the completion
of the Improvements and, at Guarantors' own cost and expense, to cause the
Improvements to be fully completed in accordance with the Plans and in
accordance with this Agreement; (ii) pay all bills in connection with the
construction of the Improvements; and (iii) indemnify and hold Agent and Lenders
harmless from any and all loss, cost, liability or expense Agent or Lenders may
suffer by reason of any such event excepting with respect to willful misconduct
or gross negligence of Agent or Lenders. Agent shall accept performance by
Guarantors of Borrower's obligations under the Loan Documents, and so long as
all of said obligations are being performed by Borrower or Guarantors, Agent
will make the Construction Loan proceeds available under the terms of this
Agreement. If, after the occurrence of a Default, Agent, in its sole discretion,
is dissatisfied with the progress of construction by Borrower and/or Guarantors,
Agent may, at its option, and on behalf of Lenders, after first having given
notice to Guarantors at the address set forth below in the manner prescribed
herein for giving notice, complete the Improvements either before or after
commencement of foreclosure proceedings or before or after any other remedy of
Agent or Lenders against Borrower or Guarantors, with such changes or
modifications in the Plans which Agent reasonably deems necessary and expend
such sums as Agent, in its discretion, reasonably
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deems necessary and proper in order to so complete the Improvements, and
Guarantors hereby waive any right to contest any such reasonably necessary
expenditures. The amount of any and all expenditures made by Agent for the
foregoing purposes shall be due and payable to Lenders upon demand and accrue
interest at a rate two percent (2%) per annum above the rate then applicable
under the Construction Loan Note (or that would be applicable under the
Construction Loan Note if it were still outstanding). Neither Borrower nor any
Guarantor shall be liable to Lenders for the cost of completing the Improvements
to the extent the aggregate cost of completing the Improvements exceeds the
Construction Loan Commitment. The obligations and liability of Guarantors under
this Section 11.2 shall not be limited or restricted by the existence of (or any
limitation on) the guaranty of payment under Section 11.1. (All Obligations of
Borrower to Agent or any Lender, including all of the Obligations specified in
Section 11.1 or this Section 11.2, shall be hereinafter collectively referred to
as the "Guaranteed Obligations."
11.3 Nature of Guaranty. Each Guarantor agrees that the guarantee provided
for in Section 11.2 is a continuing, unconditional guaranty of payment and
performance and not of collection, subject to the limitation on liability
provided below, and that its obligations hereunder shall be primary, absolute
and unconditional, irrespective of, and unaffected by:
(a) the genuineness, validity, regularity, enforceability or any
future amendment of, or change in, this Agreement or any other Loan
Document or any other agreement, document or instrument to which Borrower
is or may become a party;
(b) the absence of any action to enforce this Agreement or any other
Loan Document or the waiver or consent by Agent or any Lender with respect
to any of the provisions of this Agreement or any other Loan Document;
(c) the existence, value or condition of, or failure to perfect its
Lien against, any security for or other guaranty of the Guaranteed
Obligations or any action, or the absence of any action, by Agent or any
Lender in respect of such security or guaranty (including, without
limitation, the release of any such security or guaranty); or
(d) any other action or circumstances which might otherwise constitute
a legal or equitable discharge or defense of a surety or guarantor;
it being agreed by each Guarantor that its obligations hereunder shall not be
discharged until the final and indefeasible payment and performance, in full, of
the Guaranteed Obligations and the termination of the Commitments. Each
Guarantor expressly waives all rights it may now or in the future have under any
statute (including without limitation North Carolina General Statutes Section
26-7, et seq. or similar law), or at law or in equity, or otherwise, to compel
Agent or any Lender to proceed in respect of the Guaranteed Obligations against
Borrower or any other party or against any security for or other guaranty of the
payment and performance of the Guaranteed Obligations before proceeding against,
or as a condition to proceeding against, such Guarantor. Each Guarantor further
expressly waives and agrees not to assert or take advantage of any defense based
upon the failure of Agent or any Lender to commence an action in respect of the
Guaranteed Obligations against Borrower, any Guarantor or any other party or any
security for the payment and performance of the Guaranteed Obligations. Each
Guarantor agrees that any notice or directive given at any time to Agent or any
Lender which is inconsistent with the waivers in the preceding two sentences
shall be null and void and may be ignored by Agent or Lender, and, in addition,
may not be pleaded or introduced as evidence in any litigation relating to the
guarantee
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provided for in Section 11.2 for the reason that such pleading or introduction
would be at variance with the written terms hereof, unless Agent and the
Required Lenders have specifically agreed otherwise in writing. The foregoing
waivers are of the essence of the transaction contemplated by the Loan Documents
and, but for this guaranty and such waivers, Agent and Lenders would decline to
enter into this Agreement.
11.4 Demand by Agent. In addition to the terms set forth in Section 11.3,
and in no manner imposing any limitation on such terms, if all or any portion of
the then outstanding Guaranteed Obligations under this Agreement are declared to
be immediately due and payable, then Guarantors shall, upon demand in writing
therefor by Agent to the Guarantors, pay all or such portion of the outstanding
Guaranteed Obligations then declared due and payable. Payment by Guarantors
shall be made to Agent, to be credited and applied upon the Guaranteed
Obligations, in immediately available federal funds to an account designated by
Agent or at the address referenced herein for the giving of notice to Agent or
at any other address that may be specified in writing from time to time by
Agent.
11.5 Waivers. In addition to the waivers contained in Section 11.4, each
Guarantor waives, and agrees that it shall not at any time insist upon, plead or
in any manner whatever claim or take the benefit or advantage of, any appraisal,
valuation, stay, extension, marshalling of assets or redemption laws, or
exemption, whether now or at any time hereafter in force, which may delay,
prevent or otherwise affect the performance by such Guarantor of its obligations
under, or the enforcement by Agent or Lenders of, this guaranty. Each Guarantor
further hereby waives diligence, presentment, demand, protest and notice of
whatever kind or nature with respect to any of the Guaranteed Obligations and
waives the benefit of all provisions of law which are or might be in conflict
with the terms of this guaranty. Each Guarantor represents, warrants and agrees
that its obligations under this guaranty are not and shall not be subject to any
counterclaims, offsets or defenses of any kind against Agent, Lenders or
Borrower whether now existing or which may arise in the future.
11.6 Benefits of Guaranty. The provisions of the guarantee under this
Article XI are for the benefit of Agent and Lenders and their respective
successors, transferees, endorsees and assigns, and nothing herein contained
shall impair, as between Borrower, Agent and Lenders, the obligations of
Borrower under the Loan Documents. In the event all or any part of the
Guaranteed Obligations are transferred, endorsed or assigned by Agent or any
Lender to any Person or Persons, any reference to any "Agent" or "Lenders"
herein shall be deemed to refer equally to such Person or Persons.
11.7 Modification of Loan Documents etc. If Agent or Lenders shall at any
time or from time to time, with or without the consent of, or notice to,
Guarantors:
(a) change or extend the manner, place or terms of payment of, or
renew or alter all or any portion of, the Guaranteed Obligations;
(b) take any action under or in respect of the Loan Documents in the
exercise of any remedy, power or privilege contained therein or available
to it at law, in equity or otherwise, or waive or refrain from exercising
any such remedies, powers or privileges;
(c) amend or modify, in any manner whatsoever, the Loan Documents;
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(d) extend or waive the time for performance by Guarantors, Borrower
or any other Person of, or compliance with, any term, covenant or agreement
(other than this guaranty) on its part to be performed or observed under a
Loan Document, or waive such performance or compliance or consent to a
failure of, or departure from, such performance or compliance;
(e) take and hold security or collateral for the payment of the
Guaranteed Obligations or sell, exchange, release, dispose of, or otherwise
deal with, any property pledged, mortgaged or conveyed, or in which Agent
or Lenders have been granted a Lien, to secure any Debt of Guarantors or
Borrower to Agent or Lenders;
(f) release anyone who may be liable in any manner for the payment of
any amounts owed by Guarantors or Borrower to Agent or any Lender;
(g) modify or terminate the terms of any intercreditor or
subordination agreement pursuant to which claims of other creditors of
Guarantors or Borrower are subordinated to the claims of Agent or any
Lender; or
(h) apply any sums by whomever paid or however realized to any amounts
owing by Guarantors or Borrower to Agent or any Lender in such manner as
Agent or any Lender shall determine in its discretion;
then neither Agent nor any Lender shall incur any liability to Guarantors as a
result thereof, and no such action shall impair or release the obligations of
Guarantors hereunder.
11.8 Reinstatement. Each Guarantor agrees that, if any payment made by
Borrower or any other Person applied to the Obligations is at any time annulled,
set aside, rescinded, invalidated, declared to be fraudulent or preferential or
otherwise required to be refunded or repaid by Agent or any Lender to Borrower,
its estate, trustee, receiver or any other party, including, without limitation,
such Guarantor, under any Applicable Law or equitable cause, then, to the extent
of such payment or repayment, such Guarantor's liability hereunder shall be and
remain in full force and effect, as fully as if such payment had never been
made, and, if prior thereto, the guarantee provided for in this Article XI shall
have been canceled or surrendered, the guarantee shall be reinstated in full
force and effect, and such prior cancellation or surrender shall not diminish,
release, discharge, impair or otherwise affect the obligations of such Guarantor
in respect of the amount of such payment.
11.9 No Subrogation. Notwithstanding any payment or payments by any
Guarantor hereunder, or any set-off or application of funds of any Guarantor by
Agent or any Lender, or the receipt of any amounts by Lenders with respect to
any of the Guaranteed Obligations, Guarantors shall not be entitled to be
subrogated to any of the rights of Lenders against Borrower or any other
guarantor or against any collateral security held by Lenders for the payment of
the Guaranteed Obligations nor shall Guarantors seek any reimbursement from
Borrower or any other guarantor in respect of payments made by Guarantors in
connection with the Guaranteed Obligations, until all amounts owing to Agent or
Lenders on account of the Guaranteed Obligations are paid in full and the
Commitments are terminated. If any amount shall be paid to Guarantors on account
of such subrogation rights at any time when all of the Guaranteed Obligations
shall not have been paid in full, such amount shall be held by Guarantors in
trust for Lenders, segregated from other funds of
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Guarantors, and shall, forthwith upon receipt by Guarantors, be turned over to
Lenders in the exact form received by Guarantors (duly endorsed by Guarantors to
Lenders, if required) to be applied against the Guaranteed Obligations, whether
matured or unmatured, in such order as determined by Lenders.
11.10 Remedies. Upon the occurrence of any Default, Agent may enforce
against any Guarantor its obligations and liabilities hereunder and exercise
such other rights and remedies as may be available to Agent hereunder, under the
Loan Documents or otherwise.
11.11 Limit of Liability.
(a) Effective with the Initial Adjustment Date and provided no Default
shall have occurred and be continuing on the Initial Adjustment Date, the
aggregate liability of Guarantors hereunder shall thereafter be limited to an
amount equal to fifty percent (50%) of the principal of and interest on
(including interest accruing after the filing of any bankruptcy or similar
petition) the Loans.
(b) The obligations of each Guarantor hereunder shall be limited to an
aggregate amount equal to the largest amount that would not render its
obligations hereunder subject to avoidance under Section 548 of the United
States Bankruptcy Code or any comparable provisions of any applicable state law.
ARTICLE XII - GENERAL TERMS AND CONDITIONS
12.1 Usury Laws. Borrower, Agent, Lenders and all other parties to the Loan
Documents intend to conform to and contract in strict compliance with applicable
usury law from time to time in effect. All agreements between Borrower and
Lenders (or any other party liable with respect to any Indebtedness under the
Loan Documents) are hereby limited by the provisions of this Section which shall
override and control all such agreements, whether now existing or hereafter
arising. In no way, nor in any event or contingency (including but not limited
to prepayment, default, demand for payment, or acceleration of the maturity of
any obligation), shall the interest taken, reserved, contracted for, charged,
chargeable, or received under this Agreement, the Notes, any of the other Loan
Documents, or otherwise, exceed the maximum amount permitted under applicable
law ("Maximum Amount"). If, from any possible construction of any document,
interest would otherwise be payable in excess of the Maximum Amount, any such
construction shall be subject to the provisions of this Section and such
document shall ipso facto be automatically reformed and the interest payable
shall be automatically reduced to the Maximum Amount, without the necessity of
execution of any amendment or new document. If Lenders shall ever receive
anything of value which is characterized as interest under applicable law and
which would apart from this provision be in excess of the Maximum Amount, an
amount equal to the amount which would have been excessive interest shall,
without penalty, be applied to the reduction of the principal amount owing on
either Note in the inverse order of its maturity and not to the payment of
interest, or be refunded to Borrower or the other payor thereof, at the election
of Required Lenders in their sole discretion or as required by applicable law.
The right to accelerate maturity of the Notes or any other Indebtedness does not
include the right to accelerate any interest which has not otherwise accrued on
the date of such acceleration, and Lenders do not intend to charge or receive
any unearned interest in the event of acceleration. All interest paid or
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agreed to be paid to Lenders shall, to the extent permitted by applicable law,
be amortized, prorated, allocated and spread throughout the full stated term
(including any renewal or extension) of such Indebtedness so that the amount of
interest on account of such Indebtedness does not exceed the Maximum Amount. As
used in this Section, the term "applicable law" shall mean the laws of the State
of North Carolina or the federal laws of the United States applicable to this
transaction, whichever laws allow the greater interest, as such laws now exist
or may be changed or amended or come into effect in the future.
12.2 Lenders' Consent. Except where otherwise expressly provided in the
Loan Documents, in any instance where the approval, consent or the exercise of
judgment of Lenders is required, the granting or denial of such approval or
consent and the exercise of such judgment shall be (a) within the sole
discretion of Lenders which discretion shall be exercised in a reasonable
manner; and (b) deemed to have been given only by a specific writing intended
for the purpose given and executed by Lender. Notwithstanding any approvals or
consents by Agent or Lenders, neither Agent nor Lender has any obligation or
responsibility whatsoever for the adequacy, form or content of the Plans, the
Budget, any contract, any change order, any lease, or any other matter incident
to the Property or the construction of the Improvements. Agent's acceptance of
an assignment of the Plans on behalf of Lenders shall not constitute approval of
the Plans. Any inspection or audit of the Property or the books and records of
Borrower, or the procuring of documents and financial and other information, by
or on behalf of Lenders shall be for Lenders' protection only, and shall not
constitute any assumption of responsibility to Borrower or anyone else with
regard to the condition, construction, maintenance or operation of the Property,
or relieve Borrower of any of Borrower's obligations. Borrower has selected all
surveyors, architects, engineers, contractors, materialmen and all other persons
or entities furnishing services or materials to the Project. Lenders have no
duty to supervise or to inspect the Property or the construction of the
Improvements nor any duty of care to Borrower or any other person to protect
against, or inform Borrower or any other person of, the existence of negligent,
faulty, inadequate or defective design or construction of the Improvements.
Lenders shall not be liable or responsible for any defect in the Property or the
Improvements, the performance or default of Borrower, Borrower's architect,
engineer, General Contractor, the Construction Consultant, or any other party,
or for any failure to construct, complete, protect or insure the Improvements,
or for the payment of costs of labor, materials, or services supplied for the
construction of the Improvements, or for the performance of any obligation of
Borrower whatsoever. Nothing, including any advance or acceptance of any
document or instrument, shall be construed as a representation or warranty,
express or implied, to any party by Lenders. Inspection shall not constitute an
acknowledgment or representation by Lenders or the Construction Consultant that
there has been or will be compliance with the Plans, Loan Documents, applicable
laws and governmental requirements or that the construction is free from
defective materials or workmanship. Inspection whether or not followed by notice
of Default shall not constitute a waiver of any Default then existing, or a
waiver of Lenders' right thereafter to insist that the Improvements be
constructed in accordance with the Plans, Loan Documents, applicable laws, and
governmental requirements. Lenders' failure to inspect shall not constitute a
waiver of any of Lenders' rights under the Loan Documents or at law or in
equity.
12.3 Miscellaneous. This Agreement may be executed in several counterparts,
all of which are identical, and all of which counterparts together shall
constitute one and the same instrument. The Loan Documents are for the sole
benefit of Lenders and Borrower and are not for the benefit of any third party.
A determination that any provision of this Agreement is unenforceable or invalid
shall not affect the enforceability or validity of any other provision and
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the determination that the application of any provision of this Agreement to any
person or circumstance is illegal or unenforceable shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances. Time shall be of the essence with respect to Borrower's
obligations under the Loan Documents. This Agreement, and its validity,
enforcement and interpretation, shall be governed by North Carolina law (without
regard to any conflict of laws principles) and applicable United States federal
law.
12.4 Notices.
(a) Method of Communication. Except as otherwise provided in this
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to be
received by a party hereto (i) on the date of delivery if delivered by hand or
sent by telecopy, (ii) on the next Business Day if sent by recognized overnight
courier service and (iii) on the third Business Day following the date sent by
certified mail, return receipt requested.
(b) Addresses for Notices. Notices to any party shall be sent to it at the
following addresses, or any other address as to which all the other parties are
notified in writing.
If to Borrower: Arizona Heart Hospital, LLC
c/o AHH Management, Inc.
2632 North 20th Street
Phoenix, Arizona 85006
Attention: Karen DeWitt
Telephone No.: (602) 240-6122
Telecopy No.: (602) 240-6160
If to Guarantors: c/o MedCath Incorporated
7621 Little Avenue
Charlotte, North Carolina 28266
Attention: Richard J. Post
Telephone No.: (704) 541-3228
Telecopy No.: (704) 541-2615
With copies to: AHH Management, Inc.
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attention: Richard J. Post
Telephone No.: (704) 541-3228
Telecopy No.: (704) 541-2615
Moore & Van Allen, PLLC
47th Floor
NationsBank Corporate Center
100 North Tryon Street
Charlotte, North Carolina 28202
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Attention: Hal A. Levinson
Telephone No.: 704/331-1050
Telecopy No.: 704/331-1159
If to NationsBank as
Agent: NationsBank Plaza, NC1-002-03-10
101 South Tryon Street
Charlotte, North Carolina 28255
Attention: Charles R. Dickerson, Jr.
Telephone No.: (704) 386-5514
Telecopy No.: (704) 386-1023
With copies to: Kennedy Covington Lobdell & Hickman
NationsBank Corporate Center, Suite 4200
100 North Tryon Street
Charlotte, North Carolina 28202-4006
Attention: J. Donnell Lassiter, Esq.
Telephone No.: 704/331-7444
Telecopy No.: 704/331-7598
If to any Lender: To the Address set forth on Schedule 1
hereto
(c) Agent's Office. Agent hereby designates its office located at the
address set forth above, or any subsequent office which shall have been
specified for such purpose by written notice to Borrower and Lenders, as
Agent's Office referred to herein, to which payments due are to be made and
at which Loans will be disbursed and Letters of Credit issued.
12.5 Termination. This Agreement shall continue in full force and effect
until the Indebtedness is paid in full; and all representations and warranties
and all provisions herein for indemnity of Agent or Lenders (and any other
provisions herein specified to survive) shall survive payment in full of the
Indebtedness and any release or termination of this Agreement or of any other
Loan Documents.
12.6 Capital Requirements and Yield Maintenance. If at any time after the
date hereof, any Lender determines that the adoption or modification of any
applicable law, rule or regulation regarding taxation, such Lender's required
levels of reserves, deposits, insurance or capital (including any allocation of
capital requirements or conditions), or similar requirements, or any
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation, administration or
compliance of such Lender with any of such requirements, has or would have the
effect of (a) increasing such Lender's costs relating to the obligations
hereunder, or (b) reducing the yield or rate of return of such Lender on the
obligation hereunder, to a level below that which such Lender could have
achieved but for the adoption or modification of any such requirements, Borrower
shall, within fifteen (15) days of any request by such Lender, pay to such
Lender such additional amounts as (in such Lender's sole
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judgment, after good faith and reasonable computation) will compensate such
Lender for such increase in costs or reduction in yield or rate of return of
such Lender. No failure by any Lender to immediately demand payment of any
additional amounts payable hereunder shall constitute a waiver of such Lender's
right to demand payment of such amounts at any subsequent time. Nothing herein
contained shall be construed or so operate as to require Borrower to pay any
interest, fees, costs or charges greater than is permitted by applicable law.
12.7 Costs and Expenses. Without limitation of any Loan Document and to the
extent not prohibited by applicable laws, Borrower shall pay when due, and
reimburse to Lenders on demand, and indemnify Agent and Lenders from, all
out-of-pocket fees, costs, and expenses paid or incurred by Lender in connection
with the negotiation, preparation and execution of this Agreement and the other
Loan Documents (and any amendments, approvals, consents, waivers and releases
requested, required, proposed or done from time to time), or in connection with
the disbursement, administration or collection of the Loans or the enforcement
of the obligations or the exercise of any right or remedy of Lenders, including
(a) fees and expenses of Agent's counsel (such fees not to exceed $50,000 in
connection with the negotiation, preparation and execution of this Agreement and
the other Loan Documents); (b) reasonable and customary fees and charges of each
Construction Consultant; (c) appraisal, re-appraisal and survey costs; (d) title
insurance charges ; (e) title search or examination costs, including abstracts,
abstractors' certificates and uniform commercial code searches; (f) judgment and
tax lien searches for Borrower and each Guarantor; (g) escrow fees; (h) fees and
costs of environmental investigations and site assessments; (i) recordation
taxes, documentary taxes, transfer taxes and mortgage taxes, and (j) filing and
recording fees. Borrower shall pay all costs and expenses incurred by Agent or
Lenders, including attorneys' fees, if the obligations or any part thereof are
sought to be collected by or through an attorney at law, whether or not
involving probate, appellate, administrative or bankruptcy proceedings. Borrower
shall pay all costs and expenses of complying with the Loan Documents, whether
or not such costs and expenses are included in the Budget. Borrower's
obligations under this Section shall survive the delivery of the Loan Documents,
the making of advances, the payment in full of the obligations, the release or
determination of the Loan Documents, the foreclosure of the Mortgage or
conveyance in lieu of foreclosure, any bankruptcy or other debtor relief
proceeding, and any other event whatsoever.
12.8 Further Assurances. Borrower will, on request of Agent, (a) execute,
acknowledge, deliver, procure, record or file such further instruments and do
such further acts deemed necessary, desirable or proper by Agent to carry out
the purposes of the Loan Documents and to identify and subject to the liens and
security interest of the Loan Documents any property intended to be covered
thereby, including any renewals, additions, substitutions, replacements, or
appurtenances to the Property; (b) execute, acknowledge, deliver, procure, file
or record any document or instrument deemed necessary, desirable, or proper by
Lender to protect the liens or the security interest under the Loan Documents
against the rights or interests of third persons; and (c) provide such
certificates, documents, reports, information, affidavits and other instruments
and do such further acts deemed necessary, desirable or proper by Agent to
comply with the requirements of any agency having jurisdiction over Agent or
Lenders.
12.9 No Assignment. Borrower shall not assign, transfer or encumber its
rights or obligations under any Loan Document or any proceeds of the Loan
without the prior written consent of Required Lenders.
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12.10 Inducement to Lenders. The representations and warranties contained
in the Loan Documents (a) are made to induce Lenders to make the Loans and
Lenders are relying thereon, and (b) shall survive any bankruptcy proceedings
involving Borrower, Guarantors or the Property, foreclosure, or conveyance in
lieu of foreclosure.
12.11 Forum. Borrower hereby irrevocably submits generally and
unconditionally for itself and in respect of its property to the jurisdiction of
any state court, or any United States federal court, sitting in the State of
North Carolina and to the jurisdiction of any state court or any United States
federal court, sitting in Arizona, over any suit, action or proceeding arising
out of or relating to this Agreement or the Indebtedness. Borrower hereby
irrevocably waives, to the fullest extent permitted by law, any objection that
Borrower may now or hereafter have to the laying of venue in any such court and
any claim that any such court is an inconvenient forum. Borrower hereby agrees
and consents that, in addition to any methods of service or process provided for
under applicable law, all service of process in any such suit, action or
proceeding in any state court, or any United States federal court, sitting in
the State of North Carolina may be made by certified or registered mail, return
receipt requested, directed to Borrower at its address for notice stated in the
Loan Documents, or at a subsequent address of which Agent received actual notice
from Borrower in accordance with the Loan Documents, and service so made shall
be complete ten (10) days after the same shall have been so mailed. Nothing
herein shall affect the right of Agent or Lenders to serve process in any manner
permitted by law or limit the right of Agent or Lenders to bring proceedings
against Borrower in any other court or jurisdiction.
12.12 Interpretation. References to "Dollars," "$," "money," "payments" or
other similar financial or monetary terms are references to lawful money of the
United States of America. References to Articles, Sections, and Exhibits are,
unless specified otherwise, references to articles, sections and exhibits of
this Agreement. Words of any gender shall include each other gender. Words in
the singular shall include the plural and words in the plural shall include the
singular. References to Borrower or Guarantor shall mean, each person comprising
same, jointly and severally. References to persons shall include any legal
entities, including public or governmental bodies, agencies or
instrumentalities, and natural persons. The words "herein," "hereof,"
"hereunder" and other similar compounds of the word "here" shall refer to the
entire Agreement and not to any particular provision or section. The words
"include" and "including" shall be interpreted as if followed by the words
"without limitation". Captions and headings in the Loan Documents are for
convenience only and shall not affect the construction of the Loan Documents.
12.13 No Partnership, etc. The relationship between Lenders and Borrower is
solely that of lenders and borrower. Lenders have no fiduciary or other special
relationship with or duly to Borrower and none is created by the Loan Documents.
Nothing contained in the Loan Documents, and no action taken or omitted pursuant
to the Loan Documents, is intended or shall be construed to create any
partnership, joint venture, association, or special relationship between
Borrower and Lenders or in any way make Lenders co-principals with Borrower with
reference to the Project, the Property or otherwise. In no event shall Lenders'
rights and interests under the Loan Documents be construed to give Lenders the
right to control, or be deemed to indicate that Lenders are in control of, the
business, properties, management or operations of Borrower.
12.14 Records. The unpaid amount of the Loans set forth on the books and
records of Lenders maintained in the ordinary course of its business shall be
presumptive evidence of the amount thereof owing and unpaid, but failure to
record any such amount on the books and records
55
<PAGE>
shall not limit or affect the obligations of Borrower under the Loan Documents
to make payments on the Loans when due.
12.15 Exhibits. This Agreement includes the Exhibits listed below which are
marked by "X", all of which Exhibits are attached hereto and made a part hereof
for all purposes, it being agreed that if any Exhibit to be executed and
delivered contains blanks, the same shall be completed correctly and in
accordance with this Agreement prior to or at the time of the execution and
delivery thereof.
X Exhibit "A" - Legal description of the Land
----- Exhibit "B" - Reserved
X Exhibit "C" - Certain Conditions Precedent to
----- the First Advance
X Exhibit "D" - Budget
-----
X Exhibit "E" - Plans
-----
X Exhibit "F" - Advances
-----
X Exhibit "F-1" - Draw Request
-----
X Exhibit "G" - [Reserved]
-----
X Exhibit "H" - Officer's Compliance Certificate
-----
X Exhibit "I" - Assignment and Acceptance
-----
X Exhibit "J" - Notice of Working Capital Borrowing
-----
X Exhibit "K" - Notice of Working Capital Loan Prepayment
-----
X Exhibit "L" - Notice of Conversion/Continuation
-----
X Exhibit "M" - Notice of Construction Loan Prepayment
-----
12.16 Mandatory Arbitration. Any controversy or claim between or among the
parties hereto including but not limited to those arising out of or relating to
this Agreement or any related agreements or instruments, including any claim
based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the Rules of Practice and Procedure for
the Arbitration of Commercial Disputes of Endispute, Inc., doing business as
J.A.M.S./Endispute ("J.A.M.S."), and the "Special Rules" set forth below. In the
event of any inconsistency, the Special Rules shall control. Judgment upon any
arbitration award may be entered in any court having jurisdiction. Any party to
this Agreement may bring an action, including a summary or expedited proceeding,
to compel arbitration of any controversy or claim to which this Agreement
applies in any court having jurisdiction over such action.
(a) Special Rules. The arbitration shall be conducted in the city of
Borrower's domicile at the time of this Agreement's execution and
administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is
unable or legally precluded from administering the arbitration, then the
American Arbitration Association will serve. All arbitration hearings will
be commenced within 90 days of the demand for arbitration; further, the
arbitrator shall only, upon a showing of cause, be permitted to extend the
commencement of such hearing for up to an additional 60 days.
(b) Reservations of Rights. Nothing in this Agreement shall be deemed
to (i) limit the applicability of any otherwise applicable statutes of
limitation or repose and any waivers contained in this Agreement; or (ii)
be a waiver by Lenders of the protection afforded to it by 12 U.S.C. Sec.
91 or any substantially equivalent state law; or (iii) limit
56
<PAGE>
the right of Lenders (A) to exercise self help remedies such as (but not
limited to) setoff, or (B) to foreclose against any real or personal
property collateral, or (C) to obtain from a court provisional or ancillary
remedies such as (but not limited to) injunctive relief or the appointment
of a receiver. Lenders may exercise such self help rights, foreclose upon
such property, or obtain such provisional or ancillary remedies before,
during or after the pendency of any arbitration proceeding brought pursuant
to this Agreement. At Lenders' option, foreclosure under a deed of trust or
mortgage may be accomplished by any of the following: the exercise of a
power of sale under the deed of trust or mortgage, or by judicial sale
under the deed of trust or mortgage, or by judicial foreclosure. Neither
the exercise of self help remedies nor the institution or maintenance of an
action for foreclosure or provisional or ancillary remedies shall
constitute a waiver of the right of any party, including the claimant in
any such action, to arbitrate the merits of the controversy or claim
occasioning resort to such remedies.
No provision in the Loan Documents regarding submission to jurisdiction and/or
venue in any court is intended or shall be construed to be in derogation of the
provisions in any Loan Document for arbitration of any controversy or claim.
12.17 Set-off. In addition to any rights now or hereafter granted under
Applicable Law and not by way of limitation of any such rights, upon and after
the occurrence of any Default and during the continuance thereof, Lenders and
any assignee or participant of a Lender in accordance with Section 12.18 are
hereby authorized by Borrower at any time or from time to time, without notice
to Borrower or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate and to apply any and all deposits (general
or special, time or demand, including, but not limited to, indebtedness
evidenced by certificates of deposit, whether matured or unmatured) and any
other indebtedness at any time held or owing by Lenders, or any such assignee or
participant to or for the credit or the account of Borrower against and on
account of the Obligations irrespective of whether or not (a) Lenders shall have
made any demand under this Agreement or any of the other Loan Documents or (b)
Agent shall have declared any or all of the Obligations to be due and payable as
permitted by Section 9.2 and although such Obligations shall be contingent or
unmatured.
12.18 Successors and Assigns; Participations.
(a) Assignment by Lenders. Each Lender may assign to one or more
Eligible Assignees all or a portion of its interests, rights and
obligations under this Agreement (including, without limitation, all or a
portion of the Loans at the time owing to it and the Notes held by it);
provided that:
(i) each such assignment shall be of a constant, and not a
varying, percentage of all the assigning Lender's rights and
obligations under this Agreement;
(ii) if less than all of the assigning Lender's Commitment is to
be assigned, the Commitment so assigned shall not be less than
$5,000,000 or an integral multiple of $1,000,000 in excess thereof;
(iii) the parties to each such assignment shall execute and
deliver to Agent, for its acceptance and recording in the Register, an
Assignment and
57
<PAGE>
Acceptance in the form of Exhibit I attached hereto (an "Assignment
and Acceptance"), together with any Note or Notes subject to such
assignment;
(iv) such assignment shall not, without the consent of Borrower,
require Borrower to file a registration statement with the Securities
and Exchange Commission or apply to or qualify the Loans or the Notes
under the blue sky laws of any state; and
(v) the assigning Lender shall pay to Agent an assignment fee of
$2,500 upon the execution by such Lender of the Assignment and
Acceptance; provided that no such fee shall be payable upon any
assignment by a Lender to an Affiliate thereof.
Upon such execution, delivery, acceptance and recording, from and after the
effective date specified in each Assignment and Acceptance, which effective date
shall be at least five (5) Business Days after the execution thereof, (A) the
assignee thereunder shall be a party hereto and, to the extent provided in such
Assignment and Acceptance, have the rights and obligations of a Lender hereby
and (B) Lender thereunder shall, to the extent provided in such assignment, be
released from its obligations under this Agreement.
(b) Rights and Duties Upon Assignment. By executing and delivering an
Assignment and Acceptance, the assigning Lender thereunder and the assignee
thereunder confirm to and agree with each other and the other parties
hereto as set forth in such Assignment and Acceptance.
(c) Register. Agent shall maintain a copy of each Assignment and
Acceptance delivered to it and a register for the recordation of the names
and addresses of Lenders and the amount of the Loans with respect to each
Lender from time to time (the "Register"). The entries in the Register
shall be conclusive, in the absence of manifest error, and Borrower, Agent
and Lenders may treat each person whose name is recorded in the Register as
a Lender hereunder for all purposes of this Agreement. The Register shall
be available for inspection by Borrower or Lender at any reasonable time
and from time to time upon reasonable prior notice.
(d) Issuance of New Notes. Upon its receipt of an Assignment and
Acceptance executed by an assigning Lender and an Eligible Assignee
together with any Note or Notes subject to such assignment and the written
consent to such assignment, Agent shall, if such Assignment and Acceptance
has been completed and is substantially in the form of Exhibit I:
(i) accept such Assignment and Acceptance;
(ii) record the information contained therein in the Register;
(iii) give prompt notice thereof to Lenders and Borrower; and
(iv) promptly deliver a copy of such Assignment and Acceptance to
Borrower.
58
<PAGE>
Within five (5) Business Days after receipt of notice, Borrower shall execute
and deliver to Agent, in exchange for the surrendered Note or Notes, a new Note
or Notes to the order of such Eligible Assignee in amounts equal to the
Commitment assumed by it pursuant to such Assignment and Acceptance and a new
Note or Notes to the order of the assigning Lender in an amount equal to the
Commitment retained by it hereunder. Such new Note or Notes shall be in an
aggregate principal amount equal to the aggregate principal amount of such
surrendered Note or Notes, shall be dated the effective date of such Assignment
and Acceptance and shall otherwise be in substantially the form of the assigned
Notes delivered to the assigning Lender. Each surrendered Note or Notes shall be
canceled and returned to Borrower.
(e) Participations. Each Lender may sell participations to one or more
banks or other entities in all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of
its Loans and the Notes held by it); provided that:
(i) if less than all of such Lender's rights or obligations, each
such participation shall be in an amount not less than $5,000,000 or
an integral multiple of $1,000,000 in excess thereof;
(ii) such Lender's obligations under this Agreement (including,
without limitation, its Commitment) shall remain unchanged;
(iii) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations;
(iv) such Lender shall remain the holder of the Notes held by it
for all purposes of this Agreement;
(v) Borrower, Agent and the other Lenders shall continue to deal
solely and directly with such Lender in connection with such Lender's
rights and obligations under this Agreement;
(vi) such Lender shall not permit such participant the right to
approve any waivers, amendments or other modifications to this
Agreement or any other Loan Document other than waivers, amendments or
modifications which would reduce the principal of or the interest rate
on any Loan, extend the term or increase the amount of the Commitment,
reduce the amount of any fees to which such participant is entitled,
extend any scheduled payment date for principal of any Loan or, except
as expressly contemplated hereby or thereby, release substantially all
of the Collateral; and
(vii) any such disposition shall not, without the consent of
Borrower, require Borrower to file a registration statement with the
Securities and Exchange Commission to apply to qualify the Loans or
the Notes under the blue sky law of any state.
(f) Disclosure of Information; Confidentiality. Agent and Lenders
shall hold all non-public information with respect to Borrower obtained
pursuant to the Loan Documents in accordance with their customary
procedures for handling confidential
59
<PAGE>
information. Any Lender may, in connection with any assignment, proposed
assignment, participation or proposed participation pursuant to this
Section 12.18, disclose to the assignee, participant, proposed assignee or
proposed participant, any information relating to Borrower furnished to
such Lender by or on behalf of Borrower; provided, that prior to any such
disclosure, each such assignee, proposed assignee, participant or proposed
participant shall agree with Borrower or such Lender to preserve the
confidentiality of any confidential information relating to Borrower
received from such Lender.
(g) Certain Pledges or Assignments. Nothing herein shall prohibit any
Lender from pledging or assigning any Note to any Federal Reserve Bank in
accordance with Applicable Law.
12.19 Amendments, Waivers and Consents. Except as set forth below, any
term, covenant, agreement or condition of this Agreement or any of the other
Loan Documents may be amended or waived if such amendment, waiver or consent is
in writing signed by the Required Lenders (or by Agent with the consent of the
Required Lenders) and delivered to Agent and, in the case of an amendment,
signed by Borrower; provided, that no amendment, waiver or consent shall (a)
increase the amount or extend the time of the obligation of Lenders to make
Loans, (b) extend the originally scheduled time or times of payment of the
principal of any Loan or the time or times of payment of interest on any Loan,
(c) reduce or forgive the principal of any Loan or reduce the rate of interest
or fees payable on any Loan, (d) permit any subordination of the principal or
interest on any Loan, (e) release any material portion of the Collateral or
release any Security Document (other than as specifically permitted in this
Agreement or the applicable Security Document) or (f) amend the provisions of
this Section 12.19 or the definition of Required Lenders, without the prior
written consent of each Lender. In addition, no amendment, waiver or consent to
the provisions of Article X shall be made without the written consent of Agent.
12.20 All Powers Coupled with Interest. All powers of attorney and other
authorizations granted to Lenders, Agent and any Persons designated by Agent or
any Lender pursuant to any provisions of this Agreement or any of the other Loan
Documents shall be deemed coupled with an interest and shall be irrevocable so
long as any of the Obligations remain unpaid or unsatisfied.
12.21 Survival of Indemnities. Notwithstanding any termination of this
Agreement, the indemnities to which Agent and Lenders are entitled under the
provisions of this Article XII and any other provision of this Agreement and the
Loan Documents shall continue in full force and effect and shall protect Agent
and Lenders against events arising after such termination as well as before.
12.22 Term of Agreement. This Agreement shall remain in effect from the
Closing Date through and including the date upon which all Obligations shall
have been indefeasibly and irrevocably paid and satisfied in full. No
termination of this Agreement shall affect the rights and obligations of the
parties hereto arising prior to such termination.
12.23 Entire Agreement. The Loan Documents constitute the entire
understanding and agreement between Borrower and Lenders with respect to the
transactions arising in connection with the Loan and supersede all prior written
or oral understandings and agreements between Borrower and Lenders with respect
to the matters addressed in the Loan Documents. In particular, and without
limitation, the terms of any commitment by Lender to make the Loans are merged
into the Loan Documents. Lenders have not made any commitments to extend the
term of the
60
<PAGE>
Loans past their stated maturity date or to provide Borrower with financing
except as set forth in the Loan Documents. Except as incorporated in writing in
the Loan Documents, there are not, and were not, and no persons are or were
authorized by Lenders to make, any representations, understandings,
stipulations, agreements or promises, oral or written, with respect to the
matters addressed in the Loan Documents.
THE WRITTEN LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
61
<PAGE>
EXECUTED and DELIVERED as of the date first above written.
BORROWER:
ARIZONA HEART HOSPITAL, LLC
By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
---------------------------------
Name: Richard J. Post
---------------------
Title: Treasurer
--------------------
The Federal Tax Identification Number for Borrower:
56-2003949
GUARANTORS:
AHH MANAGEMENT, INC.
By: /s/ Richard J. Post
-----------------------------------
Name: Richard J. Post
----------------------
Title: Treasurer
----------------------
MEDCATH OF ARIZONA, INC.
By: /s/ Daniel L. Belongia
-----------------------------------
Name: Daniel L. Belongia
----------------------
Title: Treasurer
---------------------
MEDCATH OF KINGMAN, INC.
By: /s/ Daniel L. Belongia
-----------------------------------
Name: Daniel L. Belongia
-----------------------
Title: Treasurer
-----------------------
62
<PAGE>
MEDCATH OF MASSACHUSETTS, INC.
By: /s/ Richard J. Post
-----------------------------------
Name: Richard J. Post
----------------------
Title: Treasurer
----------------------
MEDCATH OF NEW JERSEY,INC.
By: /s/ Daniel L. Belongia
-----------------------------------
Name: Daniel L. Belongia
-----------------------
Title: Treasurer
-----------------------
MEDCATH DIAGNOSTICS, INC.
By: /s/ Daniel L. Belongia
-----------------------------------
Name: Daniel L. Belongia
-----------------------
Title: Treasurer
-----------------------
MEDCATH PHYSICIAN MANAGEMENT OF
VIRGINIA, INC.
By: /s/ Richard J. Post
-----------------------------------
Name: Richard J. Post
----------------------
Title: Treasurer
----------------------
PHYSMED MANAGEMENT SERVICES, INC.
63
<PAGE>
By: /s/ Daniel L. Belongia
-----------------------------------
Name: Daniel L. Belongia
-----------------------
Title: Treasurer
-----------------------
PHYSICIAN MANAGEMENT OF MCALLEN,
INC.
By: /s/ Richard J. Post
-----------------------------------
Name: Richard J. Post
----------------------
Title: Treasurer
----------------------
ULTIMED, INC.
By: /s/ Daniel L. Belongia
-----------------------------------
Name: Daniel L. Belongia
-----------------------
Title: Treasurer
-----------------------
NATIONSBANK, N.A., as Agent
By: /s/ Michael G. Mayer
-----------------------------------
Name: Michael G. Mayer
-----------------------
Title: Senior Vice President
-----------------------
LENDERS:
NATIONSBANK, N.A., as Lender
By: /s/ Michael G. Mayer
-----------------------------------
Name: Michael G. Mayer
-----------------------
Title: Senior Vice President
-----------------------
64
<PAGE>
KEY CORPORATE CAPITAL INC.
By: /s/ J. Mark Mullen
-----------------------------------
Name: J. Mark Mullen
-------------------------
Title: Assistant Vice President
-------------------------
AMSOUTH BANK
By: /s/ J. Ken Difatta
-----------------------------------
Name: J. Ken Difatta
------------------------
Title: Commercial Banking Officer
---------------------------
65
<PAGE>
CONSTRUCTION LOAN NOTE
$11,047,700 August 7, 1997
FOR VALUE RECEIVED, the undersigned, ARIZONA HEART HOSPITAL, LLC, an
Arizona limited liability company (the "Borrower"), hereby promises to pay to
the order of NATIONSBANK, N.A. (the "Bank"), at the times, at the place and in
the manner provided in the Loan Agreement hereinafter referred to, the principal
sum of up to ELEVEN MILLION FORTY-SEVEN THOUSAND SEVEN HUNDRED DOLLARS
($11,047,700), or, if less, the aggregate unpaid principal amount of all
Construction Loans disbursed by the Bank under the Loan Agreement referred to
below, together with interest at the rates as in effect from time to time with
respect to each portion of the principal amount hereof, determined and payable
as provided in the Loan Agreement.
This Note is a Construction Loan Note referred to in, and is entitled to
the benefits of, the Loan Agreement dated as of August 7, 1997 (as amended,
restated or otherwise modified, the "Loan Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Loan Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Construction Loan Note to
be executed under seal by a duly authorized officer as of the day and year first
above written.
(CORPORATE SEAL) By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
Name: Richard J. Post
Title: Treasurer
<PAGE>
CONSTRUCTION LOAN NOTE
$11,047,700 August 7, 1997
FOR VALUE RECEIVED, the undersigned, ARIZONA HEART HOSPITAL, LLC, an
Arizona limited liability company (the "Borrower"), hereby promises to pay to
the order of KEY CORPORATE CAPITAL INC. (the "Bank"), at the times, at the place
and in the manner provided in the Loan Agreement hereinafter referred to, the
principal sum of up to ELEVEN MILLION FORTY-SEVEN THOUSAND SEVEN HUNDRED DOLLARS
($11,047,700), or, if less, the aggregate unpaid principal amount of all
Construction Loans disbursed by the Bank under the Loan Agreement referred to
below, together with interest at the rates as in effect from time to time with
respect to each portion of the principal amount hereof, determined and payable
as provided in the Loan Agreement.
This Note is a Construction Loan Note referred to in, and is entitled to
the benefits of, the Loan Agreement dated as of August 7, 1997 (as amended,
restated or otherwise modified, the "Loan Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Loan Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Construction Loan Note to
be executed under seal by a duly authorized officer as of the day and year first
above written.
ARIZONA HEART HOSPITAL, LLC (SEAL)
(CORPORATE SEAL) By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
Name: Richard J. Post
Title: Treasurer
<PAGE>
CONSTRUCTION LOAN NOTE
$5,449,600 August 7, 1997
FOR VALUE RECEIVED, the undersigned, ARIZONA HEART HOSPITAL, LLC, an
Arizona limited liability company (the "Borrower"), hereby promises to pay to
the order of AMSOUTH BANK (the "Bank"), at the times, at the place and in the
manner provided in the Loan Agreement hereinafter referred to, the principal sum
of up to FIVE MILLION FOUR HUNDRED FORTY-NINE THOUSAND SIX HUNDRED DOLLARS
($5,449,600), or, if less, the aggregate unpaid principal amount of all
Construction Loans disbursed by the Bank under the Loan Agreement referred to
below, together with interest at the rates as in effect from time to time with
respect to each portion of the principal amount hereof, determined and payable
as provided in the Loan Agreement.
This Note is a Construction Loan Note referred to in, and is entitled to
the benefits of, the Loan Agreement dated as of August 7, 1997 (as amended,
restated or otherwise modified, the "Loan Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Loan Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Construction Loan Note to
be executed under seal by a duly authorized officer as of the day and year first
above written.
(CORPORATE SEAL) By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
Name: Richard J. Post
Title: Treasurer
<PAGE>
WORKING CAPITAL LOAN NOTE
$1,002,696 August 7, 1997
FOR VALUE RECEIVED, the undersigned, ARIZONA HEART HOSPITAL, LLC, an
Arizona limited liability company (the "Borrower"), hereby promises to pay to
the order of NATIONSBANK, N.A. (the "Bank"), at the times, at the place and in
the manner provided in the Loan Agreement hereinafter referred to, the principal
sum of up to ONE MILLION TWO THOUSAND SIX HUNDRED NINETY-SIX DOLLARS
($1,002,696), or, if less, the aggregate unpaid principal amount of all Working
Capital Loans disbursed by the Bank under the Loan Agreement referred to below,
together with interest at the rates as in effect from time to time with respect
to each portion of the principal amount hereof, determined and payable as
provided in the Loan Agreement.
This Note is a Working Capital Loan Note referred to in, and is entitled to
the benefits of, the Loan Agreement dated as of August 7, 1997 (as amended,
restated or otherwise modified, the "Loan Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Loan Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Working Capital Loan Note
to be executed under seal by a duly authorized officer as of the day and year
first above written.
(CORPORATE SEAL) By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
Name: Richard J. Post
Title: Treasurer
<PAGE>
WORKING CAPITAL LOAN NOTE
$1,002,696 August 7, 1997
FOR VALUE RECEIVED, the undersigned, ARIZONA HEART HOSPITAL, LLC, an
Arizona limited liability company (the "Borrower"), hereby promises to pay to
the order of KEY CORPORATE CAPITAL INC. (the "Bank"), at the times, at the place
and in the manner provided in the Loan Agreement hereinafter referred to, the
principal sum of up to ONE MILLION TWO THOUSAND SIX HUNDRED NINETY-SIX DOLLARS
($1,002,696), or, if less, the aggregate unpaid principal amount of all Working
Capital Loans disbursed by the Bank under the Loan Agreement referred to below,
together with interest at the rates as in effect from time to time with respect
to each portion of the principal amount hereof, determined and payable as
provided in the Loan Agreement.
This Note is a Working Capital Loan Note referred to in, and is entitled to
the benefits of, the Loan Agreement dated as of August 7, 1997 (as amended,
restated or otherwise modified, the "Loan Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Loan Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Working Capital Loan Note
to be executed under seal by a duly authorized officer as of the day and year
first above written.
(CORPORATE SEAL) By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
Name: Richard J. Post
Title: Treasurer
<PAGE>
WORKING CAPITAL LOAN NOTE
$494,608 August 7, 1997
FOR VALUE RECEIVED, the undersigned, ARIZONA HEART HOSPITAL, LLC, an
Arizona limited liability company (the "Borrower"), hereby promises to pay to
the order of AMSOUTH BANK (the "Bank"), at the times, at the place and in the
manner provided in the Loan Agreement hereinafter referred to, the principal sum
of up to FOUR HUNDRED NINETY-FOUR THOUSAND SIX HUNDRED EIGHT DOLLARS ($494,608),
or, if less, the aggregate unpaid principal amount of all Working Capital Loans
disbursed by the Bank under the Loan Agreement referred to below, together with
interest at the rates as in effect from time to time with respect to each
portion of the principal amount hereof, determined and payable as provided in
the Loan Agreement.
This Note is a Working Capital Loan Note referred to in, and is entitled to
the benefits of, the Loan Agreement dated as of August 7, 1997 (as amended,
restated or otherwise modified, the "Loan Agreement"), by and among the
Borrower, the lenders (including the Bank) referred to therein (the "Lenders")
and NationsBank, N.A., as Agent. The Loan Agreement contains, among other
things, provisions for the time, place and manner of payment of this Note, the
determination of the interest rate borne by and fees payable in respect of this
Note, acceleration of the payment of this Note upon the happening of certain
stated events and the mandatory repayment of this Note under certain
circumstances.
The Borrower agrees to pay on demand all costs of collection, including
reasonable attorneys' fees, if any part of this Note, principal or interest, is
collected after maturity with the aid of an attorney.
Presentment for payment, notice of dishonor, protest and notice of protest
are hereby waived.
THIS NOTE IS MADE AND DELIVERED IN THE STATE OF NORTH CAROLINA AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NORTH
CAROLINA.
The Debt evidenced by this Note is senior in right of payment to all
Subordinated Debt referred to in the Loan Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Working Capital Loan Note
to be executed under seal by a duly authorized officer as of the day and year
first above written.
(CORPORATE SEAL) By: AHH Management, Inc., acting on
behalf of Arizona Heart Hospital, LLC
By: /s/ Richard J. Post
Name: Richard J. Post
Title: Treasurer
<PAGE>
SHARE EXCHANGE AGREEMENT
AND PLAN OF REORGANIZATION
DATED AS OF JUNE 30, 1997
BY AND AMONG
SHAREHOLDERS
OF
PIMA HEART ASSOCIATES, P.C.
AND
MEDCATH INCORPORATED
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I EXCHANGE OF SHARES..................................................1
1.01 Exchange of Shares....................................................1
1.02 Further Assurances....................................................1
ARTICLE II METHOD OF EXCHANGE.................................................2
2.01 Exchange Value........................................................2
2.02 Manner of Delivery....................................................2
ARTICLE III CLOSING...........................................................2
3.01 Closing...............................................................2
3.02 Postponement of Closing Date..........................................3
ARTICLE IV DOCUMENTS TO BE DELIVERED AT CLOSING...............................3
4.01 Deliveries by Shareholders............................................3
4.02 Deliveries by MedCath.................................................4
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS......................4
5.01 Organization; Good Standing...........................................5
5.02 Corporate Documents...................................................5
5.03 Power; Authority......................................................5
5.04 Capitalization; Title.................................................6
5.05 Financial Statements..................................................6
5.06 Absence of Undisclosed Liabilities....................................6
5.07 Absence of Certain Recent Changes.....................................7
5.08 Title to Assets.......................................................8
5.09 Contracts and Leases..................................................8
5.10 Defaults and Consents.................................................9
5.11 Litigation, Etc......................................................10
5.12 Court Orders, Decrees and Laws.......................................10
5.13 Employee Matters.....................................................10
5.14 Labor Matters........................................................10
5.15 Insurance; Malpractice...............................................11
5.16 Books of Account, Reports............................................11
5.17 No Finders or Brokers................................................11
5.18 Inventory............................................................11
5.19 Equipment............................................................11
5.20 Employee Benefit Plans...............................................12
5.21 Power of Attorney....................................................15
5.22 Bank Accounts; Officers..............................................15
5.23 Environmental Matters................................................15
5.24 Fraud and Abuse......................................................15
5.25 Receivables..........................................................16
5.26 Taxes................................................................16
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5.27 Investments..........................................................18
5.28 Affiliated Transactions..............................................18
5.29 Investment Representations and Warranties............................18
5.30 Tax and Securities Advice, Etc.......................................20
5.31 Disclosure...........................................................20
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF MEDCATH.........................20
6.01 Organization; Good Standing..........................................21
6.02 Power; Authority.....................................................21
6.03 Conflicting Agreements...............................................21
6.04 MedCath Shares.......................................................21
6.05 Investment Intent....................................................22
6.06 Litigation...........................................................22
6.07 Disclosure...........................................................22
6.08 Legal Compliance.....................................................22
6.09 Registration Rights..................................................22
ARTICLE VII COVENANTS OF THE COMPANY AND THE SHAREHOLDERS....................23
7.01 Conduct of Business..................................................24
7.02 No Dividends on Shares; No Share Transfers...........................24
7.03 Governmental Filings.................................................24
7.04 Assistance...........................................................24
7.05 Access...............................................................25
7.06 Material Contracts...................................................25
7.07 Intentionally Omitted................................................25
7.08 Confidentiality......................................................25
7.09 Benefit Plans........................................................25
7.10 Tax Matters..........................................................26
7.11 Tax Indemnification..................................................26
ARTICLE VIII SHAREHOLDERS' CONDITIONS PRECEDENT..............................26
8.01 MedCath's Representations, Warranties and Covenants..................27
8.02 No Actions...........................................................27
8.03 Consents and Approvals...............................................27
8.04 Inquiries; Investigations............................................27
8.05 Deliveries...........................................................27
ARTICLE IX COVENANTS OF MEDCATH..............................................27
9.01 Governmental Filings.................................................28
9.02 Assistance...........................................................28
9.03 Confidentiality......................................................28
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ARTICLE X MEDCATH'S CONDITIONS PRECEDENT.....................................28
10.01 Shareholders' Representations, Warranties and Covenants.............28
10.02 No Actions..........................................................28
10.03 Consents and Approvals..............................................29
10.04 Inquiries; Investigations...........................................29
10.05 Material Adverse Change.............................................29
10.06 Intentionally Omitted...............................................29
10.07 Percentages of Shareholders Signing Agreement.......................29
10.08 Deliveries..........................................................29
10.09 Bank Accounts.......................................................30
10.10 Change in Accounting................................................30
10.11 Bank Loan...........................................................30
ARTICLE XI TERMINATION.......................................................30
11.01 Methods of Termination..............................................30
11.02 Effect of Termination...............................................31
ARTICLE XII SURVIVAL; INDEMNIFICATION........................................31
12.01 Survival............................................................31
12.02 Indemnification by Shareholders.....................................31
12.03 Indemnification by MedCath..........................................32
12.04 [INTENTIONALLY LEFT BLANK]..........................................32
12.05 Method of Asserting Claims..........................................32
12.06 Special Recovery Provisions.........................................34
12.07 Definitions.........................................................35
ARTICLE XIII GENERAL.........................................................36
13.01 Entire Agreement; Modifications.....................................36
13.02 Binding Effect......................................................37
13.03 Public Announcements................................................37
13.04 Counterparts........................................................37
13.05 Costs and Expenses..................................................37
13.06 Assignment..........................................................37
13.07 Notices.............................................................37
13.08 Governing Law.......................................................38
13.09 Severability........................................................39
13.10 Review By Shareholders..............................................39
13.11 Knowledge...........................................................39
13.12 Cancellation of Shareholders Agreement..............................39
iii
<PAGE>
SHARE EXCHANGE AGREEMENT
AND PLAN OF REORGANIZATION
THIS SHARE EXCHANGE AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement")
dated as of the 30th day of June, 1997 is by and among those shareholders of
PIMA HEART ASSOCIATES, P.C. ("Company") who have executed this Agreement below
(each such person being individually referred to herein as a "Shareholder" and
collectively as the "Shareholders") and MEDCATH INCORPORATED, a North Carolina
corporation ("MedCath").
BACKGROUND
A. The Shareholders at Closing shall be the owners of Two Thousand Six
Hundred (2,600) shares of the issued and outstanding common shares of the
Company, representing 100% of the issued and outstanding common shares of the
Company as of the Closing Date.
B. MedCath desires to issue and exchange shares of its common stock with
the Shareholders in exchange for their common shares of the Company, and the
Shareholders desire to so exchange their common shares of the Company for common
shares of MedCath in a transaction intended to qualify as a reorganization
within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code, as
amended, such that following such exchange the Company shall be a wholly-owned
subsidiary of MedCath.
Accordingly, in consideration of the mutual promises contained herein and
intending to be legally bound, the Company, the Shareholders and MedCath hereby
agree as follows:
ARTICLE I
EXCHANGE OF SHARES
1.01 Exchange of Shares.
Each of the Shareholders hereby agrees to exchange all of his, her or its
common shares of the Company (the "Company Shares"), which in the aggregate
shall, as of the Closing Date, constitute all of the issued and outstanding
capital shares of the Company, on the terms and conditions herein set forth.
MedCath, in reliance upon the representations and warranties of the Shareholders
and the covenants of the Shareholders and the Company contained herein and
subject to the terms and conditions of this Agreement, hereby agrees to exchange
common shares of MedCath for Company Shares in the manner provided in Article II
hereof.
1.02 Further Assurances.
Each party hereto will execute such further documents and instruments and
take such further actions as may reasonably be requested by one or more of the
others to consummate the exchange of Company Shares for MedCath Shares (as
defined by Section 2.01 below), to vest
<PAGE>
MedCath with full title to all Company Shares, to vest the Shareholders with
full title to all MedCath Shares, and to ensure that the Company continues to
have, following the consummation of such exchange, all of the assets, rights,
permits, licenses, properties, approvals, immunities and franchises of the
Company on the date hereof and to otherwise to effect the other purposes of this
Agreement.
ARTICLE II
METHOD OF EXCHANGE
2.01 Exchange Value.
In exchange for the Company Shares, MedCath shall issue to the Shareholders
Five Hundred Thousand and Six (500,006) of its shares of common stock, $.01 par
value per share (the "MedCath Shares") and deliver such shares in the manner
provided in Section 2.02. Each of the Shareholders is exchanging the number of
Company Shares referenced on Exhibit A attached hereto, and shall, in accordance
with this Article II, be issued in exchange the number of MedCath Shares
referenced on Exhibit A.
2.02 Manner of Delivery.
(a) On the Closing Date, MedCath shall cause to be issued to the
Shareholders by LaSalle National Bank (the "Exchange Agent") Five Hundred
Thousand and Six (500,006) duly authorized, fully paid and non-assessable
whole MedCath Shares, the certificates for which shall be delivered no
later than three (3) days after the Closing Date (as defined by Section
3.01 below).
(b) In the case of any lost, mislaid, stolen or destroyed certificate
for Company Shares (each a "Company Certificate" and collectively "Company
Certificates"), the holder thereof may be required, as a condition
precedent to delivery to such holder of the consideration described in this
Article II, to deliver to MedCath a bond in such reasonable sum or a
satisfactory indemnity agreement as MedCath may direct as indemnity against
any claim that may be made against the Exchange Agent or the Company with
respect to the Company Certificate alleged to have been lost, mislaid,
stolen or destroyed.
ARTICLE III
CLOSING
3.01 Closing.
The closing (the "Closing") of the transactions contemplated by this
Agreement and the Exhibits and Schedules hereto (the "Transactions") shall take
place at the offices of Bonn, Luscher, Padden & Wilkins, or at such other
location as mutually agreed upon by MedCath and the Shareholders, promptly after
the conditions precedent set forth in Article VIII and Article X have been
satisfied but in no event later than September 30, 1997, unless extended as
provided herein, (the actual date on which Closing occurs is referred to herein
as the "Closing Date");
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<PAGE>
provided, however, nothing contained herein shall obligate any party to close
hereunder if any of the conditions to such party's obligation to close (as set
forth in Article VIII or Article X hereof, as appropriate) are not satisfied.
3.02 Postponement of Closing Date.
The Closing Date may be postponed by mutual agreement signed by MedCath and
the Shareholders.
ARTICLE IV
DOCUMENTS TO BE DELIVERED AT CLOSING
4.01 Deliveries by Shareholders.
At the Closing, the Shareholders and the Company shall deliver, or cause to
be delivered, to MedCath all of the following documents and instruments:
(a) Certificates evidencing the Company Shares duly endorsed to
MedCath or accompanied by stock powers.
(b) Unaudited balance sheets and related statements of income and
retained earnings and cash flows of the Company, calculated on a cash (and
on an accrual basis) as of and for the three (3) month period ending the
month prior to the Closing Date (the "Stub Financial Statements").
(c) The resignation of all directors and removal of all officers of
the Company to be effective immediately after the Closing.
(d) Closing certificates duly executed by Shareholders and the Company
in the form satisfactory to MedCath.
(e) A certificate executed by the Secretary of the Company (i)
attaching copies of the corporate resolutions adopted by the Board of
Directors of the Company authorizing, adopting and approving or ratifying
the execution, delivery and performance of this Agreement and the
consummation of the Transactions by the Company, (ii) confirming the
incumbency of officers executing this Agreement and the agreements,
documents and instruments to be executed and delivered by the Company at
the Closing, and (iii) attaching copies of the Articles of Incorporation
and Bylaws of the Company, and certifying as to the accuracy and
completeness of such corporate documents.
(f) A Certificate of Good Standing issued by the Secretary of the
State of Arizona, dated as of a date no earlier than fifteen (15) days
prior to the Closing Date, evidencing that the Company is a corporation in
good standing under the laws of the State of Arizona.
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<PAGE>
(g) The opinion of Bonn, Luscher, Padden & Wilkins, as counsel to the
Company and the Shareholders, dated the Closing Date, in the form
satisfactory to MedCath.
(h) Estoppel certificates dated as of a date no earlier than sixty
(60) days prior to the Closing Date from each lessor stating that the
Company is in compliance with its lease agreements and that there are no
outstanding amounts owing thereunder to lessor (other than amounts owing
with respect to the then current month) and containing other terms and
conditions customary for a lessor's estoppel certificate.
(i) The Service Agreement between the Company and Pima Heart
Physicians, P.C. (the "Practice") duly executed by such parties.
4.02 Deliveries by MedCath.
At the Closing, MedCath shall deliver, or cause to be delivered, to the
Shareholders all of the following documents and instruments:
(a) Or as soon as possible thereafter, certificates evidencing the
MedCath Shares required to be issued to the Shareholders pursuant to
Section 2.02 hereof.
(b) Closing certificates executed by MedCath in the form satisfactory
to the Shareholders.
(c) A certificate executed by the Secretary of MedCath attaching a
copy of the corporate resolutions adopted by the Board of Directors of
MedCath authorizing the execution, delivery and performance of this
Agreement and consummation of the Transactions by MedCath.
(d) The opinion of Moore & Van Allen, as counsel for MedCath, dated
the Closing Date in the form satisfactory to the Shareholders.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF SHAREHOLDERS
Each Shareholder represents and warrants to MedCath as of the Closing Date
as follows, it being understood and agreed, however, that (a) each Shareholder
severally (and not jointly) makes the representations and warranties hereinafter
set forth in Sections 5.03, 5.04, 5.29 and 5.30 hereof, and (b) each
Shareholder, jointly and severally, with all other Shareholders, makes those
other representations and warranties set forth in this Article V of this
Agreement:
4
<PAGE>
5.01 Organization; Good Standing.
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of Arizona and has full power and authority
to own its properties and to carry on its business as now conducted. The Company
is not duly qualified to conduct business as a foreign corporation in any other
state.
5.02 Corporate Documents.
True and correct copies of the Company's by-laws and the Company's articles
of incorporation, all as currently in effect, have been delivered to MedCath.
Copies of the minute books and share records of the Company have been delivered
to MedCath prior to the date hereof and such copies were complete and accurately
reflect in all material respects all proceedings of the shareholders and
directors of the Company and ownership of all outstanding shares, options,
warrants and other rights to acquire shares of the Company. Except as disclosed
on Schedule 5.02, neither the Company nor any Shareholder is a party to any
shareholder agreement or voting trust which is currently or is as of the Closing
Date in effect relating to the Company and/or any equity interest therein.
5.03 Power; Authority.
(a) Each Shareholder has full power, authority and the legal capacity
to enter into this Agreement and the other agreements, documents and
instruments contemplated hereby to which such Shareholder is a party and to
consummate the transactions contemplated hereby, and this Agreement and
such other agreements, documents and instruments have been (or will be)
duly executed and delivered by such Shareholder and are (or will be) the
valid and legally binding obligations of such Shareholder enforceable in
accordance with their terms except as enforceability may be limited by
applicable bankruptcy, reorganization, moratorium or other similar laws
relating to or effecting the rights of creditors general and the
availability of equitable remedies. Neither the execution of this Agreement
or such other documents by such Shareholder nor the consummation of the
Transactions will constitute or cause a breach or violation of any
agreements, covenants, or obligations binding upon such Shareholder and
affecting the Company Shares owned by such Shareholder. No consent of any
other party is required for the Transactions and the documents executed by
such Shareholder in connection herewith to be valid and legal binding
obligations of such Shareholder.
(b) The Company has full power, authority and legal capacity to enter
into this Agreement and the other agreements, documents and instruments
contemplated hereby to which the Company is a party and to consummate the
transactions contemplated hereby. This Agreement and such other agreements,
documents and instruments have been (or will be) duly executed and
delivered by the Company and are (or will be) valid and legally binding
obligations of the Company enforceable in accordance with the their terms
except as such enforceability may be limited by applicable bankruptcy,
5
<PAGE>
reorganization, moratorium or other similar laws relating to or effecting
the rights of creditors generally and the availability of equitable
remedies.
5.04 Capitalization; Title.
(a) The Company's authorized capitalization consists of One Hundred
Thousand (100,000) common shares of which Two Thousand Six Hundred (2,600)
shares are issued and outstanding as of the Closing Date. Attached as
Schedule 5.04 hereto is a true and correct list of all Shareholders of the
Company as of the Closing Date, the residence address of such Shareholder
and the number of Company Shares held by each Shareholder.
(b) Each Shareholder of the Company is the true and lawful beneficial
and record owner of the number of Company Shares set forth opposite such
Shareholder's name on Schedule 5.04 hereto, and such shares are owned by
such Shareholder free and clear of all liens, security interests, charges,
options, agreements, and encumbrances (collectively, a "Share Lien").
(c) All of the Company Shares are validly issued, fully paid, and
nonassessable and there are, and shall be as of or on the Closing Date, no
options, calls, warrants, or any other securities, rights or common share
equivalents outstanding, which are convertible into, exercisable for or
relate to, any capital shares of the Company. The Company Shares described
on Schedule 5.04 hereto constitute all of the issued and outstanding
capital shares of the Company. All Company Shares were issued in compliance
with all applicable federal and state securities laws, rules, and
regulations.
5.05 Financial Statements.
The balance sheets of Company at February 29, 1996 and February 28, 1997
for the fiscal year to date through May 31, 1997, and the related statements of
income and cash flows for the periods then ended, are included as Schedule 5.05
(the financial statements and the related notes being herein called "Financial
Statements"). The Financial Statements and the Stub Financial Statements are
prepared on the cash basis of accounting on a consistent basis throughout the
periods involved, and on that basis, the financial statements are true, complete
and accurate in all material respects and present fairly the assets, liabilities
and financial condition of Company at the respective dates thereof and the
results of its operations for the periods then ended.
5.06 Absence of Undisclosed Liabilities.
Other than with respect to obligations to be performed after the Closing
Date which are listed on Schedule 5.06, or are otherwise specified in Section
5.09 below, and other than obligations to National Bank of Arizona with respect
to equipment acquired prior to the date hereof, the Company has no and shall not
have as of the Closing Date liabilities or obligations whether accrued,
absolute, contingent or otherwise other than up to Thirty Thousand Dollars
($30,000.00) in accounts payable due to unrelated third parties incurred in the
ordinary course of
6
<PAGE>
business, consistent with past practice, and which include no amounts for
salaries, benefits or taxes for physicians.
5.07 Absence of Certain Recent Changes.
Except as disclosed on Schedule 5.07 or reflected on the Financial
Statements or except with respect to this Agreement, Company has not, since
December 31, 1996, except in the ordinary course of business consistent with
past practice:
(a) incurred any indebtedness or other liabilities (whether accrued,
absolute, contingent or otherwise), guaranteed any indebtedness or sold any
of its assets, other than the loan from a bank in an amount to be agreed
upon by the parties but not to exceed [
] (the "Bank Loan") the proceeds of which are to be used
to pay the Compensation Amount (as defined below) prior to the date hereof
which Bank Loan shall allow for voluntary full or partial prepayments;
(b) suffered any damage, destruction or loss, to any of the tangible
Assets (as defined by Section 5.08(a), whether or not covered by insurance;
(c) increased the regular rate of compensation payable to any employee
or any physician; or increased such compensation by bonus, percentage,
compensation service award or similar arrangement theretofore in effect for
the benefit of any of its employees, and no such increase is required,
exclusive however of the payment of compensation to the Shareholders in an
amount to be agreed upon by the parties but not to exceed [
] immediately prior to the date hereof
(the "Compensation Amount");
(d) established or agreed to establish any pension, retirement or
welfare plan for the benefit of its employees not theretofore in effect;
(e) suffered any change in its financial condition, assets,
liabilities or business or suffered any other event or condition of any
character which individually or in the aggregate has or might reasonably be
expected to have a material adverse effect on its business;
(f) experienced any labor organizational efforts, strikes or formal
complaints or entered into any collective bargaining agreements with any
union;
(g) made any single capital expenditure which exceeded $5,000 or made
aggregate capital expenditures which exceeded $50,000;
(h) disposed of any of its assets having a value greater than $5,000
or written down the value of any of its assets, or revalued any of its
assets;
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
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<PAGE>
(i) paid, discharged or satisfied any claims, liabilities or
obligations other than in the ordinary course of its business (absolute,
accrued, contingent or otherwise);
(j) canceled any debts or waived any claims or rights of substantial
value other than in the ordinary course of its business;
(k) entered into, amended or terminated any contract, agreement or
license to which it is a party other than in the ordinary course of its
business;
(l) entered into a material transaction or made any change in any
method of accounting or accounting practice prior to the date hereof, other
than the change to the accrual basis method for tax and accounting
purposes;
(m) canceled, or failed to continue, insurance coverages; or
(n) agreed, whether in writing or otherwise, to take any action
described in this Section 5.07.
5.08 Title to Assets.
(a) Schedule 5.08(a) is a complete and accurate list of each of the
Company's material assets, tangible or intangible, real or personal having
an individual value greater than $1,000.00 (the "Assets").
(b) Except as disclosed in Schedule 5.08(b), Company has, or will have
on the Closing Date, good and marketable title to all of the Assets free
and clear of all liens, security interests, mortgages, claims or
encumbrances of any type or nature ("Encumbrances"). The Assets consisting
of owned personal property are subject to no Encumbrances except the
security interests of record set forth on Schedule 5.08(b), which Schedule
is a copy of UCC searches duly obtained by Company and which searches show
security interests of record relating to such Assets in every place where
such security interests are legally required to be filed and includes
copies of all such financing statements.
(c) The Assets constitute all of the non-real estate operating assets
of Company necessary or appropriate for the continued operation of the
business of the Company as it was conducted during the prior twelve (12)
month period. Immediately following the Closing Date, the Company shall
have sufficient title in and to the assets necessary or advisable to
operate and conduct the business of the Company in the same fashion as
Company was conducting such business.
5.09 Contracts and Leases.
Schedule 5.09 is a list of each contract, lease, sublease, agreement and
other instrument to which Company is a party or is bound that is for an amount
in excess of $5,000 or for a term in
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<PAGE>
excess of twelve (12) months in duration. Except as noted in such Schedule 5.09,
all such contracts, leases, subleases and agreements are in full force and
effect, there has been no threatened cancellation thereof, there are no
outstanding disputes thereunder, each is with unrelated third parties and was
entered into on an arms-length basis in the ordinary course of business and,
assuming the receipt of the appropriate consents, all will continue to be
binding in accordance with their terms after consummation of the transaction
contemplated herein; except as noted in Schedule 5.09, there are no contracts,
subleases, agreements or other instruments to which Company is a party or bound
(other than physician employment contracts and insurance policies) which could
either singularly or in the aggregate have an adverse effect on the value to
MedCath or the Company or which could inhibit or prevent Company in its ability
to transfer to or vest in MedCath good and sufficient title to the Company
Shares; and, except as disclosed on Schedule 5.09, Company is not a party to or
bound by any employment agreements or any agreements that contain any bonus,
severance or termination pay liabilities or obligations or by any agreements to
loan to or guarantee any loan to an employee. Except as set forth otherwise in
Schedule 5.09, in every instance where consent is necessary, Company shall, on
or before the Closing Date, obtain and deliver to MedCath in writing, effective
as of the Closing Date, such consents as are necessary to enable the Company to
enjoy all of the rights now enjoyed by Company under such contracts (exclusive
of contracts for the provision of medical services). Said consent shall be in a
form reasonably acceptable to MedCath and shall contain an acknowledgment by the
consenting party that Company has fully complied with and is not in default
under any provision of the particular contract or agreement.
5.10 Defaults and Consents.
Except as disclosed in Schedule 5.10, Company, to the best of its
knowledge, is not in default under, nor has any event occurred which, with
notice or the lapse of time or action by a third party, could result in a
default under any outstanding indenture, mortgage, contract, lease or agreement
to which Company is a party or by which Company may be bound or under any
provision of the Articles of Incorporation, Bylaws, or other governing documents
of Company. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement will not (a)
result in a significant liability to Company other than is contemplated by or
related to this Agreement; (b) constitute a violation of or a default under, or
a conflict with, (i) any term or provision of the Articles of Incorporation,
Bylaws, or other governing documents of Company or (ii) any order, writ,
injunction or decree of any court, governmental agency or arbitration tribunal,
or (iii) any material contract, commitment, indenture, lease, sublease or other
agreement, or (iv) any other restriction of any kind to which Company is a party
or by which Company is bound; (c) cause, or give any party grounds to cause
(with or without notice, the passage of time or both) the maturity of any
liability or obligation of Company to be accelerated, or increase any such
liability or obligation; or (d) require any consent, approval or authorization
of, or declaration, filing or registration with any governmental or regulatory
authority.
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5.11 Litigation, Etc.
Except as disclosed in Schedule 5.11, there is no litigation, arbitration,
governmental claim, investigation or proceeding pending or, to the best
knowledge of Company and the Shareholders, threatened against Company or a
Shareholder at law or in equity, before any court, arbitration tribunal or
governmental agency. No such proceeding set forth in Schedule 5.11 concerns the
ownership or other rights with respect to the Assets or the Company Shares.
Except as disclosed on Schedule 5.11, Company knows of no facts based on which
material claims may be hereafter made against it. Except as set forth on
Schedule 5.11, Company has been informed by its carriers that all claims and
litigation against Company and its employees involving allegations of medical
malpractice are fully covered by insurance, less co-payments and deductibles.
5.12 Court Orders, Decrees and Laws.
There are no outstanding or, to the best of Company knowledge, threatened
orders, writs, injunctions or decrees of any court, governmental agency or
arbitration tribunal against or affecting Company or the Assets. Company is in
compliance with all applicable federal, state and local laws, regulations and
administrative orders which are material to the operation of its business,
including, without limitation, matters relating to antitrust and
anti-competitive practices, discrimination, employment, and health and safety,
and has received no notices of alleged violations thereof except as disclosed in
Schedule 5.12 hereof. No governmental authorities are presently conducting
proceedings against Company and no such investigation or proceeding is pending
or being threatened. Company has all federal, state and local permits,
certificates, licenses, approvals and other authorizations necessary in the
conduct and operation of the Company. Schedule 5.12 contains a list of all such
governmental licenses and permits. All such licenses and permits of Company are
in full force and effect, and no violations are or have been recorded in respect
thereof for which a fine or penalty may be levied after the Closing, and no
proceeding is pending or threatened to revoke or limit any thereof. The
Shareholders shall cooperate with and assist MedCath in all respects concerning
the continued validity of all permits, licenses, consents or approvals required
by all applicable laws as a result of this transaction.
5.13 Employee Matters.
Included as Schedule 5.13 is a list of all current employees, officers and
consultants of Company and their annual compensation.
5.14 Labor Matters.
Except as disclosed in Schedule 5.14, Company has no collective bargaining
agreements with any labor union and is not currently negotiating with a labor
union. No employee of Company has ever petitioned for a representation election.
Company is in compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
and are not engaged in any unfair labor practice. There is no
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unfair labor practice complaint against Company pending before the National
Labor Relations Board or strike, dispute, slowdown or stoppage actually pending
or, to its knowledge, threatened against or affecting Company.
5.15 Insurance; Malpractice.
Schedule 5.15 is a list and brief description of all policies or binders of
fire, liability, product liability, worker's compensation, health and other
forms of insurance policies or binders currently in force insuring against risks
which will remain in full force and effect at least through the Closing Date.
Except as set forth on Schedule 5.15, (a) Company, to the best of its and the
Shareholders' knowledge, has never filed a written application for any insurance
coverage which has been denied by an insurance agency or carrier and (b) Company
has been continuously insured for professional malpractice claims for at least
the past seven (7) years. Schedule 5.15 also sets forth a list of all claims for
any loss in excess of Five Thousand Dollars ($5,000) per occurrence, filed by
Company during the three (3) year period immediately preceding the Closing Date,
including but not limit to, worker's compensation, general liability,
environmental liability and professional malpractice liability claims. Company,
to the best of its knowledge, is not in material default with respect to any
provision contained in any such policy and neither has failed to give any notice
or present any claim under any such policy in due and timely fashion.
5.16 Books of Account, Reports.
The books of account of Company accurately and fairly reflect its
transactions and the disposition of its assets consistent with the past
practices of Company. Company has filed all reports and returns required by any
law or regulation to be filed by it.
5.17 No Finders or Brokers.
Company has not engaged any finder or broker in connection with the
transactions contemplated hereunder. No commitments have been made to any
individuals for payments of stock or stock options in connection with this
Agreement except for distributions to shareholders of Company in their
capacities as shareholders.
5.18 Inventory.
All Assets consisting of inventory, to the best of Company's and the
Shareholders' knowledge, are of a quality and quantity currently usable in the
ordinary course of business. The present quantity of all current and usable
inventory is at a level consistent with the past practices of Company.
5.19 Equipment.
Except as listed on Schedule 5.19, all Assets consisting of equipment are
located at the offices of the Company and are in good condition except for
reasonable wear and tear and are
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sufficient for the purposes for which currently used. Except as listed on
Schedule 5.19, such Assets are reflected in the Financial Statements at book
value.
5.20 Employee Benefit Plans.
(a) Definition of Benefit Plans. For purposes of this Agreement, the term
"Company Benefit Plan" means any plan, program, arrangement, fund, policy,
practice, or contract to which (i) which, through which, or under which the
Company or a Company ERISA Affiliate (as hereinafter defined) provides benefits
or compensation to or on behalf of employees, former employees, or independent
contractors of the Company or a Company ERISA Affiliate (as hereinafter
defined), whether formal or informal, whether or not written, including but not
limited to the following:
(i) Arrangements - any bonus, incentive compensation, stock option,
deferred compensation, commission, severance pay, golden parachute, or
other compensation plan or rabbi trust;
(ii) ERISA Plans - any "employee benefit plan" (as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), including, but not limited to, any multiemployer plan (as
defined in Section 3(37) and Section 4001(a)(3) of ERISA), defined benefit
plan, profit sharing plan, money purchase pension plan, 401(k) plan,
savings or thrift plan, stock bonus plan, employee stock ownership plan, or
any other plan, fund, program, arrangement, or practice providing for
medical (including postretirement medical), hospitalization, accident,
sickness, disability, or life insurance benefits; and
(iii) Other Employee Fringe Benefits - any stock purchase, vacation,
scholarship, day care, prepaid legal services, dependent care, cafeteria
plan, or other fringe benefit plans, programs, arrangements, contracts, or
practices.
(b) Company ERISA Affiliate. For purposes of this Agreement, the term
"Company ERISA Affiliate" means each trade or business (whether or not
incorporated) which together with the Company is treated as a single employer
under Section 414(b), (c), (m), or (o) of the Code.
(c) Identification of Benefit Plans. Except for (i) the Company Benefit
Plans which have been terminated and with respect to which neither the Company
nor any Company ERISA Affiliate has any financial, administrative, or other
liability, obligation, or responsibility, or (ii) the Company Benefit Plans set
forth in Schedule 5.20, the Company does not maintain, nor has it at any time
established or maintained, nor has it at any time been obligated to make, or
otherwise made, contributions to or under or otherwise participated in any
Company Benefit Plan.
(d) No Certain Types of Plans. Except as described in Schedule 5.20,
neither the Company nor any Company ERISA Affiliate maintains, nor has at any
time established or maintained, nor has at any time been obligated to make, or
made, contributions to or under (i) any "multiemployer plan" (as defined in
Sections 3(37) or 4001(a)(3) of ERISA) or "multiple
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employer plan" (within the meaning of Section 4064(a) of ERISA); (ii) any
defined benefit pension plan or money purchase pension plan subject to Title IV
of ERISA; (iii) any plan which provides post-retirement medical or health
benefits with respect to employees of the Company (other than to the extent
necessary to comply with Sections 601-609 of ERISA and Section 4980B of the
Code); (iv) any organization described in Sections 501(c)(9) or 501(c)(20) of
the Code; or (v) any plan which provides retirement benefits in excess of the
limitations in Sections 401(a)(17), 401(k), 401(m), 402(g), or 415 of the Code.
There is no lien upon any property of the Company or any Company ERISA Affiliate
outstanding pursuant to Section 412(n) of the Code in favor of any Company
Benefit Plan. No assets of the Company or any Company ERISA Affiliate have been
provided as security for any Company Benefit Plan pursuant to Section 401(a)(29)
of the Code.
(e) Documentation. Each of the Company Corporations has made available to
Purchaser a true and complete copy of the following documents, if applicable,
with respect to each Company Benefit Plan identified in Schedule 5.20: (i) all
documents, including any insurance contracts and trust agreements, setting forth
the terms of the Company Benefit Plan, or if there are no such documents
evidencing the Company Benefit Plan, a full description of the Company Benefit
Plan, (ii) the ERISA summary plan description and any other summary of plan
provisions provided to participants or beneficiaries for each such Company
Benefit Plan, (iii) the annual reports (Form 5500 series) filed for the most
recent three plan years and most recent financial statements or periodic
accounting of related plan assets with respect to each Company Benefit Plan,
(iv) the most recent favorable determination letter, opinion, or ruling from the
Internal Revenue Service ("IRS") for each Company Benefit Plan, the assets of
which are held in trust, to the effect that such trust is exempt from federal
income tax, and (v) each opinion or ruling from the IRS, Department of Labor, or
the Pension Benefit Guaranty Corporation with respect to such Company Benefit
Plans.
(f) Qualified Status. Each Company Benefit Plan that is intended to be
qualified under Section 401(a) of the Code, and related trust that is intended
to be tax-exempt under Section 501(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service to the effect that such
plan is qualified under the Code and such trust is tax-exempt ("Qualified
Company Benefit Plan"). Any such determination letter remains in effect and has
not been revoked, and no amendment to such Qualified Company Benefit Plans have
been made since the effective date of such determination letter which adversely
affects the tax-qualified status of such plan and related trust. Each such
Qualified Company Benefit Plan currently complies in form with the requirements
under Section 401(a) of the Code, other than changes required by statutes,
regulations, and rulings for which amendments are not yet required. Each such
Qualified Company Benefit Plan has been administered according to its terms
(except for those terms which are inconsistent with the changes required by
statutes, regulations, and ruling for which changes are not yet required to be
made, in which case such plans have been administered in accordance with the
provisions of those statutes, regulations, and rulings) and in accordance with
the requirements of Section 401(a) of the Code.
(g) Compliance. Each Company Benefit Plan maintained by the Company or a
Company ERISA Affiliate has at all times been maintained, by its terms and in
operation, in
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accordance with all applicable laws in all material respects, including (to the
extent applicable) Code Section 4980B. Further, there has been no failure to
comply with applicable ERISA or other requirements concerning the filing of
reports, documents, and notices with the Secretary of Labor and Secretary of
Treasury or the furnishing of such documents to participants or beneficiaries
that could subject any Company Benefit Plan, Company, any Company ERISA
Affiliate to any material civil or any criminal sanction.
(h) Legal Actions. There are no actions, audits, suits, or claims known to
the Company which are pending or threatened against any Company Benefit Plan,
any fiduciary of any of Company Benefit Plans with respect to the Company
Benefit Plans, or against the assets of any of the Company Benefit Plans, except
claims for benefits made in the ordinary course of the operation of such plans.
(i) Funding. The Company and each Company ERISA Affiliate has made full and
timely payment of all amounts required to be contributed under the terms of each
Company Benefit Plan and applicable law or required to be paid as expenses under
such Company Benefit Plan, and no excise taxes are assessable as a result of any
nondeductible or other contributions made or not made to a Company Benefit Plan.
The assets of all Company Benefit Plans which are required under applicable laws
to be held in trust are in fact held in trust, and the assets of each such
Company Benefit Plan equal or exceed the liabilities of each such plan. The
liabilities of each other plan are properly and accurately reported on the
financial statements and records of the Company. The assets of each Company
Benefit Plan are reported at their fair market value on the books and records of
each plan.
(j) Liabilities. Neither the Company nor any Company ERISA Affiliate is
subject to any material liability, tax, or penalty whatsoever to any person
whomsoever as a result of the Company's or any Company ERISA Affiliate's
engaging in a prohibited transaction under ERISA or the Code, and the Company
have no knowledge of any circumstances which reasonably might result in any such
material liability, tax, or penalty as a result of a breach of fiduciary duty
under ERISA. The termination of or withdrawal from any Company Benefit Plan
maintained by the Company or a Company ERISA Affiliate which is subject to Title
IV of ERISA or any other Company Benefit Plan immediately after the Closing Date
will not subject Purchaser or any of its ERISA Affiliate to any additional
contribution requirement or to any other liability, tax, or penalty whatsoever
(excluding any liability, tax, or penalty attributable solely to the fact that
such termination or withdrawal would violate the permanency requirement of
Section 401(a) of the Code or an excise tax under Code Section 4980). Neither
the Company nor any Company ERISA Affiliate has any obligation to any retired or
former employee, or any current employee upon retirement, under any Company
Benefit Plan aside from the payment when due of any vested accrued benefits
thereunder.
(k) Amendment/New Plans. From the date of this Agreement to the Closing
Date, no amendment shall be made to any Company Benefit Plan (except as
otherwise provided in Section 7.09), no commitment shall be made to amend any
Company Benefit Plan, and no oral or written commitment shall be made to
continue any Company Benefit Plan or to adopt any new Company
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Benefit Plan for the benefit of any employees of the Company or any Company
ERISA Affiliate, absent the express written consent of Purchaser.
(l) Excess Parachute Payments. No payment required to be made to any
employee associated with the Company as a result of the transactions
contemplated hereby under any contract or otherwise will, if made, constitute an
"excess parachute payment" within the meaning of Section 280G of the Code or be
nondeductible under Section 162(m) of the Code.
(m) No Acceleration of Liability Under Benefit Plans. Neither execution nor
consummation of the transactions contemplated by this Agreement will create,
accelerate, or increase any liability, obligation, or right under any Company
Benefit Plan, other than the immediate, 100% vesting of all accrued benefits
under any Qualified Company Benefit Plan upon its termination pursuant to the
terms of Section 7.09.
5.21 Power of Attorney.
Except as provided on Schedule 5.21, Company has not given any power of
attorney, whether limited or general, to any person which is continuing in
effect past the Closing Date.
5.22 Bank Accounts; Officers.
Schedule 5.22 sets forth a list of all bank accounts and safe deposit boxes
in the name of or controlled by Company and details about the persons having
access thereto. Schedule 5.22 also contains a list of all officers of Company as
such have been designated or elected by the Board of Directors of Company.
5.23 Environmental Matters.
Company is in compliance with all federal, state and local environmental
laws, rules, regulations, standards and requirements, including, without
limitation, those respecting hazardous or biomedical materials and/or wastes.
Except as disclosed on Schedule 5.23, Company has not engaged in any storage,
holding, release, emission, discharge, generation, processing, disposition,
handling or transportation of any biomedical wastes or hazardous substances or
materials, as defined in any applicable federal or state law or regulation from,
into or on any portion of the Clinic premises.
5.24 Fraud and Abuse.
To the best of its knowledge after due inquiry, neither Company, its
officers and directors, or the Shareholders, or persons and entities providing
professional services for the Clinic, have engaged in any activities which are
prohibited under U.S.C. Sec. 1320a-7b, or the regulations promulgated thereunder
pursuant to such statutes, or related state or local statutes or regulations, or
which are prohibited by rules of professional conduct, including but not limited
to the following: (i) knowingly and willfully making or causing to be made a
false statement or representation of a material fact in any application for any
benefit or payment; (ii) knowingly and
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willfully making or causing to be made any false statement or representation of
a material fact for use in determining rights to any benefit or payment; (iii)
failure to disclose knowledge by a claimant of the occurrence of any event
affecting the initial or continued right to any benefit or payment on its own
behalf or on behalf of another, with intent to fraudulently secure such benefit
or payment; and (iv) knowingly and willful, soliciting or receiving any
remuneration (including any kickback, bribe, or rebate), directly or indirectly,
overtly or covertly, in cash or in kind or offering to pay or receive such
remuneration (a) in return for referring an individual to a person for the
furnishing or arranging for the furnishing of any item or service for which
payment may be made in whole or in part by Medicare or Medicaid, or (b) in
return for purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item for which
payment may be made in whole or in part by Medicare or Medicaid.
5.25 Receivables.
All accounts receivables on the books of the Company arose from bona fide
transactions involving the delivery of the Company's or its physicians services.
5.26 Taxes.
(a) All federal, state and local and foreign tax and information returns,
declarations, reports, estimates, information statements, and other
documentation (including any additional or supporting material) filed or
maintained, or required to be filed or maintained by the Company prior to the
Closing Date, in connection with the calculation, determination, assessment or
collection of Taxes as defined herein ("Returns") have been and will be filed by
the Company within the time and in the manner prescribed by law and such Returns
reflect, in all material respects, the income tax liability, and other tax
liability and all other information required to be reported thereon. All Returns
covering taxable periods ending prior to the Closing Date but due after the
Closing Date will be completed and submitted to MedCath at least fifteen (15)
business days prior to the due date for these filings, for its review and
satisfaction, and such Returns approved by MedCath will be subsequently filed
with the appropriate taxing authority by the due date; consistent with past
practice. The Company has provided to MedCath a list of all federal, state,
local, and foreign income tax returns filed with respect to the Company for
taxable periods ending on or after December 31, 1993.
(b) The Company, its employees, the Shareholders, its outside accountants,
and any tax advisors utilized by the Company or Shareholders will fully
cooperate with MedCath, or any of its affiliates in the complete, accurate, and
timely preparation of any additional Returns which are due after the Closing
Date and which include taxable periods through and including the Closing Date.
(c) The Company has complied (and until the Closing will comply) in all
respects with all applicable laws, rules and regulations relating to the payment
and withholding of Taxes as defined herein (including, without limitation,
withholding of Taxes pursuant to Sections 1441 or 1442 of the Code or similar
provisions under foreign laws), penalties, interest and related charges and fees
to the extent such payments are required prior to and as of the date hereof, and
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the Company does not have any deficiency with respect to any tax period or any
liability with respect to taxes, penalties or interest thereon, or related
charges and fees, whether or not assessed, which are not adequately provided for
in the tax accrual reserves in the Annual Financial Statements, except current
and deferred taxes pertaining to income earned after the date of the most recent
Annual Financial Statements.
(d) For purposes of this Agreement, "Taxes" shall mean all taxes, charges,
levies or other assessments of whatever kind or nature, including without
limitation, all net income, gross income, gross receipts, sales, use, service,
ad valorem, value added, transfer, franchise, profits, license, withholding,
payroll, employment, social security, workers' compensation, unemployment
compensation, excise, estimated, severance, stamp, occupancy or property taxes,
customs duties, fees, assessments or charges of any kind whatsoever (together
with any interest and any penalties, additions to tax or additional amounts)
imposed by any taxing authority (domestic or foreign) upon the Company.
(e) Except as set forth in Schedule 5.26 (which shall set forth the type of
return, date filed, and date of expiration of the statutes of limitations), (i)
the three (3) year statute of limitations for the assessment of federal income
tax expired for all federal income tax returns of the Company or such returns
have been examined by the Internal Revenue Service (the "Service") for all
periods through December 31, 1991; (ii) the three (3) year statute of
limitations for the assessment of state, local and foreign income taxes has
expired for all applicable Returns of the Company or such Returns have been
examined by the appropriate tax authorities for all periods through December 31,
1991; and (iii) no deficiency for any Taxes has been proposed, asserted or
assessed against the Company which has not been resolved and paid in full. Any
adjustment to Taxes made by the Service in any examination which is required to
be reported to state, local and foreign or other taxing authorities has been so
reported, and any additional Taxes due with respect thereto have been paid. No
such Taxes or Returns have been audited or, to the Shareholders' or the
Company's knowledge, are the subject of any federal, state, local or foreign
audits or other administrative proceedings or court proceedings. Except as set
forth on Schedule 5.26 hereto, neither the Company nor any subsidiary has (i)
made requests for rulings, requests for changes in accounting methods,
subpoenas, or request for information pending with respect to any taxing
authority or (ii) granted any power of attorney that is currently in force with
respect to any matter relating to Taxes. There are not in effect any waivers or
comparable consents by the Company regarding the application of statutes of
limitations or deadlines for assessments of any Taxes.
(f) No claim has ever been made to the Company by any federal, state, local
or foreign authority, at any time from January 1, 1990 until the date hereof, in
any jurisdiction where the Company does not file any Returns that it is or may
be subject to taxation by that jurisdiction.
(g) The Company has withheld and paid to the proper governmental
authorities, within the time and manner prescribed by law, all Taxes required to
have been withheld under all applicable laws and paid in connection with amounts
paid or owing to any employee, independent contractor, creditor, shareholder, or
other third party.
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(h) No Shareholder expects any authority to assess any additional Taxes
against the Company for any period for which Returns have been filed. There is
no dispute or claim concerning any Taxes of the Company claimed or raised
pending, or to the best knowledge of the Shareholders, threatened by any
federal, state, local or foreign authority prior hereto.
(i) All Tax carryovers available to the Company as of the Closing Date will
be set forth on Schedule 5.26.
(j) Except as set forth on Schedule 5.26 hereto, the Company has not taken
any action that would have the effect of deferring any liability for Taxes for
the Company from any taxable period ending on or before the Closing Date to any
taxable period ending thereafter.
5.27 Investments.
Except as identified on Schedule 5.27 (which reflects the Company's
ownership percentages), the Company has no subsidiaries and does not, directly
or indirectly, possess any interest or have an investment in any corporation,
partnership, joint venture, trust or other business or have any investment in
cash or securities or other investment assets.
5.28 Affiliated Transactions.
Schedule 5.28 sets forth a list and description of (a) all outstanding
loans in excess of One Thousand Dollars ($1,000.00) made by the Company to any
of its directors, officers, employees or shareholders or any family member of
the foregoing, (b) all outstanding loans made by the Company's directors,
officers, employees or shareholders or any family member of the foregoing, to
the Company, and (c) all other outstanding transactions out of the ordinary
course of business either between or among the Company and its directors,
officers, employees or shareholders or any family member of the foregoing.
5.29 Investment Representations and Warranties.
(a) Each Shareholder has received prior to the date hereof copies of the
following items:
(i) MedCath's 1996 Annual Report;
(ii) MedCath's 10-K report for the year ended September 30, 1996,
Proxy Statement and 10-Q for the fiscal quarter ended March 31, 1997, all
as filed with the SEC (the "Filings");
(iii) A statement by MedCath describing any material changes in
MedCath's affairs that are not disclosed in the 1996 Annual Report and the
Filings;
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(iv) Written information about any terms or arrangements of the
Transactions involving any of the Shareholders of the Company that are
materially different from those being offered to other Shareholders;
(v) Information regarding the limitations on resale of the MedCath
Shares to be issued to the Shareholders; and
(vi) Only for any of the Shareholders of the Company who are
classified as non-accredited investors in accordance with the provisions of
Rule 501(a) of Regulation D of the Securities Act of 1933, a brief written
description of any additional information MedCath has provided to any
Shareholders of the Company who are classified as accredited investors in
accordance with the provisions of such Rule 501(a).
(b) Each Shareholder has received the information designated to be received
by him, her or it which is listed above in Section 5.29(a), and in making his,
her or its decision to invest in MedCath has relied only upon such information.
(c) Each Shareholder acknowledges that all documents, records and books of
MedCath pertaining to his, her or its investment in MedCath have been made
available for inspection by him, her or it; his, her or its attorney; his, her
or its accountant and/or his, her or its representative(s), and that MedCath has
made and agreed to make such books and records available upon reasonable notice,
for inspection by the Shareholders during reasonable business hours.
(d) Each Shareholder and/or his, her or its advisor(s) have had a
reasonable opportunity to ask questions of and receive answers from MedCath, or
a person or persons acting on MedCath's behalf, concerning the terms and
conditions of the offering of the MedCath Shares, and to obtain additional
information, to the extent possessed or obtainable without unreasonable effort
or expense, necessary to verify the accuracy of the information furnished
pursuant to Section 5.29(a). All such questions have been answered to the full
satisfaction of each Shareholder. No oral representations have been made or
information furnished to any Shareholder or his, her or its advisor(s) in
connection with the offering of the MedCath Shares which were in any way
inconsistent with the information furnished pursuant to Section 5.29(a).
(e) Each Shareholder (i) has adequate means of providing for his, her or
its current needs and possible personal contingencies, (ii) has no need for
liquidity in the investment in the MedCath Shares, (iii) is able to bear the
economic risks of an investment in the MedCath Shares for an indefinite period,
(iv) at the present time, can afford a complete loss of such investment, and (v)
does not have an overall commitment to investments which are not readily
marketable that is disproportionate to such Shareholder's net worth, and such
Shareholder's investment in the MedCath Shares will not cause such overall
commitment to become excessive.
(f) The MedCath Shares are being acquired solely for each Shareholder's own
account for investment purposes only and not for
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the account of any other person and not for distribution, assignment or resale
to others and no other person has a direct or indirect beneficial interest in
such MedCath Shares.
(g) Each Shareholder is sophisticated and well informed both with respect
to the terms and conditions of the proposed investment in MedCath and with
respect to his, her or its knowledge of finance, securities and investments
generally. Each Shareholder has knowledge of the type of business proposed to be
engaged in by MedCath which has allowed such Shareholder to make an informed
decision regarding a proposed investment in MedCath. Each Shareholder has also
engaged in other investments in a manner which allows such Shareholder to
understand the nature of his, her or its proposed investment in MedCath.
5.30 Tax and Securities Advice, Etc.
No Shareholder has relied upon MedCath or any employee, agent, officer or
director of MedCath or any affiliate of MedCath for advice as to the tax
treatment or securities law consequences of the Transactions or the taxes that
may be owing or tax obligations that may be incurred by Shareholders as a result
of the Transactions. Each Shareholder has obtained its own independent,
financial and legal advice with regard to all aspects of this Agreement and the
Transactions including, but not limited to, tax and securities matters. Except
for those representations made by MedCath in Article VI hereof with respect to
the MedCath Shares, MedCath, any affiliate of MedCath, or any employee, agent,
officer or director of MedCath or any affiliate of MedCath have not made, and
will not make, any representation or warranty in this Agreement or otherwise
with respect to the federal, foreign, state, local or other tax or securities
law consequences to any Shareholder of the Company or the Company as a result of
the Transactions.
5.31 Disclosure.
No representation or warranty by the Shareholders set forth in this Article
V or in any of the agreements comprising the Exhibits hereto contains or will
contain any untrue statement of a material fact, or omits or will omit to state
a material fact necessary to make the statements contained in this Article V or
in any such Exhibit not materially misleading.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MEDCATH
MedCath represents and warrants to the Shareholders as of the Closing Date
as follows:
6.01 Organization; Good Standing.
MedCath is a corporation duly organized, validly existing and in good
standing under the laws of the State of North Carolina. MedCath has full power
and authority to own its properties and carry on its business as now conducted
and MedCath is in good standing and duly qualified to conduct business as a
foreign corporation in each jurisdiction in which the character of the business
conducted by it or the location of the properties owned by it makes such
qualification
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necessary and in which the failure to be so qualified, individually or in the
aggregate, could reasonably be expected to (a) have a material adverse effect on
MedCath's consolidated financial condition, results of operation, assets,
liabilities, or net worth, or (b) require the payment by MedCath of a material
amount of additional taxes or associated penalties.
6.02 Power; Authority.
MedCath possesses full power, authority, and legal right to enter into and
to perform under this Agreement and the other documents contemplated hereby to
which MedCath is a party and to consummate the Transactions, and this Agreement
and such other agreements, documents and instruments have been (or will be) duly
executed and delivered by MedCath and are (or will be) the valid and legally
binding obligations of MedCath enforceable in accordance with their terms except
as enforceability may be limited by applicable bankruptcy, reorganization,
moratorium or other similar laws relating to or effecting the rights of
creditors generally and the availability of equitable remedies. Neither the
execution of this Agreement or such other documents by MedCath nor the
consummation of the Transactions will constitute or cause a breach or violation
of any agreements, covenants, or obligations binding upon MedCath. No consent of
any other party which has not been obtained is required for the Transactions and
the documents executed by MedCath in connection herewith to be valid and legal
binding obligations of MedCath.
6.03 Conflicting Agreements.
The execution and delivery of this Agreement by MedCath, the consummation
of the Transactions, and the performance by MedCath of its obligations hereunder
will not be in conflict with, or result in, or constitute a breach or default of
the terms, conditions or provisions of MedCath's articles of incorporation or
by-laws or any instrument, agreement, mortgage, judgment, order, award, decree
or other restriction to which MedCath is a party or by which MedCath is bound,
or any regulatory provision affecting MedCath, subject to obtaining those
consents and/or approvals referred to in Section 9.01 hereof. MedCath has, on
the date hereof, full power and authority to enter into this Agreement and to do
and perform all other acts and things required to be done by it under this
Agreement.
6.04 MedCath Shares.
The MedCath Shares for which the Company Shares shall be exchanged, shall
be duly authorized by all necessary corporate action of MedCath, validly issued,
fully paid and nonassessable, free and clear of all liens, encumbrances and
other claims by third parties.
6.05 Investment Intent.
MedCath is acquiring the Company Shares to be transferred to it under this
Agreement for investment only and not with a view to the sale or distribution
thereof, and MedCath has no commitment or present intention to liquidate the
Company or to sell or otherwise dispose of the Company Shares.
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6.06 Litigation.
There are no claims, demands, suits, proceedings or litigation of any kind
pending or, to the knowledge of MedCath, threatened toward MedCath, and there
are no unreleased or unsatisfied judgments, decrees or orders of any court or
governmental authority, which involve or affect the ability of MedCath to enter
into this Agreement or the value of the MedCath Shares other than as disclosed
in the Securities Filings or the 1996 Annual Report.
6.07 Disclosure.
No representation or warranty by MedCath set forth in this Article VI or in
any of the Agreements comprising the Exhibits hereto contain or will contain any
untrue statement of a material fact, or omits or will omit to state a material
fact necessary to make the statements contained in this Article VI or in any
such Exhibit not materially misleading.
6.08 Legal Compliance.
To the best of MedCath's knowledge, MedCath is, and at Closing will be, in
compliance with all laws, statutes, regulations, rules and other requirements of
any governmental authority applicable to it for which noncompliance could have a
material adverse affect on MedCath or its business. MedCath has, and shall have
on the date of Closing, all licenses, permits, certificates and certifications
required to be held by MedCath as of such date by any and all local and state
governments and governmental departments having jurisdiction over the business
of MedCath the failure of which to hold would have a material adverse effect on
MedCath. There is presently no proceeding pending or, to the best of MedCath's
knowledge, threatened with respect to the revocation or limitation of any of its
material licenses.
6.09 Registration Rights.
The Shareholders shall have certain rights to require MedCath to register
with the Securities and Exchange Commission (the "SEC") their MedCath's Shares
in accordance with the terms and conditions of this Section 6.09. Within sixty
(60) days from the date hereof, MedCath and the Shareholders shall enter into a
registration rights agreement which shall contain the following terms and
conditions:
(a) On one (1) occasion during the period commencing six (6) months
after the Closing Date, the Shareholders may require MedCath to register up
to twenty-five percent (25%) of their MedCath Shares, provided, however, in
the event MedCath's Board of Directors reasonably determines that, due to
pending circumstances, it would be potentially materially adverse to
MedCath to register such shares at such time, such registration may be
delayed only until such circumstances are no longer pending or for one
hundred twenty (120) days, whichever is earlier, provided that in all
events the rights of the Shareholders to require the registration of their
MedCath Shares hereunder shall be extended until at least thirty (30) days
after the Shareholders receive notice from the
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MedCath that their shares may now be registered. Such registration
statement shall remain effective for at least thirty (30) days;
(b) All legal, accounting, printing, registration and such other fees
incurred in connection with and directly attributable to such registration
of the MedCath Shares shall be paid equally by the Shareholders and by
MedCath;
(c) The execution of an underwriting agreement, if any, entered into
in connection with such registration shall be subject to terms acceptable
to MedCath, and all underwriting commissions and discounts, if any, shall
be paid by the Shareholders with respect to their MedCath Shares;
(d) The registration rights agreement to be entered into between
MedCath and the Shareholders shall contain such other terms and conditions
as are reasonable and customary for such agreements;
(e) The election to exercise the rights of the Shareholders under this
Section 6.10 and the registration rights agreement shall be made only upon
the affirmative vote of Shareholders holding at least sixty-six (66%) of
the MedCath Shares. Upon such decision, all Shareholders shall have the
option to include or exclude, pro rata, their MedCath Shares in such
registrations in accordance with the terms of this Section 6.10;
(f) Notwithstanding anything in this Section 6.09 to the contrary, in
no event shall MedCath have any obligation to register, the MedCath Shares
of the Shareholders once their MedCath Shares become freely tradeable under
Rule 144 of the Securities Act of 1933, as amended or if MedCath is
acquired by or merged into any other party as long as the Shareholders have
all of the rights and benefits of such transaction as are provided to the
other shareholders of MedCath.
ARTICLE VII
COVENANTS OF THE COMPANY AND THE SHAREHOLDERS
From the date hereof until the Closing (the "Executory Period") (except
that these covenants shall survive and continue after the expiration of the
Executory Period), the Company and the Shareholders, jointly and severally,
agree as follows:
7.01 Conduct of Business.
Except as required by this Agreement or for the performance of their
obligations in this Agreement, the Shareholders shall cause the Company and the
Practice to, (a) carry on its business in the usual and ordinary course, (b) use
reasonable efforts to preserve its business organization intact and conserve the
good will and relationships of its customers, and others having business
relations with it, (c) conduct its business in a manner which will cause the
representations and warranties contained in Article V to be true and correct on
the Closing Date in each case, as if made on and as of such date, (d) not enter
into any agreement which would be
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material to the Company or the Practice including without limitation any
agreement calling for an expenditure of more than $5000 (a "Material Contract")
without MedCath's consent, (e) not waive any right or benefit, (f) other than
the Bank Loan, not incur any liability or obligation outside the ordinary course
of business or which involves the receipt or expenditure of more than $5,000
without MedCath's consent, and (g) maintain the employment of each of its
physicians.
7.02 No Dividends on Shares; No Share Transfers.
Except as otherwise set forth on Schedule 7.02, the Shareholders shall
cause the Company not to, declare, set aside, or pay any dividend or other
distribution of any nature on or in respect of any of the capital shares of the
Company, and the Company shall not, and the Shareholders shall cause the Company
not to, declare, set aside, or pay any dividend or other distribution of any
nature on or in respect of any of the capital shares of the Company, and the
Company shall not, and the Shareholders shall cause the Company not to, directly
or indirectly issue, redeem, retire, purchase or otherwise acquire any of its
capital shares, or agree to do any of the foregoing or grant any rights which
could result in any of the foregoing. Except as specified by this Agreement, no
Shareholder shall sell, assign, or transfer, or agree to or allow to be created
any rights or obligations for the sale, assignment or transfer of, any of the
Company Shares of such Shareholder, or any rights or interests therein. Each
Shareholder whose Company Shares are held in the name of a nominee, as indicated
on Schedule 5.04 hereto, shall cause such nominee not to sell, assign or
transfer, or agree to or allow to be created any rights or obligations for the
sale, assignment or transfer of, any of such Company Shares except as specified
by this Agreement.
7.03 Governmental Filings.
The Company shall, and the Shareholders shall and shall cause the Company
to, take all steps reasonably necessary in connection with, and diligently
pursue any filings or submissions determined by counsel to MedCath to be
appropriate or required to be made by or for the Shareholders or the Company in
order for the Transactions to be consummated.
7.04 Assistance.
The Company shall, and the Shareholders shall and shall cause the Company
to, provide, at the cost and expense of the Company, such reasonable assistance
and cooperation as may be necessary in connection with the filings of MedCath
pursuant to Section 9.01 hereof.
7.05 Access.
The Company shall, and the Shareholders shall and shall cause the Company
to, give to MedCath and its authorized agents and representatives (including,
but not limited to, accountants, lawyers, environmental consultants, lenders and
appraisers) full and complete access to the properties, premises, assets,
employees, representatives, advisors and agents of the Company and any and all
of the Company's books, records and documents except patient medical records.
The Company shall, and the Shareholders shall cause the Company to, furnish
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to MedCath such information and copies of such documents and records as MedCath
shall reasonably request in connection with its examination under and pursuant
to this Section 7.05.
7.06 Material Contracts.
The Company shall not, and the Shareholders shall cause the Company not to,
amend, terminate or give any notice with respect to amending, termination or
non-renewal of any Material Contract without the prior written consent of
MedCath. The Company shall not, and the Shareholders shall cause the Company not
to, enter into or renew the term of any agreement which constitutes or would
constitute a Material Contract, without the prior written consent of MedCath.
7.07 Intentionally Omitted.
7.08 Confidentiality.
In connection with its examination of MedCath, the Company, the
Shareholders and their agents and representatives have obtained and been
furnished and may hereafter obtain and be furnished documents and information
concerning or relating to MedCath and affiliates of MedCath. The Company, the
Shareholders and their agents and representatives shall hold in confidence and
not use, except in connection with or as otherwise provided in this Agreement
and the Transactions, all such documents, materials and information and, if the
Transactions shall not be consummated for any reason or no reason, such
confidence shall be maintained, and such documents, materials and information
shall not be used by the Company, the Shareholders or their agents or
representatives.
7.09 Benefit Plans.
On or before the Closing Date, Shareholders shall cause the Company to take
all action necessary or otherwise appropriate to transfer the sponsorship of
each Qualified Company Benefit Plan to Pima Heart Physicians, P.C., effective as
of the Closing Date, including, but not limited to (i) the timely adoption of
valid resolutions of Company's board of directors effectuating the change in
sponsorship and assumption of responsibility under ERISA with respect to such
plans; (ii) the timely adoption of valid resolutions by Pima Heart Physicians,
P.C. adopting such plans and to accept the transfer of sponsorship and
assumption of responsibility under ERISA with respect to such plans; and (iii)
taking all other actions necessary to effectuate the change in sponsorship of
such plans. Except as described in the preceding sentences, prior to the
Closing, Company shall not adopt or become obligated under any new Company
Benefit Plan and shall not materially change the terms of any existing Company
Benefit Plan without the express written consent of Purchaser.
7.10 Tax Matters.
The Company shall close its books for tax purposes as of the Closing Date.
The Shareholders shall, at their expense, cause, the Company to file all tax
returns for such period
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after having converted to accrual basis accounting for accounting and tax
purposes (which returns shall be submitted to MedCath for its reasonable
approval thirty (30) days prior to filing) and the Shareholders shall be solely
liable for Taxes of the Shareholders and/or the Company for the period through
the Closing Date and arising from the Closing of the Transactions (such returns
shall reflect its conversion to accrual basis accounting). However,
notwithstanding anything to the contrary in this Agreement, the Shareholders
shall not be liable for taxes due and payable for periods commencing after the
Closing Date arising from the conversion from cash to accrual basis accounting.
The Company shall comply with the provisions of Section 5.26 regarding the
preparation and submission of Tax Returns.
7.11 Tax Indemnification.
The Shareholders shall indemnify and hold harmless MedCath in connection
with any Taxes which are ultimately due and payable by MedCath or the Company as
a result of any act or inaction by the Company, whether prior to the Closing or
as a result of or in connection with the Closing of the transaction described
herein to the extent it relates to the period through and including the Closing,
or as a result of any act or omission by a Shareholder at any time to the extent
it relates to the period through and including the Closing and in all cases, for
Taxes not yet due and payable. Such indemnification shall include, but not be
limited to, the cost of any reasonable professional fees which are incurred by
MedCath in connection with the contesting in good faith of any such Taxes. For
purposes of this tax indemnification, Taxes shall have the same meaning as set
forth in Section 5.26(d) herein. MedCath shall indemnify and hold harmless the
Shareholders in connection with any Taxes which are due and payable by the
Shareholders as a result of any act or inaction by MedCath whether subsequent to
the Closing or as a result of or in connection with the Closing of the
transaction described herein to the extent it relates to the period of time
after the Closing. Such indemnification shall include, but not be limited to,
the cost of any reasonable professional fees which are incurred by the
Shareholders in connection with the contesting of any such Taxes. As long as the
Shareholders acknowledge in writing their indemnification obligation hereunder,
they may assume the response to and settlement of any claims for additional
Taxes for which they are liable hereunder.
ARTICLE VIII
SHAREHOLDERS' CONDITIONS PRECEDENT
All of the following shall be conditions precedent to Shareholders'
obligations to close the Transactions:
8.01 MedCath's Representations, Warranties and Covenants.
The representations and warranties made by MedCath herein shall be accurate
and correct on and as of the date of Closing as if made on and as of that date
and MedCath shall have performed and complied, in all material respects, with
all of the terms, provisions and conditions of this Agreement to be performed
and complied with by MedCath at or before the Closing.
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8.02 No Actions.
There shall not be, on the date of Closing, any action or proceeding,
judicial or administrative, federal, state or local, pending or threatened
against MedCath, any Shareholder or the Company which, if adversely determined,
would materially impair the ability of any such party to carry out its
obligations under this Agreement or in connection with the Transactions or which
relates to the Transactions and, if successful, would expose such party to a
material amount of damages.
8.03 Consents and Approvals.
All filings and submissions under Section 7.03 hereof shall have been made
and the approval or consent of the regulatory authorities with respect to the
filings described in Section 7.03 hereof shall have been obtained, and evidence
thereof shall have been provided to the Shareholders.
8.04 Inquiries; Investigations.
The Shareholders shall have the right, in addition to any other right or
election provided for herein, at any time after the date hereof, to terminate
this Agreement and all obligations hereunder in the event any inquiry,
investigation, suit or proceeding challenging the Transactions is threatened or
commenced prior to the date of Closing by any governmental agency.
8.05 Deliveries.
MedCath shall have made all of the deliveries required to be made by
MedCath, or for which MedCath has responsibility, under Article IV hereof.
ARTICLE IX
COVENANTS OF MEDCATH
During the Executory Period (except for the covenant set forth in Section
9.03 hereof, which shall relate to the period after the Closing as therein
provided), MedCath covenants and agrees as follows:
9.01 Governmental Filings.
MedCath shall take all steps reasonably necessary in connection with, and
shall diligently pursue, any filings or submissions required by MedCath for the
Transactions under (a) Federal and applicable state securities laws in order to
obtain exemption for the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended, and similar state laws, and (b) such
other filings and submissions that MedCath's counsel deems necessary or prudent
in connection with this Agreement or the consummation of the Transactions.
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9.02 Assistance.
MedCath covenants and agrees to provide such reasonable assistance and
cooperation as may be necessary in connection with the filings of the
Shareholders and/or the Company pursuant to Section 7.03 hereof.
9.03 Confidentiality.
In connection with its examination of the Company, MedCath and its agents
and representatives have obtained and been furnished and may hereafter obtain
and be furnished documents and information concerning or relating to the Company
or the Company's business. MedCath and its agents and representatives shall hold
in confidence and not use, except in connection with or as otherwise provided in
this Agreement and the Transactions, all such documents, materials and
information and, if the Transactions shall not be consummated for any reason or
no reason, such confidence shall be maintained, and such documents, materials
and information shall not be used by MedCath, its agents or representatives.
ARTICLE X
MEDCATH'S CONDITIONS PRECEDENT
All of the following shall be conditions precedent to MedCath's obligations
to close the Transactions:
10.01 Shareholders' Representations, Warranties and Covenants.
The representations and warranties made by the Shareholders herein shall be
accurate and correct on and as of the date of Closing as if made on and as of
that date, and the Shareholders and the Company shall have performed and
complied, in all material respects, with all the terms, provisions and
conditions of this Agreement to be performed and complied with by the
Shareholders or the Company at or before the Closing.
10.02 No Actions.
There shall not be, on the date of Closing, any action or proceeding,
judicial or administrative, federal, state or local, pending or threatened
against MedCath, any Shareholder, or the Company which, if adversely determined,
would materially impair the ability of any such party to carry out such party's
obligations under this Agreement or in connection with the Transactions or which
relates to the Transactions and, if successful, would expose such party to a
material amount of damages.
10.03 Consents and Approvals.
All filings and submissions under Section 9.01 hereof shall have been made
and the approval or consent of the regulatory authorities with respect to the
filings described in Sections
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7.03 and 9.01 hereof shall have been obtained or the relevant waiting periods
with respect to such filings shall have expired, and evidence thereof shall have
been provided to MedCath.
10.04 Inquiries; Investigations.
MedCath shall have the right, in addition to any other right or election
provided for in this Agreement, at any time after the date hereof, to terminate
this Agreement and all obligations hereunder in the event any inquiry,
investigation, suit or proceeding challenging the Transactions is threatened or
commenced prior to the date of the Closing by any governmental agency.
10.05 Material Adverse Change.
Since December 31, 1996, there shall not have been any material adverse
change to the Company or the Practice, including without limitation in the
financial condition, operations, assets, liabilities or net worth of the Company
or the Practice, exclusive of changes which affect medical practices generally
and exclusive of the loss of business or revenue which has occurred not as a
result of any intentional act or omission (other than entering into this
Agreement or any other agreements related to the same transactions between the
parties) on the part of the Company, the Practice or the Shareholders.
10.06 Intentionally Omitted.
10.07 Percentages of Shareholders Signing Agreement.
Shareholders owning one hundred percent (100%) of the Company Shares shall
have executed this Agreement (on their own behalf and not through an agent) and
shall have delivered this Agreement to MedCath.
10.08 Deliveries.
The Shareholders and the Company shall have made or cause to have been made
all of the deliveries required to be made by the Shareholders of the Company, or
for which the Shareholders or the Company have responsibility, under Article IV
hereof.
10.09 Bank Accounts.
The Company shall have taken such action or may be required by MedCath to
cause the bank accounts, safe deposit boxes and relationships identified on
Schedule 5.22 to be modified so that the persons with signatory or other power
with respect to such items and matters are changed in accordance with MedCath's
written instructions.
10.10 Change in Accounting.
Prior to the Closing, the Shareholders shall have caused the Company to
convert to the accrual basis method of accounting for tax and accounting
purposes.
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10.11 Bank Loan.
Prior to the Closing, the Shareholders shall have caused the Company to
incur the Bank Loan.
ARTICLE XI
TERMINATION
11.01 Methods of Termination.
This Agreement may be terminated and the Transactions herein contemplated
may be abandoned at any time prior to Closing:
(a) by mutual consent of MedCath and Shareholders;
(b) by MedCath if all of the conditions specified in Article X hereof
have not been satisfied on or before the Closing Date;
(c) by the Shareholders if all of the conditions specified in Article
VIII hereof have not been satisfied on or before the Closing Date;
(d) by MedCath if the Shareholders or any Shareholder are in default
in any material respect under this Agreement and such default is not cured
within five (5) days after written notice thereby by MedCath to the
Shareholders; or
(e) by the Shareholders if MedCath is in default in any material
respect under this Agreement and such default is not cured within five (5)
days after written notice thereof by the Shareholders to MedCath.
MedCath may exercise its right to terminate this Agreement by giving
written notice thereof to the Shareholders. The Shareholders may exercise its
right to terminate this Agreement by giving written notice thereof to MedCath.
11.02 Effect of Termination.
If this Agreement is terminated pursuant to Section 11.01 hereof, this
Agreement shall forthwith become void (other than Sections 7.08 and 9.03, which
shall remain in full force and effect), and there shall be no further liability
on the part of any party who is not in violation or breach of their covenant,
representation or warranty hereunder (except for any liability of MedCath or the
Shareholders under Sections 7.08 and 9.03). The nonbreaching party shall have
all rights and remedies available to it at law or equity arising from any breach
or violation of any covenant, representation or warranty hereunder by any other
party hereto including without limitation those arising from the failure to
close the Transaction by the Closing Date.
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ARTICLE XII
SURVIVAL; INDEMNIFICATION
12.01 Survival.
(a) Representations and Warranties. The representations and warranties and
the covenants (including, without limitation, Sections 7.11, 13.01 and 13.06
thereof) of the Shareholders (or any Shareholder), the Company and MedCath
contained in this Agreement or in any Schedule or Exhibit hereto shall survive
the Closing.
(b) Indemnity Claim. Notwithstanding the foregoing, any claim arising out
of any representation, warranty, covenant or right to indemnification that would
otherwise terminate in accordance with Section 12.02 or 12.03 will continue to
survive, if an Indemnity Notice (as hereinafter defined) based in whole or in
part thereon shall have been timely given under this Article XII on or prior to
such termination date, until such claim for indemnification has been satisfied
or otherwise finally resolved.
12.02 Indemnification by Shareholders.
Subject to the terms, conditions and limitations of this Article XII the
Shareholders shall jointly and severally (except for violations of Sections
5.03, 5.04, 5.29 or 5.30 for which a Shareholder's liability shall be several
and not joint) indemnify, defend and hold harmless MedCath from, against and
with respect to any and all Losses suffered or incurred by MedCath after
Closing, arising out of or in any manner incident, relating or attributable to
(i) any inaccuracy, falsity or incorrectness in any representation or warranty
of the Shareholders or any Shareholder contained in this Agreement or in any
Schedule or Exhibit hereto, (ii) any breach by the Shareholders, any Shareholder
or the Company of, or the failure of the Shareholders, any Shareholder or the
Company to perform, any covenant or agreement of the Shareholders or any
Shareholder or the Company contained in this Agreement or in any Schedule or
Exhibit hereto (including, without limitation, Sections 7.11, 13.01 and 13.06
hereof), (iii) any Loss arising out of any violation of any law, rule or
regulation by any Shareholder or the Company prior to the Closing Date other
than as set forth in (vi) below, (iv) any Loss arising out of the performance or
delivery of any medical services or patient care arising out or related to
events or circumstances which first occurred or arose prior to the Closing Date,
(v) any Loss, howsoever arising, relating to or arising out of any cause of
action, claim or proceeding of or by any former shareholder of the Company or
(vi) any Loss arising out of any failure to comply with Medicare or Medicaid
laws, rules or regulations during the period prior to the Closing Date. Any
Losses suffered or incurred by the Company or its successor shall, for purposes
of this Article 12.02, be deemed to be suffered or incurred by MedCath on a
dollar for dollar basis.
Notwithstanding anything herein to the contrary, MedCath's rights to make
indemnity claims under this Article 12.02 shall terminate unless an Indemnity
Notice shall have been given with two (2) years after the Closing Date except
that its rights to make indemnity claims with respect to claims arising based
upon representations, warranties or covenants made in Sections
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5.04, 5.21, 5.27, 7.10 or 7.11 hereof or claims arising under subsections (iv),
(v) or (vi) above shall survive until the expiration of any applicable statute
of limitations.
12.03 Indemnification by MedCath.
Subject to the terms, conditions and limitations of this Article XII,
MedCath shall indemnify, defend and hold harmless the Shareholders from, against
and with respect to any and all Losses suffered or incurred by the Shareholders
or any of them after Closing, arising out of or in any manner incident, relating
or attributable to (a) any inaccuracy, falsity or incorrectness in any
representation or warranty of MedCath contained in this Agreement, in any
Schedule or Exhibit hereto the 1996 Annual Report or the Filings or (b) any
breach by MedCath of, or the failure of MedCath to perform, any covenant or
agreement of MedCath contained in this Agreement or in any Schedule or Exhibit
hereto (including, but not limited to Section 13.01). The Shareholders' rights
to make indemnity claims under this Article XII shall terminate unless an
Indemnity Notice shall have been given two (2) years from the Closing Date.
12.04 [INTENTIONALLY LEFT BLANK]
12.05 Method of Asserting Claims.
(a) Other than with respect to claims arising under Section 12.02(b), all
claims for indemnification by any Indemnified Party under this Article XII shall
be asserted and resolved as provided in this Section 12.05 and in Section 12.06.
In the event any Indemnified Party shall have a claim for indemnification under
Section 12.02 or 12.03 hereof against any Indemnifying Party, the Indemnified
Party shall deliver an Indemnity Notice to the Indemnifying Party within a
period of forty-five (45) days following the date on which the Indemnified Party
becomes aware of such claim. The failure by any Indemnified Party to give such
Indemnity Notice (provided such notice is given within one (1) year of the date
hereof) shall not impair such party's rights hereunder, except to the extent
that the Indemnifying Party demonstrates that it has been irreparably prejudiced
thereby. If the Indemnifying Party notifies the Indemnified Party that it does
not dispute the claim described in such Indemnity Notice, or fails to notify the
Indemnified Party within the Dispute Period whether the Indemnifying Party
disputes the claim described in such Indemnity Notice, the Losses in the amount
specified in the Indemnity Notice will be conclusively deemed a liability of the
Indemnifying Party under Section 12.02 or 12.03, hereof, as the case may be, and
the Indemnifying Party shall immediately pay the amount of such Losses to the
Indemnified Party on demand, subject to the provisions of Section 12.06 hereof.
If the Indemnifying Party notifies the Indemnified Party within the Dispute
Period that it disputes the claim described in the Indemnity Notice, the
Indemnifying Party and the Indemnified Party will proceed in good faith to
negotiate a resolution of such dispute, and, if not resolved through
negotiations within the Resolution Period, such dispute shall be resolved by any
lawful manner.
(b) If any written claim is made by a third party, or if any suit or
proceeding (including, but not limited to, an arbitration or an audit by any
taxing
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authority) is instituted, in each case against Indemnified Party which, if
prosecuted successfully, would, in the judgment of Indemnified Party, be a
matter for which Indemnified Party is entitled to indemnification under this
Agreement (a "Third Party Claim"), the obligations and liabilities of the
parties hereunder with respect to such Third Party Claim shall be subject to the
following terms and conditions:
(i) Indemnified Party shall give Indemnifying Party an Indemnity
Notice of any such Third Party Claim within twenty (20) days after receipt
by Indemnified Party of written notice thereof, provided, however, that the
failure of Indemnified Party to furnish written notice to Indemnifying
Party of a Third Party Claim shall not release Indemnifying Party from
Indemnifying Party's obligations under this Article XII, except to the
extent Indemnifying Party is actually prejudiced by such failure.
Indemnifying Party may undertake the defense of such Third Party Claim at
its expense by representatives of its own choosing; provided that (A) the
Indemnifying Party shall obtain the prior approval by the Indemnified Party
of such counsel, which approval shall not be unreasonably withheld, (B) the
Third Party Claim does not involve a claim for specific performance, or
injunctive or other equitable relief (such claims being dealt with under
subsection (a) above) and (C) nothing herein shall prejudice the right of
the Indemnified Party to participate in such defense at its own expense
through counsel of its choosing. The assumption of the defense of any Third
Party Claim by Indemnifying Party shall constitute the agreement of
Indemnifying Party to assume, without condition or reservation, full
responsibility for such Third Party Claim. Thereafter, Indemnifying Party
shall pay as and when due all costs and expenses related to the defense of
such Third Party Claim and shall pay and satisfy in full the Final Amount
of any and all Losses arising therefrom or related thereto.
(ii) If Indemnifying Party does not so undertake the defense of such
Third Party Claim within fifteen (15) days after written notice of such
claim has been given to Indemnifying Party by Indemnified Party,
Indemnified Party shall have the right to undertake the defense, compromise
and settlement of such Third Party Claim with counsel of its own choosing.
Under such circumstances, Indemnified Party shall, promptly upon its
assumption of the defense of such Third Party Claim, give an Indemnity
Notice which shall thereafter be deemed to be an Indemnity Notice that is
not with respect to a Third Party Claim subject to the procedures set forth
in this Section 12.05(b).
(iii) The Indemnified Party and Indemnifying Party shall cooperate
with each other in all reasonable respects in connection with the defense
of any Third Party Claim, including, but not limited to, making available
records relating to such claim and furnishing employees of Indemnified
Party or Indemnifying Party as may be reasonably necessary for the
preparation of the defense of any such Third Party Claim or for testimony
as witnesses in any proceeding relating to such claim. All costs and
expenses incurred by
33
<PAGE>
Indemnifying Party or Indemnified Party in connection with the foregoing
shall be the responsibility of the party requesting such cooperation.
(iv) The Indemnified Party shall have the right to participate fully
in all proceedings, including settlement discussions, shall be provided
copies of notices, orders and all other papers, and shall be given prior
notice by the Indemnifying Party of any meetings, hearings and other
discussions in any such suit or proceeding. The Indemnifying Party shall
consult with the Indemnified Party and keep the Indemnified Party fully
advised of the progress of any such suit or proceeding, and shall make no
admissions or otherwise act in a manner which might be prejudicial to the
Indemnified Party's rights in connection with any such suit or proceeding.
(v) The Indemnifying Party agrees that any controversy between it and
the Indemnified Party concerning its obligations under this indemnity may
be litigated in the same forum and concurrently with any lawsuit against
the Indemnified Party to which such controversy may relate, and the
Indemnified Party agrees to voluntarily appear in such forum and submit to
the jurisdiction thereof.
(vi) Unless Indemnifying Party has failed or refused to undertake the
defense of such third party claim, no settlement by Indemnified Party of a
Third Party Claim shall be made without the prior written consent of
Indemnifying Party, which consent shall not be unreasonably withheld or
delayed. If Indemnifying Party has assumed the defense of a Third Party
Claim as contemplated by this Section 12.05(b), no settlement of such Third
Party Claim may be made by Indemnifying Party without the prior written
consent of Indemnified Party, which consent shall not be unreasonably
withheld or delayed.
12.06 Special Recovery Provisions.
(a) Several Representations. Subject to subsection (c) below, in the case
of any claim for indemnification by MedCath based upon any representation made
on a several basis only, the individual Shareholder breaching such
representation or covenant shall pay to MedCath the Final Amount with respect to
such claim and the remaining Shareholders shall have no obligations with respect
to such claim.
(b) Joint and Several Representations. Subject to subsection (c) below, in
the case of any claim for indemnity made by MedCath based upon any
representation or breach of covenant made on a joint and several basis, the
Shareholders shall, jointly and severally, pay to MedCath, the Final Amount with
respect to such claim.
(c) General Limitations on Recovery from Shareholders. Except with respect
to breaches of the representation and warranty in Section 5.26 and/or the
covenant set forth in Section 7.07 (with respect to which the liability of the
Shareholder breaching
34
<PAGE>
such representation, warrant or covenant is unlimited), MedCath agrees that the
maximum aggregate Final Amount of Losses which each Shareholder shall be liable
for and pay to MedCath pursuant to this Article XII, whether such liability is
several or joint and several, shall be an amount equal to the aggregate value of
the MedCath Shares received or which may be received by such Shareholder as a
result of the Transactions, valued under Section 2.01 as of the Closing Date.
(d) Limitation on Recovery from MedCath. The Shareholders agree that the
maximum aggregate Final Amount of Losses which MedCath shall be liable for and
pay to the Shareholders pursuant to this Article XII shall be an amount equal to
the aggregate value of the MedCath Shares delivered or which may be delivered to
the Shareholders as a result of the Transactions, valued under Section 2.01 as
of the Closing Date.
(e) Set-Off. MedCath shall be entitled to offset, in accordance with the
terms of the Service Agreement, the amount of any Losses to which it is entitled
hereunder against any amounts owed to or held for the Shareholders by MedCath or
its Affiliates under the Service Agreement.
(f) Notwithstanding anything in this Agreement to the contrary, in no event
shall either party hereto have any liability to the other under this Article XII
for any failure of this transaction to qualify as a tax-free transaction or
reorganization under the Code.
12.07 Definitions.
For purposes of this Article XII the following terms shall have the
following meanings:
(a) "Dispute Period" means the period ending thirty (30) days following
receipt by an Indemnifying Party of an Indemnity Notice.
(b) "Final Amount" means the amount of any Losses or Loss determined in
accordance with this Article XII.
(c) "Indemnified Party" means any Person claiming indemnification under any
provision of Article XII.
(d) "Indemnifying Party" means any Person against whom a claim for
indemnification is being asserted under any provision of this Article XII.
(e) "Indemnity Notice" means written notification pursuant to Section 12.05
of a claim for indemnity under Article XII by an Indemnified Party, specifying
the nature of and basis for such claim, together with the amount or, if not then
reasonably ascertainable, the estimated amount, determined in good faith, of
such claim.
35
<PAGE>
(f) "Losses" shall mean any and all claims, liabilities, obligations,
losses, damages, deficiencies, penalties, fines, assessments, encumbrances,
judgments, costs and expenses (including, without limitation, reasonable fees
and expenses of attorneys, consultant's and expert's fees and expenses and
reasonable costs and expenses incurred in investigating, preparing, defending
against or prosecuting any litigation or claim, action, suit, proceeding,
administrative proceeding (including informal proceeding or demand), but not
including special, indirect or consequential damages and without giving effect
to any multiple of earnings.
(g) "Person" means any natural person, corporation, general partnership,
limited partnership, trust, other business organization or other entity and
shall include, without limitation, MedCath, the Company and each Shareholder.
(h) "Resolution Period" means the period ending thirty (30) days following
receipt by an Indemnified Party of a written notice from an Indemnifying Party
stating that it disputes all or any portion of the claim set forth in an
Indemnity Notice.
ARTICLE XIII
GENERAL
13.01 Entire Agreement; Modifications.
This Agreement (including the Exhibits and Schedules referred to herein)
constitutes the entire agreement among the parties pertaining to the subject
matter hereof and supersedes all prior agreements relating thereto, whether oral
or written. No amendment, supplement, modification, waiver or termination of
this Agreement shall be implied or be binding (including, without limitation,
any alleged waiver based on a party's knowledge of any inaccuracy in any
representation or warranty contained herein) unless in writing and signed by the
party against which such amendment, supplement, modification, waiver or
termination is asserted. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar), nor shall such waiver constitute a continuing waiver
unless otherwise expressly therein provided.
13.02 Binding Effect.
All of the terms and provisions of this Agreement by or for the benefit of
the parties shall be binding upon and inure to the benefit of their successors,
permitted assigns, heirs and personal representatives. Except as expressly
provided herein, nothing herein is intended to confer upon any person other than
the parties, their successors, permitted assigns, heirs and personal
representatives, any rights or remedies under or by reason of this Agreement.
13.03 Public Announcements.
Except as may be required by law (so long as advance written notice thereof
is given by the party making the required release or announcement), any and all
public announcements or
36
<PAGE>
releases related to the Transactions shall be approved by MedCath and the
Shareholders in advance of dissemination.
13.04 Counterparts.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same Agreement. The parties hereto may execute this Agreement on separate
signature pages, and there is no requirement that all parties sign the same
signature pages. Signatures may be by fax if followed promptly by original
signature pages.
13.05 Costs and Expenses.
Each party hereto assumes the payment of its own costs and expenses
(including any legal and/or accounting fees) in connection with the negotiation
and execution of this Agreement and the consummation of the Transactions.
13.06 Assignment.
No Shareholder shall have the right to assign its rights or to delegate its
obligations under this Agreement without the prior written consent of MedCath.
13.07 Notices.
All notices, requests, instructions, documents and other communications
provided for herein or given hereunder shall be in writing and shall be deemed
to have been given if sent to the parties at the following addresses in the
manner set forth below:
37
<PAGE>
(a) If to MedCath to:
MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attention: President
with a copy to:
Moore & Van Allen, PLLC
NationsBank Corporate Center
100 N. Tryon Street, Floor 47
Charlotte, North Carolina 28202-4003
Attention: Hal A. Levinson
(b) If to Shareholders or any Shareholder:
Pima Heart Physicians, P.C.
445 N. Silverbell, Suite 200
Tucson, Arizona 85745
Attention: Chief Executive Officer
in either case, with a copy to:
Jeff C. Padden, Esq.
Bonn, Luscher, Padden & Wilkins
805 North 2nd Street
Phoenix, Arizona 85004
All such notices, requests, instructions, documents and other
communications shall be sent either by registered or certified mail, postage
prepaid, or by a nationally recognized overnight courier service providing
receipt of delivery and shall be deemed to have been given three (3) days after
being deposited in the mails or one (1) day after being delivered to such a
courier service. Any party from time to time may change its address, or other
information for the purpose of notices to that party, by giving notice
specifying such change to the other parties hereto in the manner provided
hereby.
13.08 Governing Law.
This Agreement shall be construed and governed under the domestic, internal
law (but not the conflicts of law principles) of the State of Arizona.
38
<PAGE>
13.09 Severability.
Should any clause, section or part of this Agreement be held or declared to
be void or illegal for any reason, all other clauses, sections or parts of this
Agreement which can be effective without such void or illegal clause section or
part shall, nevertheless, remain in full force and effect.
13.10 Review By Shareholders.
EACH SHAREHOLDER HEREBY WAIVES AND RELEASES ANY CLAIM OF SUCH SHAREHOLDER
AGAINST ANY DIRECTOR OR SHAREHOLDER OF THE COMPANY OR AGAINST THE SHAREHOLDERS
BASED ON THEIR APPROVAL OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
13.11 Knowledge.
As used in this Agreement, the phrase "to the knowledge" and any
substantially similar words and phrases shall mean the actual knowledge of a
person (or, in the case of a person that is a corporation or other entity, the
actual knowledge of the officers of the corporation or persons holding similar
positions in an unincorporated entity) and the knowledge such person could be
expected to have after making due inquiry with respect to the matter involved.
13.12 Cancellation of Shareholders Agreement.
By execution and delivery of this Agreement, each Shareholder and the
Company consents to the consummation of the transactions contemplated by the
Agreement by the other parties hereto, notwithstanding any restrictions
contained in the Company's bylaws or any shareholders agreement or buy-sell
agreement among the Company and the Shareholders all of which agreements are
hereby cancelled.
39
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the date and year first above written.
MEDCATH:
MEDCATH INCORPORATED
By: /s/ David Crane
----------------------------
Printed Name: David Crane
Title: Executive V.P. & COO
SHAREHOLDERS:
/s/ Stephen S. Algeo
-------------------------------
Stephen S. Algeo, M.D.
/s/ John E. Boulet
-------------------------------
John E. Boulet, M.D.
/s/ Laryenth D. Lancaster
-------------------------------
Laryenth D. Lancaster, M.D.
/s/ David I. Lapan
-------------------------------
David I. Lapan, M.D.
/s/ Monty C. Morales
-------------------------------
Monty C. Morales, M.D.
/s/ Marius M. Wagner
-------------------------------
Marius M. Wagner, M.D.
/s/ Edward Byrne-Quinn
-------------------------------
Edward Byrne-Quinn, M.D.
/s/ Jose J. Fernandez
-------------------------------
Jose J. Fernandez, M.D.
/s/ Charles A. Katzenberg
-------------------------------
Charles A. Katzenberg, M.D.
/s/ Lou L. Lancero
-------------------------------
Lou L. Lancero, M.D.
<PAGE>
/s/ Santiago C. Ramirez
-------------------------------
Santiago C. Ramirez, M.D.
/s/ Lawrence P. Temkin
-------------------------------
Lawrence P. Temkin, M.D.
/s/ Jerrold A. Winter
-------------------------------
Jerrold A. Winter, M.D.
<PAGE>
Schedules
5.02 Corporate Documents
5.04 Shareholders List
5.05 Financial Statements
5.06 Absence of Undisclosed Liabilities
5.07 Absence of Certain Recent Changes
5.08(a) Assets
5.08(b) UCC Searches
5.09 Contracts and Leases
5.10 Defaults and Consents
5.11 Litigation
5.12 Court Orders, Decrees and Laws
5.13 Employee Matters
5.14 Labor Matters
5.15 Insurance; Malpractice
5.20 Company Benefit Plans
5.22 Bank Accounts; Officers
5.23 Environmental Matters
5.26 Taxes
5.27 Investments
5.28 Affiliated Transactions
7.02 No Dividends on Shares; No Share Transfers
<PAGE>
Exhibits
A Shareholder Interests
<PAGE>
Exhibit A
- --------------------------------------------------------------------------------
Name of Shareholder Company Shares MedCath Shares
- --------------------------------------------------------------------------------
Stephen S. Algeo, M.D. [ ] [ ]
John E. Boulet, M.D. [ ] [ ]
Laryenth D. Lancaster, M.D. [ ] [ ]
David I. Lapan, M.D. [ ] [ ]
Monty C. Morales, M.D. [ ] [ ]
Marius M. Wagner, M.D. [ ] [ ]
Edward Byrne-Quinn, M.D. [ ] [ ]
Jose J. Fernandez, M.D. [ ] [ ]
Charles A. Katzenberg, M.D. [ ] [ ]
Lou L. Lancero, M.D. [ ] [ ]
Santiago C. Ramirez, M.D. [ ] [ ]
Lawrence P. Temkin, M.D. [ ] [ ]
Jerrold A. Winter, M.D. [ ] [ ]
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
SERVICE AGREEMENT
BETWEEN
PIMA HEART PHYSICIANS, P.C.
AND
PIMA HEART ASSOCIATES, P.C.
(which will hereafter change its name to
MedCath Physician Management, Inc.
d/b/a Pima Heart Management)
June 30, 1997
<PAGE>
TABLE OF CONTENTS
TO THE
SERVICE AGREEMENT
BETWEEN
PIMA HEART PHYSICIANS, P.C.
AND
PIMA HEART ASSOCIATES, P.C.
JUNE 30, 1997
Page
ARTICLE I RELATIONSHIP OF THE PARTIES.........................................1
SECTION 1.1 Independent Relationship................................1
SECTION 1.2 Responsibilities of the Parties.........................2
SECTION 1.3 Patient Referrals.......................................2
SECTION 1.4 Independence of Practice................................2
ARTICLE II DEFINITIONS............. ..........................................3
ARTICLE III FACILITIES TO BE PROVIDED BY MANAGER..............................7
SECTION 3.1 Facilities..............................................7
ARTICLE IV DUTIES OF THE POLICY BOARD.........................................8
SECTION 4.1 Formation and Operation of the Policy Board.............8
SECTION 4.2 Duties and Responsibilities of the Policy Board.........8
ARTICLE V ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER...................9
SECTION 5.1 Performance of Management Functions.....................9
SECTION 5.2 Financial Planning Goals...............................10
SECTION 5.3 Audits and Statements..................................11
SECTION 5.4 Inventory and Supplies.................................11
SECTION 5.5 Management Services and Administration.................12
SECTION 5.6 Executive Director.....................................16
SECTION 5.7 Personnel..............................................16
SECTION 5.8 Events Excusing Performance............................17
SECTION 5.9 Compliance with Applicable Laws........................17
SECTION 5.10 Quality Assurance.....................................17
SECTION 5.11 Ancillary Services....................................17
ARTICLE VI OBLIGATIONS OF PRACTICE...........................................17
ii
<PAGE>
SECTION 6.1 Professional Services..................................17
SECTION 6.2 Medical Practice.......................................18
SECTION 6.3 Physician Employees....................................18
SECTION 6.4 Professional Insurance Eligibility.....................19
SECTION 6.5 Fees for Professional Services.........................19
SECTION 6.6 Name. .................................................19
SECTION 6.7 Material Decisions.....................................19
SECTION 6.8 Employment of Physician Shareholders...................20
SECTION 6.9 Life Insurance.........................................21
SECTION 6.10 Profit Sharing Plan...................................21
ARTICLE VII RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES.....................23
SECTION 7.1 Restrictive Covenants by Practice......................23
SECTION 7.2 Restrictive Covenants By Current Physician
Shareholders and Physician Employees...................23
SECTION 7.3 Restrictive Covenants by Future Physician Employees....24
SECTION 7.4 Physician Shareholder and Physician Employee
Liquidated Damages.....................................25
SECTION 7.5 Development of Exclusive Ventures......................25
SECTION 7.6 Restrictive Covenants by Manager.......................26
SECTION 7.7 Enforcement............................................26
ARTICLE VIII FINANCIAL ARRANGEMENTS..........................................27
SECTION 8.1 Management Fees........................................27
SECTION 8.2 Collection of Management Fee...........................27
SECTION 8.3 Limited Guaranty Agreement.............................28
SECTION 8.4 Fees Due from New Physicians...........................28
SECTION 8.5 Amounts Due Physician Shareholder Upon Retirement......28
ARTICLE IX RECORDS...........................................................28
SECTION 9.1 Patient Records........................................28
SECTION 9.2 Records Owned by Manager...............................29
SECTION 9.3 Access to Records......................................29
ARTICLE X INSURANCE AND INDEMNITY............................................29
SECTION 10.1 Insurance to be Maintained by Practice................29
SECTION 10.2 Insurance to be Maintained by Manager.................29
SECTION 10.3 Tail Insurance Coverage...............................29
SECTION 10.4 Additional Insureds...................................30
SECTION 10.5 Indemnification.......................................30
SECTION 10.6 Rules Regarding Indemnification.......................30
SECTION 10.7 Offset ...............................................31
iii
<PAGE>
ARTICLE XI TERM AND TERMINATION .............................................31
SECTION 11.1 Term of Agreement.....................................31
SECTION 11.2 Extended Term.........................................32
SECTION 11.3 Termination by Practice...............................32
SECTION 11.4 Termination by Manager................................33
SECTION 11.5 Actions after Termination.............................33
SECTION 11.6 Closing of Repurchase by Practice and
Effective Date of Termination.........................34
ARTICLE XII GENERAL PROVISIONS...............................................35
SECTION 12.1 Assignment............................................35
SECTION 12.2 Whole Agreement, Modification.........................35
SECTION 12.3 Notices...............................................35
SECTION 12.4 Binding on Successors.................................36
SECTION 12.5 Waiver of Provisions..................................36
SECTION 12.6 Governing Law.........................................36
SECTION 12.7 Severability..........................................36
SECTION 12.8 Additional Documents..................................36
SECTION 12.9 Attorneys' Fees.......................................37
SECTION 12.10 Time is of the Essence...............................37
SECTION 12.11 Confidentiality......................................37
SECTION 12.12 Contract Modifications for Prospective
Legal Events.........................................37
SECTION 12.13 Remedies Cumulative; Survivability...................38
SECTION 12.14 Language Construction................................38
SECTION 12.15 No Obligation to Third Parties.......................38
SECTION 12.16 Communications.......................................38
SECTION 12.17 Counterpart Executions; Facsimiles...................38
SECTION 12.18 Arbitration..........................................39
iv
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into as of the 30th day of June,
1997 by and between PIMA HEART ASSOCIATES, P.C., an Arizona corporation (which
will hereafter change its name to MedCath Physician Management, Inc., d/b/a Pima
Heart Management) ("Manager") and PIMA HEART PHYSICIANS, P.C., an Arizona
professional corporation ("Practice"), is binding upon execution and shall be
effective as of the Closing Date (as defined in the Share Exchange Agreement).
RECITALS:
WHEREAS, Practice is a group medical practice with offices in Tucson,
Arizona which provides medical care to the general public;
WHEREAS, Manager is in the business of owning certain assets of and
managing and administering medical clinics, and providing support services to
and furnishing medical practices with the necessary facilities, equipment,
personnel, supplies and support staff while recognizing that each such practice,
through its physicians, must retain sole responsibility for the medical care of
its patients and thereby respecting the physician-patient relationship which
shall be maintained strictly between the physicians of such a practice and their
patients; and
WHEREAS, Practice desires to obtain the services of Manager in performing
such management functions so as to permit the physicians of Practice to devote
their efforts on a concentrated and continuous basis to the rendering of medical
services to their patients;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice hereby agrees to purchase the management and support
services herein described and Manager agrees to provide such services on the
terms and conditions provided in this Agreement.
ARTICLE I
RELATIONSHIP OF THE PARTIES
SECTION 1.1 Independent Relationship.
Practice and Manager intend to act and perform as independent contractors,
and the provisions hereof shall not create any partnership, joint venture,
agency or employment relationship between the parties. Notwithstanding the
authority granted to Manager herein, Manager and Practice agree that Practice
shall retain the authority to direct the medical, professional, and ethical
aspects of Practice's medical practice. Each party shall be solely responsible
for and shall comply with all state and federal laws applicable to that party
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes.
<PAGE>
SECTION 1.2 Responsibilities of the Parties.
1.2.1 As more specifically set forth herein, Manager shall serve in a
fiduciary capacity and shall provide Practice with offices and facilities,
equipment, supplies, support personnel, and management and financial advisory
services.
1.2.2 Manager's tax preparation, tax planning and other business matters
relating solely to Manager shall remain the sole responsibility of Manager.
1.2.3 As more specifically set forth herein, Practice shall be responsible
for the recruitment and hiring of physicians and the medical, professional and
ethical aspects of the Practice. Manager shall neither exercise control over nor
interfere with the physician-patient relationship or the medical decision-making
process, all of which shall be maintained strictly between the physicians of
Practice and their patients.
1.2.4 With respect to the Practice, except as specifically provided herein,
tax preparation, tax planning, physician compensation, employee benefits
(pension, welfare, and fringe), and investment planning (and expenses relating
solely to these internal business matters) for the Practice and individual
Physician Shareholders shall remain the sole responsibility of Practice and the
individual Physician Shareholders.
SECTION 1.3 Patient Referrals.
1.3.1 The parties agree that the performance of Manager's obligations to
Practice hereunder are not predicated upon, do not require, are not payment for,
and are not in any way contingent upon the admission, referral or any other
arrangement for the provision of any item or service offered by Manager to any
of Practice's patients in any facility or laboratory controlled, managed or
operated by Manager or Manager's affiliates.
1.3.2 The parties agree that the performance of Practices' obligations to
Manager hereunder are not predicated upon, do not require, are not payment for,
and are not in any way contingent upon the admission, referral or any other
arrangement for the provision of any item or service offered by Practice to
patients in any facility or laboratory controlled, managed or operated by
Practice, Manager or their affiliates.
SECTION 1.4 Independence of Practice.
Manager and Practice agree that Practice, as an independent
contractor, is a separate organization that retains the authority to direct the
medical, professional, and ethical aspects of its medical practice, including
but not limited to physician-patient relationships and medical decisions.
2
<PAGE>
ARTICLE II
DEFINITIONS
Many of the capitalized words and phrases used in this Agreement are
defined below. Some defined terms used in this Agreement are not listed below,
but are defined in the Section in which they are first used because they are
better understood in that context.
2.1 "Adjustments" means any adjustments for uncollectible accounts,
contractual adjustments, discounts, Medicare, and Medicaid disallowances,
worker's compensation, employee/dependent health care benefit programs,
professional courtesies extended in conformity with the historical customs
of Practice and other activities that do not generate a collectible fee by
Practice.
2.2 "Affiliate" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common control
with such Person, (ii) any Person directly or indirectly owning or
controlling twenty five percent (25%) or more of any class of outstanding
voting equity interests of such Person or of any Person which such Person
directly or indirectly owns or controls twenty five percent (25%) or more
of any class of voting equity interests, (iii) any officer, director,
general partner or trustee of such Person, or any Person of which such
Person is an officer, director, general partner or trustee, or (iv) any
Person who is an officer, director, general partner, trustee or holder of
twenty five percent (25%) or more of the voting equity interests of any
Person described in clauses (i) through (iii) of this sentence. Practice
and Manager are not Affiliates.
2.3 "Agreement" means this Service Agreement between Practice and
Manager.
2.4 "Ancillary Revenues" means (a) all fees or revenues actually
recorded each month by or on behalf of Practice which are not Physician
Services Revenues or Capitation Revenues, or revenues from sources
expressly set forth on Schedule 7.1 attached hereto plus (b) revenues from
capitation allocated to Ancillary Revenues which are not otherwise included
in Capitation Revenues or Physician Services Revenues.
2.5 "Capitation Revenues" means all revenue, from managed care
organizations or other payors when payment is made periodically on a per
member basis for the partial or total medical care needs of a patient plus
related patient co-payments made by such patients and all incentive bonuses
including those from HMO's, hospitals and others related to the foregoing.
2.6 "Executive Director" means that individual hired by Manager
pursuant to Section 5.6 hereof to manage all of the day-to-day
administrative, operating and business functions of Practice.
3
<PAGE>
2.7 "GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity or other practices and procedures as may be
approved by a significant segment of the accounting profession, which are
applicable to the circumstances as of the date of determination. For
purposes of this Agreement, GAAP shall be applied in a manner consistent
with the historic practices used by Parent.
2.8 "Manager Account" means the bank account of Manager described in
Section 5.5.2(ii).
2.9 "Manager Expenses" means, in addition to those expenses identified
elsewhere herein, all operating and non-operating expenses of Manager
directly incurred in the operation of Practice, including, without
limitation:
(i) Salaries, employee and fringe benefits (except as otherwise
provided in Section 6.10), and other direct costs of all employees of
Manager working exclusively at the Practice;
(ii) Direct costs of all employees or consultants of Manager
(including Affiliates of Manager) or Practice engaged by the Executive
Director with Policy Board approval, which approval shall not be
unreasonably withheld, to provide services at or in connection with
Practice; provided, however, only that portion of such employee's or
consultant's costs without mark-up by Manager for any reason,
including, but not limited to, overhead expenses of Parent or Manager,
that is allocable to work performed at or for the benefit of Practice
will be a Manager Expense;
(iii) Obligations of Manager under leases or subleases directly
relating to the operation of Practice;
(iv) Personal property and intangible taxes assessed against
Manager's assets utilized solely in the management of Practice,
commencing on the date of this Agreement;
(v) The amount of interest on all advances made by Manager to
provide financing or working capital to cover Manager Expenses,
Physician Expenses, Practice Surplus and the Management Fee (interest
expense will be charged for funds borrowed from outside sources as
well as from Manager; in the latter case, interest charges will be
computed at a floating rate that is equal to the prime rate of
interest charged by NationsBank, or its successor, plus one-half (1/2)
percentage point) per annum;
4
<PAGE>
(vi) Malpractice insurance expenses to the extent provided in
Article X hereof;
(vii) Other expenses incurred by Manager in carrying out its
obligations under this Agreement in accordance with the budget
adopted, or otherwise approved, by the Policy Board;
(viii) Payment of interest on indebtedness incurred by Manager or
its Affiliates for the direct and sole use or benefit of Practice; and
(ix) Amortization or depreciation or write-off of assets acquired
by Manager for the sale, use and direct benefit of Practice to the
extent the Practice has not already been charged for the principal
amount of such assets.
The term "Manager Expenses" shall not include and the following expenses
shall be paid by Manager without any contribution by Practice (A) any corporate
overhead charges, other than the kind of items listed above, of Parent or
Manager; (B) any federal or state income taxes of Manager; and (C) any expenses
which are expressly designated herein as Physician Expenses which are expenses
or responsibilities directly of Practice.
2.10 "Net Practice Revenues" means the sum of Ancillary Revenues,
Capitation Revenues and Physician Services Revenues, provided however,
notwithstanding anything herein to the contrary, revenues from the sources
expressly set forth on Schedule 7.1 shall not be included in Net Practice
Revenues.
2.11 "Operating Account" means the bank account of Practice established as
described in Section 5.5.2.
2.12 "Parent" means MedCath Incorporated, the sole shareholder of Manager.
2.13 "Patient Records" means all personal, medical and other information
collected or maintained by Practice or Manager related to or regarding the care
or treatment of or provision of services to a patient.
2.14 "Person" means any natural person, partnership, trust, estate,
association, limited liability company, corporation, custodian, nominee,
governmental instrumentality or agency, body politic or any other entity in its
own or any representative capacity.
2.15 "Physician Employees" means those individuals who are employees of
Practice who, under applicable rules or regulations, should remain as employees
thereof (rather than become employed by Manager) in order for the Practice to
maximize its third party reimbursement for the services of such employees.
2.16 "Physician Expenses" means interest on debts of Practice approved by
the Policy Board (exclusive however of principal and interest due with respect
to the Bank
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Loan) and Professional Compensation paid by Practice as set forth in Section 6.3
and paid by Practice to, independent contractors providing professional services
for or on behalf of the Practice, exclusive in all events, however, of
Professional Compensation paid by Practice with respect to any Physician
Shareholder. It is acknowledged and agreed, however, that the following expenses
to the extent not provided otherwise in Section 6.10(f) (collectively, "Extra
Expenses") shall not constitute Physician Expenses and shall instead by paid by
the Physician Shareholders out of Practice Surplus: (i) all contributions
allocable to any participant under any pension or profit-sharing plan qualified
under Section 401(a) of the Code sponsored or maintained by the Practice to the
extent provided in Section 6.10; (ii) all costs relating to sponsoring,
maintaining, and operating any other employee benefit plan, program, or
arrangement, such as a group health plan or other welfare benefit program,
sponsored or maintained by the Practice to the extent provided in Section 6.10;
(iii) all administrative expenses incurred by the Practice in sponsoring,
maintaining, and operating any plan, program, or arrangement as set forth above
in (i) or (ii) to the extent provided in Section 6.10; (iv) expenses of the
Practice listed on Schedule 2.16; (v) all accounts payable of Pima Heart
Associates, P.C. in excess of $30,000.00 and arising prior to the Closing Date
as set forth in Section 5.06 of the Share Exchange Agreement; and (vi) the
accrued pension plan contributions in an amount of at least $135,921.00 as shown
on Schedule 5.06 to the Share Exchange Agreement.
2.17 "Physician Services Revenues" means (a) all fees actually recorded
each month (net of related Adjustments), by or on behalf of Practice as a result
of professional medical services personally furnished to patients by Physician
Employees and other fees or income generated in their capacity as professionals
whether rendered in an inpatient or outpatient setting, relating to the term of
this Agreement excluding however revenue from those sources expressly listed on
Schedule 7.1, plus (b) revenues from capitation allocated to Physician Services
Revenues which are not otherwise included in Capitation Revenues or Ancillary
Revenues.
2.18 "Physician Shareholders" means those physicians who are shareholders
of Practice.
2.19 "Policy Board" means the board composed of members as established
pursuant to Section 4.1.
2.20 "Practice Account" means the bank account of Practice established as
described in Section 5.5.2(ii).
2.21 "Practice Surplus" means an amount equal to (a) Net Practice Revenue
minus Manager Expenses minus Physician Expenses for the applicable period,
multiplied by (b) [ ]%. For purposes of calculating Practice Surplus,
amounts collected after the date hereof which arose from services performed
prior to the effective date of this Agreement shall be included in Practice
Surplus and shall not be subject to the Management Fee. It is acknowledged and
agreed that principal and interest due with
[ ] These portions have been omitted and filed separately with the Commission
pursuant to request for confidential treatment.
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respect to the Bank Loan as well as payment of the Extra Expenses
shall be paid by the Physician Shareholders from Practice Surplus.
2.22 "Professional Compensation" means salary and wages, employee
and fringe benefits (except as otherwise provided in Section 6.10),
and related expenses and taxes involving certain licensed health care
personnel, all as further set forth in Section 6.3.1. Professional
Compensation due to Physician Shareholders shall be paid solely from
Practice Surplus.
2.23 "Related Party" means (a) with respect to any individual,
such individual's spouse, any descendants (whether natural, adopted or
in the process of adoption), any sibling, a spouse of any descendant
or sibling, any ancestor, any trust twenty-five percent (25%) or more
of the beneficial interests of which are owned by such individuals or
any of them, and any corporation, association, partnership or limited
liability company twenty-five (25%) or more of the equity interests of
which are owned by those above-described individuals or trusts, (b)
with respect to any trust, the owners of twenty-five (25%) or more of
the beneficial interests of such trust, and (c) with respect to any
corporation, association, partnership or limited liability company,
the owners of twenty-five percent (25%) or more of the outstanding
equity interests in such entity.
2.24 "Share Exchange Agreement" means that Share Exchange
Agreement between Practice and Parent to which this Agreement is an
exhibit.
2.25 "Territory" means the geographic region described in
Schedule 2.25.
ARTICLE III
FACILITIES TO BE PROVIDED BY MANAGER
SECTION 3.1 Facilities.
Upon the effective date of this Agreement, Manager hereby agrees to provide
the offices and facilities more fully described in Exhibit 3.1 hereto to
Practice. Manager shall be responsible for all occupancy expenses, including but
not limited to, all costs of repairs, maintenance and improvements, utility
(telephone, electric, gas, water) expenses, normal janitorial services, refuse
disposal and all other costs and expenses reasonably incurred in conducting the
operation of Practice during the term of this Agreement, including, but not
limited to, related real or personal property lease cost payments and expenses,
taxes and insurance. All such costs and expenses shall be Manager Expenses.
Nothing contained herein is intended to require Manager to provide the foregoing
services if such services are required to be provided by the landlord under a
lease for a specific property, including leases under which Practice or an
Affiliate of Practice is the landlord. Manager shall consult with Practice
regarding the condition, suitability, use and need for offices, facilities and
improvements. The Policy Board shall determine any changes to the office and
facility locations of Practice.
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ARTICLE IV
DUTIES OF THE POLICY BOARD
SECTION 4.1 Formation and Operation of the Policy Board.
The parties shall establish a Policy Board which shall be responsible for
developing management and for administrative policies for the overall operation
of Practice. The Policy Board shall consist of five (5) members. Manager shall
designate, in its sole discretion, one (1) member of the Policy Board and
Practice shall designate, in its sole discretion, four (4) members of the Policy
Board. Except as may otherwise be provided, the act of a majority of the members
of the Policy Board shall be the act of the Policy Board.
SECTION 4.2 Duties and Responsibilities of the Policy Board.
The Policy Board shall have the following duties and obligations:
4.2.1 Capital Improvements and Expansion.
Any renovation and expansion plans and capital equipment expenditures
and the financing thereof with respect to Practice shall be reviewed and
approved by the Policy Board and shall be based upon economic feasibility,
physician support, productivity and then current market conditions. If
Manager agrees to loan money to the Practice specifically for such
expansion or capital equipment, then Manager shall have the right to
approve of such decisions.
4.2.2 Annual Budgets. All annual capital and operating budgets
prepared by Manager, as set forth in Section 5.2, shall be subject to the
review, modification and approval of the Policy Board, and to final
approval of Practice.
4.2.3 Advertising. All advertising and other marketing of the services
performed at Practice, other than advertising or marketing programs
historically implemented by Practice within the budget approved by the
Policy Board shall be subject to the prior review and approval of the
Policy Board and final approval of Practice.
4.2.4 Patient Fees. As a part of the annual operating budget, in
consultation with Practice and Manager, the Policy Board shall review and
adopt the fee schedule for all physician and ancillary services rendered by
Practice subject to final approval of Practice.
4.2.5 Ancillary Services. The Policy Board shall approve Practice
provided ancillary services based upon the pricing, access to and quality
of such services.
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4.2.6 Provider and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health
care providers and payors and approval of managed care contracts shall be
made by the Policy Board in consultation with Practice.
4.2.7 Strategic Planning. The Policy Board shall develop long-term
strategic planning objectives for presentation to, and approval by, the
Practice.
4.2.8 Financing. All loans, leases and other financing obtained or
proposed to be obtained for the benefit of Practice for any reason shall be
subject to the review and approval of the Policy Board.
4.2.9 Physician Hiring. The Policy Board shall determine the number
and type of physicians required for the efficient operation of Practice,
provided Practice shall have the final authority over physician hiring and
termination and engage in such hiring and termination without Policy Board
approval. The approval of the Policy Board shall be required for any
variations to, or any exceptions from, the restrictive covenants which must
be included in any physician employment contract in conformance with
Article VII hereof.
4.2.10 Executive Director. The selection and retention of the
Executive Director pursuant to Section 5.6 by Manager shall be subject to
the reasonable approval of the Policy Board. If Practice is dissatisfied
with the services provided by the Executive Director, Practice shall refer
the matter to the Policy Board. Manager and the Policy Board shall each in
good faith determine whether the performance of the Executive Director
could be brought to acceptable levels through counsel and assistance, or
whether the Executive Director should be terminated. Manager shall have the
ultimate authority to terminate the Executive Director.
4.2.11 Grievance Referrals. The Policy Board shall consider and make
final decisions regarding grievances pertaining to matters not specifically
addressed in this Agreement as referred to it by Practice's governing body.
ARTICLE V
ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER
SECTION 5.1 Performance of Management Functions.
Beginning with the effective date of this Agreement, Manager shall, as a
fiduciary of the Practice, provide or arrange for the services set forth in this
Article V and otherwise as set forth in this Agreement, the cost of all of which
shall be included in Manager Expenses. Manager is hereby expressly authorized to
perform its services hereunder in whatever manner it deems reasonably
appropriate to meet the day-to-day requirements of Practice operations in
accordance
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with the decisions of the Policy Board, including, without limitation,
performance of some of the business office functions at locations other than
Practice. Practice will not act in a manner which would prevent Manager from
efficiently managing the day-to-day operations of Practice in a business-like
manner. Notwithstanding the foregoing, Manager may not assign its obligations
hereunder or contract with a third party for the performance of substantially
all of its obligations hereunder except as expressly permitted by Section 12.1
below.
SECTION 5.2 Financial Planning Goals.
5.2.1 Preparation of Budgets. Annually and at least thirty (30) days
prior to the commencement of each fiscal year of Practice, Manager shall
prepare and deliver to the Policy Board for its review, modification and
approval an operational and capital budget for such fiscal year ("Annual
Budget"), setting forth an estimate of the operating revenues and expenses
associated with the provision of professional services by Practice
(including, without limitation, all costs associated with the premises used
by Practice, equipment, supplies, services, and personnel provided by
Manager to Practice pursuant to this Agreement, and all compensation costs
associated with Practice and Practice personnel) and sources and uses of
capital expenditures. Such budget shall separately address Physician
Expenses, Manager Expenses, Practice Surplus, and Capital Expenditures.
Manager Expenses shall be in line with historical expenses of Practice and
shall be reasonable and customary for Practice and shall include reasonable
reserves for the repayment of principal on all borrowings of Practice. Any
non-budgeted expenses shall be reviewed and approved by the Policy Board.
Any such non-budgeted expense in excess of $5,000 per year undertaken by
Practice without approval by the Policy Board (except for emergency
circumstances necessary to permit Practice to function to fulfill its
patient responsibilities) shall be deducted from Practice Surplus. Manager
shall use its best efforts to perform its duties and obligations under this
Agreement such that the actual revenues, costs, and expenses associated
with the provision of professional services during any applicable period of
Practice's fiscal year shall be consistent with and within the limits
established by the Annual Budget. Manager shall prepare and submit to the
Policy Board for its review, modification and approval, and the Policy
Board shall thereafter adopt, an Annual Budget for the current fiscal year
as soon as practicable. Manager shall specify the targeted profit margin
for Practice which shall be reflected in the Annual Budget. In the event
that the Policy Board does not approve any such Annual Budget, then the
Annual Budget for the previous year shall be used until the Policy Board,
using its best efforts, approves a new Annual Budget.
5.2.2 Service Development. Manager realizes that Practice has
opportunities to provide new services and utilize new technologies that
will require capital expenditures and Manager anticipates that such
opportunities may include new and replacement equipment as may be
economically justified and medically necessary. Development of new services
will depend on, among other factors, physician composition, anticipated
volume, reimbursement and number of physicians, physician support, Practice
performance, and appropriate physician specialty mix, be subject to the
requirements of
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any applicable leases and subleases, and will require Policy Board approval
as a precondition to any capital expenditure.
5.2.3 Capital Investment. Subject to the terms hereof, Manager shall
be responsible for obtaining loans to fund all capital expenditures
approved by the Policy Board. Sources of capital, including working
capital, for such funds shall be determined by the Policy Board and may be
(i) borrowings from Manager or its Affiliates (at the rate set forth in
Article II at subparagraph (v) of the definition of Manager Expenses) all
of which loans from Manager or its Affiliates are subject to the Manager's
approval or (ii) borrowings, leases or other financing methods through
independent third-party financial institutions in accordance with Section
4.2(h) hereof which Manager may use its commercially reasonable best
efforts to obtain. It is acknowledged and agreed that the payment of
interest on any such indebtedness shall constitute Manager Expenses.
Manager shall use reasonable efforts to make funds available for borrowing
by Practice but Manager assumes no obligation to itself loan the funds to
Practice.
In the event Practice obtains a commitment for financing a particular
project or capital expenditure at a rate less than that obtained or charged
by Manager hereunder, and on other terms no less favorable than those
obtained by or available to Manager, and the Policy Board approves such
alternate financing, the project will be financed with such alternate
financing or the excess interest of the financing obtained or provided by
Manager will not be charged to the Practice as a Manager Expense or other
expense.
SECTION 5.3 Audits and Statements.
Manager shall cause annual financial statements for the operation of
Practice to be prepared and Manager shall cause the financial statements of
Manager to be included in the audited financial statements of Parent by a
certified public accountant selected by Manager in connection with the audit of
the financial statements of Parent. Manager shall cause a copy of the financial
statements of Manager to be delivered to Practice for its examination. All
financial statements shall be prepared in accordance with GAAP on a consistent
basis and the cost thereof shall be a Manager Expense. Manager shall prepare
monthly unaudited financial statements containing a balance sheet and statements
of income from Practice operations, which shall be delivered to Practice within
thirty (30) days after the close of each calendar month. In addition, Practice
shall be solely responsible for the cost of the preparation and any audit of the
financial statements or tax returns of Practice. Upon the request of Practice,
Manager shall provide Practice with a detailed listing of all Manager Expenses.
SECTION 5.4 Inventory and Supplies.
Manager shall order and purchase inventory and supplies, and such other
ordinary, necessary or appropriate materials of a quality consistent with the
past customary course of conduct and manner of operating Practice, the cost of
which shall be a Manager Expense. Returns and credits shall reduce Manager
Expense. The Policy Board may periodically review
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Manager's past purchases of inventory and supplies, and cause Manager to change
the amount and type of purchase in the future. Manager shall use reasonable
efforts to obtain the best price possible for inventory and supplies and shall
work with Parent to obtain volume discounts.
SECTION 5.5 Management Services and Administration.
5.5.1 Practice hereby appoints Manager as its sole and exclusive
manager and administrator of all day-to-day business functions and Manager
hereby accepts such appointment subject to the terms of this Agreement. The
purpose and intent of this Service Agreement is to relieve the Physician
Employees to the maximum extent possible of the administrative, accounting,
personnel and business aspects of the medical practice; Manager assumes
responsibility and is delegated all necessary authority to perform these
functions in accordance with the general standards approved by the Policy
Board. Manager agrees that Practice and only Practice will perform or have
authority with respect to the medical functions of its medical practice.
Manager will have no authority, directly or indirectly, to perform or
direct or control the performance of any medical functions. Manager may,
however, advise Practice as to the relationship between its performance of
medical functions and the overall administrative and business functioning
of its medical practice. All clinical personnel performing patient care
services shall be subject to the professional direction and supervision of
Practice in the performance of medical functions and shall not be subject
to any direction or control by, or liability, to, Manager, except as may be
specifically authorized by Practice.
5.5.2 (i) Manager shall, in compliance with all applicable state and
federal rules and regulations and on behalf of Practice, bill patients and
collect the professional fees for medical and other services rendered or
performed by Practice and by its Physician Employees. Practice hereby
appoints Manager for the term hereof to be its true and lawful
attorney-in-fact, for the following purposes: (A) to bill patients in
Practice's name and on its behalf; (B) to collect accounts receivable
resulting from such billing in Practice's name and on its behalf; (C) to
receive payments and prepayments from Blue Shield, insurance companies,
from health care plans, Medicare, Medicaid and all other third party
payors; (D) to take possession of, endorse in the name of Practice (and/or
in the name of an individual physician providing services on behalf of
Practice), and deposit only in the Practice Account any notes, checks,
money orders, insurance payments and other instruments received in payment
of accounts receivable and/or for professional or other services of
Practice; and (E) to initiate the institution of legal proceedings in the
name of Practice to collect any accounts and monies owed to Practice in
accordance with policies and procedures adopted by the Policy Board, to
enforce the rights of Practice as creditors under any contract or in
connection with the rendering of any service, and to contest adjustments
and denials by governmental agencies (or their fiscal intermediaries) as
third-party payors. All Adjustments shall be made in a reasonable manner
consistent with past customary course of conduct of Practice subject to any
final adjustments required by auditors under Section 5.3 as approved by the
Policy Board.
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(ii) Practice shall establish and control a bank account at a
bank (the "Bank") acceptable to Manager and Practice (the "Practice
Account"). In connection herewith and throughout the term of this
Agreement, Practice hereby appoints Manager as Practice's true and
lawful agent and attorney-in-fact, and grants Manager a special power
of attorney and Manager hereby accepts such special power of attorney
and appointment, to deposit in the Practice Account all funds, fees,
and revenues generated by Practice and collected by Manager. Practice
shall execute any and all additional documents required by the Bank
where the Practice Account is held to effectuate the power of attorney
granted herein. Practice shall not make withdrawals from the Practice
Account. Practice also agrees to establish this account with the Bank
under terms which provide that the balance of the Practice Account at
the close of each working day is transferred to a bank account of
Manager (the "Manager Account") at the same financial institution by
means to be designated by Manager. Practice shall not revoke such
daily transfer to Manager's Account unless Manager is in breach of
this Agreement which breach is not cured within thirty (30) days
following written notice thereof, provided however, if Manager's
breach relates to Manager's failure to pay funds when due to Practice,
Manager shall only have ten (10) days to cure such breach. Manager may
pay from funds in the Manager Account all Manager Expenses and the
Management Fee as provided under the terms of this Agreement. Practice
shall establish a second account in the name of Practice (the
"Operating Account") to which Manager shall be a signatory and to
which Manager shall deposit from time to time out of the Practice
Account or the Manager Account (to the extent available) amounts
sufficient to enable Manager to pay from that account, on behalf of
Practice, Physician Expenses and Practice Surplus to be paid by
Practice as Professional Compensation as provided under the terms of
this Agreement and principal payments on debts of Practice which were
approved by the Policy Board, when such principal repayments are due.
Any interest accruing to the funds transferred to the Manager's
Account shall constitute Net Practice Revenue.
If the balance in the Practice Account after subtraction of
reserves for repayment of debts (to the extent the debts are not then
being repaid) is insufficient to satisfy the obligations and
liabilities of Practice at a particular point in time, disbursements
from the Practice Account shall be made in the following priority:
(A) Payments or deposits of payroll and withholding taxes on
compensation of Practice and other amounts withheld from
Practice;
(B) Payments of interest and principal on debts of Practice
other than the Bank Loan that were approved by the Policy Board
and by Manager to the extent then due;
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(C) Payments of Manager Expenses;
(D) Payments of other Physician Expenses;
(E) Payments of Management Fee attributable to collections
by Practice from physicians pursuant to Section 7.4; and
(F) Pro Rata between the Management Fee (to the extent not
paid pursuant to E above) and Practice Surplus provided that all
Practice Surplus otherwise available to Physician Shareholders
shall instead first be applied towards (1) the repayment of the
principal and interest on Bank Loan and (2) to the repayment of
any advances or loans made by Manager to Practice to pay Manager
Expenses or Practice Expenses prior to the date the Bank Loan is
repaid.
(iii) Manager will use its reasonable efforts to arrange for
a third party commercial lender to provide a working capital line
of credit to Practice if needed, or, subject to Manager's
approval, Manager shall provide such line of credit, to enable
Manager or Practice as provided herein, to pay Manager Expenses,
Physician Expenses, Management Fee and Practice Surplus when due
(subject however to the obligation to repay agreed upon working
capital advances or other third party financing) and in
accordance with the Annual Budget. In the event any such advances
are provided by Manager or any of its Affiliates, such advances
shall bear interest at the "prime rate" plus 1/2% per annum
except as otherwise provided herein. The obligation of Practice
to repay any such advances to Manager or its Affiliates shall be
evidenced by one or more promissory notes and shall be secured in
accordance with the terms of a Security Agreement in a form
proposed by Manager granting a security interest in the
post-effective date accounts receivable of Practice to Manager.
Interest on such advances shall be paid monthly. Prior to making
advances hereunder, the Policy Board and Manager shall agree upon
the term over which such principal amounts shall be repaid to
Manager, including the priority of the utilization of Net
Practice Revenues for the repayment of such loans. In addition,
Practice shall cooperate with Manager and execute all necessary
documents in connection with the pledge of such accounts
receivable either to Manager, Manager's lenders or any other
lender providing such financing to Practice.
5.5.3 Manager shall supervise and, to the extent necessary, maintain
custody of all files and records relating to the operation of Practice,
including but not limited to accounting, billing, patient medical records,
collection records, and personnel records. Patient medical records shall at
all times be and remain the property of Practice and shall be located at
Practice facilities so that they are readily accessible for patient care.
The management of all files and records shall comply with applicable state
and federal statutes. Manager shall use its reasonable efforts consistent
with the past operation of Practice to preserve the confidentiality of
patient medical records and use information contained in such records only
for the limited purpose necessary to perform the services
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set forth herein; provided, however, in no event shall a breach of said
confidentiality be deemed a default under this Agreement. Manager shall at
Practice's request, require confidentiality agreements from Manager's
employees in a form approved by Practice.
5.5.4 Manager shall supply to Practice necessary clerical, accounting,
bookkeeping and computer services, printing, postage and duplication
services, medical transcribing services and any other ordinary, necessary
or appropriate service for the operation of Practice.
5.5.5 Manager shall provide the data necessary for Practice to prepare
its annual income tax returns and financial statements. Manager personnel
shall continue to provide the preparatory work currently provided by
Practice personnel. Except as provided above, Manager shall have no
responsibility for the preparation of Practice's federal or state income
tax returns or the payment of such income taxes and such costs shall not be
Manager Expenses or Physician Expenses, and shall be borne solely by
Practice. Manager shall permit Practice and its agents to examine and copy
all records relating to the business of Practice including those of Manager
and Parent.
5.5.6 Manager shall assist Practice in recruiting additional
physicians, carrying out such administrative functions as may be
appropriate such as advertising for and identifying potential candidates,
checking credentials, and arranging interviews. Practice shall interview
and make the ultimate decision as to the employment of any physician to
become associated with Practice. Candidate screening and interviewing
procedures shall be consistent with the past operation of Practice or as
otherwise adopted by the Policy Board. All physicians recruited by Manager
and accepted by Practice shall be the sole employees of Practice, to the
extent such physicians are hired as employees. Any expenses incurred in the
recruitment of physicians, including, but not limited to, employment agency
fees, relocation and interviewing expenses shall be budgeted Manager
Expenses. Such expenses shall be pre-approved by the Executive Director.
5.5.7 Subject to Policy Board approval of any proposed contract,
Manager shall, at the Policy Board's request, negotiate and administer all
managed care contracts on behalf of Practice and shall consult with
Practice on all professional or clinical matters relating thereto. At the
discretion of the Policy Board, Manager shall have no involvement in the
negotiation and administration of certain managed care contracts.
5.5.8 Subject to the provisions of Section 5.3, Section 5.5.5(e) and
this Section 5.5.8, Manager shall arrange for legal and accounting services
related to Practice operations, the expense for which has been incurred
traditionally in the ordinary course of business, including the cost of
enforcing any physician contract containing restrictive covenants, but any
cost and all other aspects of malpractice suits against Practice shall be
governed by Article X hereof. Policy Board shall designate the attorneys to
act on behalf of Practice or in its name, unless the Policy Board fails to
actively enforce, or retain and direct its attorneys to enforce, all
noncompetition covenants of the Physician Employees in which event Manager
may retain attorneys for such purpose.
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5.5.9 Manager shall provide for the proper cleanliness of and around
all Practice facilities and for the proper handling and disposal of all
waste generated thereof in compliance with applicable federal and state
regulations, and maintenance and cleanliness of the equipment, furniture
and furnishings located upon such premises.
5.5.10 Manager shall make payment for the cost of professional
licensure fees, board certification fees, medical staff dues, and national
organization fees required to maintain professional licenses, all as
historically paid by Practice in accordance with its past operation and
policies.
5.5.11 Manager shall regularly, and in no event less than monthly,
report to Practice the actual versus budgeted revenues and expenses of
Practice, including an explanation of variances.
SECTION 5.6 Executive Director.
Subject to the provisions of Section 4.2.10, Manager shall hire an
Executive Director to manage and administer all of the day-to-day business
functions of Practice on behalf of Manager and for the benefit of Practice.
Manager shall determine the salary and fringe benefits, of the Executive
Director consistent with the budget adopted by the Policy Board. At the
direction, supervision and control of Manager, the Executive Director, subject
to the terms of this Agreement, shall implement the policies established by the
Policy Board and shall generally perform the duties and have the
responsibilities of a medical practice administrator. The Executive Director
shall be responsible for organizing the agenda for the meetings of the Policy
Board referred to in Article IV.
SECTION 5.7 Personnel.
Manager shall provide non-physician professional support and administrative
personnel, clerical, secretarial, bookkeeping and collection personnel
reasonably necessary for the conduct of Practice operations. Subject to the
Annual Budget, Manager shall determine and cause the salaries and fringe
benefits of all such personnel to be paid. Such personnel shall be under the
direction, supervision and control of Manager, with any such personnel
performing patient care services or having patient contact being subject to the
professional supervision and direction of Practice. Practice shall consult with
Manager if Practice is dissatisfied with the services of any person. Manager
shall in good faith determine whether the performance of that employee could be
brought to acceptable levels through counsel and assistance or whether such
employee should be suspended, reprimanded, or terminated. Practice may hire
directly a director for managed care who shall be an employee of Practice. All
of Manager's obligations regarding staff shall be governed by the overriding
principle and goal of providing high quality medical care consistent with the
past practice of Practice. Employee assignments shall be made to assure
consistent and continued rendering of high quality medical support services and
to ensure prompt availability and accessibility of individual medical support
personnel to physicians in order to develop consistent, familiar and routine
working relationships between individual physicians and
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individual members of the medical support personnel. Manager shall maintain
established working relationships wherever possible and Manager shall make
every effort consistent with sound business practices to honor the specific
requests of Practice with regard to the assignment of its employees.
Manager shall provide administrative services such as scheduling, personnel
policies and payroll administration for Physician Employees. Manager shall
maintain a working environment which complies with all applicable laws,
including rules and regulations providing for employee discipline for
illegal discrimination or harassment of Physician Employees.
SECTION 5.8 Events Excusing Performance.
So long as Manager or Practice uses its commercially reasonable best
efforts, Manager shall not be liable to Practice, and Practice shall not be
liable to Manager, for failure to perform any of the services required herein in
the event of strikes, lockouts, calamities, acts of God, unavailability of
supplies or other events over which neither Manager nor Practice has control for
so long as such events continue, and for a reasonable period of time thereafter,
provided that nothing herein shall relieve the Practice and Physician
Shareholder from their obligations in Section 6.8 or Article VII.
SECTION 5.9 Compliance with Applicable Laws.
Manager shall comply in all material respects with all applicable federal,
state and local laws, regulations and restrictions in performing its obligations
under this Agreement.
SECTION 5.10 Quality Assurance.
Manager shall assist Practice in fulfilling its obligations to its patients
to maintain a high quality of medical and professional services.
SECTION 5.11 Ancillary Services.
Manager shall provide its services hereunder in connection with the
operation of such ancillary services as approved by the Policy Board or as may
be offered or in existence on the effective date hereof.
ARTICLE VI
OBLIGATIONS OF PRACTICE
SECTION 6.1 Professional Services.
Practice shall provide professional services to patients in compliance at
all times with ethical standards, laws and regulations applying to the medical
profession. Practice shall ensure that each of its physicians providing medical
care to patients in the State of Arizona is licensed by the State of Arizona. In
the event that any disciplinary actions or medical malpractice actions
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are initiated against any such physician, Practice shall immediately inform
Manager of such action and the underlying facts and circumstances. Practice
shall carry out a program to monitor the quality of medical care which it
provides.
SECTION 6.2 Medical Practice.
Manager shall not interfere with the physician-patient relationship between
Practice's physicians and their patients. Practice shall use and occupy the
facilities provided by Manager exclusively for the operation of its Practice,
and shall comply with all applicable local rules, ordinances and all standards
of medical care. It is expressly acknowledged by the parties that the medical
practice or practices conducted at Practice shall be conducted solely by
physicians associated with Practice, and no other physician or medical
practitioner shall be permitted to use or occupy the facilities of the Practice
without the prior written consent of the Policy Board.
SECTION 6.3 Physician Employees.
6.3.1 Practice shall employ all licensed health care personnel, including
physicians, nurses, vocational nurses and physician assistants, as Practice
deems reasonably necessary and appropriate, subject to the Annual Budget, for
Practice's operation of its medical practice and provision of professional
services, each of whom shall be subject to the applicable provisions of this
Agreement, and all of whom shall be Physician Employees. Practice shall have the
sole responsibility for paying the Professional Compensation of all such
personnel, and for withholding and paying, as required by law, any sums for
income tax, unemployment insurance, social security, or any other withholding
pursuant to any applicable law or governmental requirements (collectively,
"Professional Compensation") provided that Manager shall administer and
discharge such responsibilities from funds available pursuant to Section 8.1 as
set forth in Article V. Manager shall, in the name of and on behalf of Practice,
establish and administer and pay when due the compensation with respect to such
professional personnel and, on behalf of Practice and out of funds available in
the Operating Account, ensure that proper tax withholdings from such
compensation are made and timely remitted to the appropriate governmental
entities. Each physician retained by Practice shall at all times hold and
maintain a valid and unlimited license to practice in the State of Arizona
subject to waiver by Policy Board. Practice shall enter into and maintain with
each Physician Shareholder a written agreement which shall include, without
limitation, the provisions of Section 7.2 hereof. Practice shall ensure that
each of its Physician Employees participates in such continuing medical
education as is consistent with past practice.
Consistent with the historical operation of the Practice, the Practice
Surplus, or any other forms of revenue earned by the Practice, will not be
accumulated by the Practice in any material amount. It is acknowledged and
agreed that Practice Surplus will be depleted through the payment of
Professional Compensation, principal and interest due with respect to the Bank
Loan, and Extra Expenses.
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6.3.2 Practice, through its Physician Employees, shall continuously
and uninterruptedly, during the term hereof, during normal business hours
and on such days as businesses of like nature in the area are open for
business, provide services in a manner calculated to produce the maximum
volume of revenue which is consistent with the professional obligations of
Practice and the individual health care providers and in the best interest
of Practice's patients. Except as otherwise provided in this Agreement,
Practice shall use reasonable efforts to have the work load, patient load
and criteria for its Physician Employees, taken as a whole, remain
substantially the same as their historical practice during the immediate
past three (3) years.
6.3.3 Practice and the Physician Shareholders shall take all actions
necessary, including without limitation adjusting Professional Compensation
of physicians on at least a quarterly basis, to ensure from time to time
that the Professional Compensation paid, distributed or provided to the
Physician Shareholders under their employment agreements or otherwise, in
the aggregate, never exceeds Practice Surplus.
SECTION 6.4 Professional Insurance Eligibility.
Practice shall cooperate in the obtaining and retaining of professional
liability insurance by assuring that its Physician Employees are insurable, and
by participating in an on-going risk management program.
SECTION 6.5 Fees for Professional Services.
Practice shall be solely responsible for legal, accounting and other
professional services fees incurred and retained by Practice, and not approved
by the Policy Board, except as set forth in Article V herein.
SECTION 6.6 Name.
As part of this Agreement, Manager hereby licenses its rights to Practice
the use of the name "Pima Heart Associates" or "Pima Heart Physicians" in
connection with the operation of Practice for a period of five (5) years.
SECTION 6.7 Material Decisions.
In addition to any other rights of Manager in this Agreement, the following
actions or decisions shall be made or taken, directly or indirectly, by Practice
or the Physician Shareholders only with the consent of Manager (which consent
shall not unreasonably be withheld with respect to subparagraphs (d) or (f)):
(a) Entering into any merger unless Practice is the surviving entity
and after which the Physician Shareholders immediately prior to the date of
the closing of such merger own at least fifty-one percent (51%) of the
capital stock of Practice after the closing;
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(b) Entering into any sale or series of related sales by Practice or
by the Physician Shareholders of the capital stock of Practice during the
term of this Agreement to any party who is not a Physician Shareholder as
of the date hereof, provided such sales may be made to individual
physicians who become full-time employees of Practice in the ordinary
course of Practice's operations and business but only if the Physician
Shareholders as of the date hereof continue to own in the aggregate at
least fifty-one percent (51%) of the Capital Stock of Practice thereafter;
(c) Entering into any agreement or consummating any transaction for
the sale of any of the material assets of Practice;
(d) Paying money or other property by Practice for a majority of the
capital stock or all or substantially all of the assets constituting a
business of any person or entity unless made for investment purposes only;
(e) Paying compensation, benefits or distributions, directly or
indirectly, of any type or nature to any Physician Shareholder until all
amounts due as Physician Expenses, Manager Expenses and Management Fee
currently due and payable have been paid in full;
(f) Deviating from the collection policies generally followed by
Practice prior to the date hereof with respect to any patient account or
other amount due for Practice's services;
(g) Entering into any new relationship or agreement with a Physician
Shareholder or an Affiliate of or a Related Party to a Physician
Shareholder or continuing any existing relationship or agreement with any
such Person to the extent such relationship or agreement is not fully
reflected in a written contract that has been provided to Manager as of the
date hereof; and
(h) All decisions or matters involving commitments of funds or loans
from Manager or its Affiliates.
SECTION 6.8 Employment of Physician Shareholders.
Practice and each of the Physician Shareholders agree that each of the
Physician Shareholders shall be employed by Practice in accordance with the
terms of his employment agreement with Practice dated as of the date hereof or
entered into to be effective as of the effective date of this Agreement, the
term of which employment shall not be less than five (5) years from the
effective date hereof (whether or not he remains an owner of Practice), unless
attributable to the termination of an employment agreement upon the death or
disability of the Physician Shareholder. Notwithstanding the foregoing, Manager
and the other parties agree that (x) after three (3) years from the Effective
Date, up to three (3) Physician Shareholders, who prior to their retiring are
designated in writing by the Practice as a "retiring physician" for
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purposes of this Section 6.8, may terminate their employment with the Practice
and such termination shall not be a breach of this Agreement as long as such
Physician Shareholders have fully retired from the practice of medicine and all
other professional medical duties and (y) (i) up to one (1) Physician
Shareholder in the aggregate at any one time during the first year after the
Closing Date, (ii) up to an aggregate of two (2) Physician Shareholders at any
one time during the second through fifth years after the Closing Date may elect
part-time status in accordance with Practice's policies and (iii) during the
fourth and fifth years after the Closing Date, the Practice may elect, upon
prior written notice to Manager to reduce the potential number of retiring
physicians and replace each retiring physician position which is eliminated with
a position for an additional part-time physician; provided however, at no time
during the fourth and fifth years after the Closing Date shall there be more
than an aggregate at any one time of five (5) retiring and part-time physicians,
and there shall never be more than three (3) retiring physicians in the
aggregate prior to the fifth anniversary of the Closing Date. All such Physician
Shareholders shall remain subject to their noncompetition covenants set forth in
their Employment Agreement no less than for the remainder of such five (5) year
period plus one (1) year thereafter.
SECTION 6.9 Life Insurance.
Practice shall cause each of its physician employees to and the Physician
Shareholders shall cooperate fully with any efforts by Manager to obtain
insurance policies on the life of any such physicians under which Manager would
be the owner and beneficiary. Manager will be solely responsible for the costs
of any such insurance and such costs shall not be Manager Expenses or other
expense deductible from Net Practice Surplus.
SECTION 6.10 Profit Sharing Plan.
(a) Practice shall sponsor or maintain a profit-sharing plan that is
intended to be qualified under Section 401(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), which contains (i) a salary reduction,
elective contribution feature which qualifies as a cash or deferred
arrangement within the meaning of Section 401(k) of the Code and (ii) an
employer matching contribution provision within the meaning of Section
401(m) of the Code ("Practice Qualified Plan"). The employer matching
contribution provision in the Practice Qualified Plan shall match elective
contributions at a rate, and in the aggregate amount, that is at least
equivalent to the employer matching contribution provision contained in the
MedCath Incorporated 401(k) Profit-Sharing Plan and Trust ("MedCath Plan").
(b) All contributions to the Practice Qualified Plan made on behalf
of, or with respect to, any participant thereunder (including, without
limitation, Physician Shareholders, Physician Employees who are not
Physician Shareholders, and Manager employees who are treated as Practice
employees because they are "leased employees" within the meaning of Section
414(n) of the Code with respect to the Practice), shall be paid solely by
the Physician Shareholders from Practice Surplus; provided, however, that
any elective contributions to the Practice Qualified Plan by Physician
Employees that are not Physician Shareholders shall be considered
Professional Compensation and any
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elective contributions to the Practice Qualified Plan by any Manager
employees who are treated as Practice employees because they are "leased
employees" within the meaning of Section 414(n) of the Code with respect to
the Practice shall be considered a Manager Expense.
(c) In addition to the Practice Qualified Plan, Practice shall be
solely responsible for any other employee benefit plan, program, or
arrangement, such as a group health plan or other welfare benefit program,
it chooses to sponsor or maintain for the benefit of Practice employees
(including, without limitation, Physician Shareholders, Physician Employees
who are not Physician Shareholders, and any Manager employees who are
treated as Practice employees because they are "leased employees" within
the meaning of Section 414(n) of the Code). The costs relating to
sponsoring and maintaining any such plans, programs, or arrangements shall
be paid solely by the Physician Shareholders from Practice Surplus.
(d) Unless such expenses are, pursuant to its terms and applicable
law, expenses of such plans or of individual participants, the compensation
of counsel, accountants, corporate trustees, investment managers, and other
agents and service providers necessary in the administration of the
Practice Qualified Plan and any other employee benefit plan, program, or
arrangement adopted and maintained by Practice shall be an Extra Expense,
and shall not be a Physician Expense, a Manager Expense, or an expense of
or borne by Manager. Similarly, unless such expenses are, pursuant to its
terms and applicable law, expenses of such plans or of individual
participants, all such expenses necessary in the administration of the
MedCath Plan and any other employee benefit plan, program, or arrangement
adopted and maintained by Manager shall be a Manager Expense to the extent
such expenses are allocable to Manager employees who are providing services
to Practice on a substantially full-time basis.
(e) From and after the Closing, employees of the Manager who were
employed by Practice (or its predecessors) shall be credited under all of
Manager's employee benefit plans, programs, or arrangements with service,
for eligibility and vesting purposes, equal to the service credited to them
for such purposes under the terms of the corresponding employee benefit
plan, program, or arrangement of the Practice (or its predecessors).
(f) Notwithstanding anything else in this Agreement to the contrary,
all contributions (i.e., employee elective contributions, employer matching
contributions, and discretionary nonelective employer contributions) to the
MedCath Plan made on behalf of, or with respect to, any participant
thereunder who is a Manager employee providing services to Practice on a
substantially full-time basis shall be considered a Manager Expense.
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ARTICLE VII
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
The parties recognize that Parent paid a substantial amount in connection
with this Agreement and Manager will incur substantial costs in providing the
premises, personnel, management, equipment, supplies and other goods and
services being provided hereunder and that the services to be provided by
Manager shall be feasible only if Practice operates an active medical practice
to which the physicians associated with Practice devote their full time and
attention. To that end, subject to Section 7.5.2 hereof:
SECTION 7.1 Restrictive Covenants by Practice.
During the term of this Agreement, Practice and the physicians in the
Practice shall not, directly or indirectly, either as a shareholder, partner,
member, manager or otherwise establish, operate or provide physician services at
any medical office, clinic or other health care facility providing services,
including but not limited to ancillary services, substantially similar to those
provided by Practice pursuant to this Agreement anywhere within the Territory or
within the Arizona counties of Pima, Pinal, Cochise and Santa Cruz unless the
proceeds of such services inure to the benefit of the Practice and all revenues
therefrom shall constitute Net Practice Revenue except for revenue from sources
expressly set forth on Schedule 7.1. Additionally, during the term of this
Agreement and for a period of twelve (12) months following the termination
hereof prior to the 40th anniversary of the date hereof for any reason other
than due to a default by Manager, Practice and the physicians in the Practice
(except to the extent such physicians are no longer employed by Practice and are
not subject to any restrictive covenants herein or in their Employment
Agreement), shall not, directly or indirectly, enter into any agreement or
arrangement similar to this Agreement with any other person or party (whether in
a single transaction or series of related transactions) or sell substantially
all the assets of Practice or sell or issue ownership interests (whether through
a sale, merger or otherwise) in Practice except to individual physicians who
become full-time employees of Practice in the ordinary course of Practice's
operations and business. Notwithstanding anything to the contrary in this
Agreement, the Practice and the physicians in the Practice may continue to
provide any physician or related services to any medical office, clinic, or
other health care facility, if such services or facilities are listed on
Schedule 7.1, the revenue from which shall constitute Net Practice Revenue
except as expressly set forth on Schedule 7.1.
SECTION 7.2 Restrictive Covenants By Current Physician Shareholders
and Physician Employees.
7.2.1 Practice shall obtain and enforce formal written agreements from
its current Physician Shareholders pursuant to which the Physician
Shareholders agree not to within the Territory or within fifty (50) miles
of any office or location where Practice maintains an office in which such
physician had provided services prior to termination of employment,
directly or indirectly, whether as a shareholder, partner, employee,
director, consultant, agent or otherwise (i) establish, operate or provide
physician services at any
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medical office, hospital, clinic or outpatient and/or ambulatory treatment
or diagnostic facility providing services, including but not limited to
ancillary services, substantially similar to those provided by Practice
except as an employee of Practice or as set forth on Schedule 7.1, or (ii)
solicit or employ any employee or consultant of Practice or of Manager, in
all cases during the term of their employment and for a period of twelve
(12) months after any termination of employment with Practice for any
reason (unless this Agreement has been terminated as of such date in
accordance with the terms of this Agreement as a result of a default
hereunder by Manager). Practice also shall use its reasonable best efforts
to obtain appropriate restrictive covenants from physicians who are not
Physician Shareholders.
7.2.2 In addition to the other restrictions in this Article VII, the
Physician Shareholders hereby agree with Manager (and all future physicians
who become shareholders of Practice shall be required to agree in writing)
and shall enter into a similar covenant with Practice, which Practice
agrees to fully enforce, that for a period of twelve (12) months after any
termination of employment with Practice (unless this Agreement has been
terminated as of such date in accordance with the terms of this Agreement
as a result of a default hereunder by Manager) that they shall neither
accept employment to practice medicine or become a consultant for the
purpose of providing such medical services from or with any other party or
entity, or group of affiliated parties or entities (a "New Employer") if at
least fifty-one percent (51%) of the then current Physician Shareholders of
Practice within any twelve (12) month period accept employment or enter
into any consulting or other similar arrangement with such New Employer at
the same time or in a series of related circumstances, nor engage in any
other transaction which is substantially similar to that described in this
sentence (a "Group Departure") unless such New Employer or the Physician
Shareholders personally assume all liabilities and obligations of Practice
to Manager under Article VIII with respect to such Physician Shareholders
and under other provisions herein related to such obligations and
liabilities plus any amount due from Practice to Manager under Section
5.5(b)(iii).
7.2.3 The covenants of the Physician Shareholders and the Physician
Employees above are hereafter referred to as the "Restrictive Covenants".
SECTION 7.3 Restrictive Covenants by Future Physician Employees.
Unless otherwise agreed to in writing by Manager, Practice shall obtain and
enforce formal agreements from each of its future Physician Employees (and
future Physician Shareholders who are not currently Physician Employees), which
contain the restrictions and covenants set forth in Section 7.2.
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SECTION 7.4 Physician Shareholder and Physician Employee Liquidated
Damages.
After the fifth (5th) anniversary of the date hereof, the Physician
Shareholders and Physician Employees may be released from their Restrictive
Covenants with the written consent of Manager by paying liquidated damages in an
amount as follows:
For Physician Shareholders and Physician Employees who are physicians
employed by Practice on the date of this Agreement and for physicians who are
shareholders or employees of Practice in the future, "Liquidated Damages" means
an amount with respect to the physician equal to the greater of (a) such
physician's Form W-2 taxable compensation paid by Practice to him for the most
recently ended calendar year, and (b) the average of such physician's Form W-2
taxable compensation paid by Practice to him for the three most recently ended
calendar years.
Such payment of Liquidated Damages or any recovery for breach shall be made
to Manager by Practice simultaneously with the physician being released from the
restrictive covenants (if consented to in writing by Manager) or any collection
of a judgment. Such payment shall be first applied to all costs incurred by
Manager or Practice in the enforcement of the restrictive covenants for that
departing physician and in recruiting a replacement physician for that departing
physician. The remainder, if any, shall become an additional Management Fee to
be paid to Manager pursuant to Article VIII hereof.
Manager shall be entitled to designate which remedies shall be sought by
Practice for breaches of restrictive covenants or such employment agreements and
Practice shall diligently pursue those remedies.
SECTION 7.5 Development of Exclusive Ventures.
7.5.1 Exclusive of ventures which exist as of June 30, 1997 and are
listed on Schedule 7.5.2, during the term of this Agreement (the "Exclusive
Period") subject to applicable law, Manager, Practice and the Physician
Shareholders, including any future shareholders of Practice may discuss and
explore the feasibility of acquiring or developing in the Territory (i) a
hospital (either a general acute care hospital or a specialty heart
hospital), and/or (ii) a cardiac catheterization lab, (collectively the
"Exclusive Ventures"). Subject to applicable law, each such Exclusive
Venture shall be owned by a joint venture, which in turn would be owned by
Manager, Practice, Physician Shareholders and other area physicians in
mutually agree upon ownership percentages. Each Exclusive Venture would be
managed by Manager or its designee for a management fee which would not
exceed reasonable management fees which are paid to other parties for
managing similar facilities or activities in bona fide transactions
involving unrelated persons or entities. Capital shall be contributed to
the joint venture on a pro rata basis by Manager or its designee, on the
one hand, and Practice and/or the Physician Shareholders on the other hand,
in accordance with their ownership percentages. No additional payment would
be due to Manager, Practice or the Physician Shareholders in connection
with the development or ownership of any Exclusive Venture other than pro
rata
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distributions to them from the joint venture. All material decisions and
determinations to be made hereunder with respect to the development,
ownership and operation of any such Exclusive Venture, subject to
applicable law, shall be made by mutual consent of Manager and/or its
designee on the one hand, and a majority of the Physician Shareholders
owning an interest in the Exclusive Venture (directly or indirectly), on
the other hand. Manager, Practice and the Physician Shareholders agree to
cooperate and negotiate with one another in good faith with respect to the
development or acquisition of the Exclusive Venture and to enter into all
such additional agreements and to take all such additional actions as are
reasonably necessary or appropriate to fulfill the purpose and intent of
this Section 7.5.
In the event that health care counsel of Manager, which is reasonably
acceptable to Practice, advises that the legal entity owning any such
health care facility or service should be owned only by Practice, the
Physician Shareholders or Affiliates thereof, then the parties hereto shall
instead, to the extent consistent with applicable laws and regulations,
enter into a management and service agreement which will provide Manager
with substantially all of the benefits which it would have received had it
been legally entitled to be an owner of such facility or service.
7.5.2 During the Exclusive Period, Practice agrees that it will not,
directly or indirectly, develop or acquire an interest in any Exclusive
Venture not formed as of the date of this Agreement and listed on Schedule
7.5.2, and each Physician Shareholder agrees that he will not develop or
acquire an interest in any Exclusive Venture in the Territory as long as
such Physician Shareholder is a shareholder or employee of Practice and for
a period of two (2) years thereafter, other than through a joint venture
between Manager or its designee, on the one hand, and Practice and/or the
Physician Shareholders on the other hand, as provided in (a) above.
SECTION 7.6 Restrictive Covenants by Manager.
As long as Manager is managing Practice in accordance with the terms of
this Agreement, Manager shall not manage the medical practice of any other
cardiologist or group of cardiologists within the Territory without the prior
written consent of Practice, provided that nothing in this Section 7.6 shall
restrict Manager or its Affiliates from managing the medical practices of any of
the physicians listed on Schedule 7.6 or of any other physician who hereafter
becomes associated with such medical practices as long as the majority of the
physicians employed by such other medical practice are physicians listed on
Schedule 7.6. Manager shall be entitled to continue to manage any such medical
practice which meets the criteria set forth above even if, over time, physicians
on Schedule 7.6 withdraw from such practice or new physicians not listed on
Schedule 7.6 join such medical practice.
SECTION 7.7 Enforcement.
Manager, Practice and the Physician Shareholders acknowledge and
agree that since a remedy at law for any breach or attempted breach of the
provisions of this Article VII shall be
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inadequate, either party shall be entitled to specific performance and
injunctive or other equitable relief in case of any such breach or attempted
breach, in addition to whatever other remedies may exist by law. All parties
hereto also waive any requirement for the securing or posting of any bond in
connection with the obtaining of any such injunctive or other equitable relief.
If any provision of Article VII relating to the restrictive period, scope of
activity restricted and/or the territory described therein shall be declared by
a court of competent jurisdiction to exceed the maximum time period, scope of
activity restricted or geographical area such court deems reasonable and
enforceable under applicable law, the time period, scope of activity restricted
and/or area of restriction held reasonable and enforceable by the court shall
thereafter be the restrictive period, scope of activity restricted and/or the
territory applicable to the restrictive covenant provisions in this Article VII.
The invalidity or non-enforceability of this Article VII in any respect shall
not affect the validity or enforceability of the remainder of this Article VII
or of any other provisions of this Agreement.
ARTICLE VIII
FINANCIAL ARRANGEMENTS
SECTION 8.1 Management Fees.
Practice and Manager agree that the compensation set forth in this Article
VIII is being paid to Manager in consideration of the substantial commitment
made by Manager hereunder and that such fees are fair and reasonable. Manager
shall be paid as its management fee for each fiscal year of Practice during the
term of this Agreement (the "Management Fee") an amount equal to all Net
Practice Revenues for the fiscal year subject however to the obligation of
Manager to pay to Practice an amount equal to all Physician Expenses and all
Practice Surplus for the fiscal year, provided, however, it is acknowledged and
agreed that Practice Surplus shall not actually be paid to the Physician
Shareholders until the Bank Loan is paid in full. Also due to Manager as
"Management Fees" is any Liquidated Damages amount collected by Practice from a
Physician Shareholder or Physician Employee pursuant to Article VII or any
amount collected in lieu thereof pursuant to an arbitration or judicial
proceeding addressing the application of the Restrictive Covenants.
The amount of Management Fee due to Manager each month shall be determined
using the accrual method of accounting. It is acknowledged and agreed that the
amounts actually available for distribution to the parties in accordance with
the other terms of this Agreement shall be subject in all events to Section
5.5.2(ii).
SECTION 8.2 Collection of Management Fee.
The Management Fees to be paid to Manager under this Article VIII shall be
payable monthly within forty-five (45) days after the end of each month provided
that after six (6) months from the date hereof, such fee shall be due within
thirty (30) days after the end of each month
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based upon the previous month's operating results of Practice. Adjustments to
the estimated payments shall be made to reconcile actual amounts due under this
Article VIII, by the end of the following month during each calendar quarter.
Upon preparation of annual financial statements, final adjustments to the
Management Fee for the fiscal year shall be made, including any modification
resulting from a change in the amount of Adjustments after comparing collections
to billings of the Practice for such period, and any additional payments owing
to Manager or Practice shall then be made. Any audit adjustments shall be
reflected in the calculation for the fourth quarter. Operating results shall be
prepared on a consistent basis in accordance with GAAP. Amounts due to Manager
pursuant to Article VII shall be paid to Manager immediately upon receipt by
Practice.
SECTION 8.3 Limited Guaranty Agreement.
Each existing and any future Physician Shareholder shall execute the
Limited Guaranty Agreement attached hereto as Exhibit 8.3.
SECTION 8.4 Fees Due from New Physicians.
Net Practice Revenues shall include, without limitation, all revenue
resulting from physicians who are first hired or retained by Practice after the
date hereof.
SECTION 8.5 Amounts Due Physician Shareholder Upon Retirement.
In the event that a Physician Shareholder as of the date hereof hereafter
fully retires from the practice of medicine in accordance with the policies of
Practice (and the Practice first so certifies in writing to Manager) and such
Physician Shareholder at no time is in violation of his obligations under
Article VII hereof or under the Liquidated Damages Agreement entered into as of
the date hereof, then such Physician Shareholder shall be entitled to receive
from Manager the portion of the actual collected net proceeds of the accounts
receivable owned by Manager as of the Closing Date which arose from services
rendered prior to the Closing Date in accordance with Schedule 8.5. Such amounts
shall be paid to such retiring Physician Shareholder in eighteen (18) equal
monthly payments following his retirement.
ARTICLE IX
RECORDS
SECTION 9.1 Patient Records.
All Patient Records maintained by or for Practice shall be and remain
the property of the Practice. Upon termination of this Agreement, Practice shall
retain all patient medical records maintained by Practice or Manager in the name
of Practice. Practice shall, at its option at no additional cost to Practice, be
entitled to retain copies of financial and accounting records of Manager
relating to all services performed by Practice.
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SECTION 9.2 Records Owned by Manager.
All records relating in any way to the operation of Practice which are not
the property of Practice under the provisions of Section 9.1 above, shall at all
times be the property of Manager but Practice shall be entitled to copies of all
such records.
SECTION 9.3 Access to Records.
During the term of this Agreement, and thereafter, Practice or its designee
shall have reasonable access in Tucson, Arizona during normal business hours to
Practice's and Manager's financial records which relate to Practice, including,
but not limited to, records of collections, expenses and disbursements as kept
by Manager in performing Manager's obligations under this Agreement, and
Practice may copy any or all such records.
ARTICLE X
INSURANCE AND INDEMNITY
SECTION 10.1 Insurance to be Maintained by Practice.
Throughout the term of this Agreement, Practice shall maintain
comprehensive professional liability insurance with limits of not less than
$1,000,000 per claim and with aggregate policy limits of not less than
$3,000,000 for Practice and an excess liability policy in the amount of not less
than $5,000,000, with such carrier as is approved by the Policy Board.
Malpractice premiums, deductibles and such accruals shall be a Manager Expense.
Practice shall be responsible for all liabilities in excess of the limits of
such policies. Manager shall have the option, with Policy Board approval, of
providing such professional liability insurance through an alternative program,
provided such program meets the requirements of the Insurance Commissioner of
the State of Arizona.
SECTION 10.2 Insurance to be Maintained by Manager.
Throughout the term of this Agreement, Manager will provide and maintain,
as a Manager Expense, comprehensive professional liability insurance for all
professional employees of Manager, if any, with limits and with such carrier as
provided above and comprehensive general liability and property insurance
covering Practice premises and operations with limits and with such carrier as
determined reasonable by Manager in its national program.
SECTION 10.3 Tail Insurance Coverage.
Practice will cause each individual physician who becomes associated with
Practice after the date hereof to enter into an agreement with Practice that
upon termination of such physician's relationship with Practice, for any reason,
and in the event tail insurance is not provided for such physician under
Practice's insurance policies, tail insurance coverage will be purchased by the
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<PAGE>
individual physician; provided however, in the event that such physician's
relationship with Practice is terminated due to death or disability or due to an
uncured event of default by Practice under its agreement for the services of
such physician, then Practice, rather than such physician, shall pay the costs
of such tail insurance. Such provisions may be contained in employment
agreements, restrictive covenant agreements or other agreements entered into by
Practice and the individual physicians, and Practice hereby covenants with
Manager to enforce such provisions relating to the tail insurance coverage or to
provide such coverage at the expense of Practice. The Policy Board may determine
to provide coverage for such a physician as a Manager Expense on a physician by
physician basis. The Policy Board may also decide to require other categories of
physicians currently employed by Practice to provide tail coverage upon
termination of employment with Practice.
SECTION 10.4 Additional Insureds.
Practice and Manager agree to use their reasonable efforts to have each
other named as an additional insured on the other's respective professional
liability insurance programs.
SECTION 10.5 Indemnification.
(a) Practice shall indemnify, hold harmless and defend Manager, its
officers, directors, shareholders and employees, from and against any and
all liability, loss, damage, claim, causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly,
by or as a result of the performance of medical services or the performance
of any intentional acts, negligent acts or omissions by Practice and/or its
shareholders, agents, employees and/or subcontractors (other than Manager,
Parent or their agents) during the term hereof.
(b) Manager shall indemnify, hold harmless and defend Practice, its
officers, shareholders, directors and employees, from and against any and
all liability, loss, damage, claim causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by
insurance, caused or asserted to have been caused, directly or indirectly,
by or as a result of the performance of any intentional acts, negligent
acts or omissions by Manager and/or its shareholders, agents, employees
and/or subcontractors (other than Practice) during the term of this
Agreement.
SECTION 10.6 Rules Regarding Indemnification.
The obligations and liabilities of each indemnifying party hereunder with
respect to claims resulting from the assertion of liability by the other party
or third parties shall be subject to the following terms and conditions:
10.6.1 The indemnified party shall give prompt written notice to the
indemnifying party of any claim which might give rise to a claim by the
indemnified party against the indemnifying party based on the indemnity
agreement contained in Section
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10.5 hereof, stating the nature and basis of said claims and the amounts
thereof, to the extent known. If written notice is not given to the
indemnifying party within thirty (30) days from receipt of notice of the
claim to be indemnified, or such shorter time as shall otherwise prejudice
the rights of the indemnifying party, and in sufficient detail to apprise
the indemnifying party of the nature of the claim (in each instance taking
into account the facts and circumstances known by the indemnified party
with respect to such claim), the indemnifying party shall not be liable to
the party seeking indemnification. The indemnifying party shall have the
right, at its option, to compromise or defend, at its own expense and by
its own counsel, any claim involving the asserted liability of the party
seeking indemnification. If any indemnifying party shall undertake to
compromise or defend any such asserted liability, it shall promptly notify
the party seeking indemnification of its intention to do so, and the party
seeking indemnification agrees to cooperate fully with the indemnifying
party and its counsel in the compromise of, or defense against, any such
asserted liability. All costs and expenses incurred in connection with such
cooperation shall become by the indemnifying party. In any event, the
indemnified party shall have the right, at its own expense and by its own
counsel to participate in the defense of such asserted liability.
10.6.2 The indemnified party shall not make any settlement of any
claims without the written consent of the indemnifying party, which consent
shall not be unreasonably withheld or delayed.
SECTION 10.7 Offset
10.7.1 Manager is hereby authorized upon ten (10) days prior written notice
to Practice to offset or apply any funds of Practice or the Physician
Shareholders which Manager holds from time to time or which Manager owes to
Practice or to the Physician Shareholders against or to any amounts owed by
Practice or a Physician Shareholder to Manager under this Agreement or to
MedCath Incorporated under the Share Exchange Agreement; provided however, if
within ten (10) days of such written notice Practice objects thereto, such funds
shall be placed with an escrow agent pursuant to a mutually acceptable escrow
agreement until any dispute with respect thereto is finally resolved through
binding arbitration.
ARTICLE XI
TERM AND TERMINATION
SECTION 11.1 Term of Agreement.
This Agreement shall commence on the date hereof and shall expire on the
40th anniversary hereof unless earlier terminated pursuant to the terms hereof
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SECTION 11.2 Extended Term.
Unless earlier terminated as provided for in this Agreement, the term of
this Agreement shall be automatically extended for additional terms of five (5)
years each, unless Manager delivers to Practice, or Practice delivers to
Manager, not less than six (6) months prior to the expiration of the preceding
term, written notice of intention not to extend the term of this Agreement. If
the preceding sentence would result in this Agreement being in violation of any
applicable law or would render this Agreement void or unenforceable, such
sentence shall be void and of no further force or effect.
SECTION 11.3 Termination by Practice.
Practice may terminate this Agreement as follows:
11.3.1 In the event or the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Manager, or
upon other action taken or suffered, voluntarily or involuntarily, under
any federal or state law for the benefit of debtors by Manager, except for
the filing of a petition in involuntary bankruptcy against Manager which is
dismissed within ninety (90) days thereafter, Practice may give notice of
the immediate termination of this Agreement; or
11.3.2 In the event Manager shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement and such default shall continue for a period of forty-five (45)
days after written notice thereof has been given to Manager by Practice or
Manager shall fail to remit any material payments due as provided in
Article VIII hereof and such failure to remit shall continue for a period
of fifteen (15) days after written notice thereof, Practice may terminate
this Agreement. Termination of this Agreement pursuant to this subsection
(b) by Practice shall require the affirmative vote of Physician
Shareholders holding at least seventy-five (75%) of the ownership of
Practice.
11.3.3 During the twenty-four (24) month period commencing as of the
date hereof, Practice shall have the right to terminate this Agreement in
the event that due to its entering into this Agreement with Manager,
Practice loses managed care contracts which in the aggregate represent
thirty percent (30%) or more of the Practice's revenues for the trailing
twelve (12) months and such contracts are not replaced within the following
six (6) months by contracts or fee for service work generating an
equivalent amount of revenue, provided that Practice shall have no right to
terminate this Agreement if such contracts are lost due to Physicians
leaving the Practice, failing to comply with the terms of this Agreement or
failing to use their best efforts for the benefit of the Practice.
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SECTION 11.4 Termination by Manager.
Manager may terminate this Agreement as follows:
11.4.1 In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Practice, or
upon other action taken or suffered, voluntary or involuntarily, under any
federal or state law for the benefit of debtors by Practice, except for the
filing of a petition in involuntary bankruptcy against Practice which is
dismissed within ninety (90) days thereafter, Manager may give notice of
the immediate termination of this Agreement;
11.4.2 In the event Practice shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of forty-five (45)
days after written notice thereof has been given to Practice by Manager,
Manager may give notice of the immediate termination of this Agreement;
11.4.3 In the event that on or before the fifth anniversary of this
Agreement more than four (4) or more physicians employed by Practice during
the prior twelve (12) months cease for any reason (other than death or
disability) to be employed by Practice.
SECTION 11.5 Actions after Termination.
Upon termination of this Agreement by either party for any reason or upon
expiration of this Agreement, Practice and the Physician Shareholders jointly
and severally agree to:
(i) Purchase from Manager at book value all intangible assets set
forth on the Opening Balance Sheet, or otherwise on the balance sheet of
Manager and relating to Practice, all as adjusted through the last day of
the month most recently ended prior to the date of such termination in
accordance with GAAP to reflect amortization or depreciation of
intangibles;
(ii) Purchase from Manager any real estate owned by Manager and used
exclusively for the operation of Practice's medical practice at the
appraised value thereof. In the event of any repurchase of such real
property, the appraised value shall be determined by Manager and Practice
each selecting a duly qualified appraiser, who in turn will agree on a
third appraiser. This agreed upon appraiser shall perform the appraisal
which shall be binding on both parties. In the event either party fails to
select an appraiser within fifteen (15) days of the selection of an
appraiser by the other party, the appraiser selected by the other party
shall make the selection of the third-party appraiser;
(iii) Purchase from Manager at book value all improvements, additions
or leasehold improvements which have been made by Manager and which are
used solely for the operation or management of the Practice;
<PAGE>
(iv) Assume all debt and all contracts, payables and leases which are
obligations of Manager and which are used solely for the operation or
management of the Practice; and
(v) Purchase from Manager at book value all of the equipment of
Manager used solely by Manager or Practice for the benefit of Practice
including all replacements and additions thereto made by Manager pursuant
to the performance of its obligations under this Agreement, and all other
assets, including [inventory, accounts receivable] and supplies, tangibles
and intangibles, set forth on the balance sheet of Manager as of the date
it begins to provide services to Practice hereunder, as adjusted through
the last day of the month most recently ended prior to the date of such
termination in accordance with GAAP to reflect operations of Practice,
depreciation, amortization and other adjustments of assets shown on the
Opening Balance Sheet and all other assets owned or used by Manager
exclusively in connection with the operation of Practice.
(vi) In the event this Agreement is terminated pursuant to Section
11.3.3, then Practice and its Physician Shareholders, jointly and
severally, shall pay and deliver to Manager Five Hundred Thousand and Six
(500,006) shares of MedCath's Common Stock (even though its value may
substantially exceed $7,000,000.00), less the aggregate amount paid to
Manager under Article VIII excluding amounts paid as Manager Expenses,
Physician Expenses and Practice Surplus and Liquidated Damages paid
pursuant to the terms of this Agreement since the date of this Agreement.
SECTION 11.6 Closing of Repurchase by Practice and Effective Date of
Termination.
Practice and the Physician Shareholders shall pay cash for the repurchased
assets. The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Manager assumed by Practice and Physician Shareholders.
Practice and any physician associated with Practice shall execute such documents
as may be required to assume the liabilities set forth in Section 11.5 and to
remove Manager from any liability with respect to such repurchased assets and
with respect to any such property leased or subleased by Manager. Manager will
execute and deliver such documents as are customary in asset sales with general
warranties of title, and such assets shall be in no worse condition than when
delivered to Manager by Practice, normal wear and tear excepted, and such
documents to be executed and delivered by Manager shall be similar to the
documents executed by Practice in connection with the asset sale to Parent. The
closing date for the repurchase shall be determined by Practice, but shall in no
event occur later than 150 days from the date of the notice of termination. The
termination of this Agreement shall become effective upon the closing of the
sale of the assets. Manager shall have the right, in its sole and absolute
discretion, to waive the repurchase requirements herein, in which event, the
termination of this Agreement shall become effective upon the execution and
delivery of such waiver notice. From and after any termination, each party shall
provide the other party with reasonable access to books and records then owned
by it to permit such requesting party to satisfy reporting and contractual
obligations which may be required of it.
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ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 Assignment.
Manageri shall have the right to assign its rights hereunder to any Person
that is an Affiliate of or Related Party to Manager and to any lending
institution, for security purposes or as collateral, from which Parent or
Manager obtains financing, or to any purchaser of substantially all of the
assets of Parent. Except as set forth above, neither Manager nor Practice shall
have the right to assign their respective rights and obligations hereunder
without the written consent of the other party. For purposes of this paragraph,
the sale or transfer of twenty percent (20%) or more of the outstanding stock in
Manager shall be deemed an assignment of this Agreement. Notwithstanding the
foregoing, the Manager shall have the right to assign all or any portion of this
Agreement without the prior consent of Practice to (x) a purchaser of
substantially all of the assets of Parent that also purchases all of Parent's
interests in and to Manager or to (y) Arizona Medical Development Company, LLC,
an Arizona limited liability company.
SECTION 12.2 Whole Agreement, Modification.
This Agreement constitutes the entire agreement between the parties. There
are no other agreements or understandings, written or oral between the parties
regarding this Agreement, the Exhibits and the Schedules, other than as set
forth herein. This Agreement shall not be modified or amended except by a
written document executed by both parties to this Agreement, and such written
modification(s) shall be attached hereto.
SECTION 12.3........Notices.
All notices required or permitted by this Agreement shall be in
writing and shall be addressed as follows:
To Manager: MedCath Physician Management, Inc.
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attn: President
With a copy to: Hal A. Levinson, Esq.
Moore & Van Allen, PLLC
100 N. Tryon Street, Floor 47
Charlotte, North Carolina 28202-4003
35
<PAGE>
To Practice: Pima Heart Physicians, P.C.
445 N. Silverbell, Suite 200
Tucson, Arizona 85745
Attn: Chief Executive Officer
With a copy to: Jeff C. Padden, Esq.
Bonn, Luscher, Padden & Wilkins
805 North Second Street
Phoenix, Arizona 85004
or to such other address as either party shall notify the other.
SECTION 12.4 Binding on Successors.
Subject to Section 12.1, this Agreement shall be binding upon the parties
hereto, and their successors, assigns, heirs and beneficiaries.
SECTION 12.5 Waiver of Provisions.
Any waiver of any terms and conditions hereof must be in writing, and
signed by the parties hereto. The waiver of any of the terms and conditions of
this Agreement shall not be construed as a waiver of any other terms and
conditions hereof.
SECTION 12.6 Governing Law.
The validity, interpretation and performance of this Agreement shall be
governed by and construed in accordance with the laws of the State of Arizona.
The parties acknowledge that Manager is not authorized or qualified to engage in
any activity which may be construed or deemed to constitute the practice of
medicine. To the extent any act or service required of Manager in this Agreement
should be construed or deemed, by any governmental authority, agency or court to
constitute the practice of medicine, the performance of said act or service by
Manager shall be deemed waived and forever unenforceable and the provisions of
Section 12.12 shall be applicable.
SECTION 12.7 Severability.
The provisions of this Agreement shall be deemed severable and if any
portion shall be held invalid, illegal or unenforceable for any reason, the
remainder of this Agreement shall be effective and binding upon the parties.
SECTION 12.8 Additional Documents.
Each of the parties hereto agrees to execute any document or documents that
may be requested from time to time by the other party to implement or complete
such party's obligations pursuant to this Agreement.
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<PAGE>
SECTION 12.9 Attorneys' Fees.
If legal action is commenced by either party to enforce or defend its
rights under this Agreement, the prevailing party in such action shall be
entitled to recover its costs and reasonable attorneys' fees in addition to any
other relief granted.
SECTION 12.10 Time is of the Essence.
Time is hereby expressly declared to be of the essence in this Agreement.
SECTION 12.11 Confidentiality.
Except for disclosure to its attorneys, accountants, bankers, underwriters
or lenders, or as necessary or desirable for conduct of business, including
negotiations with other acquisition candidates, neither party hereto shall
disseminate or release to any third party any information regarding any
provision of this Agreement, or any financial information regarding the other
(past, present or future) that was obtained by the other in the course of the
negotiation of this Agreement or in the course of the performance of this
Agreement, without the other party's written approval; provided, however, the
foregoing shall not apply to information which (i) is generally available to the
public other than as a result of a breach of confidentiality provisions, (ii)
becomes available on a non-confidential basis from a source other than the other
party, or its affiliates or agents, which source was not itself bound by a
confidentiality agreement, or (iii) which is required to be disclosed by law,
including securities laws or pursuant to court order. Notwithstanding the
foregoing, Practice may disclose information it deems advisable to its physician
employees provided such physician employees are advised of the confidential
nature of such information and agree to keep such information confidential as
provided herein. Manager shall be a third party beneficiary of such agreements.
SECTION 12.12 Contract Modifications for Prospective Legal Events.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision or regulatory agency or legal counsel in such a
manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, Practice and Manager shall amend this Agreement as
necessary to eliminate such violation. To the maximum extent possible, any such
amendment shall preserve the underlying economic and financial arrangements and
other obligations between Practice and Manager. To the extent the parties cannot
agree on any such amendment or changes, the matter shall be submitted to binding
arbitration upon the request of either party and through the arbitration process
an equitable modification shall be implemented based on all of the facts and
circumstances or the Agreement will terminate.
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SECTION 12.13 Remedies Cumulative; Survivability.
No remedy set forth in this Agreement or otherwise conferred upon or
reserved to any party shall be considered exclusive of any other remedy
available to any party, but the same shall be distinct separate and cumulative
and may be exercised from time to time as often as occasion may arise or as may
be deemed expedient. Pursuit of any remedy set forth in this Agreement shall not
preclude pursuit of any other remedy provided in this Agreement or any other
remedy provided for in this Agreement constitute a waiver of any amount due from
a defaulting party under this Agreement or of any damages accruing by reason of
the violation of any of its terms, provisions and covenants. No waiver of any
violation shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions and covenants contained in
this Agreement, and forbearance to enforce one or more of the remedies provided
on an event of default shall not be deemed or construed to constitute a waiver
of such default or of any other remedy provided for in this Agreement. The
termination of this Agreement shall not affect the remedies and rights of a
party hereunder with respect to a breach of this Agreement occurring on or
before such termination.
SECTION 12.14 Language Construction.
The language in all parts of this Agreement shall be construed, in all
cases, according to its fair meaning, and not for or against either party
hereto. The parties acknowledge that each party and its counsel have reviewed
and revised this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement.
SECTION 12.15 No Obligation to Third Parties.
None of the obligations and duties of Manager or Practice under this
Agreement shall in any way or in any manner be deemed to create any obligation
of Manager or of Practice to, or any rights in, any person or entity not a party
to this Agreement.
SECTION 12.16 Communications.
Practice and Manager agree that good communication between the parties is
essential to the successful performance of this Agreement, and each pledges to
communicate fully and clearly with the other on matters relating to the
successful operation of Practice.
SECTION 12.17 Counterpart Executions; Facsimiles.
This Agreement may be executed in any number of counterparts with the same
effect as if all of the parties had signed the same document. Such executions
may be transmitted to the parties by facsimile and such facsimile execution
shall have the full force and effect of an original signature. All fully
executed counterparts, whether original executions or facsimile executions or a
combination, shall be construed together and shall constitute one and the same
agreement.
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SECTION 12.18 Arbitration.
The parties hereto agree that any dispute between them other than an action
or proceeding for injunctive or other equitable relief, shall be resolved by
binding arbitration. Such arbitration shall be conducted by the American
Arbitration Association in accordance with its then existing commercial rules
applicable to such disputes. Such arbitration shall be conducted in Tucson,
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s) effective as of the day and year first above
written.
39
<PAGE>
EXECUTION PAGE
TO THE
SERVICE AGREEMENT
BETWEEN
PIMA HEART PHYSICIANS, P.C.
AND
PIMA HEART ASSOCIATES, P.C.
JUNE 30, 1997
PRACTICE:
PIMA HEART PHYSICIANS, P.C.
By: /s/ Santiago C. Ramirez
--------------------------
Title:
MANAGER:
PIMA HEART ASSOCIATES, P.C.
By: /s/ David I. Lapan
--------------------
Title:
40
<PAGE>
The Physician Shareholders of Practice hereby execute this Agreement for
purposes of acknowledging and agreeing to be bound by the terms of Sections 5.5,
6.3, 6.7, 6.8, 6.9, Article VII, Sections 8.3, 10.7, 11.5 and 11.6 hereof.
/s/ Stephen S. Algeo
--------------------
Stephen S. Algeo, M.D.
/s/ John E. Boulet
------------------
John E. Boulet, M.D.
/s/ Laryenth D. Lancaster
-------------------------
Laryenth D. Lancaster, M.D.
/s/ David I. Lapan
------------------
David I. Lapan, M.D.
/s/ Monty C. Morales
-----------------------------------------
Monty C. Morales, M.D.
/s/ Marius M. Wagner
-----------------------------------------
Marius M. Wagner, M.D.
/s/ Edward Byrne- Quinn
-----------------------------------------
Edward Byrne-Quinn, M.D.
/s/ Jose J. Fernandez
-----------------------------------------
Jose J. Fernandez, M.D.
/s/ Charles A. Katzenberg
-----------------------------------------
Charles A. Katzenberg, M.D.
/s/ Lou L. Lancero
-----------------------------------------
Lou L. Lancero, M.D.
41
<PAGE>
/s/ Santiago C. Ramirez
-----------------------------------------
Santiago C. Ramirez, M.D.
/s/ Lawrence P. Temkin
-----------------------------------------
Lawrence P. Temkin, M.D.
/s/ Jerrold A. Winter
-----------------------------------------
Jerrold A. Winter, M.D.
42
<PAGE>
Schedule 2.25
Territory shall mean Pima, Pinal, Cochise and Santa Cruz counties, Arizona.
43
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Schedule 7.6
1. All cardiologists associated with Pima Heart Physicians, P.C. or Pima Heart
Associates, P.C. whether now or hereafter;
2. All cardiologists who as of _________ directly or indirectly have an
ownership interest in MedCath of Tucson, L.L.C. or CCT, L.L.C.
<PAGE>
Schedule 8.5
Each Physician Shareholder as of the Closing Date shall be entitled to receive
[ ]% of amounts due to Physician Shareholders upon retirement under Section
8.5 of the Service Agreement.
[ ] These portsion have been omitted and filed separately with the Commission
pursuant to request for confidential treatment.
LIQUIDATED DAMAGES AGREEMENT
THIS LIQUIDATED DAMAGES AGREEMENT (the "Agreement") dated as of the 30th
day of June, 1997 is by and among those Shareholders of PIMA HEART ASSOCIATES,
P.C., an Arizona corporation (the "Company") who have executed this Agreement
below (each such person being individually referred to as a "Shareholder" and
collectively as the "Shareholders"), MEDCATH INCORPORATED, a North Carolina
corporation ("MedCath") and PIMA HEART PHYSICIANS, P.C., an Arizona professional
corporation (the "Practice").
RECITALS:
1. The Shareholders are the owners of all of the issued and outstanding
common shares of the Company;
2. The Shareholders are also the owners of Practice which specializes in
the practice of cardiology;
3. As of the date hereof, MedCath and the Shareholders have entered into
that certain Share Exchange Agreement and Plan of Reorganization (the "Share
Exchange Agreement") pursuant to which the Shareholders shall exchange their
common shares of the Company for common shares of MedCath;
4. As a material condition to the closing of such transaction, and as an
inducement to MedCath to enter into such transaction, each of the Shareholders
have agreed to become employed by the Practice and to cause the Practice to
enter into as of the date hereof a Service Agreement with the Company (the
"Service Agreement");
5. MedCath would not enter into the Share Exchange Agreement if each of the
Shareholders had not agreed to be employed by the Practice and to enter into
this Agreement;
6. The Shareholders acknowledge that MedCath and the Company will be
materially damaged if they fail to remain employed by the Practice in accordance
with the terms of this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. The parties hereto acknowledge that the Company is, as of the date
hereof, entering into the Service Agreement with the Practice, which Service
Agreement requires that for the benefit of the Practice and the Company, that
each of the Shareholders, as physician employees of Practice as of the date
hereof, execute an employment agreement (an "Employment Agreement") for the
provision of the full-time service of such individual. MedCath would not enter
into the Share Exchange Agreement unless each of the Shareholders so agreed to
remain employed by the Practice in that their employment by Practice enhances
the value of the Service Agreement and also therefore, the value of the Company
to MedCath. The Shareholders agree and covenant that except as provided in
Schedule 1 attached hereto, each such Shareholder as a
<PAGE>
physician employee of the Practice shall remain employed by the Practice
pursuant to the terms of such Shareholder's respective Employment Agreement for
at least five (5) years from the Closing Date (as defined in the Share Exchange
Agreement) subject only to the death or permanent disability of any such
physician employee. The Shareholders shall have breached their covenants set
forth in this paragraph 1 in the event that any Shareholder fails to so remain
employed by Practice for at least five (5) years from the Closing Date unless
such Shareholder is a "Retiring Shareholder" or a "Part-Time Shareholder" as
defined in Schedule 1 attached hereto.
2. Each of the Shareholders further hereby acknowledge and agree that
MedCath and the Company will incur substantial losses and damages in the event
that any Shareholder as a physician employee of Practice fails to fulfill his
obligations to remain employed by the Practice for at least five (5) years from
the Closing Date, except in the case of a Retiring Shareholder or a Part-Time
Shareholder as defined in Schedule 1. Accordingly, in the event that any
Shareholder of the Practice as of the date hereof (the "Breaching Physician")
hereafter ceases to be employed on a full-time basis for any reason by Practice
for at least five (5) years from the Closing Date (other than due to the death
or permanent disability of any such physician employee or in the case of a
Retiring Shareholder), which failure shall constitute a material breach of their
covenants in paragraph 1 hereof and which shall materially decrease the value of
the consideration received by MedCath pursuant to the Share Exchange Agreement,
then all of the Shareholders, jointly and severally, agree to indemnify MedCath
for its losses and damages suffered as a result of such failure. Due to the
difficulty in measuring such loss, MedCath and the Shareholders agree that upon
any such Breaching Physician's failure to fulfill his obligation to so remain
employed for five (5) years by Practice from the Closing Date, the Shareholders
shall be jointly and severally obligated to pay to MedCath as indemnification,
liquidated damages in an amount determined as set forth in Schedule 1 attached
hereto, provided that nothing herein shall release Practice or its Shareholders
as physician employees from any noncompetition covenant or restriction to which
they are a party during such five (5) year period and for the one (1) year
period thereafter. Such amounts of liquidated damages shall be due in full
within fifteen (15) days of demand therefore by MedCath.
3. In the event of any conflict or inconsistency between the terms of any
Employment Agreement between a Shareholder and Practice (other than the terms
set forth in Section 6 of any such Employment Agreement), the Service Agreement,
this Agreement and the Share Exchange Agreement (collectively, the "Controlling
Documents") on the one hand, and the terms of Section 6 of any such Employment
Agreement or any rules and regulations incorporated therein on the other hand,
the parties hereto agree that the Controlling Documents shall govern and control
all such conflicts, inconsistencies, issues and matters.
4. It is further acknowledged and agreed that any termination for any
reason of the Employment Agreement which each Shareholder has entered into with
the Practice shall not release a Shareholder from any obligation or liability
which he may have under any of the Controlling Documents or under any provision
of the Employment Agreement containing noncompetition or other restrictive
covenants.
5. The parties hereby incorporate the terms and conditions of Article XIII
from the Share Exchange Agreement in their entirety as if all such provisions
were fully set forth herein.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
MEDCATH INCORPORATED
By: /s/ David Crane
--------------------------------------
Title: Executive V.P. & C.O.O.
PIMA HEART PHYSICIANS, P.C.
By: /s/ Santiago C. Ramirez
--------------------------------------
Title:___________________________
/s/ Stephen S. Algeo
-----------------------------------------
Stephen S. Algeo, M.D.
/s/ John E. Boulet
-----------------------------------------
John E. Boulet, M.D.
/s/ Laryenth D. Lancaster
-----------------------------------------
Laryenth D. Lancaster, M.D.
/s/ David I. Lapan
-----------------------------------------
David I. Lapan, M.D.
/s/ Monty C. Morales
-----------------------------------------
Monty C. Morales, M.D.
/s/ Marius M. Wagner
-----------------------------------------
Marius M. Wagner, M.D.
/s/ Edward Byrne-Quinn
-----------------------------------------
Edward Byrne-Quinn, M.D.
/s/ Jose J. Fernandez
-----------------------------------------
Jose J. Fernandez, M.D.
3
<PAGE>
/s/ Charles A. Katzenberg
-----------------------------------------
Charles A. Katzenberg, M.D.
/s/ Lou L. Lancero
-----------------------------------------
Lou L. Lancero, M.D.
/s/ Santiago C. Ramirez
-----------------------------------------
Santiago C. Ramirez, M.D.
/s/ Lawrence P. Temkin
-----------------------------------------
Lawrence P. Temkin, M.D.
/s/ Jerrold A. Winter
-----------------------------------------
Jerrold A. Winter, M.D.
4
<PAGE>
SCHEDULE 1
TO THE
LIQUIDATED DAMAGES AGREEMENT
BY AND BETWEEN
MEDCATH INCORPORATED
AND
THE SHAREHOLDERS OF
PIMA HEART ASSOCIATES, P.C.
June 30, 1997
Liquidated Damages.
1. In the event of a breach of paragraph 1 of this Agreement due to a
Shareholder's ceasing to be employed by Practice for any reason other than as a
result of his death or permanent disability (a "Breaching Physician"), unless
such Shareholder is a Retiring Shareholder or a Part-Time Shareholder as defined
Paragraph 5 below, the amount of "Liquidated Damages" immediately due to MedCath
from the Shareholders, shall equal the Breaching Physician's Consideration
Allocation reduced by the Breaching Physician's Management Fee Allocation.
"Consideration Allocation" shall mean the amount listed in Paragraph 2 below
that is allocated to the Breaching Physician as provided in Paragraph 3 below.
Such obligation to pay the Liquidated Damages shall be a joint and several
liability of the Shareholders. A Breaching Physician's "Management Fee
Allocation" shall mean the cumulative Management Fee paid by Practice to Manager
under Section 8.1 of the Service Agreement, calculated however by excluding all
Manager Expenses, Practice Expenses, and Physician Surplus and any payment of
liquidated damages which is due to Manager pursuant to the Service Agreement
therefrom, which Practice allocated through the date of the event giving rise to
application of this Schedule 1 to the Breaching Physician in determining his
compensation under his employment agreement with Practice.
2. The "Consideration Allocation" to be allocated among the Shareholders
shall equal:
[ ] If the breach occurs between Closing and the last day of
the sixth (6th) month after Closing.
[ ] If the breach occurs between the first day of the seventh
(7th) month and the last day of the twelfth (12th) month
after Closing.
[ ] If the breach occurs between the first day of the
thirteenth (13th) month and the last day of the
eighteenth (18th) month after Closing.
The Consideration Allocation shall be further increased by nine percent
(9%) for each six (6) month period after the eighteenth (18th) month until
the fifth (5th) anniversary.
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
<PAGE>
3. Listed below is the allocation of the Consideration Allocation among the
Shareholders as determined by Practice:
Percentage of Consideration Allocation
Shareholder Allocated to Shareholders
- ----------- -------------------------
Stephen S. Algeo, M.D. [ ]
John E. Boulet, M.D. [ ]
Laryenth D. Lancaster, M.D. [ ]
David I. Lapan, M.D. [ ]
Monty C. Morales, M.D. [ ]
Marius M. Wagner, M.D. [ ]
Edward Byrne-Quinn, M.D. [ ]
Jose J. Fernandez, M.D. [ ]
Charles A. Katzenberg, M.D. [ ]
Lou L. Lancero, M.D. [ ]
Santiago C. Ramirez, M.D. [ ]
Lawrence P. Temkin, M.D. [ ]
Jerrold A. Winter, M.D. [ ]
4. Notwithstanding the payment of Liquidated Damages as set forth above,
nothing herein shall release the Practice or the Breaching Physician from any
noncompetition covenant or restriction which shall remain in full force and
effect and MedCath shall also be entitled to any other equitable relief to which
it is entitled under this Agreement, the Service Agreement, any employment
agreement or otherwise (e.g., injunctive relief).
5. Notwithstanding anything herein to the contrary, Liquidated Damages
shall not be due if (x) at any time after three (3) years from the Closing Date,
up to three (3) Shareholders, who prior to their retiring are designated in
writing by the Practice as a "Retiring Physician" for purposes of this
Agreement, terminate their employment with the Practice in which event such
termination shall not be a breach of this Agreement or the Service Agreement as
long as such Shareholders have fully retired from the practice of medicine and
all other professional medical duties and (y) up to one (1) Shareholder in the
aggregate at any one time during the first year
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
6
<PAGE>
after the Closing Date and up to an aggregate of two (2) Shareholders at any one
time during the second through fifth years after the Closing Date elect
part-time status in accordance with Practice's policies (a "Part-Time
Shareholder") provided further that during the fourth and fifth years after the
Closing Date, the Practice may elect, upon prior written notice to Manager, to
reduce the maximum potential number of Retiring Physicians and replace each
Retiring Physician position which is eliminated with a position for an
additional Part-Time Shareholder; provided further however, at no time during
the fourth and fifth years after the Closing Date shall there be more than an
aggregate at any one time of five (5) Retiring and Part-Time Shareholders, and
there shall never be more than three (3) Retiring Shareholders in the aggregate
prior to the fifth anniversary of the Closing Date. All such Shareholders shall
remain subject to their noncompetition covenants set forth in their Employment
Agreement no less than for the remainder of such five (5) year period plus one
(1) year thereafter.
7
SERVICES AND BILLING AGREEMENT
This SERVICES AND BILLING AGREEMENT is effective as of this 1st day of
October, 1997, by and between MEDCATH OF TUCSON, L.L.C., a North Carolina
limited liability company ("Hospital"), and CCT, L.L.C., a North Carolina
limited liability company ("CCT") .
R E C I T A L S:
A. The Hospital owns certain real property located in Tucson, Arizona on
which it operates an acute care hospital (the "Hospital Building").
B. In property leased to CCT by the Hospital, CCT operates a cardiac
catheterization laboratory (the "Cath Lab"). The property in which the Cath Lab
is operated is leased from the Hospital pursuant to that certain Lease between
the Hospital and CCT dated as of the date hereof (the "Lease").
C. The Hospital and CCT wish to enter into this Agreement to govern certain
services and billing arrangements for such services provided by CCT.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Hospital and CCT hereby agree as follows:
1. Services and Billing.
A. From time to time during the term of this Agreement, CCT shall provide
to the Hospital and its patients all inpatient and outpatient cardiac
catheterization services which they may reasonably request from time to time
including without limitation those services identified on Schedule A attached
hereto (the "Services"). CCT shall be obligated to provide its Services in
accordance with reasonable rules, regulations and standards established from
time to time by the Hospital and in accordance with all applicable rules, laws
and regulations. It shall be the obligation of CCT to make its facilities and
equipment available from time to time in accordance with the scheduling
requirements of the Hospital. CCT shall require its employees to comply with the
rules, regulations and standards which the Hospital reasonably establishes from
time to time with respect to its own employees.
B. Hospital shall bill the technical fees for all patients of the Hospital
who receive Services at the Cath Lab. CCT hereby assigns to the Hospital the
right to bill the technical fees and collect payment for such services and CCT
shall not bill the patient directly. CCT agrees to promptly provide the Hospital
with all information and medical records necessary for Hospital to appropriately
bill for services provided at the Cath Lab.
<PAGE>
2. Rates.
A. Included on Schedule A is a Flat Rate Fee Schedule for certain
procedures to be provided by CCT at the Cath Lab. CCT shall charge the Hospital
the Flat Rate as set forth on the attached Fee Schedule for those procedures
described therein for all Hospital patients who receive those procedures at the
Cath Lab. Any procedures provided to such patients which are not listed on the
attached Fee Schedule shall be charged by CCT on a fee-for-service basis at
CCT's reasonable, customary charges.
B. The Flat Rate Fee Schedule attached hereto as Schedule A shall be
effective through the termination of this Agreement subject to adjustment as
provided below. The Flat Rate Fee Schedule will be increased or decreased
annually based on the reasonable agreement of the parties hereto.
3. Payment. The Hospital shall pay to CCT for Services provided by CCT on
or before the fifteenth (15th) day of the month following the month that CCT
provided the Services to the patient.
4. Term. Subject to early termination as provided herein, the term of this
Agreement shall commence on October 1, 1997, and shall continue until October 1,
2003.
5. Termination; Default.
A. Termination of the Lease. This Agreement shall terminate upon
termination of the Lease for any reason.
B. Termination for Loss of Medicare Provider Status. This Agreement shall
terminate if CCT, the Hospital or the physicians who directly or indirectly own
or control CCT lose Medicare provider status or are excluded from Medicare so as
to prevent the Hospital from billing Medicare pursuant to this Agreement.
C. Termination on Alleged Substantial Violation. If a governmental agency
takes the written position that performance of this Agreement is in violation of
an applicable law, rule, regulation or ordinance which presents risk of loss of
JCAHO accreditation, governmental licenses required for operations,
qualification for payment by Medicare or payment by Medicare under this
Agreement, criminal penalties or substantial civil penalties or ongoing civil
penalties, and the alleged violation cannot be reasonably resolved by the
parties and the governmental agency after the parties' good faith attempts at
resolution, CCT or the Hospital may terminate this Agreement (without prior
arbitration), without liability, effective sixty (60) days after written notice
thereof. In that event, CCT's business and equipment may be purchased by the
Hospital based on their then current fair market value.
D. Post-Termination. Upon termination of this Agreement, each party shall
remain liable for any obligations or liabilities arising from activities carried
on by such party prior to the effective date of termination. Where immediate
termination of this Agreement is provided
2
<PAGE>
for, CCT shall, at the request of Hospital, continue to provide professional
services pursuant to all of the terms and conditions of this Agreement, until
such time as Hospital patients being treated by CCT no longer require its
services or have been transferred back to the Hospital.
E. Other Default. CCT and the Hospital shall have all other legal rights
and remedies for any default occurring under this Agreement.
6. Assignment.
This Agreement shall not be assigned separate and apart from the Lease and
shall be assigned by CCT or the Hospital with any assignment of the Lease and as
permitted under the Lease.
7. Utilization, Peer Review, and Records.
CCT shall participate in an integrated utilization review and peer review
procedure with the Hospital. CCT and the Hospital will modify the integrated
utilization review and peer review procedures, as necessary, to comply with
standards of the Joint Commission on Accreditation of Health Care Organizations
("JCAHO") and to permit the Hospital to bill for procedures as described in
Section 1. CCT will provide information reasonably requested by the Hospital so
the Hospital can maintain a complete clinical record of the services provided by
CCT.
8. Pharmacy. While such drugs are available, the Hospital will stock the
thrombolytic agents, TPA and Urokinase, for CCT's use. CCT will promptly provide
all information necessary for the Hospital to bill third party payors for these
agents. If the Hospital mixes these agents, any mixing shall be in accordance
with all Hospital protocols.
9. Indemnification.
A. Except to the extent any such loss is covered by Hospital's insurance
policies, CCT shall indemnify and hold the Hospital harmless from any and all
claims, demands, causes of action, losses, liabilities, judgments, damages,
obligations, costs or expenses (including attorneys' fees), arising out of or in
connection with any of the Services or other acts of CCT performed pursuant to
this Agreement, including, without limitation, any liability for the negligence
or malpractice of CCT or any of the employees, contractors or physicians
performing its obligations.
B. Except to the extent any such loss is covered by CCT's insurance
policies, the Hospital shall indemnify and hold CCT harmless from any and all
claims, demands, causes of action, losses, liabilities, judgments, damages,
obligations, costs or expenses (including attorneys' fees), arising out of or in
connection with any of the services or other acts of the Hospital performed
pursuant to this Agreement, including, without limitation, any liability for the
negligence or malpractice of the Hospital or any of the employees, contractors
or physicians performing its obligations.
3
<PAGE>
C. The indemnities contained in this Section 9 shall survive the
termination of this Agreement.
10. Notices. Any and all default notices required by this Agreement shall
be personally delivered or sent by regular first-class mail, postage prepaid,
addressed to a party at the address set forth herein, or at such other address
as it may designate to the other party in accordance with this paragraph. A
notice shall be deemed effective when mailed, or, if personally delivered, when
delivered. All notices to CCT shall be to CCT, L.L.C., at the addresses set
forth below or such other address or addresses as CCT may designate in writing
in accordance with this Section:
CCT, L.L.C.
c/o MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, NC 28226
Attn: President - Diagnostics Division
All notices to the Hospital shall be sent to the address set forth below or such
other address as the Hospital may designate in writing in accordance with this
Section:
MedCath of Tucson, L.L.C.
4888 N. Stone Avenue
Tucson, AZ 85704
Attn: President of Tucson Heart Hospital
with a copy to: MedCath of Tucson, L.L.C.
c/o MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, NC 28226
Attention: President - Hospital Division
11. Access to Books and Records. Upon the written request of the Secretary
of Health and Human Services or the Comptroller General or any of their duly
authorized representatives, CCT will make available those contracts, books,
documents and records necessary to verify the nature and extent of the cost of
providing services under this Agreement. Such inspection will be available up to
four (4) years after the rendering of such services. If CCT carries out any of
the duties of this Agreement through a subcontract with a value of Ten Thousand
Dollars ($10,000.00) or more over a 12-month period with a related individual or
organization, CCT agrees to include this requirement in any such subcontract.
This Section is included pursuant to and governed by the requirement of 42
U.S.C. ss.1395x(v)(1) and the regulations promulgated thereunder. No
attorney-client, accountant-client, or other legal privilege will be deemed to
have been waived by either party or by virtue of this Agreement.
12. Compliance With Laws. The parties agree to comply with all applicable
laws, rules, regulations and ordinances relating to the performance of the
obligations required in this Agreement.
4
<PAGE>
13. No Contingencies. Nothing in this Agreement shall be deemed to require
CCT to use the Hospital or its related organizations, or to require CCT to use
any Hospital services, including inpatient, outpatient, or ancillary services,
or to prevent CCT or any of its owners from establishing staff privileges at,
providing services at, or referring patients to any other facility.
14. Arbitration; Mediation. Except where mediation is required in Section 2
above, any dispute, controversy or disagreement between the parties arising out
of or relating to this Agreement shall be submitted to and settled by
arbitration. Except as otherwise specifically provided herein, the arbitration
shall be concluded in accordance with the commercial arbitration rules then
existing of the American Arbitration Association whose decision shall be final
and binding on the parties hereto. Mediation pursuant to Section 2 above shall
be conducted by a single mediator, experienced in medical issues. If the parties
cannot agree upon a mediator, they shall each appoint an independent
representative within twenty (20) days of a request for mediation and the two
representatives shall select the mediator within twenty (20) days thereafter.
The mediation shall be conducted within twenty (20) days of the appointment of
the mediator.
15. Attorneys' Fees. The prevailing party in any litigation, arbitration or
other proceedings arising out of this Agreement shall be reimbursed by the other
party for all costs and expenses incurred in such proceedings, including
reasonable attorneys' fees.
16. Governing Law. This Agreement shall be governed by the laws of the
State of Arizona.
17. Entire Agreement. This Agreement and the Lease contain the entire
understanding of the parties and supersedes any prior understandings and
agreements, written or oral, respecting the subjects discussed herein.
18. Amendments. This Agreement may not be amended or modified except in
writing signed by the parties.
19. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns.
20. Waiver of Provisions. The failure to enforce at any time any provision
of this Agreement or to insist on timely performance of any obligation contained
in this Agreement shall not be construed to be a waiver of such provision or of
any other provision or of the right to timely performance of all obligations
contained herein.
21. Severability. The invalidity of any portion of this Agreement shall not
affect the validity of the remaining portions which shall remain in full force
and effect.
23. Counterparts. This Agreement may be executed in counterparts, each of
which, when executed, shall be deemed an original.
5
<PAGE>
22. No Third-Party Beneficiary. Nothing in this Agreement shall be
construed as providing any rights to enforce this Agreement, or any rights to
otherwise enjoy the benefits of the terms of this Agreement, to any person or
entity not a party to this Agreement or expressly named as a third-party
beneficiary herein.
6
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement on the
date and year first above written.
"HOSPITAL"
MEDCATH OF TUCSON, L.L.C.
By: /s/ Thomas D. Plantz
--------------------------
By: /s/ R. William Moore, Jr.
--------------------------
Name: Thomas D. Plantz
Title: President
"CCT"
CCT, L.L.C.
By: Southern Arizona Heart, Inc.
By: /s/ R. William Moore, Jr.
--------------------------
Name: R. William Moore, Jr.
Title: Assistant Secretary
7
<PAGE>
Schedule A
CCT, L.L.C.
Fee Schedule
DRG Description CCT Billing Rate
- --- ----------- ----------------
112 PTCA $4,241
112 Periph Angioplasty $4,241
112 EP $4,241
116 PTCA - Stent $5,341
115-118 Pacemakers $5,341
124 Cath w/complex diag $2,916
125 Cath w/o complex diag $2,066
Cath - outpatient $1,915
LEASE AGREEMENT
THIS LEASE, made and entered effective as of the 1st day of October, 1997,
by and between MEDCATH OF TUCSON, L.L.C., a North Carolina limited liability
company (the "Lessor"), and CCT, L.L.C., a North Carolina limited liability
company (the "Lessee").
W I T N E S E T H:
Lessor hereby leases unto Lessee, and Lessee hereby leases from the Lessor,
upon the terms and conditions hereinafter set forth, approximately 7,840 square
feet of space of the Lessor's facility known as the Tucson Heart Hospital
(hereinafter called the "Building"), located in Tucson, Arizona in which
location Lessee shall own and operate cardiac catheterization laboratories (the
"Premises").
ARTICLE 1
TERM OF LEASE
Section 1.1 Term. The term of this Lease ("Term") shall commence upon the
execution hereof and shall continue in force for a period of five (5) years
after the Rent Commencement Date, as defined herein.
Section 1.2 Acceptance of Premises. Lessor has made no representations or
promises with respect to the Building, Premises or this Lease except as set
forth herein.
Section 1.3 Option to Renew. Provided Lessee is not in default of any
provisions of this Lease at the expiration of the current Term, the Term of this
Lease shall be automatically renewed and continue in force for a period of
fifteen (15) consecutive one (1) year option terms, unless either party gives
written notice of termination to the other no later than sixty (60) days prior
to the expiration of the then current Term.
Section 1.4 Surrender of the Premises. The Lessee shall keep the Premises
in good order and repair, except the portions thereof to be repaired by the
Lessor as provided herein, and upon the expiration or other termination of this
Lease, quit and surrender the Premises to the Lessor in the same condition as at
the commencement of the term, natural wear and tear only excepted.
ARTICLE 2
RENT
Section 2.1 Commencement. The Rent Commencement Date shall be the day the
Tucson Heart Hospital is first open for business and is entitled to receive
Medicare certification. Upon request of either party hereto, Lessor and Lessee
agree to execute and deliver a written declaration expressing the Rent
Commencement Date.
<PAGE>
Section 2.2 Rent. Lessee shall pay to Lessor at the Lessor's office or at
such place as Lessor may from time to time designate in writing, Base Rent, as
described herein, and Additional Rent, as described herein, (collectively
referred to from time to time as "Rent") during the lease term as follows:
Section 2.3 Base Rent. Beginning with the Rent Commencement Date, and
continuing for the full term of this Lease, Lessee shall pay to Lessor an amount
of One Hundred Sixty-Four Thousand and Six Hundred Forty Dollars ($164,640) per
year, (the "Base Rent"), one-twelfth (1/12) of which shall be paid in advance on
the first day of each month and shall be prorated for any portion of a month at
the beginning or end of the lease Term.
Section 2.4 Additional Rent. In addition to the foregoing Base Rent, Lessee
shall pay as additional rent Fourteen Thousand Four Hundred Seven Dollars
($14,407) per month for the Additional Services. The Additional Rent shall be
due and payable by Lessee to Lessor in advance on the first day of each month
during the Term.
Notwithstanding anything in this Lease to the contrary, in the event any
payment of Base Rent or Additional Rent is more than thirty (30) days past due,
such past due amount shall bear interest at the rate of eighteen percent (18%)
per annum (or the highest lawful rate allowable if less than 18%) until paid in
full, with said interest to be due and payable by Lessee to Lessor, upon written
demand.
ARTICLE 3
CONDITION OF IMPROVEMENTS
Section 3.1. Alterations or Improvements by Lessor. Lessor shall upfit the
Premises in accordance with the plans and specifications mutually agreed upon by
Lessor and Lessee (the "Lessor's Work"). Upon completion of Lessor's Work,
Lessor shall deliver the Premises to Lessee in move-in condition. Lessor and
Lessee shall cooperate with one another so that all of Lessee's cardiac
catheterization equipment can be timely and properly installed in the Premises.
Section 3.2 Additional Services. Lessor shall furnish the Premises with the
following "Additional Services": linen and laundry service, utilities, hotel
services (janitorial services, routine maintenance, etc.), management
information systems, telephones and facility and maintenance supplies for which
Lessee shall pay to Lessor the Additional Rent.
The Lessor shall not be liable for failure to furnish or delay in
furnishing Additional Service when such failure is caused by circumstances
beyond Lessor's reasonable control including, but not limited to, special
equipment requirements of Lessee, a strike or labor controversy, a riot, the
inability to secure fuel for the Building, any accident or casualty.
Section 3.3 Alterations or Improvements by Lessee. The Lessee shall have
the rights, from time to time, to make improvements or alterations to the
Premises, subject to the following conditions:
2
<PAGE>
(a) No material improvement or alteration shall at any time be made
which shall impair the structural soundness or diminish the value of the
Building.
(b) No improvement or alteration shall be undertaken until the Lessee
shall have procured and paid for all required municipal and other
governmental permits and authorizations of the various municipal
departments and governmental subdivisions having jurisdiction.
(c) All work done in connection with any improvements or alterations
shall be done in a good and workmanlike manner and in compliance with all
building and zoning laws, and with all other laws, ordinances, rules, and
requirements of any federal, state or municipal government or agency having
jurisdiction and shall be completed free of all mechanics or materialmen's
liens.
(d) Any improvement or alteration to the Premises, except moveable
furniture, trade fixtures, medical equipment, and any cabinets placed by
Lessee in the leased Premises, shall at once become the absolute property
of the Lessor and remain upon and be surrendered with the Premises as a
part thereof at the termination of this Lease without disturbance or
injury.
Section 3.4 Repairs. Lessor shall be responsible for routine repairs or
improvements to the Building.
Lessee shall not cause or permit any waste, damage, or injury to the
Premises. Lessee, at its sole expense, shall keep the Premises as now or
hereafter constituted with all improvements made thereto in good condition
(reasonable wear and tear excepted).
Lessee shall indemnify the Lessor against all costs, expenses, liabilities,
losses, damages, suits, fines, penalties, claims, and demands, including
reasonable counsel fees, because of Lessee's failure to comply with the last
preceding paragraph, and the Lessee shall not call upon the Lessor for any
disbursement or outlay whatsoever in connection therewith, and expressly
releases and discharges the Lessor of and from any liability therefor.
Section 3.5 Inspection. Lessor shall have the right to enter and grant
licenses to others to enter the Premises at any time during all reasonable hours
and upon the approval of Lessee to examine the same or to make such repairs,
additions or alterations as may be deemed necessary for the safety, comfort or
preservation thereof, or of the Building and to exhibit the Premises to
prospective tenants or purchasers and for the purpose of removing placards,
signs, fixtures, alterations or additions which do not conform to the terms of
this Lease or to the rules and regulations of the Building; provided, however
that such activities will not unreasonably interfere with Lessee's operation of
its cardiac laboratory.
3
<PAGE>
ARTICLE 4
USE OF PREMISES
Section 4.1 Use of Premises. The Premises shall be used and occupied by the
Lessee solely for the purpose of operating cardiac catheterization laboratories.
Section 4.2 Enjoyment of Premises. The Lessee, on paying the Base Rent,
Additional Rent and any other rent sums due under Article 2 hereof and keeping
and performing the agreements and covenants herein contained, shall have the
peaceful and quiet enjoyment of the Premises for the term hereof subject,
however, to the provisions of this Lease.
Section 4.3 Removal of Personal Property. The Lessee may remove all
personal property which Lessee has placed in the Premises, provided Lessee
repairs all damages to the Premises caused by such removal. If the Lessee shall
fail to remove all such property from the Premises upon the termination of this
Lease for any cause whatsoever, the Lessor may, at its option, remove the same
in any manner that the Lessor shall and store it without liability to the Lessee
for loss thereof. In such event, the Lessee shall pay to Lessor on demand any
and all expenses incurred in such removal, including court costs, attorney's
fees, and storage charges for the length of time the same shall be in the
Lessor's possession. Alternatively, the Lessor may, at its option, without
notice, and without legal process, sell the property or any part thereof at a
private sale for such price as the Lessor may obtain, and apply the proceeds of
the sale to any amounts due under this Lease and the expenses incident to
removal and sale of said property.
Section 4.5 Signs. Lessee may place signs upon corridor doors of the
Premises.
ARTICLE 5
ASSIGNMENT AND SUBLETTING
Section 5.1 Assignment and Subletting. The Lessee shall not assign this
Lease or sublet the Premises or any part thereof, without the written consent of
the Lessor, which consent shall not be unreasonably withheld. The Premises shall
be used and occupied by the assignee or sublessee solely for the purpose of
operating cardiac catheterization laboratories and the assignee or sublessee
shall meet and be capable of meeting all terms and conditions of Lease and shall
agree in writing to be bound by all terms and conditions contained herein and
provided that any consents by third parties such as lenders have been obtained.
Section 5.2 Transfer of Lessor's Interest. In the event of the sale,
assignment or transfer by the Lessor of its interest in the Building or in this
Lease (other than a collateral assignment to secure a debt of the Lessor) to a
successor in interest who expressly assumes the obligations of the Lessor under
this Lease, the Lessor shall be released and discharged from all of its
covenants and obligations under this Lease, except obligations which have
accrued prior to any sale, assignment or transfer, and Lessee agrees to look
solely to the Lessor's successor in interest for performance of such
obligations. The Lessor's assignment of the Lease or of its interest in the
Building shall not affect the Lessee's obligations under this Lease. The Lessee
shall attorn and look to the Lessor's assignee, as landlord, provided the Lessee
has first received written notice of
4
<PAGE>
the assignment of the Lessor's interest. The Lessor shall have the right to
freely sell, assign or otherwise transfer its interest in the Building and/or
this Lease.
ARTICLE 6
DAMAGE OR DESTRUCTION TO THE PREMISES
Section 6.1 Loss or Damage and Insurance. The Lessor shall not be liable
for any damage to property in the Premises or on or near the Building caused by
gas, smoke, steam, electricity, ice, rain, or snow which may leak from any part
of the Building, or from pipes, appliances or plumbing works. The Lessor shall
not be liable for any damage to persons or property sustained by Lessee or
others due to the Building or any part thereof being out of repair or due to the
happening of accident in or about the Building or due to any negligence of any
tenant or occupant of the Building, or any other person, other than the Lessor
or its agents. Notwithstanding the foregoing, the Lessor shall be liable for
failure to make repair in the event Lessor has been notified of the need for
repair or otherwise has knowledge of the need of repair but has been negligently
dilatory and without cause in its failure to make repair.
Lessee shall indemnify, hold harmless and defend Lessor from and against
any and all claims, actions, damages, liability and expense, including, but not
limited to, attorney's and other professional fees, in connection with loss of
life, personal injury and/or damage to property arising from or out of the
occupancy or use by Lessee of the Premises or any part thereof or any other part
of the Building, occasioned wholly or in part by any act or omission of Lessee,
its officers, agents, contractors, employees or invitees.
During the term of this Lease, Lessee will carry and maintain, at its
expense (a) public liability insurance including, but not limited to, insurance
against assumed or contractual liability under this Lease, with respect to the
Premises, to afford protection with limits which are reasonably acceptable to
Lessor respect to property damage; (b) all-risks property and casualty
insurance, written at replacement cost value and with replacement cost
endorsement, covering all of Lessee's personal property in the premises
(including, without limitation, inventory, trade fixtures, floor coverings,
furniture and other property removable by Lessee under the provisions of this
Lease) and all leasehold improvements installed in the Premises by or on behalf
of Lessee; and (c) if and to the extent required by law, worker's compensation
or similar insurance in form and amounts required by law. If Lessee shall fail
to perform its obligations to maintain the required insurance, Lessor may
perform the same and the cost thereof shall be deemed additional rent and shall
be payable upon Lessor's demand.
The Lessor shall keep the Building insured against loss or damage by fire,
in an amount not less than ninety percent (90%) of the full insurable value as
determined from time to time (or in such other amounts and under such other
policies as may be required to comply with any laws of the State of Arizona. The
term "full insurable value" shall mean actual replacement cost (exclusive of the
cost of excavation, foundations, and footings below the basement floor) without
deduction for physical depreciation. Such insurance shall be issued by
financially responsible insurers duly authorized to do business in Arizona.
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Section 6.2 Condemnation. If the whole or any part of the Premises shall be
taken by any public authority under the power of eminent domain, then the terms
of this Lease shall cease as to the part taken on the date possession of that
part is surrendered and any unearned rent for such part paid or credited in
advance shall be refunded. The Lessee shall not be entitled to receive any part
of any award or awards that may be made or received by the Lessor. The Lessee
may at its own expense commence independent proceedings against the public
authority exercising the power of eminent domain to prove and establish any
other damage Lessee may have incurred.
Section 6.3 Casualty. If all or any part of the Premises is damaged or
destroyed by fire or other casualty, through no fault of Lessee, insured under
the standard fire insurance policy with approved standard extended coverage
endorsement applicable to the Premises and Building, the Lessor shall, except as
otherwise provided herein (but only to the extent the holder of the mortgage
lien on the building permits release of the insurance proceeds), repair and
rebuild the Premises with reasonable diligence, and if there is a substantial
interference with the operation of the Lessee's laboratory in the Premises
requiring the Lessee temporarily to close its laboratory, the rental shall be
equitably apportioned for the duration of such repairs in proportion to the
extent to which there is interference with the operation of the Lessee's
laboratory. Notwithstanding the foregoing provisions, in the event the Premises
shall be damaged by fire or other insured casualty due to the fault or neglect
of the Lessee, or the Lessee's servants, employees, contractors, agents,
visitors, or licensees, then, without prejudice to any other rights and remedies
of the Lessor, and provided the damage is repaired by the Lessor, there shall be
no apportionment or abatement of any rent. Except to the extent provided for in
this paragraph, neither the rent payable by the Lessee nor any of the Lessee's
other obligations under any provision of this Lease shall be affected by any
damage to or destruction of the Premises by any cause whatsoever, and the Lessee
hereby expressly waives any and all additional rights it might otherwise have
under any law or statute.
ARTICLE 7
DEFAULT
Section 7.1 Defaults. In the event (i) the Lessee defaults in the payment
of rent for a period of ten (10) days after receipt of notice by Lessor of such
default; (ii) the Premises are vacated; (iii) the Lessee fails to comply with
any term of this Lease (other than payment of rent) or any of the rules and
regulations now or hereafter established for the government of the Building;
(iv) any proceeding, whether voluntary of involuntary, is instituted for the
Lessee because of his insolvency or the Lessee becomes insolvent or makes a
transfer in fraud of creditors; or (v) the Lessee makes an assignment for the
benefit of creditors; then, in any such event, the Lessor may (i) terminate this
Lease by giving written notice to Lessee, and declare the entire amount of rent
which would become due, immediately due and payable; (ii) take possession of the
Premises and enter the leased Premises as agent of the Lessee and relet them for
such rent as is obtainable by reasonable effort and collect the deficiency from
the Lessee plus collect all costs of reletting, including lease commissions,
attorney's fees and upfitting costs which Lessor deems necessary for a new
tenant; or (iii) pursue any other remedies which may be provided by law;
provided, however, that should any event or condition described in items (ii) -
(v) of this section occur, such event or condition shall not constitute a
default should such event or
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condition be cured to the satisfaction of Lessor within thirty (30) days from
the occurrence of such event or condition, or a reasonable period of time in
addition thereto if circumstances are such that the default cannot be reasonably
cured within thirty (30) days and the Lessee promptly takes action to cure such
default and pursues such action with due diligence.
Section 7.2 Rights and Remedies. All rights and remedies of the Lessor
herein shall be cumulative, and none shall be exclusive of any other, or of any
rights and remedies allowed by law, and pursuit of any one of said rights or
remedies does not preclude pursuit of any one or more of the other of said
rights or remedies.
Section 7.3 Costs of Suit. If Lessee or Lessor shall bring an action for
any relief against the other, declaratory or otherwise, arising out of this
Lease, including any suit by Lessor for the recovery of rent or possession of
the Premises, the prevailing party shall be entitled to recover all reasonable
costs and expenses associated with such action, including reasonable attorneys'
fees, from the nonprevailing party, with the court or other tribunal hearing
such action to make such determinations.
ARTICLE 8
HAZARDOUS WASTE
Section 8.1 Hazardous Waste. Lessee warrants, represents and covenants to
Lessor that:
(a) Lessee's use of the Premises will at all times comply with and
conform to all laws, statutes, ordinances, rules and regulations of any
governmental, quasi-governmental or regulatory authority ("Laws") which
relate to the transportation, storage, placement, handling, treatment,
discharge, generation, production or disposal (collectively "Treatment") of
any waste, waste products, radioactive waste, poly-chlorinated biphenyls,
asbestos, hazardous materials of any kind, and any substance which is
regulated by any law, statute, ordinance, rule or regulation (collectively
"Waste"). Lessee further covenants that it will not engage in or permit any
party to engage in any Treatment of any Waste on or which affects the
Premises, unless said Treatment complies with and conforms to all Laws
relating to such Waste.
(b) Immediately upon receipt of any Notice, as hereinafter defined,
from any party, Lessee shall deliver to Lessor a true, correct and complete
copy of any written Notice or a true, correct, and complete report of any
nonwritten Notice. Additionally, Lessee shall notify Lessor immediately
after having knowledge of any Treatment of Waste, which does not comply
with or conform to all Laws relating to such Waste or any Spill, as
hereinafter defined, of Waste in or affecting the Premises. "Notice" shall
mean any note, notice, or report of any of the following:
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(i) any suit, proceeding, investigation, order, consent order,
injunction, writ, award, or action related to or affecting or
indicating the Treatment of any Waste in or affecting the Premises;
(ii) any spill, contamination, discharge, leakage, release or
escape of any Waste in or affecting the Premises, whether sudden or
gradual, accidental or anticipated, or of any other nature
(hereinafter "Spill");
(iii) any dispute relating to Lessee's or any other party's
Treatment of any Waste or any Spill in or affecting the Premises;
(iv) any claims by or against any insurer related to or arising
out of any Waste or Spill in or affecting the Premises;
(v) any recommendations or requirements of any governmental or
regulatory authority, insurer or board of underwriters relating to any
Treatment of Waste or a Spill in or affecting the Premises;
(vi) any legal requirement or deficiency related to the Treatment
of Waste or any Spill in or affecting the Premises; or
(vii) any tenant, licensee, concessionaire, manager, or other
party or entity occupying or using the premises or any part thereof
which has engaged in or engages in the Treatment of any Waste in or
affecting the Premises.
(c) In the event that (i) Lessee has caused, suffered or permitted,
directly or indirectly, any Spill in or affecting the Premises, or (ii) any
Spill of any Waste has occurred on the Premises during the term of this
Lease, then Lessee shall immediately take all of the following actions:
(i) notify Lessor, as provided herein;
(ii) take all steps necessary or desirable, in Lessor's
reasonable opinion, to clean up such Spill and any contamination
related to the Spill, all in accordance with the requirements, rules
and regulations of any state or federal environmental department or
agency having jurisdiction over the Spill;
(iii) fully restore the Premises to its condition prior to the
Spill;
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(iv) allow Lessor or its agents and any state or federal
environmental department or agency having jurisdiction thereof to
monitor and inspect all cleanup and restoration related to such Spill;
and
(v) at the written request of Lessor, post a bond or obtain a
letter of credit for the benefit of Lessor (drawn upon a company or
bank satisfactory to Lessor) or deposit an amount of money in an
escrow account under Lessor's name upon which bond, letter of credit
or escrow Lessee may draw, and which bond, letter of credit or escrow
shall be in an amount sufficient to meet all of Lessee's obligations
under this Article 8. Lessor shall have the unfettered right to draw
against the bond, letter of credit or escrow in its discretion in the
event that Lessee is unable or unwilling to meet its obligations under
this paragraph or, if Lessee fails to post a bond or obtain a letter
of credit or deposit such cash as is required herein, then Lessor, at
Lessee's cost and expense, may, but shall have no obligation, do so
for the benefit of Lessee and do those things which Lessee is required
to do under this Section 8.1(c)(ii), (iii) and (iv).
(d) Lessee hereby agrees that it will indemnify, defend, save and hold
harmless the Lessor and Lessor's members and the officers, directors and
employees of said members (collectively "Indemnified Parties") against and
from, and to reimburse the Indemnified Parties with respect to, any and all
damages, claims, liabilities, losses, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses, court costs,
administrative costs, costs of appeals and all clean up, administrative,
fines, penalties and enforcement costs of applicable governmental agencies)
which may be incurred by or asserted against the Indemnified Parties by
reason or arising out of: (i) the breach of any representation or
undertaking of Lessee under this Article 8, or (ii) the Treatment of any
Waste by Lessee or any tenant, licensee, concessionaire, manager, or other
party occupying or using the Premises, in or affecting the Premises, or
(iii) any Spill governed by the terms of this Article 8, or (iv) the
presence of any Waste upon the Premises, whether or not caused by Lessee.
(e) The obligations of Lessee under this Article 8 shall survive any
termination or satisfaction of this Lease.
ARTICLE 9
MISCELLANEOUS
Section 9.1 Mortgages. This Lease is and shall remain subject and
subordinate to all mortgages trust affecting the Premises and the Lessee shall
promptly execute and deliver to the Lessor such documents as the Lessor may
request, showing the subordination of this Lease to such mortgage, and in
default of the Lessee's doing so, the Lessor shall be and hereby is authorized
and empowered to execute such documents in the name and as the act and deed of
the Lessee. This authority is coupled with an interest and is irrevocable.
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Section 9.2 Rules and Regulations. The Lessor has made, or from time to
time shall make, rules and regulations for the government of the Building. These
rules and regulations are, or shall be, a part of this Lease and binding upon
the Lessee to the same extent as if set out herein and copies thereof shall be
delivered to the Lessee.
Section 9.3 Brokers. The parties warrant that they have had no dealings
with any real estate broker or agent in connection with the negotiations of this
Lease that would give rise to a valid claim for commission.
Section 9.4 Estoppel Certificates. Lessee agrees to provide Lessor within
five (5) days of a written request therefor a certificate in form and substance
satisfactory to Lessor stating (i) that this Lease is in full force and effect;
(ii) the commencement date and term of this Lease; (iii) the date through which
rent has been paid; (iv) that there are no defaults existing under this Lease,
or, if any default exists, specifying such default and the actions required to
cure such default; and (v) such other matters as Lessor may reasonably require.
Section 9.5 Severability. If any term of this Lease is declared to be
illegal or unenforceable, the unaffected terms shall remain in full force and
effect.
Section 9.6 Successors and Assigns. Except as otherwise provided in this
Lease, all of the covenants, conditions and provisions of this Lease shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and assigns.
Section 9.7 Parties. The words "Lessor" and "Lessee" as used herein shall
include the parties to the Lease, whether singular or plural, masculine or
feminine, or corporate, partnership, limited liability company or other entity
and their heirs, personal representatives, successors and assigns.
Section 9.8 Waivers. No covenant, term or condition hereof shall be deemed
waived, except by written consent of the party against whom the waiver is
claimed, and any waiver of the breach of any covenant, term or condition shall
not be deemed to be a waiver of any preceding or succeeding breach of the same
or any other covenant, term or condition of this Lease. Acceptance by Lessor of
any performance by Lessee after the time the same shall have become due shall
not constitute a waiver by Lessor of the breach or default of any covenant, term
or condition of this Lease unless otherwise expressly agreed to by Lessor in
writing.
Section 9.9 Approval. This Lease is subject to the approval of the lender
or lenders which provide the financing on the property in which the Premises are
located and shall be modified or altered to embody any terms required by said
company or companies. All such modifications shall be reasonably approved by
Lessee.
Section 9.10 Memorandum of Lease. This Lease shall not be recorded. At the
request of either party, the Lessor and Lessee shall execute a short form or
memorandum of lease in
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Maricopa County, Arizona. Lessee shall pay the recording charges and shall be
responsible for payment of all lease stamps applicable to this Lease.
Section 9.11 Controlling Law. This Lease is entered into in Arizona and
shall be enforced and construed in accordance with the laws thereof.
Section 9.12 Captions. The captions of the paragraphs of this Lease and its
Exhibits are for convenience only and are not a part of this Lease, and do not
in any way limit or amplify the terms or provisions of this Lease, and shall not
be considered in the construction or interpretation of any provision hereof.
Section 9.13 Relationship. The parties agree that Lessor shall in no event
be construed or held, by virtue of this Lease, to be an agent, partner, member
or associate of the Lessee in the conduct of any of Lessee's business, nor shall
Lessor be liable for any debts incurred by Lessee in the conduct of Lessee's
business.
Section 9.14 Entire Agreement. This Lease, together with any later written
modifications or amendments thereto, shall constitute the entire agreement
between the parties with respect to the subject matter hereof and shall
supersede any prior or contemporaneous agreements or understandings, whether
written or oral, which the parties, their agents or representatives may have had
relating to the subject matter hereof. No modification, alteration or waiver of
any term, condition or covenant of this Lease shall be valid unless in writing,
dated and signed by the Lessor and the Lessee.
Section 9.15 Corporate Authority. Each individual executing this Lease on
behalf of Lessee limited liability company represents and warrants that he is
duly authorized to execute and deliver this Lease on behalf of said company in
accordance with a duly adopted resolution of the managers of said company or in
accordance with the operating agreement of said company, and that this Lease is
binding upon said company in accordance with its terms. Lessee shall deliver to
Lessor, within thirty (30) days after execution of this Lease, a certified copy
of a resolution of the managers of said company authorizing or ratifying the
execution of this Lease.
Section 9.16 Notices. Any written notice required or allowed by this Lease
to be given to either the Lessor or the Lessee shall be deemed given upon
receipt by certified or registered mail, postage prepaid, properly addressed to
the parties as follows:
Lessee: CCT, L.L.C.
c/o MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, NC 28226
Attention: President - Diagnostics Division
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Lessor: Tucson Heart Hospital
4888 N. Stone Avenue
Tucson, AZ 85704
Attention: Thomas D. Plantz, President
with a copy to: MedCath of Tucson, L.L.C.
c/o MedCath Incorporated
7621 Little Avenue, Suite 106
Charlotte, NC 28226
Attention: President - Hospital Division
Section 9.17 Limitation of Lessor's Liability. Notwithstanding anything in
this Lease to the contrary, the Lessee agrees that it shall look solely to the
estate and property of the Lessor in the Building in which the Premises are
located for the collection of any judgment (or other judicial process) requiring
the payment of money by the Lessor for any default or breach by the Lessor of
any of its obligations under this Lease, subject, however, to the prior rights
of the holder of any mortgage encumbering the Building. No other assets of the
Lessor shall be subject to levy, execution or other judicial process for the
satisfaction of the Lessee's claim. This provision shall not be deemed,
construed or interpreted to be or constitute an agreement, express or implied
between the Lessor and the Lessee that the Lessor's interest in the Building
shall be subject to impressment of an equitable lien or otherwise.
Section 9.18 Bankruptcy. To the extent permitted by applicable law, Lessee
shall not, without the prior written consent of the holder of any mortgage or
owner, elect to treat the Lease as terminated under Section 365(h)(1) of the
Bankruptcy Code. Any such election made without the prior written consent of
such party shall be void.
Section 9.19 Notice to Lessor. Notwithstanding anything in this Lease to
the contrary, Lessee agrees that it will not terminate this Lease or withhold
any rentals due hereunder because of Lessor's default in the performance hereof
until Lessee has first given written notice to the Lessor and to the holder of
any mortgage and to the owner specifying the nature of such default by the
Lessor and allowing the Lessor, such mortgage holder and owner, or any of them,
thirty (30) days after date of such notice to cure such default or a reasonable
period of time in addition thereto if circumstances are such that said default
cannot reasonably be cured within said thirty (30) day period and the Lessor,
such mortgage holder, or the owner promptly takes action to cure such default
and pursues such action with due diligence.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed under seal, all as of the day and year first above written.
LESSOR:
MEDCATH OF TUCSON, L.L.C.
By: /s/ Thomas D. Plantz
----------------------------------------
Name: Thomas D. Plantz
Title: President, Tucson Heart Hospital
LESSEE:
CCT, L.L.C.
By: Southern Arizona Heart, Inc.
By: /s/ R. William Moore, Jr.
----------------------------------------
Name: R. William Moore, Jr.
-------------------------------------
Title: Assistant Secretary
------------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated as of October 1, 1997
by and between MEDCATH, INCORPORATED, a North Carolina corporation (the
"Company") and STEPHEN R. PUCKETT ("Puckett"), a resident of Charlotte, North
Carolina.
WHEREAS, the Company desires to employ Puckett and Puckett desires to
accept that employment;
NOW, THEREFORE, it is agreed as follows:
1. Employment. For new and very valuable consideration described
herein, the Company employs Puckett and Puckett accepts employment upon the
terms and conditions hereinafter set forth.
2. Duties. Puckett shall be Chairman of the Board, President and Chief
Executive Officer of the Company and shall have such duties as shall be
assigned to him from time to time by the Board of Directors of the Company.
During the term of employment hereunder, Puckett shall not be engaged
in any other business activity whether or not such business activity is pursued
for gain, profit, or other pecuniary advantage unless agreed upon by the Board
of Directors of the Company; provided that this provision shall not prevent
Puckett from investing his personal assets in businesses which do not compete
with the Company and which will not require substantial services on the part of
Puckett in the operation of the affairs of the companies in which such
investments are made.
3. Compensation. For and in consideration of the services to be
rendered by Puckett hereunder, the Company shall pay to Puckett during the term
of this Agreement compensation described as follows:
(a) Base Salary. The Company shall pay to Puckett an annual
base salary (herein "Base Salary") of Two Hundred Fifty Thousand Dollars
($250,000.00) which shall be paid on a monthly basis.
(b) Cash Bonus Compensation. In addition to the Base Salary,
the Company shall also pay to Puckett annually bonus compensation (herein
"Bonus") which will be paid within 45 days of the end of each fiscal year of the
Company during the term of this Agreement. The Bonus for each fiscal year of the
Company will be tied to the Company's earnings per share as reported in its
annual financial statements before any extraordinary items set forth therein
(herein "EPS") and the annual EPS target for that year (herein "EPS Target") as
established by the Management and the Board of Directors. At the beginning of
each fiscal year, Management and the Board of Directors shall establish an
EPS Target for that year. At the end of each fiscal year, Puckett shall be paid
a Bonus based upon the following formula:
<PAGE>
If the Company's actual EPS is 80% of the EPS Target or
greater (the comparative percentage of the EPS to the EPS Target is referred to
herein as the "Bonus Growth Percentage"), then Puckett's Bonus shall be the
Bonus Growth Percentage multiplied times 50% of Puckett's Base Salary for the
fiscal year then ended, subject to a maximum Bonus Growth Percentage of 120%. If
the Bonus Growth Percentage is less than 80%, no Bonus will be earned or paid.
(c) Base Salary Compensation. The Company recognizes that
Puckett has made substantial contributions to the success of the Company and
therefore he may also receive such increases to Base Salary and Bonus
Compensation as the Board of Directors may determine from time to time based
upon recommendations of the Compensation Committee of the Board of Directors. In
that regard, the Company agrees that at all times, Puckett's base salary shall
be no less than the median base salary of chief executive officers for companies
of comparable size to Medcath.
4. Incentive Stock Options. Annually during the term of this Agreement,
the Company shall grant to Puckett options to purchase additional stock of the
Company, which options shall vest 25% in the year earned and 25% in each year
for the following three years, on the following terms and conditions:
(a) Number of Shares Granted. In determining the number of
shares contained in each annual option grant, the following definitions shall
apply:
(i) "EPS" shall be as defined in Paragraph 3(b)
above;
(ii) "EPS Growth Target Percentage" shall be 10% for
each fiscal year during the term of this Agreement,
(iii) "Actual Growth Percentage" shall mean
the percentage by which the EPS for a fiscal year exceeds the EPS for the
immediately preceding fiscal year,
(iv) "Outstanding Shares" means the number of
common shares of the Company outstanding based on the same figures used by the
Company in calculating EPS for the applicable fiscal year,
(v) "Bonus Percentage" for each applicable fiscal
year shall be 10%.
The Company shall grant to Puckett each year during the term of this Agreement
the option to purchase the number of shares calculated by subtracting the EPS
Growth Target Percentage of 10% from the Actual EPS Growth Percentage and
multiplying that percentage times the Outstanding Shares, and multiplying that
quotient times the Bonus Percentage. (For example, if the Actual EPS Growth Rate
calculation for a fiscal year is 17.6%, and the outstanding shares of the
Company are 11,600,000 shares, then Puckett for that fiscal year would earn an
option to purchase 88,160 shares [the formula as applied in this example is as
follows: .176 minus .10 equals .076 times 11,600,000 shares times .10 equals
88,160 shares]). Puckett's maximum Incentive Stock Option Grant for each year
covered under the Agreement will be limited to no more than 1.67% of the shares
of the Company outstanding in that fiscal year and to no more than 4.05% of the
shares of the Company outstanding for the three year period covered by this
Agreement, such limits to exclude shares and Incentive Stock Option Grants
owned by Puckett as of the date of this Agreement.
(b) Purchase Price of Shares. For any options granted
hereunder, the purchase price of the stock shall be the market price or 10%
above the market price based upon regulations covering the granting of the
option.
(c) Exercise of Options. The time for exercising all options
granted hereunder shall be the maximum time period allowed by law.
5. Miscellaneous Benefits. The Company shall provide Puckett with all
additional benefits during the period of his employment substantially equivalent
to those which are generally provided to the executive officers of the Company.
The Company shall reimburse Puckett for reasonable expenses incurred by him in
the course of his employment with the Company provided those expenses are
consistent with reasonable policies provided from time to time by the Company's
Board of Directors.
6. Term and Termination of Employment.
(a) This Agreement shall have a term of three (3) years
commencing as of the date hereof, and shall be renewed automatically upon the
expiration of such term for consecutive one year terms unless either party gives
the other notice of nonrenewal at least 90 days prior to the end of the then
current term;
(b) By the Company for Cause. The Company shall have the right
to terminate Puckett's employment for cause as provided herein by giving written
notice thereof. "Cause" shall mean that Puckett commits a willful act of fraud
or dishonesty toward the Company; is convicted of criminal felony resulting in a
jail sentence (whether or not such sentence is suspended); materially violates a
material term of this Agreement; becomes disabled; or submits a notice of
resignation to the Company. Puckett shall be deemed disabled if he has been
unable, by reason of physical or mental infirmity, to perform on a full-time
basis the duties of a principal executive officer of the Company then assigned
to him by the Company's Board of Directors for a period of nine (9) months or
more. The existence of disability shall be reasonably determined by the Board of
Directors of the Company (excluding Puckett).
(c) By the Company Without Cause or Upon Change of Control.
Subject to (e) below, Puckett's employment may be terminated by the Company at
any time after the date six months from the date hereof without cause upon
written notice thereof, and in any event, this
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Agreement shall be terminated upon a Change of Control of the Company as defined
herein. For purposes of this Agreement, a "Change of Control" shall mean the
earliest date on which either of the following events shall occur:
(i) An individual, entity, or group shall acquire
otherwise than directly from the Company, beneficial ownership of 40% or more of
the outstanding common stock or voting power of the Company, provided that no
such individual, entity or group shall be deemed to beneficially own any
securities held by:
(1) the Company or any of its subsidiaries,
or
(2) any employee benefit plan of the Company
or any of its subsidiaries;
(3) any current employee of the Company; or
(ii) The persons who are directors of the Company on
the date of this Agreement, together with those who subsequently became
directors of the Company and whose election, or nomination for election by the
Company's shareholders, was approved by the vote of at least a majority of the
directors who were directors on the date of this Agreement, or directors whose
nomination or the continuing Directors as defined in the MedCath, Incorporated
Omnibus Stock Plan, as amended, shall cease to constitute a majority of the
Board or of its successor by merger, consolidation, or sale of assets.
(d) By Puckett. Puckett may terminate his employment upon at
least ninety (90) days' written notice.
(e) Salary and Benefits. (i) If the Company terminates
Puckett's employment under this Agreement for any reason other than cause, or
this Agreement is terminated as the result of a Change of Control, then within
thirty days of the event causing such termination, the Company will pay to
Puckett in a lump sum, an amount equal to two times the total cash
compensation earned by Puckett during the immediately preceding fiscal year of
the Company, regardless of when such compensation was paid, plus an amount equal
to the then present value of two years of normal health, life insurance and
retirement benefits provided to Puckett pursuant to Paragraph 5 above. If this
Agreement is terminated as a result of a Change of Control, all stock options
previously granted to Puckett by the Company, including those granted prior to
the date of this Agreement, shall vest immediately. Further, if the Company
terminates Puckett's employment under this Agreement for any reason other than
cause, then Puckett shall be granted the Incentive Stock Options described in
Paragraph 4 for the fiscal year in which such termination occurs with all
computations to be as of the date of termination.
(ii) Upon any termination of Puckett's employment for
cause, Puckett shall be entitled to receive only his then accrued salary and
additional benefits.
4
<PAGE>
(iii) Upon termination of Puckett's employment for
any reason, Puckett shall be entitled to receive only such additional benefits
as provided in this subparagraph (e) except for benefits which, under the terms
of the governing plan, he has earned the right to receive after his retirement
from the Company.
(iv) Upon termination of his employment by Puckett,
Puckett shall not be entitled to any additional salary or benefits other than
those accrued prior the date of termination. Notwithstanding anything herein to
the contrary, no further salary shall be due Puckett once he begins to receive
the proceeds of any disability insurance policy.
7. Confidentiality and Non-Disclosure. During the course of Puckett's
employment, Puckett has been and will be exposed and have access to substantial
quantities of information and technology (the "Confidential Information")
relating to the Company's business that are valuable trade secrets or
confidential information, including information concerning customers and
marketing strategies.
The Confidential Information was developed, compiled and/or tested by
the Company at considerable expense, and the Company continues to spend
considerable amounts of money in building upon and expending that Confidential
Information. The Confidential Information enables the Company to conduct its
business with success and with a competitive edge. It is essential to the
Company's success and competitive advantage that the Confidential Information
remain not generally known to others, whether those others operate in direct
competition with the Company or its customers or begin operations in
geographical areas which are of interest to the Company (that is, within the
United States).
Puckett, by reason of his role as an employee, officer, director, and
major shareholder of the Company, is familiar with and has access to the
Company's customers and their needs and to the marketing and pricing pursued by
the Company with respect to those customers and the Company's products and
services.
This Paragraph is designed to prohibit Puckett from using the
Confidential Information and knowledge and relationships developed as an insider
of the Company for his own benefit or for the benefit of parties other than the
Company. The Company would not give Puckett access to the Confidential
Information and authority without Puckett's execution of this Agreement and
Puckett willingly signs this Agreement because he has received additional
consideration to do so and because he believes his relationship with the Company
is and will be in his own best interest. Both parties agree that this
Paragraph's provisions should be construed broadly in favor of the Company.
In light of the foregoing, the parties agree as follows:
5
<PAGE>
A. Confidential Information.
Puckett promises that:
(1) During or after termination of his relationship with the
Company, he will not, directly or indirectly, use, or disclose or make available
to anyone outside the Company, any Confidential Information.
(2) He will safeguard all Confidential Information at all
times so that it is not exposed to, or taken by, unauthorized persons, and, when
entrusted to him, will exercise his best efforts to assure its safekeeping.
B. Competition.
Puckett agrees that:
(1) He will not, during the period of his relationship with
the Company, engage or be interested, directly or indirectly, in any manner, as
a partner, officer, director, advisor, employee or in any other capacity in any
business which is a competitive business to the Company.
(2) The Company's business is unusual and that by virtue of
his relationship with the Company he is, and will become more, familiar with and
close to the Confidential Information and the Company's business and customers.
In the event this relationship with the Company ceases for any reason, he will
not engage in, for a period of twelve (12) months after that termination, in any
manner, directly or indirectly, whether as an employee, officer, owners,
partners, shareholder, consultant or otherwise, in the cardiology services
business or any other health care business in which the Company is specifically
engaged as of the date of such termination, within the continental United
States.
8. Renegotiation Rights. Both Puckett and the Company shall have the
right to require a renegotiation of the Bonus Compensation formula if
circumstances arise that cause the results of such formula to be unfair or
inequitable. Such circumstances include, but are not limited to, a combination
with another company, capital restructuring, material changes in accounting
rules or tax laws, severe or prolonged recession or inflation or any other
circumstance, whether intrinsic or extrinsic to the Company, that would
materially effect the bonus formula results. If in such circumstances the
Company and Puckett are unable to reach an agreement on a substitute Bonus
Compensation formula, the parties agree to submit the matter for binding
arbitration to the American Arbitration Association. Any change in the bonus
formula for Bonus Compensation may be made only on a prospective basis (i.e.,
only with respect to future years or a year as to which the deadline under
federal tax law for establishing a performance-based plan has not passed).
6
<PAGE>
9. Enforcement. If there is a breach or threatened breach of the
provision of Paragraph 7 of this Agreement, in addition to other remedies at law
or equity, the Company shall be entitled to injunctive relief. The parties
desire and intend that the provisions of Paragraph 7 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 Paragraph 7. Should any such paragraphs,
subparagraph, sentence, clause, phrase, word, or figure be adjudicated to be
wholly invalid or unenforceable, the balance of Paragraph 7 shall thereupon be
modified in order to render the same valid and enforceable.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sent by registered or certified mail,
by other reasonable means of delivery providing overnight service, or by hand to
Puckett at 2324 Kingsmill Terrace, Charlotte, North Carolina 28270; to the
Company at 7621 Little Avenue, Charlotte, North Carolina 28226. Notice shall be
deemed to have been given when deposited with the Postal Service or other
delivery service or, if delivered by hand, when received by the addressee. A
party may change the address to which notice to it must be given by advising the
other parties in writing of the new address.
11. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by the waiving party.
12. Assignment. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. As a personal service contract the rights and
obligations of Puckett under this Agreement may not be assigned by him.
13. Entire Agreement. This instrument may not be changed orally but
only by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification, extension or discharge is sought.
14. Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of North Carolina applicable to contracts made and to
be performed in this State, without reference to choice of laws principles, and
that law shall be applied in connection with its enforcement in other states and
jurisdictions to the fullest extent possible.
7
<PAGE>
IN WITNESS WHEREOF, the parties have signed and sealed this Agreement
as of the date first above written.
MEDCATH, INCORPORATED
By: /s/ W. Jack Duncan
------------------
Chair
Compensation Committee
ATTEST:
By: ________________________________
Secretary
[Corporate Seal]
/s/ Stephen R. Puckett
____________________________[SEAL]
Stephen R. Puckett
8
<PAGE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated as of October 1, 1997 by
and between MEDCATH, INCORPORATED, a North Carolina corporation (the "Company")
and DAVID CRANE ("Crane"), a resident of Charlotte, North Carolina.
WHEREAS, the Company desires to employ Crane and Crane desires to accept
that employment;
NOW, THEREFORE, it is agreed as follows:
1. Employment. For new and very valuable consideration described herein,
the Company employs Crane and Crane accepts employment upon the terms and
conditions hereinafter set forth.
2. Duties. Crane shall be Executive Vice President and Chief Operating
Officer of the Company and shall have such duties as shall be assigned to him
from time to time by the Board of Directors of the Company.
During the term of employment hereunder, Crane shall not be engaged in any
other business activity whether or not such business activity is pursued for
gain, profit, or other pecuniary advantage unless agreed upon by the Board of
Directors of the Company; provided that this provision shall] not prevent Crane
from investing his personal assets in businesses which do nor compete with the
Company and which will not require substantial services on the part of Crane in
the operation of the affairs of the companies in which such investments are
made.
3. Compensation. For and in consideration of the services to be rendered by
Crane hereunder, the Company shall pay to Crane during the term of this
Agreement compensation described as follows;
(a) Base Salary. The Company shall pay to Crane an annual base salary
(herein "Base Salary") of Two Hundred Thousand Dollars ($200,000 00) which
shall be paid on a monthly basis.
(b) Cash Bonus Compensation. In addition to the Base Salary, the
Company shall also pay to Crane annually bonus compensation (herein
"Bonus") which will be paid within 45 days of the end of each fiscal year
of the Company during the term of this Agreement. The Bonus for each fiscal
year of the Company will be tied to the Company's earnings per share as
reported in its annual financial statements before any extraordinary items
set forth therein (herein "EPS") and the annual EPS target for that year
(herein "EPS Target") as established by Management and the Board of
Directors. At the beginning of each fiscal year, Management and the Board
of Directors shall establish an EPS Target for that year. At the end of
each fiscal year, Crane shall be paid a Bonus based upon the following
formula:
<PAGE>
If the Company's actual EPS is 80% of the EPS Target or greater (the
comparative percentage of the EPS to the EPS Target is referred to herein as the
"Bonus Growth Percentage"), then Crane's Bonus shall be the Bonus Growth
Percentage multiplied times 50% of Crane's Base Salary for the fiscal year then
ended, subject to a maximum Bonus Growth Percentage of 120%. If the Bonus Growth
Percentage is less than 80%, no Bonus will be earned or paid.
(c) Base Salary Compensation. The Company recognizes that Crane has
made substantial contributions to the success of the Company and therefore
he may also receive such increases to Base Salary and Bonus Compensation as
the Board of Directors may determine from time to time based upon
recommendations of the Compensation Committee of the Board of Directors. In
that regard, the Company agrees that at all times, Crane's base salary
shall be no less than the median base salary of chief operating officers
for companies of comparable size to Medcath.
4. incentive Stock Options. Annually during the term of this Agreement, the
Company shall grant to Crane options to purchase additional stock of the
Company, which options shall vest 25% in the year earned and 25% in each year
for the following three years, on the following terms and conditions:
(a) Number of Shares Granted. In determining the number of shares
contained in each annual option grant, the following definitions shall
apply:
(i) "EPS" shall be as defined in Paragraph 3(b) above;
(ii) "EPS Growth Target Percentage" shall be 10% for each fiscal
year during the term of this Agreement;
(iii) "Actual Growth Percentage" shall mean the percentage by
which the EPS for a fiscal year exceeds the EPS for the immediately
preceding fiscal year.
(iv) "Outstanding Shares" means the number of common shares of
the Company outstanding based on the same figures used by the Company
in calculating EPS for the applicable fiscal year;
(v) "Bonus Percentage" for each applicable fiscal year shall be
6%.
The Company shall grant to Crane each year during the term of this Agreement the
option to purchase the number of shares calculated by subtracting the EPS Growth
Target Percentage of 10% from the Actual EPS Growth Percentage and multiplying
that percentage times the Outstanding Shares, and multiplying that quotient
times the Bonus Percentage. (For example, if the Actual EPS Growth Rate
calculation for a fiscal year is 17.6%, and the outstanding shares of the
Company are 11,600,000 shares, then Crane for that fiscal year would earn an
option to
2
<PAGE>
purchase 52,896 shares [the formula as applied in this example is as follows:
.176 minus .10 equals .076 times 11,600,000 shares times .06 equals 52,896
shares]). Crane's maximum Incentive Stock Option Grant for each year covered
under the Agreement will be limited to no more than 1.0% of the shares of the
Company outstanding in that fiscal year and to no more than 2.43% of the shares
of the Company outstanding for the three year period covered by this Agreement,
such limits to exclude shares and Incentive Stock Option Grants owned by Crane
as of the date of this Agreement.
(b) Purchase Price of Shares. For any options granted hereunder, the
purchase price of the stock shall be the market price or 10% above the
market price based upon regulations covering the granting of the option.
(c) Exercise of Options. The time for exercising all options granted
hereunder shall be the maximum time period allowed by law.
5. Miscellaneous Benefits. The Company shall provide Crane with all
additional benefits during the period of his employment substantially equivalent
to those which are generally provided to the executive officers of the Company.
The Company shall reimburse Crane for reasonable expenses incurred by him in the
course of his employment with the Company provided those expenses are consistent
with reasonable policies provided from time to time by the Company's Board of
Directors.
6. Term and Termination of Employment.
(a) This Agreement shall have a term of three (3) years commencing as
of the date hereof, and shall be renewed automatically upon the expiration
of such term for consecutive one year terms unless either party gives the
other notice of nonrenewal at least 90 days prior to the end of the then
current term;
(b) By the Company for Cause. The Company shall have the right to
terminate Crane's employment for cause as provided herein by giving written
notice thereof. "Cause" shall mean that Crane commits a willful act of
fraud or dishonesty toward the Company; is convicted of criminal felony
resulting in a jail sentence (whether or not such sentence is suspended);
materially violates a material term of this Agreement; becomes disabled; or
submits a notice of resignation to the Company. Crane shall be deemed
disabled if he has been unable, by reason of physical or mental infirmity,
to perform on a full-time basis the duties of a principal executive officer
of the Company then assigned to him by the Company's Board of Directors for
a period of nine (9) months or more. The existence of disability shall be
reasonably determined by the Board of Directors of the Company (excluding
Crane).
(c) By the Company Without Cause or Upon Change of Control. Subject to
(e) below, Crane's employment may be terminated by the Company at any time
after the date six months from the date hereof without cause upon written
notice thereof and in any event, this
3
<PAGE>
Agreement shall be terminated upon a Change of Control of the Company as
defined herein. For purposes of this Agreement a "Change of Control" shall
mean the earliest date on which either of the following events shall occur:
(i) An individual, entity, or group shall acquire otherwise than
directly from the Company, beneficial ownership of 40% or more of the
outstanding common stock or voting power of the Company, provided that
no such individual, entity or group shall be deemed to beneficially
own any securities held by:
(1) the Company or any of its subsidiaries, or
(2) any employee benefit plan of the Company or any of its
subsidiaries;
(3) any current employee of the Company, or
(ii) The persons who are directors of the Company on the date of
this Agreement, together with those who subsequently became directors
of the Company and whose election, or nomination for election by the
Company's shareholders, was approved by the vote of at least a
majority of the directors who were directors on the date of this
Agreement, or directors whose nomination or the Continuing Directors
as defined in the MedCath, Incorporated Omnibus Stock Plan, as
amended, shall cease to constitute a majority of the Board or of its
successor by merger, consolidation, or sale of assets.
(d) By Crane. Crane may terminate his employment upon at least ninety
(90) days' written notice.
(e) Salary and Benefits. (i) If the Company terminates Crane's
employment under this Agreement for any reason other than cause, or this
Agreement is terminated as the result of a Change of Control, then within
thirty days of the event causing such termination, the Company will pay to
Crane in a lump sum, an amount equal to two times the total cash
compensation earned by Crane during the immediately preceding fiscal year
of the Company, regardless of when such compensation was paid, plus an
amount equal to the then present value of two years of normal health, life
insurance and retirement benefits provided to Crane pursuant to Paragraph 5
above. If this Agreement is terminated as a result of a Change of Control,
all stock options previously granted to Crane by the Company, including
those granted prior to the date of this Agreement, shall vest immediately.
Further, if the Company terminates Crane's employment under this Agreement
for any reason other than cause, then Crane shall be granted the Incentive
Stock Options described in Paragraph 4 for the fiscal year in which such
termination occurs with all computations to be as of the date of
termination.
(ii) Upon any termination of Crane's employment for cause, Crane
shall then accrued salary and additional benefits.
4
<PAGE>
(iii) Upon termination of Crane's employment for any reason,
Crane shall be entitled to receive only such additional benefits as
provided in this subparagraph (e) except for benefits which, under the
terms of the governing plan, he has earned the right to receive after
his retirement from the Company.
(iv) Upon termination of his employment by Crane, Crane shall not
be entitled to any additional salary or benefits other than those
accrued prior the date of termination. Notwithstanding anything herein
to the contrary, no further salary shall be due Crane once he begins
to receive the proceeds of any disability insurance policy.
7. Confidentiality and Non-Disclosure. During the course of Crane's
employment, Crane has been and will be exposed and have access to substantial
quantities of information and technology (the "Confidential Information")
relating to the Company's business that are valuable trade secrets or
confidential information, including information concerning customers and
marketing strategies.
The Confidential Information was developed, compiled and/or tested by the
Company at considerable expense, and the Company continues to spend considerable
amounts of money in building upon and expending that Confidential Information.
The Confidential Information enables the Company to conduct its business with
success and with a competitive edge. It is essential to the Company's success
and competitive advantage that the Confidential Information remain not generally
known to others, whether those others operate in direct competition with the
Company or its customers or begin operations in geographical areas which are of
interest to the Company (that is, within the United States).
Crane, by reason of his role as an employee, officer, director, and major
shareholder of the Company, is familiar with and has access to the Company's
customers and their needs and to the marketing and pricing pursued by the
Company with respect to those customers and the Company's products and services.
This Paragraph is designed to prohibit Crane from using the Confidential
Information and knowledge and relationships developed as an insider of the
Company for his own benefit or for the benefit of parties other than the
Company. The Company would not give Crane access to the Confidential Information
and authority without Crane's execution of this Agreement and Crane willingly
signs this Agreement because he has received additional consideration to do so
and because he believes his relationship with the Company is and will be in his
own best interest. Both parties agree that this Paragraph's provisions should be
construed broadly in favor of the Company.
In light of the foregoing, the parties agree as follows:
5
<PAGE>
A. Confidential Information.
Crane promises that:
(1) During or after termination of his relationship with the Company,
he will not, directly or indirectly, use, or disclose or make available to
anyone outside the Company, any Confidential Information.
(2) He will safeguard all Confidential Information at all times so
that it is not exposed to, or taken by, unauthorized persons, and, when
entrusted to him, will exercise his best efforts to assure its safekeeping.
B. Competition.
Crane agrees that:
(1) He will not, during the period of his relationship with the
Company, engage or be interested, directly or indirectly, in any manner, as
a partner, officer, director, advisor, employee or in any other capacity in
any business which is a competitive business to the Company.
(2) The Company's business is unusual and that by virtue of his
relationship with the Company he is, and will become more, familiar with
and close to the Confidential Information and the Company's business and
customers. In the event this relationship with the Company ceases for any
reason he will not engage in, for a period of twelve (12) months after that
termination, in any manner, directly or indirectly, whether as an employee,
officer, owners, partners, shareholder, consultant or otherwise, in the
cardiology services business or any other health care business in which the
Company is specifically engaged as of the date of such termination, within
the continental United States.
8. Renegotiation Rights. Both Crane and the Company shall have the tight to
require a renegotiation of the Bonus Compensation formula if circumstances arise
that cause the results of such formula to be unfair or inequitable. Such
circumstances include but are not limited to, a combination with another
company, capital restructuring, material changes in accounting rules or tax
laws, severe or prolonged recession or inflation or any other circumstance,
whether intrinsic or extrinsic to the Company, that would materially effect the
bonus formula results. If in such circumstances the Company and Crane are unable
to reach an agreement on a substitute Bonus Compensation formula, the parries
agree to submit the matter for binding arbitration to the American Arbitration
Association. Any change in the bonus formula for Bonus Compensation may be made
only on a prospective basis (i.e., only with respect to future years or a year
as to which the deadline under federal tax law for establishing a
performance-based plan has not passed).
6
<PAGE>
9. Enforcement. If there is a breach or threatened breach of the provision
of Paragraph 7 of this Agreement, in addition to other remedies at law or
equity) the Company shall be entitled to injunctive relief. The parties desire
and intend that the provisions of Paragraph 7 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 Paragraph 7. Should any such paragraphs,
subparagraph, sentence, clause, phrase, word, or figure be adjudicated to be
wholly invalid or unenforceable, the balance of Paragraph 7 shall thereupon be
modified in order to render the same valid and enforceable.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sent by registered or certified mail,
by other reasonable means of delivery providing overnight service, or by hand to
Crane at ______________, North Carolina; to the Company at 7621 Little Avenue,
Charlotte, North Carolina 28226. Notice shall be deemed to have been given when
deposited with the Postal Service or other delivery service or, if delivered by
hand, when received by the addressee. A party may change the address to which
notice to it must be given by advising the other parties in writing of the new
address.
11. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by the waiving party.
12. Assignment. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. As a personal service contract the rights and
obligations of Crane under this Agreement may not be assigned by him.
13. Entire Agreement. This instrument may not be changed orally but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
14. Applicable Law This Agreement shall be construed in accordance with the
laws of the State of North Carolina applicable to contracts made and to be
performed in this State, without reference to choice of laws principles, and
that law shall be applied in connection with its enforcement in other states and
jurisdictions to the fullest extent possible.
7
<PAGE>
IN WITNESS WHEREOF, the parties have signed and sealed this Agreement as of
the date first above written.
MEDCATH, INCORPORATED
By: /s/ W. Jack Duncan
---------------------------
Chair
Compensation Committee
ATTEST;
By:_______________________________
Secretary
[Corporate Seal]
/s/ DAVID CRANE (SEAL]
---------------------------
DAVID CRANE
8
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by
and between MEDCATH INCORPORATED, a North Carolina corporation (the
"Company") and Richard J. Post, a resident of Dallas, Texas ("Employee")
and is effective the 24th day of September, 1996.
WHEREAS, the Company desires to employ Employee as a full-time employee and
Employee desires to accept that position in accordance with the terms hereof.
NOW, THEREFORE, it is agreed as follows:
1. EMPLOYMENT. Employee shall be employee as Chief Financial Officer. For
new and very valuable consideration described herein, the Company shall
employ Employee and Employee accepts employment upon the terms and conditions
hereinafter set forth, with such employment to commence on the 30th day of
September, 1996.
2. DUTIES. Employee shall be a full-time employee of the Company and,
accordingly, shall devote a commensurate amount of time and effort in the
performance of Employee's duties hereunder. Employee shall be responsible for
the supervision and direction of all financial matters of the Company,
including but not limited to financial reporting, financial planning and
forecasts, and relationships with third parties such as stock analysts,
creditors, and joint venturers. Employee shall also have such other duties
as assigned to Employee from time to time by the Company's President. Employee
shall become a full-time resident of either Charlotte, North Carolina or a
community within a reasonable commuting distance thereof as soon as reasonably
possible.
During the term of employment hereunder, Employee shall not be engaged in
any other business activity whether or not such business activity is pursued
for gain, profit, or other pecuniary advantage.
3. COMPENSATION. For and in consideration of the services to be rendered by
Employee hereunder, the Company shall pay to Employee an annual salary of One
Hundred Forty-Five Thousand Dollars ($145,000) which shall be paid on a monthly
basis unless otherwise agreed to by the parties hereto. Employee's salary shall
be reviewed by the President of the Company or other officers or senior
management team members of the Company as designated by the President from
time to time. Employee shall also be eligible to participate in an annual bonus
compensation plan each year of employment in accordance with the Company's
senior executive compensation plan as implemented from time to time by the
Company's Compensation Committee. Employee will only be eligible for any bonus
award if Employee is employed by the Company on the day that is thirty (30)
days prior to the end of the year for which the bonus applies.
4. MISCELLANEOUS BENEFITS. During Employee's employment, the Company shall
provide Employee with additional benefits substantially equivalent to those
which are generally
<PAGE>
provided to other similar employees of the Company. The Company shall
reimburse Employee for reasonable expenses incurred by Employee
in the course of Employee's employment with the Company provided those
expenses are consistent with reasonable policies established from time to time
by the Company. The Company shall pay up to Ten Thousand Dollars ($10,000) for
Employee's relocation and moving expenses upon the receipt of proper
documentation of such expenses by Employee.
5. TERMINATION OF EMPLOYMENT.
(a) BY THE COMPANY FOR CAUSE. The Company shall have the right to
terminate Employee's employment for cause as provided herein by giving
written notice thereof. "Cause" shall mean that Employee commits a willful act
of fraud, dishonesty or disloyalty toward the Company; is convicted of
criminal conduct resulting in a jail sentence (whether or not such sentence
is suspended); engages in conduct significantly injurious to the Company
monetarily; violates a material term of this Agreement including, but not
limited to, failure to fulfill the duties assigned to Employee by the
Company; becomes disabled; or submits a notice of resignation to the Company.
Employee shall be deemed disabled if he has been unable for a period of thirty
(30) days, by reason of physical or mental infirmity, to perform on a full-
time basis Employee's assigned responsibilities. The existence of disability
shall be reasonably determined by the Board of Directors of the Company.
(b) By the Company Without Cause. Subject to (e) below, the Company
may terminate Employee's employment at any time without cause by giving
Employee written notice thereof.
(c) Change of Control. The Company shall terminate Employee's
employment immediately upon a Change of Control of the Company, as defined
herein. For purposes of this Agreement, a "Change of Control" shall mean
the earliest date on which either of the following events shall occur;
(i) An individual, enmity or group shall acquire otherwise than
directly from the Company, beneficial ownership of forty percent (40%)
or more of the outstanding common stock or voting power of the
Company, provided that no such individual, entity or group shall be
deemed to beneficially own any securities held by:
(1) the Company or any of its subsidiaries,
(2) any employee benefit plan of the Company or any of its
subsidiaries, or
(3) any current employee of the Company; or
(ii) The persons who were directors of the Company on the
effective date of this Agreement, together with those who subsequently
became directors of the Company and whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at
least a majority of the directors who were directors on the effective
date of this Agreement, or directors whose nomination or election was
approved as provided above, shall cease to constitute a majority of
the
1
<PAGE>
Board of Directors of the Company or of its successor by merger,
consolidation or sale of assets.
If the Company terminates Employee's employment as the result of a
Change of Control, then within thirty (30) days of the event causing such
termination, the Company shall pay to Employee in a lump sum, an amount
equal to two (2) times the total cash compensation earned by Employee
during the immediately preceding fiscal year of the Company, regardless of
when such compensation was paid, plus an amount equal to the then present
value of two (2) years' worth of normal health, life insurance and
retirement benefits as provided to Employee pursuant to Paragraph 4 above
(but excluding any relocation and moving expenses). If the Company
terminates Employee's employment as the result of a Change in Control, all
options in the Company's common stock granted to Employee by Company shall
vest immediately.
(d) By Employee. Employee may terminate Employee's employment upon at
least thirty (30) days' written notice.
(e) Salary and Benefits.
(i) If the Company terminates Employee's employment under this
Agreement for any reason other than cause or Change of Control, the
Company will continue to be liable for Employee's salary and all
awarded bonuses, to be paid on a monthly basis for a period of five
(5) months following the date of termination, as long as and only if
Employee is not otherwise in default hereunder during that period;
provided, however, that Employee's salary shall not be payable once
Employee becomes employed substantially full-time or otherwise earns,
on a monthly basis, at least 75% of Employee's monthly salary
hereunder.
(ii) Upon any termination of Employee's employment for cause,
Employee shall not be entitled to any further salary, bonuses or
benefits following the date of termination of Employee's employment.
(iii) Upon termination of Employee's employment for any reason,
Employee shall be entitled to receive only such additional benefits
which have accrued or become payable to Employee prior to the end of
Employee's actual employment.
(iv) Upon termination, Employee shall not be entitled to any
additional salary or benefits other than those accrued prior to the
date of termination or as provided in paragraph 5(c) or paragraph
5(e)(i) above, if any. Notwithstanding anything in this Agreement to
the contrary, no further salary or benefits shall be due to Employee
once Employee begins to receive the proceeds of any disability
insurance policy.
-2-
<PAGE>
6. CONFIDENTIALITY, NON-DISCLOSURE AND NON-COMPETITION.
(a) IN GENERAL. For purposes of this Paragraph 6, all references to the
Company shall include all affiliates of the Company. During the course of
Employee's employment, Employee will be exposed and have access to substantial
quantities of information and technology (the "Confidential Information")
relating to the Company's business that are valuable trade secrets or
confidential information, including, but not limited to, information concerning
customers, operations, pricing, technology, marketing strategies, methods of
operations, design of facilities and terms of agreements to which the Company
is a party.
The Confidential Information was developed, compiled and/or tested by the
Company at considerable amounts of money in building upon and expanding that
Confidential Information. The Confidential Information enables the Company to
conduct its business with success and with a competitive advantage as long as
the Confidential Information remains not generally known to others, whether
those others operate in direct competition with the Company or its customers
or begin operations in geographical areas which are of interest to the Company,
specifically within the United States.
Employee, by reason of Employee's role as an employee of the Company, is
familiar with and has access to the Company's customers and their needs and
to the marketing and pricing pursued by the Company with respect to those
customers and the Company's products and services.
This Paragraph is designed to prohibit Employee from using the Confidential
Information and knowledge and relationships developed as an insider of the
Company for Employee's own benefit or for the benefit of parties other than
the Company. The Company would not give Employee access to the Confidential
Information and authority without Employee's execution of this Agreement
and Employee willingly signs this Agreement because Employee has received
additional consideration to do so and because Employee believes Employee's
relationship with the Company is and will be in Employee's own best interest.
Both parties agree that the provisions of this Paragraph 6 should be construed
broadly in favor of the Company. In light of the foregoing, Employee agrees
to the terms of subparagraph (b) and (c) below.
(b) Confidential Information. Employee promises that:
(i) Employee will take all reasonable precautions to safeguard all
Confidential Information at all times so that it is not exposed to, or taken
by, unauthorized persons, and, when entrusted to Employee, will exercise
Employee's best efforts to assure its safekeeping; and
-3-
<PAGE>
(ii) During or after termination of Employee's relationship with the
Company, Employee will not, directly or indirectly, use, or disclose or make
available to anyone outside the Company, any Confidential Information.
(c) Competition.
(i) Employee agrees that:
(A) Employee will not, during the period of Employee's employment with
the Company, engage or be interested, directly or indirectly, in any manner,
as a partner, owner, officer, director, advisor, employee or in any other
capacity in any Competitive Business; and
(B) In the event Employee's employment with the Company ceases for any
reason, Employee will not engage in, for a period of eighteen (18) months
after that termination, in any manner directly or indirectly, whether as an
employee, officer, owner, partner, shareholder, consultant, agent or otherwise,
any Competitive Business within fifty (50) miles of any location which the
Company (1) has provided facilities or services of any type whatsoever during
Employee's employment with the Company, or (2) is actively developing any
facility or service.
(ii) For purposes of this subparagraph (c), a "Competitive Business"
shall include:
(A) A hospital;
(B) Any health care facility or service providing primarily cardiology
related facilities or services;
(C) Any other health care facility or service which provides any facility
or service similar to that provided by the Company during Employee's
employment by the Company; or
(D) Any health care facility or service which the Company was actively
developing, or actively considering the development of, during
Employee's employment by the Company.
7. ENFORCEMENT. If there is a breach or threatened breach of the provisions
of Paragraph 6 of this Agreement, in addition to other remedies at law or
equity, the Company shall be entitled to injunctive relief. The parties
desire and intend that the provisions of Paragraph 6 shall be enforced to the
fullest extent permissible under the law and public policies applied. In the
event that any paragraph, subparagraph, sentence, clause, phrase, word, or
figure is found by any applicable authority to be invalid or unenforceable,
such unenforceable provision shall be deemed to be deleted from this
Agreement and the balance of Paragraph 6 shall thereupon be modified in order to
render the same valid and enforceable.
-4-
<PAGE>
8. NOTICES. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sent by registered mail, by other
reasonable means of delivery providing overnight service, or by hand to
Employee at the Company's address set forth below until the Company is
notified otherwise in writing by Employee; to the Company at 7621 Little
Avenue, Suite 106, Charlotte, NC 28226, Attention: President. Notice shall
be deemed to have been given when deposited with the Postal Service or other
delivery service or, if delivered by hand, when received by the addressee.
A party may change the address to which notice it must be given by advising
the other parties in writing of the new address.
9. WAIVER OF BREACH. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by the waiving party.
10. ASSIGNMENT. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company. As a personal service contract the
rights and obligations of Employee under this Agreement may not be
assigned by Employee.
11. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
the parties with respect to the subject matter hereof and cannot be amended
orally but only by a writing signed by the party against whom enforcement of
any waiver, change, modification, extension or discharge is sought.
12. APPLICABLE LAW. This Agreement shall be construed in accordance with
the laws of the State of North Carolina applicable to contracts made and
to be performed in North Carolina, without reference to choice of laws
principles, and that law shall be applied in connection with its
enforcement in other states and jurisdictions to the fullest extent possible.
13. COUNTERPART EXECUTIONS: Facsimiles. This Agreement may be executed in
any number of counterparts with the same effect as if all of the parties had
signed the same document. Such executions may be transmitted to the parties
by facsimile and such facsimile execution shall have the full force and
effect of an original signature. All fully executed counterparts, whether
original executions or facsimile executions or a combination, shall be
construed together and shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s) effective as of the day and year first above
written.
-5-
<PAGE>
EXECUTION PAGE
TO
EMPLOYMENT AGREEMENT
MEDCATH INCORPORATED
9/24/96 By: /s/ Stephen R. Puckett
- ------- --------------------------------
Date Stephen R. Puckett, President
9/24/96 /s/ Richard J. Post (SEAL)
- ------- ---------------------------------
Date Richard J. Post
3
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated as of October 1, 1997 by
and between MEDCATH INCORPORATED, a North Carolina corporation (the "Company")
and CHARLES W. JOHNSON ("Johnson"), a resident of Charlotte, North Carolina.
WHEREAS, the Company desires to employ Johnson and Johnson desires to
accept that employment;
NOW, THEREFORE, it is agreed as follows:
1. Employment. For new and very valuable consideration described herein,
the Company employs Johnson and Johnson accepts employment upon the terms and
conditions hereinafter set forth.
2. Duties. Johnson shall be Senior Vice President - Development and Managed
Care of the Company and shall have such duties as shall be assigned to him from
time to time by the Board of Directors of the Company.
During the term of employment hereunder, Johnson shall not be engaged in
any other business activity whether or nor such business activity is pursued for
gain, profit, or other pecuniary advantage unless agreed upon by the Board of
Directors of the Company; provided that this provision shall not prevent
Johnson from investing his personal assets in businesses which do not compete
with the Company and which will not require substantial services on the part of
Johnson in the operation of the affairs of the companies in which such
investments are made.
3. Compensation. For and in consideration of the services to be rendered by
Johnson hereunder, the Company shall pay to Johnson during the term of this
Agreement compensation described is follows:
(a) Base Salary. The Company shall pay to Johnson an annual base salary
(herein "Base Salary") of One Hundred Eighty Thousand Dollars ($180,000.00) as
of July 1, 1997 which shall be paid on a monthly basis.
(b) Cash Bonus Compensation. In addition to the Base Salary, the Company
shall also pay to Johnson annually bonus compensation (herein "Bonus") which
will be paid within 45 days of the end of each fiscal year of the Company during
the term of this Agreement. The Bonus for each fiscal year of the Company will
be tied to the Company's earnings per share as reported in its annual financial
statements before any extraordinary items set forth therein (herein "EPS") and
the annual EPS target for that year (herein "EPS Target") as established by
Management and the Board of Directors. At the beginning of each fiscal year,
Management and the Board of Directors shall establish an EPS Target for that
year. At the end of each fiscal year, Johnson shall be paid a Bonus based upon
the following formula:
<PAGE>
If the Company's actual EPS is 80% of the EPS Target or greater (the
comparative percentage of the EPS to the EPS Target is referred to herein as
the "Bonus Growth Percentage"), then Johnson's Bonus shall be the Bonus Growth
Percentage multiplied times 50% of Johnson's Base Salary for the fiscal year
then ended, subject to a maximum Bonus Growth Percentage of 120%. If the Bonus
Growth Percentage is less than 80%, no Bonus will be earned or paid.
(c) Base Salary Compensation. The Company recognizes that Johnson has made
substantial contributions to the success of the Company and therefore he may
also receive such increases to Base Salary and Bonus Compensation as the Board
of Directors may determine from time to time based upon recommendations of the
Compensation Committee of the Board of Directors In that regard, the Company
agrees that at all times, Johnson's base salary shall be no less than the median
base salary of vice president - development for companies of comparable size to
Medcath.
4. Incentive Stock Options. Annually during the term of this Agreement, the
Company shall grant to Johnson options to purchase additional stock of the
Company, which options shall vest 25% in the year earned and 25% in each year
for the following three years, on the following terms and conditions:
(a) Number of Shares Granted. In determining the number of shares
contained in each annual option grant, the following definitions shall
apply:
(i) "EPS" shell be as defined in Paragraph 3(b) above;
(ii) "EPS Growth Target Percentage" shall be 10% for each fiscal
year during the term of this Agreement;
(iii) "Actual Growth Percentage" shall mean the percentage by
which the EPS for a fiscal year exceeds the EPS for the immediately
preceding fiscal year.
(iv) "Outstanding Shares" means the number of common shares of
the Company outstanding based on the same figures used by the Company
in calculating EPS for the applicable fiscal year;
(v) "Bonus Percentage" for each applicable fiscal year shall be
5%.
The Company shall grant to Johnson each year during the term of this Agreement
the option to purchase the number of shares calculated by subtracting the EPS
Growth Target Percentage of 10% from the Actual EPS Growth Percentage and
multiplying that percentage times the Outstanding Shares, and multiplying that
quotient times the Bonus Percentage. (For example, if the Actual EPS Growth
Rate calculation for a fiscal year is 17.6%, and the outstanding shares of the
Company are 11,600,000 shares, then Johnson for that fiscal year would earn an
option to
2
<PAGE>
purchase 44,080 shares [the formula as applied in this example is as follows:
.176 minus 10 equals .076 times 11,600,000 shares times .05 equals 44,080
shares]). Johnson's maximum Incentive Stock Option Grant for each year covered
under the Agreement will be limited to no more than 0.83% of the shares of the
Company outstanding in that fiscal year and to no more than 2.02% of the shares
of the Company outstanding for the three year period covered by this Agreement,
such limits to exclude shares and Incentive Stock Option Grants owned by Johnson
as of the date of this Agreement.
(b) Purchase Price of Shares. For any options granted hereunder, the
purchase price of the stock shall be the market price or 10% above the
market price based upon regulations covering the granting of the option.
(c) Exercise of Options. The time for exercising all options ranted
hereunder shall be the maximum time period allowed by law.
5. Miscellaneous Benefits. The Company shall provide Johnson with all
additional benefits during the period of his employment substantially equivalent
to those which are generally provided to the executive officers of the Company.
The Company shall reimburse Johnson for reasonable expenses incurred by him in
the course of his employment with the Company provided those expenses are
consistent with reasonable policies provided from time to time by the Company's
Board of Directors.
6. Term and Termination of Employment.
(a) This Agreement shall have a term of three (3) years commencing as of
the date hereof and shall be renewed automatically upon the expiration of such
term for consecutive one year terms unless either party gives the other notice
of nonrenewal at least 90 days prior to the end of the then current term,
(b) By the Company for Cause. The Company shall have the right to terminate
Johnson's employment for cause as provided herein by giving written notice
thereof. "Cause" shall mean that Johnson commits a wilfull act of fraud or
dishonesty toward the Company; is convicted of criminal felony resulting in a
jail sentence (whether or not such sentence is suspended); materially violates a
material term of this Agreement; becomes disabled; or submits a notice of
resignation to the Company. Johnson shall be deemed disabled if he has been
unable, by reason of physical or mental infirmity, to perform on a full-time
basis the duties of a principal executive officer of the Company then assigned
to him by the Company's Board of Directors for a period of nine (9) months or
more. The existence of disability shall be reasonably determined by the Board of
Directors of the Company (excluding Johnson).
(c) By the Company Without Cause or Upon Change of Control. Subject to (e)
below, Johnson's employment may be terminated by the Company at any time after
the date six months from the date hereof without cause upon written notice
thereof, and in any event, this
3
<PAGE>
Agreement shall be terminated upon a Change of Control of the Company as defined
herein. For purposes of this Agreement, a "Change of Control" shall mean the
earliest date on which either of the following events shall occur:
(i) An individual, entity, or group shall acquire otherwise than
directly from the Company, beneficial ownership of 40% or more of the
outstanding common stock or voting power of the Company, provided that no
such individual, entity or group shall be deemed to beneficially own any
securities held by:
(1) the Company or any of its subsidiaries, or
(2) any employee benefit plan of the Company or any of its
subsidiaries,
(3) any current employee of the Company, or
(ii) The persons who are directors of the Company on the date of this
Agreement, together with those who subsequently became directors of the
Company and whose election, or nomination for election by the Company's
shareholders, was approved by the vote of at least a majority of the
directors who were directors on the date of this Agreement, or directors
whose nomination or the Continuing Directors as defined in the MedCath,
Incorporated Omnibus Stock Plan, as amended, shall cease to constitute a
majority of the Board or of its successor by merger, consolidation, or sale
of assets.
(d) By Johnson. Johnson may terminate his employment upon at least ninety
(90) days' written notice.
(e) Salary and Benefits (i) If the Company terminates Johnson's employment
under this Agreement for any reason other than cause, or this Agreement is
terminated as the result of a Change of Control, then within thirty days of the
event causing such termination, the Company will pay to Johnson in a lump sum,
an amount equal to two times the total cash compensation earned by Johnson
during the immediately preceding fiscal year of the Company, regardless of when
such compensation was paid, plus an amount equal to the then present value of
two years of normal health, life insurance and retirement benefits provided to
Johnson pursuant to Paragraph 5 above. If this Agreement is terminated as a
result of a Change of Control, all stock options previously granted to Johnson
by the Company, including those granted prior to the date of this Agreement,
shall vest immediately. Further, if the Company terminates Johnson's employment
under this Agreement for any reason other than cause, then Johnson shall be
granted the Incentive Stock Options described in Paragraph 4 for the fiscal year
in which such termination occurs with all computations to be as of the date of
termination.
(ii) Upon any termination of Johnson's employment for cause, Johnson shall
be entitled to receive only his then accrued salary and additional benefits.
4
<PAGE>
(iii) Upon termination of Johnson's employment for any reason, Johnson
shall be entitled to receive only such additional benefits as provided in this
subparagraph (e) except for benefits which, under the terms of the governing
plan, he has earned the right to receive after his retirement from the Company.
(iv) Upon termination of his employment by Johnson, Johnson shall not be
entitled to any additional salary or benefits other than those accrued prior the
date of termination. Notwithstanding anything herein to the contrary, no further
salary shall be due Johnson once he begins to receive the proceeds of any
disability insurance policy.
7. Confidentiallity and Non-Disclosure. During the course of Johnson's
employment, Johnson has been and will be exposed and have access to substantial
quantities of information and technology (the "Confidential Information")
relating to the Company's business that are valuable trade secrets or
confidential information, including information concerning customers and
marketing strategies.
The Confidential Information was developed, compiled and/or tested by the
Company at considerable expense, and the Company continues to spend considerable
amounts of money in building upon and expending that Confidential information.
The ConfldentiaI Information enables the Company to conduct its business with
success and with a competitive edge. It is essential to the Company's success
and competitive advantage that the Confidential information terminal not
generally known to others, whether those others operate in direct competition
with the Company or its customers or begin operations in geographical areas
which are of interest to the Company (that is, within the United States).
Johnson, by reason of his role as an employee, officer, director, and major
shareholder of the Company, is familiar with and has access to the Company's
customers and their needs and to the marketing and pricing pursued by the
Company with respect to those customers and the Company's products and services.
This Paragraph is designed to prohibit Johnson from using the Confidential
Information and knowledge and relationships developed as an insider of the
Company for his own benefit or for the benefit of parties other than the
Company. The Company would not give Johnson access to the Confidential
Information and authority without Johnson's execution of this Agreement and
Johnson willingly signs this Agreement because he has received additional
consideration to do so and because he believes his relationship with the Company
is and will be in his own best interest. Both parties agree that this
Paragraph's provisions should be construed broadly in favor of the Company.
In light of the foregoing, the parties agree as follows:
5
<PAGE>
A. Confidential Information.
Johnson promises that:
(1) During or after termination of his relationship with the
Company, he will not, directly or indirectly, use, or disclose or make
available to anyone outside the Company, any Confidential Information.
(2) He will safeguard all Confidential Information at all times
so that it is not exposed to, or taken by, unauthorized persons, and,
when entrusted to him, will exercise his best efforts to assure its
safekeeping.
B. Competition.
Johnson agrees that:
(1) He will not, during the period of his relationship with the
Company, engage or be interested, directly or indirectly, in any
manner, as a partner, officer, director, advisor, employee or in any
other capacity in any business which is a competitive business to the
Company.
(2) The Company's business is unusual and that by virtue of his
relationship with the Company he is, and will become more, familiar
with and close to the Confidential Information and the Company's
business and customers. In the event this relationship with the
Company ceases for any reason, he will not engage in for a period of
twelve (12) months after that termination, in any manner, directly or
indirectly, whether as an employee, officer, owners, partners,
shareholder, consultant or otherwise, in the cardiology services
business or any other health care business in which the Company is
specifically engaged as of the date of such termination, within the
continental United States.
8. Renegotiation Rights. Both Johnson and the Company shall have the right
to require a renegotiation of the Bonus Compensation formula if circumstances
arise that cause the results of such formula to be unfair or inequitable. Such
circumstances include, but are not limited to, a combination with another
company, capital restructuring, material changes in accounting rules or tax
laws, severe or prolonged recession or inflation or any other circumstance,
whether intrinsic or extrinsic to the Company, that would materially effect the
bonus formula results. If in such circumstances the Company and Johnson are
unable to reach an agreement on a substitute Bonus Compensation formula, the
parties agree to submit the matter for binding arbitration to the American
Arbitration Association. Any change in the bonus formula for Bonus Compensation
may be made only on a prospective basis (i.e., only with respect to future years
or a year as to which the deadline under federal tax law for establishing a
performance-based plan has not passed).
6
<PAGE>
9. Enforcement. If there is a breach or threatened breach of the provision
of Paragraph 7 of this Agreement, in addition to other remedies at law or
equity, the Company shall be entitled to injunctive relief. The parties desire
and intend that the provisions of Paragraph 7 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 Paragraph 7. Should any such paragraphs,
subparagraph, sentence, clause, phrase, word, or figure be adjudicated to be
wholly invalid or unenforceable, the balance of Paragraph 7 shall thereupon be
modified in order to render the same valid and enforceable.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sent by registered or certified mail,
by other reasonable means of delivery providing overnight service, or by hand to
Johnson at 2517 Sherwood NE, Charlotte, NC 28207, to the Company at 7621 Little
Avenue, Charlotte, North Carolina 25226. Notice shall be deemed to have been
given when deposited with the Postal Service or other delivery service or, if
delivered by hand, when received by the addressee. A party may change the
address to which notice to it must be given by advising the other parties in
writing of the new address.
11. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by the waiving party.
12. Assigment. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. As a personal service contract the rights and
obligations of Johnson under this Agreement may not be assigned by him.
13. Entire Agreement. This instrument may not be changed orally but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
14. Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of North Carolina applicable to contracts made and to be
performed in this State, without reference to choice of laws principles, and
that law shall be applied in connection with its enforcement in other states and
jurisdictions to the fullest extent possible.
7
<PAGE>
IN WITNESS WHEREOF, the parties have signed and sealed this Agreement as of
the date first above written.
MEDCATH, INCORPORATED
By: /s/ W. Jack Duncan
--------------------------------
Chair,
Compensation Committee
ATTEST:
By:
--------------------------
Secretary
[Corporate Seal]
/s/ Charles W. Johnson
------------------------------[SEAL]
Charles W. Johnson
8
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT dated as of March 9, 1994 and by and between
MEDCATH, INC., a North Carolina corporation (the "Corporations"); and R. William
Moore, Jr. ("Moore"), a resident of North Carolina (the "Agreement").
WHEREAS, the company desires to employ Moore as a full-time employee and
Moore desires to accept that position in accordance with the terms hereof;
NOW, THEREFORE, it is agreed as follows:
1. Employment. For new and very valuable consideration described herein,
the Company shall employ Moore and Moore accepts employment upon the terms and
conditions hereinafter set forth.
2. Duties. As an employee, Moore shall have such duties relating to the
development and operation of freestanding cardiac catheterization centers,
cardiac imaging centers, heart hospitals, mobile cardiac catheterization unit
routes, cardiology related programs, or such other duties as shall be assigned
to him from time to time by the Officers of the Company.
During the term of employment hereunder, Moore shall not be engaged in any
other business activity whether or not such business activity is pursued for
gain, profit, or other pecuniary advantage unless agreed on by the President of
the Company.
3. Compensation. For and in consideration of the services to be rendered by
Moore hereunder, the Company shall pay to Moore an annual salary of One Hundred
Thousand Dollars ($100,000.00) and continue during the term of this agreement
and which shall be paid on a monthly basis unless otherwise agreed to by the
parties hereto. Moore shall also participate in an annual bonus compensation
plan each year of his employment. The initial bonus plan will be $75,000
relating to the development of the McAllen, Texas Heart Hospital. Moore's salary
shall be reviewed by either the President of the Company or other officers of
the Company as designated by the President from time to time. Moore will only be
eligible for the bonus award if he is employed by the Company on October 31st
of the year for which the bonus applies.
During the first twelve months of employment, MetCath will guarantee Moore
$25,000 of his bonus to be paid monthly ($2,083.33 per month).
4. Miscellaneous Benefits. During his employment, the Company shall provide
Moore with additional benefits substantially equivalent to those which are
generally provided to other similar employees of the Company. The Company shall
reimburse Moore for reasonable expenses incurred by him in the course of his
employment with the Company provided those expenses are consistent with
reasonable policies provided from time to time by the Company's Board of
Directors. During the first twelve months of employment the Company will
reimburse Moore for
<PAGE>
COBRA payments to continue health coverage for Moore's wife until she is
eligible to be included in the Company's health plan. These expenses will be
handled through the monthly employee expense reporting and reimbursement
mechanism such that the reimbursements will be tax free to Moore. The Company
agrees to reimburse Moore for reasonable moving expenses to relocate his family
to Texas.
5. Termination of Employment.
(a) By the Company for Cause. The Company shall have the right to terminate
Moore's employment for cause as provided herein by giving written notice
thereof. "Cause" shall mean that Moore commits a willful act of fraud,
dishonesty or disloyalty toward the company; is convicted of criminal conduct
resulting in a jail sentence (whether or not such sentence is suspended);
engages in conduct significantly injurious to the Company monetarily; violates a
material term of this Agreement including, but not limited to, failure to
fulfill the duties assigned to Moore by the Company; becomes disabled; or
submits a notice of resignation to the Company. Moore shall be deemed disabled
it he has been unable, by reason of physical or mental infirmity, to perform on
a full-time basis his assigned responsibilities. The existence of disability
shall be reasonably determined by the Board of Directors of the Company.
(b) By the Company Without Cause. Subject to (d) below, the Company may
terminate Moore's employment at any time without cause by giving Moore written
notice thereof.
(c) By Moore. Moore may terminate his employment upon at least (30) days'
written notice.
(d) Salary and Benefits. (i) If the Company terminates Moore's employment
under this Agreement for any reason other than cause, the Company will continue
to be liable for his salary and all accrued bonuses to be paid on a monthly
basis for a period of Nine (9) months following the date of termination, as long
as and only if Moore is not otherwise in default hereunder during that period;
provided, however, that his salary shall not be payable once Moore becomes
employed substantially full-time or otherwise earns, on a monthly basis, at
least 75% of his monthly salary hereunder. (ii) Upon any termination of Moore's
employment for cause, Moore shall not be entitled to any further salary, bonuses
or benefits following the date of termination of his employment. (iii) Upon
termination of Moore's employment for any reason, Moore shall be entitled to
receive only such additional benefits which have accrued or become payable to
him prior to the end of his actual employment. (iv) Upon termination, Moore
shall not be entitled to any additional salary or benefits other than those
accrued prior to the date of termination. Notwithstanding anything in this
Agreement to the contrary, no further salary or benefits shall be due to Moore
once he begins to receive the proceeds of any disability insurance policy.
6. Confidentiality, Non-Disclosure and Non-Competition. During the course
<PAGE>
of Moore's employment. Moore has been and will be exposed and have access to
substantial quantities of information and Technology (the "Confidential
Information") relating to the Company's business that are valuable trade secrets
or confidential information, including information concerning customers,
operations, pricing, technology, and marketing strategies.
The Confidential Information was developed, compiled and/or tested by the
Company at considerable amounts of money in building upon and expanding that
Confidential Information. The Confidential Information enables the Company to
conduct its business with success and with a competitive advantage as long as
the Confidential Information remains not generally known to others, whether
those others operate in direct competition with the Company or its customers or
begin operations in geographical areas which are of interest to the Company,
specifically within the United States.
Moore, by reason of his role as an employee of the company, is familiar
with and has access to the Company's customers and their needs and to the
marketing and pricing pursued by the Company with respect to those customers and
the Company's products and services.
This Paragraph is designed to prohibit Moore from using the Confidential
Information and knowledge and relationships developed as an insider of the
Company for his own benefit or for the benefit of parties other than the
Company. The Company would not give Moore access to the Confidential Information
and authority without Moore's execution of this Agreement and Moore willingly
signs this Agreement because he has received additional consideration to do so
and because he believes his relationship with the Company is and will be in his
own best interest. Both parties agree that this Paragraph's provisions should be
construed broadly in favor of the Company.
In light of the foregoing, the parties agree as follows:
A. Confidential Information.
Moore promises that:
(1) During or after termination of his relationship with the
Company, he will not directly or indirectly, use, or disclose or make
available to anyone outside the Company, any Confidential Information.
(2) He will safeguard all Confidential Information at all times
so that it is not exposed to, or taken by, unauthorized persons, and,
when entrusted to him, will exercise his best efforts to assure to
safekeeping.
B. Competition.
<PAGE>
Moore agrees that:
(1) He will not, during the period of his relationship with the
Company, engage or be interested directly or indirectly in any
manner, as a partner, officer, director, advisor, employee or in any
other capacity in any business similar to business to the Company.
(2) The Company's business is unusual and that by virtue of his
relationship with the Company he is, and will become more, familiar
with and close to the Confidential Information and the Company's
business and Customers. In the event his relationship with the Company
ceases for any reason, he will not engage in, for a period of eighteen
(18) months after that termination, in any manner directly or
indirectly, whether as an employee, officer, owner, partner,
shareholder, consultant or otherwise, in any business or other
activity similar in business to and in competition with the company
within seventy-five (75) miles of any location which the Company has
(x) provided cardiology services of any type whatsoever during his
employment with the Company, or (y) made a written proposal to provide
such services, which proposal was made at least in part as a result of
the efforts of Moore.
7. Enforcement. If there is a breach or threatened breach of the provisions
of Paragraph 6 of this Agreement, in addition to other remedies at law or
equity, the Company shall be entitled to injunctive relief. The parties desire
and intend that the provisions of Paragraph 6 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 be adjudicated to be wholly invalid or
unenforceable, the balance of Paragraph 6 shall thereupon be modified in order
to render the same valid and enforceable.
8. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sent by registered mail, by other
reasonable means of delivery providing overnight service, or by hand to Moore at
8233 Lost Roy Ct., Charlotte, NC 28213; to the Company at 7621 Little Avenue,
Suite 106, Charlotte, NC 28226. Notice shall be deemed to have been given when
deposited with the Postal Service or other delivery service or, if delivered by
hand, when received by the addressee. A party may change the address to which
notice to it must be given by advising the other parties in writing of the new
address.
9. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by the waiving party.
10. Assignment. The rights and obligations of the Company under this
Agreement shall insure to the benefit of and shall be binding upon the
successors and assigns of the Company. As a personal service contract the rights
and obligations of Moore under this agreement may not be assigned by him.
<PAGE>
11. Entire Agreement. This instrument may not be changed orally but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
12. Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of North Carolina Applicable to contracts made and to be
performed in this State, without reference to choice of laws principles, and
that law shall be applied in connection with its enforcement in other states and
jurisdictions to the fullest extent possible.
IN WITNESS WHEREOF, the parties have signed and sealed this Agreement as of
the date first above written.
MEDCATH INCORPORATED
BY: /s/ Stephen R. Puckett
-------------------------------
Stephen R. Puckett
President Title
--------------------------
/s/ R. William Moore, Jr.
- ----------------------------------
R. William Moore, Jr.
3/9/94
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT dated as of August 28, 1995 and by and between
MEDCATH, INC., a North Carolina corporation (the "Corporation"); and Thomas K.
Hearn ("Hearn"), a resident of North Carolina (the "Agreement").
WHEREAS, the company desires to employ Hearn as a full-time employee and
Hearn desires to accept that position in accordance with the terms hereof;
NOW, THEREFORE, it is agreed as follows:
1. Employment. For new and very valuable consideration described herein,
the Company shall employ Hearn and Hearn accepts employment upon the terms and
conditions hereinafter set forth,
2. Duties. As an employee, Hearn shall be employed as the Vice President-
Diagnostics Division. As such he shall be responsible for all aspects of
management, growth and planning for this division including total P & L
responsibility for its routes and centers. He may also potentially have duties
relating to the development and operation of freestanding cardiac
catheterization centers, cardiac imaging centers, heart hospitals, mobile
cardiac catheterization unit routes, cardiology related programs, or such other
duties as shall be assigned to him from time to time by the Officers of the
Company.
During the term of employment hereunder, Hearn shall not be engaged in any
other business activity whether or not such business activity is pursued for
gain, profit or other pecuniary advantage unless agreed on by the President of
the Company. It is understood that Hearn is currently an Officer and principle
shareholder in Decision Support Systems, a privately held company. Hearn and the
Corporation agree that he will, prior to joining MedCath engage personnel to
replace him on a day-to-day operating basis at Decision Support Systems and that
his involvement will continue on a Director level only. If at any time in the
future, in the sole discretion of the Corporation, Hearn's ownership interest in
Decision Support Systems detracts from his performance at MedCath, or in any way
causes a conflict with MedCath's interests, then Hearn agrees to divest himself
of that ownership interest in a timely fashion.
3. Compensation. For and in consideration of the services to be rendered by
Hearn hereunder, the Company shall pay to Hearn an annual salary of One Hundred
Thousand Dollars ($100,000.00) and continue during the term of this agreement
and which shall be paid on a monthly basis unless otherwise agreed to by the
parties hereto. Hearn shall also participate in an annual bonus compensation
plan each year of his employment. The initial bonus plan will be $30,000
relating to goals and objectives pertaining to the management of the Diagnostic
Division. Hearn's salary shall be reviewed by the Chief Operating Officer of the
Company on an annual basis. Hearn will only be eligible for the bonus award if
he is employed by the Company on the last day of the year for which the bonus
applies. During Hearn's initial year of
<PAGE>
employment he will be guaranteed a minimum bonus of $10,000.
4. Miscellaneous Benefits. During his employment, the Company shall provide
Hearn with additional benefits substantially equivalent to those which are
generally provided to other similar employees of the Company. The Company shall
reimburse Hearn for reasonable expenses incurred by him in the course of his
employment with the Company provided those expenses are consistent with
reasonable policies provided from time to time by the Company's Board of
Directors.
5. Termination of Employment.
(a) By the Company for Cause. The Company shall have the right to terminate
Hearn's employment for cause as provided herein by giving written notice
thereof. "Cause" shall mean that Hearn commits a willful act of fraud,
dishonesty or disloyalty toward the company; is convicted of criminal conduct
resulting in a jail sentence (whether or not such sentence is suspended);
engages in conduct significantly injurious to the Company monetarily; violates a
material term of this Agreement including, but not limited to, failure to
fulfill the duties assigned to Hearn by the Company; becomes disabled; or
submits a notice of resignation to the Company. Hearn shall be deemed disabled
if he has been unable, by reason of physical or mental infirmity, to perform on
a full-time basis his assigned responsibilities. The existence of disability
shall be reasonably determined by the Board of Directors of the Company.
(b) By the Company Without Cause. Subject to (d) below, the Company may
terminate Hearn's employment at any time without cause by giving Hearn written
notice thereof.
(c) By Hearn. Hearn may terminate his employment upon at least (45) days'
written notice,
(d)) Salary and Benefits. (i) If the Company terminates Hearn's employment
under this Agreement for any reason other than cause, the Company will continue
to be liable for his salary and all accrued bonuses to be paid on a monthly
basis for a period of Six (6) months following the date of termination, as long
as and only if Hearn is not otherwise in default hereunder during that period;
provided, however, that his salary shall not be payable once Hearn becomes
employed substantially full-time or otherwise earns, on a monthly basis, at
least 75% of his monthly salary hereunder. (ii) Upon any termination of Hearn's
employment for cause, Hearn shall not be entitled to any further salary, bonuses
or benefits following the date of termination of his employment. (iii) Upon
termination of Hearn's employment for any reason, Hearn shall be entitled to
receive only such additional benefits which have accrued or become payable to
him prior to the end of his actual employment. (iv) Upon termination, Hearn
shall not be entitled to any additional salary or benefits other than those
accrued prior to the date of termination. Notwithstanding anything in this
Agreement to the contrary, no further salary or benefits shall be due to Hearn
once he
<PAGE>
begins to receive the proceeds of any disability insurance policy.
6. Confidentiality. Non-Disclosure and Non-Competition. During the course
of Hearn's employment, Hearn has been and will be exposed and have access to
substantial quantities of information and technology (the "Confidential
Information") relating to the Company's business that are valuable trade secrets
or confidential information, including information concerning customers,
operations, pricing, technology and marketing strategies.
The Confidential Information was developed, compiled and/or tested by the
Company at considerable amounts of money in building upon and expanding that
Confidential Information. The Confidential Information enables the Company to
conduct its business with success and with a competitive advantage as long as
the Confidential Information remains not generally known to others, whether
those others operate in direct competition with the company or its customers or
begin operations in geographical areas which are of interest to the Company,
specifically within the United States.
Hearn, by reason of his role as an employee of the company, is familiar
with and has access to the Company's customers and their needs and to the
marketing and pricing pursued by the Company with respect to those customers and
the Company's products and services.
This Paragraph is designed to prohibit Hearn from using the Confidential
Information and knowledge and relationships developed as an insider of the
Company for his own benefit or for the benefit of parties other than the
Company. The Company would not give Hearn access to the Confidential Information
and authority without Hearn's execution of this Agreement and Hearn willingly
signs this Agreement because he has received additional consideration to do so
and because he believes his relationship with the Company is and will be in his
own best interest. Both parties agree that this Paragraph's provisions should be
construed broadly in favor of the Company.
SEE Attachment A{init}
In light of the foregoing, the parties agree as follows:
A. Confidential Information
Hearn promises that:
(1) During or after termination of his relationship with the Company,
he will not, directly or indirectly, use, or disclose or make available to
anyone outside the Company, any Confidential Information.
(2) He will safeguard all Confidential Information at all times so
that it is not exposed to, or taken by, unauthorized persons, and, when
entrusted to him, will
<PAGE>
exercise his best efforts to assure to safekeeping.
B. Competition.
Hearn agrees that:
(1) He will not, during the period of his relationship with the
Company, engage or be interested, directly or indirectly, in any manner, as
a partner, officer, director, advisor, employee or in any other capacity in
any business similar to business to the Company.
(2) The Company's business is unusual and that by virtue of his
relationship with the Company he is, and will become more, familiar with
and close to the Confidential Information and the Company's business and
Customers. In the event his relationship with the Company ceases for any
reason, he will not engage in, for a period of eighteen (18) months after
that termination, in any manner directly or indirectly, whether as an
employee, officer, owner, partner, shareholder, consultant or otherwise, in
any business or other activity similar in business to and in competition
with the company within seventy-five (75) miles of any location which the
Company has (x) provided cardiology services of any type whatsoever during
his employment with the Company, or (y) made a written proposal to provide
such services, which proposal was made at least in part result of the
efforts of Hearn.
See Attachment B
7. Enforcement. If there is a breach or threatened breach of the provisions
of Paragraph 6 of this Agreement, in addition to other remedies at law or
equity, the Company shall be entitled to injunctive relief. The parties desire
and intend that the provisions of Paragraph 6 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 be adjudicated to be wholly invalid or
unenforceable, the balance of Paragraph 6 shall thereupon be modified in order
to render the same valid and enforceable.
8. Any notice required or permitted to be given under this Agreement shall
be in writing and shall be sent by registered mail, by other reasonable means of
delivery providing overnight service, or by hand to Hearn at
__________________________________________; to the Company at 7621 Little
Avenue, Suite 106, Charlotte, NC 28226. Notice shall be deemed to have been
given when deposited with the Postal Service or other delivery service or, if
delivered by hand, when received by the addressee. A party may change the
address to which notice to it must be given by advising the other parties in
writing of the new address.
9. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by the waiving party.
<PAGE>
10. Assignment. The rights and obligations of the Company under this
Agreement shall insure to the benefit of and shall be binding upon the
successors and assigns of the Company. As a personal service contract the rights
and obligations of Hearn under this agreement may not be assigned by him.
11. Entire Agreement. This instrument may not be changed orally but only by
an agreement in writing signed by the party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
12. Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of North Carolina Applicable to contracts made and to be
performed in this State, without reference to choice of laws principles, and
that law shall be applied in connection with its enforcement in other states and
jurisdictions to the fullest extent possible.
IN WITNESS WHEREOF, the parties have signed and sealed this Agreement as of
the date first above written.
MEDCATH INCORPORATED
By: /s/ David Crane
-------------------
David Crane
Chief Operating Officer
/s/ Thoman K. Hearn
- -------------------
Thoman K. Hearn
<PAGE>
Attachement A
Confidential information shall not include information that is in the
public domain or is available or shall become available to Hearn by other than
her employment with the company.
/s/ Thoman K. Hearn
-------------------
Thoman K. Hearn
8/27/95
Attachment B:
For purposes of this agreement confidential information shall not include
information related to the development, implementation, and automation of
clinical paths, which was previously known or in the public domain.
/s/ Thoman K. Hearn
-------------------
Thoman K. Hearn
8/27/95
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into by and
between MEDCATH INCORPORATED, a North Carolina corporation (the "COMPANY") and
Kenneth Petronis, a resident of North Carolina ("Employee") and is effective the
7th day of August ,1997.
WHEREAS, the Company desires to employ Employee as a full-time employee and
Employee desires to accept that position in accordance with the terms hereof.
NOW, THEREFORE, it is agreed as follows:
1. Employment. Employee shall be employed as President PPM Division. For
new and very valuable consideration described herein, the Company shall employ
Employee and Employee accepts employment upon the terms and conditions
hereinafter set forth, with such employment to commence on the 8th day of
September, 1997.
2. Duties. Employee shall be a full-time employee of the Company and,
accordingly, shall devote a commensurate amount of time and effort in the
performance of Employee's duties hereunder. Employee shall be responsible for
directing all operations and development within the PPM Division. Employee shall
also have such other duties as assigned to Employee from time to time by the
Company's officers or other senior management team members. Employee shall
become a full-time resident of either Charlotte, NC or a community within a
reasonable commuting distance thereof as soon as reasonably possible.
During the term of employment hereunder, Employee shall not be engaged in
any other business activity whether or not such business activity is pursued for
gain, profit, or other pecuniary advantage.
3. Compensation. For and in consideration of the services to be rendered by
Employee hereunder, the Company shall pay to Employee a one-time payment of up
to Fifteen Thousand dollars ($15,000.00) based upon Employee's incurred expenses
in selling his current home to be paid upon Employee's relocation to Charlotte,
NC ("Moving Bonus") and the Company shall pay to Employee an annual salary of
One Hundred Thirty Thousand Dollars ($130,000) which shall be paid on a monthly
basis unless otherwise agreed to by the parties hereto. Employee's salary shall
be reviewed by either the President of the Company or other officers or senior
management team members of the Company as designated by the President on an
annual basis coinciding with the conclusion of the company's fiscal year
(September 30). Employee shall also be eligible to participate in an annual
bonus compensation plan each year of employment. The initial bonus plan
potential will be approximately 40% of annual salary and will be based upon
mutually agreed upon performance objectives. The award of any such bonus shall
be subject to the discretion of the Company. Employee will only be eligible for
the bonus award if Employee is employed by the Company on the day that is thirty
(30) days prior to the end of the
<PAGE>
year for which the bonus applies.
4. Miscellaneous Benefits. During Employee's employment, the Company shall
provide Employee with additional benefits substantially equivalent to those
which are generally provided to other similar employees of the Company. The
Company shall reimburse Employee for reasonable expenses incurred by Employee in
the course of Employee's employment with the Company provided those expenses are
consistent with reasonable policies established from lime to time by the
Company. The Company will pay reasonable moving expenses as well as up to three
(3) months temporary housing in Charlotte.
5. Termination of Employment.
(a) By the Company for Cause. The Company shall have the right to
terminate Employee's employment for cause as provided herein by giving
written notice thereof. "Cause" shall mean that Employee commits a willful
act of fraud, dishonesty or disloyalty toward the Company; is convicted of
criminal conduct resulting in jail sentence (whether or not such sentence
is suspended); engages in conduct significantly injurious to the Company
monetarily; violates a material term of this Agreement including, but not
limited to, failure to fulfull the duties assigned to Employee by the
Company; becomes disabled; or submits a notice of resignation to the
Company. Employee shall be deemed disabled if he has been unable for a
period of thirty (30) days, by reason of physical or mental infirmity, to
perform on a full-time basis Employee's assigned responsibilities. The
existence of disability shall be reasonably determined by the Board of
Directors of the Company.
(b) By the Company Without Cause. Subject to (d) below, the Company
may terminate Employee's employment at any time without cause by giving
Employee written notice thereof.
(c) By Employee. Employee may terminate Employee's employment upon at
least thirty (30) days' written notice.
(d) Salary and Benefits.
(i) If the Company terminates Employee's employment under this
Agreement for any reason other than cause, the Company will continue
to be liable for Employee's salary, and all awarded bonuses, to be
paid on a monthly basis for a period of five (5) months following the
date of termination, as long as and only if Employee is not otherwise
in default hereunder during that period; provided, however, that
Employee's salary shall not be payable once Employee becomes employed
substantially full-time or otherwise earns, on a monthly basis, at
least 75% of Employee's monthly salary hereunder.
(ii) Upon any termination of Employee's employment for cause,
Employee shall not be entitled to any further salary, bonuses or
benifits following the date of termination of Employee's employment.
-2-
<PAGE>
(iii) Upon termination of Employee's employment for any reason,
Employee shall be entitled to receive only such additional benefits
which have accrued or become payable to Employee prior to the end of
Employee's actual employment.
(iv) Upon termination, Employee shall not be entitled to any
additional salary or benefits other than those accrued prior to the
date of termination or as provided in paragraph 5(d)(i) above, if any.
Notwithstanding anything in this Agreement to the contrary, no farther
salary or benefits shall be due to Employee once Employee begins to
receive the proceeds of any disability insurance policy.
(e) Repayment of Moving Bonus. In the event Employee terminates his
employment with the Company within twelve months of receiving bonus,
Employee shall repay the Company a pro rata portion of the Moving Bonus.
Such repayment shall be equal to the Moving Bonus times the number of
months remaining in that twelve (12) month period divided by twelve (12).
6. Confidentiality, Non-disclosure and Non-Competition.
(a) In General. For purposes of this Paragraph 6, all references to
the Company shall include all affiliates of the Company. During the course
of Employee's employment, Employee will be exposed and have access to
substantial quantities of information and technology (the "Confidential
Information") relating to the Company's business that are valuable trade
secrets or confidential information, including, but not limited to,
information concerning customers, operations, pricing, technology,
marketing strategies, methods of operations, design of facilities and terms
of agreements to which the Company is a party.
The Confidential Information was developed, compiled and/or tested by the
Company at considerable amounts of money in building upon and expanding that
Confidential information. The Confidential Information enables the Company to
conduct its business with success and with a competitive advantage as long as
the Confidential Information remains not generally known to others, whether
those others operate in direct competition with the Company or its customers or
begin operations in geographical areas which are of interest to the Company,
specifically within the United States.
Employee, by reason of Employee's role as an employee of the Company, is
familiar with and has access to the Company's customers and their needs and to
the marketing and pricing pursued by the Company with respect to those customers
and the Company's products and services.
This Paragraph is designed to prohibit Employee from using the Confidential
Information and knowledge and relationships developed as an insider of the
Company for Employee's own benefit or for the benefit of parties other than the
Company. The Company would not give Employee access to the Confidential
Information and authority without Employee's execution of this Agreement and
Employee willingly signs this Agreement because Employee has received
-3-
<PAGE>
additional consideration to do so and because Employee believes Employee's
relationship with the Company is and will be in Employee's own best
interest. Both parties agree that the provisions of this Paragraph 6 should
be construed broadly in favor of the Company. In light of the foregoing.
Employee agrees to the terms of subparagraph (b) and (c) below.
(b) Confidential Information. Employee promises that:
(i) Employee will take all reasonable precautions to safeguard all
Confidential Information at all times so that it is not exposed to, or
taken by, unauthorized persons, and, when entrusted to Employee, will
exercise Employee's best efforts to assure its safekeeping; and
(ii) During or after termination of Employee's relationship with the
Company, Employee will not, directly or indirectly, use, or disclose or
make available to anyone outside the Company, any Confidential Information.
(c) Competition.
(i) Employee agrees that:
(A) Employee will not, during the period of Employee's employment with the
Company, engage or be interested, directly or indirectly, in any manner, as a
partner, owner, officer, director, advisor, employee or in any other capacity in
any Competitive Business; and
(B) In the event Employee's employment with the Company ceases for any
reason, Employee will not engage in, for a period of eighteen (18) months after
that termination, in any manner directly or indirectly, whether as an employee,
officer, owner, partner, shareholder, consultant, agent or otherwise, any
Competitive Business within fifty (50) miles of any location which the Company
(1) has provided facilities or services of any type whatsoever during Employee's
employment with the Company, or (2) is actively developing any facility or
service.
(ii) For purposes of this subparagraph (c), a "Competitive Business"
shall include:
(A) A hospital in any market where MedCath owns or manages a
Heart Hospital;
(B) Any health care facility or service providing primarily
cardiology related facilities or services;
(C) Any health care facility or service which the Company was
actively developing, or actively considering the development
of, during Employee's employment by the Company.
-4-
<PAGE>
7. Enforcement. If there is a breach or threatened breach of the provisions
of Paragraph 6 of this Agreement, in addition to other remedies at law or
equity, the Company shall be entitled to injunctive relief. The parties desire
and intend that the provisions of Paragraph 6 shall be enforced to the fullest
extent permissible under the law and public policies applied. In the event that
any paragraph, subparagraph, sentence, clause, phrase, word, or figure is found
by any applicable authority to be invalid or unenforceable, such unenforceable
provision shall be deemed to be deleted from this Agreement and the balance of
Paragraph 6 shall thereupon be modified in order to render the same valid and
enforceable.
8. Notices. Any notice required or permitted to be given under this
Agreement shall be in writing and shall be sent by registered mail, by other
reasonable means of delivery providing overnight service, or by hand to Employee
at [Home address on file] to the Company at 7621 Little Avenue, Suite 106,
Charlotte, NC 28226, Attention: David Crane. Notice shall be deemed to have been
given when deposited with the Postal Service or other delivery service or, if
delivered by hand; when received by the addressee. A party may change the
address to which notice it must be given by advising the other parties in
writing of the new address.
9. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement by the other party shall not operate or be construed
as a waiver of any subsequent breach by the waiving party.
10. Assignment. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company. As a personal service contract the rights and
obligations of Employee under this Agreement may not be assigned by Employee.
11. Entire Agreement. This Agreement sets forth the entire understanding
between the parties with respect to the subject matter hereof and cannot be
amended orally but only by a writing signed by the party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought.
12. Applicable law. This Agreement shall be construed in accordance with
the laws of the State of North Carolina applicable to contracts made and to be
performed in North Carolina without reference to choice of laws priciples, and
that law shall be applied in connection with its enforcement in other stares
and jurisdictions to the fullest extent possible.
13. Counterpart Executions; Facsimiles. This Agreement may be executed in
any number of counterparts with the same effect as if all of the parties had
signed the same document. Such executions may be transmitted to the parties by
facsimile and such facsimile execution shall have the full force and effect of
an original signature. All fully executed counterparts, whether original
executions or facsimile executions or a combination, shall be construed together
and shall constitute one and the same agreement.
-5-
<PAGE>
In WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s) effective as of the day and year first above
written.
-6-
<PAGE>
EXECUTION PAGE
TO
EMPLOYMENT AGREEMENT
MEDCATH INCORPORATED
By:/s/ David Crane
8/7/97 ------------------
------ David Crane, Executive Vice President/COO
Date
By:/s/ Kenneth Petronis
8/7/97 ---------------------
------ Kenneth Petronis
(SEAL)
Date
THIS AMENDMENT TO LOAN AGREEMENT is made and entered into effective
February 4, 1997 ("Effective Date") by and between HEALTH CARE REIT, INC., a
Delaware corporation ("Lender") and MEDCATH OF LITTLE ROCK, L.L.C., a North
Carolina limited liability company ("Borrower").
R E C I T A L S
A. Lender made a loan ("Loan") in the amount of $27,000,000.00 to Borrower
pursuant to a Construction and Term Loan Agreement ("Loan Agreement") dated
December 7, 1995. The Loan is evidenced by a Note ("Note") of even date
therewith and is secured by a Mortgage, Security Agreement, Assignment of Leases
and Rents and Fixture Filing ("Mortgage"), an Unconditional and Continuing
Limited Guaranty ("Guaranty"), and a Pledge Agreement ("Pledge Agreement") of
even date therewith. The Loan Agreement, Note, Mortgage, Guaranty, Pledge
Agreement and other documents delivered by Borrower to Lender in connection
therewith are hereinafter referred to as the "Loan Documents".
B. Borrower has requested, and Lender has agreed to, an increase in the
original loan amount due under the Note from $27,000,000.00 to $29,000,000.00.
In connection therewith, the Loan Agreement, Note, Mortgage and Guaranty are
being amended to accommodate Borrower's request.
C. Lender and Borrower desire to amend the Loan Agreement as hereinafter
set forth, and to ratify and confirm the Loan Agreement in all other respects.
D. Manager (as defined in the Loan Agreement) has consented to this
Amendment as set forth below.
NOW, THEREFORE, in consideration of the mutual promises of the parties, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Lender and Borrower agree as follows:
1. The definition of 'Letter of Credit' in Section 1.2 of the Loan
Agreement shall be deleted and replaced with the following language:
"Letter of Credit" means an irrevocable and transferable Letter of Credit
in the amount of $1,450,000.00 issued by Issuer in favor of Lender as security
for the Loan and in form acceptable to Lender and any amendment, thereto or
replacements or substitutions therefor.
<PAGE>
2. The definition of "Loan Amount" in Section 1.2 of the Loan Agreement
shall be deleted and replaced with the following language.
"Loan Amount" means $29,000,000.00.
3. In all other respects, the Loan Agreement is hereby ratified and
confirmed.
IN WITNESS WHEREOF, the parties has executed this Amendment to Loan
Agreement as of the date first above written.
LENDER: HEALTH CARE REIT, INC.
By: /s/ Erin L. Ibele
--------------------------------
Title: Vice President
Corporate Secretary
BORROWER: MEDCATH OF LITTLE ROCK, L.L.C.
By: Medcath of Arkansas, Inc.
Manager
By: /s/ David Crane
-------------------------------
Title: VP
<PAGE>
STATEMENT RE: COMPUTATION
OF PER SHARE EARNINGS
(in thousands except per share data)
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Weighted Average Common Shares Outstanding 8,170 9,874 11,149
Dilutive Effect of Stock Options computed by use
of treasury stock method 211 319 219
Assumed conversion of Convertible Subordinated Debt
into Common Shares - 318
Weighted Average Common and Common
============================================
Equivalent Shares Outstanding (A) 8,381 10,193 11,686
============================================
Income Before Extraordinary Item $ 4,251 $ 5,202 $ 6,954
Interest Expense - Convertible Subordinated Debt (net of tax) - - 112
============================================
Adjusted Income Before Extraordinary Item (B) $ 4,251 $ 5,202 $ 7,066
============================================
Net Income $ 4,023 $ 5,202 $ 6,724
Interest Expense - Convertible Subordinated Debt (net of tax) - - 112
============================================
Adjusted Net Income (C) $ 4,023 $ 5,202 $ 6,836
============================================
Net Income Per Share:
Income Before Extraordinary Item (B)/(A) $ 0.51 $ 0.51 $ 0.60
===========================================
Net Income (C)/(A) $ 0.48 $ 0.51 $ 0.58
===========================================
</TABLE>
<PAGE>
MedCath Incorporated
Index to Exhibit 13.1
Portions of the 1997 Annual Report to Shareholders
Description Page
- -------------------------------------------------------------------------------
Selected Consolidated Financial Data 1
Management's Discussion and Analysis of
Financial Condition and Results of Operations 2-11
Report of Independent Auditors 12
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended
September 30, 1995, 1996 and 1997 13
Consolidated Balance Sheets at September 30, 1996 and 1997 14
Consolidated Statements of Shareholders' Equity for the Years Ended
September 30, 1995, 1996 and 1997 15
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997 16
Notes to Consolidated Financial Statements 17-32
<PAGE>
Selected Consolidated Financial Data
The following table sets forth selected historical financial data and other
operating information of the Company for each of the five fiscal years ending
September 30, 1997, which are derived from the consolidated financial statements
of the Company. In April 1995, the Company acquired Healthtech Corporation in a
transaction accounted for as a pooling-of-interests. Accordingly, the financial
statements of the Company, and the selected financial data presented below, were
restated to include the accounts
<TABLE>
<CAPTION>
INCOME STATEMENT DATA
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1993 1994 1995 (2) 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue $17,635 $25,892 $40,106 $ 66,191 $ 110,910
Medical supplies, personnel and other operating expenses 9,113 13,239 23,586 43,502 73,109
Provision for doubtful accounts - - - 735 2,083
Marketing, general and administrative expense 2,601 3,492 4,438 5,408 7,037
----------------------------------------------------------
EBITDA (1) 5,921 9,161 12,082 16,546 28,681
Depreciation and amortization expense 2,179 2,767 3,633 6,649 12,855
----------------------------------------------------------
Income from operations 3,742 6,394 8,449 9,897 15,826
Interest expense, net (1,235) (1,632) (8) (523) (3,018)
Minority interest in earnings of consolidated entities (654) (893) (1,530) (979) (1,539)
Equity in net earnings of unconsolidated joint venture - 93 117 104 -
----------------------------------------------------------
Income before income taxes and extraordinary item 1,853 3,962 7,028 8,499 11,269
Provision for income taxes (551) (1,497) (2,777) (3,297) (4,315)
----------------------------------------------------------
Income before extraordinary item 1,302 2,465 4,251 5,202 6,954
Extraordinary loss - - (228) - (230)
----------------------------------------------------------
Net income $ 1,302 $ 2,465 $ 4,023 $ 5,202 $ 6,724
==========================================================
Net income per share:
Income before extraordinary item $ 0.22 $ 0.42 $ 0.51 $ 0.51 $ 0.60
Extraordinary loss - - (0.03) - (0.02)
----------------------------------------------------------
Net income $ 0.22 $ 0.42 $ 0.48 $ 0.51 $ 0.58
==========================================================
<CAPTION>
BALANCE SHEET AND OTHER CASH FLOW DATA
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 3,452 $ 5,466 $18,525 $ 61,693 $ 42,951
Working capital 2,186 2,893 17,240 64,816 47,498
Total assets 23,034 37,905 78,372 181,681 259,008
Long-term debt and capital leases, excluding
current maturities 5,810 13,198 15,734 45,896 98,863
Subordinated debt 3,766 3,842 - - -
Redeemable convertible preferred stock 6,763 6,763 - - -
Shareholders' equity 1,479 4,256 50,494 120,245 127,137
Weighted average common shares outstanding 5,832 5,918 8,381 10,193 11,686
Net cash provided by operating activities 4,237 6,061 7,963 7,115 14,992
</TABLE>
(1) EBITDA represents income from operations before depreciation, amortization,
interest, minority interests, equity in income of unconsolidated
subsidiaries and income taxes. While EBITDA should not be construed as a
substitute for income from operations or a better indicator of liquidity
than cash flows from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
(2) Includes the results of operations of PhysMed Management Services, Inc.,
which was acquired in a purchase business combination effective October 1,
1994. See Note 3 of Notes to Consolidated Financial Statements.
1
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis is provided to increase the
understanding of, and should be read in conjunction with, the Consolidated
Financial Statements and accompanying Notes thereto included elsewhere herein.
All references to 1995, 1996 and 1997 refer to the respective fiscal years ended
September 30, 1995, 1996 and 1997.
Introduction and Business Strategy
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. The Company believes that a
fully-integrated network incorporating leading physicians, state-of-the-art
facilities and practice management systems designed to provide high quality,
cost-effective diagnosis and treatment of cardiovascular disease offers
significant advantages to patients, providers and payors.
Key elements of the Company's strategy are to (i) focus exclusively on
cardiology and cardiovascular services, (ii) develop and operate full-service
heart hospitals, co-owned with leading local cardiac care physicians, that are
designed to have a substantially lower cost structure than conventional acute
care hospitals ("Heart Hospitals"), (iii) acquire and manage physician group
practices which include cardiologists and cardiovascular and vascular surgeons
with leading local market positions ("Managed Practices") and (iv) acquire,
develop and operate fixed-site cardiac diagnostic and therapeutic facilities
("Fixed-Site Facilities") and mobile cardiac diagnostic centers ("Mobile Cath
Labs") in selected markets. The Company believes that its strategy will enable
it to respond proactively to the restructuring of the health care system away
from traditional fee-for-service plans and towards managed care arrangements.
With the lower cost structure of its integrated cardiac care delivery systems,
the Company believes it will be well positioned in the markets it serves to
capture a significant share of patients enrolled in HMOs and other managed care
programs.
Hospital Division
Since 1994, the Company has formed numerous ventures for the purpose of
constructing and operating its specialty Heart Hospitals. The Company serves as
manager and owns a majority interest (generally 51%) in these ventures
represented by pro rata cash contributions from the Company ranging from
$730,000 to $2.0 million. Other investors in the ventures include cardiologists
and cardiovascular and vascular surgeons as well as other physicians who will
practice at the hospital. Accordingly, these ventures are included in the
Company's consolidated financial statements, and the ventures' profits and
losses are allocated to its partners or members on a pro rata basis. However, if
the cumulative losses of a venture exceed its initial capitalization, the
Company, as the only general partner or managing member, is required to
recognize 100% of the ventures' losses that otherwise would be allocated on a
pro rata basis. The Company will continue to recognize 100% of the ventures'
profits and losses to the extent it has previously recognized a disproportionate
share of the ventures losses.
As of September 30, 1997, the Company operated two Heart Hospitals; the
McAllen Heart Hospital, located in McAllen, Texas, which opened in January 1996
and the Arkansas Heart Hospital, located in Little Rock, Arkansas, which opened
in March 1997. Each is a licensed general acute-care hospital having from 60 to
84 beds, three to six cardiac catheterization labs and three surgery suites.
The Company has five other Heart Hospitals in various stages of
development. The Tucson Heart Hospital, located in Tucson, Arizona, opened in
October 1997 and the Arizona Heart Hospital, located in
2
<PAGE>
Phoenix, Arizona is expected to open in February 1998. In addition, the Company
expects to open three additional hospitals in fiscal year 1999 located in
Austin, Texas; Bakersfield, California and Dayton, Ohio. These five hospitals
will each have from 48 to 66 beds, three or four cardiac catheterization labs
and three surgery suites.
Practice Management and Diagnostics Divisions
As of September 30, 1997, the Company managed three physician group
practices comprised of 79 physicians under long-term management agreements. The
Company provides most non-physician personnel required to operate the practices
and performs the primary administrative and financial services. The Company does
not enter into direct contracts with managed care companies as it pertains to
these long-term management contracts with the physicians. The Company's risk
associated with any managed care contracts entered into by the practices is
limited to the Company's participation in the practices' net revenue or net
income. The Company's fees for the services provided include reimbursement of
operating expenses plus a percentage of the net revenue or operating income of
the practices.
In October 1997, the Company acquired a contract to manage a
17-cardiologist group practice, the Company's fourth Managed Practice, through
the issuance of common stock valued at approximately $7 million.
The Company currently operates 31 Mobile Cath Labs and Fixed-Site
Facilities located throughout the United States, including two additional
Fixed-Site Facilities that opened in 1997.
3
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Results of Operations
The following table sets forth the percentages of net revenue represented
by certain items reflected in the Company's Consolidated Statements of Income.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net Revenue:
Diagnostics Division 75.6% 51.5% 33.0%
Practice Management Division 24.4 22.2 17.0
Hospital Division - 26.3 49.6
Other - - .4
----------------- ----------------- -----------------
Total Net Revenue 100.0% 100.0% 100.0%
Operating Expenses:
Medical Supplies, Personnel & Other Operating Expenses 58.8 65.7 65.9
Depreciation and Amortization Expense 9.1 10.0 11.6
Provision for Doubtful Accounts - 1.1 1.9
Marketing, General and Administrative Expenses 11.0 8.2 6.3
----------------- ----------------- -----------------
Total Operating Expenses 78.9 85.0 85.7
----------------- ----------------- -----------------
Income From Operations 21.1 15.0 14.3
Interest Expense, Net - (.8) (2.7)
Minority Interest in Earnings of Consolidated Entities (3.8) (1.5) (1.4)
Equity in Earnings of Unconsolidated Subsidiaries .2 .2 -
----------------- ----------------- -----------------
Income Before Income Taxes and Extraordinary Item 17.5 12.9 10.2
Provision for Income Taxes (6.9) (5.0) (3.9)
----------------- ----------------- -----------------
Income Before Extraordinary Item 10.6 7.9 6.3
Extraordinary Loss on Early Extinguishment of Debt (.6) - (.2)
----------------- ----------------- -----------------
Net Income 10.0% 7.9% 6.1%
================= ================= =================
</TABLE>
1997 Compared to 1996
Net Revenue
Consolidated net revenue increased 67.6% to $110.9 million in 1997 from
$66.2 million in 1996. Of this $44.7 million increase, $37.6 million was
attributable to increased net revenue in the Hospital Division, which more than
tripled in 1997 to $55.0 million from $17.4 million in 1996. In March 1997, the
Company opened its second Heart Hospital, the Arkansas Heart Hospital, which
generated net revenue of $19.5 million and accounted for approximately 17.6% of
the consolidated net revenue. Additionally, the McAllen Heart Hospital generated
net revenue of $35.5 million in its first full year of operations, and accounted
for 32.0% of the consolidated net revenue.
Net revenue in the Practice Management Division increased 28.2% to $18.8
million in 1997 from $14.7 million in 1996 accounting for $4.1 million of the
increase in consolidated net revenue. This increase was partially attributable
to the October 1996 acquisition of a contract to manage Heart Clinic, P.A.,
("Heart Clinic") and also to an increase in net revenue from existing contracts
to manage the Arizona Medical Clinic ("AMC") and Mid-Atlantic Medical
Specialists, Inc., ("Mid-Atlantic"). The total number
4
<PAGE>
of physicians under management in the Practice Management Division increased to
79 in 1997 compared with 66 in 1996.
Net revenue in the Diagnostics Division increased 7.2% to $36.6 million in
1997 from $34.1 million in 1996 and accounted for $2.5 million of the total
increase in net revenue. This increase was attributable primarily to revenue at
two new Fixed-Site Facilities that opened in 1997. This increase in net revenue
was partially offset by the scheduled July 1997 closing of the Fixed-Site
Facility located in Tucson, Arizona.
Operating Expenses and Income from Operations
Total operating expenses increased 68.9% to $95.1 million in 1997 from
$56.3 million in 1996. The increase was attributable primarily to operating
expenses at the Arkansas and McAllen Heart Hospitals and expenses incurred in
managing physician practices in the Practice Management Division. Income from
operations increased 59.9% to $15.8 million in 1997 from $9.9 million in 1996
due to an overall increase in consolidated net revenue. Operating margins
decreased to 14.3% in 1997 from 15.0% in 1996. This decrease was primarily
attributable to the substantial growth in the Hospital Division which operates
at lower margins than those realized in the Company's other operating divisions
and to a slight decrease in margins in the Diagnostics Division.
Income from operations at the Hospital Division in 1997 was $5.3 million as
compared to a loss from operations of $616,000 in 1996. EBITDA was approximately
$13.0 million or 23.7% of hospital net revenue in 1997 as compared to $2.2
million, or 12.8% of hospital net revenue in 1996. The McAllen and Arkansas
Heart Hospitals both had positive operating income during 1997. The Arkansas
Heart Hospital experienced operating profits before interest and minority
interest beginning in April 1997, its second month of operations. Although the
Arkansas Heart Hospital had operating income in 1997, the Company expects each
of its future Heart Hospitals in development will experience operating losses in
the first six to nine months of operations, but also expects they will generate
positive EBITDA margins during this period. In 1997, the Hospital Division's
total operating loss after interest and minority interest was approximately $.07
per share, as compared to $.16 per share in 1996.
Income from operations in the Practice Management Division increased 48.2%
to $2.2 million in 1997 from $1.5 million in 1996. The increase is attributable
primarily to income from the contract to manage Heart Clinic, which was acquired
in October 1996, and increased operating income from managing Mid Atlantic,
which was acquired in February 1996. Operating margins in the Practice
Management Division increased to 11.8% in 1997 from 10.2% in 1996, primarily due
to the structure of the contract to manage Heart Clinic.
Income from operations in the Diagnostics Division was $13.0 million in
both 1997 and 1996. Operating margins in the Diagnostics Division decreased to
35.4% in 1997 from 37.5% in 1996 and EBITDA margins were 47.6% in both 1996 and
1997. The decrease in operating margins is due to additional depreciation
expense incurred on capital expenditures made for new equipment for several
mobile cath labs.
Marketing, general and administrative expenses in 1997 increased 30.1% over
1996 primarily as a result of the Company's continued investment in corporate
infrastructure to accommodate growth. In 1997, the Company continued to add
personnel to the Human Resources and Information Systems department, as well as
additional finance and development personnel. The remainder of the increase was
attributable to increased professional fees associated with pursuing business
development opportunities, the addition of administrative and accounting
personnel to support growth and increases in salaries. As a percentage of
consolidated net revenue, marketing, general and administrative expenses
decreased to 6.3% in 1997 from 8.2% in 1996, demonstrating the Company's ability
to continue growth without a corresponding increase in additional administrative
costs.
5
<PAGE>
Interest Expense and Interest Income
Interest expense in 1997 increased $3.1 million over 1996 primarily as the
result of interest incurred on borrowings at the Arkansas and McAllen Heart
Hospitals. Substantially all of the property, plant and equipment at the
hospitals was financed using borrowings that bear interest at rates ranging from
8.50% to 11.54%. Consolidated long-term debt and capital leases increased to
$105.0 million in 1997 from $48.2 million in 1996 primarily due to borrowings in
the Hospital Division. Interest income increased $634,000 in 1997 compared with
1996 due to investment income earned on an increase in average short-term
investment balances.
1996 Compared to 1995
Net Revenue
Consolidated net revenue increased 65.0% to $66.2 million in 1996 from
$40.1 million in 1995. Of this $26.1 million increase, $17.4 million was
attributable to net revenue at the McAllen Heart Hospital.
In January 1996, the Company opened its first Heart Hospital, the McAllen
Heart Hospital, located in McAllen, Texas. The hospital generated net revenue of
$17.4 million and accounted for approximately 26% of the consolidated net
revenue. Operating expenses incurred at the McAllen Heart Hospital accounted for
a majority of the increase in consolidated operating expenses from 1995. Loss
from operations in 1996, before interest and minority interest, was
approximately $616,000. Although the hospital experienced operating losses,
EBITDA at the hospital was approximately $2.2 million, or 12.8% of net revenue.
In 1996, the McAllen Heart Hospital's total operating loss after interest and
minority interest was approximately $.16 per share. Included in this total
operating loss was approximately $.05 per share which represented the required
recognition of a disproportionate share of the hospital's losses because the
cumulative losses of the hospital exceeded its initial capitalization.
Net revenue in the Practice Management Division increased 50.1% to $14.7
million in 1996 from $9.8 million in 1995 accounting for $4.9 million of the
increase in consolidated net revenue. This increase was attributable to the
acquisition in February 1996 of a contract to manage Mid-Atlantic and also to an
increase in net revenue from the existing contract to manage AMC. The total
number of physicians under management in the Practice Management Division
increased to 66 in 1996 compared with 51 in 1995.
Net revenue in the Diagnostics Division increased 12.5% to $34.1 million in
1996 from $30.3 million in 1995 and accounted for $3.8 million of the increase
in consolidated net revenue. This was the result of higher procedure volumes
performed at the Fixed-Site Facilities and Mobile Cath Labs as well as the
addition of several new hospital contracts on several Mobile Cath Labs. The
number of Fixed-Site Facilities and Mobile Cath Labs operated by the Company
increased to 29 in 1996 compared with 28 in 1995.
Operating Expenses and Income from Operations
Consolidated operating expenses increased 77.8% to $56.3 million in 1996
from $31.7 million in 1995. The increase was attributable primarily to operating
expenses at the McAllen Heart Hospital and expenses incurred in managing
Mid-Atlantic. Income from operations increased 17.1% to $9.9 million in 1996
from $8.4 million in 1995. Operating margins decreased to 15% in 1996 from 21.1%
in 1995 and was attributable to the operating losses experienced at the McAllen
Heart Hospital during the first nine months of operations.
6
<PAGE>
Income from operations in the Practice Management Division increased 49.5%
to $1.5 million in 1996 from $1.0 million in 1995. The increase is attributable
to income from managing Mid-Atlantic and increased operating income from
managing AMC. Operating margins in the Practice Management Division were 10.2%
in both 1996 and 1995.
Income from operations in the Diagnostics Division increased 22.2% to $13.0
million in 1996 from $10.6 million in 1995. The increase is due primarily to
increased procedure volumes in the Mobile Cath Labs and Fixed-Site Facilities
managed by the Company in both years. Operating margins in the Diagnostics
Division improved to 37.5% in 1996 from 34.7% in 1995 and EBITDA margins
improved to 47.6% in 1996 from 45.8% in 1995. This overall improvement in
margins was due to continuing efficiencies in operating Mobile Cath Labs
resulting from the April 1995 acquisition of HealthTech.
Marketing, general and administrative expenses in 1996 increased 21.9% over
1995 primarily as a result of the Company's continued investment in corporate
infrastructure to accommodate growth. In 1996, the Company added both a Human
Resources and an Information Systems department, as well as additional finance
and development personnel. The remainder of the increase was attributable to
increased professional fees associated with pursuing business development
opportunities, the addition of administrative and accounting personnel to
support growth and increases in salaries.
Interest Expense and Interest Income
Interest expense in 1996 increased $1.2 million over 1995 primarily as the
result of interest incurred on borrowings at the McAllen Heart Hospital.
Substantially all of the property, plant and equipment at the hospital was
financed using borrowings that bear interest at rates ranging from 8.54% to
10.19%. The increase in interest expense at the McAllen Heart Hospital was
offset partially by a reduction in interest expense on capital leases and
corporate borrowings due to the retirement of these obligations using a portion
of the proceeds from a public offering of common stock in April 1996. Interest
income increased $636,000 in 1996 compared with 1995 due to additional
investment income earned on the remaining proceeds.
Liquidity and Capital Resources
Operating Cash Flows
Net cash provided by operating activities was $8.0 million, $7.1 million
and $15.0 million in 1995, 1996 and 1997, respectively. Accounts receivable
increased $12.0 million in 1997, due primarily to operations at the Arkansas and
McAllen Heart Hospitals. At September 30, 1997, the Company had working capital
of $47.5 million, including $43.0 million of cash and short-term investments and
$22.4 million of accounts receivable.
Investing Cash Flows
The Company used $31.3 million, $98.7 million, and $55.0 million in
investing activities in 1995, 1996 and 1997, respectively. In 1995, the Company
used $15.2 million for construction and start-up costs related to the McAllen
Heart Hospital, purchased $9.7 million of short-term investments and used $6.4
million to expand the Practice Management and Diagnostics Divisions through
capital expenditures, additional investments and working capital advances.
In 1996, the Company used $17.0 million, $21.7 million and $5.1 million in
the McAllen, Arkansas and Tucson Heart Hospitals, respectively, in 1996 for land
and equipment acquisitions, construction costs incurred and start-up and other
development costs incurred prior to opening the hospitals. The remaining
investing activities consisted of $9.9 million to further expand the Company's
Practice Management and
7
<PAGE>
Diagnostics Divisions and $45.0 million to purchase short-term investments using
the remaining proceeds of a public offering of common stock in April 1996.
In 1997, the Company invested $80.6 million in the Hospital Division,
primarily at the Arkansas, Tucson, and Arizona Heart Hospitals for land
acquisition, construction costs, equipment purchases and pre-opening and other
development costs. The remaining investing activities consisted of $5.7 million
used to further expand the Company's Practice Management and Diagnostics
Divisions. A significant portion of these investing activities was provided for
by the Company's sale of short-term investments totaling $31.3 million.
Financing Cash Flows
In 1995, the Company issued 2.3 million shares of common stock through its
initial public offering and used the proceeds of approximately $28.9 million to
retire existing debt and to fund a portion of the development and construction
costs of the McAllen Heart Hospital. In addition, the Company used proceeds of
the long-term borrowings to fund a portion of the land acquisition and
construction costs of the McAllen Heart Hospital.
In 1996, the Company issued 2.3 million shares of common stock through a
public offering and used a portion of the net proceeds of approximately $62.5
million to retire existing debt and obligations under capital leases. The
remaining proceeds have been and will be used to fund (i) a portion of the
construction and pre-opening expenses of Heart Hospitals and Fixed-Site
Facilities, (ii) potential future acquisitions, (iii) working capital and (iv)
general corporate purposes.
In July 1997, the Company terminated its existing revolving credit facility
and entered into a $20 million, unsecured revolving credit facility (the
"Revolver") with a bank, the proceeds of which are to be used for general
corporate purposes. The Revolver matures on July 28, 1999. Borrowings under the
Revolver bear interest at variable rates based, at the Company's option, on the
bank's base rate plus 1/2% or the London Interbank Offered Rate ("LIBOR") plus 1
1/2%. Amounts available under the Revolver are subject to a borrowing base which
includes, as its primary component, a percentage of the Company's eligible
accounts receivable. Under this borrowing base, at September 30, 1997, there was
approximately $18 million available under the Revolver. The Company has no
outstanding balance.
The Company entered into mortgage loans with real estate investment trusts
("REITs") from 1994 to 1996 for the purpose of financing the land acquisition
and construction costs of the McAllen, Arkansas and Tucson Heart Hospitals
(collectively the "REIT Loans"). The interest rates are based on a fixed premium
above the seven-year treasury note rate and the principal and interest is
payable monthly over a seven year term using extended period amortization
schedules. As of September 30, 1997, the interest rates on the REIT Loans ranged
from 9.50% to 11.54%.
In July 1997, the Company obtained a financing commitment from a REIT for
up to $35 million for the purpose of financing the land acquisition and
construction costs of the Heart Hospital of Austin. The interest rate is based
on a fixed premium above the seven-year treasury note rate and the principal and
interest is payable monthly over a seven year term using an extended period
amortization schedule. The Company completed the transaction in November 1997.
In August 1997, the Company entered into a mortgage loan with a bank for
the purpose of financing a portion of the land acquisition and construction
costs of the Arizona Heart Hospital (the "Phoenix Loan"). Borrowings of up to
$28 million are available and the term is for three years, subject to extension
for an additional year, at the option of the Company. Principle and interest are
payable monthly beginning in the third year using an extended period
amortization schedule. The interest rate on the Phoenix Loan is based
8
<PAGE>
on a premium above LIBOR. As of September 30, 1997, the rate was 8.50%, and the
outstanding balance was $11 million.
The Company has acquired substantially all of the medical and other
equipment for the McAllen, Arkansas and Tucson Heart Hospitals under installment
notes payable to equipment lenders secured by the related equipment. Amounts
borrowed under these notes are payable in monthly installments of principal and
interest over five to seven year terms. Interest is at fixed rates ranging from
8.50% to 10.75%.
The Company anticipates that the cost of its Heart Hospitals currently
under development will range from $32 to $52 million, and will be financed
through a combination of (i) REIT financing, (ii) bank financing, (iii) notes
payable to various equipment lenders and (iv) available cash reserves.
In October 1996, the Company entered into a 40-year contract to manage
Heart Clinic, a multi-physician cardiologist group located in McAllen, Texas.
Total consideration given in connection with the acquisition of the management
contract was approximately $6.4 million (subject to increase if certain base
performance levels are exceeded by the physicians) and consisted of fixed and
contingent promissory notes that are partially convertible into shares of the
Company's common stock.
The Company anticipates financing its future operations through a
combination of amounts available under the Revolver, financing from other real
estate lenders and various equipment lenders, capital contributions by minority
partners, cash reserves and operating cash flows. The Company believes the
combination of these sources will be sufficient to meet the Company's currently
anticipated Heart Hospital development, acquisition and working capital needs
through fiscal year 1998. 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.
General Trends and Business Outlook
Revenue trends
Future trends for revenue and profitability are difficult to predict;
however, the Company believes that there will be continuing pressure to reduce
costs and develop integrated healthcare delivery systems with geographically
concentrated service capabilities. The largest disease category is
cardiovascular disease which, according to the American Heart Association, is
estimated to account for approximately $158 billion in total medical treatment
costs in 1997. The Company believes that the demand for cardiology and
cardiovascular services will increase in the future as people age 55 and older,
the primary users of such services, represent a growing proportion of the total
population. By focusing on cardiovascular disease, through the operation of
Heart Hospitals, Fixed-Site Facilities, Mobile Cath Labs and Managed Practices,
the Company believes it is well positioned to adapt to these demands by
providing fully-integrated cost effective networks focused on cardiovascular
disease.
The Company expects each of its future Heart Hospitals will experience
negative cash flow during the development phase, and operating losses in the
first six to nine months of operations. Some Heart Hospitals are expected to
become profitable faster than others, however, the Company expects each will
generate positive EBITDA margins during this period.
9
<PAGE>
Health care reform
In recent years, there have been intense national, state and private
industry efforts to reform the healthcare delivery and payment systems and as
such, the healthcare industry faces increased uncertainty. While the Company is
unable to predict which, if any, proposals for healthcare reform will be
adopted, it continues to monitor their progress and analyze their potential
impacts in order to formulate its future business strategies.
Seasonality
The Company's business experiences some degree of seasonality due to the
location of significant operations. Several of the Company's Fixed-Site
Facilities and Managed Practices, as well as the McAllen Heart Hospital, are
located in regions subject to seasonal population shifts to and from warmer
climates. In addition, because patients and physicians have some discretion in
scheduling elective diagnostic or therapeutic procedures, volumes are generally
affected by vacation schedules of both the patients and the physicians.
Consequently, the Company's third and fourth fiscal quarter procedure volumes
and net revenues tend to be lower at these facilities.
Technological advances
The market for cardiovascular care is rapidly growing and subject to rapid
technological change. As pressures from third party payors to contain costs
continue, technological advances in the delivery of cardiac care will impact the
Company's strategy. The Company believes that cash flows generated by the
Company's operations together with borrowings available under the Revolver and
other third party financing sources will be sufficient to meet the Company's
cash needs to adapt to any major technological changes.
In July 1996, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on issue 96-14, Accounting for the Costs
Associated with Modifying Computer Software for the Year 2000, which provides
that costs associated with modifying computer software for the year 2000 be
expensed as incurred. The Company is assessing the extent of the necessary
modifications to its computer software.
Inflation
The healthcare industry is very labor intensive and salaries and benefits
are subject to inflationary pressures as are supply costs which tend to escalate
as vendors pass on the rising costs through price increases. There can be no
assurance that the Company will not be affected by inflation in the future.
Management believes that by adhering to cost containment policies, labor
management, and reasonable price increases, the effects of inflation, which has
not had a material impact on the results of operations during the last three
years, on future operating margins should be manageable.
Newly Issued Accounting Standards
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS 128") was issued and 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 fiscal years ended
September 30, 1995, 1996 and 1997 of $.01, $.02, and $.02 per share
respectively. The impact of SFAS 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be material.
10
<PAGE>
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"), was issued and will be adopted by the Company on October 1, 1998. SFAS
131 requires that a public company report financial and descriptive information
about its reportable operating segments pursuant to criteria that differ from
current accounting practice. Operating segments, as defined, are components of
an enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The financial information to be
reported include segment profit or loss, certain revenue and expense items and
segment assets and reconciliations to corresponding amounts in the general
purpose financial statements. SFAS 131 also requires information about products
and services, geographic areas of operation, and major customers. The Company
has not completed its analysis of the effect of adoption on its financial
statement disclosure, however, the adoption of SFAS 131 will not effect results
of operations or financial position.
In November 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on issue 97-2, Consolidation of
Physicians' Practice Entities. This pronouncement provides guidance on the issue
of consolidating a physician practice if an owning member meets all of several
criteria concerning control over the physician practice and a financial interest
in the physician practice. The consensus requires that it be applied to existing
investments no later than for financial statements issued for fiscal years
ending after December 15, 1998. The Company is currently assessing the impact of
the issue on its financial statements.
In December 1997, the Accounting Standards Executive Committee cleared its
Statement of Position (the "SOP"), Reporting on the Costs of Start-Up
Activities. The SOP is effective for most entities for fiscal years beginning
after December 15, 1998. The SOP will require entities to charge to expense
start-up costs, including organizational costs, as incurred. In addition, the
SOP will require most entities upon adoption to write-off as a cumulative change
in accounting principle any previously capitalized start-up or organizational
costs. When adopted, this SOP will require the Company to change its accounting
method for these costs.
Other
Statements contained herein which are not historical facts may be
considered forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those projected. Such risks and uncertainties include
construction and development risks associated with heart hospitals, including
without limitation, unanticipated delays in construction and licensing;
increased construction costs; operating losses and negative cash flows during
the initial operation of heart hospitals continuing longer than anticipated;
dependence on physician relationships; increased competition from existing
hospitals in the marketplace; dependence on the availability and terms of
long-term management contracts; fluctuations in quarterly operating results from
seasonality, population shifts and other factors; dependence on key management;
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission.
11
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
MedCath Incorporated
We have audited the accompanying consolidated balance sheets of MedCath
Incorporated as of September 30, 1996 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MedCath
Incorporated at September 30, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Charlotte, North Carolina
November 7, 1997
12
<PAGE>
MedCath Incorporated
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------
1995 1996 1997
-------------------------------------
<S> <C> <C> <C>
Net revenue $ 40,106 $ 66,191 $ 110,910
Operating expenses:
Medical supplies and other 14,611 25,192 43,123
Personnel costs 8,975 18,310 29,986
Depreciation 2,886 4,543 8,385
Amortization 747 2,106 4,470
Provision for doubtful accounts - 735 2,083
Marketing, general and administrative 4,438 5,408 7,037
-------------------------------------
Total operating expenses 31,657 56,294 95,084
-------------------------------------
Income from operations 8,449 9,897 15,826
Interest expense (956) (2,107) (5,236)
Interest income 948 1,584 2,218
Minority interest in earnings of consolidated entities (1,530) (979) (1,539)
Equity in net earnings of unconsolidated joint venture 117 104 -
-------------------------------------
Income before income taxes and extraordinary item 7,028 8,499 11,269
Provision for income taxes (2,777) (3,297) (4,315)
-------------------------------------
Income before extraordinary item 4,251 5,202 6,954
Extraordinary loss on early extinguishment of debt (net of tax) (228) - (230)
-------------------------------------
Net income $ 4,023 $ 5,202 $ 6,724
=====================================
Net income per share:
Income before extraordinary item $ 0.51 $ 0.51 $ 0.60
Extraordinary loss (0.03) - (0.02)
-------------------------------------
Net income $ 0.48 $ 0.51 $ 0.58
=====================================
Weighted average number of common and common
equivalent shares outstanding (in thousands) 8,381 10,193 11,686
</TABLE>
See accompanying notes.
13
<PAGE>
MedCath Incorporated
Consolidated Balance Sheets
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
As of September 30,
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,026 $ 17,607
Short-term investments 56,667 25,344
Accounts receivable, net of allowance of $417 and $1,489
in 1996 and 1997, respectively 10,402 22,360
Medical supplies 1,549 3,168
Prepaid expenses and other current assets 610 668
-------- --------
Total current assets 74,254 69,147
Property, plant and equipment, net of accumulated depreciation 72,304 139,185
Other assets 1,910 2,470
Organization and start-up costs, net of accumulated amortization of
$1,470 and $4,881 in 1996 and 1997, respectively 7,628 13,737
Advances to physician groups 6,363 8,194
Intangible assets, net of accumulated amortization of $1,781 and
$2,308 in 1996 and 1997, respectively 19,222 26,275
-------- --------
Total assets $181,681 $259,008
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,861 $ 4,818
Distribution payable to minority interests 629 1,081
Accrued liabilities 3,624 9,648
Current portion of long-term debt 1,931 5,503
Current portion of obligations under capital leases 393 599
-------- --------
Total current liabilities 9,438 21,649
Deferred income taxes 2,625 3,731
Long-term debt 43,842 96,703
Obligations under capital leases 2,054 2,160
-------- --------
Total liabilities 57,959 124,243
Minority interests in equity of consolidated entities 3,477 7,628
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
and 11,121,326 and 11,168,603 shares issued and outstanding
at September 30, 1996 and 1997, respectively 111 112
Paid-in capital 108,898 109,065
Retained earnings 11,236 17,960
-------- --------
Total shareholders' equity 120,245 127,137
-------- --------
Total liabilities, minority interests and shareholders' equity $181,681 $259,008
======== ========
</TABLE>
See accompanying notes.
14
<PAGE>
MedCath Incorporated
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock
------------------------
Shares Par Paid- in Retained
(000's) Value Capital Earnings Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994 3,395 $ 34 $ 1,177 $ 3,046 $ 4,257
Net income - - 4,023 4,023
Issuance of Common Stock 650 6 6,994 - 7,000
Issuance of Common Stock 2,300 23 28,904 - 28,927
Conversion of redeemable convertible preferred stock 2,288 23 6,740 - 6,763
Exercise of stock options 52 1 188 - 189
Equity distribution of pooled entity - - (318) (318)
Pro forma tax provision of pooled entity - - 212 212
Adjustments to conform fiscal year end and
accounting policies of pooled entity - - (558) (558)
Transfer of undistributed S Corporation earnings
of pooled entity to paid-in capital - 371 (371) -
--------------------------------------------------------------------
Balance at September 30, 1995 8,685 87 44,374 6,034 50,495
Net income - - 5,202 5,202
Issuance of Common Stock 96 1 1,899 - 1,900
Issuance of Common Stock 2,300 23 62,467 - 62,490
Exercise of stock options 41 - 158 - 158
--------------------------------------------------------------------
Balance at September 30, 1996 11,122 111 108,898 11,236 120,245
Net income - - 6,724 6,724
Exercise of stock options 47 1 167 - 168
--------------------------------------------------------------------
Balance at September 30, 1997 11,169 $ 112 $ 109,065 $ 17,960 $ 127,137
====================================================================
</TABLE>
See accompanying notes.
15
<PAGE>
MedCath Incorporated
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Income before extraordinary item $ 4,251 $ 5,202 $ 6,954
Adjustments to reconcile income before extrordinary item to
net cash provided by operating activities:
Depreciation and amortization 3,732 6,771 12,892
Equity in net earnings of unconsolidated joint venture (117) (104) --
Minority interest -- (765) (765)
Deferred income taxes 483 327 1,107
Current tax benefit of extraordinary loss 140 -- 143
Pro forma tax provision of pooled entity 212 -- --
(Increase) decrease in current assets:
Accounts receivable (1,281) (5,530) (11,943)
Medical supplies 126 (1,137) (1,619)
Prepaid expenses and other current assets 150 (366) (5)
Increase (decrease) in current liabilities:
Accounts payable 274 1,897 1,919
Distribution payable to minority interest 471 (182) 452
Accrued liabilities (301) 1,067 5,962
Other (177) (65) (105)
-------- -------- --------
Net cash provided by operating activities 7,963 7,115 14,992
Investing activities
Purchases of property, plant and equipment (16,233) (44,978) (75,452)
Proceeds from sale of assets 353 804 542
Organization and Start-up costs (2,368) (6,562) (9,598)
Advances to physician groups (2,693) (3,456) (2,624)
Repayments of advances to physician groups -- 463 793
Net (purchases) sales of short-term investments (9,703) (44,964) 31,323
Acquisition of management contracts (655) -- --
-------- -------- --------
Net cash used in investing activities (31,299) (98,693) (55,016)
Financing activities
Proceeds from issuance of long-term debt 11,824 38,181 53,718
Repayments of long-term debt (9,915) (6,252) (4,646)
Repayments of obligations under capital leases (1,876) (4,194) (530)
Proceeds from issuance of common stock 29,116 62,648 168
Investments by minority partners 2,445 376 4,916
Payment of loan acquisition costs and deferred loan fees (472) (977) (1,021)
Repayments of subordinated debt (4,225) -- --
Distributions to shareholders of pooled entity (318) -- --
Distributions to minority partners (83) -- --
-------- -------- --------
Net cash provided by financing activities 26,496 89,782 52,605
-------- -------- --------
Net increase (decrease) in cash and equivalents 3,160 (1,796) 12,581
Adjustment for the effect on cash flows of pooled
entity's different fiscal year 196 -- --
Cash and cash equivalents, beginning of year 3,466 6,822 5,026
-------- -------- --------
Cash and cash equivalents, end of year $ 6,822 $ 5,026 $ 17,607
======== ======== ========
</TABLE>
See accompanying notes.
16
<PAGE>
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements
1. Organization
MedCath Incorporated ("MedCath" or the "Company") provides cardiology and
cardiovascular services through the development, operation and management of
heart hospitals and other specialized cardiac care facilities and provides
physician practice management services. The Company affiliates with leading
cardiologists and cardiovascular and vascular surgeons in targeted geographic
markets in the U.S. and provides state-of-the-art facilities, financial
resources and management services. The Company's strategy is to establish and
maintain localized, fully-integrated networks to provide comprehensive
diagnostic and therapeutic cardiac care services. Key elements of the Company's
strategy are to (i) focus exclusively on cardiology and cardiovascular services,
(ii) develop and operate full-service heart hospitals, co-owned with leading
local cardiac care physicians, that are designed to have a substantially lower
cost structure than conventional acute care hospitals ("Heart Hospitals"), (iii)
acquire and manage physician group practices which include cardiologists and
cardiovascular surgeons with leading local market positions ("Managed
Practices") and (iv) acquire, develop and operate fixed-site cardiac diagnostic
and therapeutic facilities ("Fixed-Site Facilities") and mobile cardiac
diagnostic centers ("Mobile Cath Labs") in selected markets.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its 50% or greater owned subsidiaries which the Company controls. All
intercompany accounts and transactions have been eliminated in consolidation.
Investments in unconsolidated affiliates in which the Company owns 20% or more
are accounted for using the equity method of accounting and other investments
are stated at cost.
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments with maturities
of three months or less to be cash equivalents.
Short-Term Investments
Short-term investments are recorded at fair value and consist of investments in
pooled investment accounts, managed by financial institutions, which invest
primarily in government-backed debt securities. On October 1, 1994, the Company
adopted Statement of Financial Accounting Standard No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). In accordance
with the provisions of SFAS 115, such securities would be classified as
"available for sale" and, accordingly, would be reflected at estimated market
value, with a corresponding adjustment to stockholders' equity. The difference
between the estimated market value and cost for these securities at September
30, 1995, 1996 and 1997, was not significant.
Medical Supplies
Medical supplies consist primarily of laboratory and surgical supplies, contrast
media and catheters and are stated at the lower of first-in, first-out (FIFO)
cost or market.
17
<PAGE>
MedCath Incorporated
Notes to Consolidated Financial Statements (continued)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided for
on the straight-line method over estimated useful lives of three to nine years
for equipment and forty years for buildings and improvements.
Interest expense incurred in connection with the construction of Heart Hospitals
is capitalized as part of the cost of the building until the facility is
operational, at which time depreciation begins using the straight-line method
over the life of the building.
Other Assets
Other assets consist primarily of the costs associated with obtaining long-term
financing, net of accumulated amortization, and are amortized to interest
expense over the life of the related debt agreements.
Organization and Start-Up Costs
Organization costs are amortized using the straight-line method over five years.
Start-up costs incurred prior to the opening of Heart Hospitals and other new
facilities are capitalized and amortized using the straight-line method over two
to three years beginning with the commencement of operations.
Advances to Physician Groups
Advances to physician groups consist of working capital advances made to
unconsolidated physician groups managed by the Company in accordance with the
terms of the related management agreements.
Intangible Assets
Intangible assets consist of amounts paid to acquire certain contracts to manage
Fixed-Site Facilities and Managed Practices, the value assigned to a Certificate
of Need ("CON") exemption and the excess of cost of acquired assets over fair
value ("goodwill"). Amortization is provided for using the straight-line method.
Intangible assets relating to management contracts are amortized over the terms
of the respective contracts, which range from 30 to 40 years, the CON exemption
is amortized over eight years, and goodwill is amortized over 40 years. The
carrying value of intangible assets is reviewed if the facts and circumstances
suggest that the asset may be impaired. If this review indicates that the value
of the intangible asset will not be recoverable, as determined based on the
undiscounted cash flows of the entity or management agreement acquired over the
remaining amortization period, the Company's carrying value of the intangible
asset is reduced by the estimated shortfall of cash flows. In addition, the
Company assesses long-lived assets for impairment under Statement of Financial
Accounting Standards 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). Under those rules,
intangibles associated with assets acquired in a purchase business combination
are included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Income Taxes
Deferred income taxes are provided for under the liability method based on
temporary differences that arise due to differences between tax bases of assets
or liabilities and their reported amounts in the financial statements.
18
<PAGE>
Revenue Recognition
The Company's Mobile Cath Labs, Fixed-Site Facilities and Managed Practices
operate under various fixed-price and cost-reimbursement-plus-fee contracts.
Revenue on fixed-price contracts is recognized as services are rendered based on
contracted rates. Revenue on cost-reimbursement-plus-fee contracts is recognized
on the basis of costs incurred during the period plus the fee earned. The
Company's fees for the services provided to Managed Practices include a
percentage of the net revenue or operating income of the practice. The Company's
risk associated with any managed care contracts entered into by the practices is
limited to the Company's participation in the practices' net revenue or net
income.
The Company's Heart Hospitals have agreements with third party payors that
provide for payments to the hospitals at amounts different from their
established rates. Payment arrangements include prospectively determined rates
per discharge, reimbursed costs, and discounted charges. Net revenue is reported
at the estimated net realizable amounts from patients, third-party payors, and
others as services are rendered, including estimated retroactive adjustments
under reimbursement agreements with third-party payors. Retroactive adjustments
are accrued on an estimated basis in the period that the related services are
rendered and adjusted in future periods as final settlements are determined. In
1996 and 1997, net revenue from Medicare and Medicaid patients represented
approximately 19% and 36% of consolidated net revenue, respectively.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. The Company believes that it is in compliance
with all applicable laws and regulations and it is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing. While
no such regulatory inquiries have been made, compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties, and exclusion
from the Medicare and Medicaid programs.
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.
Newly Issued Accounting Standards
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
per Share," ("SFAS 128") was issued and 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 fiscal years ended
September 30, 1995, 1996 and 1997 of $.01, $.02, and $.02 per share
respectively. The impact of SFAS 128 on the calculation of fully diluted
earnings per share for these periods is not expected to be material.
In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"), was
issued and will be adopted by the Company on October 1, 1998. SFAS 131 requires
that a public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice.
19
<PAGE>
Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. The financial information to be reported include segment
profit or loss, certain revenue and expense items and segment assets and
reconciliations to corresponding amounts in the general purpose financial
statements. SFAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption on its financial statement
disclosure, however, the adoption of SFAS 131 will not effect results of
operations or financial position.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
3. Business Combinations
In October 1994, the Company acquired all the outstanding stock of PhysMed
Management Services Inc. ("PhysMed"), a newly formed management services
organization, in exchange for 650,424 shares of the Company's common stock
valued at approximately $7 million. PhysMed has a 40-year contract to manage
Arizona Medical Clinic ("AMC"), a multi-physician practice which includes
several cardiologists serving the Sun City, Arizona area. Under the terms of the
management contract, the Company's fees include reimbursement of expenses plus a
percentage of the net revenue of AMC.
This acquisition has been accounted for under the purchase method of accounting,
and the results of operations have been included in the consolidated financial
statements since the acquisition date.
In April 1995, the Company acquired all of the outstanding shares of HealthTech
Corporation ("HealthTech"), which operated ten Mobile Cath Labs, in exchange for
1 million shares of the Company's common stock in a transaction accounted for as
a pooling-of-interests.
20
<PAGE>
Net revenue, net income and net income per share for the Company and HealthTech
for the period presented prior to the pooling are as follows (in thousands,
except per share data):
Six Months Ended March 31, 1995
--------------------------------
(unaudited)
Net revenue:
MedCath $ 16,076
HealthTech 3,980
--------------------------------
Combined 20,056
================================
Net income:
MedCath $ 1,494
HealthTech 555
Pro forma tax provisions (211)
--------------------------------
Combined 1,838
================================
Combined primary and fully diluted net
income per share:
Income before extraordinary item $ 0.26
================================
Net Income $ 0.23
================================
Prior to the pooling, HealthTech was an S Corporation and was therefore not
subject to U.S. Federal and State income taxes. A pro forma income tax provision
is reflected to provide for additional federal and state income taxes which
would have been incurred had HealthTech been taxed as a C Corporation. An
adjustment to retained earnings of $300,000 was recorded in 1995 to conform
accounting policies by recording deferred taxes upon HealthTech's termination of
S Corporation status.
Costs and other expenses related to the pooling amounting to approximately
$315,000 were charged to expense and decreased net income and net income per
share for the year ended September 30, 1995, by approximately $190,000 and $.02,
respectively.
4. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
September 30,
----------------------------------------
1996 1997
----------------------------------------
Land $ 8,057 $ 16,237
Building 15,733 42,528
Medical equipment 39,233 66,972
Equipment held under capital leases 2,447 1,284
Office equipment 1,759 4,754
Construction in progress 17,072 27,352
----------------------------------------
84,301 159,127
Less accumulated depreciation (11,997) (19,942)
----------------------------------------
$ 72,304 $ 139,185
========================================
Substantially all of the Company's property, plant and equipment is pledged as
collateral for various long-term obligations as described in Note 6.
21
<PAGE>
Effective May 1, 1995, the Company changed its estimate of the remaining useful
lives of certain lab and x-ray equipment acquired through the
pooling-of-interests with HeathTech from five years to nine years. The Company
believes this change better reflects the actual economic life of the assets,
conforms to American Hospital Association guideline lives for these assets and
is consistent with the lives used for similar equipment by the Company. This
change in estimate increased income before extraordinary item and net income for
the year ended September 30, 1995 by approximately $182,000 ($.02 per share).
5. Supplementary Information
Accounts Receivable
Accounts receivable, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1996 1997
---------------------------------------
<S> <C> <C>
Receivables, principally from billings to hospitals for various
cardiology procedures $ 2,272 $ 2,896
Receivables, principally from patients and third party payors 4,983 14,130
Amounts under management contracts 1,870 3,283
Other 1,277 2,051
---------------------------------------
$10,402 $22,360
=======================================
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
<CAPTION>
September 30,
---------------------------------------
1996 1997
---------------------------------------
Compensation and other payroll related benefits $ 2,514 $ 3,448
Vendor accruals 343 1,915
Property taxes 206 773
Other 561 3,512
---------------------------------------
$ 3,624 $ 9,648
=======================================
</TABLE>
22
<PAGE>
6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1996 1997
---------------------------------------
<S> <C> <C>
The REIT Loans (as defined below) $34,570 $58,781
The Phoenix Loan (as defined below) - 11,133
Convertible Subordinated Debt (as defined below) - 4,452
Notes payable to various equipment lenders 10,689 27,638
Other notes payable 514 202
---------------------------------------
45,773 102,206
Less current portion (1,931) (5,503)
---------------------------------------
$43,842 $ $96,703
=======================================
</TABLE>
In July 1997, the Company terminated its existing revolving credit facility and
entered into a $20 million, unsecured revolving credit facility (the "Revolver")
with a bank, the proceeds of which are to be used for general corporate
purposes. The Revolver matures on July 28, 1999. Borrowings under the Revolver
bear interest at variable rates based, at the Company's option, on the bank's
base rate plus 1/2% or the London Interbank Offered Rate ("LIBOR") plus 1 1/2%.
Amounts available under the Revolver are subject to a borrowing base which
includes a percentage of the Company's eligible accounts receivable. Under the
borrowing base, at September 30, 1997, there was approximately $18 million
available under the Revolver and the Company had no outstanding balance.
In connection with the termination of its existing revolving credit facility,
the Company recorded an extraordinary loss on early extinguishment of debt of
approximately $230,000 (net of income tax benefit of $143,000), which
represented the unamortized loan origination fees.
From 1994 to 1996, the Company entered into mortgage loans with real estate
investment trusts ("REITs") for the purpose of financing the land acquisition
and construction costs of the McAllen, Arkansas and Tucson Heart Hospitals
(collectively the "REIT Loans"). The interest rate on the REIT Loans is at 3
1/2% to 4 1/4% above a rate index tied to U.S. Treasury Notes, that is
determined on the completion date of the hospital, and subsequently increases by
22 to 27 basis points per year. As of September 30, 1997, the interest rates on
the REIT Loans ranged from 9.50% to 11.54%. The principal and interest is
payable monthly over a seven year term through 2005 using extended period
amortization schedules and include balloon payments at the end of each
respective term. Each are subject to extension for an additional seven years at
the option of the Company. Borrowings under the REIT Loans are secured by a
pledge of the Company's interest in the respective partnerships or limited
liability companies, the land on which the hospital stands, the hospital
building and fixtures and certain other hospital assets.
In August 1997, the Company entered into a mortgage loan with a bank for the
purpose of financing a portion of the land acquisition and construction costs of
the Arizona Heart Hospital (the "Phoenix Loan"). Borrowings of up to $28 million
are available and the term is for three years, subject to extension for an
additional year at the option of the Company. Principal amortization begins in
September 1999 using an extended amortization schedule and becomes due and
payable in September 2000, unless the term is extended by the Company. Interest
is payable monthly based on LIBOR plus 3 1/4% decreasing to LIBOR plus 2 3/4%
upon the attainment of certain financial ratios. As of September 30, 1997, the
interest rate on the Phoenix Loan was 8.50%. Borrowings under the Phoenix Loan
is secured by a pledge of the Company's interest in the Partnership, the land on
which the hospital stands, the hospital building and fixtures and certain other
hospital assets.
23
<PAGE>
The Company has acquired substantially all of the medical and other equipment
for the McAllen, Arkansas and Tucson Heart Hospitals under installment notes
payable to equipment lenders secured by the related equipment. Amounts borrowed
under these notes are payable in monthly installments of principal and interest
over five to seven year terms. Interest is at fixed rates ranging from 8 1/2% to
10 3/4%.
In October 1996, the Company entered into a 40-year contract to manage Heart
Clinic, P.A. ("Heart Clinic") a multi-physician cardiologist group located in
McAllen, Texas. The Company issued a convertible subordinated promissory note in
the amount of $6.4 million in connection with the acquisition. 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 the option of the noteholder) 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.
Covenants related to long-term debt prohibit the payment of dividends and
require the maintenance of specific financial ratios and amounts. The Company
was in compliance with these covenants at September 30, 1997.
In July 1997, the Company obtained a financing commitment from a REIT for up to
$35 million for the purpose of financing the land acquisition and construction
costs of the Heart Hospital of Austin. The interest rate is based on a fixed
premium above the seven-year treasury note rate and the principal and interest
is payable monthly over a seven year term using an extended period amortization
schedule.
Future maturities of long-term debt as of September 30, 1997 are as follows (in
thousands):
Fiscal Year
1998 $ 5,503
1999 10,162
2000 17,272
2001 6,117
2002 4,540
2003 and thereafter 58,612
-----------------
$ 102,206
=================
7. Commitments and Contingencies
The Company currently leases several Mobile Cath Labs, Fixed Site Facilities,
office space, computer software, and certain vehicles under noncancelable
capital and operating leases expiring through fiscal year 2002. Some of these
leases contain provisions for annual rental adjustments based on increases in
the consumer price index, renewal options and options to purchase during the
lease terms. Amortization of the capitalized amounts are included in
depreciation and amortization expense in the accompanying consolidated financial
statements through the retirement date of the leases.
24
<PAGE>
Total future minimum payments under leases with initial terms of one year or
more as of September 30, 1997 are as follows (in thousands):
Capital Operating
Fiscal Year
1998 $ 838 $ 764
1999 838 676
2000 838 529
2001 785 442
2002 32 369
2003 and thereafter - 50
---------------------------
Total future minimum lease payments 3,331 $ 2,830
===============
Less: amounts representing interest (572)
------------
Present value of net minimum lease payments 2,759
Less: current portion (599)
------------
$ 2,160
============
Rent expense under all operating leases was $1.2 million, $1.3 million and $1.6
million for the years ended September 30, 1995, 1996 and 1997, respectively.
The Company has entered into agreements to provide networks of hospitals with
Mobile Cath Labs and related catheterization services through 2001. In addition,
the Company leases several Mobile Cath Labs to hospitals under lease agreements
of various lengths. These are accounted for as operating leases, and the rental
income is included in revenue in the consolidated statements of income when
earned.
Total future minimum revenue to be earned under these agreements as of September
30, 1997 is as follows (in thousands):
Fiscal Year
1998 $ 6,126
1999 1,994
2000 774
2001 7
---------------
$ 8,901
===============
At September 30, 1997, the Company was contingently liable for outstanding
letters of credit of $2 million relating to the REIT Loans.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect, if any, on
the Company's consolidated financial position or results of operations.
25
<PAGE>
8. Income Taxes
The components of the provision for income taxes were as follows (in thousands):
Year Ended September 30,
------------------------------------
1995 1996 1997
------------------------------------
Current tax expense:
Federal $ 1,732 $ 2,296 $ 2,466
State 350 674 742
Deferred tax expense:
Federal 443 253 825
State 40 74 282
Pro forma tax provision of pooled entity 212 - -
------------------------------------
2,777 3,297 4,315
====================================
The components of net deferred taxes were as follows (in thousands):
September 30,
---------------------------
1996 1997
---------------------------
Deferred tax liabilities:
Excess of book over tax bases of property
and equipment $ (1,700) $ (4,423)
Tax over book amortization (697) (64)
Other (468) (167)
Deferred tax assets:
Nondeductible reserves 120 813
Other 120 110
--------------------------
Net deferred tax liability $(2,625) $ (3,731)
==========================
The differences between the U.S. federal statutory tax rate and the Company's
effective rate were as follows:
Year Ended September 30,
------------------------------
1995 1996 1997
------------------------------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State income taxes 4.1 6.0 6.1
Tax exempt interest income - (3.3) (4.9)
Other 1.4 2.1 3.4
------------------------------
Effective income tax rate 39.5% 38.8% 38.6%
==============================
9. Shareholders' Equity and Stock Options
In 1995, the Company completed an initial public offering of 2.3 million shares
of its common stock netting proceeds of approximately $28.9 million. A portion
of the proceeds was used to repay $4.2 million of subordinated debt and $9.6
million of bank financing. The remainder of the proceeds were used to fund the
development of new Heart Hospitals and Fixed-Site Facilities and ongoing capital
expenditures.
26
<PAGE>
Upon the retirement of subordinated debt, the Company incurred an extraordinary
loss on the early extinguishment of debt of approximately $228,000 (net of the
income tax benefit of $140,000), which represented the unamortized portion of
the original issue debt discount. Assuming the Company had issued the necessary
shares of common stock and used the proceeds to retire the debt on October 1,
1994, the pro forma net income per share would not have differed from the
reported amount.
In April 1996, the Company completed a public offering of 2.3 million shares of
its common stock netting proceeds of approximately $62.5 million. A portion of
the proceeds was used to repay $5.0 million outstanding under the Revolver and
$3.3 million was used to retire obligations under capital leases. The remainder
of the proceeds were used to fund (i) a portion of the construction and start-up
costs of Heart Hospitals and Fixed-Site Facilities, (ii) potential future
acquisitions, (iii) working capital and (iv) general corporate purposes.
Assuming the Company had issued the necessary shares of common stock and used
the net proceeds to retire the Revolver and the capitalized leases on October 1,
1995, the pro forma net income per share for the year ended September 30, 1996,
would not have differed from the reported amount.
On October 2, 1996, the Company's Board of Directors adopted a Shareholder
Rights Plan under which common stockholders have the right to purchase Series A
Participating Preferred Stock in the event of an accumulation of or tender offer
for at least 15% of the Company's common stock. The rights will expire on
October 15, 2006, unless redeemed or exchanged earlier by the Company. The
rights will be represented by existing common stock certificates until they
become exercisable and no rights are exercisable under the plan.
In August 1992, the Company adopted an Incentive Stock Option Plan (the "ISO
Plan") for key employees. The Company has reserved 296,587 shares of common
stock for issuance under the ISO Plan.
In October 1994, the Board of Directors adopted the 1994 Omnibus Stock Plan (the
"Omnibus Plan"). The Omnibus Plan is intended to encourage high levels of
performance from key employees and enable the Company to retain their services
on a basis competitive with industry practices. Through September 30, 1997,
awards under the Omnibus Plan consisted of options to purchase common stock. The
Company has reserved 1,300,000 shares of common stock for issuance under the
Omnibus Plan.
In October 1994, the Board of Directors adopted the Outside Directors' Stock
Option Plan (the "Directors' Plan"). Under the Directors' Plan, each outside
director joining the Board will automatically be granted a non-qualified option
to purchase 2,000 shares of common stock at fair market value on the date of
grant. On each anniversary of an outside director's election to the Board, an
additional option to purchase 2,000 shares of common stock will be granted at
the then fair market value. The Company has reserved 50,000 shares of common
stock for issuance under the Directors' Plan.
27
<PAGE>
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") was issued. SFAS 123
encourages a fair value based method of accounting for employee stock options
and similar equity instruments, which generally would result in the recording of
additional compensation expense in an entity's financial statements. SFAS 123
also allows an entity to continue to account for stock-based employee
compensation using the intrinsic value for equity instruments under APB Opinion
No. 25. The company has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for the stock option
plans. Had compensation expense for the various stock option plans been
determined consistent with the provisions of SFAS 123, the Company's net income
and net income per share would have been the pro forma amounts indicated below
(in thousands, except per share data):
Year Ended September 30,
--------------------------------------
1996 1997
--------------------------------------
Net Income:
As Reported $ 5,202 $ 6,724
Pro Forma $ 5,109 $ 6,252
Net Income Per Share:
As Reported $ .51 $ .58
Pro Forma $ .50 $ .56
Because Statement 123 is applicable only to options granted after September 30,
1995, only those subsequent years are presented.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following range of assumptions used
for the option grants which occurred during 1996 and 1997:
Year Ended September 30,
---------------------------------------
1996 1997
---------------------------------------
Volatility 23.0% - 24.2% 23.0% - 24.2%
Interest rate 6.0% - 6.9% 6.0% - 7.1%
Expected life (years) 6 - 10 6 - 10
Stock-based compensation costs on a pro forma basis would have reduced pretax
income by $153,000 ($93,000 after tax) and $768,000 ($472,000 after tax) in 1996
and 1997, respectively. Because the SFAS 123 method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
disclosures may not be representative of that to be expected in future years.
28
<PAGE>
Option plan activity for the years ended September 30, 1995, 1996 and 1997 is
set forth below:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price Price Per Share
----------------------------------------------------
<S> <C> <C> <C>
Outstanding options, September 30, 1994 300,118 $ 3.91 $ 3.54 - 7.51
Granted 310,000 12.31 12.00 - 14.00
Exercised (52,020) 3.63 3.54 - 7.51
Canceled -- -- --
------------
Outstanding options, September 30, 1995 558,098 $ 8.60 $ 3.54 - 14.00
Granted 475,448 17.32 12.00 - 34.75
Exercised (40,721) 3.88 3.54 - 7.51
Canceled (92,500) 19.89 13.50 - 34.75
------------
Outstanding options, September 30, 1996 900,325 $12.26 $ 3.54 - 24.00
Granted 270,449 14.50 13.13 - 19.50
Exercised (47,277) 3.54 3.54
Canceled (205,870) 16.57 3.54 - 18.25
------------
Outstanding options, September 30, 1997 917,627 $12.40 $ 3.54 - 24.00
============
</TABLE>
Options to purchase 26,481, 105,455 and 180,294 shares of common stock were
exercisable as of September 30, 1995, 1996 and 1997, respectively. Total common
shares reserved for future issuance under these plans were 844,567, 1,053,846
and 1,506,569 as of September 30, 1995, 1996 and 1997, respectively. The
weighted average fair value for options granted in 1996 and 1997 with an
exercise price equal to the stock price at the grant date was $7.76 and $6.49,
respectively. The weighted average fair value for options granted in 1996 and
1997 with an exercise price greater than the stock price at the grant date was
$3.32 and $6.75, respectively.
Options outstanding at September 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- ----------------------------
Remaining Weighted Average Weighted Average
Contractual Life Number Exercise Price Number Exercise Price
- --------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C>
5 Years 121,140 $ 3.54 81,713 $ 3.54
6 Years 23,539 7.51 15,300 7.51
8 Years 286,500 12.34 29,286 13.23
9 Years 254,999 15.35 33,318 15.69
10 Years 231,499 14.36 20,677 13.13
----------- ------------
917,627 180,294
=========== ============
</TABLE>
10. Supplemental Cash Flow Information
The Company gave non-cash consideration totaling approximately $7.0 million,
$1.9 million and $7.3 million for the years ended September 30, 1995, 1996 and
1997, respectively, for acquisitions of net assets and management contracts.
29
<PAGE>
Interest paid, net of amounts capitalized, during the years ended September 30,
1995, 1996 and 1997 was $1.7 million, $2.0 million and $4.9 million,
respectively. Total interest capitalized during the years ended September 30,
1995, 1996 and 1997 was $0.6 million, $1.3 million and $2.3 million,
respectively.
Income taxes paid, net of refunds, during the years ended September 30, 1995,
1996 and 1997 were $2.4 million, $3.4 million and $1.8 million, respectively.
The Company entered into capital lease obligations during the years ended
September 30, 1995, 1996 and 1997 totaling $0.2 million, $2.4 million and $0.7
million, respectively.
11. Malpractice Insurance Coverage
The Company is subject to claims arising in the course of providing services.
The Company maintains malpractice insurance coverage on a "claims made" basis,
with coverage being contingent on a policy being in effect when a claim is made,
regardless of when the events which gave rise to the claim occurred.
12. Employee Benefit Plan
In January 1994, the Company adopted a defined contribution retirement savings
plan (the "401(k) Plan") which covers all employees who meet minimum service
requirements. The 401(k) Plan allows eligible employees to contribute from 1% to
15% of their annual compensation on a pre-tax basis. The Company, at its
discretion, may make an annual contribution of up to 25% of an employee's
pre-tax contribution, up to a maximum of 6% of compensation. The Company's
contributions to the 401(k) Plan for the years ended September 30, 1995, 1996
and 1997 were approximately $38,000, $54,000 and $143,000, respectively.
13. Disclosures About Fair Values of Financial Instruments
The Company considers the carrying amounts of significant classes of financial
instruments on the consolidated balance sheets, including cash, short-term
investments, loans to affiliates, long-term debt, obligations under capital
leases and other long-term obligations to be reasonable estimates of fair value.
Fair value of the Company's debt and obligations under capital leases was
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of arrangements.
30
<PAGE>
14. Quarterly Financial Data (Unaudited)
Summarized quarterly financial results were as follows (in thousands, except per
share data):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------------ ----------------------- ----------------------- -----------------
<S> <C> <C> <C> <C>
Fiscal Year 1996:
Net revenue 11,209 17,284 18,376 19,322
Operating expenses 8,846 14,631 16,108 16,709
----------- --------- ---------- ----------
Income from operations 2,363 2,653 2,268 2,613
Net income 1,226 1,302 1,172 1,502
Net income per share .14 .14 .10 .13
Fiscal Year 1997:
Net revenue 22,854 26,709 29,915 31,432
Operating expenses 19,333 22,805 25,880 27,066
---------- ---------- ---------- ----------
Income from operations 3,521 3,904 4,035 4,366
Income before extraordinary loss 1,754 2,097 1,546 1,557
Extraordinary loss - - - (230)
---------- ------------- -------------- ------------
Net income 1,754 2,097 1,546 1,327
Income per share before
extraordinary item .15 .18 .13 .14
Net income per share .15 .18 .13 .12
</TABLE>
31
<PAGE>
15. Segment Information
The Company provides cardiology and cardiovascular services through the
development, operation and management of heart hospitals (the "Hospital
Division"), the development, operation and management of Fixed-Site Facilities
and Mobile Cath Labs (the "Diagnostics Division") and provides physician
practice management services (the "Practice Management Division"). Financial
information concerning the Company's operations by business segment as of and
for the periods indicated are as follows (in thousands):
Year Ended September 30
------------------------------------
1995 1996 1997
------------------------------------
Revenue:
Diagnostics Division $ 30,308 $ 34,085 $ 36,612
Practice Management Division 9,798 14,706 18,848
Hospital Division -- 17,400 54,966
Corporate and other -- -- 484
--------- --------- ---------
Consolidated totals $ 40,106 $ 66,191 $ 110,910
========= ========= =========
Income from operations:
Diagnostics Division $ 10,611 $ 12,972 $ 12,978
Practice Management Division 1,003 1,499 2,222
Hospital Division -- (616) 5,267
Corporate and other (3,165) (3,958) (4,641)
--------- --------- ---------
Consolidated totals $ 8,449 $ 9,897 $ 15,826
========= ========= =========
Depreciation and amortization:
Diagnostics Division $ 3,405 $ 3,474 $ 4,452
Practice Management Division 184 251 466
Hospital Division -- 2,838 7,745
Corporate and other 44 86 192
--------- --------- ---------
Consolidated totals $ 3,633 $ 6,649 $ 12,855
========= ========= =========
Capital expenditures:
Diagnostics Division $ 3,020 $ 6,611 $ 3,334
Practice Management Division -- 72 343
Hospital Division 13,043 37,978 70,940
Corporate and other 170 317 835
--------- --------- ---------
Consolidated totals $ 16,233 $ 44,978 $ 75,452
========= ========= =========
Aggregate identifiable assets:
Diagnostics Division $ 31,378 $ 37,641 $ 48,259
Practice Management Division 10,289 15,089 21,484
Hospital Division 21,947 68,740 158,722
Corporate and other 14,758 60,211 30,543
--------- --------- ---------
Consolidated totals $ 78,372 $ 181,681 $ 259,008
========= ========= =========
The amounts presented for "Corporate and other" include, general overhead
expenses, certain cash and cash equivalents, short-term investments, prepaid
expenses, other assets and other operations of the business not subject to
segment reporting.
32
Subsidiaries of Medcath Incorporated
Medcath, Inc.
Sept 30 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Name State of Incorporation or
Organization
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
100% Owned Subsidiaries
AHH Management, Inc. North Carolina
DTO Management, Inc. North Carolina
HHBF, Inc. North Carolina
Hospital Management IV, Inc. North Carolina
Medcath Clinical Research North Carolina
Medcath Diagnostics, Inc. (formerly HealthTech Corporation) North Carolina
MedCath of Arizona, Inc. North Carolina
MedCath of Arkansas, Inc. North Carolina
MedCath of Kingman, Inc. North Carolina
MedCath of Massachusetts, Inc. North Carolina
MedCath of Michigan, Inc. North Carolina
MedCath of New Jersey, Inc. North Carolina
MedCath of Texas, Inc. North Carolina
MedCath Physician Management of Virginia, Inc. North Carolina
Physician Management of McAllen, Inc. North Carolina
PhysMed Management Services, Inc. Arizona
Southern Arizona Heart, Inc. North Carolina
Ultimed, Inc. North Carolina
Venture Holdings, Inc. North Carolina
50% or Greater Owner, Partnership Interest or Membership Interest
Arizona Heart Hospital, L.L.C. North Carolina
Arizona Medical Development Company, L.L.C. North Carolina
Cape Cod Cardiology Services, L.P. North Carolina
Cardiac Services, Inc. North Carolina
CCT, L.L.C. North Carolina
Gaston Cardiology Services, L.L.C. North Carolina
Heart Hospital IV, L.P. North Carolina
Heart Hospital of BK, L.L.C. North Carolina
Heart Hospital of DTO, L.L.C. North Carolina
Heart South Imaging II L.L.C. North Carolina
MedCath of Little Rock L.L.C. North Carolina
MedCath of McAllen Limited Partnership North Carolina
MedCath of New Jersey CTC Limited Partnership New Jersey
MedCath of Tucson L.L.C. North Carolina
Sun City Cardiac Center Associates Arizona
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of MedCath Incorporated of our report dated November 7, 1997, included in the
1997 Annual Report to Shareholders of MedCath Incorporated.
Our audits also included the financial statement schedule of MedCath
Incorporated listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-92664, Form S-8 No. 333-1310 and Form S-8
No. 333-29471) pertaining to the MedCath Incorporated 1992 Incentive Stock
Option Plan, the MedCath Incorporated Omnibus Stock Plan and the MedCath
Incorporated Outside Directors' Stock Option Plan of our report dated
November 7, 1997, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of MedCath Incorporated.
Charlotte, North Carolina
December 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at September 30, 1997
and the Condensed Consolidated Statement of Income for the twelve months ended
September 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000931782
<NAME> MedCath Incorporated
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 17,607
<SECURITIES> 25,344
<RECEIVABLES> 23,849
<ALLOWANCES> (1,489)
<INVENTORY> 3,168
<CURRENT-ASSETS> 69,147
<PP&E> 159,127
<DEPRECIATION> (19,942)
<TOTAL-ASSETS> 259,008
<CURRENT-LIABILITIES> 21,649
<BONDS> 98,863
0
0
<COMMON> 112
<OTHER-SE> 127,025
<TOTAL-LIABILITY-AND-EQUITY> 259,008
<SALES> 0
<TOTAL-REVENUES> 110,910
<CGS> 0
<TOTAL-COSTS> 73,109
<OTHER-EXPENSES> 19,892
<LOSS-PROVISION> 2,083
<INTEREST-EXPENSE> 5,236
<INCOME-PRETAX> 11,269
<INCOME-TAX> 4,315
<INCOME-CONTINUING> 6,954
<DISCONTINUED> 0
<EXTRAORDINARY> (230)
<CHANGES> 0
<NET-INCOME> 6,724
<EPS-PRIMARY> 0.58
<EPS-DILUTED> 0.58
</TABLE>
