SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
SCHEDULE 13E-3
RULE 13E-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(E) OF THE SECURITIES EXCHANGE ACT OF 1934)
MEDCATH INCORPORATED
(Name of the Issuer)
MCTH ACQUISITION, INC.
MEDCATH HOLDINGS, INC.
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
PATRICK J. WELSH
ANDREW M. PAUL
STEPHEN R. PUCKETT
DAVID CRANE
CHARLES W. (TODD) JOHNSON
RICHARD J. POST
MEDCATH INCORPORATED
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
0005840501
(CUSIP Number of Class of Securities)
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
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Edward A. Gilhuly Paul B. Queally Stephen R. Puckett
c/o MedCath Holdings, Inc. c/o MedCath Holdings, Inc. MedCath Incorporated
Kohlberg Kravis Roberts & Co. Welsh, Carson, Anderson & Stowe 7621 Little Avenue, Suite 106
2800 Sand Hill Road, Suite 200 320 Park Avenue Charlotte, North Carolina 28226
Menlo Park, California 94025 New York, New York 10022 (704) 541-3228
(650) 233-6560 (212) 893-9500
WITH COPIES TO:
Gary I. Horowitz, Esq. Karen C. Wiedemann, Esq. Richard W. Cass, Esq.
Simpson Thacher & Bartlett Reboul, MacMurray, Hewitt, Maynard & Wilmer Cutler & Pickering
425 Lexington Avenue Kristol 2445 M Street, N.W.
New York, New York 10017 45 Rockefeller Plaza Washington, D.C. 20037
(212) 455-2000 New York, New York 10111 (202) 663-6000
(212) 841-5700
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This statement is filed in connection with (check the appropriate box):
a. X The filing of solicitation materials or an information statement
subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the
Securities Exchange Act of 1934. [X]
b. The filing of a registration statement under the Securities Act
of 1933.
c. A tender offer.
d. None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [X]
CALCULATION OF FILING FEE
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=============================================================== ====================
--------------------------------------------------------------- --------------------
Transaction Value* Amount of Filing
Fee
--------------------------------------------------------------- --------------------
$224,454,676. . . . . . . . . . . . . . . . . . . . . . . . . $44,891
=============================================================== ====================
* For purposes of calculating the fee only. Assumes purchase of 11,807,571 shares of Common Stock,
par value $.01 per share, of MedCath Incorporated at $19.00 per share.
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Check box if any of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing. [X]
Amount previously paid: $44,891
Form or registration no.: Preliminary Proxy Statement on
Schedule 14A
Filing party: MedCath Incorporated
Dates filed: April 15, 1998, June 2, 1998 and June 22, 1998
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This Amendment No. 2 to Rule 13e-3 Transaction Statement as so amended,
(the "Statement") is being filed in connection with the filing by MedCath
Incorporated ("MedCath" or the "Company") with the Securities and Exchange
Commission (the "Commission") on June 22, 1998 of a revised preliminary Proxy
Statement on Schedule 14A (as amended, the "Proxy Statement") in connection with
a special meeting of the shareholders of MedCath. At such meeting, the
shareholders of MedCath will vote upon, among other things, the adoption of an
Agreement and Plan of Merger dated as of March 12, 1998 (the "Merger Agreement")
by and among MedCath, MCTH Acquisition, Inc. and MedCath Holdings, Inc.,
pursuant to which MCTH Acquisition, Inc., a wholly-owned subsidiary of MedCath
Holdings, Inc., will be merged with and into MedCath.
The following cross reference sheet is being supplied pursuant to
General Instruction F to Schedule 13E-3 and shows the location in the Proxy
Statement of the information required to be included in response to the items of
this Statement. The information in the Schedule 14A which is attached hereto as
Exhibit (d)(3), including all appendices thereto, is hereby expressly
incorporated herein by reference and the responses to each item are qualified in
their entirety by the provisions of the Proxy Statement.
CROSS REFERENCE SHEET
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CAPTION OR LOCATION IN THE
ITEM IN SCHEDULE 13E-3 PROXY STATEMENT
Item 1(a) Outside Front Cover Page;
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"Introduction"; "Summary--Parties to the Merger"
Item 1(b) Outside Front Cover Page; "Summary--Record Date and Quorum"; "--Market Prices
of Common Stock and Dividends"
Item 1(c) "Summary--Market Prices of Common Stock and Dividends"
Item 1(d) "Summary--Market Prices of Common Stock and Dividends"
Item 1(e) "Summary--Market Prices of Common Stock and Dividends"
Item 1(f) None
Item 2(a) "Summary--Parties to the Merger"; "Certain Information Concerning the Parent,
the Acquiror and Other Affiliates"
Item 2(b) "Summary--Parties to the Merger"; "Certain Information Concerning the Parent,
the Acquiror and Other Affiliates"
Item 2(c) "Summary--Parties to the Merger"; "Certain Information Concerning the Parent,
the Acquiror and Other Affiliates"
Item 2(d) "Summary--Parties to the Merger"; "Certain Information Concerning the Parent,
the Acquiror and Other Affiliates"
Item 2(e) None
Item 2(f) None
Item 2(g) "Summary--Parties to the Merger"; "Certain Information Concerning the Parent,
the Acquiror and Other Affiliates"
Item 3(a)(1) None
Item 3(a)(2) "Summary--Conflicts of Interest"; "--Certain Effects of the Merger";
"Special Factors--Background of the Merger"; "--Conflicts of Interest";
"--Certain Effects of the Merger"
Item 3(b) "Summary--Conflicts of Interest"; "--Certain Effects of the Merger";
"Special Factors--Background of the Merger"; "--Conflicts of Interest";
"--Certain Effects of the Merger"
Item 4(a) "Introduction"; "Summary--The Merger"; "--Effective Time of the Merger
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and Payment for Shares"; "--Certain Effects of the Merger"; "--Conditions to
the Merger, Termination and Expenses"; "--Rights of Dissenting Shareholders";
"The Merger"; "Rights of Dissenting Shareholders"; Appendix A
Item 4(b) "Introduction"; "Summary--Purpose of the Special Meeting"; "--Parties to the
Merger"; "--Purpose and Reasons of the Affiliates for the Merger";
"--Conflicts of Interest"; "--Rights of Dissenting Shareholders"; "Special
Factors--Purpose and Reasons of the Affiliates for the Merger"; "--Conflicts
of Interest"; "--Certain Effects of the Merger"; "The Merger--Termination
Fee"; "Rights of Dissenting Shareholders"
Item 5(a), (b) "Summary--Purpose and Reasons of the Affiliates for the Merger"; "--Conflicts
of Interest"; "--Certain Effects of the Merger";
"--Financing of the Merger"; "Special Factors--Background of the Merger";
"--Purpose and Reasons of the Affiliates for the Merger"; "--Conflicts of
Interest"; "--Certain Effects of the Merger"; "--Conduct of MedCath's
Business After the Merger"
Item 5(c) "Special Factors--Conduct of MedCath's Business After the Merger"
Item 5(d) "Summary--Financing of the Merger"; "--Market Prices of Common Stock and
Dividends"; "The Merger--Financing"; "Summary--Conflicts of Interest";
"Special Factors--Conflicts of Interest"
Item 5(e) "Summary--Financing of the Merger"; "--Certain Effects of the Merger";
"Special Factors--Certain Effects of the Merger"; "--Conduct of MedCath's Business
After the Merger"; "The Merger--Financing"
Item 5(f), (g) "Summary--Certain Effects of the Merger"; "Special Factors--Certain Effects
of the Merger"
Item 6(a) "Summary--Financing of the Merger"; "The Merger--Financing"
Item 6(b) "The Merger--Expenses of the Transaction"
Item 6(c) "Summary--Financing of the Merger"; "The Merger--Financing"
Item 6(d) Not applicable
Item 7(a)-(c) "Summary"; "Special Factors--Background of the Merger"; "--The Special
Committee's and the Board's Recommendation"; "--Opinion of Financial
Advisor"; "--Purpose and Reasons of the Affiliates for the Merger"; "--Conflicts
of Interest"
Item 7(d) "Summary--The Merger"; "--Purpose and Reasons of the Affiliates for the
Merger"; "--Certain Effects of the Merger"; "--Federal Income Tax
Consequences"; "--Accounting Treatment"; "--Financing of the Merger";
"--Rights of Dissenting Shareholders"; "Special Factors--Background of the
Merger"; "--Purpose and Reasons of the Affiliates for the Merger";
"--Conflicts of Interest"; "--Certain Effects of the Merger"; "--Conduct of
MedCath's Business After the Merger"; "The Merger--Financing"; "--Accounting
Treatment"; "Rights of Dissenting Shareholders"; "Federal Income Tax
Consequences"; "Principal Shareholders and Stock Ownership of Management"
Item 8(a), (b) "Summary--The Special Committee's and the Board's Recommendation"; "--Opinion
of Financial Advisor"; "--Position of the Affiliates as to Fairness of the
Merger"; "--Conflicts of Interest"; "--Rights of Dissenting Shareholders";
"Special Factors--Background of the Merger"; "--The Special Committee's and
the Board's Recommendation"; "--Opinion of Financial Advisor"; "--Position of
the Affiliates as to Fairness of the
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Merger"; "--Conflicts of Interest"; "Rights of Dissenting Shareholders"
Item 8(c) "Introduction"; "Summary--Vote Required"; "Special Factors--The Special
Committee's and the Board's Recommendation"; "The Special Meeting--Voting
Procedures"; "The Merger--Conditions"
Item 8(d) "Summary--The Special Committee's and the Board's Recommendation"; "--Opinion
of Financial Advisor"; "Special Factors--Background of the Merger"; "--The
Special Committee's and the Board's Recommendation"; "--Opinion of Financial
Advisor"
Item 8(e) "Summary--The Special Committee's and the Board's Recommendation";
"--Conflicts of Interest"; "Special Factors--The Special Committee's and the
Board's Recommendation"; "--Conflicts of Interest"
Item 8(f) None
Item 9(a)-(c) "Summary--The Special Committee's and the Board's Recommendation"; "--Opinion
of Financial Advisor"; "Special Factors--The Special Committee's and the
Board's Recommendation"; "--Opinion of Financial Advisor"; Appendix B
Item 10(a) "Summary--Conflicts of Interest"; "Special Factors--Conflicts of Interest";
"Principal Shareholders and Stock Ownership of Management"
Item 10(b) None
Item 11 "Summary--Vote Required"; "--Parties to the Merger"; "--Conflicts of
Interest"; "--Financing of the Merger"; "Special Factors--Background of the
Merger"; "--Conflicts of Interest"; "--Certain Effects of the Merger"; "The
Merger--Financing"
Item 12(a), (b) "Introduction"; "Summary--Vote Required"; "--Purpose and Reasons of the
Affiliates for the Merger"; "--The Special Committee's and the Board's
Recommendation"; "Special Factors--Purpose and Reasons of the
Affiliates for the Merger"; "--The Special Committee's and the Board's
Recommendation"; "The Special Meeting--Voting Procedures"
Item 13(a) "Summary--Rights of Dissenting Shareholders"; "Rights of Dissenting
Shareholders"; Appendix C
Item 13(b) Not applicable
Item 13(c) Not applicable
Item 14(a) "Selected Consolidated Financial Data"; "Incorporation of Certain Documents
by Reference"
Item 14(b) Not applicable
Item 15(a) "Summary--Parties to the Merger"; "--Conflicts of Interest"; "--Financing of
the Merger"; "Special Factors--Conflicts of Interest"; "The Special
Meeting--Proxy Solicitation"; "The Merger--Termination Fee"; "--Financing";
"--Expenses"
Item 15(b) "The Special Meeting--Proxy Solicitation"
Item 16 Proxy Statement
Item 17(a)-(f) Not applicable
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ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The information set forth on the cover page to the Proxy Statement
and in the sections entitled "Introduction" and "Summary--Parties to the Merger"
of the Proxy Statement is incorporated herein by reference
(b) The information set forth on the cover page to the Proxy Statement
and in the sections entitled "Summary--Record Date and Quorum" and "--Market
Prices of Common Stock and Dividends" of the Proxy Statement is incorporated
herein by reference.
(c) The information set forth in the section entitled "Summary--Market
Prices of Common Stock and Dividends" of the Proxy Statement is incorporated
herein by reference.
(d) The information set forth in the section entitled "Summary--Market
Prices of Common Stock and Dividends" of the Proxy Statement is incorporated
herein by reference.
(e) The information set forth in the section entitled "Summary--Market
Prices of Common Stock and Dividends" of the Proxy Statement is incorporated
herein by reference.
(f) None.
ITEM 2. IDENTITY AND BACKGROUND.
(a)-(d), (g) The information set forth in the sections entitled
"Summary--Parties to the Merger" and "Certain Information Concerning the Parent,
the Acquiror and Other Affiliates" of the Proxy Statement is incorporated herein
by reference.
(e), (f) Neither Parent, Acquiror nor any executive officer, director
or person controlling Parent, Acquiror or any Affiliate has during the last five
years (i) been convicted in a criminal proceeding (excluding traffic violations
or similar misdemeanors) or (ii) been a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction and as a result of
such proceeding was or is subject to a judgment, decree or final order enjoining
future violations of, or prohibiting activities subject to, federal or state
securities laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) None.
(a)(2) The information set forth in the sections entitled
"Summary--Conflicts of Interest," "--Certain Effects of the Merger," "Special
Factors--Background of the Merger," "--Conflicts of Interest" and "--Certain
Effects of the Merger" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in the sections entitled
"Summary--Conflicts of Interest," "--Certain Effects of the Merger," "Special
Factors--Background of the Merger," "--Conflicts of Interest" and "--Certain
Effects of the Merger" of the Proxy Statement is incorporated herein by
reference.
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ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "Introduction,"
"Summary--The Merger," "--Effective Time of the Merger and Payment for Shares,"
"--Certain Effects of the Merger," "--Conditions to the Merger, Termination and
Expenses," "--Rights of Dissenting Shareholders," "The Merger" and "Rights of
Dissenting Shareholders" of the Proxy Statement and Appendix A to the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in the sections entitled "Introduction,"
"Summary--Purpose of the Special Meeting," "--Parties to the Merger," "--Purpose
and Reasons of the Affiliates for the Merger," "--Conflicts of Interest,"
"--Rights of Dissenting Shareholders," "Special Factors--Purpose and Reasons of
the Affiliates for the Merger," "--Conflicts of Interest," "--Certain Effects of
the Merger" "The Merger--Termination Fee" and "Rights of Dissenting
Shareholders" of the Proxy Statement is incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a)-(b) The information set forth in the sections entitled
"Summary--Purpose and Reasons of the Affiliates for the Merger," "--Conflicts of
Interest," "--Certain Effects of the Merger," "--Financing of the Merger,"
"Special Factors--Background of the Merger," "--Purpose and Reasons of the
Affiliates for the Merger," "--Conflicts of Interest," "--Certain Effects of the
Merger" and "--Conduct of MedCath's Business After the Merger" of the Proxy
Statement is incorporated herein by reference.
(c) The information set forth in the section entitled "Special
Factors--Conduct of MedCath's Business After the Merger" of the Proxy Statement
is incorporated herein by reference.
(d) The information set forth in the sections entitled
"Summary--Financing of the Merger," "--Market Prices of Common Stock and
Dividends," "The Merger--Financing," "Summary--Conflicts of Interest" and
"Special Factors--Conflicts of Interest" of the Proxy Statement is incorporated
herein by reference.
(e) The information set forth in the sections entitled
"Summary--Financing of the Merger," "--Certain Effects of the Merger," "Special
Factors--Certain Effects of the Merger," "--Conduct of MedCath's Business After
the Merger" and "The Merger--Financing" of the Proxy Statement is incorporated
herein by reference.
(f)-(g) The information set forth in the sections entitled
"Summary--Certain Effects of the Merger" and "Special Factors--Certain Effects
of the Merger" of the Proxy Statement is incorporated herein by reference.
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the sections entitled
"Summary--Financing of the Merger" and "The Merger--Financing" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth in the section entitled "The
Merger--Expenses of the Transaction" of the Proxy Statement is incorporated
herein by reference.
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(c) The information set forth in the sections entitled
"Summary--Financing of the Merger" and "The Merger--Financing" of the Proxy
Statement is incorporated herein by reference.
(d) Not applicable.
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ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a)-(c) The information set forth in the sections entitled "Summary,"
"Special Factors--Background of the Merger," "--The Special Committee's and the
Board's Recommendation," "--Opinion of Financial Advisor," "--Purpose and
Reasons of the Affiliates for the Merger" and "--Conflicts of Interest" of the
Proxy Statement is incorporated herein by reference.
(d) The information set forth in the sections entitled "Summary--The
Merger," "--Purpose and Reasons of the Affiliates for the Merger," "--Certain
Effects of the Merger," "--Federal Income Tax Consequences," "--Accounting
Treatment," "--Financing of the Merger," "--Rights of Dissenting Shareholders,"
"Special Factors--Background of the Merger"; "--Purpose and Reasons of the
Affiliates for the Merger," "--Conflicts of Interest," "--Certain Effects of the
Merger," "--Conduct of MedCath's Business After the Merger," "The
Merger--Financing," "--Accounting Treatment," "Rights of Dissenting
Shareholders," "Federal Income Tax Consequences" and "Principal Shareholders and
Stock Ownership of Management" of the Proxy Statement is incorporated herein by
reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a)-(b) The information set forth in the sections entitled
"Summary--The Special Committee's and the Board's Recommendation," "--Opinion of
Financial Advisor," "--Position of the Affiliates as to Fairness of the Merger,"
"--Conflicts of Interest," "--Rights of Dissenting Shareholders," "Special
Factors--Background of the Merger," "--The Special Committee's and the Board's
Recommendation," "--Opinion of Financial Advisor," "--Position of the Affiliates
as to Fairness of the Merger," "--Conflicts of Interest" and "Rights of
Dissenting Shareholders" of the Proxy Statement are incorporated herein by
reference.
(c) The information set forth in the sections entitled "Introduction,"
"Summary--Vote Required," "Special Factors--The Special Committee's and the
Board's Recommendation," "The Special Meeting--Voting Procedures" and "The
Merger--Conditions" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth in the sections entitled "Summary--The
Special Committee's and the Board's Recommendation," "--Opinion of Financial
Advisor," "Special Factors--Background of the Merger," "--The Special
Committee's and the Board's Recommendation" and "--Opinion of Financial Advisor"
of the Proxy Statement is incorporated herein by reference.
(e) The information set forth in the sections entitled "Summary--The
Special Committee's and the Board's Recommendation," "--Conflicts of Interest,"
"Special Factors--The Special Committee's and the Board's Recommendation" and
"--Conflicts of Interest" of the Proxy Statement is incorporated herein by
reference.
(f) None.
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ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a)-(c) The information set forth in the sections entitled
"Summary--The Special Committee's and the Board's Recommendation," "--Opinion of
Financial Advisor," "Special Factors--The Special Committee's and the Board's
Recommendation" and "--Opinion of Financial Advisor" of the Proxy Statement and
in Appendix B to the Proxy Statement is incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in the sections entitled
"Summary--Conflicts of Interest," "Special Factors--Conflicts of Interest,"
"Principal Shareholders and Stock Ownership of Management" of the Proxy
Statement is incorporated herein by reference.
(b) None.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in the sections entitled "Summary--Vote
Required," "--Parties to the Merger," "--Conflicts of Interest," "--Financing of
the Merger," "Special Factors--Background of the Merger," "--Conflicts of
Interest," "--Certain Effects of the Merger" and "The Merger--Financing" of the
Proxy Statement is incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD
TO THE TRANSACTION.
(a)-(b) The information set forth in the sections entitled
"Introduction," "Summary--Vote Required," "--Purpose and Reasons of the
Affiliates for the Merger," "--The Special Committee's and the Board's
Recommendation," "Special Factors--Purpose and Reasons of the Affiliates for the
Merger," "--The Special Committee's and the Board's Recommendation" and "The
Special Meeting--Voting Procedures" of the Proxy Statement is incorporated
herein by reference.
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in the sections entitled "Summary--Rights
of Dissenting Shareholders" and "Rights of Dissenting Shareholders" of the Proxy
Statement and in Appendix C to the Proxy Statement is incorporated herein by
reference.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth in the section entitled "Selected
Consolidated Financial Data" of the Proxy Statement and in the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the
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fiscal year ended September 30, 1997 (as amended) and the Unaudited Condensed
Consolidated Financial Statements included in the Company's Quarterly Reports on
Form 10-Q for the fiscal quarters ended December 31, 1997 and March 31, 1998,
which are incorporated by reference in the Proxy Statement, is incorporated
herein by reference.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in the sections entitled
"Summary--Parties to the Merger," "--Conflicts of Interest," "--Financing of the
Merger," "Special Factors--Conflicts of Interest," "The Special Meeting--Proxy
Solicitation," "The Merger--Termination Fee," "--Financing" and "--Expenses" of
the Proxy Statement is incorporated herein by reference.
(b) The information set forth in the section entitled "The Special
Meeting--Proxy Solicitation" of the Proxy Statement is incorporated herein by
reference.
ITEM 16. ADDITIONAL INFORMATION.
The entirety of the Proxy Statement is incorporated herein by
reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(b)(1) Opinion of Goldman, Sachs & Co. dated June ___, 1998 (included as
Appendix B to the preliminary Proxy Statement, which is filed herewith
as Exhibit (d)(3)).
(b)(2) Management's projections for fiscal years 1997 through 2003 provided
to Goldman, Sachs & Co., that are summarized in the Preliminary
Proxy Statement, which is filed herewith as Exhibit (d)(3).
(c)(1) Agreement and Plan of Merger dated as of March 12, 1998 among MedCath
Incorporated, MCTH Acquisition, Inc. and MedCath Holdings, Inc.
(included as Appendix A to the preliminary Proxy Statement, which is
filed herewith as Exhibit (d)(3)).
(c)(2) Stockholders Agreement dated as of March 12, 1998 among MedCath
Holdings, Inc., MCTH Acquisition, Inc. and the Stockholders named
therein (filed as Exhibit (c)(2) to Amendment No. 1 to this
Schedule 13E-3, which was filed June 2, 1998).
(c)(3) Form of Contribution Agreement among MedCath Holdings, Inc. and the
Contributors named therein (filed as Exhibit (c)(3) to Amendment
No. 1 to this Schedule 13E-3, which was filed June 2, 1998).
(d)(1) Preliminary copy of Letter to Shareholders.
(d)(2) Preliminary copy of Notice of Special Meeting of Shareholders.
(d)(3) Preliminary Proxy Statement.
(d)(4) Form of Proxy.
(d)(5) Press Release issued by MedCath Incorporated dated as of March
13, 1998 (incorporated by reference to current report on Form
8-K filed by MedCath on March 23, 1998).
(e) Article 13 of the North Carolina Business Corporation Act
(included as Appendix C to the preliminary Proxy Statement,
which is filed herewith as Exhibit (d)(3)).
(f) Not applicable.
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SIGNATURES
After due inquiry and to the best of our knowledge and belief,
each of the undersigned certifies that the information set forth in this
Statement is true, complete and correct.
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MEDCATH INCORPORATED
By: /s/ Stephen R. Puckett
--------------------------
Name: Stephen R. Puckett
Dated: June 22, 1998 Title: President, Chief Executive Officer and
Chairman of the Board
MCTH ACQUISITION, INC.
By: /s/ Paul B. Queally
--------------------------
Name: Paul B. Queally
Dated: June 22, 1998 Title: Vice President
MEDCATH HOLDINGS, INC.
By: /s/ Paul B. Queally
--------------------------
Name: Paul B. Queally
Dated: June 22, 1998 Title: Vice President
WELSH, CARSON, ANDERSON & STOWE
VII, L.P.
By: WCAS VII Partners, General Partner
By: /s/ Paul B. Queally
--------------------------
General Partner
By: /s/ Patrick J. Welsh
- ------------------------------------------------------------------------------
Dated: June 22, 1998 Patrick J. Welsh
By: /s/ Andrew M. Paul
- -------------------------------------------------------------------------------
Dated: June 22, 1998 Andrew M. Paul
By: /s/ Stephen R. Puckett
- -------------------------------------------------------------------------------
Dated: June 22, 1998 Stephen R. Puckett
By: /s/ David Crane
- -------------------------------------------------------------------------------
Dated: June 22, 1998 David Crane
By: /s/ Charles W. (Todd) Johnson
- -------------------------------------------------------------------------------
Dated: June 22, 1998 Charles W. (Todd) Johnson
By: /s/ Richard J. Post
- -------------------------------------------------------------------------------
Dated: June 22, 1998 Richard J. Post
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EXHIBIT INDEX
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EXHIBIT NUMBER DESCRIPTION PAGE NUMBER
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(b)(2) Management's projections for fiscal years 1997 through 2003
provided to Goldman, Sachs & Co. that are summarized in the
Preliminary Proxy Statement filed herewith as Exhibit (d)(3).
(d)(1) Preliminary copy of Letter to Shareholders.
(d)(2) Preliminary copy of Notice of Special Meeting of Shareholders.
(d)(3) Preliminary Proxy Statement.
(d)(4) Form of Proxy.
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EX-(b)(2)
EXHIBIT (b)(2)
MEDCATH INCORPORATED CONSOLIDATED OPERATING RESULTS - MARCH PROJECTION
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YTD ' 98 YTD ' 99 YTD ' 00 YTD ' 01 YTD ' 02 YTD ' 03
-------- -------- -------- -------- -------- --------
Diagnostic Division 36,255 39,068 43,521 47,197 52,057 56,160
Practice Management Division 29,791 35,281 47,045 55,397 68,167 77,575
Hospital Division 119,704 213,698 279,957 335,689 392,448 451,394
Other 2,242 2,242 2,242 2,242 2,242 2,242
-----------------------------------------------------------------------------------
Total Revenue 187,992 290,289 372,764 440,525 514,914 587,371
EBITDA 45,263 77,170 101,466 120,380 141,803 160,389
D&A 15,639 24,842 30,923 36,481 42,246 48,326
Pre-Opening Costs/Amortization 7,798 3,600 3,500 3,500 3,500 3,500
Interest 9,294 19,072 22,954 24,978 26,423 27,160
Equity in Earnings of Unconsolidated Subs 10 1,774 2 (1,848) (4,289) (7,214)
Minority Interest 3,980 11,571 18,360 23,592 29,846 36,160
-----------------------------------------------------------------------------------
Pre-Tax Income 8,542 16,312 25,726 33,677 44,078 52,457
===================================================================================
Net Income 5,276 9,951 15,693 20,543 26,887 31,999
===================================================================================
Shares 12,375 13,200 14,250 15,200 16,250 17,200
EPS $ 0.43 $ 0.75 $ 1.10 $ 1.35 $ 1.65 $ 1.86
Yr. over Yr. Growth
Revenue 70% 54% 28% 18% 17% 14%
EBITDA 58% 70% 31% 19% 18% 13%
Net Income -24% 89% 58% 31% 31% 19%
EPS -29% 77% 46% 23% 22% 12%
Margins
EBITDA 24% 27% 27% 27% 28% 27%
D&A 8% 9% 8% 8% 8% 8%
Pre-Opening Costs 4% 1% 1% 1% 1% 1%
Interest 5% 7% 6% 6% 5% 5%
Minority Interest 2% 4% 5% 5% 6% 6%
Tax Rate 38% 39% 39% 39% 39% 39%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDCATH INCORPORATED CONSOLIDATED OPERATING RESULTS - MARCH PROJECTION
<S> <C> <C> <C> <C> <C> <C>
YTD ' 98 YTD ' 99 YTD ' 00 YTD ' 01 YTD ' 02 YTD ' 03
-------- -------- -------- -------- -------- --------
Balance Sheet Info
"Corporate Cash/(Revolver)" 24,007 (9,165) (14,656) (15,003) (2,311) 17,376
Cash at Other Divisions 10,409 16,477 21,355 27,049 32,800 38,860
Net Current Assets 22,515 40,765 52,265 64,265 76,665 89,465
Working Capital Receivable - 3 Way Deals 1,900 18,300 26,000 28,800 25,900 22,300
Land 17,883 21,383 24,883 28,383 31,883 35,383
Building 131,175 161,877 184,877 207,877 230,877 253,877
Equipment 122,329 154,381 183,706 214,531 246,856 280,681
Pre-Opening Costs 27,169 - - - - -
Intangible Assets 37,038 40,932 44,591 48,084 51,320 54,369
Less: D&A (49,125) (58,011) (87,993) (123,366) (164,248) (211,023)
-----------------------------------------------------------------------------------
Net Capital Assets 286,469 320,562 350,065 375,509 396,688 413,287
REIT Debt 137,063 166,845 189,584 211,592 232,934 253,702
Equipment Debt 71,411 79,833 79,293 75,925 71,595 65,071
Working Capital Debt - - - - - -
Convertible Debt 4,452 - - - - -
-----------------------------------------------------------------------------------
Total Debt 212,926 246,678 268,877 287,517 304,529 318,773
Additional Cash Equity 5,975 6,615 7,255 7,895 8,535 9,175
Equity 137,411 147,361 163,054 183,597 210,485 242,484
Cash Flow Analysis
EBITDA 44,533 77,170 101,466 120,380 141,803 160,389
(Inc.) Dec. in NCA (13,695) (18,250) (11,500) (12,000) (12,400) (12,800)
Consolidated Taxes Paid (3,266) (6,362) (10,033) (13,134) (17,190) (20,458)
Minority Interest (2,565) (3,319) (3,696) (4,010) (4,421) (4,771)
Less: Cap. Expenditures (112,726) (70,254) (59,825) (61,325) (62,825) (64,325)
Less: Pre-Opening Costs (7,592) (3,600) (3,500) (3,500) (3,500) (3,500)
Less: Acq./New Ops. - (600) (600) (600) (600) (600)
Less: Interest on Debt (8,315) (18,018) (22,118) (24,386) (26,104) (27,111)
Inc. (Dec.) in REIT Principal 69,930 29,782 22,739 22,008 21,342 20,768
Inc. (Dec.) in Equip. Principal 49,662 8,422 (540) (3,368) (4,330) (6,524)
Inc. (Dec.) in WC Principal - - - - - -
Inc. (Dec.) in Acquisition Debt - - - - - -
Inc. (Dec.) in Convert. Debt - (4,452) - - - -
Additional Cash Equity (1,635) 640 640 640 640 640
-----------------------------------------------------------------------------------
Net Cash Available for Dist. 14,331 (8,841) 13,032 20,705 32,415 41,707
Cash Distributed to Doctors (3,528) (1,862) (6,076) (12,691) (17,003) (21,903)
Cash Distributed to MedCath - - 132 132 132 2,343
-----------------------------------------------------------------------------------
Net Inc. (Dec.) in Cash 10,803 (10,703) 7,088 8,146 15,544 22,147
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDCATH INCORPORATED CONSOLIDATED OPERATING RESULTS - JUNE PROJECTION
<S> <C> <C> <C> <C> <C> <C>
FY ' 97 FY ' 98 FY ' 99 FY ' 00 FY ' 01 FY ' 02
------- ------- ------- ------- ------- -------
Diagnostic Division 36,411 37,611 46,502 50,627 56,158 60,766
Practice Management Division 18,880 22,824 26,965 33,313 37,979 44,878
Hospital Division 54,037 140,143 278,338 422,770 585,701 757,983
-----------------------------------------------------------------------------------------------
Total Revenue 109,328 200,578 351,805 506,710 679,838 863,627
EBITDA 28,436 57,462 104,244 152,169 206,063 262,887
D&A 8,945 18,123 30,412 42,432 55,285 68,822
Pre-Opening Costs/Amortization 3,297 8,203 10,500 10,500 10,500 10,500
Interest 3,077 12,572 24,985 34,880 42,411 47,863
Minority Interest 1,614 2,932 13,054 26,048 42,486 60,902
-----------------------------------------------------------------------------------------------
Pre-Tax Income 11,503 15,631 25,294 38,309 55,382 74,800
===============================================================================================
Net Income 7,023 9,553 15,447 23,386 33,801 45,646
===============================================================================================
Shares 11,694 12,175 12,975 14,025 14,975 16,025
EPS $ 0.60 $ 0.78 $ 1.19 $ 1.67 $ 2.26 $ 2.85
Yr. over Yr. Growth
Revenue 83% 75% 44% 34% 27%
EBITDA 102% 81% 46% 35% 28%
Net Income 36% 62% 51% 45% 35%
EPS 31% 52% 40% 35% 26%
Margins
EBITDA 26% 29% 30% 30% 30% 30%
D&A 8% 9% 9% 8% 8% 8%
Pre-Opening Costs 3% 4% 3% 2% 2% 1%
Interest 3% 6% 7% 7% 6% 6%
Minority Interest 1% 1% 4% 5% 6% 7%
Tax Rate 39% 39% 39% 39% 39% 39%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDCATH INCORPORATED CONSOLIDATED OPERATING RESULTS - JUNE PROJECTION
<S> <C> <C> <C> <C> <C> <C>
FY ' 97 FY ' 98 FY ' 99 FY ' 00 FY ' 01 FY ' 02
------- ------- ------- ------- ------- -------
Balance Sheet Info
Cash 46,583 28,697 21,023 27,597 50,535 84,314
Net Current Assets 17,441 35,741 55,841 77,241 99,841 123,641
Land 17,800 30,300 40,800 51,300 61,800 72,300
Building 86,898 159,407 228,407 297,407 366,407 435,407
Equipment 84,573 140,548 200,523 264,998 333,973 407,448
Pre-Opening Costs 18,950 28,714 - - - -
Intangible Assets 28,092 32,092 35,883 39,484 42,945 46,198
Less: D&A (27,376) (53,103) (82,606) (124,039) (178,184) (245,659)
-----------------------------------------------------------------------------------------------
Net Capital Assets 208,937 337,958 423,008 529,150 626,941 715,694
REIT Debt 93,729 169,338 240,448 310,868 380,768 450,188
Equipment Debt 41,923 80,430 110,956 132,516 143,156 144,463
Working Capital Debt 8,319 8,319 8,319 8,319 8,319 8,319
Acquisition Debt - - - - - -
Convertible Debt 4,452 4,452 - - - -
-----------------------------------------------------------------------------------------------
Total Debt 148,423 262,539 359,723 451,703 532,243 602,970
Additional Cash Equity 7,940 13,820 19,700 25,580 31,460 37,340
Equity 132,179 141,732 157,179 180,565 214,366 260,012
Cash Flow Analysis
EBITDA 28,436 57,462 104,244 152,169 206,063 262,887
(Inc.) Dec. in NCA (4,088) (18,300) (20,100) (21,400) (22,600) (23,800)
Consolidated Taxes Paid (4,480) (6,096) (9,864) (14,940) (21,599) (29,172)
Minority Interest (2,368) (2,929) (3,939) (4,290) (4,758) (5,150)
Less: Cap. Expenditures (109,262) (144,984) (143,475) (147,975) (152,475) (156,975)
Less: Pre-Opening Costs (7,751) (9,764) (10,500) (10,500) (10,500) (10,500)
Less: Acq./New Ops. - (600) (600) (600) (600) (600)
Less: Interest on Debt (3,104) (12,572) (24,985) (34,880) (42,411) (47,863)
Inc. (Dec.) in REIT Principal 58,592 75,608 71,110 70,420 69,900 69,420
Inc. (Dec.) in Equip. Principal 37,731 38,507 30,526 21,560 10,640 1,307
Inc. (Dec.) in WC Principal - - - - - -
Inc. (Dec.) in Acquisition Debt - - - - - -
Inc. (Dec.) in Convert. Debt - - (4,452) - - -
Additional Cash Equity 3,077 5,880 5,880 5,880 5,880 5,880
-----------------------------------------------------------------------------------------------
Net Cash Available for Dist. (3,217) (17,789) (6,155) 15,444 37,540 65,433
Cash Distributed to Doctors - (98) (1,519) (8,869) (14,602) (31,654)
Cash Distributed to MedCath - - - - - -
-----------------------------------------------------------------------------------------------
Net Inc. (Dec.) in Cash (3,217) (17,887) (7,674) 6,575 22,938 33,779
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDCATH INCORPORATED CONSOLIDATED OPERATING RESULTS - DECEMBER PROJECTION
<S> <C> <C> <C> <C> <C> <C>
YTD ' 98 YTD ' 99 YTD ' 00 YTD ' 01 YTD ' 02 YTD ' 03
-------- -------- -------- -------- -------- --------
Diagnostic Division 34,912 37,658 42,040 45,643 50,425 54,446
Practice Management Division 30,056 35,559 47,337 55,704 68,489 77,913
Hospital Division 132,986 239,474 307,549 365,408 425,686 486,936
Other 2,328 2,328 2,328 2,328 2,328 2,328
-------------------------------------------------------------------------------------
Total Revenue 200,282 315,018 399,254 469,082 546,927 621,623
EBITDA 47,839 84,140 109,472 129,140 151,545 170,788
D&A 16,693 28,674 34,170 39,979 45,994 52,324
Pre-Opening Costs/Amortization 8,412 3,500 3,500 3,500 3,500 3,500
Interest 9,397 24,384 26,942 28,950 30,026 30,096
Equity in Earnings of Unconsolidated Subs 5 1,289 766 (672) (2,608) (5,061)
Minority Interest 5,489 10,394 19,415 24,986 32,002 38,870
-------------------------------------------------------------------------------------
Pre-Tax Income 7,843 15,898 24,679 32,398 42,632 51,059
=====================================================================================
Net Income 4,829 9,698 15,054 19,763 26,005 31,146
=====================================================================================
Shares 12,375 13,200 14,250 15,200 16,250 17,200
EPS $ 0.39 $ 0.73 $ 1.06 $ 1.30 $ 1.60 $ 1.81
Yr. over Yr. Growth
Revenue 81% 57% 27% 17% 17% 14%
EBITDA 67% 76% 30% 18% 17% 13%
Net Income -31% 101% 55% 31% 32% 20%
EPS -35% 88% 44% 23% 23% 13%
Margins
EBITDA 24% 27% 27% 28% 28% 27%
D&A 8% 9% 9% 9% 8% 8%
Pre-Opening Costs 4% 1% 1% 1% 1% 1%
Interest 5% 8% 7% 6% 5% 5%
Minority Interest 3% 3% 5% 5% 6% 6%
Tax Rate 38% 39% 39% 39% 39% 39%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDCATH INCORPORATED CONSOLIDATED OPERATING RESULTS - DECEMBER PROJECTION
<S> <C> <C> <C> <C> <C> <C>
YTD ' 98 YTD ' 99 YTD ' 00 YTD ' 01 YTD ' 02 YTD ' 03
-------- -------- -------- -------- -------- --------
Balance Sheet Info
"Corporate Cash/(Revolver)" 18,590 (7,069) (16,802) (19,997) (6,841) 11,076
Cash at Other Divisions 16,424 20,339 25,803 32,039 37,862 44,531
Net Current Assets 20,141 42,141 53,841 66,241 79,041 92,241
Working Capital Receivable - 3 Way Deals 600 7,200 15,700 21,200 22,300 22,300
Land 23,062 26,562 30,062 33,562 37,062 40,562
Building 157,281 180,281 203,281 226,281 249,281 272,281
Equipment 138,219 167,169 197,994 230,319 264,144 299,469
Pre-Opening Costs 28,875 - - - - -
Intangible Assets 24,369 28,258 31,911 35,397 38,627 41,669
Less: D&A (50,612) (64,913) (98,136) (137,001) (181,625) (232,391)
-------------------------------------------------------------------------------------
Net Capital Assets 321,194 337,357 365,112 388,558 407,489 421,590
REIT Debt 167,388 190,470 212,629 234,135 255,077 275,413
Equipment Debt 87,209 88,349 85,939 80,465 74,245 67,703
Working Capital Debt - - - - - -
Convertible Debt 4,452 - - - - -
-------------------------------------------------------------------------------------
Total Debt 259,049 278,819 298,568 314,600 329,322 343,116
Additional Cash Equity 9,140 9,780 10,420 11,060 11,700 12,340
Equity 136,964 146,662 161,716 181,479 207,484 238,630
Cash Flow Analysis
EBITDA 47,839 84,140 109,472 129,140 151,545 170,788
(Inc.) Dec. in NCA (14,820) (22,000) (11,700) (12,400) (12,800) (13,200)
Consolidated Taxes Paid (3,014) (6,200) (9,625) (12,635) (16,626) (19,913)
Minority Interest (2,658) (3,204) (3,576) (3,883) (4,288) (4,632)
Less: Cap. Expenditures (157,581) (59,450) (61,325) (62,825) (64,325) (65,825)
Less: Pre-Opening Costs (10,786) (3,500) (3,500) (3,500) (3,500) (3,500)
Less: Acq./New Ops. - (600) (600) (600) (600) (600)
Less: Interest on Debt (8,480) (23,416) (26,191) (28,444) (29,792) (30,083)
Inc. (Dec.) in REIT Principal 92,862 23,082 22,159 21,506 20,942 20,336
Inc. (Dec.) in Equip. Principal 61,131 1,140 (2,410) (5,474) (6,220) (6,542)
Inc. (Dec.) in WC Principal - - - - - -
Inc. (Dec.) in Acquisition Debt - - - - - -
Inc. (Dec.) in Convert. Debt - (4,452) - - - -
Additional Cash Equity (1,320) 640 640 640 640 640
-------------------------------------------------------------------------------------
Net Cash Available for Dist. 3,174 (13,820) 13,345 21,525 34,975 47,469
Cash Distributed to Doctors (196) (1,323) (9,114) (12,985) (14,896) (24,500)
Cash Distributed to MedCath - - - - - 1,617
-------------------------------------------------------------------------------------
Net Inc. (Dec.) in Cash 2,978 (15,143) 4,231 8,540 20,079 24,586
</TABLE>
MEDCATH INCORPORATED
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
June , 1998
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of MedCath Incorporated (the "Company" or "MedCath") to be
held on July 22, 1998, at 10:00 a.m., local time, at Raintree Country Club,
located at 8600 Raintree Lane, Charlotte, North Carolina. The purpose of the
Special Meeting is to consider and vote upon a merger (the "Merger") that, if
approved and subsequently consummated, will result in the public shareholders
of MedCath receiving $19 in cash per share for their stock and MedCath becoming
a privately-owned company.
If approved by MedCath's shareholders, the Merger would be accomplished
pursuant to an Agreement and Plan of Merger (the "Merger Agreement") as
follows. MCTH Acquisition, Inc. (the "Acquiror"), a newly-formed North Carolina
corporation which is a wholly-owned subsidiary of MedCath Holdings, Inc., a
newly-formed Delaware corporation (the "Parent"), would merge with and into
MedCath, which would be the surviving corporation in the Merger. If the Merger
is consummated, each outstanding share of common stock, $.01 par value, of
MedCath (the "Common Stock"), other than shares held by shareholders who are
entitled to and who have perfected their dissenters' rights and shares held by
the Acquiror, will be canceled and converted automatically into the right to
receive $19 in cash, payable to the holder thereof, without interest.
The Parent was organized at the direction of two private investment
partnerships that have jointly agreed, together with certain affiliated
entities and individuals, to acquire (indirectly through the Parent and the
Acquiror in the Merger) the stock of the public shareholders of MedCath. The
first partnership is KKR 1996 Fund, L.P. (the "KKR Partnership"), an affiliate
of Kohlberg Kravis Roberts & Co., L.P. ("KKR"). The second partnership is
Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII"). One other private
investment partnership and 12 individuals affiliated with WCAS VII will also
participate in the transaction (together with WCAS VII, the "WCAS Investors").
Three other members of MedCath's management and I (the "Management Group")
have each agreed to contribute to the Parent in kind at least 50% of the value
of our equity interests in MedCath, which includes both shares of Common Stock
and the difference between $19 per share and the exercise prices of our stock
options. Certain of the WCAS Investors have also agreed to contribute a portion
of their shares of Common Stock to the Parent. In addition, the approximately
80 physicians (the "Physicians") who own shares of Common Stock issued to them
in connection with the Company's acquisition of contracts to manage their
practices will be individually offered the opportunity to contribute to the
Parent up to 50% of their shares of Common Stock (or, in the case of two of the
Physicians, 100% of their shares). All of the approximately 30 employees (the
"Employees") of MedCath (not including members of the Management Group) who
hold options to purchase shares of Common Stock will individually be offered
the opportunity to exchange their existing options for options to purchase
shares of common stock of the Parent.
If the Merger is consummated, the Management Group, the WCAS Investors,
the Physicians and the Employees will not receive any cash in the Merger for
the value of their equity interests in MedCath contributed to the Parent.
Instead, they will receive shares, and (in the case of the Management Group and
the Employees) options to purchase shares, of common stock of the Parent and
will continue to have indirect ownership interests in MedCath following the
Merger. They will, however, receive cash in the Merger (on the same terms as
the other shareholders) for their shares of Common Stock that they do not
contribute to the Parent. The Management Group and the Employees will also
receive cash for the difference between $19 per share and the exercise prices
of any stock options they do not agree to exchange for substantially equivalent
options to purchase shares of common stock of the Parent.
A special committee of the Board of Directors of MedCath (the "Special
Committee"), consisting of two independent directors (who are neither members
of the Management Group nor affiliated with WCAS VII or the KKR Partnership)
was formed nearly a year ago to investigate, consider and evaluate strategic
alternatives to maximize shareholder value. The Special Committee has
unanimously recommended to MedCath's Board of Directors that the Merger and
related agreements be approved. In connection with its evaluation of strategic
alternatives, the Special Committee engaged Goldman, Sachs & Co. ("Goldman
Sachs") to act as its financial advisor. Goldman Sachs has rendered its opinion
that, as of the date of this Proxy Statement, based upon and subject to the
assumptions, limitations and qualifications set forth in such opinion, the cash
merger consideration of $19 per share to be received in the Merger is fair from
a financial point of view to the shareholders of the Company (other than the
Management Group, the KKR Partnership, the WCAS Investors and the Acquiror).
The
<PAGE>
written opinion of Goldman Sachs, dated the date of this Proxy Statement, is
attached as Appendix B to the enclosed Proxy Statement and should be read
carefully and in its entirety by shareholders.
The Special Committee and the Board of Directors believe that the terms of
the Merger are fair to, and in the best interests of, the Company's
shareholders and unanimously recommend that shareholders approve the Merger.
Four of the six members of MedCath's Board of Directors are either members of
the Management Group or WCAS Investors and, consequently, have conflicts of
interest in connection with this recommendation. None of those directors
participated in the vote on the Merger. As a result, the two independent
directors (who also constituted the Special Committee) were the only members of
the Board of Directors who voted on the Merger.
Approval of the Merger at the Special Meeting will require the affirmative
vote of holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Special Meeting. Shareholders (including the Management
Group, the other executive officers of MedCath, the WCAS Investors, Welsh,
Carson, Anderson & Stowe V, L.P., an affiliate of WCAS VII, and the members of
the Special Committee) who, as of the record date, beneficially owned
approximately 23% of the outstanding shares of Common Stock, have either agreed
to or expressed their intention to vote their shares for approval of the
Merger.
The accompanying Proxy Statement provides you with a summary of the
proposed Merger and additional information about the parties involved and their
interests. Please give all this information your careful attention. Whether or
not you plan to attend, it is important that your shares are represented at the
Special Meeting. A failure to vote will count as a vote against the Merger.
Accordingly, you are requested to promptly complete, sign and date the enclosed
proxy and return it in the envelope provided.
STEPHEN R. PUCKETT
Chairman, President and Chief Executive
Officer
MEDCATH INCORPORATED
----------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held July 22, 1998
----------------------------------------
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Special Meeting") of MedCath Incorporated, a North Carolina corporation (the
"Company" or "MedCath"), will be held on July 22, 1998 at 10:00 a.m., local
time, at Raintree Country Club, located at 8600 Raintree Lane, Charlotte, North
Carolina, for the following purposes:
(1) To consider and vote on a proposal to approve an Agreement and Plan of
Merger pursuant to which MCTH Acquisition, Inc., a newly-formed company
(the "Acquiror"), will be merged (the "Merger") with and into MedCath and
each shareholder of the Company (other than shareholders who are entitled
to and have perfected their dissenters' rights and the Acquiror) will
become entitled to receive $19 in cash for each outstanding share of
common stock, $.01 par value, of the Company (the "Common Stock") owned
immediately prior to the effective time of the Merger. A copy of the
Agreement and Plan of Merger dated as of March 12, 1998 is attached as
Appendix A to and is described in the accompanying Proxy Statement.
(2) To consider and act upon such other matters as may properly come before
the Special Meeting or any adjournment or adjournments thereof.
The Board of Directors has determined that only holders of Common Stock of
record at the close of business on June 22, 1998, will be entitled to notice
of, and to vote at, the Special Meeting or any adjournment or adjournments
thereof.
By Order of the Board of Directors,
RICHARD J. POST
Chief Financial Officer, Secretary and
Treasurer
YOUR VOTE IS IMPORTANT
Whether or not you are able to attend the meeting, please date, sign and
return the accompanying proxy card promptly in the enclosed envelope which
requires no postage if mailed in the United States. Please do not send in any
certificates for your shares at this time.
Any shareholder shall have the right to dissent from the consummation of
the transactions contemplated by the Agreement and Plan of Merger and to
receive payment of the "fair value" of his or her shares upon compliance with
the procedures set forth in Chapter 55, Article 13 of the General Statutes of
North Carolina. See "RIGHTS OF DISSENTING SHAREHOLDERS" in the Proxy Statement
that accompanies this notice and the full text of Chapter 55, Article 13 of the
General Statutes of North Carolina, which is attached as Appendix C and is
described in the accompanying Proxy Statement.
MEDCATH INCORPORATED
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
---------------
PROXY STATEMENT
---------------
Introduction
This Proxy Statement is being furnished to the shareholders of MedCath
Incorporated, a North Carolina corporation (the "Company" or "MedCath"), in
connection with the solicitation by its Board of Directors (the "Board") of
proxies to be used at a Special Meeting of Shareholders (the "Special Meeting")
to be held on July 22, 1998 at 10:00 a.m., local time, at Raintree Country
Club, located at 8600 Raintree Lane, Charlotte, North Carolina, and at any
adjournment or adjournments thereof. This Proxy Statement, the Notice of
Special Meeting of Shareholders and the enclosed proxy card are first being
mailed to shareholders of MedCath on or about June , 1998.
The Special Meeting has been called to consider and vote on a proposal to
approve an Agreement and Plan of Merger (the "Merger Agreement"), which is
attached to this Proxy Statement as Appendix A. Pursuant to the Merger
Agreement, MCTH Acquisition, Inc. (the "Acquiror"), a newly-formed North
Carolina corporation, will be merged with and into MedCath (the "Merger"). In
the Merger, each outstanding share of common stock, $.01 par value, of MedCath
(the "Common Stock") (other than shares held by shareholders who are entitled
to and who have perfected their Dissenters' Rights (as defined below) and
shares held by the Acquiror) will be canceled and converted automatically into
the right to receive $19 in cash, payable to the holder thereof, without
interest.
The Acquiror is a wholly-owned subsidiary of MedCath Holdings, Inc. (the
"Parent"), a newly-formed Delaware corporation organized at the direction of
two private investment partnerships, KKR 1996 Fund, L.P. (the "KKR
Partnership"), which is an affiliate of Kohlberg Kravis Roberts & Co., L.P.
("KKR"), and Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII"). One other
private investment partnership and 12 individuals affiliated with WCAS VII
(together with WCAS VII, the "WCAS Investors") will also participate in the
transaction. Welsh, Carson, Anderson & Stowe V, L.P. ("WCAS V"), a private
investment partnership related to WCAS VII that currently holds approximately
7.5% of the outstanding Common Stock, will not participate in the transaction
and will instead receive $19 per share in cash for its shares on the same basis
as other MedCath shareholders. Four members of MedCath's management, Stephen R.
Puckett, Chairman, President and Chief Executive Officer; David Crane,
Executive Vice President and Chief Operating Officer; Charles W. (Todd)
Johnson, Senior Vice President-Development and Managed Care; and Richard J.
Post, Chief Financial Officer, Secretary and Treasurer (together, the
"Management Group") are participating in the transaction, will remain the
executive officers of the Company immediately following the Merger and will
become the executive officers of the Parent. Mr. Puckett and Mr. Crane will
become directors of the Parent. The Management Group, the KKR Partnership and
the WCAS Investors are sometimes referred to together as the "Investor Group."
Immediately prior to the Effective Time (as defined below), certain
parties will contribute to the Parent shares of Common Stock or options to
purchase Common Stock in exchange for shares of common stock or stock options
of the Parent as follows:
o The Management Group. Each member of the Management Group has agreed to
contribute to the Parent in kind at least 50% of the value of his equity
interest in MedCath, including both shares of Common Stock and the
difference between $19 per share and the exercise prices of his MedCath
stock options times the number of shares issuable upon exercise of such
options (the "Aggregate Unrealized Gain"). In exchange for shares of
Common Stock contributed, each member of the Management Group will receive
shares of common stock of the Parent. In exchange for MedCath stock
options, each member of the Management Group will receive similar options,
which will be fully vested and immediately exercisable, with the same
Aggregate Unrealized Gain to purchase shares of common stock of the
Parent.
o The WCAS Investors. Certain of the WCAS Investors, including two
non-management members of MedCath's Board of Directors, Patrick J. Welsh
and Andrew M. Paul (the "WCAS Directors"), have also agreed to contribute
to the Parent a portion of their shares of Common Stock in exchange for
shares of the Parent.
o The Physicians. The approximately 80 physicians who own shares of Common
Stock issued to them in connection with the Company's acquisition of
contracts to manage their practices (the "Physicians") will be
individually offered
<PAGE>
the opportunity to contribute to the Parent up to 50% of their shares of
Common Stock (or, in the case of two of the Physicians, 100% of their
shares) in exchange for shares of common stock of the Parent.
o The Employees. All of the approximately 30 employees of MedCath (not
including members of the Management Group) who hold options to purchase
shares of Common Stock (the "Employees") will individually be offered the
opportunity to exchange their existing options for options to purchase
shares of common stock of the Parent. The new options will be fully vested
at the time of grant and will have the same Aggregate Unrealized Gain as
the canceled options to purchase Common Stock.
The Board of Directors of the Parent will reserve shares of the Parent's
common stock representing 15% of the fully diluted equity of the Parent for the
grant after consummation of the Merger of stock options at an exercise price of
$19 per share (the "New Options"). It is anticipated that the Management Group
will receive a substantial portion of the New Options, which will vest as
described under "SPECIAL FACTORS -- Conflicts of Interest."
If the Merger is consummated, the Management Group, the WCAS Investors and
the Physicians will not receive any cash in the Merger for the shares of Common
Stock contributed to the Parent. Similarly, the Management Group and the
Employees will not receive any cash in the Merger for the Aggregate Unrealized
Gain on the options to purchase shares of Common Stock that they exchange for
options to purchase shares of common stock of the Parent. Instead, they will
all receive equity interests in the Parent and will continue to have indirect
ownership interests in MedCath following the Merger. The Management Group, the
WCAS Investors and the Physicians will, however, receive cash in the Merger on
the same terms as other MedCath shareholders for the shares of Common Stock
that they do not contribute to the Parent. The Management Group and the
Employees will also receive cash for the Aggregate Unrealized Gain on any stock
options that they do not exchange for similar options to purchase shares of
common stock of the Parent.
The aggregate consideration payable in the Merger, excluding fees and
expenses, is approximately $242 million. The amount to be paid in cash will be
reduced by the aggregate value of the equity interests in MedCath that the
Management Group, the WCAS Investors, the Physicians and the Employees
contribute to the Parent.
Approval of the Merger at the Special Meeting will require the affirmative
vote of the holders of a majority of the outstanding shares of Common Stock
entitled to vote at the Special Meeting. Shareholders (including the Management
Group, the other executive officers of MedCath, the WCAS Investors, WCAS V and
the members of the Special Committee) who, as of the record date, beneficially
owned approximately 23% of the outstanding shares of Common Stock have either
agreed to or expressed their intention to vote their shares for approval of the
Merger.
The consummation of the Merger is subject to a number of conditions.
Accordingly, even if shareholders approve the Merger, there can be no assurance
that the Merger will be consummated. This Proxy Statement, the Notice of
Special Meeting and the enclosed proxy card are first being mailed to
shareholders of the Company on or about June , 1998.
The Merger has not been approved or disapproved by the Securities and
Exchange Commission nor has the Commission passed upon the fairness or merits
of the Merger nor upon the accuracy or adequacy of the information contained in
this document. Any representation to the contrary is unlawful.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION .............................................. iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE .................... iv
SUMMARY ............................................................ 1
Date, Time and Place of the Special Meeting ..................... 1
Purpose of the Special Meeting .................................. 1
Record Date and Quorum .......................................... 1
Vote Required ................................................... 1
Parties to the Merger ........................................... 1
The Merger ...................................................... 3
Effective Time of the Merger and Payment for Shares ............. 3
The Special Committee's and Board's Recommendation .............. 3
Opinion of Financial Advisor .................................... 3
Purpose and Reasons of the Affiliates for the Merger ............ 4
Position of the Affiliates as to Fairness of the Merger ......... 4
Conflicts of Interest ........................................... 4
Certain Effects of the Merger ................................... 6
Conditions to the Merger, Termination and Expenses .............. 6
Federal Income Tax Consequences ................................. 8
Rights of Dissenting Shareholders ............................... 8
Accounting Treatment ............................................ 8
Financing of the Merger ......................................... 8
Market Prices of Common Stock and Dividends ..................... 8
SELECTED CONSOLIDATED FINANCIAL DATA ............................... 9
SPECIAL FACTORS .................................................... 11
Background of the Merger ........................................ 11
The Special Committee's and the Board's Recommendation .......... 18
Opinion of Financial Advisor .................................... 22
Purpose and Reasons of the Affiliates for the Merger ............ 25
Position of the Affiliates as to Fairness of the Merger ......... 26
Conflicts of Interest ........................................... 26
Certain Effects of the Merger ................................... 30
Conduct of MedCath's Business After the Merger .................. 30
Certain Forward Looking Information ............................. 30
THE SPECIAL MEETING ................................................ 31
Proxy Solicitation .............................................. 31
Record Date and Quorum Requirement .............................. 31
Voting Procedures ............................................... 31
Voting and Revocation of Proxies ................................ 31
Effective Time .................................................. 31
THE MERGER ......................................................... 32
Conversion of Securities ........................................ 32
Cash-out of MedCath Stock Options ............................... 32
Transfer of Shares .............................................. 32
Conditions ...................................................... 32
Representations and Warranties .................................. 33
Covenants ....................................................... 34
Nonsolicitation Covenant ........................................ 35
Indemnification and Insurance ................................... 35
Expenses ........................................................ 35
Termination, Amendment and Waiver ............................... 36
Termination Fee ................................................. 36
Financing ....................................................... 37
</TABLE>
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<TABLE>
<S> <C>
Expenses of the Transaction .............................................. 38
Regulatory Approvals ..................................................... 38
Accounting Treatment ..................................................... 38
RIGHTS OF DISSENTING SHAREHOLDERS ........................................... 38
FEDERAL INCOME TAX CONSEQUENCES ............................................. 40
BUSINESS OF THE COMPANY ..................................................... 41
Overview ................................................................. 41
Hospital Division ........................................................ 41
Practice Management Division ............................................. 42
Diagnostics Division ..................................................... 43
CERTAIN FORWARD LOOKING INFORMATION ......................................... 44
The June Projection ...................................................... 44
The December Projection .................................................. 45
The March Projection ..................................................... 46
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT .................... 47
CERTAIN INFORMATION CONCERNING THE PARENT, THE ACQUIROR AND OTHER AFFILIATES 48
SHAREHOLDER PROPOSALS ....................................................... 49
INDEPENDENT AUDITORS ........................................................ 50
OTHER MATTERS ............................................................... 50
</TABLE>
APPENDICES
<TABLE>
<S> <C>
APPENDIX A -- The Agreement and Plan of Merger ........................................ A-1
APPENDIX B -- Opinion of Goldman, Sachs & Co. ......................................... B-1
APPENDIX C -- Text of Chapter 55, Article 13 of the General Statutes of North Carolina C-1
</TABLE>
ii
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements, and other information filed with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549 and at the
following Regional Offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.
Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission, including the Company. The same information
is also available on the Internet at http://www.FreeEDGAR.com.
The Company, the Parent, the Acquiror, the Management Group, WCAS VII and
the WCAS Directors (the "Affiliates") have filed a Schedule 13E-3 with the
Commission with respect to the transactions contemplated by the Merger
Agreement. As permitted by the rules and regulations of the Commission, this
Proxy Statement omits certain information contained in the Schedule 13E-3. The
Schedule 13E-3, including any amendments and exhibits filed or incorporated by
reference as a part thereof, is available for inspection or copying as set
forth above. Statements contained in this Proxy Statement or in any document
incorporated herein by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete and in each
instance reference is made to such contract or other document filed as an
exhibit to the Schedule 13E-3 or such other document, and each such statement
shall be deemed qualified in its entirety by such reference.
No person has been authorized to give any information or make any
representation in connection with the solicitation of proxies made hereby other
than those contained or incorporated by reference in this Proxy Statement, and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company, the Parent or the Acquiror. This Proxy
Statement does not constitute a solicitation of a proxy in any jurisdiction
where, or to or from any person to whom, it is unlawful to make such proxy
solicitation in such jurisdiction. The delivery of this Proxy Statement shall
not, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained or incorporated by reference herein is correct as of any
time subsequent to its date.
iii
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the
Company (File No. 0-25176) pursuant to the Exchange Act are incorporated herein
by this reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (as amended by Form 10-K/A-3 filed June , 1998);
2. The Company's Current Report on Form 8-K dated March 23, 1998;
3. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1997 (as amended by Form 10-Q/A filed June , 1998); and
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998 (as amended by Form 10-Q/A filed June , 1998).
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the date of the Special Meeting are hereby incorporated by
reference into this Proxy Statement and shall be deemed a part hereof from the
date of filing such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Proxy Statement.
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. Such documents (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference)
are available, without charge, to any person, including any beneficial owner,
to whom this Proxy Statement is delivered, on written request to the Company at
7621 Little Avenue, Suite 106, Charlotte, North Carolina 28226, Attention:
Richard J. Post, Secretary. Such documents will be provided to such person by
first class mail or other equally prompt means within one business day of
receipt of such request. In order to ensure delivery of the documents prior to
the Special Meeting, requests should be received by June , 1998.
iv
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. Reference is made to, and this Summary is qualified in
its entirety by, the more detailed information contained elsewhere or
incorporated by reference in this Proxy Statement. Shareholders are urged to
read this Proxy Statement and its appendices in their entirety before voting.
Date, Time and Place of the Special Meeting
A Special Meeting of Shareholders (the "Special Meeting") of MedCath
Incorporated (the "Company" or "MedCath") will be held on July 22, 1998, at
10:00 a.m., local time, at Raintree Country Club, located at 8600 Raintree
Lane, Charlotte, North Carolina.
Purpose of the Special Meeting
At the Special Meeting, the shareholders of the Company will consider and
vote on a proposal to approve an Agreement and Plan of Merger (the "Merger
Agreement"), which is attached to this Proxy Statement as Appendix A, pursuant
to which MCTH Acquisition, Inc. (the "Acquiror"), a newly-formed North Carolina
corporation which is a wholly-owned subsidiary of MedCath Holdings, Inc., a
newly-formed Delaware corporation (the "Parent"), would merge with and into
MedCath (the "Merger"), which would be the surviving corporation in the Merger,
and each outstanding share of common stock, $.01 par value, of MedCath (the
"Common Stock"), other than shares held by shareholders who are entitled to and
who have perfected their Dissenters' Rights (as defined below) and shares held
by the Acquiror will be converted automatically into the right to receive $19
in cash payable to the holders thereof, without interest (the "Cash Merger
Consideration"). See "THE MERGER."
Record Date and Quorum
The Board of Directors of the Company (the "Board") has fixed the close of
business on June 22, 1998 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the
Special Meeting and any adjournment or adjournments thereof. Each holder of
record of Common Stock at the close of business on the Record Date is entitled
to one vote for each share then held on each matter submitted to a vote of
shareholders. At the close of business on the Record Date, there were
11,813,404 shares of Common Stock outstanding. The holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting must
be present in person or represented by proxy to constitute a quorum for the
transaction of business. See "THE SPECIAL MEETING."
Vote Required
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Special Meeting is required to
approve the Merger Agreement. Thus, a failure to vote or a vote to abstain will
have the same legal effect as a vote cast against approval. In addition,
brokers who hold shares of Common Stock as nominees will not have discretionary
authority to vote such shares in the absence of instructions from the
beneficial owners. A broker non-vote will have the same effect as a vote
against the Merger. See "THE SPECIAL MEETING -- Voting Procedures."
Shareholders (including the Management Group, the other executive officers
of MedCath, the WCAS Investors, WCAS V, and the members of the Special
Committee) who as of the record date owned 2,772,835, or approximately 23%, of
the outstanding shares of Common Stock have either agreed or expressed their
intention to vote their shares for approval of the Merger. Holders of 9,040,569
shares of Common Stock, or approximately 77%, of the outstanding shares of
Common Stock, remain uncommitted with respect to how they will vote on the
Merger. Accordingly, the affirmative vote by holders of Common Stock
representing approximately 3,133,868 of such uncommitted shares, or
approximately 27% of the outstanding shares, will be required to approve the
Merger.
Parties to the Merger
The Company
The Company is a provider of cardiology and cardiovascular services
through the development, operation and management of specialized cardiac
facilities and the management of physician practices. The Company operates four
specialty heart hospitals: The McAllen Heart Hospital in McAllen, Texas (which
opened in January 1996), the Arkansas Heart Hospital in Little Rock, Arkansas
(which opened in March 1997), the Tucson Heart Hospital in Tucson, Arizona
(which opened in
1
<PAGE>
October 1997) and the Arizona Heart Hospital in Phoenix, Arizona (which opened
in June 1998). (These hospitals are sometimes referred to in this Proxy
Statement as "McAllen," "Little Rock," "Tucson" and "Phoenix" respectively.)
The Company has four additional heart hospitals under development. (The
Company's existing and planned heart hospitals are referred to in this Proxy
Statement as "Heart Hospitals.") The Company also manages six medical practices
comprising approximately 115 physicians, manages eight fixed-site cardiac
diagnostic and therapeutic centers, and owns and operates 23 mobile cardiac
catheterization laboratories serving networks of hospitals. The principal
executive offices of the Company are located at 7621 Little Avenue, Suite 106,
Charlotte, North Carolina 28226. The Company's telephone number is (704)
541-3228. See "BUSINESS OF THE COMPANY."
The Acquiror
The Acquiror is a newly-formed North Carolina corporation organized at the
direction of the Parent for the sole purpose of effecting the Merger and has
not conducted any prior business. The principal executive offices of the
Acquiror are located at 2800 Sand Hill Road, Suite 200, Menlo Park, California
94025. The Acquiror's telephone number is (650) 233-6560.
The Parent
The Parent is a newly-formed Delaware corporation organized at the
direction of the KKR Partnership and WCAS VII, each of which is a private
investment partnership. See "CERTAIN INFORMATION CONCERNING THE PARENT, THE
ACQUIROR AND OTHER AFFILIATES." Prior to the consummation of the Merger,
certain members of the Investor Group will contribute to the Parent shares of
Common Stock or options to purchase Common Stock in exchange for shares of
common stock or stock options of the Parent as follows:
o The KKR Partnership. The KKR Partnership will contribute up to
approximately $106 million in cash, provided that such contribution is
subject to reduction by an amount equal to one-half of the Aggregate
Unrealized Gain on the stock options contributed to the Parent by the
Employees.
o The WCAS Investors. The WCAS Investors will contribute an aggregate of
262,474 shares of Common Stock (valued at $19 per share with an aggregate
value of approximately $5 million), plus approximately $101 million of
cash, such that the total amount of the WCAS Investors' contribution to
the Parent is equal to approximately $106 million; provided that the cash
portion of such contribution is subject to reduction by an amount equal
to (i) the aggregate value (at $19 per share) of the shares of Common
Stock contributed to the Parent by the Physicians and (ii) one-half of
the Aggregate Unrealized Gain on the stock options contributed to the
Parent by the Employees. The WCAS Investors include WCAS VII, WCAS
Healthcare Partners, L.P., a private investment limited partnership, and
13 individuals who are affiliates of WCAS VII or have a business
relationship with WCAS VII.
o The Management Group. Each member of the Management Group has agreed to
contribute to the Parent in kind at least 50% of the value of his equity
interest in MedCath, including both shares of Common Stock and the
difference between $19 per share and the exercise prices of his MedCath
stock options times the number of shares issuable upon exercise of such
options (the "Aggregate Unrealized Gain"). In exchange for shares of
Common Stock contributed, each member of the Management Group will
receive shares of common stock of the Parent. In exchange for MedCath
stock options, each member of the Management Group will receive similar
options, which will be fully vested and immediately exercisable, with the
same Aggregate Unrealized Gain to purchase shares of common stock of the
Parent. The members of the Management Group are the following executive
officers of MedCath: Stephen R. Puckett, Chairman of the Board, President
and Chief Executive Officer; David Crane, Executive Vice President and
Chief Operating Officer; Charles W. (Todd) Johnson, Senior Vice President
-- Development and Managed Care; and Richard J. Post, Chief Financial
Officer, Secretary and Treasurer. Following consummation of the Merger,
the current executive officers of MedCath will retain their positions
with MedCath and become the executive officers of the Parent.
o The Physicians. The approximately 80 physicians who own shares of Common
Stock issued to them in connection with the Company's acquisition of
contracts to manage their practices (the "Physicians") will be
individually offered the opportunity to contribute to the Parent up to
50% of their shares of Common Stock (or, in the case of two of the
Physicians, 100% of their shares) in exchange for shares of common stock
of the Parent.
o The Employees. All of the approximately 30 employees of MedCath (not
including members of the Management Group) who hold options to purchase
shares of Common Stock (the "Employees") will individually be offered the
opportunity to exchange their existing options for options to purchase
shares of common stock of the Parent. The
2
<PAGE>
new options will be fully vested at the time of grant and will have the
same Aggregate Unrealized Gain as the canceled options to purchase Common
Stock.
The executive offices of the Parent are located at 2800 Sand Hill Road, Suite
200, Menlo Park, California 94025. The Parent's telephone number is (650)
233-6560.
The Merger
The Merger Agreement provides that subject to satisfaction of certain
conditions, the Acquiror will be merged with and into MedCath, and that
following the Merger, the separate existence of the Acquiror will cease and
MedCath will continue as the surviving corporation and a wholly-owned
subsidiary of the Parent. At the effective time of the Merger, which shall be
the date and time of filing of Articles of Merger with the Secretary of State
of the State of North Carolina (the "Effective Time"), and subject to the terms
and conditions set forth in the Merger Agreement, each share of issued and
outstanding Common Stock (other than shares as to which Dissenters' Rights (as
defined below) are properly perfected and not withdrawn and shares held by the
Acquiror) will, by virtue of the Merger, be canceled and converted into the
right to receive $19 in cash, without interest (the "Cash Merger
Consideration"). As a result of the Merger, MedCath's Common Stock will no
longer be publicly traded and will be 100% owned by the Parent. See "THE
MERGER."
Effective Time of the Merger and Payment for Shares
The Effective Time is currently expected to occur as soon as practicable
after the Special Meeting, subject to approval of the Merger Agreement at the
Special Meeting and satisfaction or waiver of the terms and conditions of the
Merger Agreement. See " -- Conditions to the Merger, Termination and Expenses"
and "THE MERGER -- Conditions." Detailed instructions with regard to the
surrender of share certificates, together with a letter of transmittal, will be
forwarded to shareholders by the Company's transfer agent, LaSalle National
Bank (the "Disbursing Agent"), promptly following the Effective Time.
Shareholders should not submit their certificates to the Disbursing Agent until
they have received such materials. The Disbursing Agent will send payment of
the Cash Merger Consideration to shareholders as promptly as practicable
following receipt by the Disbursing Agent of their certificates and other
required documents. No interest will be paid or accrued on the cash payable
upon the surrender of certificates. See "THE MERGER -- Conversion of
Securities." Shareholders should not send any share certificates at this time.
The Special Committee's and Board's Recommendation
In July 1997, because of the possibility of a sale of the Company in a
transaction in which management and the WCAS Directors might have a continuing
financial interest, the Board appointed a committee of disinterested directors
to review and evaluate the Company's strategic options, including a possible
sale of the Company (the "Special Committee"). Based on the factors set forth
in this Proxy Statement (see "SPECIAL FACTORS -- The Special Committee's and
the Board's Recommendation"), the Special Committee unanimously recommended to
the Board that the Merger Agreement be approved and that it be recommended to
the shareholders of the Company. Following the unanimous recommendation of the
Special Committee, the Board approved the Merger Agreement and recommended that
the shareholders of the Company approve the Merger Agreement. In connection
with the foregoing, the Special Committee and the Board determined that the
Merger is substantively and procedurally fair to the shareholders of the
Company other than the Investor Group. The Special Committee and the Board each
reconfirmed, as of the date of this Proxy Statement, that the Merger is
substantively and procedurally fair to the shareholders of the Company other
than the Investor Group. At the meetings of the Board at which the Merger
Agreement was considered, all directors other than the members of the Special
Committee either abstained from voting or absented themselves from the meeting
due to their conflicts of interests. See "SPECIAL FACTORS -- Conflicts of
Interest." In connection with their recommendations, the Special Committee and
the Board each adopted the analyses and findings of the Special Committee's
financial advisor, Goldman, Sachs & Co. See "SPECIAL FACTORS -- Opinion of
Financial Advisor." The Special Committee and the Board recommend that the
shareholders vote "For" the approval of the Merger Agreement.
Opinion of Financial Advisor
Goldman, Sachs & Co. ("Goldman Sachs") provided its oral opinion to the
Special Committee on March 12, 1998 that, as of the date of such opinion, the
Cash Merger Consideration pursuant to the Merger Agreement was fair from a
financial point of view to the holders of the outstanding shares of Common
Stock (excluding the Investor Group). Goldman Sachs subsequently confirmed its
earlier opinion by delivery of its written opinion dated the date hereof.
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<PAGE>
The full text of the written opinion of Goldman Sachs, which sets forth
assumptions made, matters considered and limitations on the review undertaken
in connection with the opinion, is attached hereto as Appendix B and is
incorporated herein by reference. The opinion of Goldman Sachs referred to
herein does not constitute a recommendation as to how any holder of such shares
should vote with respect to the Merger. Holders of shares of Common Stock are
urged to, and should, read such opinion in its entirety. See "SPECIAL FACTORS
- -- Opinion of Financial Advisor."
The Company has agreed to pay Goldman Sachs, contingent upon consummation
of the Merger, a transaction fee of 1% of the aggregate consideration (the
total value of the Common Stock valued at $19 per share plus the outstanding
debt of MedCath assumed by Acquiror), subject to a minimum of $3.25 million.
The Company has agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorneys' fees, and to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.
Purpose and Reasons of the Affiliates for the Merger
The purpose of the Parent, the Acquiror, the members of the Management
Group, WCAS VII and the WCAS Directors (the "Affiliates") for engaging in the
transactions contemplated by the Merger Agreement is to acquire, together with
any participating Physicians and Employees, up to 100% of the ownership of the
Company. The Affiliates believe that as a private company MedCath will have
greater operating flexibility to focus on enhancing value by emphasizing growth
and operating cash flow without the constraint of the public market's emphasis
on quarterly earnings and the potentially disruptive effect associated with
losses in connection with the construction and start-up of new Heart Hospitals.
The members of the Management Group beneficially own, in the aggregate,
approximately 15.2% of the outstanding Common Stock. The two WCAS Directors may
be deemed to beneficially own, in the aggregate, approximately 8.2% and 7.7%,
respectively, of the outstanding Common Stock, including 7.5% that is held of
record by WCAS V. See "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF
MANAGEMENT."
Prior to consummation of the Merger, members of the Management Group have
agreed to contribute a portion of their equity interests in MedCath to the
Parent, representing an investment of approximately $17 million in the Parent
(based on the $19 per share to be received by shareholders in the Merger), in
exchange for 668,016 shares of common stock of the Parent and options to
purchase 294,767 shares of common stock of the Parent. The WCAS Investors have
agreed to contribute an aggregate of 262,474 shares of Common Stock to the
Parent (of which 88,385 will be contributed by the WCAS Directors) in exchange
for an equivalent number of shares of common stock of the Parent.
As a result of the Merger, the KKR Partnership will acquire, indirectly
through the Parent for an investment of up to approximately $106 million, up to
approximately 46% of the equity interest in the Company; the WCAS Investors
will acquire, indirectly through the Parent for an investment of up to
approximately $106 million, up to approximately 46% of the equity interest in
the Company, and the Management Group will acquire, indirectly through the
Parent for an investment in kind of approximately $17 million of their equity
interest in MedCath, approximately 8% of the equity interest in the Company.
See "SPECIAL FACTORS -- Background of the Merger." Members of the Management
Group and the WCAS Investors will also receive the Cash Merger Consideration
for the remainder of their investment in the Company on the same terms as other
shareholders.
Position of the Affiliates as to Fairness of the Merger
Each of the Affiliates has considered the analyses and findings of the
Special Committee and the Board (described in detail in "SPECIAL FACTORS -- The
Special Committee's and the Board's Recommendation") with respect to the
fairness of the Merger to the unaffiliated shareholders of the Company. As of
the date of this Proxy Statement, each of the Affiliates adopts the analyses
and findings of the Special Committee and the Board with respect to the
fairness of the Merger and believes that the Merger is both procedurally and
substantively fair to the Company's unaffiliated shareholders; provided that no
opinion is expressed as to the fairness to any shareholder making an investment
in the Parent. None of the Affiliates makes any recommendation as to how the
Company's shareholders should vote on the Merger Agreement. See "SPECIAL
FACTORS -- Position of the Affiliates as to Fairness of the Merger." The WCAS
Directors have financial interests in the Merger and the members of the
Management Group have financial and employment interests in the Merger. See
"SPECIAL FACTORS -- Conflicts of Interest."
Conflicts of Interest
In considering the recommendation of the Board with respect to the Merger,
shareholders should be aware that certain officers and directors of MedCath and
affiliates of these officers and directors have interests in connection with
the Merger
4
<PAGE>
which may present them with actual or potential conflicts of interest, which
are described in more detail under "SPECIAL FACTORS -- Conflicts of Interest."
The Management Group. After consummation of the Merger, members of the
Management Group will own shares of common stock of the Parent, and fully
vested options to purchase such shares, representing approximately 8% of such
shares expected to be then issued and outstanding (assuming exercise of such
options). The Parent, the KKR Partnership and WCAS VII have also agreed with
the Management Group that the Parent will reserve for issuance, pursuant to
future grants of additional options, shares of common stock of the Parent
representing 15% of the fully diluted equity of the Parent. It is contemplated
that members of the Management Group will receive a substantial portion of such
option grants. In addition, the Management Group will become executive officers
of the Parent and will designate two persons, Stephen R. Puckett and David
Crane, to serve on the Board of the Parent immediately following the Merger. As
a condition to the Merger Agreement, the members of the Management Group have
entered into a voting agreement with the Acquiror and the Parent pursuant to
which they have agreed to vote their shares of Common Stock in favor of the
Merger.
Shares of Common Stock held by the Management Group that are not
contributed to the Parent will be converted into the right to receive the same
Cash Merger Consideration as shares of Common Stock held by other shareholders
of MedCath. Options to purchase shares of Common Stock held by the members of
the Management Group that are not exchanged for similar options to purchase
shares of common stock of the Parent will be converted into the right to
receive a cash payment equal to the Aggregate Unrealized Gain on such stock
options. See "THE MERGER -- Cash-out of MedCath Stock Options."
The members of the Management Group will, upon consummation of the Merger,
enter into new employment agreements with the Parent replacing their existing
employment agreements with MedCath. The new employment agreements will provide
for the payment to them of base salaries, possible annual cash bonuses,
potential severance benefits and a separate payment in respect of the
termination of their previously existing employment agreements. The base
salaries for each of Stephen R. Puckett, David Crane, Charles W. (Todd) Johnson
and Richard J. Post pursuant to each of their employment agreements will
initially remain at their current levels of $375,680, $263,172, $189,996 and
$157,992, respectively. The potential annual cash bonuses for each of the
members of the Management Group pursuant to each of their employment agreements
will equal a percentage of each of their base salaries, be calculated using a
bonus formula comparable to the bonus formula in effect immediately prior to
the Merger, and will depend upon the Company meeting or exceeding certain
performance targets to be established yearly by the Board.
The consummation of the Merger will constitute a "change of control"
triggering severance payment obligations under their existing employment
agreements. In connection with entering into their new employment agreements,
each member of the Management Group has agreed to waive any rights and forego
any severance payments that he may have under his current employment agreement
or that he might otherwise be entitled to upon a "change of control" of the
Company in consideration of the payments to be received pursuant to the new
employment agreements described immediately below. If they had not agreed to
forego such payments, then Stephen R. Puckett, David Crane, Charles W. (Todd)
Johnson and Richard J. Post would have been entitled to receive $778,342,
$613,326, $530,155 and $441,982 respectively, under their current employment
agreements upon the occurrence of a "Change of Control." See "SPECIAL FACTORS
- -- Conflicts of Interest."
Each member of the Management Group will be entitled under his new
employment agreement to a separate payment in respect of the termination of his
previously existing employment agreement and a separate payment in respect of a
covenant not to compete. The amounts of such payments to be received by each
member of the Management Group immediately after consummation of the Merger are
set forth in the table below.
<TABLE>
<CAPTION>
Management Group Member Termination Payment Non-Compete Payment
- ---------------------------------- --------------------- --------------------
<S> <C> <C>
Stephen R. Puckett $378,342 $400,000
David Crane 298,326 315,000
Charles W. (Todd) Johnson 265,155 265,000
Richard J. Post 221,982 220,000
</TABLE>
After consummation of the Merger, the Parent and the members of the
Management Group will enter into a stockholders' agreement that will restrict
the Management Group's ability to transfer the shares of common stock of the
Parent to be owned by them. The agreement will give them (or their estates) the
right in certain events to sell, and will obligate the Parent to purchase,
their shares of common stock of the Parent. The agreement will also grant them
certain registration rights for their shares of the Parent and will further
give the Parent the right to call their shares at a specified price upon the
occurrence of certain events.
5
<PAGE>
The WCAS Directors. After consummation of the Merger, the WCAS Directors
may be deemed to beneficially own approximately 44% of the shares of common
stock of the Parent expected to be then issued and outstanding (including
approximately 43% that will be held of record by WCAS VII, which the WCAS
Directors and certain of the other individual WCAS Investors may be deemed to
indirectly beneficially own). In addition, the WCAS Investors will designate
three persons to serve on the Board of Directors of the Parent following the
Merger.
Upon consummation of the Merger, MedCath will pay a financial advisory fee
to WCA Management Corporation, the investment adviser to WCAS VII and related
funds ("WCA Management"), of not more than $2.5 million. In addition, MedCath
will pay WCA Management a monitoring fee annually in an amount to be determined
after consummation of the Merger.
The Special Committee. The members of the Special Committee will receive a
payment for their shares of Common Stock and the Aggregate Unrealized Gain on
such options in the aggregate amount of $1,212,750 upon consummation of the
Merger. As compensation for serving on the Special Committee, which met more
than 20 times from July 1997 through the date of this Proxy Statement, the
members of the Special Committee each received fees in the amount of $20,000,
which were paid pursuant to the Board's policy for compensation of directors
for attendance at committee meetings. Members of the Special Committee will be
entitled to certain indemnification rights granted under the Merger Agreement
to the current and former directors and officers of the Company. See "SPECIAL
FACTORS -- Conflicts of Interest."
Indemnification Rights. The Merger Agreement provides that the current and
former directors and officers of the Company (including the members of the
Special Committee) will be indemnified by the Company, to the full extent
permitted by applicable law, against all liabilities (including reasonable
attorneys' fees) relating to actions or omissions arising out of such directors
or officers being a director, officer, employee or agent of the Company at or
prior to the Effective Time (including the transactions contemplated by the
Merger Agreement). In addition, the directors and executive officers of the
Company will be provided with continuing directors' and officers' liability
insurance coverage following the Merger, subject to certain limitations. See
"SPECIAL FACTORS -- Conflicts of Interest."
Certain Effects of the Merger
As a result of the Merger, the entire equity interest in the Company will
be owned (indirectly through the Parent) by the Investor Group and by the
Physicians and the Employees who elect to invest in the Parent. The public
shareholders will no longer have any interest in, and will not be shareholders
of, MedCath, and therefore will not participate in MedCath's future earnings
and potential growth. Instead, the public shareholders will have the right to
receive $19 in cash, without interest, for each share held (other than shares
in respect of which Dissenters' Rights (as defined below) have been perfected).
An equity investment in the Company (indirectly through an equity investment in
the Parent) following the Merger involves substantial risk resulting from the
limited liquidity of any such investment and the leverage resulting from the
future borrowings that will be required to fund the substantial capital
expenditures necessary to execute the Company's business strategy. Nonetheless,
if the Company successfully executes its business strategy, the value of such
an equity investment would be considerably greater than the original cost
thereof. See "SPECIAL FACTORS -- Conflicts of Interest" and "CERTAIN FORWARD
LOOKING INFORMATION."
In addition, the Common Stock will no longer be traded on the Nasdaq
National Market and price quotations with respect to sales of shares in the
public market will no longer be available. The registration of the Common Stock
under the Exchange Act will terminate, and this termination will eliminate the
Company's obligation to file periodic financial and other information with the
Commission and will make most other provisions of the Exchange Act
inapplicable. See "SPECIAL FACTORS -- Certain Effects of the Merger."
Conditions to the Merger, Termination and Expenses
Each party's obligation to effect the Merger is subject to satisfaction of
a number of conditions, each of which may be waived by a specified party or
parties (to the extent permitted by law), including with respect to one or both
parties: (i) the Merger Agreement shall have been approved by holders of a
majority of the outstanding shares of Common Stock, (ii) all required consents
and approvals shall have been obtained, (iii) the Acquiror shall have obtained
financing on terms satisfactory to it, (iv) the representations and warranties
of the parties shall be true and correct in all material respects as of the
Effective Time except as contemplated by the Merger Agreement, and (v) neither
MedCath nor any of its subsidiaries shall be under investigation for any
violation of the "Stark" laws, anti-kickback laws or the laws relating to
Medicare, Medicaid, CHAMPUS, or any rules or regulations related thereto. Any
or all of the conditions that have not been satisfied may be waived (other than
the condition that the Merger Agreement shall have been approved by holders of
a majority of the outstanding shares of Common Stock). After approval of the
Merger Agreement by the shareholders of MedCath, however, no
6
<PAGE>
condition may be waived which reduces the amount or changes the form of the
Cash Merger Consideration to be received by the shareholders or that would
adversely affect the shareholders of MedCath unless a waiver of such condition
is approved by the shareholders. If, after the Special Meeting is held and the
shareholders approve the Merger Agreement, the members of the Company's Board
of Directors, in the exercise of their fiduciary duties and applying the
foregoing standard, determine that any proposed amendment or waiver of a
provision in the Merger Agreement (including any of the conditions to closing)
requires the approval of the Company's shareholders, the Board of Directors
will schedule another Special Meeting and resolicit proxies from the Company's
shareholders. See "THE MERGER -- Conditions." Even if the shareholders approve
the Merger Agreement, there can be no assurance that the Merger will be
consummated.
At any time prior to the Effective Time, the Merger Agreement may be
terminated by the mutual consent of the Board and the Board of Directors of the
Acquiror. In addition, any of the parties may terminate the Merger Agreement
prior to the Effective Time if (i) the conditions precedent to effecting the
Merger have not occurred on or before August 31, 1998 (which failure to become
effective shall not be the result primarily of the breach of any
representation, warranty or covenant by the party desiring to terminate), (ii)
the requisite approval by the shareholders of MedCath has not been obtained, or
(iii) a court or other governmental entity permanently enjoins, restrains or
prohibits the Merger and such action is final and non-appealable. See "THE
MERGER -- Termination, Amendment and Waiver."
The Merger Agreement may be terminated by the Acquiror prior to the
Effective Time by written notice to MedCath if (i) MedCath breaches any
representation, warranty or covenant and fails to cure such breach within
thirty days after written notice, (ii) the Board withdraws or modifies its
approval or recommendation of the Merger Agreement or the Merger, (iii) MedCath
enters into a definitive agreement with any party regarding an Acquisition
Proposal (as defined below), or (iv) a third party commences a tender or
exchange offer for 25% or more of the Common Stock and the Board has
recommended that MedCath's shareholders tender their shares in connection with
such offer.
An "Acquisition Proposal" is defined under the Merger Agreement to include
any offer or proposal by any corporation, partnership, person or other entity
or group concerning any tender or exchange offer, proposal for a merger, share
exchange, recapitalization, consolidation or other business combination
involving MedCath or any of its subsidiaries or divisions, or any proposal or
offer to acquire in any manner, directly or indirectly, a significant equity
interest in, or a substantial portion of the assets, of MedCath or any of its
subsidiaries, other than pursuant to the transactions contemplated by the
Merger Agreement.
MedCath may terminate the Merger Agreement if (i) the Board or Special
Committee determines, based upon advice of counsel, that the continued
recommendation of the Merger or the Merger Agreement would violate fiduciary
duties of the Board under applicable law, (ii) the Board or Special Committee
determines that MedCath has entered into a definitive agreement with any party
regarding an Acquisition Proposal, provided the Board first determines, based
upon advice of counsel, that failing to take such action would violate the
Board's fiduciary duties under applicable law, or (iii) a third party commences
a tender or exchange offer for 25% or more of the Common Stock and the Board
has recommended that the shareholders of MedCath tender their shares in
connection with such offer, provided that the Board or Special Committee first
determines, based upon advice of counsel, that failing to take such action
would violate the Board's fiduciary duties under applicable law. See "THE
MERGER -- Termination, Amendment and Waiver."
MedCath has agreed to pay a termination fee (the "Termination Fee") in the
amount of $6,774,640 to the Acquiror in the event the Merger Agreement is
terminated by MedCath due to certain events, including (i) the Board or the
Special Committee withdrawing or modifying its approval or recommendation of
the Merger Agreement or the Merger in connection with the exercise of its
fiduciary duties, (ii) MedCath entering into a definitive agreement with any
party with respect to an Acquisition Proposal following a determination that
the Company's failure to do so would violate the Board's fiduciary duties or
(iii) the commencement by a third party of a tender offer for 25% or more of
the Common Stock which the Board has recommended to MedCath's shareholders. See
"THE MERGER -- Termination Fee."
Each of the parties has agreed to pay its own costs and expenses in
connection with the Merger. In the event, however, that the Merger Agreement is
terminated due to the failure of MedCath's shareholders to approve the
transaction, MedCath has agreed to reimburse the Acquiror for its reasonable
out-of-pocket fees and expenses. See "THE MERGER -- Expenses" and " --
Termination Fee."
7
<PAGE>
Federal Income Tax Consequences
The receipt of the Cash Merger Consideration by holders of Common Stock
pursuant to the Merger will be a taxable transaction for federal income tax
purposes. All holders of Common Stock are urged to consult their tax advisors
to determine the effect of the Merger on such holders under federal, state,
local and foreign tax laws. See "FEDERAL INCOME TAX CONSEQUENCES."
Rights of Dissenting Shareholders
Any shareholder of MedCath who does not vote in favor of the proposal to
approve the Merger Agreement and who complies strictly with the applicable
provisions of Article 13 of Chapter 55 of the North Carolina General Statutes
("Article 13") has the right to dissent and be paid cash for the "fair value"
for such holder's shares of Common Stock ("Dissenters' Rights"). The applicable
provisions of Article 13 are attached to this Proxy Statement as Appendix C. To
perfect Dissenters' Rights with respect to the Merger, a MedCath shareholder
must follow the procedures set forth therein precisely. Those procedures are
summarized in this Proxy Statement under "RIGHTS OF DISSENTING SHAREHOLDERS."
Shares of Common Stock held by persons properly exercising Dissenters'
Rights (the "Dissenting Shares") will not be converted into the Cash Merger
Consideration in the Merger and after the Effective Time will represent only
the right to receive such consideration as is determined to be due such
dissenting shareholder pursuant to Article 13. If after the Effective Time any
dissenting shareholder fails to perfect or loses such right to payment or
appraisal under Article 13, each share of Common Stock of such shareholder
shall be treated as a share that had been converted as of the Effective Time
into the right to receive the Cash Merger Consideration.
Accounting Treatment
The Merger will be treated as a purchase business combination for
accounting purposes.
Financing of the Merger
It is estimated that approximately $260 million will be required to
consummate the Merger and pay related fees and expenses. This sum will be
provided by (i) equity contributions to the Parent of up to approximately $106
million from currently available funds by each of the KKR Partnership and the
WCAS Investors (reduced, in the case of the WCAS Investors, by the aggregate
value (at $19 per share) of the shares of Common Stock contributed to the
Parent by the WCAS Investors and by the Physicians, and, in the case of each of
the WCAS Investors and the KKR Partnership, by an amount equal to one-half of
the Aggregate Unrealized Gain on the stock options contributed to the Parent by
the Employees), (ii) a contribution in kind of approximately $17 million in
value of their equity interests in MedCath by the Management Group and (iii) a
draw of approximately $31 million under the MedCath revolving credit facility.
See "THE MERGER -- Financing."
Market Prices of Common Stock and Dividends
The Common Stock is traded on the Nasdaq National Market (symbol: MCTH).
The following table sets forth the high and low sales prices for each quarterly
period for the two most recent fiscal years and for the current fiscal year to
date.
<TABLE>
<CAPTION>
Fiscal Years Ended or Ending September 30,
-------------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- ----------------------------
High Low High Low High Low
---------- --------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter .......... $25 3/4 $ 17 $17 1/2 $12 1/8 $18 1/8 $ 13
Second Quarter ......... 30 18 1/2 16 14 18 3/8 12 3/4
Third Quarter .......... 42 5/8 10 3/4 16 12 3/8 18 9/16* 17 3/4*
Fourth Quarter ......... 19 1/4 7 3/4 20 1/4 14 5/8
</TABLE>
- ---------
* Through June , 1998
On March 12, 1998, the last trading day prior to announcement of the
execution of the Merger Agreement, the closing price per share of Common Stock
as reported by Nasdaq was $16.50. On June , 1998, the last trading day prior to
printing of this Proxy Statement, the closing price per share of Common Stock
as reported by Nasdaq was $ .
At June 22, 1998, there were holders of record of Common Stock and
approximately persons or entities holding in nominee name.
The Company has never paid any cash dividends on its Common Stock. Under
the Merger Agreement, the Company has agreed not to pay any dividends on the
Common Stock prior to the Effective Time.
In April 1996, MedCath made an underwritten public offering of 2,300,000
shares of Common Stock. The offering price per share was $28.75, and the net
proceeds received by MedCath were approximately $62.5 million.
8
<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
ended September 30, 1997, which are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements for
the five fiscal years ended September 30, 1997 have been audited by Ernst &
Young LLP, independent auditors, except that the financial statements for the
two years ended December 31, 1994 of HealthTech Corporation, a consolidated
subsidiary acquired in April 1995 in a business combination accounted for as a
pooling of interests, have been audited by other independent auditors. The
historical financial data of the Company for the six month periods ended March
31, 1997 and 1998 are derived from unaudited condensed consolidated financial
statements included in the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 1998, incorporated herein by reference. The
unaudited condensed consolidated financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the consolidated financial position and consolidated
results of operations for these periods. The data are qualified by reference
to, and should be read in conjunction with, the Consolidated Financial
Statements, related Notes and other financial information included in the
Company's Annual Report on Form 10-K (as amended) for the year ended September
30, 1997, incorporated by reference herein.
MEDCATH INCORPORATED
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
Income Statement Data (1)
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------
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
Depreciation and amortization expense ........... 2,179 2,767 3,633 6,649 12,855
Provision for doubtful accounts ................. -- -- -- 735 2,083
Marketing, general and administrative
expense ........................................ 2,601 3,492 4,438 5,408 7,037
-------- -------- -------- -------- ---------
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 weighted average share: (3)
Income before extraordinary item ............... $ 0.38 $ 0.73 $ 0.55 $ 0.53 $ 0.62
Extraordinary loss ............................. -- -- ( 0.03) -- ( 0.02)
-------- -------- --------- -------- ---------
Net income ..................................... $ 0.38 $ 0.73 $ 0.52 $ 0.53 $ 0.60
======== ======== ========= ======== =========
Shares used in computation ..................... 3,388 3,395 7,760 9,875 11,149
======== ======== ========= ======== =========
Net income per share assuming dilution: (3)
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
======== ======== ========= ======== =========
Shares used in computation ..................... 5,832 5,918 8,381 10,193 11,686
======== ======== ========= ======== =========
<CAPTION>
Six Months Ended
March 31,
-----------------------
1997 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Net revenue ..................................... $ 49,564 $ 90,511
Medical supplies, personnel and other
operating expenses ............................. 32,547 62,151
Depreciation and amortization expense ........... 4,955 10,682
Provision for doubtful accounts ................. 938 2,842
Marketing, general and administrative
expense ........................................ 3,699 4,118
-------- --------
Income from operations .......................... 7,425 10,718
Interest expense, net ........................... (279) (4,111)
Minority interest in earnings of consolidated
entities ....................................... (840) (1,758)
Equity in net earnings of unconsolidated
joint venture .................................. -- 12
-------- --------
Income before income taxes and
extraordinary item ............................. 6,306 4,861
Provision for income taxes ...................... (2,454) (1,896)
-------- --------
Income before extraordinary item ................ 3,852 2,965
Extraordinary loss .............................. -- --
-------- --------
Net income ...................................... $ 3,852 $ 2,965
======== ========
Net income per weighted average share: (3)
Income before extraordinary item ............... $ 0.35 $ 0.25
Extraordinary loss ............................. -- --
-------- --------
Net income ..................................... $ 0.35 $ 0.25
======== ========
Shares used in computation ..................... 11,141 11,669
======== ========
Net income per share assuming dilution: (3)
Income before extraordinary item ............... $ 0.33 $ 0.24
Extraordinary loss ............................. -- --
-------- --------
Net income ..................................... $ 0.33 $ 0.24
======== ========
Shares used in computation ..................... 11,667 12,286
======== ========
</TABLE>
9
<PAGE>
Balance Sheet Data
<TABLE>
<CAPTION>
September 30, March 31,
--------------------------------------------------------- ------------
1993 1994 1995 1996 1997 1998
---------- ---------- ----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash and short-term investments .................... $ 3,452 $ 5,466 $ 18,525 $ 61,693 $ 42,951 $ 18,531
Working capital .................................... 2,186 2,893 17,240 64,816 47,498 27,947
Total assets ....................................... 23,034 37,905 78,372 181,681 259,008 333,494
Long-term debt and capital leases, excluding current
maturities ........................................ 5,810 13,198 15,734 45,896 98,863 149,498
Subordinated debt .................................. 3,766 3,842 -- -- -- --
Redeemable convertible preferred stock ............. 6,763 6,763 -- -- -- --
Shareholders' equity ............................... 1,479 4,256 50,494 120,245 127,137 139,040
</TABLE>
Cash Flow and Other Data (1)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
----------------------------------------------------------- -------------------------
1993 1994 1995(2) 1996 1997 1997 1998
---------- ---------- ------------ ------------ ----------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash provided by operating activities $ 4,237 $ 6,061 $ 7,963 $ 7,115 $ 14,992 $ 3,903 $ 2,193
Net cash used in investing activities .... (7,273) (9,572) (31,299) (98,693) (55,016) (24,699) (62,281)
Net cash provided by financing activities 5,255 3,524 26,496 89,782 52,605 26,646 55,402
EBITDA (4) ............................... 5,921 9,161 12,082 16,456 28,681 12,380 21,400
</TABLE>
- ---------
(1) The ratio of earnings to fixed charges for the fiscal years ended
September 30, 1996 and 1997 was 2.60x and 2.09x, respectively. The ratio of
earnings to fixed charges for the six month periods ended March 31, 1997
and 1998 was 2.75x and 1.66x, respectively. The book value per share as of
September 30, 1997 and March 31, 1998 was $11.38 and $11.92 per share,
respectively.
(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 included in
the Company's Annual Report on Form 10-K (as amended) for the year ended
September 30, 1997, incorporated by reference herein.
(3) The net income per share amounts prior to the three months ended December
31, 1997, have been restated to comply with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). For further
discussion of earnings per share and the impact of SFAS 128, see Note 16 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K (as amended) for the year ended September 30, 1997,
incorporated herein by reference.
(4) 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.
10
<PAGE>
SPECIAL FACTORS
Background of the Merger
Management's Preliminary Discussions Regarding a Sale of the Company.
During the Spring of 1997, the Management Group discussed the effect on the
market price of the Common Stock (which during the Spring frequently had traded
below the Company's initial public offering price of $14 per share) of start-up
losses experienced by new Heart Hospitals, the large capital expenditure budget
associated with the development of Heart Hospitals and fluctuations in the
Company's profitability. Management concluded that, under the Company's
existing operating strategy, shareholders likely would not begin to realize the
value management believed is inherent in the Company's business strategy until
a significant number of Heart Hospitals had achieved profitability. Once this
had occurred, management believed the cash flow and earnings generated by its
existing Heart Hospitals would be sufficient to absorb the development costs
and start-up expenses associated with opening new hospitals, which management
believed had historically depressed the market price of the Common Stock.
Management believed such a critical mass of profitable hospitals would not
exist for a minimum of two years. See " -- The Special Committee's and the
Board's Recommendation" for a discussion of these factors.
Management considered that a sale of the Company to a strategic or
financial buyer having the financial resources to absorb the short-term losses
that are inherent in the Company's operating strategy might constitute a viable
option to accelerate the recognition by shareholders of the Company's long-term
value. In May 1997, management met informally with an investment banking firm
on behalf of the Company to discuss in general terms a possible sale of the
Company. Based on the Company's historical performance through the first half
of fiscal year 1997 and the Company's projected operations for the balance of
the fiscal year and through fiscal year 2002, management believed that a sale
of the Company at an appropriate price might be achievable.
Later in May 1997, Stephen R. Puckett discussed with John B. McKinnon, a
director of the Company since 1996, management's views about a possible sale of
the Company. Mr. McKinnon recommended that Mr. Puckett, on behalf of the
Company, contact Goldman Sachs (which is not the investment banking firm with
which management met informally in May 1997 as described above) to obtain its
views regarding possible buyers for the Company. In order to gauge the interest
of strategic buyers in acquiring a business meeting the Company's general
description, Mr. Puckett, on behalf of the Company, requested Goldman Sachs to
evaluate on a preliminary basis a number of health care providers as potential
acquirors of the Company. Based on the results of these evaluations, which were
made in June and July 1997, management concluded that a sale of the Company to
a strategic buyer at an appropriate price might be a possibility.
Concurrently with management's discussions with Mr. McKinnon and Goldman
Sachs described above, management explored other avenues relating to a possible
sale of the Company. Believing that institutional investors that previously had
invested in MedCath might be potential buyers of the Company, Mr. Puckett and
Mr. Post in May 1997 approached the WCAS Directors, Patrick J. Welsh and Andrew
M. Paul, and the principal investment group of Goldman Sachs regarding whether
they might be interested in participating with management in a potential
purchase of the Company. (Certain investment partnerships affiliated with
Goldman Sachs had been early venture capital investors in the Company.)
Consideration of this alternative ended in July 1997, however, when the parties
decided they were not interested in such a transaction.
Appointment of Special Committee. In July 1997, Mr. Puckett reported to
Mr. McKinnon his recent conversations with the WCAS Directors and Goldman
Sachs. Because of the possibility of a sale of the Company in a transaction in
which management and the WCAS Directors might have a continuing financial
interest, Mr. McKinnon and Mr. Puckett agreed that the Board should appoint a
committee of disinterested directors to review and evaluate the Company's
strategic options, including a possible sale of the Company (the "Special
Committee"). Mr. McKinnon and Mr. Puckett further agreed that it would be
appropriate to recommend to the Board that it appoint to the Special Committee
the only directors not affiliated with WCAS V or management, Mr. McKinnon and
Dr. W. Jack Duncan, a director of the Company since 1994. Mr. McKinnon, the
former President and a director of Integon Corporation (positions he
relinquished in October 1997), served as President of Sara Lee Corporation from
1986 to 1988 and Dean of the Babcock Graduate School of Management at Wake
Forest University from 1989 to 1995. He currently serves as a director of
Premark International, Inc., Morrison's Health Care, Inc., Ruby Tuesday, Inc.
and two privately-held companies. Mr. McKinnon received an A.B. from Duke
University and an M.B.A. from Harvard Business School. (Mr. McKinnon had been a
director of and investor in HealthTech Corporation, an operator of mobile cath
labs acquired by the Company in 1995 ("HealthTech"). HealthTech had been
founded in 1991 by Charles W. (Todd) Johnson, who became employed by the
Company following its acquisition of HealthTech and is a member of the
Management Group. Mr. Johnson and Mr. McKinnon also have been co-investors in
other ventures unrelated to HealthTech and the Company.) Dr. Duncan, a personal
friend of Mr. Puckett since 1970, has served as Acting Dean of the School of
Business at the University of Alabama at Birmingham ("UAB") since June 1997.
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Since 1987, he has been a Professor and University Scholar in Management in the
Graduate School of Management and Professor of Health Care Organization and
Policy and a Senior Scholar in the Lister Hill Center for Health Policy in the
School of Public Health of UAB. Dr. Duncan received a B.S. in Economics from
Howard College and an M.B.A. and a Ph.D. from Louisiana State University.
Neither Mr. McKinnon nor Dr. Duncan has any material business, financial or
other relationship with KKR or any of the WCAS Investors.
In anticipation of Mr. McKinnon's and Dr. Duncan's formal appointment as
members of the Special Committee, Mr. McKinnon engaged Womble Carlyle Sandridge
& Rice, PLLC of Charlotte, North Carolina ("Womble Carlyle") to advise the
Special Committee regarding its duties in connection with a possible sale of
the Company. On July 28, 1997, Mr. McKinnon, Dr. Duncan and Womble Carlyle met
with Mr. Puckett, Mr. Crane and Mr. Post and with representatives of Goldman
Sachs at the Company's headquarters in Charlotte, North Carolina. At the
meeting, Mr. Puckett reviewed with Mr. McKinnon and Dr. Duncan management's
views concerning a possible sale of the Company, and Goldman Sachs summarized
its views on possible market interest, all as described above. In addition,
Goldman Sachs confirmed that, although it had considered participating as
principal in a sale of the Company, it was no longer interested in pursuing
such opportunity.
Mr. Puckett first informed the Board as a whole of management's views
concerning a possible sale of the Company at a regular meeting of the Board
held on July 29, 1997. Mr. Puckett summarized for the Board the discussions
that had occurred regarding a possible sale of the Company beginning in the
Spring of 1997 (as discussed above under "Management's Preliminary Discussions
Regarding a Sale of the Company"). At the meeting, the Board formally appointed
Mr. McKinnon and Dr. Duncan as the members of the Special Committee and
authorized the Special Committee to review and evaluate strategic options that
might be available to the Company and independently to solicit proposals to
acquire the Company. The Board granted the Special Committee exclusive
authority on behalf of the Board to review, evaluate and negotiate any
transaction proposed by a group which included one or more members of
management or the Board or an affiliate of any member of management or the
Board and any competing offer to acquire the Company not involving a conflict
of interest. The Board retained authority to review, evaluate and negotiate
proposals only in the absence of any proposal which would create a conflict of
interest.
Solicitation and Receipt of Preliminary Proposals. Pursuant to a letter
dated August 8, 1997, the Special Committee formally engaged Goldman Sachs to
act as its financial advisor in connection with the proposed sale of the
Company. The Special Committee engaged Goldman Sachs based primarily on Goldman
Sachs' nationally recognized reputation as an investment banking firm that has
substantial experience in acquisitions involving public companies, including
companies in the health care industry. The Special Committee also considered
Mr. McKinnon's experience with Goldman Sachs, which had provided investment
banking services to two companies (Sara Lee Corporation and Integon
Corporation) that Mr. McKinnon had served as President as described above. The
Special Committee also considered Goldman Sachs' specific knowledge of the
Company based on its informal discussions with Mr. Puckett who, on behalf of
the Company and upon Mr. McKinnon's recommendation, had requested Goldman Sachs
to evaluate a number of health care providers as possible acquirors of the
Company as described above. The Special Committee considered management's prior
contacts with Goldman Sachs to have focused primarily on the feasibility of a
sale of the Company to an unaffiliated strategic buyer and, therefore, not to
have created a conflict of interest with respect to the Special Committee's
engagement of Goldman Sachs. The Special Committee further considered the
possible interest of Goldman Sachs' principal investment group in participating
in an acquisition of the Company and retained Goldman Sachs only after
obtaining Goldman Sachs' confirmation that its principal investment group would
not participate in such an acquisition. Neither Mr. McKinnon nor Dr. Duncan has
any material professional, financial or other relationship with Goldman Sachs.
Based on discussions with management and the Special Committee and its own
knowledge of the Company's industry, Goldman Sachs assembled an initial list of
13 potential buyers of the Company that the Special Committee and Goldman Sachs
believed were most likely to have an interest. The initial list included seven
strategic buyers and six financial buyers. At the request of management, and
with the concurrence of the Special Committee, Goldman Sachs omitted from the
list one strategic buyer that is a major competitor of the Company in markets
served by two of its existing three Heart Hospitals and in certain markets to
be served by Heart Hospitals under development. Such competitor was eliminated
because, in the view of management and the Special Committee, it would be able
to use information concerning a possible sale of the Company to the Company's
competitive disadvantage. The initial list also did not include WCAS VII, which
was aware of the possible sale of the Company because of the service on the
Board of the WCAS Directors and which the Special Committee believed would
decide whether to participate in the process independently of the marketing
efforts undertaken by the Special Committee and Goldman Sachs. Five additional
financial buyers (including WCAS VII) were later added to the initial list of
13.
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Beginning in August 1997, Goldman Sachs circulated a confidential offering
memorandum (the "Offering Memorandum") concerning the Company to potential
buyers that had agreed to enter into confidentiality agreements, including nine
of the potential buyers on the initial list and the five that were later added
to such list as referred to above. Of the 14 potential buyers that received the
Offering Memorandum, 10 initiated a due diligence investigation and
participated in management presentations. The Offering Memorandum contained a
projection, prepared by management in June 1997, of the Company's operations
for the balance of the fiscal year ending September 30, 1997 and for each year
in the five year period ending September 30, 2002 (the "June Projection"). The
June Projection and the principal assumptions on which it is based are
summarized in this Proxy Statement under "CERTAIN FORWARD LOOKING INFORMATION."
On October 30, 1997, each of the parties that had participated in
management presentations was invited to submit by November 7, 1997 a written,
preliminary non-binding proposal to acquire the Company. Three proposals
representing four financial buyers, including KKR, were submitted. No strategic
buyer submitted a proposal. All of the proposals contemplated an acquisition of
the Company for cash at prices ranging between $18 and $24 per share, with
management retaining a significant equity interest in the surviving company
through the rollover of a portion of their equity interest in the Company. The
KKR proposal was priced at $20 to $22 per share. All of the proposals were
subject to customary conditions, including the completion of due diligence.
The Special Committee met with Goldman Sachs on November 9, 1997, to
review and discuss the three preliminary proposals. On November 10, 1997, the
Special Committee and Goldman Sachs met with Mr. Puckett and Mr. Post to review
the proposals with them and determine whether management anticipated
significant issues in reaching an agreement with any of the four potential
buyers. Mr. Puckett expressed his initial impression that management could work
with any of the potential buyers, although management would need to be
comfortable with the capitalization of the surviving company. At a meeting of
the Board on November 11, 1997, the Special Committee reported to the Board the
status of the bidding process for the Company.
On November 13, 1997, the Company issued a press release announcing
results of operations for the fiscal year ended September 30, 1997 (the
"November Press Release"). The November Press Release disclosed that the
openings of the Tucson Heart Hospital in October and the Arizona Heart Hospital
(expected in the second quarter of fiscal year 1998) were expected to have a
dampening effect on earnings in the first and second quarters of fiscal year
1998, but that the ramp-up of the two new hospitals was expected to accelerate
earnings momentum in the second half of the fiscal year, allowing the then
current earnings projection of approximately $0.72 per share for the fiscal
year ending September 30, 1998 to be met.
Subsequent to the Board meeting on November 11, 1997, the Special
Committee decided not to pursue the lowest of the three proposals, at $18 to
$20 per share, because it was regarded as too low and the buyer required a
significantly longer timeline prior to entering into a transaction than either
of the other bidders. In due diligence sessions during November and December
with the bidder that had submitted the highest proposal, at $22 to $24 per
share, such bidder concluded that it would not be able to finance a bid and
subsequently withdrew its proposal. Such bidder advised the Company that its
bid required the participation of an additional equity partner, which it had
been unable to obtain, and that, given the Company's existing debt levels, such
bidder believed additional debt financing was impracticable.
In mid-December 1997, Paul B. Queally, a general partner of the sole
general partner of WCAS VII, met with representatives of both KKR and the
Company to conduct due diligence and discuss the terms of a possible joint bid
by KKR and WCAS VII. While Andrew M. Paul, a WCAS Director, had had preliminary
conversations with KKR representatives immediately prior to the submission of
KKR's November 7 proposal regarding a joint bid, WCAS VII indicated that it was
not, at that time, interested in making a joint bid and did not join KKR's
November proposal.
Developments Relating to Tucson. During the first two weeks of December
1997, management provided to Goldman Sachs, which in turn provided to KKR,
operating data relating to the ramp-up of Tucson, which had opened in October.
While the June Projection assumed that the Company's Heart Hospitals would
incur start-up losses for a period of approximately six to nine months
following their opening, Tucson's progress was unexpectedly slow, as evidenced
by December data in particular. In December, the average daily census for
Tucson (which has a capacity of 66 beds, approximately 21 of which were then
staffed) was eight. In addition, the number and overall mix of procedures were
far short of expectations as reflected in the June Projection. Based primarily
on this information, KKR advised Goldman Sachs on or about December 18, 1997
that it no longer believed it would be able to submit a bid in the $20-$22
range set forth in its first proposal submitted November 7, 1997. Goldman Sachs
discussed the matter with the Special Committee on December 19, 1997. Goldman
Sachs reported to the Special Committee that it had discussed KKR's concerns
with Mr. Puckett and Mr. Post,
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who stated that management was in the process of evaluating the situation but
believed that the problems that were contributing to the slow ramp-up of Tucson
were potentially long-term in nature and that Tucson's performance would
materially and adversely impact the Company's ability to achieve the June
Projection.
The Special Committee thereafter requested a meeting with management on
December 22, 1997 to discuss recent developments at Tucson. During this
meeting, management outlined the estimated impact of Tucson on the June
Projection and outlined certain preliminary action steps designed to address
Tucson's slow ramp-up. While management expressed to the Special Committee its
confidence in the Company's Heart Hospital concept and business strategy,
management also expressed concern regarding whether Tucson's operating problems
could be successfully resolved.
On December 22, 1997, KKR submitted a revised, non-binding proposal to
acquire the Company for a cash purchase price of $18 per share (the "Revised
Proposal"). WCAS VII joined in the Revised Proposal, subject to reaching an
agreement with KKR regarding corporate governance and other stockholder rights
issues for the surviving company. The proposal indicated that before a
definitive agreement could be reached, KKR and WCAS VII would need to conduct
additional due diligence.
Following receipt of the Revised Proposal on December 22, 1997, the
Special Committee and Goldman Sachs met with management. The Special Committee
expressed its view that, while there may have been a change in the current
operating environment, the Special Committee was unwilling, based on
information currently available to it, to reduce its price expectations. The
Special Committee requested management to analyze the Tucson situation,
consider the implications for the Company's business strategy, prepare a
revised projection and make a formal presentation to the Special Committee as
soon as practicable.
Representatives of Goldman Sachs had further due diligence conversations
with individual members of management following the Special Committee's meeting
with management on December 22, 1997. During these conversations, Goldman Sachs
explored in more detail the basis for management's concerns regarding Tucson
and the effect of Tucson on the June Projection.
On December 31, 1997, at a meeting held at the Company's headquarters in
Charlotte, North Carolina, the Management Group presented the Special Committee
with a revised projection of the Company's operations for the balance of fiscal
year 1998 and through fiscal year 2003 (the "December Projection"). The
December Projection, which was also provided to KKR and WCAS VII, and the
principal assumptions on which it is based are summarized in this Proxy
Statement under "CERTAIN FORWARD LOOKING INFORMATION." The performance of the
Company as reflected in the December Projection, when compared to the June
Projection, demonstrated the estimated impact of Tucson on the Company's future
operations. The Special Committee engaged the Management Group in an extensive
discussion of the revised assumptions underlying the December Projection,
including management's assumptions regarding the reduced roll-out rate for new
hospitals, the assumed annual growth rate for new and existing Heart Hospitals
and the ramp-up period for new Heart Hospitals. During the presentation, the
Management Group confirmed its preliminary view, communicated to Goldman Sachs
prior to its meeting with the Special Committee on December 19, 1997, that the
performance of Tucson would materially and adversely affect the Company's
ability to achieve the June Projection, as evidenced by the December
Projection. During the December 31, 1997 meeting, the Management Group also
expressed its view that the market's concern regarding the Company's Heart
Hospital concept is reflected in the performance of the Common Stock and,
accordingly, the market price of the Common Stock is a barometer of the
Company's desirability as a business partner for physicians with whom the
Company may desire to develop future Heart Hospitals. This view is based on
discussions between the Company and market analysts, institutional shareholders
and physicians (including physicians who have contracted with the Company and
physicians who have elected not to contract with the Company). The Management
Group expressed concern that Tucson's performance could have a continuing
impact on the market price of the Common Stock and thus could materially and
adversely affect the Company's development plans.
Immediately after the December 31, 1997 meeting, Mr. McKinnon met
individually with certain members of management to ascertain their views of the
Company's business prospects, including in particular the business prospects
for Tucson. Their views were consistent with the views expressed by the
Management Group at the December 31, 1997 meeting with the Special Committee.
Based on information provided by management at the December 31, 1997
meeting, the Special Committee believes that the operating problems experienced
at the Tucson Heart Hospital in December 1997 were significant and likely
long-term in nature. Tucson's average daily census for December 1997 was eight,
which was far short of the Company's projection. In addition, the number and
type of cardiovascular procedures being performed at Tucson in December 1997
fell far short of expectations. As a result, Tucson's revenues were
significantly below the June Projection and resulted in a pre-tax loss
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at Tucson for the quarter ended December 31, 1997 of twice the pre-tax loss for
the quarter assumed for the purpose of the June Projection. Based on its
discussions with management, the Special Committee believes that the principal
factors contributing to Tucson's poor performance in December 1997 include the
large number of competing cardiology service providers in the Tucson market,
the significant penetration of the Tucson market by managed care providers and
HMOs, the low-cost health care environment in the Tucson market and the
geographic dispersion of the physicians who are on the medical staff of the
Tucson Heart Hospital and their lack of proximity to the hospital. The Special
Committee believes these factors explain the significant shortfall in Tucson's
performance in December 1997 and, because they are structural to the Tucson
market, indicate that Tucson's operating problems likely are long-term in
nature.
On January 2, 1998, representatives of Goldman Sachs met with management
to review the December Projection. On January 5, 1998, the Special Committee
and its legal counsel met in New York City with Goldman Sachs. During the
meeting, the Special Committee and Goldman Sachs reviewed progress to date and
again discussed in detail the December Projection, including the reasonableness
of management's assumptions underlying the projection. The Special Committee
focused particularly on the following assumptions underlying the December
Projection that reflected a slower growth rate for the Heart Hospitals than had
been provided for in the June Projection:
o The December Projection assumed a ramp-up period for the Heart Hospitals
of four quarters, compared to the two quarter ramp-up period provided for
in the June Projection. This change was consistent with the Company's
experience with the three Heart Hospitals currently in operation. The
actual ramp-up periods for McAllen and Little Rock were 11 months and
eight months, respectively, and the projected ramp-up period for Tucson,
which had been lengthened due to its significant start up problems, was
15 months, resulting in an average ramp-up period for the three Heart
Hospitals of 11.3 months or approximately four quarters.
o The December Projection assumed the rate of increase in revenue for the
10 quarters immediately following a post ramp-up base year would be 10%
annually, compared to 20% annually provided for in the June Projection.
This change was consistent with the Company's experience with McAllen,
which is the only Heart Hospital which had been in operation for more
than nine months. The Special Committee also believed the reduction in
the assumed rate of increase in revenue was justified by the unforeseen
start-up difficulties the Company had experienced with two out of its
three Heart Hospitals. Management believed such difficulties would
discourage physicians in other markets from participating in the
development of new Heart Hospitals and thus would adversely affect the
Company's growth prospects in such markets. Management also believed that
the fact that the Company had experienced unforeseen difficulties with
two out of its three existing Heart Hospitals (McAllen and Tucson)
indicated a likelihood that the Company's future Heart Hospitals might
also experience unforeseen difficulties.
o The December Projection assumed the Company would open two new Heart
Hospitals per year beginning in the year 2000, compared to three new
Heart Hospitals provided for in the June Projection. The Special
Committee believed this reduction in the roll-out rate for new Heart
Hospitals was justified by a combination of factors, including
construction delays the Company had experienced with certain of its Heart
Hospitals then under construction, the likelihood that issues involving
the Tucson Heart Hospital would continue to absorb a significant amount
of management's time and the likelihood that similar issues and
corresponding demands on management's time might arise with respect to
future Heart Hospitals.
Based on the Special Committee's and Goldman Sachs' meetings with
management on December 31, 1997 and January 2, 1998, and the Special
Committee's review of the December Projection and discussion of the December
Projection with Goldman Sachs (including the reasons for changes in the
assumptions on which the June Projection had been based, as discussed above),
the Special Committee concluded that management's rationale for modifying the
assumptions underlying the June Projection was reasonable. The Special
Committee further concluded that the operating uncertainties represented by
Tucson and the Company's Heart Hospital concept justified selling the Company
at a price below the range that earlier had appeared appropriate and that
negotiations with KKR and WCAS VII should continue.
Negotiations with KKR and WCAS VII. On January 14, 1998, KKR submitted a
formal offer to acquire all of the outstanding shares of Common Stock for $18
per share in cash on the terms and conditions set forth in a mark-up of the
Company's form of merger agreement that accompanied the offer. The offer
contemplated that the Management Group would roll over no less than 50% of the
value of their equity interest in the Company, and it was made subject to KKR's
ability to structure a mutually acceptable arrangement with management. The
offer was further conditioned on, among other things, KKR's receipt of
financing on terms acceptable to KKR, resolution of legal due diligence issues
and negotiation and execution of a definitive merger agreement. WCAS VII did
not join in the offer, but WCAS VII did discuss the offer's terms with KKR, as
well as initial KKR proposals for corporate governance and stockholder rights
in the acquiring company.
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The Special Committee and Goldman Sachs met on January 15, 1998, following
the Special Committee's receipt of the KKR offer. Also attending the meeting
were Mr. Puckett and Mr. Post, representing the Management Group, Womble
Carlyle and representatives of the Company's law firm, Moore & Van Allen, PLLC
of Charlotte, North Carolina ("Moore & Van Allen"). During the meeting, the
Special Committee reviewed and discussed with management, Goldman Sachs, Womble
Carlyle and Moore & Van Allen the revised offer by KKR, recent performance of
the Tucson Heart Hospital, results of operations of the Company for the quarter
ended December 31, 1997 (which were more favorable than had been reflected in
the December Projection due to certain recent developments of a nonrecurring
nature that were unrelated to Tucson), issues arising in connection with the
mark-up of the Company's form of merger agreement which accompanied KKR's offer
and the status of the Management Group's progress in reaching an agreement with
KKR relating to management's participation in the proposed transaction. The
Special Committee concluded that while further improvements in the terms of the
KKR offer should be sought, it was prepared to enter into substantive
negotiations with KKR.
From January 16 to January 18, 1998, Womble Carlyle and Goldman Sachs on
behalf of the Special Committee, together with the Management Group, Moore &
Van Allen, and KKR and WCAS VII and their legal counsel, met in New York City
to negotiate a definitive merger agreement. The Management Group's personal
counsel, Wilmer Cutler & Pickering of Washington, D.C., also was present to
advise the Management Group in negotiating the terms of its participation in
the transaction with KKR and WCAS VII. Aside from the purchase price, the
principal points of negotiation among the parties under the Merger Agreement
included (i) the "fiduciary out" provisions of the agreement, permitting the
Board to consider alternative proposals or offers to acquire the Company
submitted after the date of the Merger Agreement, (ii) the circumstances under
which the Company would be required to pay a termination fee to KKR and WCAS
VII and to reimburse KKR and WCAS VII for their out-of-pocket expenses, as well
as the amount of such termination fee, (iii) KKR and WCAS VII's ability to
terminate the Merger Agreement based on matters relating to the Tucson Heart
Hospital and the results of KKR's and WCAS VII's due diligence investigations,
and (iv) the scope of certain representations and warranties of the Company.
While the parties made substantial progress in resolving the issues under the
Merger Agreement, they were unable to reach a definitive agreement. The parties
agreed that KKR and WCAS VII should complete their remaining due diligence
prior to the parties' resuming negotiations.
Prior to the opening of the market on January 29, 1998, the Company issued
a press release announcing results of operations for the first quarter of
fiscal year 1998 (the "January Press Release"). The January Press Release
disclosed, among other things, that the ramp-up of the Tucson Heart Hospital
had been slower than expected and that, primarily as a result of Tucson's
performance (as well as a delay in the opening of the Arizona Heart Hospital),
the Company no longer expected to achieve its earnings projection of $0.72 per
share for fiscal year 1998, which had been disclosed in the November Press
Release. The closing price of the Common Stock on the day prior to the
announcement was $13.88 per share. The low sale and closing prices of the
Common Stock on January 29 were $12.88 and $13.13 per share, respectively.
In early March 1998, Goldman Sachs was contacted by a party which stated
it might be interested in pursuing an acquisition of the Company. Such party
was advised that if it was interested in pursuing such a possibility it should
promptly submit an indicative bid. Such party did not submit any bid or
thereafter contact the Company or its representatives regarding the possibility
of an acquisition of the Company.
From the end of January through February 1998, KKR and WCAS VII continued
their due diligence investigation of the Company. In late February 1998, KKR
advised Goldman Sachs that KKR and WCAS VII were prepared to resume
negotiations to acquire the Company at a purchase price of $18 per share.
On March 4, 1998, management provided the Special Committee and Goldman
Sachs with an updated projection (the "March Projection") which management had
prepared at the request of the Special Committee. The March Projection, which
was also provided to KKR and WCAS VII, and the principal assumptions on which
it is based are summarized in this Proxy Statement under "CERTAIN FORWARD
LOOKING INFORMATION." The Special Committee and Goldman Sachs met with
representatives of the Management Group on March 10, 1998 to review the March
Projection. During the meeting, management reported that each of the Heart
Hospitals had performed well above the levels reflected in the December
Projection. Management further reported, however, that Tucson had failed to
sustain this performance in February and through the first week of March. In
addition, the March Projection was negatively impacted by an estimated
four-month delay in the opening of the Arizona Heart Hospital in Phoenix due to
damage resulting from a burst water pipe that occurred immediately prior to the
scheduled occupancy of the Heart Hospital in January 1998. Thus, although the
March Projection reflected the improved January performance of the Heart
Hospitals, the overall business of the Company was not materially different
from that reflected in the December Projection.
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On March 10 and 11, 1998, Mr. McKinnon on behalf of the Special Committee
communicated with Mr. Welsh and Mr. Queally on behalf of WCAS VII regarding the
proposed purchase price for the Company and the structure of the transaction.
Mr. McKinnon expressed to Mr. Welsh and Mr. Queally the Special Committee's
view that it would not negotiate with WCAS VII and KKR on an exclusive basis
based on a valuation of $18 per share. Mr. McKinnon also stated that the
Special Committee would need to be satisfied that the "fiduciary out"
provisions of the Merger Agreement would not be unduly restrictive. In a series
of conversations between Mr. McKinnon and Mr. Queally, Mr. Queally offered to
increase the purchase price from $18 to $18.50 per share (which Mr. McKinnon
rejected) and, finally, to $19 per share, in consideration of an increase in
the termination fee payable to KKR and WCAS VII under certain circumstances
from $4 million to approximately $6.8 million. Mr. McKinnon agreed to recommend
the $19 per share purchase price and the increase in the termination fee. Mr.
McKinnon and Mr. Queally expressed confidence that counsel to the parties could
work out satisfactorily the "fiduciary out" provisions of the Merger Agreement.
During this period, legal counsel for the respective parties negotiated certain
provisions of the Merger Agreement to reflect the foregoing understandings and
KKR and WCAS VII reached an agreement in principle regarding corporate
governance and stockholder rights in the surviving company.
On March 12, 1998, the Special Committee met to consider the Merger
Agreement, including Mr. McKinnon's recommendation relating to the $19 per
share purchase price and the increased termination fee. Following the Special
Committee's vote to recommend the Merger Agreement to the Board, the Board met
to approve the Merger Agreement and recommend it to the shareholders of the
Company. Because of the financial interest in the merger of four of the members
of the Board (Mr. Puckett, Mr. Crane, Mr. Welsh and Mr. Paul), a majority of
the Board could not independently review and determine the fairness of the
Merger to the shareholders of the Company other than the Investor Group. Mr.
Welsh and Mr. Paul did not attend the Board meeting because of their conflicts
of interest, and Mr. Puckett and Mr. Crane abstained from voting with respect
to the Merger because of their conflicts of interest. Therefore, the remaining
directors (who also constituted the Special Committee) were the only directors
who voted on the Merger. The parties executed the definitive Merger Agreement
after the close of business on March 12, 1998.
On April 7, 1998, the Company signed a non-binding letter of intent with
Carondelet Health Systems, Inc., a not-for-profit healthcare provider
("Carondelet"), which contemplated Carondelet's becoming an investor in the
Tucson Heart Hospital. See "BUSINESS OF THE COMPANY -- Hospital Division --
Recent Developments in the Hospital Division -- Tucson Heart Hospital." On
April 9, 1998, the Special Committee and its financial and legal advisors met
with management of the Company to receive an update concerning the Company's
discussions with Carondelet. Management informed the Special Committee that the
consolidation of the heart programs of Tucson Heart Hospital and Carondelet,
which owns two not-for-profit hospitals in the Tucson area, would improve the
Heart Hospital's revenues. However, management stated that an agreement with
Carondelet was contingent on the parties' resolving several critical issues,
including the extent and timing of the closure of Carondelet's existing heart
programs, the extent to which Carondelet would maintain certain diagnostic and
emergency services and certain economic terms of the joint venture.
Accordingly, management emphasized that whether the parties would be able to
reach a definitive agreement and the timing of an agreement, if any, were
extremely uncertain. The Special Committee encouraged management to pursue and
successfully conclude discussions with Carondelet regarding the proposed joint
venture as soon as possible.
On June 12, 1998, the Special Committee and its financial and legal
advisors met with management to receive a further update concerning the
Company's discussions with Carondelet. Management reported that discussions
with Carondelet were still ongoing but that progress had been slow. Management
reported that representatives of the Company and Carondelet had met on a weekly
or bi-weekly basis since the parties had entered into their non-binding letter
of intent and that Carondelet currently is in the process of performing due
diligence with respect to the Company's Heart Hospitals. However, management
reported that the parties had not resolved the critical issues referred to
above relating to the extent and timing of the consolidation of the parties'
heart programs or the economic terms of the joint venture. Management stated
its belief that if an agreement with Carondelet could be consummated, the
benefits to the Tucson Heart Hospital would at a minimum enable the Heart
Hospital to operate on a break-even basis. Management further stated that it
remained extremely difficult to predict whether the parties would be able to
reach an agreement or, if an agreement were reached, the timing of such an
agreement. Following the June 12, 1998 meeting, Dr. Duncan, on behalf of the
Special Committee, contacted Carondelet to discuss the status of its
negotiations with the Company and confirmed the status of negotiations.
At the June 12, 1998 meeting, management also updated the Special
Committee and Goldman Sachs regarding the Company's results of operations for
the months of April and May of 1998. Based on such update, the Special
Committee concluded that the Company's business and business prospects had not
changed materially from that reflected in the March Projection.
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The Special Committee's and the Board's Recommendation
The Special Committee met on 20 occasions between July 28, 1997 and the
date of this Proxy Statement, in person or by telephone conference, to consider
developments relating to a possible sale of the Company, including meetings on
13 occasions to consider successive proposals by KKR and WCAS VII. The Special
Committee was assisted in its deliberations by its financial advisor, Goldman
Sachs, and its legal counsel, Womble Carlyle. At a meeting held on March 12,
1998, the Special Committee determined that the cash consideration to be paid
to the shareholders of the Company other than the Investor Group (the "Public
Shareholders") pursuant to the Merger Agreement was substantively and
procedurally fair and recommended that the full Board approve the Merger
Agreement. The Special Committee reconfirmed, as of the date of this Proxy
Statement, that the Merger is substantively and procedurally fair to the Public
Shareholders.
The material factors the Special Committee evaluated in its decision to
recommend approval of the Merger Agreement are described below. Except as noted
below, the Special Committee considered the following factors to be positive
factors supporting its determination that the Merger is substantively and
procedurally fair to the Public Shareholders. In arriving at its decision, the
Special Committee gave the most weight to:
(i) The Special Committee's view that the market price of the Common
Stock has not reflected, and for an indefinite period of time would not
reflect, the value that may be inherent in the Company's business strategy
due to the risk (which the Special Committee believed to be significant)
that the Company may not successfully execute its business strategy
relating to Heart Hospitals. The following factors contributed to the
Special Committee's assessment of the risk of execution of the Company's
business strategy:
o The Company has experienced unanticipated start-up problems at two of
the Company's first three Heart Hospitals (McAllen and Tucson). Such
start-up problems are a basis for uncertainty relating to the Company's
Heart Hospital concept, including uncertainty relating to the extent to
which the Heart Hospital concept is transportable nationwide without
significant alteration of the model to address local factors.
o The Common Stock is susceptible to significant declines based on
negative developments relating to the performance of the Company's
Heart Hospitals. Because the market price of the Common Stock is viewed
as a barometer of the Company's desirability as a business partner, a
precipitous decline in the market price could lead to the Company's
inability to attract physician participation in the development of, and
to obtain financing to fund, new Heart Hospitals and thus significantly
impede the Company's opening of Heart Hospitals in the future.
o The Company's operating strategy requires it to incur significant debt
to fund new Heart Hospitals. The Company's ability to generate cash
flow sufficient to service its debt is highly dependent on the
operations of the Company's existing Heart Hospitals. The failure of
the Company's Heart Hospitals to generate positive cash flow in
accordance with the Company's projections, such as the Company has
experienced with Tucson, may have a material and adverse effect on the
Company's ability to develop new Heart Hospitals. In this connection,
the March Projection showed that the Company might encounter cash flow
deficits in certain years included in the March Projection. Such
deficits assume no increase in the Company's revolving credit facility,
which management believes could be increased based on the projected
increase in the Company's accounts receivable through such period.
Nevertheless, the Special Committee believes, and management
acknowledges, that the continued underperformance of Tucson could make
it difficult for the Company to obtain capital to finance future Heart
Hospitals.
o The Company operates in a highly regulated environment in which changes
in regulations or in their interpretations could force the Company to
modify the way it does business.
(ii) The impact on the value of the Company resulting from the start-up
problems at the Tucson Heart Hospital, which the Special Committee believes
justifies selling the Company at a price below the range that earlier had
appeared appropriate. Primarily as a result of Tucson's operating problems,
the Company projects that its earnings per share for fiscal year 1998 will
be $0.43 per share, compared to $0.78 per share assumed for the purpose of
the June Projection. As reflected in the March Projection, such problems
are expected to continue to materially and adversely affect the Company's
earnings per share, which according to the June Projection would have
increased from $0.78 per share in fiscal year 1998 to $2.85 in fiscal year
2002 but, according to the March Projection, are now expected to increase
from only $0.43 in fiscal year 1998 to only $1.65 in fiscal year 2002. The
Special Committee's original understanding of the Company's value was based
on the June Projection, which was prepared months before Tucson opened and
its start-up problems surfaced. As described above under " -- Developments
Relating to Tucson," the Special Committee believes
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the factors that have given rise to the operating problems experienced at
Tucson to date, most of which are structural to the Tucson market, indicate
such problems likely will be long-term in nature. In this connection, the
Special Committee also considered the non-binding letter of intent entered
into on April 7, 1998 between the Company and Carondelet. See " --
Background of the Merger -- Negotiations with KKR and WCAS VII" and
"BUSINESS OF THE COMPANY -- Hospital Division -- Recent Developments in the
Hospital Division -- Tucson Heart Hospital." The Special Committee
considered that the Tucson Heart Hospital would benefit from consummation
of a joint venture that would result in the consolidation of Carondelet's
and the Tucson Heart Hospital's heart programs. The Special Committee also
considered, however, that the parties had not resolved certain critical
issues relating to the structure of the joint venture, and that is not
possible to predict whether or when the Company and Carondelet might
successfully reach a definitive agreement and consummate the joint venture.
The possibility that the Company might consummate a joint venture with
Carondelet was a negative factor in the Special Committee's determination
that the Merger is fair to the Public Shareholders. However, the continuing
uncertainty of the prospects for and timing of such a transaction led the
Special Committee to reconfirm such fairness determination.
(iii) The belief of the Special Committee that the Merger represents a
more desirable alternative than continuing to operate the Company as a
public company. In this connection, the Special Committee gave strong
consideration to rejecting the KKR and WCAS VII proposal in favor of
maintaining the Company's independence and enabling the Public Shareholders
to share in the Company's future earnings and growth potential. However,
the Special Committee believes that continuing to operate the Company as an
independent entity would subject the Company and its shareholders to the
risk of execution of the Company's business strategy as described above.
After evaluating such risk (including the factors described under item (i)
above), the Special Committee concluded that, while the Company's business
strategy could ultimately prove successful, the risk that the Company's
Heart Hospitals will continue to experience significant operating problems
adversely impacting the performance of the Common Stock justifies a sale of
the Company pursuant to the terms of the Merger Agreement. The Special
Committee did not consider alternatives to the Merger, other than
continuing to operate the Company as an independent entity and the
preliminary proposals that are described above under " -- Solicitation and
Receipt of Preliminary Proposals."
(iv) Information with respect to the financial condition, results of
operations and business of the Company. The Special Committee focused in
particular on the March Projection, which reflected substantially lower
earnings for future periods than had been anticipated prior to fiscal year
1998. The March Projection projected earnings per share for the Company for
fiscal years 1998 through 2002 of $0.43, $0.75, $1.10, $1.35 and $1.65,
respectively, compared to earnings per share reflected in the June
Projection of $0.78, $1.19, $1.67, $2.26 and $2.85, respectively.
(v) The scope of efforts to sell the Company, including the number and
identity of potential buyers from which indications of interest were
solicited. In this connection, the Special Committee considered that
Goldman Sachs received only three indications of interest and that several
firms that declined to submit an indication of interest cited as reasons
for their decision concerns relating to the Company's ability to execute
its business strategy. The Special Committee also considered the terms of
two preliminary proposals submitted by bidders other than KKR (which had
been submitted prior to the occurrence of developments relating to the
Tucson Heart Hospital that were reflected in the December Projection), the
withdrawal of one of such proposals and the prospects for consummating such
proposals.
(vi) The oral opinion of Goldman Sachs that the $19 per share to be
received by the Public Shareholders was fair to such holders from a
financial point of view. The full text of the confirming written opinion of
Goldman Sachs, which sets forth assumptions made, matters considered and
limitations on the review undertaken in connection with its opinion, is
attached hereto as Appendix B and is incorporated herein by reference. The
Special Committee and the Board adopted the analyses and findings of
Goldman Sachs in their determination that the Merger is fair to the Public
Shareholders. The Company's shareholders are urged to and should read such
opinion in its entirety.
In addition to the factors referred to in subparagraphs (i) - (vi) above, the
other material factors considered by the Special Committee in reaching its
fairness determination are as follows:
(vii) The proposed terms and conditions of the Merger Agreement. In
particular, the Special Committee considered the fact that the Merger
Agreement does not provide for unreasonable termination fees and expense
reimbursement obligations which would have the effect of unreasonably
discouraging competing bids and that, subject to the satisfaction of
certain conditions, the Board would be able to withdraw or modify its
recommendation to the shareholders regarding the Merger and enter into an
agreement with respect to a more favorable transaction with a third party,
if such a transaction becomes available prior to the consummation of the
Merger. See "THE MERGER."
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(viii) The market price of the Common Stock, which as recently as January
and February 1998 had traded at prices below the Company's initial public
offering price of $14, and the premium over such prices (as well as over
the then prevailing market price) represented by the $19 per share to be
received by the Public Shareholders in the Merger. The closing price of the
Common Stock had increased from $14.63 on February 18, 1998 to $16.50 on
March 12, 1998. The Special Committee considered the possibility that the
market price of the Common Stock in the weeks preceding March 12, 1998 may
have reflected speculation concerning a possible sale of the Company. This
possibility was based on rumors reported to management by analysts and
shareholders in early 1998. In addition, the Special Committee considered
Goldman Sachs' analysis of the premiums paid in comparable merger
transactions, which ranged from 25% to 40% of the 90 day average price
prior to announcement of the transaction. See " -- Opinion of Financial
Advisor."
(ix) The unpredictability of the Company's earnings, the effect of such
unpredictability on the market price of the Common Stock, and the effect of
such factors on management's ability to execute the Company's business
strategy. In this connection, the Special Committee considered that the
Company may be capable of being managed more effectively as a private
company not subject to pressures from public shareholders and market
professionals to maintain and grow earnings per share, and that the Company
might be unable to retain certain members of management if the Company were
to remain public. The Special Committee believes that as a private company
the Company would have greater flexibility to consider business strategies
that have long-term benefits but, if the Company were public, would
adversely impact earnings per share and the market price of the Common
Stock in the short term.
(x) The financial ability and willingness of KKR and WCAS VII to
consummate the Merger. The Merger Agreement conditions the Acquiror's
obligations to consummate the Merger on the Acquiror's having obtained
financing for the Merger on terms satisfactory to the Acquiror. In this
connection, the Special Committee reviewed commitment letters for equity
financing supplied by the KKR Partnership and WCAS VII and for debt
financing supplied by the Acquiror's lender. In addition, the Special
Committee, through its financial and legal advisors, discussed the proposed
financing with the Acquiror and its lender. Based on the foregoing, the
Special Committee viewed as remote the risk that the financing condition of
the Merger Agreement would not be satisfied. Further, the Special Committee
did not consider it to be material that a portion of the financing of the
Merger would be provided under a revolving credit facility to be entered
into by the Company with the Acquiror's lender. The Special Committee
considered the financing risk to be a neutral factor in its determination
that the Merger is fair to the Public Shareholders.
(xi) Actual or potential conflicts of interest to which certain officers
and directors of the Company and their affiliates are subject in connection
with the Merger, as follows:
o The Special Committee considered that members of the Management Group
will own shares of common stock of the Parent and fully vested options
to purchase such shares, representing approximately 8% of the Parent's
fully diluted equity. The Special Committee also considered that the
Parent will reserve for issuance to employees of the Company, pursuant
to future grants of additional options, shares of common stock of the
Parent representing 15% of the fully diluted equity of the Parent, a
substantial portion of which are anticipated to be granted to the
Management Group. The Special Committee further considered that members
of the Management Group will enter into new employment agreements with
the Parent replacing their existing employment agreements with the
Company, and that such new employment agreements will provide for the
payment to them of base salaries, possible annual cash bonuses,
potential severance benefits, and separate payments in respect of the
termination of their previously existing employment agreements and in
respect of a covenant not to compete. The Special Committee considered
these conflicts of interest to be a negative factor in its
determination that the Merger is fair to the Public Shareholders,
although the compensation and benefits payable to members of the
Management Group referred to above and disclosed in more detail
elsewhere in this Proxy Statement are intended primarily to provide for
the payment of compensation and benefits to the Management Group
substantially equivalent to the compensation and benefits they are
currently entitled to receive from the Company.
o The Special Committee considered that the Parent has given each member
of the Management Group an opportunity to roll over up to 100% of his
equity investment in the Company into an investment in the Parent,
provided each member rolls over a minimum of 50%. The Special Committee
considered that the rollover of substantially more than 50% of a
member's current equity investment in the Company would indicate a
level of confidence in the Company's prospects that might be
inconsistent with the Special Committee's assessment of the risks
associated with the Company's Heart Hospital concept. Three members of
the Management Group elected to roll over the minimum 50% investment,
and a fourth member elected to roll over only slightly in
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excess of the 50% minimum. The Special Committee viewed this as a
neutral factor in its determination that the Merger is fair to the
Public Shareholders.
o The Special Committee considered the foregoing conflicts of interest in
connection with management's preparation of the December Projection and
the March Projection, which, as disclosed elsewhere in this Proxy
Statement, reflect a significantly slower rate of growth for the
Company and supports a significantly lower value for the Company than
reflected in the June Projection. While the Special Committee
recognized that the conflicts of interest to which the Management Group
were subject might be a basis for doubting the reasonableness of the
December Projection and the March Projection, the Special Committee
concluded, based on its discussions with the Management Group during
January and March 1998 as described above, that management's
assumptions underlying the December Projection and the March Projection
are reasonable. The Special Committee considered the Management Group's
conflicts of interest in connection with preparation of the December
Projection and the March Projection to be a negative factor in its
determination that the Merger is fair to the Public Shareholders.
The Special Committee believes that the Company's existing and planned
Heart Hospitals are the dominant factor in determining the value of the
Company.
Except to the extent noted above, the Special Committee did not assign
relative weights to the factors it considered, and it did not consider any
relative weighting to be necessary in reaching its fairness determination.
The Special Committee noted that approximately 24% of the outstanding
shares of Common Stock are held by persons who have committed or expressed
their intention to vote their shares of Common Stock in favor of the Merger,
including members of the Management Group, members of the Board and other
members of the Investor Group. The Special Committee also considered that the
obligation of the Company to consummate the Merger is not conditioned upon the
favorable vote of a majority of the Public Shareholders. Notwithstanding the
absence of such a voting requirement, the Special Committee believes that the
procedure that was followed in determining the purchase price to be paid to the
shareholders of the Company was fair to the Public Shareholders. As described
above, the six person Board of Directors of the Company (a majority of whom are
members of the Management Group or affiliated with WCAS VII) appointed as the
only members of the Special Committee two non-employee directors who were
independent of the Management Group and WCAS VII and granted the Special
Committee authority independently to solicit proposals to acquire the Company,
including exclusive authority on behalf of the Board to review, evaluate and
negotiate any transaction proposed by a group which included one or more
members of management or the Board or an affiliate of any member of management
or the Board and any competing offer to acquire the Company not involving a
conflict of interest. The Board retained authority to review, evaluate and
negotiate proposals only in the absence of any proposal which would create a
conflict of interest. Goldman Sachs, the Special Committee's financial advisor,
solicited indications of interest from 18 potential buyers, which resulted in
the submission of three preliminary proposals by financial buyers all of which
required management's participation in the buyout. With the assistance of its
financial advisor and legal counsel, the Special Committee evaluated, and
ultimately rejected, proposals by KKR and WCAS VII that would have paid the
shareholders less than $19 per share in cash. The Merger Agreement negotiated
by the Special Committee contains provisions that would enable the Board to
withdraw or modify its recommendation to the shareholders regarding the Merger
and to enter into an agreement with respect to a more favorable transaction
with a third party, and contains provisions (without which the Special
Committee believes KKR and WCAS VII would not have entered into the Merger
Agreement) imposing upon the Company termination fee and expense reimbursement
obligations that, in the view of the Special Committee, are reasonable and
would not have the effect of unreasonably discouraging competing bids. Further,
the shareholders of the Company may dissent from the Merger and be paid cash
for the "fair value" of their shares as determined in accordance with North
Carolina law. Thus, although the Merger is not structured to require approval
of a majority of the unaffiliated shareholders (which the Special Committee
considered to be a negative factor), the Special Committee nevertheless
believes, as of the date of this Proxy Statement and for the reasons set forth
above, the Merger is procedurally fair to the Public Shareholders.
Based on the foregoing, the Special Committee unanimously determined that
the Merger is substantively and procedurally fair to the Public Shareholders
and recommended to the Board approval of the Merger Agreement and that it be
recommended to the shareholders of the Company.
The Board approved the Merger on March 12, 1998 and reconfirmed, as of the
date of this Proxy Statement, that the Merger is substantively and procedurally
fair to the Public Shareholders. THE BOARD RECOMMENDS THAT THE SHAREHOLDERS
APPROVE THE MERGER. Because of the financial interest in the Merger of four of
the members of the Board (Mr. Puckett, Mr. Crane, Mr. Welsh and Mr. Paul), a
majority of the Board could not independently review and
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determine the fairness of the Merger to the Public Shareholders. Mr. Welsh and
Mr. Paul did not attend the meetings of the Board at which the Merger Agreement
was considered because of their conflicts of interest, and Mr. Puckett and Mr.
Crane abstained from voting with respect to the Merger because of their
conflicts of interest. Therefore, the remaining directors (who also constituted
the Special Committee) were the only directors who voted on the Merger. In
their consideration of the Merger, such remaining directors, in their
capacities as members of the Board and not in their capacities as members of
the Special Committee, adopted the analyses and conclusions of the Special
Committee.
In considering the fairness of the Merger, the Special Committee and the
Board did not consider such factors as the Company's net book value or
liquidation value, which are not believed to be indicative of the value of the
Company as a going concern. The Company's net book value per share as of March
31, 1998 was $11.92, substantially below the $19.00 purchase price per share to
be paid by the Acquiror in the Merger. The Special Committee further believes
the Company's liquidation value, which takes into account the appreciated value
of the Company's assets, a significant portion of which has been acquired by
the Company since September 30, 1995, also would be substantially below $19.00
per share. In addition, neither the Company nor, to the knowledge of the
Special Committee and the Board, any affiliate of the Company has purchased
securities of the Company (except pursuant to stock option plans of the
Company) since October 1, 1995. Accordingly, the purchase prices paid in such
transactions were not considered by the Special Committee or the Board in their
fairness determinations.
Opinion of Financial Advisor
On March 12, 1998, Goldman Sachs delivered its oral opinion to the Special
Committee that, as of the date of such opinion, the Cash Merger Consideration
pursuant to the Merger Agreement was fair from a financial point of view to the
shareholders of the Company (other than the Investor Group and the Acquiror).
Goldman Sachs subsequently confirmed its earlier opinion by delivery of its
written opinion dated as of the date hereof.
The full text of the written opinion of Goldman Sachs dated the date of
this Proxy Statement, which sets forth assumptions made, matters considered and
limitations on the review undertaken in connection with the opinion, is
attached hereto as Appendix B to this Proxy Statement and is incorporated
herein by reference. Shareholders of the Company are urged to, and should, read
such opinion in its entirety.
In connection with its opinion, Goldman Sachs reviewed, among other
things, (i) the Merger Agreement; (ii) this Proxy Statement; (iii) the Annual
Reports to Shareholders and Annual Reports on Form 10-K of the Company for the
three fiscal years ended September 30, 1997; (iv) the Company's Prospectus for
its initial public offering of the Common Stock dated December 6, 1994; (v)
certain interim reports to shareholders and Quarterly Reports on Form 10-Q of
the Company; (vi) certain other communications from the Company to its
shareholders; and (vii) certain internal financial analyses and projections for
the Company prepared by its management. Goldman Sachs also held discussions
with members of the management of the Company regarding its past and current
business operations, financial condition, and future prospects . Goldman Sachs
also discussed with members of the Special Committee their views as to the
risks and uncertainties associated with achieving management's projections for
the Company. In addition, Goldman Sachs reviewed the reported price and trading
activity for the Common Stock, compared certain financial and stock market
information for the Company with similar information for certain other
companies, the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the hospital industry and the
physician practice management industry specifically and in other industries
generally and performed such other studies and analyses as it considered
appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy
and completeness for purposes of rendering its opinion. In addition, Goldman
Sachs has not made an independent evaluation or appraisal of the assets and
liabilities of the Company or any of its subsidiaries and Goldman Sachs has not
been furnished with any such evaluation or appraisal. The opinion of Goldman
Sachs referred to herein was provided for the information and assistance of the
Special Committee in connection with its consideration of the transaction
contemplated by the Merger Agreement and such opinion does not constitute a
recommendation as to how any holder of Common Stock should vote with respect to
such transaction.
The following is a summary of all material financial analyses used by
Goldman Sachs in connection with providing its oral opinion to the Special
Committee on March 12, 1998. Goldman Sachs utilized the same type of financial
analyses in connection with providing its written opinion attached hereto as
Appendix B. All implied per share values referred to below reflect the value of
the Company as a whole, including all of its divisions.
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(i) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical trading prices and volumes for the Common Stock both separately
and in comparison to the S&P 500 index and to the Selected Hospital and PPM
Companies (each as defined herein) for the six-month, one-year and
three-year periods prior to the date of the delivery of its oral opinion to
the Special Committee. In addition, Goldman Sachs analyzed the
consideration to be received by holders of the Common Stock pursuant to the
Merger Agreement in relation to the market price of the Common Stock. Such
analysis indicated that the price per share to be paid pursuant to the
Merger Agreement represented a premium of 23% based on the closing price of
$15.50 per share on March 4, 1998, and a premium of 29% based on the 90-day
average market price of $14.77 per share.
(ii) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted
cash flow analysis using the March Projection prepared by management.
Goldman Sachs created separate discounted cash flow models for each of the
three divisions of the Company: the Diagnostics Division, the Practice
Management Division and the Hospital Division.
For the Diagnostics Division and the Practice Management Division,
Goldman Sachs calculated a net present value of free cash flows for the
years 1998 through 2003 using discount rates ranging from 11% to 13%.
Goldman Sachs calculated the two divisions' terminal values in the year
2003 based on terminal perpetuity growth rates ranging from 2% to 5%. These
terminal values were then discounted to present value using discount rates
from 11% to 13%.
For the Hospital Division, Goldman Sachs analyzed separately each of
fifteen hospitals, which were classified in three groups based on the
development stage: those already completed, those under development and
those planned for the future. The operational results of each hospital were
projected for each year up to the year when its operation was deemed to
have reached a steady state (the "Steady State Year"). The Steady State
Year for the fifteen hospitals ranged from 2001 to 2008. Goldman Sachs
calculated a net present value of free cash flows of each hospital for the
years 1998 through the Steady State Year of that hospital using discount
rates ranging from 11% to 13%, from 13% to 15%, or from 15% to 17%
depending on the development stage of that hospital. Goldman Sachs
calculated such hospital's terminal value in its Steady State Year based on
terminal perpetuity growth rates ranging from 2% to 5%. These terminal
values were then discounted to present value using discount rates ranging
from 11% to 13%, from 13% to 15%, or from 15% to 17% depending on the
development stage of that hospital.
The various ranges for discount rates and terminal perpetuity growth
rates were chosen to reflect appropriate risk of capital deployed. Based on
this analysis, the implied per share values ranged from $15 to $23.
(iii) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to the Company to corresponding
financial information, ratios and public market multiples of:
(a) six publicly traded corporations in the hospital industry:
Columbia/HCA Healthcare Corporation, Health Management Associates, Inc.,
Paracelsus Healthcare Corporation, Quorum Health Group, Inc., Tenet
Healthcare Corporation and Universal Health Services, Inc. (the "Selected
Hospital Companies"); and
(b) eighteen publicly traded corporations in the physician practice
management industry, six of which are primary/multispecialty physician
practice management companies: Advanced Health Corporation, Coastal
Physician Group, Inc., FPA Medical Management, Inc., MedPartners, Inc.,
PhyCor, Inc., PhyMatrix Corp. and Sheridan Healthcare, Inc. (the
"Selected Primary PPM Companies"); and twelve of which are specialty
physician practice management companies: American Oncology Resources,
Inc., Apogee, Inc., Complete Management, Inc., EquiMed, Inc., Concentra
Managed Care, Inc., Omega Health Systems, Inc., Orthodontic Centers of
America, Inc., Pediatrix Medical Group, Inc., Physician Reliance Network,
Inc., Physicians Resource Group, Inc. and Specialty Care Network, Inc.
(the "Selected Specialty PPM Companies", and together with the Selected
Primary PPM Companies, the "Selected PPM Companies"; the Selected PPM
Companies and the Selected Hospital Companies being the "Selected
Companies").
The Selected Hospital Companies and the Selected PPM Companies were
chosen because they are publicly traded companies with operations that for
purposes of analysis may be considered similar to the Hospital Division and
the Practice Management Division, respectively, of the Company. There was
only one publicly traded company comparable to the Diagnostics Division:
Raytel Medical Corporation. Goldman Sachs calculated and compared various
financial multiples and ratios. The multiples of the Company were
calculated using a price of $15.50 per share, the closing price of the
Common Stock on the Nasdaq National Market on March 4, 1998. The multiples
and ratios for the Company were based on information provided by the
Company's management and the multiples for each of the Selected Companies
were based on the most recent publicly available information.
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Goldman Sachs considered, among other ratios, levered market
capitalization (i.e., market value of common equity plus estimated market
value of debt less cash) as a multiple of earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the latest twelve-month
("LTM") period. Goldman Sachs' analyses indicated multiples ranging from
6.3x to 17.2x with a median of 9.8x for the Selected Hospital Companies,
multiples ranging from 3.1x to 62.7x with a median of 8.8x for the Selected
Primary PPM Companies, and multiples ranging from 2.5x to 46.5x with a
median of 15.0x for the Selected Specialty PPM Companies.
Goldman Sachs also considered for the Selected Hospital Companies, the
Selected Primary PPM Companies, and the Selected Specialty PPM Companies
estimated price/earnings ratios (based on Institutional Broker Estimate
System (IBES) median estimates as of February 27, 1998), which ranged from
12.5x to 31.3x, from 18.4x to 26.3x, and from 7.1x to 30.4x, respectively,
for the 1998 calendar year, and from 6.3x to 24.9x, from 12.3x to 19.3x,
and from 8.0x to 23.5x, respectively, for the 1999 calendar year; estimated
LTM EBITDA margins and LTM earnings before interest and taxes ("EBIT")
margins, which ranged from 8.2% to 26.5% and 3.3% to 22.4%, respectively,
for the Selected Hospital Companies, from 1.4% to 22.6% and 6.3% to 17.1%,
respectively, for the Selected Primary PPM Companies, and from 2.9% to
68.7% and 0.8% to 61.3%, respectively, for the Selected Specialty PPM
Companies; and price/book value ratios, which ranged from 1.9x to 7.2x for
the Selected Hospital Companies, from 0.2x to 6.7x for the Selected Primary
PPM Companies, and from 0.4x to 6.2x for the Selected Specialty PPM
Companies. Applied to the Common Stock and the March Projection, including
management's estimated earnings per share for 1998, the above median range
of EBITDA and price/earnings multiples implied a price per share of the
Common Stock in the range of $9 to $13.
(iv) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to selected transactions in the hospital industry
since 1989 (the "Selected Hospital Transactions") and selected transactions
in the physician practice management industry since 1991 (the "Selected PPM
Transactions"). The Selected Hospital Transactions included the following:
the acquisition of Deaconess Incarnate Word Health System by Tenet
Healthcare Corporation announced in January 1997, the acquisition of OrNda
HealthCorp by Tenet Healthcare Corp. announced in October 1996, the
acquisition of Champion Healthcare Corp. by Paracelsus Healthcare Corp.
announced in April 1996, the acquisition of HealthTrust Inc. - The Hospital
Co. by Columbia/HCA Healthcare Corp. announced in October 1994, the
acquisition of American Medical Holdings Inc. by National Medical
Enterprises Inc. announced in September 1994, the acquisition of EPIC
Healthcare Group Inc. by HealthTrust Inc. - The Hospital Co. announced in
January 1994, the acquisition of Summit Health Ltd. by OrNda HealthCorp
announced in December 1993, the acquisition of American Healthcare
Management Inc. by OrNda HealthCorp announced in November 1993, the
acquisition of HCA Hospital Corp of America by Columbia Healthcare Corp.
announced in October 1993, the acquisition of 10 Hospitals of Charter
Medical Corp. by Quorum Health Group Inc. announced in October 1993, the
acquisition of Galen Health Care Inc. by Columbia Hospital Corp. announced
in June 1993, the acquisition of American Medical International Inc. by IMA
Holdings Corp. announced in July 1989, and the acquisition of Hospital
Corp. of America by a management group announced in March 1989. The
Selected PPM Transactions constituted a total of 95 transactions and
reflect selected acquisitions in the physician practice management industry
entered into since September 1991 for which information was available. No
minimum consideration paid threshold was used in identifying such
transactions.
Such analysis indicated that, for the Selected Hospital Transactions and
the Selected PPM Transactions, the median of the levered consideration
(i.e., the price paid for the equity securities acquired plus the estimated
market value of any debt less cash assumed) was: as a multiple of LTM
sales, 1.1x for the Selected Hospital Transactions and 0.7x for the
Selected PPM Transactions; as a multiple of LTM EBIT, 11.9x for the
Selected Hospital Transactions and 21.7x for the Selected PPM Transactions;
and as a multiple of LTM EBITDA, 6.9x for the Selected Hospital
Transactions and 17.4x for the Selected PPM Transactions. Applied to the
Common Stock and the March Projection, including management's estimate of
earnings per share for 1998, the median range of transaction multiples
implied a price per share of the Common Stock in the range of $7 to $10.
Goldman Sachs also analyzed the premiums paid in such merger
transactions, which ranged from 25% to 40% of the 90 day average price
prior to announcement of the transaction. Applied to the Common Stock of
the Company and the March Projection, including management's estimate of
earnings per share for 1998, these merger premiums implied a price per
share of $14 to $18 when transaction premium analysis is combined with the
trading multiples analysis as described in Section (iii) above.
(v) Implied Future Prices Analysis. Goldman Sachs calculated implied
future prices of the Common Stock at the end of each year for the five-year
period ending in 2003 on the basis of the management's earnings estimates
in the March Projection and the assumption of a price/earnings ratio of
21.0x (the median of price/earnings ratio in 1998 for the Selected Hospital
Companies). The implied future prices of the Common Stock reflected an
average compound
24
<PAGE>
annual growth rate of 34.0% for the price of the Common Stock between 1998
and 2003. Goldman Sachs then discounted the implied future prices of the
Common Stock at a discount rate of 12% to arrive at implied per share
values ranging from $9 to $21.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable
to the Company or the contemplated transaction. The analyses were prepared
solely for purposes of Goldman Sachs' providing its opinion to the Special
Committee as to the fairness from a financial point of view of the Cash Merger
Consideration pursuant to the Merger Agreement to holders of outstanding shares
of the Common Stock (excluding the Investor Group and the Acquiror) and do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Analyses based upon projections of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, none of the Company, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those projected.
As described above, Goldman Sachs' opinion to the Special Committee was one of
many factors taken into consideration by the Special Committee in making its
determination to approve the Merger Agreement. The foregoing summary does not
purport to be a complete description of the analyses performed by Goldman Sachs
and is qualified in its entirety by reference to the written opinion of Goldman
Sachs set forth in Appendix B hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. The Special Committee
selected Goldman Sachs as its financial advisor because it is a nationally
recognized investment banking firm that has substantial experience in
transactions similar to the Merger. Goldman Sachs has provided certain
investment banking services to KKR, WCAS VII and their affiliates from time to
time and may provide investment banking services to KKR, WCAS VII and their
affiliates from time to time in the future.
Pursuant to a letter agreement dated August 8, 1997 (the "Engagement
Letter"), the Special Committee engaged Goldman Sachs to act as its financial
advisor in connection with the contemplated transaction. Pursuant to the terms
of the Engagement Letter, the Company has agreed to pay Goldman Sachs upon
consummation of the Merger a transaction fee of 1% of the aggregate
consideration (the total value of the Common Stock at $19 per share plus the
outstanding debt of MedCath assumed by Acquiror), subject to a minimum of $3.25
million. The Company has agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorney's fees, and to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.
Purpose and Reasons of the Affiliates for the Merger
The purpose of the Affiliates for engaging in the transactions
contemplated by the Merger Agreement is to acquire, together with any
participating Physicians and Employees, 100% of the ownership of the Company.
The Affiliates believe that as a private company MedCath will have greater
operating flexibility to focus on enhancing value by emphasizing growth and
operating cash flow without the constraint of the public market's emphasis on
quarterly earnings and the potentially disruptive effect associated with losses
in connection with the construction and start-up of new Heart Hospitals.
The members of the Management Group beneficially own, in the aggregate,
approximately 15.2% of the outstanding Common Stock. The two WCAS Directors may
be deemed to beneficially own, in the aggregate, approximately 8.2% and 7.7%,
respectively, of the outstanding Common Stock, including 7.5% that is held of
record by WCAS V. See "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF
MANAGEMENT."
Prior to consummation of the Merger, members of the Management Group have
agreed to contribute a portion of their equity interests in MedCath to the
Parent, representing an investment of approximately $17 million in the Parent
(based on the $19 per share to be received by shareholders in the Merger), in
exchange for 668,016 shares of common stock of the Parent and options to
purchase 294,767 shares of common stock of the Parent. The WCAS Investors have
agreed to contribute an aggregate of 262,474 shares of Common Stock to the
Parent (of which 88,385 will be contributed by the WCAS Directors) in exchange
for an equivalent number of shares of common stock of the Parent.
25
<PAGE>
As a result of the Merger, the KKR Partnership will acquire, indirectly
through the Parent for an investment of up to approximately $106 million, up to
approximately 46% of the equity interest in the Company; the WCAS Investors
will acquire, indirectly through the Parent for an investment of up to
approximately $106 million, up to approximately 46% of the equity interest in
the Company; and the Management Group will acquire, indirectly through the
Parent for an investment in kind of approximately $17 million of their equity
interest in Medcath, approximately 8% of the equity interest in the Company.
See "SPECIAL FACTORS -- Background of the Merger." Members of the Management
Group and the WCAS Investors will also receive the Cash Merger Consideration
for the remainder of their investment in the Company on the same terms as other
shareholders.
Position of the Affiliates as to Fairness of the Merger
Each of the Affiliates has considered the analyses and findings of the
Special Committee and the Board (described in detail in "SPECIAL FACTORS -- The
Special Committee's and the Board's Recommendation") with respect to the
fairness of the Merger to the unaffiliated shareholders of the Company. As of
the date of this Proxy Statement, each of the Affiliates adopts the analyses
and findings of the Special Committee and the Board with respect to the
fairness of the Merger and believes that the Merger is both procedurally and
substantively fair to the Company's unaffiliated shareholders; provided that no
opinion is expressed as to the fairness to any shareholder making an investment
in the Parent. None of the Affiliates makes any recommendation as to how the
Company's shareholders should vote on the Merger Agreement. The WCAS Directors
have financial interests in the Merger and the members of the Management Group
have financial and employment interests in the Merger. See "SPECIAL FACTORS --
Conflicts of Interest."
Conflicts of Interest
In considering the recommendations of the Board with respect to the
Merger, shareholders should be aware that certain officers and directors of
MedCath and affiliates, and associates and persons related to the officers and
directors are members of the Investor Group or otherwise have interests in
connection with the Merger which may present them with actual or potential
conflicts of interest as summarized below. The Special Committee and the Board
were aware of these interests and considered them among the other matters
described under " -- The Special Committee's and the Board's Recommendation."
The Special Committee considered the Management Group's conflicts of interest
to be a negative factor in its determination that the Merger is fair to the
Public Shareholders, even though the compensation and benefits payable to
members of the Management Group are intended to provide for the payment of
compensation and benefits to the Management Group substantially equivalent to
the compensation and benefits they are currently entitled to receive from the
Company.
Voting Agreement. As a condition to the Merger Agreement, the members of
the Management Group have entered into an agreement with the Acquiror and the
Parent pursuant to which they have agreed to vote their shares of Common Stock
(i) in favor of the adoption and approval of the Merger Agreement and the
transactions contemplated thereby and (ii) except as otherwise agreed to in
writing by the Parent, against any extraordinary corporate transaction
involving MedCath or its subsidiaries; any reorganization, recapitalization,
dissolution or liquidation of MedCath or its subsidiaries; any change in a
majority of the directors, material amendment to MedCath's Articles of
Incorporation or Bylaws; or any other action involving MedCath or its
subsidiaries that has the effect of impeding, delaying or impairing the
consummation of the Merger or the transactions contemplated thereby.
Post-Merger Ownership and Control of the Parent. It is anticipated that
immediately after the Merger the following individuals and entities will
beneficially own the number of shares of common stock of the Parent shown in
the table below. The table does not reflect the beneficial ownership of any
shares of common stock of the Parent by Physicians or Employees. To the extent
any of the Physicians accept the Parent's offer to issue to them shares of
common stock of the Parent in exchange for shares of Common Stock, the
percentages shown in the table below for WCAS VII, WCAS Healthcare Partners,
L.P., the WCAS Directors and the other WCAS Investors will decrease, and to the
extent that any of the Employees accept the Parent's offer to grant them stock
options in exchange for the cancellation of their options to purchase shares of
Common Stock, all of the percentages shown in the table below will decrease.
26
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Percentage of Parent
Parent Common Stock Common Stock
Name of Beneficial Owner Beneficially Owned Beneficially Owned
- -------------------------------- --------------------- ----------------------
<S> <C> <C>
The KKR Partnership 5,573,684 46.02%
WCAS VII 5,232,370 43.21
WCAS Healthcare Partners, L.P. 52,632 0.43
WCAS Directors(1)
Patrick J. Welsh 72,595 0.60
Andrew M. Paul 15,790 0.13
Other WCAS Investors 200,298 1.65
Management Group(2)
Stephen R. Puckett 657,243 5.43
David Crane 156,015 1.29
Charles W. (Todd) Johnson 136,882 1.13
Richard J. Post 12,642 0.11
</TABLE>
- ---------
(1) See "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT" for number
of shares of Common Stock and percentage of Common Stock beneficially
owned before the Merger by these persons and entities.
(2) Includes an aggregate of 294,767 shares of common stock of the Parent
issuable upon exercise of options to be received in exchange for MedCath
stock options held by members of the Management Group, which will be fully
vested and immediately exercisable. Does not include any shares of common
stock of the Parent issuable upon exercise of New Options expected to be
granted to the Management Group at the Effective Time. See " -- Grant of
New Options of the Parent to the Management Group."
Following consummation of the Merger, the members of the Management Group
will continue as the executive officers of the Company, and the Management
Group will designate Stephen R. Puckett and David Crane to serve on the Board
of Directors of the Company. In addition, the Management Group will become the
executive officers of the Parent.
The Board of Directors of the Parent will have ten members. The Management
Group will designate Stephen R. Puckett and David Crane to serve on the Board
of Directors of the Parent. The WCAS Investors will designate three persons to
serve on such board.
Contribution to the Parent of Equity Interests in MedCath by the
Management Group and WCAS Directors. Each member of the Management Group has
agreed to contribute in kind at least 50% of the value of his equity interest
in MedCath, including both shares of Common Stock and the Aggregate Unrealized
Gain on options held by him to purchase shares of Common Stock. In exchange for
shares of Common Stock contributed, each member of the Management Group will
receive shares of common stock of the Parent. In exchange for the Aggregate
Unrealized Gain on MedCath stock options, each member of the Management Group
will receive options to purchase shares of common stock of the Parent that will
be fully vested and immediately exercisable. This contribution will occur prior
to consummation of the Merger. If the Merger is consummated, the Management
Group will not receive any cash in the Merger for their shares of Common Stock
contributed to the Parent or the Aggregate Unrealized Gain on their MedCath
stock options exchanged for Parent stock options, but, instead, will receive
common stock of the Parent and options to purchase shares of such common stock
and, therefore, will continue to have indirect ownership interests in MedCath
following the Merger. Shares of Common Stock held by the Management Group that
are not contributed to the Parent will be converted into the right to receive
the same Cash Merger Consideration as shares of Common Stock held by other
shareholders of the Company. The Management Group will also receive cash on the
same basis as all other optionees for the Aggregate Unrealized Gain on any
stock options they do not agree to exchange for substantially equivalent
options to purchase shares of common stock of the Parent.
Prior to the Effective Time, MedCath has agreed, pursuant to the terms of
the Merger Agreement, to take all necessary action to cancel all outstanding
options to purchase Common Stock, whether or not exercisable, other than
options exchanged by the Management Group and the Employees for similar options
to purchase shares of common stock of the Parent. See "THE MERGER -- Cash-out
of MedCath Stock Options" and "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF
MANAGEMENT." As of June 22, 1998, there were options outstanding to purchase an
aggregate of 1,189,195 shares of Common Stock at a weighted average exercise
price of $13.05 per share, all but 28,255 of which have an exercise price per
share of less than $19.
The following table sets forth information as of June 22, 1998 as to the
shares of Common Stock and the options to purchase shares of Common Stock held
by members of the Management Group for which cash payments will be received
27
<PAGE>
upon consummation of the Merger.
<TABLE>
<CAPTION>
Amount of Cash
to be Received
Shares Not for Shares Not
Management Group Member Contributed to Parent Contributed to Parent
- ------------------------- ----------------------- -----------------------
<S> <C> <C>
Stephen R. Puckett 605,000 $11,495,000
David Crane 102,117 1,940,223
Charles W. (Todd)
Johnson 129,504 2,460,576
Richard J. Post -- --
<CAPTION>
Shares Amount of Cash Total Amount of Cash
Underlying to be Received to be Received
Stock Options for Stock Options upon Consummation
Management Group Member Not Contributed Not Contributed of the Merger
- ------------------------- ----------------- ------------------- ---------------------
<S> <C> <C> <C>
Stephen R. Puckett -- -- $11,495,000
David Crane 42,837 $282,999 2,223,222
Charles W. (Todd)
Johnson -- -- 2,460,576
Richard J. Post 32,959 180,162 180,162
</TABLE>
Certain of the WCAS Investors have agreed to contribute to the Parent an
aggregate of 262,474 shares of Common Stock, of which an aggregate of 88,385
shares will be contributed by the WCAS Directors, in exchange for shares of
common stock of the Parent. The value (at $19 per share) of the shares of
Common Stock contributed (approximately $5 million) plus cash contributed to
the Parent by the WCAS Investors will aggregate approximately $106 million
(reduced by the aggregate value (at $19 per share) of any shares of Common
Stock contributed to the Parent by the Physicians and by an amount equal to
one-half of the Aggregate Unrealized Gain on the stock options contributed to
the Parent by the Employees).
Grant of New Options of Parent to the Management Group. The Board of
Directors of the Parent will reserve shares of the Parent's common stock
representing 15% of the fully diluted equity of the Parent for the grant of
Parent stock options at an exercise price of $19 per share (the "New Options").
Fifty percent of the New Options will vest in equal portions annually over the
four years following the grant. The remaining fifty percent of the New Options
will become exercisable after the eighth anniversary of grant, subject to
acceleration if the Parent achieves certain performance targets, which will be
consistent with the June Projection, to be established by the Board of
Directors of the Parent. The New Options are also subject to a number of other
conditions. See "CERTAIN FORWARD LOOKING INFORMATION."
The New Options will be granted as follows:
o the Management Group will receive between 70% and 80% of the New Options
upon consummation of the Merger;
o other key employees of the Company will receive approximately 90% of the
remaining New Options upon consummation of the Merger; and
o the approximately 10% of the remaining New Options will remain available
for grant to future employees of the Parent.
No determination has yet been made as to the number of New Options to be
granted to any individual.
"Change of Control" Payments to Members of the Management Group. The
consummation of the Merger will constitute a "Change in Control" of the Company
pursuant to the terms of the respective employment agreements between the
members of the Management Group and the Company. Upon such a Change in Control,
each of them becomes entitled to a lump-sum payment equal to two times the
total cash compensation earned by such employee during the immediately
preceding fiscal year of the Company, plus the present value of two years of
normal health, life insurance and retirement benefits. Each member of the
Management Group has agreed to forego such payment, however, in consideration
of the payments to be received pursuant to the new employment agreements
described immediately below. If they had not agreed to forego such payments,
then Stephen R. Puckett, David Crane, Charles W. (Todd) Johnson and Richard J.
Post would have been entitled to receive $778,337, $613,321, $530,147 and
$444,977, respectively, under their current employment agreements upon the
occurrence of a "Change of Control."
New Employment Agreements with the Management Group. Upon consummation of
the Merger, the employment agreements that each member of the Management Group
currently has with the Company will terminate. At such time, each member of the
Management Group will enter into a new employment agreement with the Parent.
The principal terms of the employment agreements are summarized below:
o each agreement will have a term of four years with an extension for an
additional year, unless terminated or not renewed in accordance with the
agreement's terms;
o each agreement will provide for compensation consisting of base salary
(the amount of which is intended to be, at all times, no less than the
median base salary for each of the four highest paid officers of
companies of similar size and character as the Parent), and a potential
cash bonus (the eligibility formula for which is intended to be
28
<PAGE>
comparable to the current cash bonus formula of the Company and based
upon performance targets to be determined by the Board of Directors of
the Parent); and
o each agreement will provide for a severance payment in the event of
termination by the Parent without cause or resignation by the employee
for good reason, consisting of two years' payment of base salary and
bonus and continuation of normal health, life insurance, retirement and
other benefits.
The initial base salaries for Stephen R. Puckett, David Crane, Charles W.
(Todd) Johnson and Richard J. Post pursuant to their new employment agreements
with the Parent will be $352,680, $263,172, $189,996 and $157,992,
respectively. The possible annual cash bonuses for each of the members of the
Management Group will equal a percentage of each of their base salaries, be
calculated using a bonus formula comparable to the bonus formula in effect
immediately prior to the Merger, and will depend upon the Company meeting or
exceeding certain performance targets to be established yearly by the Board.
Each member of the Management Group will also be entitled to a separate
payment in respect of the termination of his previously existing employment
agreement and a separate payment in respect of a covenant not to compete. For
each member of the Management Group, the covenant not to compete will be in
effect during the period of his employment and for one year thereafter. Without
prior written consent of the Parent, while the covenant not to compete is in
effect, a member of the Management Group may not, directly or indirectly, in
any capacity carry on, be engaged in or have any financial interest in (with
the exception of a less than 5% interest in a public company) any business
which is in competition (as defined in the employment agreement) with the
existing business of the Company. The amounts of such payments to be received
by each member of the Management Group immediately after consummation of the
Merger are set forth in the table below.
<TABLE>
<CAPTION>
Management Group Member Termination Payment Non-Compete Payment
- -------------------------------- --------------------- --------------------
<S> <C> <C>
Stephen R. Puckett $378,342 $400,000
David Crane 298,326 315,000
Charles W. (Todd) Johnson 265,155 265,000
Richard J. Post 221,982 220,000
</TABLE>
Stockholders' Agreement. The Parent and the members of the Management
Group will enter into a stockholders' agreement that will restrict the
Management Group's ability to transfer the shares of common stock of the Parent
to be owned by them. The agreement will give them (or their estates) the right
in certain events to sell, and will obligate the Parent to purchase, their
shares of common stock of the Parent. The agreement will also grant them
certain registration rights for their shares of the Parent and will give the
Parent the right to call their shares at a specified price upon the occurrence
of certain events.
Payments to Investment Adviser of WCAS VII. Upon consummation of the
Merger, MedCath will pay a financial advisory fee to WCA Management of not more
than $2.5 million. In addition, WCA Management will receive annually a
monitoring fee in an amount to be determined after consummation of the Merger.
Indemnification and Insurance. The Merger Agreement requires that MedCath
provide indemnification to its current and former directors and officers
against liabilities (including reasonable attorneys' fees) relating to actions
or omissions arising out of their being a director, officer, employee or agent
of the Company at or prior to the Effective Time (including the transactions
contemplated by the Merger Agreement). In addition, MedCath is obligated for a
period of six years from the Effective Time to continue in effect directors'
and officers' liability insurance with respect to matters occurring prior to
the Effective Time, which insurance must contain terms and conditions no less
advantageous than are contained in MedCath's current directors' and officers'
liability insurance policy; provided that MedCath is not obligated to expend
annually more than 200% of the current cost of such coverage.
Special Committee. As compensation for serving on the Special Committee,
which met on 20 occasions between July 28, 1997 and the date of this Proxy
Statement, the members of the Special Committee each received fees in the
amount of $20,000 pursuant to the Board's standard policy for compensating
directors for attendance at committee meetings.
Each member of the Special Committee, as an outside director,
automatically received on the date of each annual meeting options to purchase
2,000 shares of Common Stock at the market price of the Common Stock on such
date. Dr. Duncan and Mr. McKinnon each received a total of 4,000 such options,
none of which have been exercised. In addition, Dr. Duncan was granted upon
appointment to the Board options to purchase 3,531 shares of Common Stock at an
exercise price of $7.51
29
<PAGE>
per share, of which 1,177 have not been exercised. Under the terms of the
Merger Agreement, the options held by the members of the Special Committee will
be terminated and each holder thereof will receive an amount in cash equal to
the Aggregate Unrealized Gain on such options on the same basis as other
holders of MedCath stock options.
In addition to the options described in the preceding paragraph, Dr.
Duncan owns 2,354 shares of Common Stock, and Mr. McKinnon owns 60,000 shares
of Common Stock, all of which will, upon consummation of the Merger, be
canceled and for which they will receive the Cash Merger Consideration.
Accordingly, upon consummation of the Merger, the members of the Special
Committee will receive the following cash payments: Dr. Duncan will receive
$20,774 for the Aggregate Unrealized Gain on his stock options and $44,726 for
his shares of Common Stock, for a total cash payment of $65,500. Mr. McKinnon
will receive $7,250 for the Aggregate Unrealized Gain on his stock options and
$1,140,000 for his shares of Common Stock, for a total cash payment of
$1,147,250.
Members of the Special Committee will also be entitled to certain
indemnification rights granted under the Merger Agreement to the current and
former directors and officers of the Company. See " -- Conflicts of Interest --
Indemnification and Insurance."
Certain Effects of the Merger
As a result of the Merger, other than the Management Group, the
Physicians, the Employees and the WCAS Investors, the current shareholders of
MedCath will not have an opportunity to continue their equity interest in
MedCath as an ongoing corporation and therefore will not share in the future
earnings and potential growth of MedCath. Upon consummation of the Merger, the
Common Stock will no longer be traded on the Nasdaq National Market, price
quotations will no longer be available and the registration of the Common Stock
under the Exchange Act will be terminated. The termination of registration of
the Common Stock under the Exchange Act will eliminate the requirement to
provide information to the Commission and will make most of the provisions of
the Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) and the requirement of furnishing a proxy or information statement in
connection with shareholders' meetings, no longer applicable.
The members of the Management Group, the Physicians, the Employees and the
WCAS Directors will own an equity interest in the Parent that will allow them
indirectly to share in the future earnings and potential growth of MedCath,
which will upon consummation of the Merger become a wholly-owned subsidiary of
the Parent. An investment in MedCath (indirectly through an equity investment
in the Parent) following the Merger involves substantial risk resulting from
the limited liquidity of any such investment and the increased leverage
associated with future borrowings that will be necessary to fund the
substantial capital expenditures required to execute the Company's business
strategy. Nonetheless, if the Company is able to successfully implement its
business strategy, the value of such an equity investment would be considerably
greater than the original cost thereof. See "CERTAIN FORWARD LOOKING
INFORMATION."
The receipt of cash pursuant to the Merger will be a taxable transaction.
See "FEDERAL INCOME TAX CONSEQUENCES."
Conduct of MedCath's Business After the Merger
The Parent is continuing to evaluate MedCath's business, assets,
practices, operations, properties, corporate structure, capitalization,
management and personnel and discuss what changes, if any, will be desirable.
Subject to the foregoing, the Parent expects that the day-to-day business and
operations of MedCath will be conducted substantially as they are currently
being conducted by MedCath. The Parent does not currently intend to dispose of
any assets of MedCath, other than in the ordinary course of business.
Additionally, the Parent does not currently contemplate any material change in
the composition of MedCath's current management, although after the Merger, the
Board will consist of four designees of the KKR Partnership, three designees of
the WCAS Investors, Stephen R. Puckett and David Crane of the Management Group
and one independent director to be elected by the other directors.
Certain Forward Looking Information
Certain projections prepared by management of MedCath are included
elsewhere in this Proxy Statement under the heading "CERTAIN FORWARD LOOKING
INFORMATION."
30
<PAGE>
THE SPECIAL MEETING
Proxy Solicitation
This Proxy Statement is being delivered to MedCath's shareholders in
connection with the solicitation by the Board of proxies to be voted at the
Special Meeting to be held July 22, 1998 at 10:00 a.m., local time, at Raintree
Country Club, located at 8600 Raintree Lane, Charlotte, North Carolina. All
expenses incurred in connection with solicitation of the enclosed proxy will be
paid by the Company. Officers, directors and regular employees of the Company,
who will receive no additional compensation for their services, may solicit
proxies by telephone or personal call. In addition, the Company has retained
Georgeson & Company Inc. to solicit proxies for a fee of $7,000 plus expenses.
The Company has requested brokers and nominees who hold stock in their names to
furnish this proxy material to their customers and the Company will reimburse
such brokers and nominees for their related out-of-pocket expenses. This Proxy
Statement and the accompanying proxy card are being mailed to shareholders on
or about June , 1998.
Record Date and Quorum Requirement
The Common Stock is the only outstanding voting security of the Company.
The Board has fixed the close of business on June 22, 1998 as the record date
(the "Record Date") for the determination of shareholders entitled to notice
of, and to vote at, the Special Meeting and any adjournment or adjournments
thereof. Each holder of record of Common Stock at the close of business on the
Record Date is entitled to one vote for each share then held on each matter
submitted to a vote of shareholders. At the close of business on the Record
Date, there were 11,813,404 shares of Common Stock issued and outstanding held
by holders of record and by approximately persons or entities holding in
nominee name.
The holders of a majority of the outstanding shares entitled to vote at
the Special Meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Abstentions are counted
for purposes of determining the presence or absence of a quorum for the
transaction of business.
Voting Procedures
Approval of the Merger Agreement, which is attached as Appendix A hereto,
will require the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting. A
failure to vote or a vote to abstain will have the same legal effect as a vote
cast against approval. Brokers and, in many cases, nominees will not have
discretionary power to vote on the proposal to be presented at the Special
Meeting. Accordingly, beneficial owners of shares should instruct their brokers
or nominees how to vote. A broker non-vote will have the same effect as a vote
against the Merger.
Under North Carolina law, holders of Common Stock who do not vote in favor
of the Merger Agreement and who comply with certain notice requirements and
other procedures will have the right to dissent and to be paid cash for the
"fair value" of their shares as finally determined under such procedures, which
may be more or less than the consideration to be received by other shareholders
of MedCath under the terms of the Merger Agreement. Failure to follow such
procedures precisely may result in loss of Dissenters' Rights. See "RIGHTS OF
DISSENTING SHAREHOLDERS."
Voting and Revocation of Proxies
A shareholder giving a proxy has the power to revoke it at any time before
it is exercised by (i) filing with the Secretary of MedCath an instrument
revoking it, (ii) submitting a duly executed proxy bearing a later date or
(iii) voting in person at the Special Meeting. Subject to such revocation, all
shares represented by each properly executed proxy received by the Secretary of
MedCath will be voted in accordance with the instructions indicated thereon,
and if no instructions are indicated, will be voted to approve the Merger and
in such manner as the persons named on the enclosed proxy card in their
discretion determine upon such other business as may properly come before the
Special Meeting or any adjournment thereof.
The shares represented by the accompanying proxy card and entitled to vote
will be voted if the proxy card is properly signed and received by the
Secretary of the Company prior to the Special Meeting.
Effective Time
The Merger will be effective as soon as practicable following shareholder
approval of the Merger Agreement and upon the filing of articles of merger with
the Secretary of State of the State of North Carolina. The Effective Time is
currently expected to occur as soon as practicable after the Special Meeting,
subject to approval of the Merger Agreement at the Special Meeting and
satisfaction or waiver of the terms and conditions set forth in the Merger
Agreement. See "THE MERGER -- Conditions."
31
<PAGE>
THE MERGER
The Merger Agreement provides that the Acquiror, a newly-formed North
Carolina corporation which is a wholly-owned subsidiary of the Parent, will be
merged with and into MedCath, and that following the Merger, the separate
existence of the Acquiror will cease and MedCath will continue as the surviving
corporation.
The terms of and conditions to the Merger are contained in the Merger
Agreement which is included in full as Appendix A to this Proxy Statement and
is incorporated herein by reference. The discussion in this Proxy Statement of
the Merger and the summary description of the principal terms of the Merger
Agreement are subject to and qualified in their entirety by reference to the
more complete information set forth in the Merger Agreement.
Conversion of Securities
At the Effective Time, subject to the terms, conditions and procedures set
forth in the Merger Agreement, each share of Common Stock issued and
outstanding immediately prior to the Effective Time (other than the Dissenting
Shares and shares held by the Acquiror) will, by virtue of the Merger, be
converted into the right to receive the Cash Merger Consideration. Except for
the right to receive the Cash Merger Consideration, from and after the
Effective Time, all shares (other than the Dissenting Shares and shares held by
the Acquiror), by virtue of the Merger and without any action on the part of
the holders, will no longer be outstanding and will be canceled and retired and
will cease to exist. Each holder of a certificate formerly representing any
shares (other than the Dissenting Shares and shares held by the Acquiror) will
after the Effective Time cease to have any rights with respect to such shares
other than the right to receive the Cash Merger Consideration for such shares
upon surrender of the certificate.
No interest will be paid or accrued on the amount payable upon the
surrender of any certificate. Payment to be made to a person other than the
registered holder of the certificate surrendered is conditioned upon the
certificate so surrendered being properly endorsed and otherwise in proper form
for transfer, as determined by the Disbursing Agent. Further, the person
requesting such payment will be required to pay any transfer or other taxes
required by reason of the payment to a person other than the registered holder
of the certificate surrendered or establish to the satisfaction of the
Disbursing Agent that such tax has been paid or is not payable. Six months
following the Effective Time, MedCath will be entitled to cause the Disbursing
Agent to deliver to it any funds (including any interest received with respect
thereto) made available to the Disbursing Agent which have not been disbursed
to holders of certificates formerly representing shares outstanding prior to
the Effective Time, and thereafter such holders will be entitled to look to
MedCath only as general creditors with respect to cash payable upon due
surrender of their certificates. Notwithstanding the foregoing, neither the
Disbursing Agent nor any party to the Merger Agreement will be liable to any
holder of certificates formerly representing shares for any amount paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Except as described in this paragraph, MedCath will pay all
charges and expenses, including those of the Disbursing Agent, in connection
with the exchange of shares for the Cash Merger Consideration.
Each share of the Acquiror's common stock that is issued and outstanding
immediately prior to the Merger will be converted at the Effective Time into
one share of Common Stock of MedCath.
Cash-out of MedCath Stock Options
In general, outstanding stock options to purchase shares of MedCath shall
be canceled or terminated as of the Effective Time. Holders of such options
shall receive cash equal to the Aggregate Unrealized Gain on such options.
Options contributed by the Management Group to the Parent for similar options
to purchase shares of common stock of the Parent will be canceled, and the
members of the Management Group will not receive any cash payment upon the
cancellation thereof.
Transfer of Shares
No transfers of shares of Common Stock will be made on the stock transfer
books at or after the Effective Time. If, after the Effective Time,
certificates representing such shares are presented to MedCath, such shares
will be canceled and exchanged for the Cash Merger Consideration.
Conditions
Each party's respective obligation to effect the Merger is subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, any or all of which may be waived (other than those appearing in
(i) and (iii) below) at the appropriate party's discretion, to the extent
permitted by applicable law:
32
<PAGE>
(i) the Merger Agreement and the transactions contemplated therein shall
have been approved in the manner required by applicable law by the holders
of a majority of the outstanding shares entitled to vote thereon;
(ii) there is no action, suit or proceeding pending before any court or
governmental body that may have the effect of making illegal or otherwise
preventing, prohibiting or substantially delaying consummation of the
Merger or would result in an award of damages that would have a material
adverse effect on MedCath; and
(iii) the waiting period applicable to the consummation of the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), shall have expired or terminated.
The obligations of MedCath to effect the Merger are subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, unless waived by MedCath:
(i) the representations and warranties of the Acquiror and the Parent in
the Merger Agreement shall be true and correct in all material respects as
of the date of execution thereof and as of the Effective Time as though
made at the Effective Time, except for changes specifically permitted by
the Merger Agreement;
(ii) the Acquiror and the Parent shall have performed in all material
respects their agreements contained in the Merger Agreement required to be
performed at or prior to the Effective Time; and
(iii) MedCath shall have received a certificate of the President and a
Vice President of the Acquiror and the Parent certifying to the effect of
the preceding clauses (i) and (ii).
The obligations of the Acquiror and the Parent to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, unless waived by the Acquiror:
(i) the representations and warranties of MedCath contained in the Merger
Agreement shall be true and correct in all material respects as of the date
of execution thereof and, except as contemplated by the Merger Agreement,
as of the Effective Time, as though all of such representations were made
by MedCath at the Effective Time;
(ii) MedCath shall have performed in all material respects its agreements
contained in the Merger Agreement required to be performed at or prior to
the Effective Time;
(iii) the Acquiror shall have received a certificate of the President and
a Vice President of MedCath certifying, as applicable, to the effect of the
preceding clauses (i) and (ii);
(iv) the Acquiror shall have obtained the financing for the Merger on
terms satisfactory to the Acquiror;
(v) all consents, approvals or notices to any governmental authority or
other person or entity whose consent or approval or to whom notice is
required in connection with the execution or delivery and performance of
the Merger Agreement and the transactions contemplated by those agreements
shall have been obtained or made;
(vi) the Management Group shall have invested in the Parent at least 50%
of the value of their equity interest in the Company, including both shares
of Common Stock and the Aggregate Unrealized Gain or MedCath stock options
held by them;
(vii) the directors of MedCath, other than those who are also directors
of the Acquiror, shall have resigned; and
(viii) to MedCath's knowledge, no investigation of MedCath for any
violation of the "Stark" laws, anti-kickback laws or laws or regulations
relating to Medicare, Medicaid or CHAMPUS shall be pending.
After approval of the Merger Agreement by the shareholders of MedCath, no
condition may be waived that reduces the amount or changes the form of the Cash
Merger Consideration to be received by the shareholders or that would adversely
affect the shareholders of MedCath unless a waiver of such condition is
approved by the shareholders.
Representations and Warranties
MedCath has made representations and warranties in the Merger Agreement
regarding, among other things, its organization and good standing, authority to
enter into the transaction, its capitalization, its financial statements, the
absence of certain changes in the business of MedCath since September 30, 1997,
the content and submission of forms and reports required to be filed by MedCath
with the Commission, requisite governmental and other consents and approvals,
compliance with all applicable laws, including without limitation those
relating to billing and coding for healthcare services, absence of litigation
to which MedCath is a party, brokers and finders, requisite tax filings,
absence of defaults under material contracts, employee benefits and coding and
environmental matters.
33
<PAGE>
The Parent and the Acquiror have made representations and warranties in
the Merger Agreement regarding, among other things, their organization and good
standing, authority to enter the transaction, the Acquiror's capitalization,
compliance with all applicable laws, requisite governmental and other consents
and approvals, accuracy of information supplied by the Acquiror for submission
on forms and reports required to be filed by MedCath with the Commission,
financing for the Merger, brokers and finders, the absence of prior activities
and absence of litigation to which the Acquiror or the Parent is a party.
The representations and warranties of the parties in the Merger Agreement
will expire upon consummation of the Merger, and upon such expiration none of
such parties or their respective officers, directors or principals will have
any liability whatsoever with respect to any such representations or
warranties.
Covenants
In the Merger Agreement, MedCath has agreed that prior to the Effective
Time, unless otherwise agreed to in writing by the Acquiror or as otherwise
contemplated by the Merger Agreement, MedCath and each of its subsidiaries will
conduct business only in the ordinary course substantially consistent with past
practice and will not:
(i) amend its articles of incorporation or bylaws or the organizational
documents of any of MedCath's subsidiaries;
(ii) declare, set aside or pay any dividend or make any other
distribution in respect of any of its shares of capital stock;
(iii) issue, grant, sell, pledge, or transfer any shares of its capital
stock, stock options, warrants, securities or rights to acquire any such
shares, securities or rights of MedCath or propose or agree to do any of
the foregoing or acquire directly or indirectly any shares of its capital
stock or make any other changes in its equity capital structure;
(iv) incur any indebtedness, directly or through guarantees or otherwise,
other than under existing credit facilities for current operations in the
ordinary course of its business or make loans other than to its
subsidiaries;
(v) acquire directly or indirectly by redemption or otherwise any shares
of the capital stock of MedCath of any class or any options, warrants or
other rights to purchase any such shares, fail to use their reasonable best
efforts to conduct their relations with employees and their employee
benefit plans only in the ordinary and usual course consistent with past
practices;
(vi) amend, or enter into any additional, employment agreements with
officers or directors of MedCath or make increases in employee compensation
or benefits except as permitted by the Merger Agreement;
(vii) fail to use their reasonable best efforts to keep in place its
current insurance policies which are material;
(viii) make any investment of a capital nature or otherwise enter into
any material transaction;
(ix) make any material tax election or settle or compromise any material
tax liability;
(x) not make any change in its accounting principles or methods except
insofar as may be required by a change in generally accepted accounting
principles;
(xi) split, combine or reclassify any of the capital stock of MedCath or
issue other securities in respect of or in substitution for such existing
capital stock;
(xii) acquire any other business or entity whether by acquisition of
assets or stock, merger or consolidation;
(xiii) agree to engage in any new developments;
(xiv) sell, lease, mortgage or otherwise encumber any of its assets other
than in the ordinary course of business;
(xv) make capital expenditures in amounts which exceed MedCath's annual
capital expenditure budget for fiscal year 1998;
(xvi) pay, discharge or satisfy material claims other than in the
ordinary course of business;
(xvii) adopt a plan of complete or partial liquidation or merger with
respect to MedCath or any of its subsidiaries;
(xviii) enter into any new collective bargaining agreement;
(xix) settle or compromise any litigation against MedCath or its
subsidiaries;
34
<PAGE>
(xx) engage in any transaction or enter into any agreement with any
affiliate or other person covered under Item 404 of the Commission's
Regulation S-K;
(xxi) adopt new, or amend existing, employee benefit plans;
(xxii) grant employees any new or modified severance;
(xxiii) effectuate a plant closing or mass layoff without complying with
applicable law;
(xxiv) fail to grant to the Acquiror and its representatives, on a
confidential basis, access to the records and facilities of MedCath; and
(xxv) fail to use its reasonable best efforts to cooperate with and
assist the Acquiror with respect to financing necessary to effect the
Merger.
The Merger Agreement also provides that the Acquiror will use its
reasonable best efforts to consummate the financing necessary to effect the
Merger and pay the expenses related to the Merger. See "THE MERGER --
Financing."
MedCath has also agreed to provide prompt notice to the Acquiror upon
obtaining knowledge of:
(i) material litigation and claims;
(ii) notices of default under agreements and instruments where the
default would have a material adverse effect;
(iii) notice from a third party claiming that its consent is required in
connection with the transactions contemplated by the Merger Agreement; and
(iv) any material adverse change in the condition (financial or
otherwise), results of operations, properties, assets, liabilities or
business of MedCath and its subsidiaries, taken as a whole, or the
occurrence of an event which could result in any such change.
Nonsolicitation Covenant
Under the terms of the Merger Agreement, MedCath has agreed not to permit
any of its officers, directors, affiliates, representatives or agents to,
directly or indirectly, solicit, initiate or knowingly encourage any
Acquisition Proposal or participate in any discussions or negotiations with any
other party to facilitate an Acquisition Proposal. Further, the Merger
Agreement provides that all of MedCath's representatives will be instructed to
cease these activities. However, MedCath may furnish information and
participate in discussions and negotiations with a party who has made an
unsolicited Acquisition Proposal if either MedCath's Board or its Special
Committee has determined in good faith, based upon the reasonably concluded
written advice of outside counsel, that failing to take such action would
violate fiduciary duties under applicable law. MedCath is obligated to inform
the Acquiror immediately of any Acquisition Proposal, provide the Acquiror
notice of its material terms and conditions and keep the Acquiror advised of
all material developments.
Indemnification and Insurance
The Merger Agreement provides that the current and former directors and
officers of MedCath and any of its subsidiaries (including the members of the
Special Committee) will be indemnified by MedCath, to the fullest extent
permitted by applicable law, against any costs, expenses, judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation, and will be advanced reasonable costs and expenses
(including attorneys' fees), in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to the approval and
consummation of the transactions contemplated by the Merger Agreement. In
addition, MedCath is required to maintain in effect, for a period of six years
after the Effective Time, MedCath's policies of directors' and officers'
liability insurance (provided that MedCath may substitute therefor policies of
at least the same amounts and comparable coverage). However, in no event will
MedCath be required to pay premiums for such insurance in excess of 200% of
premiums currently paid by MedCath.
Expenses
The parties have agreed to pay their own costs and expenses in connection
with the Merger Agreement and the transactions contemplated thereby. MedCath
has agreed, however, to pay or reimburse the Acquiror for all reasonable
out-of-pocket expenses incurred by or on behalf of the Acquiror in connection
with the Merger Transaction upon certain events. See "THE MERGER -- Termination
Fee."
35
<PAGE>
Termination, Amendment and Waiver
At any time prior to the Effective Time, the Merger Agreement may be
terminated by the mutual consent of the Boards of Directors of MedCath and the
Acquiror.
Any of the parties may terminate the Merger Agreement prior to the
Effective Time by written notice to the other parties if (i) the conditions
precedent to closing have not occurred by August 31, 1998 unless the failure to
close results from such party's breach of any representation, warranty or
covenant, (ii) approval of the shareholders of MedCath necessary to consummate
the Merger has not been obtained or (iii) any court of competent jurisdiction
or other governmental entity issues an order, decree or ruling or takes any
action enjoining, restraining or prohibiting the Merger and such order, decree,
ruling or action becomes final and nonappealable.
In addition, the Acquiror may terminate the Merger Agreement prior to the
Effective Time by written notice to MedCath if (i) MedCath breaches any
representation, warranty or covenant and fails to cure such breach within
thirty days after written notice, (ii) the Board withdraws or modifies its
approval or recommendation of the Merger Agreement or the Merger, (iii) MedCath
enters into a definitive agreement with any party regarding an Acquisition
Proposal or (iv) a third party commences a tender or exchange offer for 25% or
more of the Common Stock and the Board has recommended that MedCath's
shareholders tender their shares in connection with such offer.
MedCath may terminate the Merger Agreement prior to the Effective Time by
written notice to the Acquiror if (i) the Board or the Special Committee
withdraws or modifies its approval or recommendation of the Merger Agreement or
the Merger after having determined in good faith, and based upon the reasonably
concluded written advice of counsel, that continuing to recommend the Merger
Agreement and the Merger would violate fiduciary duties of the Board, (ii) the
Board or the Special Committee has determined that MedCath has entered into a
definitive agreement with any party with respect to a transaction the proposal
of which qualifies as an Acquisition Proposal, provided that the Board or the
Special Committee has first determined in good faith based upon reasonably
concluded written advice of counsel that failing to take such action would
violate the Board's fiduciary duties or (iii) a third party commences a tender
or exchange offer for 25% or more of the Common Stock which has not been
solicited by MedCath and the Board has recommended that the shareholders of
MedCath tender their shares in connection with such offer, provided that the
Board or the Special Committee has first determined in good faith based upon
the reasonably concluded written advice of counsel that failing to take such
action would violate the Board's fiduciary duties.
Subject to the provisions of applicable law, the Merger Agreement may be
modified or amended, and provisions thereof waived, by written agreement of the
parties. However, after approval of the principal terms of the Merger Agreement
by the shareholders of MedCath, no amendment or waiver of a provision may be
made which reduces the amount or changes the form of the Cash Merger
Consideration to be received by the shareholders or that would adversely affect
the shareholders of MedCath unless such amendment or waiver of a provision is
approved by the shareholders. With respect to any decision regarding a proposed
modification, amendment or waiver of the Merger Agreement, the Board, in the
exercise of its fiduciary duty, will make a determination as to whether
resolicitation of shareholders is required.
Termination Fee
In the event that the Merger Agreement is terminated by MedCath due to (i)
the Board or the Special Committee withdrawing or modifying its approval or
recommendation of the Merger Agreement or the Merger in connection with the
exercise of its fiduciary duties, (ii) MedCath entering into a definitive
agreement with any party with respect to an Acquisition Proposal following a
determination that the Company's failure to do so would violate the Board's
fiduciary duty or (iii) the commencement by a third party of a tender offer for
25% or more of the Common Stock which the Board has recommended to MedCath's
shareholders, then in any of such events, MedCath is required to promptly pay
to the Acquiror $6,774,640 plus the Acquiror's reasonable out-of-pocket fees
and expenses (the "Termination Fee").
The Termination Fee shall also be due in the event that (i) the Merger
Agreement is terminated by the Acquiror due to the Board's withdrawal or
modification of its approval or recommendation of the Merger Agreement or the
Merger, (ii) MedCath enters into a definitive agreement with any party with
respect to an Acquisition Proposal or (iii) a third party commences a tender or
exchange offer for 25% or more of the Common Stock which has been recommended
by the Board to MedCath's shareholders.
Additionally, the Termination Fee will be due to the Acquiror if an
Acquisition Proposal is made to MedCath at any time after the date of the
Merger Agreement and either five months following the termination of the Merger
Agreement due to the failure of the shareholders of MedCath to approve the
Merger Agreement, or one year after termination of the Merger
36
<PAGE>
Agreement for any other reason (other than a default by the Acquiror), MedCath
consummates a transaction the proposal of which qualifies as an Acquisition
Proposal.
Further, in the event that the Merger Agreement is terminated due to the
failure of the shareholders of MedCath to approve the transaction, MedCath
shall be obligated to reimburse the Acquiror for its reasonable out-of-pocket
fees and expenses. Upon a breach of the Merger Agreement by either party which
is not cured within thirty days following written notice, the breaching party
shall be obligated to reimburse the other party hereto for its reasonable
out-of-pocket fees and expenses incurred in connection with the Merger
Agreement.
Financing
Cash Financing for the Merger. Financing for the Merger and the initial
working capital needs of MedCath after the Merger will be provided as follows:
<TABLE>
<CAPTION>
Source of Funds Amount
- -------------------------------------------------------------------- ---------------
<S> <C>
Cash contribution to the Parent by the KKR Partnership(1) ..... $105,900,000
Cash contribution to the Parent by the WCAS Investors(2) ...... 100,900,000
Revolving credit agreement of MedCath(3) ...................... 31,000,000
------------
$237,800,000
============
</TABLE>
- ---------
(1) The amount of the cash contribution of the KKR Partnership will be reduced
by an amount equal to one-half of the Aggregate Unrealized Gain on the
stock options contributed to the Parent by the Employees.
(2) The amount of the cash contribution of the WCAS Investors will be reduced
by the aggregate value (at $19 per share) of any shares of Common Stock
contributed to the Parent by the Physicians and by an amount equal to
one-half of the Aggregate Unrealized Gain on the stock options contributed
to the Parent by the Employees.
(3) The amount of the draw to be made on the revolving credit agreement will be
reduced to the extent of the value of the equity interests contributed by
the Employees.
Contributed Equity Financing. Members of the Management Group will invest
at least 50% of the value of their equity interest in MedCath in shares of
common stock of the Parent and in options to purchase shares of common stock of
the Parent in the respective amounts shown below and thereby relieve the Parent
of the need to finance the payment of Cash Merger Consideration for equity
interests in MedCath totaling approximately $17 million. The WCAS Investors
will invest a portion of the value of their equity interest in MedCath in
shares of common stock of the Parent as also set forth in the table below.
<TABLE>
<CAPTION>
Value of
Portion of Percentage of
Value of Equity Interest Equity Interest
Total Equity in MedCath in MedCath
Interest in Contributed to Contributed
Investor Group Member MedCath(1) Parent(1) to Parent
- ------------------------------ -------------- ----------------- ----------------
<S> <C> <C> <C>
Management Group
Stephen R. Puckett $23,523,807 $12,028,807 51.13%
David Crane 4,446,442 2,223,220 50.00
Charles W. (Todd) Johnson 4,921,131 2,460,555 50.00
Richard J. Post 360,313 180,151 50.00
WCAS Directors
Patrick J. Welsh 1,545,612 1,379,305 89.24
Andrew M. Paul 445,322 300,010 67.37
Other WCAS Investors 4,080,801 3,307,691 81.05
</TABLE>
- ---------
(1) Includes, in the case of the members of the Management Group, the Aggregate
Unrealized Gain on options to purchase shares of Common Stock that will be
exchanged for options to purchase shares of common stock of the Parent.
37
<PAGE>
Expenses of the Transaction
Assuming the Merger is consummated, the estimated costs and fees in
connection with the Merger, financing and the related transactions, which will
be paid by MedCath, are as follows:
<TABLE>
<CAPTION>
Cost or Fee Estimated Amount
- -------------------------------------------------- -----------------
<S> <C>
Financial advisory fees .................. $ 9,300,000
Bank commitment fees ..................... 1,600,000
Legal fees ............................... 2,500,000
Termination and non-compete payments ..... 2,363,805
Accounting fees .......................... 700,000
Printing and mailing fees ................ 40,000
Solicitation expenses .................... 7,000
Commission filing fees ................... 44,891
Other regulatory filing fees ............. 90,000
Miscellaneous ............................ 654,304
-----------
$17,300,000
===========
</TABLE>
- ---------
See "SPECIAL FACTORS -- Opinion of Financial Advisor" for a description of
the fees to be paid to Goldman Sachs in connection with its engagement. For a
description of certain fees payable to the members of the Special Committee,
see "SPECIAL FACTORS -- Conflicts of Interest."
For a description of MedCath's obligation, even if the Merger is not
consummated, to pay or reimburse the Acquiror for expenses incurred by the
Acquiror in connection with the Merger, see "THE MERGER -- Expenses" and " --
Termination Fee."
Regulatory Approvals
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until certain notifications are given and certain
information is furnished to the FTC and the Antitrust Division of the
Department of Justice and specified waiting period requirements are satisfied.
The applicable waiting period expired on May 15, 1998.
MedCath is not aware of any license or regulatory permit which is material
to the business of MedCath and which is likely to be adversely affected by the
Merger or of any approval or other action by any state, federal or foreign
government or governmental agency that would be required prior to effecting the
Merger.
Accounting Treatment
The Merger will be treated as a purchase business combination for
accounting purposes.
RIGHTS OF DISSENTING SHAREHOLDERS
Under North Carolina law, holders of Common Stock who do not vote in favor
of the Merger and who comply with certain notice requirements and other
procedures will have the right to dissent and to be paid cash for the "fair
value" of their shares. The "fair value" of the Common Stock as finally
determined under such procedures may be more or less than the $19 per share
cash which will be paid in respect of shares held by non-dissenting
shareholders in the Merger. Failure to follow such procedures precisely may
result in loss of Dissenters' Rights.
The following discussion is not a complete statement of the law pertaining
to Dissenters' Rights under Article 13 and is qualified in its entirety by the
full text of Article 13 which is reprinted in its entirety as Appendix C to
this Proxy Statement.
A record shareholder may assert Dissenters' Rights as to fewer than all
the shares of Common Stock registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
Company in writing of the name and address of each person on whose behalf he
asserts Dissenters' Rights. The rights of a partial dissenter will be
determined as if the shares as to which he dissents and his other shares were
registered in the names of different shareholders. A beneficial owner may
assert Dissenters' Rights as to shares of Common Stock held on his behalf only
if he:
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<PAGE>
(a) submits to the Company the record shareholder's written consent to the
dissent not later than the time the beneficial shareholder asserts Dissenters'
Rights and (b) asserts Dissenters' Rights with respect to all shares of which
he is the beneficial owner.
A holder of shares of Common Stock wishing to exercise Dissenters' Rights
must: (a) give to the Company, and the Company must actually receive before the
vote on the Merger is taken, written notice of the holder's intent to demand
payment for his shares if the Merger is consummated, and (b) must not vote his
shares in favor of the Merger. Such notice may be sent to the Company at the
following address: 7621 Little Avenue, Suite 106, Charlotte, North Carolina
28226, Attention: Richard J. Post, Secretary. If the Merger Agreement is
approved by holders of the requisite number of outstanding shares of Common
Stock, the Company will, no later than 10 days following the consummation of
the Merger, mail a written dissenters' notice to all of its shareholders who
gave the aforementioned notice of intent to demand payment. Such dissenters'
notice will: (a) state where the payment demand must be sent and where and when
certificates for shares must be deposited; (b) supply a form for demanding
payment; (c) set a date by which the Company must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date on
which the dissenters' notice is sent; and (d) be accompanied by a copy of
Article 13. To exercise his Dissenters' Rights, a shareholder sent a
dissenters' notice must demand payment and deposit his share certificates in
accordance with the terms of the notice. A shareholder failing to do so will
not be entitled to payment for his shares under Article 13. A shareholder who
demands payment and deposits his share certificates in accordance with the
terms of the notice will retain all other rights of a shareholder until
consummation of the Merger.
As soon as the Merger is completed, or within 30 days after the Company's
receipt of a payment demand by a shareholder made in compliance with the
above-described procedures, the Company will pay such shareholder the amount
the Company estimates to be the value of his shares, plus interest accrued to
the date of payment. Such payment will be accompanied by: (a) the Company's
balance sheet as of the fiscal year ended September 30, 1997, an income
statement and a statement of cash flows for that year and the latest available
interim financial statements; (b) an explanation of how the Company estimated
the fair value of the shares; (c) an explanation of how the interest was
calculated; (d) a statement of the dissenter's right to notify the Company of
his own estimate of the value of his shares and the amount of interest due if
(i) he believes the amount paid by the Company is less than the fair value of
his shares or that the interest due was incorrectly calculated, (ii) the
Company fails to make a payment within the time period described in the first
sentence of this paragraph, or (iii) the Company, having failed to consummate
the Merger, fails to return deposited share certificates within 60 days after
the date set for demanding payment; and (iv) a copy of Article 13.
If: (a) a dissenter believes that the amount paid by the Company is less
than the fair value of his shares, or that the interest due is incorrectly
calculated; (b) the Company fails to make payment within the time period set
forth in the first sentence of the immediately preceding paragraph; or (c) the
Company, having failed to consummate the Merger, fails to return deposited
stock certificates to a dissenter within 60 days after the date set for
demanding payment, the dissenter may notify the Company in writing of his own
estimate of the fair value of his shares and amount of interest due and demand
payment of the amount in excess of the Company's payment to him. Such notice
and demand may be sent to the Company at the address set forth in the second
immediately preceding paragraph. A dissenter will waive his right to demand
payment as described in this paragraph, and will be deemed to have withdrawn
his dissent and demand for payment, unless he notifies the Company of his
demand in writing within 30 days after the Company (x) made payment for his
shares or (y) fails to take the actions described in clauses (b) and (c) of
this paragraph, as the case may be.
If a demand for payment as described above remains unsettled, a
shareholder may commence a proceeding within 60 days after the earlier of (i)
the date of the Company's payment to him as described in the second immediately
preceding paragraph, or (ii) the date of his payment demand as described in the
immediately preceding paragraph and file a complaint with the Superior Court
Division of the North Carolina Court of Justice to determine the fair value of
the shares and accrued interest. A dissenter who does not commence a proceeding
within this 60-day period will be deemed to have withdrawn his dissent and
demand for payment.
The court may, in its discretion, make all dissenters whose demands remain
unsettled parties to the proceeding as in an action against their shares and
all parties must be served with a copy of the complaint. The jurisdiction of
the Superior Court is plenary and exclusive. The court may appoint one or more
appraisers to receive evidence and recommend a decision on the question of fair
value. Parties to the proceeding are entitled to the same discovery rights as
parties in other civil proceedings. The proceeding will be tried as in other
civil actions; however, since the Company is a "public corporation," no party
to any proceeding described herein will have the right to trial by jury.
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Each dissenter made a party to the proceeding by the court will be
entitled to judgment for the amount, if any, by which the court finds that the
fair value of his shares, plus interest, exceeds the amount paid by the
Company. The court may assess the costs of a proceeding described above,
including the compensation and expenses of appointed appraisers, as it finds
equitable. With respect to the fees and expenses of counsel and experts for the
parties to the proceeding, the court may assess such costs as it finds
equitable (a) against the Company, and in favor of any or all dissenters, if it
finds that the Company did not substantially comply with the above-described
procedures or (b) against either the Company or a dissenter or in favor of
either or any other party, if it finds that the party against whom such costs
are assessed acted arbitrarily, vexatiously, or not in good faith with respect
to the Dissenters' Rights provided under Article 13. In addition, if the court
finds that the services of counsel to any dissenter were of substantial benefit
to other dissenters and that the costs of such services should not be assessed
against the Company, the court may award to such counsel reasonable fees to
paid out of the amounts owed to the dissenters who were benefited.
The provisions of Article 13 are technical in nature and complex.
Shareholders desiring to exercise Dissenters' Rights and to obtain a
determination of the fair value of their shares should consult counsel, since
the failure to comply strictly with the provisions of Chapter 13 may result in
a waiver or forfeiture of their Dissenters' Rights.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Common Stock. This discussion is based on currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to the holders of
Common Stock as described herein. Special tax consequences not described below
may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are foreign corporations, foreign partnerships or foreign
estates or trusts as to the United States and holders who acquired their stock
through the exercise of an employee stock option or otherwise as compensation.
The receipt of the Cash Merger Consideration in the Merger by holders of
Common Stock will be a taxable transaction for federal income tax purposes.
Each holder's gain or loss per share will be equal to the difference between
$19 and the holder's basis per share in the Common Stock. Such gain or loss
generally will be a capital gain or loss. In the case of individuals, trusts
and estates, such capital gain will be subject to a maximum federal income tax
rate of 20% for shares of Common Stock held for more than 18 months prior to
the date of disposition and 28% for Common Stock held for more than one year
but for not more than 18 months prior to the date of disposition.
A holder of Common Stock may be subject to backup withholding at the rate
of 31% with respect to Cash Merger Consideration received pursuant to the
Merger, unless the holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (b) provides a
correct taxpayer identification number ("TIN"), certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholdings rules. To prevent the possibility of
backup federal income tax withholding on payments made to certain holders with
respect to shares of Common Stock pursuant to the Merger, each holder must
provide the Disbursing Agent with his correct TIN by completing a Form W-9 or
Substitute Form W-9. A holder of Common Stock who does not provide MedCath with
his or her correct TIN may be subject to penalties imposed by the Internal
Revenue Service (the "IRS"), as well as backup withholding. Any amount withheld
under these rules will be creditable against the holder's federal income tax
liability. MedCath (or its agent) will report to the holders of Common Stock
and the IRS the amount of any "reportable payments," as defined in Section 3406
of the Code, and the amount of tax, if any, withheld with respect thereto.
The foregoing tax discussion is included for general information only and
is based upon present law. Each holder of Common Stock should consult such
holder's own tax advisor as to the specific tax consequences of the Merger to
such holder, including the application and effect of federal, state, local and
other tax laws and the possible effect of changes in such tax laws.
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BUSINESS OF THE COMPANY
Overview
MedCath 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 partners
with cardiologists and cardiovascular and vascular surgeons to develop, co-own
and operate specialty 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); Tucson, Arizona (since October 1997); and in Phoenix,
Arizona (since June 1998). In addition, MedCath plans to open Heart Hospitals
in Austin, Texas; Bakersfield, California; Dayton, Ohio; and Albuquerque, New
Mexico over the next two fiscal years. Two of the Company's four existing Heart
Hospitals have experienced unanticipated problems during the ramp-up period.
For a discussion of these unanticipated problems and their effect on the
Company's current and projected results of operations, see "SPECIAL FACTORS --
Background of the Merger."
The Company has long-term contracts to manage six physician group
practices, which include leading cardiologists and cardiovascular surgeons
("Managed Practices"), located in Arizona, Virginia, Texas and Ohio. In
addition, MedCath manages eight fixed-site cardiac diagnostic and therapeutic
facilities ("Fixed-Site Facilities") located in Arizona, New Jersey,
Massachusetts North Carolina, and Alabama and operates 23 mobile cardiac
diagnostic centers ("Mobile Cath Labs"), principally serving networks of
hospitals located in smaller communities throughout the United States.
Hospital Division
General. 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 or substantial interest in each limited liability company or
partnership and serves as its manager.
Information concerning the Company's four operating Heart Hospitals and
its four Heart Hospitals under development is presented in the tables below:
Operating Heart Hospitals
<TABLE>
<CAPTION>
Licensed Cath Operating MedCath
Hospital Location Opening Date Beds Labs Rooms Ownership %
- -------------------------- ----------------------- -------------- ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
McAllen Heart Hospital McAllen, Texas January 1996 60 3 3 51%
Arkansas Heart Hospital Little Rock, Arkansas March 1997 84 6 3 51%
Tucson Heart Hospital(1) Tucson, Arizona October 1997 66 4 3 51%
Arizona Heart Hospital Phoenix, Arizona June 1998 56 4 3 51%
</TABLE>
- ---------
(1) The Tucson Heart Hospital has four cardiac catheterization laboratories
that are separately owned and operated by CCT, LLC in which the Company
owns a majority interest and which the Company manages.
Heart Hospitals Under Development
<TABLE>
<CAPTION>
Expected Licensed Cath Operating MedCath
Hospital Location Opening Date Beds Labs Rooms Ownership %
- ------------------------------ ------------------------- ------------------ ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Heart Hospital of Austin Austin, Texas October 1998 58 4 3 51%
Bakersfield Heart Hospital Bakersfield, California Fiscal Year 1999 48 4 3 51%
Dayton Heart Hospital Dayton, Ohio Fiscal Year 1999 48 4 3 35%
Heart Hospital of New Mexico Albuquerque, New Mexico Fiscal Year 1999 55 4 3 24%
</TABLE>
Recent Developments in the Hospital Division. The Company intends to
develop future Heart Hospitals in selected markets as three-way ventures, which
involve an existing local hospital as well as local physicians. In the typical
three-way venture, the local hospital partner would close its existing heart
program and become a substantial investor in MedCath's Heart Hospital. The
MedCath Heart Hospital would generally purchase a wide range of existing
services from the hospital partner, including emergency department services,
pharmacy services, lab services, social services and rehabilitation care. The
Company will account for its three-way ventures by the equity method of
accounting. Under this method, the Company's
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<PAGE>
share of the earnings or losses of the venture will be shown in the Company's
Consolidated Statements of Income as a single amount. Accordingly, no revenues,
expenses, assets or liabilities of the three-way ventures will be recorded in
the Consolidated Financial Statements of the Company.
Dayton Heart Hospital. In January 1998, MedCath announced that it had
entered into an agreement with Franciscan Health System of Ohio Valley, Inc.
("FHSOV") to locate MedCath's previously announced Dayton Heart Hospital on the
grounds of the Franciscan Medical Center - Dayton Campus. FHSOV has
subsequently become a 30% investor in the hospital, with MedCath and local
physician partners holding the remaining interests. MedCath is the managing
partner, with responsibility for the day-to-day operation of the hospital.
FHSOV will close its existing heart program.
Heart Hospital of New Mexico. In February 1998, MedCath announced that it
had formed a venture to construct a new Heart Hospital to be located in
Albuquerque, New Mexico. The hospital will be a three-way venture between
MedCath, two leading local physician groups and St. Joseph Healthcare System, a
leading not-for-profit system in Albuquerque. Under the terms of the agreement,
St. Joseph Healthcare System will close its existing heart program, and the
Heart Hospital of New Mexico, which will be located adjacent to the St. Joseph
Medical Center, will purchase a wide variety of existing services from St.
Joseph. MedCath, as manager, will be responsible for the day-to-day operations
of the hospital.
Tucson Heart Hospital. The Company has experienced unforeseen problems
during the start-up period at the Tucson Heart Hospital which opened in October
1997. For a discussion of these problems and their impact on the current and
future operating results of the Company, see "SPECIAL FACTORS -- Background of
the Merger." On April 7, 1998, MedCath signed a non-binding letter of intent
with Carondelet Health Systems, Inc., a not-for-profit healthcare provider
("Carondelet"), pursuant to which Carondelet may become an investor in
MedCath's Tucson Heart Hospital. If the transaction is completed, all or part
of the heart programs of the Tucson Heart Hospital and Carondelet's two
hospitals may be consolidated. The letter of intent with Carondelet is
non-binding and does not obligate either party to complete the transaction. The
successful negotiation and closing of a definitive agreement would be subject
to the satisfaction of numerous and material conditions. It is entirely
possible that MedCath and Carondelet will not proceed beyond the letter of
intent stage of negotiations, or even if they do, that they will not complete
the proposed transaction.
Arizona Heart Hospital. On June 10, 1998, the Arizona Department of Health
Services completed its inspection of the Arizona Heart Hospital, located in
Phoenix, and determined that all conditions of compliance regarding Medicare
certification were met. Concurrent with receiving the Medicare certification,
the Company officially opened the hospital. Upon processing of the
certification by the Health Care Financing Administration (HCFA) regional
office, the hospital will receive its Medicare provider number that will allow
the hospital to begin billing the Medicare program for its services retroactive
to the certification date of June 10, 1998. The Company expects that the
hospital will receive its Medicare provider number during the fiscal quarter
ending September 30, 1998.
Practice Management Division
General. 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. Under
these management services agreements, the Company performs 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. In some cases, the Company makes
advances for working capital purposes to these practices. The Company's
management fee for the services provided to all but one of the Managed
Practices is a percentage of operating income of the practice, ranging from 15%
to 20%, plus reimbursement of certain operating expenses incurred in managing
the practice. In one of the Managed Practices, the Company's management fee for
the services provided is approximately 4% of the net revenue of the practice,
plus reimbursement of certain operating expenses incurred in managing the
practice. The Company recognizes revenue under such contracts on the basis of
reimbursable costs incurred during the period plus the fee earned. Set forth
below is a brief description of each of the Managed Practices.
Arizona Medical Clinic. In October 1994, MedCath acquired PhysMed
Management Services, Inc., 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. 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. The
Company's fee for the services provided is approximately 4% of the net revenue
of AMC, plus reimbursement of certain operating expenses incurred in managing
AMC.
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<PAGE>
Mid-Atlantic Medical Specialists. In January 1996, the Company acquired
MedCath Physician Management of Virginia, Inc., which under a 40-year agreement
manages Mid-Atlantic Medical Specialists, Inc., a 12-physician practice that
includes two cardiologists and is located in southwest Virginia.
Heart Clinic. In October 1996, the Company acquired a 40-year contract to
manage Heart Clinic, P.A. a nine member cardiologist group located in McAllen,
Texas that has four offices throughout the Rio Grande Valley of South Texas.
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, a
17-member cardiologist group located in Tucson, Arizona.
Recent Developments in the Practice Management Division. In January 1998,
the Company announced that it had completed a transaction with McAllen,
Texas-based Valley Cardiology under which MedCath would provide long-term
management services to this group of seven cardiologists. In April 1998,
MedCath announced that it had completed a transaction with Dayton, Ohio-based
Dayton Heart Center, Inc. under which MedCath would provide long-term
management services to this group of 11 cardiologists.
Diagnostics Division
Fixed-Site Facilities. Through affiliations with physician groups or
medical facilities, the Company either manages or co-owns eight Fixed-Site
Facilities. 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. The
Company's Fixed-Site Facilities operate under various fixed-fee per case
contracts. In the Fixed-Site Facilities under management, the Company's
management fee is based on a percentage of the Facilities' net income ranging
from 55% to 90%, plus the reimbursement of certain operating expenses. The
co-owned Fixed-Site Facilities are included in the Consolidated Financial
Statements of the Company because the Company's ownership percentage of those
facilities ranges from 51% to 60%. Information concerning the eight Fixed-Site
Facilities is presented in the table below:
<TABLE>
<CAPTION>
Commencement of
Year Operations or Managed or
Name of Fixed-Site Facility Location Founded Management Co-Owned
- -------------------------------------- ---------------------------- --------- ---------------- -----------
<S> <C> <C> <C> <C>
Sun City Cardiac Center Sun City, Arizona 1985 November 1992 Managed
Cardiac Testing Centers New Providence, New Jersey 1986 July 1992 Managed
Cardiac Testing Centers Summit, New Jersey 1994 January 1994 Managed
Heart Institute of Northern Arizona Kingman, Arizona 1994 August 1994 Managed
Cape Cod Cardiology Services Hyannis, Massachusetts 1996 September 1996 Co-owned
Cardiac Diagnostic Center Raleigh, North Carolina 1996 October 1996 Managed
Gaston Cardiology Services Gastonia, North Carolina 1996 November 1996 Co-owned
Southeastern Cardiology Heart Center Montgomery, Alabama 1998 April 1998 Co-owned
</TABLE>
The Company expects to open its ninth and tenth Fixed-Site Facilities to
be located in Colorado Springs, Colorado and Dakota Dunes, South Dakota by the
end of fiscal year 1999.
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. 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.
Mobile Cath Labs. The Company owns or operates 23 Mobile Cath Labs that
serve networks of hospitals throughout the United States or are leased to
hospitals and other medical facilities that directly operate such laboratories
on their campuses. The Mobile Cath Labs operated by the Company to service
hospital networks are moved, usually on a daily basis, from one hospital to
another within each network and are fully equipped and operated by highly
skilled, non-physician MedCath technologists and nurses to enable cardiologists
to perform cardiac catheterization procedures for hospital patients. The
cardiac catheterization procedures are performed by cardiologists located in
the communities served by the hospitals or, in some instances, by cardiologists
with whom MedCath has contracted or arranged to perform, as independent
contractors, such procedures. 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
43
<PAGE>
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.
CERTAIN FORWARD LOOKING INFORMATION
The Company does not, as a matter of course, make public projections as to
future financial results. However, management of the Company, in connection
with the possible sale of the Company, prepared at various times during fiscal
years 1997 and 1998 and provided to KKR, WCAS VII, the Special Committee and
Goldman Sachs certain projections for fiscal years 1997 through 2003. None of
these projections were prepared with a view to public disclosure or compliance
with published guidelines of the Commission or the guidelines established by
the American Institute of Certified Public Accountants regarding projections.
Ernst & Young LLP, the Company's independent auditors, have not performed any
procedures with respect to the projections and assume no responsibility for
them. 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; the lack of
managed care arrangements or agreements for the Company's Heart Hospitals and
other facilities, especially during their start-up periods; dependence on the
availability and terms of long-term management contracts; fluctuations in
quarterly operating results from seasonality, population shifts and other
factors; and dependence on key management. Nevertheless, the Company believes
that the assumptions underlying these projections were reasonable at the time
the projections were prepared.
The June Projection
In June 1997, MedCath's management prepared a projected income statement
(the "June Projection") for the balance of the fiscal year ending September 30,
1997 and for each of the fiscal years in the five year period ending September
30, 2002 (the "Projection Period"). Projections for the fiscal year ending
September 30, 1997 were based upon the Company's actual performance through
June 30 of that year and the Company's budgeted financial performance for the
fourth quarter. For subsequent periods, management projected revenue and EBITDA
separately for each of the Company's operating divisions and then calculated
the resulting net income and earnings per share. Management assumed that
corporate overhead would increase at a rate necessary to support the growth in
the Company's three principal operating divisions. The June Projection was
included in the Offering Memorandum provided by Goldman Sachs to potential
purchasers of the Company.
With respect to the Diagnostics Division of the Company, management made
the following assumptions:
o Revenue would increase at a rate consistent with historical financial
performance.
o The division's EBITDA margins would remain stable.
o The Company would develop two new Fixed-Site Labs annually.
o Beginning in fiscal year 1999, the division would begin receiving
additional revenue both from consulting and management agreements and the
development of therapeutic procedures in diagnostic labs.
With respect to the Practice Management Division of the Company,
management made the following assumptions:
o Revenue would increase at a rate consistent with the division's
historical financial performance.
o The division's EBITDA margins would remain stable.
o The Company would make two new practice acquisitions annually.
The projection for the Hospital Division of the Company was prepared by
management as follows:
o Revenue and EBITDA margins for Heart Hospitals in operation (McAllen and
Little Rock) were projected based on the Company's previous revenue and
EBITDA assumptions for those hospitals as revised to reflect their
historical financial performance.
o For each Heart Hospital under development other than Tucson, management
prepared a market-specific "base year" projection of revenue and EBITDA
margin based upon projected patient census levels and procedure volumes
for the hospital. Management assumed for each new hospital that the
hospital would operate for two full fiscal quarters (the "Ramp-up Period")
before reaching the base year level and that the hospital would then
operate at the base year
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<PAGE>
level for four fiscal quarters. Thereafter, each new hospital would enter
a growth period during which revenue would increase at a 20% annual rate
for ten fiscal quarters. Management assumed that revenue would increase
thereafter at a more modest rate reflecting overall market (as opposed to
hospital-specific) growth and inflation. In the case of the Tucson Heart
Hospital, management made all of the same assumptions described above
except that management assumed that revenue of the Tucson Heart Hospital
would increase during the growth period at only a 5% annual rate for ten
fiscal quarters.
o Management assumed that the hospitals under development which the Company
had previously announced (the "Specific Hospitals") would open in
accordance with their construction schedules.
o Management assumed that hospitals to be announced in the future (the
"Generic Hospitals") would open at a rate such that the Company would open
three hospitals per year during the Projection Period.
Set forth below is a summary of the June Projection:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30,
-----------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
------------- ------------- ------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue ................................ $ 109,328 $ 200,578 $ 351,805 $ 506,710 $ 679,838 $ 863,627
EBITDA ................................. 28,436 57,462 104,244 152,169 206,063 262,887
Net income (before extraordinary items) 7,023 9,553 15,447 23,386 33,801 45,646
Earnings per share (assuming dilution) . 0.60 0.78 1.19 1.67 2.26 2.85
</TABLE>
The December Projection
The December Projection reflected the following changes in the assumptions
management made when it prepared the June Projection:
o The Company's operating budget for fiscal year 1998 (as updated to
reflect actual results in October and November and estimated results for
December of such fiscal year) was used in lieu of the projections for
fiscal year 1998 that were used in the June Projection.
o The projection for the Tucson Heart Hospital for the entire Projection
Period was revised based upon the actual performance of the hospital in
its first two months of operations and an estimate of its performance in
December 1997. In its revised projection for the hospital, management
projected average daily patient census would increase gradually to 50% of
capacity by the end of fiscal year 1998 and remain at that level through
the entire Projection Period.
o The assumed opening dates of the Arizona Heart Hospital and the Heart
Hospital of Austin were moved to March 1998 and October 1998,
respectively, to reflect delays in their construction schedules.
o The growth rate assumptions made for both Specific Hospitals and Generic
Hospitals were revised as follows: The Ramp-up Period was increased from
two to four quarters to track more closely the Company's actual
experience with its three operating hospitals. The rate of increase in
revenue during the ten quarters immediately following the four-quarter
long base year was reduced from 20% to 10% annually to take into account
the possibility that the Company may experience problems in operating
future hospitals similar to those experienced at the Tucson Heart
Hospital.
o Beginning in fiscal year 2000, the number of Generic Hospitals opening
each year was reduced from three to two to reflect anticipated
difficulties in attracting physicians to participate in future hospitals
resulting in part from public perception of the Company's experience with
the Tucson Heart Hospital.
o Management revised its assumptions about Generic Hospitals to provide
that, beginning in fiscal year 2000, one of the two Generic Hospitals
projected to open each year in the Projection Period would be a three-way
venture between MedCath (with a 33% ownership interest), local physicians
and an established local hospital.
o The revenue projection for the Diagnostics Division beginning in fiscal
year 1999 from consulting fees and therapeutic procedures was removed.
45
<PAGE>
Set forth below is a summary of the December Projection:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30,
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue ................................ $ 200,282 $ 315,018 $ 399,254 $ 469,082 $ 546,927 $ 621,623
EBITDA ................................. 47,839 84,140 109,472 129,140 151,545 170,788
Net income (before extraordinary items) 4,829 9,698 15,054 19,763 26,005 31,146
Earnings per share (assuming dilution) . 0.39 0.73 1.06 1.30 1.60 1.81
</TABLE>
The March Projection
The March Projection reflected (in addition to the changes in the
assumptions management made when it prepared the December Projection) the
following changes:
o Adjustments to reflect actual operating performance for the month of
December 1997, which, as the result of factors not related to the
performance of Tucson, were more favorable than had been estimated when
management prepared the December Projection.
o Projected performance of McAllen and Little Rock for fiscal year 1998
was revised to reflect management's expectations that their results of
operations would exceed those projected for them in the Company's fiscal
year 1998 operating budget and in the December Projection.
o The projection for Tucson was revised to reflect revised expectations
for patient census and procedure volumes. Management assumed that census
would be in the high teens for the remainder of fiscal year 1998 and that
certain cost savings would be achieved in the latter months of the fiscal
year. Management further assumed that a slight increase in patient census
levels would occur in fiscal year 1999 and that the hospital would
operate at an approximately break-even level beginning in fiscal year
2000.
o As the result of a burst water pipe during construction, the opening of
the Arizona Heart Hospital was moved to July 1998 and the projected
results during the Ramp-up Period of the hospital were revised to reflect
the lower patient census and procedure volume associated with the opening
of a hospital in the Southwest during the summer.
o To reflect a revised construction schedule, the opening of the
Bakersfield Heart Hospital was moved to June 1999.
o The projection for the Dayton Heart Hospital was revised to reflect the
Company's announcement in January that Franciscan Health System of Ohio
Valley, Inc. would become a 30% investor in the Dayton Heart Hospital and
the Company's interest would be reduced to 35%. To reflect a revised
construction schedule, the opening of the Dayton Heart Hospital was moved
to the third quarter of fiscal year 1999.
Set forth below is a summary of the March Projection:
<TABLE>
<CAPTION>
Fiscal Year Ending September 30,
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- ------------- -------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue ................................ $ 187,992 $ 290,289 $ 372,764 $ 440,525 $ 514,914 $ 587,371
EBITDA ................................. 45,263 77,170 101,466 120,380 141,803 160,389
Net income (before extraordinary items) 5,276 9,951 15,693 20,543 26,887 31,999
Earnings per share (assuming dilution) . 0.43 0.75 1.10 1.35 1.65 1.86
</TABLE>
46
<PAGE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 22, 1998 by: (i) each
person known to the Company to beneficially own more than 5% of the Common
Stock, (ii) each director of the Company, (iii) each executive officer named in
the Summary Compensation Table included in the Company's Annual Report on Form
10-K (as amended), and (iv) all executive officers and directors of the Company
as a group.
<TABLE>
<CAPTION>
Amount and Nature Percentage of
of Common
Name of Beneficial Owner Beneficial Ownership(1) Stock
- ----------------------------------------------------------------------- ------------------------- --------------
<S> <C> <C>
Stephen R. Puckett (2) ............................................... 1,258,311 10.6%
Patrick J. Welsh (3) ................................................. 966,177 8.2
Andrew M. Paul (3) ................................................... 908,267 7.7
Welsh, Carson, Anderson & Stowe V, L.P. (4) .......................... 884,829 7.5
The Northwestern Mutual Life Insurance Company (5) ................... 981,905 8.3
Crown Advisors, Ltd. (6) ............................................. 748,629 6.3
The TCW Group, Inc. (7) .............................................. 600,600 5.1
Charles W. (Todd) Johnson (8) ........................................ 265,526 2.2
David Crane (8) ...................................................... 254,886 2.1
John B. McKinnon (8) ................................................. 61,999 *
R. William Moore (8) ................................................. 20,882 *
Richard J. Post (8) .................................................. 19,793 *
W. Jack Duncan (8) ................................................... 5,530 *
All executive officers and directors as a group (11 persons) (9) ..... 2,884,233 24.4
</TABLE>
- ---------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.
(2) The address of Mr. Puckett is 7621 Little Avenue, Suite 106, Charlotte,
North Carolina 28226. Includes 1,165,650 shares held by two limited
partnerships of which Mr. Puckett is the sole general partner and 92,661
shares issuable upon exercise of options that are exercisable within 60
days of June 22, 1998.
(3) Includes 884,829 shares of Common Stock held by WCAS V. Each of Mr. Welsh
and Mr. Paul is a general partner of the sole general partner of WCAS V.
The address of Mr. Welsh and Mr. Paul is 320 Park Avenue, Suite 2500, New
York, New York 10022.
(4) The address of WCAS V is 320 Park Avenue, Suite 2500, New York, New York
10022. Mr. Welsh and Mr. Paul each serves as a general partner of the sole
general partner of WCAS V.
(5) The address of The Northwestern Mutual Life Insurance Company is 720 E.
Wisconsin Avenue, Milwaukee, Wisconsin 53202. The number of shares shown as
beneficially owned is based upon a statement on Schedule 13G filed February
4, 1998, which indicates the reporting person has sole voting and
dispositive power over 521,605 shares and shared voting and dispositive
power over an additional 460,300 shares.
(6) The address of Crown Advisors, Ltd. is 60 East 42nd Street, New York, New
York 10165. The number of shares shown as beneficially owned is based upon
a statement on Schedule 13G filed February 19, 1998 and information
provided to the Company by Crown Advisors, Ltd. Includes 402,400 shares
held by certain investment partnerships for which Crown Advisors, Ltd.
serves as investment advisor, and as to which Crown Advisors, Ltd. has
shared voting and investment power, 294,100 shares held by a co-advisor to
such partnerships and 52,129 shares held by an affiliate of Crown Advisors,
Ltd.
(7) The address of The TCW Group, Inc. is 865 South Figueroa Street, Los
Angeles, California 90017. The number of shares shown as beneficially owned
is based upon a statement on Schedule 13G filed February 12, 1998, which
indicates the reporting person has sole voting and dispositive power over
600,600 shares.
47
<PAGE>
(8) Includes for each of these beneficial owners the number of shares set
forth below that are issuable upon exercise of options that are exercisable
within 60 days of June 22, 1998:
<TABLE>
<S> <C> <C> <C>
Charles W. (Todd) Johnson ..... 28,656 R. William Moore ......... 19,372
David Crane ................... 152,769 Richard J. Post .......... 19,793
John B. McKinnon .............. 1,999 W. Jack Duncan ........... 3,176
</TABLE>
(9) Includes 326,177 shares of Common Stock issuable upon exercise of options
that are exercisable within 60 days of June 22, 1998.
CERTAIN INFORMATION CONCERNING THE
PARENT, THE ACQUIROR AND OTHER AFFILIATES
Parent and the Acquiror. The Parent is a newly-formed Delaware corporation
organized at the direction of (i) the KKR Partnership, an affiliate of KKR, and
(ii) WCAS VII, each of which is a private investment partnership.
KKR Partnership. The KKR Partnership, a Delaware limited partnership, is
principally engaged in the business of investing in other companies. Its
principal executive offices are located at 9 West 57th Street, New York, New
York 10019. The sole general partner of the KKR Partnership is KKR Associates
1996 L.P., a Delaware limited partnership principally engaged in the business
of investing through partnerships in other companies with its principal
executive offices at 9 West 57th Street, New York, New York 10019.
KKR Associates 1996 L.P. The sole general partner of KKR Associates 1996
L.P. is KKR 1996 GP LLC, a Delaware limited liability company principally
engaged in the business of investing through partnerships in other companies
with its principal executive offices at 9 West 57th Street, New York, New York
10019.
KKR 1996 GP LLC. The managing members of KKR 1996 GP LLC are Henry R.
Kravis and George R. Roberts. The other members of KKR 1996 GP LLC are Robert
I. MacDonnell, Paul E. Raether, Michael W. Michelson, James H. Greene, Jr.,
Michael T. Tokarz, Perry Golkin, Clifton S. Robbins, Scott M. Stuart and Edward
A. Gilhuly. Each such individual is a citizen of the United States, and the
principal occupation of each is as a managing member or member of KKR & Co.
L.L.C., which is the general partner of KKR. The principal business address of
each of Messrs. Kravis, Raether, Golkin, Tokarz, Robbins and Stuart is 9 West
57th Street, New York, New York 10019. The principal business address of each
of Messrs. Roberts, MacDonnell, Michelson, Greene and Gilhuly is 2800 Sand Hill
Road, Suite 200, Menlo Park, California 94025.
WCAS VII. The principal business of WCAS VII, a Delaware limited
partnership, is that of a private investment partnership. Its principal
executive offices are located at 320 Park Avenue, Suite 2500, New York, New
York 10022. The sole general partner of WCAS VII is WCAS VII Partners, L.P., a
Delaware limited partnership.
WCAS VII Partners, L.P. The principal business of WCAS VII Partners, L.P.
is that of acting as the general partner of WCAS VII and its principal
executive offices are located at 320 Park Avenue, Suite 2500, New York, New
York 10022. Each of the general partners of WCAS VII Partners, L.P. is a
citizen of the United States and each of their principal occupations is as a
general partner of WCAS VII Partners, L.P. and other associated partnerships.
The general partners are Patrick J. Welsh, Russell L. Carson, Bruce K.
Anderson, Richard H. Stowe, Andrew M. Paul, Thomas E. McInerney, Laura
VanBuren, Robert A. Minicucci, Anthony J. deNicola and Paul B. Queally. The
principal business address of each of them is c/o Welsh, Carson, Anderson &
Stowe VII, L.P., 320 Park Avenue, Suite 2500, New York, New York 10022.
WCAS Directors. The WCAS Directors are Patrick J. Welsh and Andrew M.
Paul. The principal business address of each of them is c/o Welsh, Carson,
Anderson & Stowe VII, L.P., 320 Park Avenue, New York, New York 10022. Each of
the WCAS Directors is a citizen of the United States.
Patrick J. Welsh, a director of the Company since 1991, serves as a
general partner of the respective sole general partners of WCAS V, WCAS VII and
other associated partnerships. Mr. Welsh has been a general partner of the sole
general partner of associated limited partnerships since 1979. Prior to 1979,
Mr. Welsh was President and a director of Citicorp Venture Capital, Ltd., an
affiliate of Citicorp engaged in venture capital investing. Mr. Welsh serves as
a director of Walsh International, Inc., Pharmaceutical Marketing Services Inc.
and several privately-held companies.
Andrew M. Paul has been a director of the Company since 1991. He has
served as a general partner of the sole general partner of WCAS V, WCAS VII and
other associated partnerships since 1984. From 1983 to 1984, he was an
associate in Hambrecht & Quist's venture capital group. From 1978 to 1981, he
was a systems engineer and then a marketing representative for IBM. Mr. Paul
received a B.A. from Cornell University and an M.B.A. from Harvard Business
School.
48
<PAGE>
Mr. Paul serves as a director of Lincare, Inc., Centennial Healthcare, Inc.,
Housecall Medical Resources, Inc. and several privately-held companies.
Management Group. The members of the Management Group are the following
executive officers of MedCath: Stephen R. Puckett, Chairman of the Board,
President and Chief Executive Officer; David Crane, Executive Vice President
and Chief Operating Officer; Charles W. (Todd) Johnson, Senior Vice President -
Development and Managed Care; and Richard J. Post, Chief Financial Officer,
Secretary and Treasurer. The business address for each member of the Management
Group is the principal executive offices of MedCath, 7621 Little Avenue, Suite
106, Charlotte, North Carolina 28226. Each member of the Management Group is a
citizen of the United States.
Stephen R. Puckett was a founder of the Company in 1988 and has served as
Chairman of the Board of Directors, President and Chief Executive Officer of
the Company since that time. From 1984 to 1989, Mr. Puckett served as Executive
Vice President and Chief Operating Officer of Charlotte Mecklenburg Hospital
Authority (the "Authority"), a 1,677-bed multi-hospital system, and from 1981
to 1983, he served as Senior Vice President of the Authority. Carolinas Medical
Center, an 853-bed hospital and the largest facility in the Authority's system,
operates one of the largest heart programs in the Southeast. While he was
associated with the Authority, Mr. Puckett was active in managing many of the
additions to the Carolinas Medical Center, including an 80,000 square foot
heart institute with four surgical suites and several cardiac diagnostic and
therapeutic laboratories. From 1976 to 1981, Mr. Puckett worked for the
University of Alabama hospital and served in a variety of management positions
with increasing responsibilities for hospital operations. Mr. Puckett serves as
a director of Cardiovascular Diagnostics, Inc. Mr. Puckett received a B.A. and
an M.S. in Health Management from the University of Alabama.
David Crane has served as a director and Chief Operating Officer of the
Company since 1989 and Executive Vice President since 1997. From 1985 to 1989,
Mr. Crane was employed by MediVision, Inc., an owner/manager of ophthalmic
outpatient surgery centers and private ophthalmic surgical practices, and he
served as Chief Operating Officer of MediVision from 1987 to 1989. While he was
associated with MediVision, Mr. Crane managed the construction of several
ophthalmic outpatient surgical centers. From 1982 to 1985, he was a business
and health care consultant with Bain & Company, a consulting firm. Mr. Crane
received a B.A. from Yale University and an M.B.A. from Harvard Business
School.
Charles W. (Todd) Johnson has served as a Vice President of the Company
since April 1995 when the Company acquired all of the outstanding shares of
HealthTech Corporation and as Senior Vice President - Development and Managed
Care since 1997. Mr. Johnson was the founder and President of HealthTech
Corporation, a company whose principal business was the ownership and operation
of mobile cardiac catheterization laboratories. Prior to founding HealthTech
Corporation in July 1991, Mr. Johnson was a partner in Paragon Group, a
national real estate development and investment company. Mr. Johnson received a
B.A. from the University of North Carolina and an M.B.A. from Wake Forest
University.
Richard J. Post joined MedCath in September 1996 as Chief Financial
Officer, Secretary and Treasurer. From 1986 to 1996, Mr. Post was employed as
an investment banker, assisting clients in the execution of a wide variety of
public and private debt and equity financings and merger and acquisition
transactions. He served as a Senior Vice President, Corporate Finance with
Price Waterhouse LLP from 1994 to 1996. From 1992 to 1994, he was a Senior
Manager in the Corporate Finance Department of Ernst & Young LLP and from 1988
to 1992, he was a Vice President in the Investment Banking Department of Bear,
Stearns & Co. Inc. From 1986 to 1988, he was an Associate in the Corporate
Finance Group at The First Boston Corporation. Mr. Post served as a Military
Intelligence Officer in the United States Army from 1977 to 1986. He received a
B.A. in English and Philosophy from the University of Notre Dame and an M.B.A.
from Harvard Business School.
SHAREHOLDER PROPOSALS
MedCath's annual meeting of shareholders is normally held in February of
each year. In February 1998, management postponed the date of the annual
meeting of shareholders to April 1998. When the proposed Merger was announced
in March, management again postponed the annual meeting of shareholders. If the
proposal to approve the Merger is not approved at the Special Meeting, the
annual meeting of shareholders will be held in November 1998. Proposals of
shareholders intended to be presented at the 1998 annual meeting of
shareholders must be submitted, by registered or certified mail, to the
attention of the Company's secretary at its principal executive offices by
September 1, 1998 in order to be considered for inclusion in the Company's
proxy statement and form of proxy for such meeting. If the Merger is
consummated, the annual meeting of shareholders may be scheduled for an earlier
or later date consistent with the Company's organizational documents.
49
<PAGE>
INDEPENDENT AUDITORS
The Consolidated Balance Sheets as of September 30, 1997 and September 30,
1996, and the related Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for each of the three fiscal years in the period ended September
30, 1997, included in the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997, as amended, incorporated herein by reference,
have been audited by Ernst & Young LLP, independent auditors, as stated in
their report. A representative of Ernst & Young LLP will be at the Special
Meeting to answer appropriate questions from shareholders and will have the
opportunity to make a statement if so desired.
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named
in the proxy to vote on such matters according to their best judgment unless
the authority to do so is withheld in such proxy.
50
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
Dated as of March 12, 1998
by and among
MEDCATH INCORPORATED,
MCTH ACQUISITION, INC.
AND
MEDCATH HOLDINGS, INC.
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of March 12, 1998
by and among MEDCATH INCORPORATED, a North Carolina corporation ("MedCath"),
MCTH ACQUISITION INC., a North Carolina corporation ("Acquiror"), and MEDCATH
HOLDINGS, INC., a Delaware corporation (the "Parent"), which is the sole
shareholder of Acquiror.
RECITALS
The board of directors of MedCath and Acquiror deem it advisable for the
mutual benefit of MedCath and Acquiror and their respective shareholders,
respectively, that Acquiror be merged with and into MedCath (the "Merger") upon
the terms and subject to the conditions set forth in the Plan of Merger (the
"Plan of Merger"), which is set forth in the Articles of Merger in
substantially the form attached hereto as Exhibit A (the "Articles of Merger"),
and in accordance with the North Carolina Business Corporation Act ("North
Carolina Law").
The boards of directors of the Parent and Acquiror have approved and
adopted this Agreement. The board of directors and Strategic Options Committee
of MedCath have adopted this Agreement and have resolved, subject to the terms
of this Agreement, to recommend to the shareholders of MedCath to vote to
approve this Agreement in conjunction with their approval of the Plan of
Merger.
In consideration of the mutual covenants, agreements, representations and
warranties contained herein, and for the purpose of setting forth certain terms
and conditions of the Merger, and the mode of carrying the same into effect,
MedCath, the Parent and Acquiror hereby agree as follows:
ARTICLE 1
MERGER AND ORGANIZATION
Section 1.1 The Merger.
Acquiror shall be merged with and into MedCath at the Effective Time (as
defined below), upon the terms and subject to the conditions hereinafter set
forth, as permitted by and in accordance with North Carolina Law. Acquiror and
MedCath are herein sometimes referred to as the "Constituent Corporations", and
MedCath, which shall be the surviving corporation following the effectiveness
of the Merger, is sometimes referred to herein as the "Surviving Corporation".
Section 1.2 Effective Time.
If this Agreement is not terminated pursuant to Article 8 hereof, as soon
as practicable after all conditions to the Merger set forth in Article 7 hereof
shall have been satisfied or waived, MedCath and Acquiror shall cause the
Articles of Merger to be executed, acknowledged and filed with the Secretary of
State of the State of North Carolina as provided in North Carolina Law. The
Merger shall be consummated and the closing of the transactions contemplated by
this Agreement (the "Closing") shall occur immediately upon the filing of the
Articles of Merger with the Secretary of State of the State of North Carolina
(the date and time of such filing and Closing being referred to herein as the
"Effective Time"). The Closing shall take place at Simpson Thacher & Bartlett,
425 Lexington Avenue, New York, New York 10017, or at such other place as the
parties may mutually agree.
Section 1.3 Effect of Merger.
The parties agree to the following provisions with respect to the Merger:
(a) The name of the Surviving Corporation shall from and after the
Effective Time be and continue to be "MedCath Incorporated" until changed in
accordance with applicable law.
A-1
<PAGE>
(b) The articles of incorporation of MedCath shall be amended and restated
to conform to the articles of incorporation of Acquiror as in effect
immediately prior to the Effective Time; provided, however, that, at the
Effective Time, Article I of the articles of incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation
is MedCath Incorporated" and Article II shall be amended to provide that the
number of authorized shares of common stock of the corporation shall be 100.
(c) The bylaws of Acquiror, as in effect immediately prior to the
Effective Time, shall be the bylaws of the Surviving Corporation until
thereafter amended in accordance with law, the articles of incorporation of the
Surviving Corporation and such bylaws.
(d) At the Effective Time, the separate corporate existence of Acquiror
shall cease, and MedCath as the surviving corporation and successor shall
succeed to Acquiror as set forth in Section 55-11-06 of the North Carolina Law.
(e) The directors of Acquiror immediately prior to the Effective Time will
be the initial directors of the Surviving Corporation, and the officers of
MedCath immediately prior to the Effective Time will be the initial officers of
the Surviving Corporation, in each case until their successors are elected and
qualified.
(f) If at any time after the Effective Time the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments or
assurances or any other acts or things are necessary, desirable or proper (i)
to vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its right, title or interest in, to or under any of the rights,
properties or assets of the Constituent Corporations acquired or to be acquired
as a result of the Merger, or (ii) otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors or
their designees shall be authorized to execute and deliver, in the name and on
behalf of the Constituent Corporations, all such deeds, bills of sale,
assignments and assurances and do, in the name and on behalf of the Constituent
Corporations, all other acts and things necessary, desirable or proper to vest,
perfect or confirm its right, title or interest in, to or under any of the
rights, properties or assets of the Constituent Corporations acquired or to be
acquired as a result of the Merger and otherwise to carry out the purposes of
this Agreement.
ARTICLE 2
CONVERSION OF SECURITIES AT THE EFFECTIVE TIME
Section 2.1 Conversion of Securities of MedCath and Acquiror.
At the Effective Time, pursuant to this Agreement and by virtue of the
Merger and without any action on the part of MedCath, Acquiror or the holders
of any of the following securities:
(a) Each share of common stock, par value $.01 per share, of MedCath
("MedCath Common Stock") (shares of MedCath Common Stock being hereinafter
collectively referred to as "MedCath Shares" and individually as a "MedCath
Share") issued and outstanding immediately prior to the Effective Time (other
than any MedCath Shares to be cancelled pursuant to Section 2.1(b) and any
Dissenting Shares (as defined in Section 2.1(d)) shall be cancelled,
extinguished and shall be converted automatically into the right to receive an
amount equal to $19.00 in cash, without interest (the "Cash Merger
Consideration"), payable to the holder thereof, as provided in Section 2.2,
upon surrender of the certificate formerly representing the MedCath Shares
being converted into the right to receive the Cash Merger Consideration, less
any required withholding taxes;
(b) Each MedCath Share held in the treasury of MedCath and each MedCath
Share owned by Acquiror (including MedCath Shares contributed to the Parent by
agreement with the Parent which are in turn contributed by Parent to Acquiror),
if any, immediately prior to the Effective Time shall be cancelled without any
conversion thereof and no payment or distribution shall be made with respect
thereto;
(c) Each share of Acquiror's common stock, $.01 par value ("Acquiror
Common Stock"), that is issued and outstanding immediately prior to the
Effective Time shall be converted into one newly issued, fully paid and
nonassessable share of common stock of the Surviving Corporation;
(d) Notwithstanding anything in this Agreement to the contrary, shares of
MedCath Common Stock issued and outstanding immediately prior to the Effective
Time held by a holder who has the right, if any, under North Carolina Law, to
demand payment for an appraisal of such shares in accordance with Article 13 of
the North Carolina Law (or any successor provision) ("Dissenting Shares") shall
not be converted into a right to receive the Cash Merger Consideration (but
shall have the rights set forth in Article 13 of the North Carolina Law (or any
successor provision), if applicable) unless such holder fails to perfect or
otherwise loses such holder's right to such payment or appraisal, if any,
pursuant to Article 13 of
A-2
<PAGE>
the North Carolina Law. If, after the Effective Time, such holder fails to
perfect or loses any such right to appraisal, each such share of such holder
shall be treated as a share that had been converted as of the Effective Time
into the right to receive the Cash Merger Consideration in accordance with this
Section 2.1. MedCath shall give prompt notice to Acquiror of any notices of
dissent, demands for payment of fair value or other communications or actions
received by MedCath with respect to shares of MedCath Common Stock, and
Acquiror shall have the right to participate in and approve all negotiations
and proceedings with respect thereto. MedCath shall not, except with the prior
written consent of Acquiror, make any payment with respect to, or settle or
offer to settle, any such demands.
Section 2.2 Payment of Cash for MedCath Common Stock.
(a) At the Effective Time, the Parent or Acquiror shall irrevocably
deposit or cause to be deposited with a bank or trust company to be designated
by Acquiror and reasonably satisfactory to MedCath which is organized and doing
business under the laws of the United States or any state thereof and has a
combined capital and surplus of at least $100,000,000 (the "Disbursing Agent"),
as agent for the holders of shares of MedCath Common Stock, cash in the
aggregate amount required to effect conversion of shares of MedCath Common
Stock into the Cash Merger Consideration at the Effective Time pursuant to
Section 2.1(a) hereof. Pending distribution pursuant to Section 2.2(b) hereof
of the cash deposited with the Disbursing Agent, such cash shall be held in
trust for the benefit of the holders of MedCath Common Stock and the fund shall
not be used for any other purposes, and Acquiror and Surviving Corporation may
direct the Disbursing Agent to invest such cash, provided that such investments
(i) shall be obligations of or guaranteed by the United States of America,
commercial paper obligations receiving the highest rating from either Moody's
Investors Services, Inc. or Standard & Poor's Corporation, or certificates of
deposit, bank repurchase agreements or bankers acceptances of domestic
commercial banks with capital exceeding $250,000,000 (collectively "Permitted
Investments") or money market funds which are invested solely in Permitted
Investments and (ii) shall have maturities that will not prevent or delay
payments to be made pursuant to Section 2.2(b) hereof. Each holder of a
certificate or certificates representing shares of MedCath Common Stock
cancelled on the Effective Time pursuant to Section 2.1(a) hereof may
thereafter surrender such certificate or certificates to the Disbursing Agent,
as agent for such holder of shares of MedCath Common Stock, which shall effect
the exchange of such certificate or certificates on such holder's behalf for a
period ending six months after the Effective Time. Any interest and other
income resulting from such investments shall be paid to Acquiror.
(b) After surrender to the Disbursing Agent of any certificate which prior
to the Effective Time shall have represented any shares of MedCath Common
Stock, the Disbursing Agent shall promptly distribute to the person in whose
name such certificate shall have been registered a check representing the
amount of cash into which such shares of MedCath Common Stock shall have been
converted at the Effective Time pursuant to Section 2.1(a) hereof. Until so
surrendered and exchanged, each such certificate shall, after the Effective
Time, be deemed to represent only the right to receive such cash, and until
such surrender and exchange, no cash shall be paid to the holder of such
outstanding certificate in respect thereof. The Surviving Corporation shall
promptly after the Effective Time cause to be distributed to such holders
appropriate materials to facilitate such surrender.
(c) If any cash deposited with the Disbursing Agent for purposes of
payment in exchange for shares of MedCath Common Stock remains unclaimed
following the expiration of six (6) months after the Effective Time, such cash
shall be delivered to the Surviving Corporation by the Disbursing Agent, and
thereafter the Disbursing Agent shall not be liable to any persons claiming any
amount of such cash, and the surrender and exchange shall be effected directly
with the Surviving Corporation (subject to applicable abandoned property,
escheat and similar laws). No interest shall accrue or be payable with respect
to any amounts which any such holder shall be so entitled to receive. The
Surviving Corporation or the Disbursing Agent shall be authorized to pay the
cash attributable to any certificate theretofore issued which has been lost or
destroyed, upon receipt of satisfactory evidence of ownership of the shares of
MedCath Common Stock represented thereby and of appropriate indemnification.
(d) None of Acquiror, the Surviving Corporation or the Disbursing Agent
shall be liable to any person in respect of any shares of retained MedCath
Common Stock (or dividends or distributions with respect thereto) or cash
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law. If any certificates representing shares of MedCath
Common Stock shall not have been surrendered prior to two years after the
Effective Time (or immediately prior to such earlier date on which any cash, if
any, in lieu of fractional shares of retained MedCath Common Stock or any
dividends or distributions with respect to retained MedCath Common Stock in
respect of such certificate would otherwise escheat to or become the property
of any governmental entity), any such cash, dividends or distributions in
respect of such certificate shall, to the extent permitted by applicable law,
become the property of the Surviving Corporation, free and clear of all claims
or interest of any person previously entitled thereto.
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(e) If payment is to be made to a person other than the person in whose
name a surrendered certificate, which prior to the Effective Time shall have
represented any shares of MedCath Common Stock, is registered, it shall be a
condition to such payment that the certificate so surrendered shall be endorsed
or shall otherwise be in proper form for transfer, and that the person
requesting such payment shall have paid any transfer and other taxes required
by reason of such payment in a name other than that of the registered holder of
the certificate surrendered or shall have established to the satisfaction of
the Surviving Corporation or the Disbursing Agent that such tax either has been
paid or is not payable.
(f) From and after the Effective Time, the holders of shares of MedCath
Common Stock outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such shares of MedCath Common Stock except as
otherwise provided herein or by law.
(g) After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any shares of MedCath Common
Stock which were outstanding immediately prior to the Effective Time. If, after
the Effective Time, certificates for shares of MedCath Common Stock are
presented to the Surviving Corporation, they shall be cancelled and promptly
exchanged for Cash Merger Consideration except as provided in Section 2.2(d).
Section 2.3 Exchange of Acquiror Common Stock Certificate.
Immediately after the Effective Time, upon surrender by the record holder
of the certificate, duly endorsed in blank, representing the shares of Acquiror
Common Stock outstanding immediately prior to the Effective Time, the Surviving
Corporation shall deliver to such record holder a share certificate, registered
in such holder's name, representing the number of shares of common stock of the
Surviving Corporation to which such record holder is so entitled by virtue of
Section 2.1(c). Such certificate will bear a legend restricting the
transferability of such shares of the Surviving Corporation except in
accordance with applicable federal and state securities laws.
ARTICLE 3
ADDITIONAL AGREEMENTS IN CONNECTION WITH THE MERGER
Section 3.1 Shareholders' Approval.
MedCath shall take all actions reasonably necessary in accordance with
applicable law and its articles of incorporation and bylaws to convene a
meeting of its shareholders as soon as reasonably practicable for the purpose
of considering and approving this Agreement and the Merger (the "Special
Meeting"). In connection with the Special Meeting, the board of directors of
MedCath shall recommend that the shareholders of MedCath vote to approve this
Agreement and the Merger unless the Strategic Options Committee of such board
of directors (the "Strategic Options Committee") has determined at any time
prior to the Special Meeting in good faith, after consultation with and based
upon the reasonably concluded written advice of counsel to the Strategic
Options Committee, that making such recommendation would violate the fiduciary
duties of the board of directors under applicable law.
Section 3.2 Proxy Materials and Schedule 13E-3.
(a) In connection with the Special Meeting, MedCath shall prepare and file
a preliminary proxy statement relating to the transactions contemplated by this
Agreement and the Merger (the "Preliminary Proxy Statement") with the United
States Securities and Exchange Commission (the "SEC") and shall use its
reasonable best efforts to respond to the comments of the SEC and to cause a
definitive proxy statement to be mailed to MedCath's shareholders (the
"Definitive Proxy Statement") all as soon as reasonably practicable; provided,
that prior to the filing of each of the Preliminary Proxy Statement and the
Definitive Proxy Statement, MedCath shall consult with Acquiror with respect to
such filings and shall afford Acquiror reasonable opportunity to comment
thereon. Acquiror shall provide MedCath with any information for inclusion in
the Preliminary Proxy Statement and the Definitive Proxy Statement which may be
required under applicable law and which is reasonably requested by MedCath.
(b) MedCath and any Person that may be deemed to be an affiliate of
MedCath shall prepare and file concurrently with the filing of the Preliminary
Proxy Statement a Statement on Schedule 13E-3 ("Schedule 13E-3") with the SEC.
If at any time prior to the Special Meeting any event should occur which is
required by applicable law to be set forth in an amendment of, or supplement
to, the Schedule 13E-3, MedCath and such Person shall file such amendments or
supplements.
Section 3.3 Termination of MedCath Stock Option Plans.
Except as disclosed in Item 3.3 of the Disclosure Schedules, all
outstanding stock options issued by MedCath (collectively, the "Stock
Options"), including without limitation those issued under the MedCath
Incorporated Omnibus Stock Plan,
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the 1992 Incentive Stock Option Plan and the Outside Director's Stock Option
Plan shall terminate upon the Merger. With respect to each Stock Option not
otherwise terminated by its terms upon the effectiveness of the Merger, MedCath
shall obtain at the earliest practicable date and prior to the Effective Time
the written consent of each holder to the cancellation of such holders' Stock
Options (irrespective of their exercise price and whether or not then currently
exercisable) to take effect on the Effective Time or shall take appropriate
action to amend the relevant plans to provide for such cancellation. At the
Effective Time, the Surviving Corporation shall pay each holder of Stock
Options, to the extent such Stock Options have not been previously exercised or
cancelled, (x) cash in an amount equal to the product of (i) the difference
between $19.00 and the exercise price of such Stock Options (but in no event
less than 0), multiplied by (ii) the number of shares of MedCath Common Stock
subject to such Stock Options, less (y) the amount of all applicable
withholding taxes; provided, that those holders of Stock Options that have
agreed in writing with Acquiror to accept options to purchase common stock of
the Parent shall not receive any cash payment with respect to cancelled Stock
Options.
Section 3.4 Reasonable Best Efforts; Consents; Other Filings.
Upon the terms and subject to the conditions herein provided, and subject
to the duties of the board of directors of MedCath under applicable law, as it
or the Strategic Options Committee may be advised in writing by counsel, each
party hereto shall use its reasonable best efforts to take, or cause to be
taken, all reasonable action and to do, or cause to be done and to assist and
cooperate with the other parties hereto in doing, all things necessary, proper
or advisable under applicable laws and regulations and their respective
articles or certificates of incorporation and bylaws to consummate and make
effective, as soon as reasonably practicable, the transactions contemplated by
this Agreement, subject, however, to the requisite vote of shareholders of
MedCath. Such actions shall include, without limitation, using its reasonable
best efforts to (i) defend any lawsuits or other legal proceedings, whether
judicial or administrative and whether brought derivatively or on behalf of
third parties (including governmental agencies or officials), challenging this
Agreement, or the consummation of the transactions contemplated thereby or
hereby and (ii) effect all necessary registrations and filings, including but
not limited to any filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR Act"), and submissions of information requested by
governmental authorities. Upon the terms and subject to the conditions hereof,
and subject to the duties of the board of directors of MedCath under applicable
law, as it, or the Strategic Options Committee, may be advised in writing by
counsel, each of the parties hereto shall use its reasonable best efforts to
take, or cause to be taken, all reasonable actions and to do, or cause to be
done, all things necessary to satisfy the other conditions of Closing set forth
herein and to cooperate with all reasonable requests made by the other party.
Without limiting the generality of the foregoing, and notwithstanding anything
in this Agreement to the contrary, MedCath shall, except with respect to the
agreements as set forth on Item 3.4 of the Disclosure Schedules, obtain all
consents, amendments to or waivers from other parties under the terms of all
leases and other agreements between MedCath and such parties required as a
result of the transactions contemplated by this Agreement (including the
agreements listed in Item 3.8 of the Disclosure Schedules) the failure of which
to obtain would have a Material Adverse Effect and obtain all necessary
consents, approvals and authorizations as are required to be obtained under any
federal or state law or regulation.
Section 3.5 Financing.
MedCath shall use its reasonable best efforts to cooperate and assist
Acquiror with respect to the Financing (as defined in Section 6.7).
Section 3.6 Conduct of Business by MedCath Pending the Merger.
MedCath covenants and agrees that, prior to the Effective Time or earlier
termination of this Agreement as provided herein, unless Acquiror shall
otherwise agree in writing and except as contemplated by this Agreement:
(a) MedCath shall, and shall cause its subsidiaries to, act and carry on
their respective businesses in the ordinary course of business substantially
consistent with past practice and use its and their respective reasonable best
efforts to preserve substantially intact their current material business
organizations, keep available the services of their current officers and
employees (except for terminations of employees in the ordinary course of
business) and preserve their material relationships with others having
significant business dealings with them;
(b) MedCath shall not (i) amend its articles of incorporation or bylaws,
or (ii) declare, set aside or pay any dividend or other distribution or payment
in cash, stock or property in respect of any of its shares of capital stock;
(c) Neither MedCath nor any of its subsidiaries shall (i) except as set
forth in Item 3.6(c) of the Disclosure Schedules, issue, grant, sell, pledge or
transfer or agree or propose to issue, grant, sell, pledge or transfer any
shares of capital stock, stock options, warrants, securities or rights of any
kind or rights to acquire any such shares, securities or rights of MedCath,
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any of its subsidiaries or any successor thereto, (ii) acquire directly or
indirectly by redemption or otherwise any shares of the capital stock of
MedCath of any class or any options, warrants or other rights to purchase any
such shares except as otherwise provided in this Agreement, or (iii) enter into
or modify any contract, agreement, commitment or arrangement with respect to
any of the foregoing;
(d) Except as disclosed in Item 3.6(d) of the Disclosure Schedules,
neither MedCath nor any of its subsidiaries shall (i) incur any indebtedness
for borrowed money or guarantee any such indebtedness of another person, issue
or sell any debt securities or warrants or other rights to acquire any debt
securities of MedCath or any of its subsidiaries, guarantee any debt securities
of another person, enter into any "keep well" or other agreement to maintain
any financial statement condition of another person or enter into any
arrangement having the economic effect of any of the foregoing, except for
short-term borrowings incurred in the ordinary course of business consistent
with past practice under existing indebtedness agreements, or (ii) make any
loans, advances or capital contributions to, or investments in, any other
person, other than to MedCath or any direct or indirect wholly-owned subsidiary
of MedCath;
(e) Each of MedCath and its subsidiaries shall use its reasonable best
efforts to keep in place its current insurance policies which are material
(either individually or in the aggregate) to the conduct of their business; and
notwithstanding such efforts, if any such policy is cancelled, MedCath shall
use its reasonable best efforts to replace such policy or policies;
(f) Neither MedCath nor any of its subsidiaries shall make any material
tax election, file any amended Tax Returns or settle or compromise any material
federal, state, local or foreign income tax liability;
(g) Neither MedCath nor any of its subsidiaries shall make any material
change in its accounting principles or methods except insofar as may be
required by a change in generally accepted accounting principles;
(h) Neither MedCath nor any of its subsidiaries shall split, combine or
reclassify any capital stock of MedCath or any subsidiary or issue or authorize
the issuance of any other securities in respect of, in lieu of or substitution
for shares of capital stock of MedCath or any subsidiary;
(i) Neither MedCath nor any of its subsidiaries shall acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial
portion of the stock or assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or division thereof having a value in excess of $250,000;
(j) Neither MedCath nor any of its subsidiaries shall agree to any
development deals, except to the extent such deals would require an investment
of less than $100,000 individually and $250,000 in the aggregate;
(k) Except as set forth in Item 3.6(k) of the Disclosure Schedules,
neither MedCath nor any of its subsidiaries shall sell, lease, license,
mortgage or otherwise encumber or subject to any lien or otherwise dispose of
any of its properties or assets other than any such properties or assets the
value of which do not exceed $250,000 individually and $1,000,000 in the
aggregate, except sales of inventory and receivables in the ordinary course of
business consistent with past practice;
(l) Neither MedCath nor any of its subsidiaries shall acquire or agree to
acquire any assets, other than inventory in the ordinary course of business
consistent with past practice, that are material, individually or in the
aggregate, to MedCath and its subsidiaries taken as a whole, or make or agree
to make any capital expenditures except capital expenditures which,
individually or in the aggregate and taken together with any capital
expenditure made between October 1, 1997 and the date hereof (inclusive), do
not exceed the amount budgeted therefor in MedCath's annual capital
expenditures budget for 1998 previously provided to Acquiror;
(m) Neither MedCath nor any of its subsidiaries shall (x) pay, discharge
or satisfy any material claims (including claims of stockholders), liabilities
or obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), except for the payment, discharge or satisfaction of (i)
liabilities or obligations in the ordinary course of business consistent with
past practice or in accordance with their terms as in effect on the date hereof
including without limitation all liabilities disclosed in Item 3.6(d) of the
Disclosure Schedules or (ii) claims settled or compromised to the extent
permitted by Section 3.6(p), or (y) waive, release, grant, or transfer any
rights of material value or modify or change in any material respect any
existing material license, lease, contract or other document, other than in the
ordinary course of business consistent with past practice;
(n) Neither MedCath nor any of its subsidiaries shall adopt a plan of
complete or partial liquidation or resolutions providing for or authorizing
such a liquidation or a dissolution, merger, consolidation, restructuring,
recapitalization or reorganization;
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(o) Neither MedCath nor any of its subsidiaries shall enter into any new
collective bargaining agreement or any successor collective bargaining
agreement to any collective bargaining agreement;
(p) Neither MedCath nor any of its subsidiaries shall settle or compromise
any litigation (whether or not commenced prior to the date of this Agreement)
other than settlements or compromises of litigation where the settlement is
limited solely to monetary payment and the release of claims and the amount
paid (after giving effect to insurance proceeds actually received) in
settlement or compromise does not exceed $250,000, provided that the aggregate
amount paid in connection with the settlement or compromise of all such
litigation matters shall not exceed $350,000;
(q) Neither MedCath nor any of its subsidiaries shall engage in any
transaction with, or enter into any agreement, arrangement, or understanding
with, directly or indirectly, any of MedCath's affiliates, including, without
limitation, any transactions, agreements, arrangements or understandings with
any affiliate or other Person covered under Item 404 of SEC Regulation S-K that
would be required to be disclosed under such Item 404 other than such
transactions of the same general nature, scope and magnitude as are disclosed
in documents filed by MedCath with the SEC as described in Section 4.6;
(r) Neither MedCath nor any of its subsidiaries shall adopt or amend
(except as may be required by law) any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or other
employee benefit plan, agreement, trust, fund or other arrangement for the
benefit or welfare of any employee, director or former director or employee or,
other than increases for individuals and arrangements for new employees (other
than, in each case, officers and directors) in the ordinary course of business
consistent with past practice, increase the compensation or fringe benefits of
or loan or advance money or other property to any director, employee or former
director or employee or pay any benefit not required by any existing plan,
arrangement or agreement;
(s) Neither MedCath nor any of its subsidiaries shall grant to employees
any new or modified severance (except for increases in severance granted to
employees other than officers in the ordinary course of business which are
immaterial individually and in the aggregate) or termination arrangement or
increase or accelerate any benefits payable under its severance or termination
pay policies in effect on the date hereof;
(t) Neither MedCath nor any of its subsidiaries shall effectuate a "plant
closing" or "mass layoff", as those terms are defined in the Worker Adjustment
and Retraining Notification Act of 1988 ("WARN"), affecting in whole or in part
any site of employment, facility, operating unit or employee of MedCath or any
subsidiary, without notifying Acquiror or its affiliates in advance and without
complying with the notice requirements and other provisions of WARN; and
(u) Neither MedCath nor any of its subsidiaries shall authorize any, or
commit or agree to do any of the things described in clauses (a) through (t) or
anything which would make any representation or warranty of MedCath in this
Agreement untrue or incorrect in any material respect as of the date hereof and
as of the Effective Time, as if made on such date, except to the extent such
representations and warranties expressly relate to a specific date (in which
case such representations and warranties shall be true and correct as of such
date).
Section 3.7 MedCath's Notification of Certain Matters.
MedCath shall, promptly upon obtaining knowledge of any of the following
occurring subsequent to the date of this Agreement and prior to the Effective
Time, notify Acquiror of: (a) any material claims, actions, proceedings, tax
audits or investigations commenced or, to its knowledge, threatened in writing,
involving or affecting MedCath or any of its subsidiaries or any of their
properties or assets, which if adversely resolved would have a Material Adverse
Effect or which could reasonably be expected to prevent, hinder or materially
delay the ability of MedCath to consummate the Merger or the transactions
contemplated by this Agreement, (b) any notice of, or other communication
relating to, a default or event which, with notice or lapse of time or both,
would become a default, received by MedCath or any of its subsidiaries, under
any agreement, lease, indenture or instrument to which MedCath or any of its
subsidiaries is a party or is subject where such a default would have a
Material Adverse Effect on MedCath or (c) any notice or other communication
from any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement.
Section 3.8 Access to MedCath's Books and Records.
Upon reasonable notice, MedCath shall afford Acquiror and its
representatives and representatives of all prospective sources of Financing
reasonable access during normal business hours to the properties, books,
records and personnel of MedCath and its subsidiaries and such additional
information concerning the business and properties of MedCath and its
subsidiaries as Acquiror and its representatives may reasonably request. Unless
and until MedCath otherwise agrees, Acquiror
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will obtain appropriate undertakings from the representatives of all
prospective sources of Financing to hold in confidence all confidential
information and not use any confidential information except in connection with
the transactions contemplated hereby and the Financing, all in accordance with
that certain letter agreement dated October 1, 1997 by and between Kohlberg
Kravis Roberts & Co., L.P. and MedCath, the terms of which are incorporated
herein by reference (the "Confidentiality Agreement"). The parties acknowledge
that the Confidentiality Agreement shall remain in full force and effect until
the Closing.
Section 3.9 Acquisition Proposals.
Any offer or proposal by any corporation, partnership, person or other
entity or group concerning any tender or exchange offer, proposal for a merger,
share exchange, recapitalization, consolidation or other business combination
involving MedCath or any of its subsidiaries or divisions, or any proposal or
offer to acquire in any manner, directly or indirectly, a significant equity
interest in, or a substantial portion of the assets of, MedCath or any of its
subsidiaries, other than pursuant to the transactions contemplated by this
Agreement, is hereby defined as an "Acquisition Proposal". MedCath shall not,
nor shall it permit any of its officers, directors, affiliates, representatives
or agents to, directly or indirectly, (a) take any action to solicit, initiate
or knowingly encourage any Acquisition Proposal, or (b) participate in any
discussions or negotiations with or encourage any effort or attempt by any
other person or entity or take any other action to facilitate an Acquisition
Proposal. From and after the date hereof, MedCath, its subsidiaries and all
officers, directors, employees of, and all investment bankers, attorneys and
other advisors and representatives of, MedCath and its subsidiaries shall cease
doing any of the foregoing. Notwithstanding the foregoing, MedCath or any such
persons may, directly or indirectly, subject to a confidentiality agreement
substantially no less favorable taken as a whole to MedCath than the
Confidentiality Agreement, furnish to any party information and access in
response to a request for information or access made incident to an Acquisition
Proposal made after the date hereof and may participate in discussions and
negotiate with such party concerning any written Acquisition Proposal made
after the date hereof (provided neither MedCath nor any such Person, after the
date hereof, solicited, initiated or encouraged such Acquisition Proposal), if
the board of directors of MedCath, or in the event of an Acquisition Proposal
in which a member of such Board of Directors or any affiliate thereof has an
interest which would be adverse to MedCath (an "Interested Party Proposal"),
then the Strategic Options Committee, shall have determined in good faith based
upon the reasonably concluded written advice of outside counsel to MedCath or
counsel to the Strategic Options Committee, as the case may be, that failing to
take such action would violate MedCath's board of directors' fiduciary duty
under applicable law. During the term of this Agreement, the board of directors
of MedCath shall notify Acquiror immediately if any Acquisition Proposal is
made and shall in such notice indicate in reasonable detail the identity of the
offeror and the terms and conditions of such Acquisition Proposal and shall
keep Acquiror promptly advised of all material developments which could
reasonably be expected to culminate in the board of directors withdrawing,
modifying or amending its recommendation of the Merger and the other
transactions contemplated by this Agreement. During the term of this Agreement,
MedCath shall not waive or modify any provisions contained in any
confidentiality agreement entered into relating to a possible acquisition
(whether by merger, stock purchase, asset purchase or otherwise) or
recapitalization of MedCath.
Section 3.10 Director and Officer Protection.
The Surviving Corporation shall indemnify, defend and hold harmless the
present and former directors, officers, employees and agents of MedCath and its
subsidiaries (each an "Indemnified Party") against all costs and expenses
(including reasonable attorney's fees), judgments, fines, losses, claims,
damages, liabilities and settlement amounts relating to actions or omissions
arising out of the Indemnified Party's being a director, officer, fiduciary,
employee or agent of MedCath at or prior to the Effective Time (including the
transactions contemplated by this Agreement) to the fullest extent permitted
under applicable law, whether or not the Surviving Corporation is insured
against any such matter (and shall pay any expenses in advance of the final
disposition of such action or proceeding to each Indemnified Party as such
expenses are incurred to the fullest extent permitted under applicable law,
provided MedCath or the Surviving Party, as the case may be, receives from the
Indemnified Party to whom expenses are advanced an undertaking to repay such
advances required under applicable law). Without limiting the foregoing, in any
case in which approval by the Surviving Corporation is required to effectuate
any indemnification, the Surviving Corporation shall direct, at the election of
the Indemnified Party, that the determination of any such approval shall be
made by independent counsel mutually agreed to by the Surviving Corporation and
the Indemnified Party. The Surviving Corporation shall maintain in effect for a
period of six years after the Effective Time directors' and officers' liability
insurance with respect to matters occurring prior to the Effective Time which
insurance shall contain terms and conditions no less advantageous than are
contained in MedCath's current directors' and officers' liability insurance
policy; provided, the Surviving Corporation shall not be required to pay an
annual premium for such insurance in
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excess of two times the current annual premium. In the event MedCath or the
Surviving Corporation or any of their respective successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
person, then, and in each case, proper provision shall be made so that the
successors and assigns of MedCath or the Surviving Corporation, as the case may
be, or, at the Parent's option, the Parent shall assume the obligations set
forth in this Section 3.10.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF MEDCATH
MedCath represents and warrants to Acquiror and Parent as follows:
Section 4.1 Organization and Good Standing.
Each of MedCath and its subsidiaries is a duly organized and validly
existing corporation in good standing under the laws of the state of its
incorporation with all requisite power and authority (corporate and other) to
own, lease and operate its properties and conduct its business and is duly
qualified and in good standing as a foreign corporation authorized to do
business in each of the jurisdictions in which the character of the properties
owned or held under lease by it or the nature of the business transacted by it
makes such qualification necessary, except where the failure to be so qualified
would not have a Material Adverse Effect on MedCath and its subsidiaries, taken
as a whole. MedCath has heretofore delivered to Acquiror accurate and complete
copies of its and its subsidiaries' certificates or articles of incorporation
and bylaws, as currently in effect. For the purposes of this Agreement
"Material Adverse Change" or "Material Adverse Effect" means any change or
effect that either individually or in the aggregate is materially adverse to
the business, assets, operations, properties, financial condition or results of
operations of MedCath and its subsidiaries taken as a whole and is exclusive of
any claims or litigation involving MedCath and its subsidiaries relating to the
absence of the consents, waivers or approvals relating to the Merger with
respect to the agreements set forth in Item 3.4 of the schedules provided by
MedCath to Acquiror and Parent ("Disclosure Schedules"); provided that for the
purposes of this Agreement, "Material Adverse Effect" shall exclude the effect
on the business, assets, operations, properties, financial condition or results
in operations (i) from the delay until July 1, 1998 in the opening of the heart
hospital in Phoenix, to the extent such delay was caused by the flood that
occurred on January 18, 1998 and (ii) from the financial performance of the
heart hospital in Tucson, other than changes in financial performance from and
after the date hereof when compared to the financial performance prior to the
date hereof; provided that nothing in the immediately prior proviso shall be
interpreted to mean that delays in the opening of the heart hospital in Phoenix
beyond July 1, 1998 or further changes in the financial performance of the
Tucson heart hospital are per se Material Adverse Changes or Material Adverse
Effects.
Section 4.2 Authorization; Binding Agreement.
MedCath has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
MedCath's board of directors and, except for the approval of this Agreement and
the Merger by the shareholders of MedCath in accordance with the North Carolina
Law and the articles of incorporation and bylaws of MedCath, no other corporate
proceedings on the part of MedCath are necessary to authorize this Agreement
and the transactions contemplated hereby. This Agreement has been duly and
validly executed and delivered by MedCath, and subject to the requisite
approval of the shareholders of MedCath, constitutes the legal, valid and
binding agreement of MedCath, enforceable against MedCath in accordance with
its terms, except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other laws, now or hereafter in
effect, relating to or limiting creditors' rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law)
which provide, among other things, that the remedies of specific performance
and injunctive and other forms of equitable relief are subject to equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought.
Section 4.3 Capitalization.
The authorized capital stock of MedCath consists of 20,000,000 shares of
MedCath Common Stock, and 2,348,167 shares of Preferred Stock, 300,000 of which
have been designated as Series A Preferred Stock, 200,000 of which have been
designated as Series A Junior Participating Preferred Stock, 20,000 of which
have been designated as Series B Preferred Shares and 28,167 of which have been
designated as Series C Preferred Shares "North Carolina Preferred Stock"). As
of
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March 12, 1998, 11,669,359 shares of MedCath Common Stock and no shares of
North Carolina Preferred Stock were outstanding. As of the date hereof,
1,506,569 shares of MedCath Common Stock were reserved for issuance upon
exercise of outstanding Stock Options. All of the outstanding shares of capital
stock of MedCath and the subsidiaries of MedCath have been duly authorized and
validly issued and are fully paid and nonassessable. All issued and outstanding
shares of capital stock of the subsidiaries of MedCath are owned by MedCath or
a subsidiary of MedCath free and clear of all liens, charges, encumbrances,
claims and options of any nature. Except as contemplated by this Agreement and
the Rights Agreement of MedCath dated as of October 15, 1996 (the "Rights
Agreement") and except for the Stock Options and as set forth on Item 3.6(c) of
the Disclosure Schedules, neither MedCath nor any subsidiary of MedCath has or
as of the Effective Time will have granted any outstanding security, call,
option, warrant, subscription or other right, or entered into any agreement or
commitment which either (a) obligates MedCath or any of its subsidiaries to
issue, sell or transfer or cause to be issued, delivered or sold any shares of
the capital stock of MedCath or any subsidiary of MedCath or (b) restricts the
transfer of, or otherwise encumbers, shares of MedCath Common Stock.
Section 4.4 Financial Statements.
All consolidated financial statements of MedCath and its subsidiaries
(including the notes to such financial statements) included in MedCath's Annual
Report on Form 10-K for the year ended September 30, 1997 (the "Year End
Financial Statements") filed pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (a) are in accordance with the books and
records of MedCath and its subsidiaries in all material respects, (b) present
fairly in all material respects the consolidated financial position, results of
operations, changes in shareholders' equity and cash flow (as applicable) of
MedCath and its subsidiaries as of the respective dates and for the respective
periods indicated and (c) have been prepared in conformity with generally
accepted accounting principles applied in all material respects on a consistent
basis through all the periods involved. MedCath has no material liabilities
that are required by generally accepted accounting principles to be disclosed
on a balance sheet other than (i) those disclosed in the Year End Financial
Statements, and (ii) those arising in the ordinary course of business since
September 30, 1997 or as disclosed in Items 3.6(c) and (d) of the Disclosure
Schedules.
Section 4.5 Absence of Certain Changes or Events.
Since September 30, 1997, (a) there has not been any Material Adverse
Change, (b) there has not been any damage, destruction or loss, whether covered
by insurance or not, having a Material Adverse Effect, (c) there has not been
any condition, event or occurrence which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect or give rise to
a Material Adverse Change, (d) MedCath and its subsidiaries have conducted
their respective businesses only in the ordinary course, taken as a whole, (e)
MedCath has not changed its accounting principles or methods in any material
respect except insofar as may be required by a change in generally accepted
accounting principles, (f) there has been no condition, event or occurrence
which could reasonably be expected to prevent, materially hinder or materially
delay the ability of MedCath to consummate the Merger or the transactions
contemplated by this Agreement, (g) there has not been any declaration, setting
aside or payment of any dividend or other distribution (whether in cash, stock
or property) with respect to the equity interests of MedCath or any of its
subsidiaries, other than dividends paid by wholly-owned subsidiaries and (h)
MedCath and its subsidiaries have not (i) increased the compensation or fringe
benefits of any present or former director, officer or employee of MedCath or
its subsidiaries (except for increases in salary or wages in the ordinary
course of business consistent with past practice), (ii) granted any severance
or termination pay to any present or former director or officer of MedCath or
its subsidiaries or, other than in the ordinary course of business, to any
other employee of MedCath or its subsidiaries; (iii) loaned or advanced money
or other property by MedCath or its subsidiaries to any of their present or
former directors, officer or employees or (iv) established, adopted, entered
into, amended or terminated any Company Benefit Plan.
Section 4.6 SEC Reports and other Documents.
Since January 1, 1995, MedCath has filed all reports required to be filed
by it with the SEC and all such reports complied as to form in all material
respects with the applicable requirements of law. Each report required to be
filed by MedCath with the SEC since January 1, 1995 did not on the date of
filing of such reports and, except to the extent revised or superseded by a
subsequent filing with the SEC prior to the date hereof does not, contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
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Section 4.7 Governmental and Other Consents and Approvals.
Except as set forth in Item 4.7 of the Disclosure Schedules, subject to
the approval of this Agreement and the Merger by the shareholders of MedCath,
no consent, waiver, approval, license or authorization of or designation,
declaration or filing with any governmental agency or authority or other public
persons or entities in the United States is required in connection with the
execution or delivery by MedCath of this Agreement or the consummation by
MedCath of the transactions contemplated hereby, other than (a) filing in the
State of North Carolina articles of merger in accordance with the North
Carolina Law, (b) filings required under the HSR Act, (c) filings required
under the Exchange Act and (d) such other consents, waivers, approvals,
licenses or authorizations, the failure of which to be obtained will not have a
Material Adverse Effect or will not materially and adversely affect the ability
of MedCath to consummate the transactions contemplated hereby.
Section 4.8 No Violation.
Except as set forth in Item 4.8 of the Disclosure Schedules, the execution
and delivery of this Agreement, the filing by MedCath of articles of merger in
connection with the Merger in the State of North Carolina in accordance with
the North Carolina Law, the consummation by MedCath of the transactions
contemplated hereby, or compliance by MedCath with any of the provisions
hereof, will not:
(a) violate any provision of the articles of incorporation or bylaws of
MedCath or any comparable charter or organizational documents of its
subsidiaries;
(b) cause MedCath or any of its subsidiaries to violate in any material
respect (i) any statute or law or any judgment, decree, order, regulation or
rule of any court or governmental authority applicable to MedCath or any of its
subsidiaries or any of their respective properties or (ii) the award of any
arbitrator or panel of arbitrators;
(c) cause the acceleration of the maturity of any debt or obligation which
is material to MedCath and its subsidiaries, taken as a whole; or
(d) with or without notice or lapse of time, or both, violate, or be in
conflict with, or constitute a material default under, or permit the
termination of, or give rise to a right of termination, cancellation or
acceleration of or "put" right with respect to any obligation or to loss of a
material benefit under, or, except as contemplated by this Agreement, require
the consent of any person under, or result in the creation of any material lien
upon any property of MedCath or any of its subsidiaries under, any agreement,
indenture, lease, instrument, permit, concession, franchise, or license
applicable to MedCath or any of its subsidiaries or to which MedCath or any of
its subsidiaries is a party or by which MedCath or any of its subsidiaries (or
their respective properties) may be bound, which individually or in the
aggregate would have a Material Adverse Effect.
Section 4.9 Litigation.
Except as set forth in Item 4.9 of the Disclosure Schedules, there is no
legal action, suit, arbitration or other legal, administrative or other
governmental investigation, inquiry or proceeding (whether federal, state,
local or foreign) pending or, to the knowledge of MedCath, threatened against
or affecting MedCath, any of its subsidiaries or any of their respective
properties, assets, business, franchises or governmental approvals before any
court or governmental department, commission, board, bureau, agency,
instrumentality or arbitrator, which, individually or in the aggregate, could
reasonably be expected (a) to have a Material Adverse Effect, or (b) to
materially and adversely affect the ability of MedCath to carry out, or prevent
or make unduly burdensome, the Merger or the transactions contemplated by this
Agreement nor is there any judgment, decree, injunction, rule or order of any
governmental entity or arbitrator outstanding against MedCath or any of its
subsidiaries having, or which in the future could have, any such effect.
Section 4.10 Governmental Approvals; Compliance with Law.
MedCath and its subsidiaries possess from the appropriate agency,
commission, board or governmental authority, whether federal, state or local,
all licenses, permits, authorizations, approvals, franchises and rights
("Government Approvals") that are necessary for MedCath and its subsidiaries to
engage in the business currently conducted by them, except in those instances
in which failure to possess Government Approvals, individually or in the
aggregate, would not have a Material Adverse Effect. MedCath and its
subsidiaries have been, are and as of the Effective Time will be in compliance
with all applicable federal, state and local laws, statutes, ordinances, rules
and regulations except where the failure to so comply would not constitute a
material violation of law compliance with which is material to MedCath and its
subsidiaries, taken as a whole.
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Section 4.11 Brokers and Finders.
Except for Goldman, Sachs & Co. ("Goldman Sachs"), which has been engaged,
pursuant to an engagement letter dated August 8, 1997, a true and complete copy
of which has been delivered to Acquiror, to provide financial advisory services
to the Strategic Options Committee of MedCath and, as requested by the
Strategic Options Committee, to provide advice to the board of directors of
MedCath with respect to whether the consideration to be received by the holders
of MedCath Common Stock is fair to them, no broker, finder or investment banker
is entitled to any brokerage, finder's or other fee or commission in connection
with the Merger or in connection with any transaction involving MedCath based
upon arrangements made by or on behalf of MedCath.
Section 4.12 Fairness Opinions and Approval by Strategic Options Committee.
On or prior to the date hereof, the Strategic Options Committee approved
the terms of this Agreement and received an opinion from Goldman Sachs as of
such date, which opinion shall be confirmed in writing substantially to the
effect that, from a financial point of view, the consideration to be received
by the holders of MedCath Common Stock pursuant to the Merger is fair to them
(which opinion shall be updated in writing to the date of the Definitive Proxy
Statement), a true and complete copy of which written opinion has been or will
promptly be delivered to Acquiror following its receipt by the Strategic
Options Committee.
Section 4.13 Taxes.
(a) All Returns (as hereinafter defined) required to be filed by or with
respect to MedCath and Tax Affiliates (as hereinafter defined) have been filed
on a timely basis, except where the failure to file such Returns would not have
a Material Adverse Effect. All such Returns were correct and complete in all
material respects. There are no deficiencies for Taxes that have been proposed,
asserted or assessed against MedCath or Tax Affiliates that remain unpaid.
MedCath and its Tax Affiliates have paid or made adequate provision in all
material respects in the Financial Statements (other than reserves for deferred
income Taxes established to reflect differences between book basis and Tax
basis of assets and liabilities) for the payment of all Taxes, whether or not
shown on any Return. As used in this Section 4.13, the term "Tax" or "Taxes"
means all federal, state, local, foreign and other net income, gross income,
gross receipts, franchise, sales, use, withholding, employment, property
alternative or add-on minimum, environmental (including Taxes under Section 59A
of the Internal Revenue Code of 1986, as amended (the "Code")) or other taxes,
fees, assessments or charges of any kind whatsoever, together with any interest
and any penalties, additions to tax or additional amounts with respect thereto;
the term "Returns" means all returns, declarations, reports, statements and
other documents required to be filed in respect of Taxes, including any
schedule or attachment thereto, and including any amendment thereof; and the
term "Tax Affiliate" means any subsidiaries of MedCath and any individual or
entity for whose Taxes MedCath or any of its subsidiaries is or could be held
liable, whether by reason of being a member of an affiliated, consolidated,
combined, unitary, or other similar group for Tax purposes, by reason of being
a successor, member or general partner, by agreement, or otherwise (but only
with respect to the Taxes and taxable periods(s) or portions thereof with
respect to which MedCath or such subsidiaries is or could be held liable for
such Taxes).
(b) Item 4.13 of the Disclosure Schedules lists all Returns that have been
audited, and indicates all Returns that are currently the subject of audit.
Neither MedCath nor any Tax Affiliate has granted any extension or waiver of
the statute of limitations period on the assessment of any material Taxes,
which period (after giving effect to such extension or waiver) has not expired.
Neither MedCath nor any Tax Affiliate has granted a power of attorney with
respect to any matter relating to any material Tax. No claim has been made by
an authority in a jurisdiction where MedCath or any Tax Affiliate does not file
Returns that it is or may be subject to Tax in that jurisdiction.
(c) MedCath and each Tax Affiliate has withheld and paid all Taxes
required to have been paid in connection with amounts paid or owing to any
employee, independent contractor, stockholder, partner, or other third party.
(d) Neither MedCath nor any Tax Affiliate is a party to any Tax
allocation, sharing, or similar agreement. Neither MedCath nor any Tax
Affiliate has been a member of an affiliated group filing a consolidated
federal income tax Return (other than a group the common parent of which was
MedCath).
(e) Except as disclosed to Acquiror prior to the date of this Agreement,
neither MedCath nor any Tax Affiliate has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code Section 280G or would constitute compensation in excess
of the limitation set forth in Section 162(m) of the Code.
(f) No consent under Section 341(f) of the Code has been filed with
respect to MedCath or any Tax Affiliates.
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(g) Neither MedCath nor any Tax Affiliate has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.
(h) No material claim for unpaid Taxes has become a lien or encumbrance of
any kind against the property of MedCath or any Tax Affiliates.
Section 4.14 Employee Benefits.
(a) A list of all employee benefit plans, programs, arrangements, funds,
policies, practices, or contracts and samples of representative employment
agreements with respect to which, through which, or under which the MedCath or
any of MedCath's subsidiaries has any liability to provide benefits or
compensation to or on behalf of employees, former employees, or independent
contractors of MedCath or any of MedCath's subsidiaries, whether formal or
informal, whether or not written, including but not limited to any employee
benefit plan (within the meaning of Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), any multiemployer plan (as
defined in Section 3(37) and Section 4001(a)(3) of ERISA), stock purchase,
stock option, severance, employment, change in control, fringe benefit,
collective bargaining, bonus, incentive, and deferred compensation arrangement
(collectively, the "Company Benefit Plans"), have been disclosed in writing to
Acquiror. MedCath has made available to Acquiror a true and complete copy of
the following documents, if applicable, with respect to each Company Benefit
Plan: (i) all documents 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 written summary of plan provisions provided to
participants or beneficiaries for each such Company Benefit Plan, (iii) the
annual report (Form 5500 series), required under ERISA or the Code, filed for
the most recent plan year and most recent financial statements or periodic
accounting of related plan assets with respect to each Company Benefit Plan,
and (iv) the most recent favorable determination letter, opinion, or ruling
from the Internal Revenue Service 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.
(b) Each Company Benefit Plan has at all times been maintained, by its
terms and in operation, in accordance with the Code, ERISA, and other
applicable laws, except where the failure to so comply is not reasonably likely
to have a Material Adverse Effect. 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, and
any such determination letter remains in effect and has not been revoked. All
contributions required to be made prior Closing under the terms of each Company
Benefit Plan, the Code, ERISA, or other applicable law have been or will be
timely made, and adequate reserves have been provided for by MedCath with
respect to all accrued benefits attributable to service on or prior to the
Closing. No Company Benefit Plan provides for an increase in benefits on or
after the Closing.
(c) Each Company Benefit Plan may be amended or terminated at any time
without any obligation or liability other than for benefits accrued prior to
such amendment or termination, or as required to be vested pursuant to
applicable law as a result of such amendment or termination. There are no
actions, audits, suits, or claims which are pending or threatened, to the
knowledge of MedCath against any Company Benefit Plan, except claims for
benefits made in the ordinary course of the operation of such plans. MedCath
will promptly notify Acquiror in writing of any such actions, audits, suits, or
claims arising between the date hereof and the Closing. Neither MedCath nor any
of its subsidiaries is subject to any material liability, tax, or penalty
whatsoever to any person whomsoever as a result of MedCath or any of its
subsidiaries engaging in a prohibited transaction under ERISA or the Code. To
the knowledge of MedCath, no event has occurred and no condition exists that
would subject MedCath, either directly or by reason of its affiliation with any
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 ("Company ERISA Affiliate"), to any material liability, tax, or penalty
imposed by ERISA, the Code, or other applicable law.
(d) Neither MedCath 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 any plan subject to Title IV of ERISA.
Section 4.15 Environmental Matters.
Except for such items of non-compliance that could not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect:
(i) MedCath and its subsidiaries, taken as a whole, hold and formerly
held, and, to the knowledge of MedCath, are and have been in compliance
with, all Environmental Permits, and MedCath and its subsidiaries are and
have been,
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otherwise in compliance with all applicable Environmental Laws and there
are no circumstances that might prevent or interfere with such compliance
in the future;
(ii) None of MedCath or its subsidiaries has received any Environmental
Claim, and none of MedCath or its subsidiaries is aware after reasonably
inquiry of any threatened material Environmental Claim or of any
circumstances, conditions or events that could reasonably be expected to
give rise to an Environmental Claim that could result in a Material Adverse
Effect;
(iii) None of MedCath or its subsidiaries has entered into or agreed to
any consent decree, order or agreement under any Environmental Law, and
none of MedCath or its subsidiaries is subject to any material judgment,
decree, order or other material requirement relating to compliance with any
Environmental Law or to investigation, cleanup, remediation or removal of
regulated substances under any Environmental Law;
(iv) To the knowledge of MedCath, there are no (a) underground storage
tanks, (B) polychlorinated biphenyls, (C) asbestos or asbestos-containing
materials, (D) urea-formaldehyde insulation, (E) sumps, (F) surface
impoundments, (G) landfills, (H) sewers or septic systems or (I) Hazardous
Materials present at any facility currently or formerly owned, leased,
operated or otherwise used by MedCath or any of its subsidiaries that could
reasonably be expected to give rise to a Material Adverse Effect;
(v) There are no past (including, without limitation, with respect to
assets or businesses formerly owned, leased or operated by MedCath or any
of its subsidiaries) or present actions, activities, events, conditions or
circumstances, with respect to or against MedCath or its subsidiaries
including without limitation the release, threatened release, emission,
discharge, generation, treatment, storage or disposal of Hazardous
Materials, that could reasonably be expected to give rise to a Material
Adverse Effect under any Environmental Laws or any contract or agreement;
(vi) No modifications, revocation, reissuance, alteration, transfer, or
amendment of the Environmental permits, or any review by, or approval of,
any third party of the Environmental Permits is required in connection with
the execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby or the continuation of the business of
MedCath or its subsidiaries following such consummation;
(vii) Hazardous Materials have not been generated, transported, treated,
stored, disposed of, released or threatened to be released at, on, from or
under any of the properties or facilities currently or formerly owned,
leased or otherwise used by MedCath or any of its subsidiaries, in
violation of, or in a manner or to a location that could give rise to a
Material Adverse Effect, under any Environmental Laws;
(viii) For purposes of this Agreement, the following terms shall have the
following meanings:
"Environmental Claim" means any written or oral notice, claim, demand,
action, suit, complaint, proceeding or other communication by any person
alleging liability or potential liability (including without limitation
liability or potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resource damages, property damage,
personal injury, fines or penalties) arising out of, relating to, based on
or resulting from (i) the presence, discharge, emission, release or
threatened release of any Hazardous Materials at any location, either
owned, leased or operated by MedCath or any of its subsidiaries or (ii)
circumstances forming the basis of any violation or alleged violation of
any Environmental Law or Environmental Permit or (iii) otherwise relating
to obligations or liabilities under any Environmental Laws.
"Environmental Permits" means all permits, licenses, registrations and
other governmental authorizations required for MedCath and the operations
of MedCath's and its subsidiaries' facilities and otherwise to conduct its
business under Environmental Laws.
"Environmental Laws" means all applicable federal, state and local
statutes, rules, regulations, ordinances, orders, decrees and common law in
effect as of the date hereof relating in any manner to contamination,
pollution or protection of human health or the environment, including
without limitation the Comprehensive Environmental Response, Compensation
and Liability Act, the Solid Waste Disposal Act, the Clean Air Act, the
Toxic Substances Control Act, the Occupational Safety and Health Act, the
Emergency Planning and Community-Right-to-Know Act, the Safe Drinking Water
Act, all as amended, and similar state laws.
"Hazardous Materials" means all hazardous or toxic substances, wastes,
materials or chemicals, petroleum (including crude oil or any fraction
thereof) and petroleum products, asbestos and asbestos-containing
materials, pollutants, contaminants and all other materials, substances and
forces, including but not limited to electromagnetic fields, regulated
pursuant to, or that could form the basis of liability under, any
Environmental Law.
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Section 4.16 Board Recommendation.
The board of directors of MedCath, at a meeting duly called and held, has
by unanimous vote of those directors present (who constituted 100% of the
directors then in office exclusive of directors who recused themselves from
such vote because of their interest in the Parent or Acquiror) (i) determined
that this Agreement and the transactions contemplated hereby are fair to and in
the best interests of the shareholders of MedCath and (ii) resolved to
recommend that the holders of the shares of MedCath Common Stock approve this
Agreement and the transactions contemplated herein, including the Merger.
Section 4.17 Required Company Vote.
The affirmative vote of a majority of the shares of MedCath Common Stock
is the only vote of the holders of any class or series of MedCath's securities
necessary to approve this Agreement and the Merger under the North Carolina
Law.
Section 4.18 State Takeover Statutes.
No state takeover statute or similar statute or regulation of the State of
North Carolina (and, to the knowledge of MedCath after due inquiry, of any
other state or jurisdiction) applies or purports to apply to this Agreement,
the Merger, or any of the other transactions contemplated hereby. No provision
of the articles of organization, by-laws or other governing instruments of
MedCath or any of its subsidiaries would, directly or indirectly, restrict or
impair the ability of Acquiror or its affiliates to vote, or otherwise to
exercise the rights of a shareholder with respect to, securities of MedCath and
its subsidiaries that may be acquired or controlled by Acquiror or its
affiliates or permit any shareholder to acquire securities of MedCath on a
basis not available to Acquiror in the event that Acquiror were to acquire
securities of MedCath, and neither MedCath nor any of its subsidiaries has any
rights plan (except the Rights Agreement), preferred stock or similar
arrangement which have any of the aforementioned consequences. The board of
directors of MedCath has duly and validly approved and taken all corporate
action required to be taken by the board of directors for the consummation of
the transactions contemplated by this Agreement.
Section 4.19 Material Contract Defaults.
Neither MedCath nor any of its subsidiaries is, or has received any notice
or has any knowledge that any other party is, in default in any respect under
any material contract, agreement, commitment, arrangement, lease, policy or
other instrument to which it or any of its subsidiaries is a party or by which
it or any such subsidiary is bound ("Material Contracts"), except for those
defaults which could not reasonably be expected, either individually or in the
aggregate, to have a Material Adverse Effect; and there has not occurred any
event that with the lapse of time or the giving of notice or both would
constitute such a material default.
Section 4.20 Information in Proxy Statement.
The Definitive Proxy Statement (or any amendment thereof or supplement
thereto), at the date mailed to MedCath shareholders and at the time of the
Special Meeting, will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading, provided, however, that no representation is
made by MedCath with respect to statements made therein based on information
supplied by the Parent or Acquiror for inclusion in the Definitive Proxy
Statement. The Definitive Proxy Statement will comply in all material respects
with the provisions of the Exchange Act and the rules and regulations
thereunder.
Section 4.21 Rights Agreement.
The Rights Agreement has been amended so as to provide that neither the
Parent nor Acquiror will become an "Acquiring Person" or an "Adverse Person"
and that no "Triggering Event", "Stock Acquisition Date" or "Distribution Date"
(as such terms are defined in the Rights Agreement) will occur as a result of
the approval, execution or delivery of this Agreement or the consummation of
the Merger.
Section 4.22 Properties.
(a) Except with respect to liens securing indebtedness evidenced by the
agreements listed on Item 3.6(d) of the Disclosure Schedules or reflected in
the Year End Financial Statements of MedCath, each of MedCath and its
subsidiaries have good and sufficient, valid and marketable title to its owned
real property free and clear of all liens and other encumbrances that,
individually or in the aggregate, would have a Material Adverse Effect. Except
as set forth in Item 4.22 of the Disclosure Schedules, there are no outstanding
contracts for the purchase of any real property.
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(b) MedCath and its subsidiaries hold good and valid leasehold title to
leased real property they occupy, free of all liens except for liens which,
individually or in the aggregate, would not have a Material Adverse Effect or
liens securing indebtedness evidenced by the agreements listed on Item 3.6(d)
of the Disclosure Schedules or reflected in the Year End Financial Statements
of Medcath. Other than such exceptions which as would not have a Material
Adverse Effect, all real property leases are in full force and effect and grant
in all respects the leasehold estates or rights of occupancy or use they
purport to grant. There are no existing defaults (either on the part of MedCath
or any of its subsidiaries or, to the knowledge of MedCath, any other party
thereto) under any real property lease and no event has occurred which, with
notice or the lapse of time, or both, would constitute a default (either on the
part of MedCath or any of its subsidiaries or, to the knowledge of MedCath, any
other party thereto) under any of the real property leases, except for any of
the foregoing which, individually or in the aggregate, would not have a
Material Adverse Effect. The consummation of the Merger will not result in the
occurrence of a default under any of the real property leases (whether pursuant
to a "change in control" provision in the real property leases or otherwise).
Section 4.23 Billing and Coding.
MedCath and its subsidiaries have, whether directly or indirectly through
contractual arrangements with others, billed third party payers (including, but
not limited to, Medicare, Medicaid, CHAMPUS, and private payers) for health
care services rendered by MedCath, its subsidiaries, or any of its or their
employees, professional staff, or other persons or entities on behalf of whom
or for which MedCath or any of its subsidiaries is authorized to bill for
health care services, in accordance in all material respects with all federal,
state, and local laws, rules, and regulations, and all agreements, applicable
with respect thereto. Without limiting the generality of the foregoing, for
said purposes all such services have been properly documented and coded all
except to the extent the failure to so comply or to do so would not be material
individually or in the aggregate.
Section 4.24 Other Confidentiality Agreements.
MedCath has entered into a confidentiality agreement not substantially
less favorable taken as a whole to it than the Confidentiality Agreement with
each Person (as defined in Section 8.6) that, since January 1, 1997, has been
provided confidential information with respect to MedCath and its subsidiaries
with a view to a possible acquisition (whether by merger, stock purchase, asset
purchase or otherwise) or recapitalization of MedCath. Each such agreement is
in full force and effect, MedCath has not modified or waived or agreed to
modify or waive any provisions of any such agreement and, to the knowledge of
MedCath none of the other parties thereto is in default thereunder.
ARTICLE 5
[INTENTIONALLY OMITTED]
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND PARENT
Acquiror and Parent hereby represent and warrant to MedCath as follows:
Section 6.1 Organization and Good Standing.
Each of Acquiror and Parent is a duly organized and validly existing
corporation in good standing under the laws of the state of its incorporation.
Each of Acquiror and Parent has heretofore delivered to MedCath accurate and
complete copies of its articles or certificate of incorporation and bylaws as
currently in effect. Neither Acquiror nor Parent has any subsidiary (other than
Acquiror, in the case of Parent) or owns or holds any capital stock, security
or investment in any other Person other than bank accounts, certificates of
deposit, money market or similar short-term investments.
Section 6.2 Authorization; Binding Agreement.
Parent and Acquiror have all requisite corporate power and authority to
execute and deliver this Agreement and to consummate the Merger and the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the Merger and the transactions contemplated hereby
have been duly and validly authorized by its respective board of directors, and
this Agreement has been adopted by the shareholders of Acquiror in accordance
with North Carolina Law and its articles or certificate of incorporation and
bylaws. No other corporate proceedings on the part of Acquiror or Parent are
necessary to authorize this Agreement, the Merger and the transactions
contemplated hereby. This Agreement
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has been duly and validly executed and delivered by Parent and Acquiror and
constitutes a legal, valid and binding agreement of Acquiror and Parent,
enforceable against Parent and Acquiror in accordance with its terms except as
such enforceability may be limited by (a) bankruptcy, insolvency,
reorganization, moratorium or other similar laws, now or hereafter in effect,
relating to or limiting creditors, rights generally, and (b) general principles
of equity (whether considered in an action in equity or at law) which provide,
among other things, that the remedies of specific performance and injunctive
and other forms of equitable relief are subject to equitable defenses and to
the discretion of the court before which any proceedings therefor may be
brought.
Section 6.3 Capitalization.
The authorized capital stock of Acquiror consists of a single class of
20,000,000 shares of common stock, par value $.01 per share, (which class of
stock is herein called "Acquiror Common Stock"), of which 100 are issued and
outstanding on the date hereof and are beneficially owned by the Parent. All of
the shares of Acquiror Common Stock outstanding at the Effective Time (i) will
have been duly authorized, validly issued, fully paid and nonassessable and
free of preemptive rights, and (ii) will be beneficially owned by Parent.
Acquiror has not granted any outstanding option, warrant, subscription or other
right, or entered into any agreement or commitment which either (a) obligates
Acquiror to issue, sell, repurchase or transfer any shares of the capital stock
of Acquiror or (b) restricts the transfer of, or otherwise encumbers, shares of
Acquiror Common Stock. Acquiror has no treasury stock.
Section 6.4 No Violation.
Neither the execution and delivery of this Agreement, the filing of the
Articles of Merger nor the consummation by Acquiror and Parent of the
transactions contemplated hereby, nor compliance by Acquiror with any of the
provisions hereof, will:
(a) violate any provision of the charter documents or bylaws of Acquiror
or Parent;
(b) violate any statute or law or any judgment, decree, order, regulation
or rule of any court or governmental authority applicable to Acquiror or
Parent or any of their properties;
(c) cause the acceleration of the maturity of any debt or obligation of
Acquiror or Parent; or
(d) with or without notice or lapse of time, or both, violate, or be in
conflict with, or constitute a default under, or permit the termination of,
or give rise to a right of termination, cancellation or acceleration of or
"put" right with respect to any obligation or to loss of a material benefit
under, or except as contemplated by this Agreement, require the consent of
any person under, or result in the creation of any lien upon any property
of Acquiror or the Parent under, any agreement, indenture, lease or
instrument, permit, concession, franchise, or license applicable to
Acquiror or Parent to which Acquiror or Parent is a party or by which
Acquiror or the Parent (or its properties) may be bound, which in the
aggregate would have a material adverse effect on Acquiror or Parent.
Section 6.5 Governmental and Other Consents and Approvals.
Except as provided in Item 4.7 in the Disclosure Schedules, no consent,
waiver, approval, license or authorization of or designation, declaration or
filing with any governmental agency or authority or other public persons or
entities in the United States is required in connection with the execution or
delivery by Acquiror of this Agreement or the consummation by Parent or
Acquiror of the Merger or the transactions contemplated hereby, other than (a)
filings in the State of North Carolina in accordance with the North Carolina
Law, (b) filings required under the HSR Act, (c) filings required under the
Exchange Act and (d) such other consents, waivers, approvals, licenses or
authorizations, the failure of which to be obtained will not have a material
adverse effect on Parent or Acquiror or on the ability of Parent or Acquiror to
consummate the transactions contemplated hereby.
Section 6.6 Proxy and Schedule 13E-3 Information.
The information furnished to MedCath by Acquiror and Parent specifically
for inclusion in the Definitive Proxy Statement and the Schedule 13E-3, or any
amendment or supplement thereto, or specifically for inclusion in any other
documents filed with the SEC by MedCath in connection with the Merger, shall,
with respect to the Definitive Proxy Statement at the time the Definitive Proxy
Statement is mailed and at the time of the Special Meeting, and, with respect
to the Schedule 13E-3 and such other documents, at the time of filing with the
SEC and at the time of such Special Meeting, not contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
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Section 6.7 Financing.
Acquiror has obtained commitments for equity and debt financing necessary
or appropriate to consummate the Merger in an amount no less than the Cash
Merger Consideration plus the expenses related to the Merger and obtaining the
financing therefor (the "Financing"). A true and correct copy of the letters or
other documents evidencing such commitments (the "Financing Letters") have been
delivered to the Strategic Options Committee.
Section 6.8 Brokers and Finders.
Except for Kohlberg Kravis Roberts & Co., L.P. and Welsh, Carson, Anderson
& Stowe VII, L.P., the fees and expenses of which shall be paid by Acquiror,
Acquiror has not engaged any broker, finder or investment banker which
engagement would require the payment of any brokerage, finder's or other fees
by MedCath in connection with the transaction contemplated hereby.
Section 6.9 No Prior Activities.
Acquiror and Parent have not incurred, and will not incur, directly or
through any subsidiary, any liabilities or obligations, except those incurred
in connection with its organization or with the negotiation of this Agreement
and the Financing. Except as contemplated by this Agreement and the Financing
Letters, Acquiror and Parent have not engaged in any business activities of any
type or kind whatsoever, or entered into any agreements or arrangements with
any person or entity, or become subject to or bound by any obligation or
undertaking.
Section 6.10 Litigation.
There is no legal action, suit, arbitration or other legal, administrative
or other governmental investigation, inquiry or proceeding (whether federal,
state, local or foreign) pending or, to the knowledge of Acquiror or Parent,
threatened against or affecting Acquiror or Parent or any of its properties,
assets, business, franchises or governmental approvals before any court or
governmental department, commission, board, bureau, agency, instrumentality or
arbitrator, which, individually or in the aggregate, could reasonably be
expected (a) to have a material adverse effect upon Acquiror or Parent or (b)
to materially and adversely affect the ability of Acquiror or Parent to carry
out, or prevent or make unduly burdensome, the Merger or the transactions
contemplated by this Agreement.
ARTICLE 7
CONDITIONS
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions unless waived in accordance with Section 8.4:
(a) This Agreement and the Merger shall have been approved at or prior to
the Effective Time by the holders of a majority of the outstanding shares
of MedCath Common Stock entitled to vote thereon;
(b) No action, suit or proceeding shall be pending before any court or
governmental body in which an unfavorable judgment or decree would prevent
or substantially delay the consummation of the Merger, cause the Merger to
be rescinded or, with respect to any litigation in connection with the
Merger, result in an award of damages that would have a Material Adverse
Effect; and
(c) Any applicable waiting period under the HSR Act shall have expired or
early termination shall have been granted.
Section 7.2 Conditions to Obligation of MedCath to Effect the Merger.
The obligations of MedCath to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions, unless waived by MedCath:
(a) The representations and warranties of Acquiror and the Parent set
forth in Article 6 hereof shall be true and correct in all material
respects (except that any such representation and warranty that is
qualified as to materiality by reference to "Material Adverse Effect" or
any similar term shall be true and correct) as of the date of this
Agreement
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and as of the Effective Time as though made on and as of the Effective
Time, and MedCath shall have received a certificate from each of Acquiror
and Parent signed by its President and a Vice President, respectively, to
that effect, provided that such signatories shall not have any personal
liability in connection therewith; and
(b) Acquiror and Parent shall have performed in all material respects all
obligations required to be performed by them under this Agreement prior to
the Effective Time, and MedCath shall have received a certificate from each
of Acquiror and the Parent signed by its President and a Vice President,
respectively, to that effect, provided that such signatories shall not have
any personal liability in connection therewith.
Section 7.3 Conditions to Obligations of Acquiror to Effect the Merger.
The obligations of Acquiror and the Parent to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
additional conditions, unless waived by Acquiror or the Parent:
(a) The representations and warranties of MedCath set forth in Article 4
hereof shall be true and correct in all material respects (except that any
such representation and warranty that is qualified as to materiality by
reference to "Material Adverse Effect" or any similar term shall be true
and correct) as of the date of this Agreement and as of the Effective Time
as though all of such representations were made on and as of the Effective
Time by MedCath, and Acquiror shall have received a certificate of MedCath
signed by the President, the Chief Financial Officer or a Vice President of
MedCath to that effect, provided that such signatories shall not have any
personal liability in connection therewith;
(b) MedCath shall have performed in all material respects all obligations
required to be performed by it under this Agreement prior to the Effective
Time and Acquiror shall have received a certificate of MedCath signed by
the President, the Chief Financial Officer or a Vice President of MedCath
to that effect, provided that such signatories shall not have any personal
liability in connection therewith;
(c) Acquiror shall have obtained financing necessary to satisfy its
obligations to pay the Cash Merger Consideration pursuant to Section 2.1
hereof on terms and conditions satisfactory to Acquiror in its sole
discretion. Acquiror acknowledges that its obtaining financing from parties
satisfactory to it and on substantially the same terms and conditions as
set forth in the Financing Letters shall satisfy this condition.
(d) MedCath and Acquiror shall have been furnished with evidence
satisfactory to them of the timely consent or approval of, or notice to,
each governmental authority or other person or entity whose consent or
approval, or to whom notice, is required in connection with the execution
or delivery by MedCath or Acquiror of this Agreement or consummation of the
transactions contemplated hereby or the absence of which would result in a
default or acceleration under or right to terminate any contract or
agreement, except with respect to consents, waivers or approvals relating
to the Merger with respect to agreements set forth in Item 3.4 of the
Disclosure Schedules;
(e) The persons named in Item 7.3 of the Disclosure Schedules will have
invested in Parent an amount equal to at least 50% of the value of the
MedCath Common Stock and the spread on the Stock Options (assuming a value
of $19.00 per share) held by such persons, which investment will be made
substantially on the terms of the letter agreement of even date herewith
between Acquiror and such persons;
(f) The directors of MedCath shall have, other than those who are also
directors of Acquiror, tendered to MedCath their resignations effective as
of the Effective Time; and
(g) To MedCath's knowledge, neither it nor any of its subsidiaries shall
be under investigation for any violation of the "Stark" laws, anti-kickback
laws or the laws relating to Medicare, Medicaid, Champus or any rules or
regulations related thereto.
ARTICLE 8
TERMINATION; NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES
AND COVENANTS; WAIVER AND AMENDMENT
Section 8.1 Termination.
This Agreement may be terminated, and the Merger abandoned, at any time
prior to the Effective Time, by:
(a) mutual written consent of the boards of directors of the Constituent
Corporations;
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(b) Acquiror may terminate this Agreement by giving written notice to
MedCath at any time prior to the Effective Time (i) in the event MedCath
has breached any representation, warranty, or covenant contained in this
Agreement in any material respect, Acquiror has notified MedCath of the
breach, and the breach has continued without cure for a period of thirty
(30) days after the notice of breach or (ii) if the Closing shall not have
occurred on or before August 31, 1998, by reason of the failure of any
condition precedent under Section 7.1 or 7.3 hereof (unless the failure
results primarily from Acquiror breaching any representation, warranty, or
covenant contained in this Agreement);
(c) MedCath may terminate this Agreement by giving written notice to
Acquiror at any time prior to the Effective Time (i) in the event Acquiror
has breached any representation, warranty, or covenant contained in this
Agreement in any material respect, MedCath has notified Acquiror of the
breach, and the breach has continued without cure for a period of thirty
(30) days after the notice of breach or (ii) if the Closing shall not have
occurred on or before August 31, 1998, by reason of the failure of any
condition precedent under Sections 7.1 or 7.2 hereof (unless the failure
results primarily from MedCath breaching any representation, warranty, or
covenant contained in this Agreement);
(d) MedCath, by written notice to Acquiror, if (i) the board of directors
of MedCath or the Strategic Options Committee has withdrawn or modified its
approval or recommendation of this Agreement or the Merger in accordance
with Section 3.1; (ii) the board of directors of MedCath or the Strategic
Options Committee has determined that MedCath has entered into a definitive
agreement with a Person with respect to a transaction the proposal of which
qualifies as an Acquisition Proposal; provided that the board of directors
of MedCath or the Strategic Options Committee, as the case may be, has
first determined in good faith based upon the reasonably concluded written
advice of outside counsel to MedCath or counsel to the Strategic Options
Committee, as the case may be, that failing to take such action would
violate MedCath's board of directors' fiduciary duty under applicable law;
or (iii) (A) a third party commences a tender offer or exchange offer for
25% or more of the outstanding shares of MedCath Common Stock and that
tender offer or exchange offer is not solicited, initiated or encouraged
after the date hereof by MedCath and (B) the board of directors of MedCath
has recommended that the shareholders of MedCath tender their shares in
such tender of exchange offer; provided that the board of directors of
MedCath or the Strategic Options Committee has first determined in good
faith upon the reasonably concluded written advice of outside counsel to
MedCath or counsel to the Strategic Options Committee, as the case may be,
that failing to take such action would violate MedCath's board of
directors' fiduciary duty under applicable law; and provided further, that
termination under this Section 8.1(d) shall be of no effect unless and
until MedCath pays the fees and expenses referred to in Section 8.6(a);
(e) Acquiror, by written notice to MedCath, if (i) the board of directors
of MedCath has withdrawn or modified its approval or recommendation of this
Agreement or the Merger, (ii) MedCath enters into a definitive agreement
with a Person with respect to a transaction the proposal of which qualifies
as an Acquisition Proposal or (iii) (A) a third party commences a tender
offer or exchange offer for 25% or more of the outstanding shares of
MedCath Common Stock and (B) the board of directors of MedCath has
recommended that the shareholders of MedCath tender their shares in such
tender or exchange offer;
(f) MedCath or Acquiror, by written notice to the other, if upon a vote
at the Special Meeting, any approval of the shareholders of MedCath
necessary to consummate the Merger and the transactions contemplated hereby
shall not have been obtained; or
(g) any of the parties, by written notice, if any court of competent
jurisdiction or other governmental entity shall have issued an order,
decree or ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and nonappealable.
Any action to be taken to terminate this Agreement under this Section
shall be taken by, or pursuant to authority granted by, the boards of directors
of MedCath or Acquiror, as applicable. Any such action by MedCath shall be
authorized by the Strategic Options Committee, provided a termination by
MedCath pursuant to Section 8.1(d) as a result of an Acquisition Proposal that
is not an Interested Party Proposal may be authorized by the board of directors
of MedCath without the action of the Strategic Options Committee.
Section 8.2 Non-Survival of Representations, Warranties and Covenants.
The respective representations and warranties of MedCath and Acquiror
contained herein or in any certificate delivered pursuant hereto shall expire
with, and be terminated and extinguished upon, consummation of the Merger, and
thereafter neither Surviving Corporation nor MedCath or Acquiror or any
officer, director or principal thereof shall be under any liability whatsoever
with respect to any such representation or warranty. This Section 8.2 shall
have no effect upon any other covenant or agreement of the parties hereto,
whether to be performed before or after the consummation of the Merger.
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Section 8.3 Amendment.
This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto; provided, however, that after
approval of this Agreement by the shareholders of MedCath, no amendment may be
made which reduces the amount or changes the form of consideration to be
received in the Merger or otherwise changes or effects any change which would
adversely affect the holders of MedCath Common Stock without the further
approval of the shareholders of MedCath in accordance with Section 7.1(a).
Section 8.4 Waiver.
At any time prior to the Effective Time, whether before or after the
Special Meeting, any party hereto, by action taken by its board of directors,
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto or (ii) subject to the proviso contained in
Section 8.3, waive compliance with any of the agreements of any other party or
with any conditions (other than those appearing in Section 7.1(a) and (c)) to
its own obligations. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party by a duly authorized officer, and, in
the case of MedCath, authorized by the Strategic Options Committee.
Section 8.5 Effect of Termination.
In the event of the termination of this Agreement under Section 8.1, this
Agreement shall thereafter become void and have no effect and no party hereto
shall have any liability to any other party hereto or its shareholders or
directors or officers in respect thereof, except that the provisions of Section
3.8 and the Confidentiality Agreement, and Section 8.6 and Article 9 shall
survive any such termination if such obligations arose at or before the time of
such termination.
Section 8.6 Certain Payments.
(a) In the event that:
(i) this Agreement is terminated pursuant to Section 8.1(d) or (e);
(ii) an Acquisition Proposal is commenced, publicly proposed, publicly
disclosed or communicated to MedCath at any time after the date of this
Agreement and MedCath, either on or prior to the date which is five (5)
months after the termination of this Agreement pursuant to Section 8.1(f)
or one year after the termination of this Agreement for any other reason
other than by MedCath under 8.1(c), consummates with any individual,
corporation, partnership, joint venture, association, joint stock company,
trust, fund, unincorporated association or organization (a "Person") a
transaction the proposal of which would otherwise qualify as an Acquisition
Proposal or enters into a definitive agreement with a Person with respect
to a transaction the proposal of which would otherwise qualify as an
Acquisition Proposal; or
(iii) the board of directors of MedCath, withdraws or modifies its
approval or recommendation of this Agreement or the Merger;
then in any such event, MedCath shall pay Acquiror Six Million Seven Hundred
Seventy Four Thousand Six Hundred and Forty Dollars ($6,774,640), plus an
amount equal to Acquiror's actual and reasonably documented out-of-pocket fees
and expenses incurred by Acquiror, Parent or shareholders of Parent in
connection with this Agreement and the proposed consummation of the
transactions contemplated hereby, exclusive in all events of any fee due to
Parent or any of its stockholders or affiliates, which amounts shall be payable
in immediately available funds and within three business days after such event
has occurred (or in the case of fees and expenses, within three business days
after MedCath's receipt of reasonable documentation thereof).
(b) (i) In the event that this Agreement is terminated by Acquiror or
MedCath pursuant to Section 8.1(b)(i) or 8.1(c)(i) the breaching party shall
pay the non-breaching party, in immediately available funds within three
business days after the breaching party's receipt of reasonable documentation
thereof, an amount equal to the actual and documented fees and expenses
incurred by such non-breaching party in connection with this Agreement and the
proposed consummation of the transactions contemplated hereby (exclusive of any
fees due to the Parent or any of its stockholders or affiliates in the event
Acquiror is the non-breaching party).
(ii) In the event that any approval of the shareholders of MedCath
necessary to consummate the Merger and the transactions contemplated
thereby shall not have been obtained, MedCath shall pay Acquiror in
immediately available funds an amount equal to the actual and documented
fees and expenses incurred by Acquiror, Parent and shareholders
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of Parent in connection with this Agreement and the proposed consummation
of the transactions contemplated hereby (exclusive of any fees due to the
Parent or any of its stockholders or affiliates).
(c) The payments made by Acquiror to MedCath, or by MedCath to Acquiror,
as set forth above shall represent the sole and exclusive remedy at law or in
equity to which either party and its officers, directors, representatives and
affiliates shall be entitled in the event this Agreement shall be terminated in
the circumstances contemplated by subsection (a) or (b) above. Such payments
shall be made without duplication. Accordingly, Acquiror shall not be entitled
to payments under Section 8.6(a) in more than one instance, and if Acquiror is
entitled to payments under Section 8.6(a) it shall not be entitled to payments
under Section 8.6(b); provided, however, that if Acquiror is entitled to
payments under Section 8.6(b) it shall be entitled to payments under Section
8.6(a) to the extent applicable and not duplicative.
ARTICLE 9
GENERAL AGREEMENTS
Section 9.1 Notice.
All notices, requests and other communications to any party shall be in
writing (including telecopy or similar writing) and shall be given,
(a) If to Acquiror:
c/o Kohlberg Kravis Roberts & Co.
2800 Sand Hill Road, Suite 200
Menlo Park, California 94025
Attention: Edward A. Gilhuly
Facsimile No.: (415) 233-6561
and
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
Suite 2500
New York, New York 10022-6815
Attention: Paul B. Queally
Facsimile No.: (212) 893-9575
with copies to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Attention: Gary I. Horowitz
Facsimile No.: (212) 455-2502
and
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, N.Y. 10111
Attention: Karen C. Wiedemann
Facsimile No.: (212) 841-5725
(b) If to MedCath, to:
MedCath Incorporated
7621 Little Avenue,
Suite 106
Charlotte, North Carolina 28226
Attention: Stephen R. Puckett
Facsimile No.: (704) 541-2615
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with copies to:
Moore & Van Allen, PLLC
100 N. Tryon Street, Floor 47
Charlotte, North Carolina 28202
Attention: Hal A. Levinson
Facsimile No. (704) 331-1159
and to:
Strategic Options Committee
c/o John B. McKinnon
2020 Virginia Road
Winston-Salem, North Carolina 27104
Facsimile No.: (910) 777-8510
and to:
Womble Carlyle Sandridge & Rice, PLLC
3300 One First Union Center
Charlotte, North Carolina 28202
Attention: Garza Baldwin, III
Facsimile No.: (704) 338-7816
or to such other address or telecopier number as such party may hereafter
specify for the purpose of notice to the other parties. Any such notice,
request or other communication shall be deemed to have been given and received
on the day on which it is delivered or telecopied (or, if such day is not a
business day in North Carolina or if the notice or other communication is not
telecopied during business hours, at the place of receipt, on the next
following business day); provided that if notice or other communication is
given by telecopy, such notice or communication shall also be given by
certified mail or by overnight courier.
Section 9.2 Entire Agreement.
This Agreement (including the documents and instruments referred to
herein) and the Confidentiality Agreement constitute the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof.
Section 9.3 Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and, except as provided in Section 3.10 with respect to the
obligations of Parent thereunder, nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies of
any nature whatsoever under or by reason of this Agreement.
Section 9.4 Publicity.
The written release to the public by any party of any information relating
to the Merger shall be approved in advance by the other parties, which approval
shall not be unreasonably withheld or delayed.
Section 9.5 Headings.
The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this
Agreement.
Section 9.6 Interpretation.
As used herein, "knowledge" (or words to such effect) of MedCath shall
mean actual knowledge of the officers of MedCath, as the case may be, and
"knowledge" (or words to such effect) of Acquiror shall mean the actual
knowledge of its officers or actual knowledge of any partner, managing director
or employee of Acquiror.
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Section 9.7 Subsidiaries.
When a reference is made in this Agreement to subsidiaries of MedCath, the
word "subsidiaries", means any corporation all of whose outstanding voting
securities are directly or indirectly owned by MedCath.
Section 9.8 Successors and Assigns.
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto.
Section 9.9 Governing Law.
This Agreement shall be governed in all respects, including validity,
interpretation and effect, by the internal laws of the State of North Carolina,
without giving effect to the principles of conflict of laws thereof, except the
laws of the state of incorporation of a party shall govern its internal
corporate affairs.
Section 9.10 Costs and Expenses.
Except as provided in Section 8.6, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses.
Section 9.11 Counterparts.
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
Section 9.12 Specific Performance.
The parties hereto agree that irreparable damage would occur in the event
any provision of this Agreement was not performed in accordance with the terms
hereof and that the parties shall be entitled to the remedy of specific
performance of the terms hereof, in addition to any other remedy at law or
equity.
Section 9.13 Conciliation and Arbitration.
(a) If any dispute, claim or difference arises out of or relates to this
Agreement (a "Dispute"), such Dispute shall be finally settled by arbitration
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association ("AAA") effective as of the commencement of the arbitration (the
"Rules"), except as such Rules may be modified as provided herein. The
arbitration shall be held in Charlotte, North Carolina, unless the parties
mutually agree to have the arbitration held elsewhere, and judgment upon the
award made therein may be entered by any court having jurisdiction thereof. The
arbitral tribunal shall be composed of three arbitrators, who shall be
experienced commercial litigators admitted to practice law in the State of New
York or the State of North Carolina. Parent and the Company shall each appoint
one arbitrator. If such parties fail to nominate an arbitrator in accordance
with the preceding sentence within thirty days from the date when the notice of
intention to arbitrate referred to in Rule 6 of the Rules (the "Commencement
Notice") has been received by the Respondent (as defined in the Rules) such
appointment shall, upon written request by either party to the AAA, be made in
accordance with Rule 14 of the Rules. The two arbitrators thus appointed shall
attempt to agree upon the third arbitrator to act as chairperson of the
arbitration tribunal. If said two arbitrators fail to appoint the chairperson
within thirty days from the date of appointment of the second arbitrator, upon
written request of either party to the AAA, such appointment shall be made in
accordance with Rule 15 of the Rules. The arbitrators shall have no power to
waive, alter, amend, revoke or suspend any of the provisions of this Agreement,
provided, however, that the arbitrators shall have the power to decide all
questions with respect to the interpretation and validity of this Section 9.13.
The arbitration shall be conducted, and the award shall be rendered, in the
English language. An arbitrator may not act as an advocate for the party
nominating him, and all three arbitrators shall be impartial and unbiased. A
majority vote by the three arbitrators shall be required on any decision made
by them. The arbitrators shall permit such discovery as they shall determine is
appropriate in the circumstances, taking into account the needs of the parties
and the desirability of making discovery expeditious and cost-effective. Any
such discovery shall be limited to information directly relevant to the
controversy or claim in arbitration and shall be concluded within thirty days
after the appointment of the arbitration panel. This agreement to arbitrate
shall be binding upon the heirs, successors and assigns and any trustee,
receiver or executor of any party hereto. Except to the extent required by law
or court or administrative order, no party, arbitrator, representative, counsel
or witness shall disclose or confirm to any person not present at the
arbitration hearings any information about the arbitration proceeding or
hearings,
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including the names of the parties and arbitrators, the nature and amount of
the claims, the financial condition of any party, the expected date of hearing
or the award made.
(b) Subject to and not in any way limiting the preceding Section 9.13(a),
each of the parties hereto irrevocably consents and submits to the jurisdiction
in any action brought in connection with this Agreement in the United States
District Court for the Southern District of New York or for the District of
North Carolina, including, but not limited to, any action to enforce an award
rendered pursuant to the preceding Section 9.13(a). Parent hereby appoints CT
Corporation System as their agent for service of process in New York.
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers as of the date first above written.
MEDCATH INCORPORATED,
a North Carolina corporation
By: /s/ STEPHEN PUCKETT
------------------------------------
Name: Stephen R. Puckett
Title: President
MCTH ACQUISITION INC.,
a North Carolina corporation
By: /s/ EDWARD GILHULY
------------------------------------
Name: Edward A. Gilhuly
Title: President
MEDCATH HOLDINGS, INC.,
a Delaware corporation
By: /s/ EDWARD GILHULY
------------------------------------
Name: Edward A. Gilhuly
Title: President
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APPENDIX B
OPINION OF GOLDMAN, SACHS & CO.
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APPENDIX C
TEXT OF CHAPTER 55, ARTICLE 13 OF THE GENERAL STATUTES OF NORTH CAROLINA
DISSENTER'S RIGHTS.
PART I. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
ss. 55-13-01. Definitions.
In this Article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under G.S. 55-13-02 and who exercises that right when and in
the manner required by G.S. 55-13-20 through 55-13-28.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at a rate that is fair and equitable under
all the circumstances, giving due consideration to the rate currently paid by
the corporation on its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 55-13-02. Right to Dissent.
(a) In addition to any rights granted under Article 9, a shareholder is
entitled to dissent from, and obtain payment of the fair value of his
shares in the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation (other
than a parent corporation in a merger under G.S. 55-11-04) is a party
unless (i) approval by the shareholders of that corporation is not
required under G.S. 55-11-03(g) or (ii) such shares are then redeemable
by the corporation at a price not greater than the cash to be received in
exchange for such shares;
(2) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, unless such
shares are then redeemable by the corporation at a price not greater than
the cash to be received in exchange for such shares;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than as permitted by G.S.
55-12-01, including a sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be distributed in
cash to the shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it
(i) alters or abolishes a preferential right of the shares; (ii) creates,
alters, or abolishes a right in respect of redemption, including a
provision respecting a sinking fund for the redemption or repurchase, of
the shares; (iii) alters or abolishes a preemptive right of the holder of
the shares to acquire shares or other securities; (iv) excludes or limits
the right of the shares to vote on any matter, or to cumulate votes; (v)
reduces the number of shares owned by the shareholder to a fraction of a
share if the fractional share so created is to be acquired for cash under
G.S. 55-6-04; or (vi) changes the corporation into a nonprofit
corporation or cooperative organization;
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(5) Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the
board of directors provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this Article may not challenge the corporate action creating his
entitlement, including without limitation a merger solely or partly in
exchange for cash or other property, unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there shall be
no right of dissent in favor of holders of shares of any class or series
which, at the record date fixed to determine the shareholders entitled to
receive notice of and to vote at the meeting at which the plan of merger or
share exchange or the sale or exchange of property is to be acted on, were
(i) listed on a national securities exchange or (ii) held by at least 2,000
recorded shareholders, unless in either case:
(1) The articles of incorporation of the corporation issuing the
shares provide otherwise;
(2) In the case of a plan of merger or share exchange, the holders of
the class or series are required under the plan of merger or share
exchange to accept for the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of fractional shares of the
surviving or acquiring corporation, or of any other corporation which,
at the record date fixed to determine the shareholders entitled to
receive notice of and vote at the meeting at which the plan of merger
or share exchange is to be acted on, were either listed subject to
notice of issuance on a national securities exchange or held of record
by at least 2,000 record shareholders; or
c. A combination of cash and shares as set forth in
sub-subdivisions a. and b. of this subdivision.
ss. 55-13-03. Dissent by Nominees and Beneficial Owners.
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one person and notifies the
corporation in writing of the name and address of each person on whose
behalf he asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which he
dissents and his other shares were registered in the names of different
shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
2) He does so with respect to all shares of which he is the beneficial
shareholder.
ss. 55-13-04 TO 55-13-19. Reserved for Future Codification Purposes.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.
ss. 55-13-20. Notice of Dissenters' Rights.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this Article and be accompanied by a copy of this
Article.
(b) If corporate action creating dissenters' rights under G.S. 55-13-02
is taken without a vote of shareholders, the corporation shall no later
than 10 days thereafter notify in writing all shareholders entitled to
assert dissenters' rights that the action was taken and send them the
dissenters' notice described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this
section, such failure shall not invalidate any corporate action taken; but
any shareholder may recover from the corporation any damage which he
suffered from such failure in a civil action brought in his own name within
three years after the taking of the corporate action creating dissenters'
rights under G.S. 55-13-02 unless he voted for such corporate action.
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ss. 55-13-21. Notice of Intent to Demand Payment.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights:
(1) Must give to the corporation, and the corporation must actually
receive, before the vote is taken written notice of his intent to demand
payment for his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this Article.
ss. 55-13-22. Dissenters' Notice.
(a) If proposed corporate action creating dissenters' rights under G.S.
55-13-02 is authorized at a shareholders' meeting, the corporation shall
mail by registered or certified mail, return receipt requested, a written
dissenters' notice to all shareholders who satisfied the requirement of
G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days after
shareholder approval, or if no shareholder approval is required, after
approval of the board of directors, of the corporate action creating
dissenters' rights under 6.S.55-13-02, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than 30 nor more than 60 days after
the date the subsection (a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
ss. 55-13-23. Duty to Demand Payment.
(a) A shareholder sent a dissenters' notice described in G.S. 55-13-22
must demand payment and deposit his share certificates in accordance with
the terms of the notice.
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this Article.
ss. 55-13-24. Share Restriction.
(a) The corporation may restrict the transfer of uncertificated shares
from the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
ss. 55-13-25. Payment.
(a) As soon as the proposed corporate action is taken, or within 30 days
after receipt of a payment demand, the corporation shall pay each dissenter
who complied with G.S. 55-13-23 the amount the corporation estimates to be
the fair value of his shares, plus interest accrued to the date of payment.
(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet as of the
end of a fiscal year ending not more than 16 months before the date of
payment, an income statement for that year, a statement of cash flows for
that year, and the latest available interim financial statements, if any;
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(2) As explanation of how the corporation estimated the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under G.S.
55-13-28; and
(5) A copy of this Article.
ss. 55-13-26. Failure to Take Action.
(a) If the corporation does not take the proposed action within 60 days
after the date set for demanding payment and depositing share certificates,
the corporation shall return the deposited certificates and release the
transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under G.S. 55-13-22 and repeat the payment demand
procedure.
ss. 55-13-27. Reserved for Future Codification Purposes.
ss. 55-13-28. Procedure if Shareholder Dissatisfied with Corporation's Offer or
Failure to Perform.
(a) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand
payment of the amount in excess of the payment by the corporation under
G.S. 55-13-25 for the fair value of his shares and interest due, if;
(1) The dissenter believes that the amount offered under G.S. 55-13-25
is less than the fair value of his shares or that the interest due is
incorrectly calculated;
(2) The corporation fails to make payment under G.S. 55-13-25; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days after the
date set for demanding payment.
(b) A dissenter waives his rights to demand payment under this section
unless he notifies the corporation of his demand in writing (i) under
subdivision (a)(1) within 30 days after the corporation made payment for
his shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days
after the corporation has failed to perform timely. A dissenter who fails
to notify the corporation of his demand under subsection (a) within such
30-day period shall be deemed to have withdrawn his dissent and demand for
payment.
ss. 55-13-29. Reserved for Future Codification Purposes.
PART 3. JUDICIAL APPRAISAL OF SHARES.
ss. 55-13-30. Court Action.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the
dissenter may commence a proceeding within 60 days after the earlier of (i)
the date payment is made under G.S. 55-13-25, or (ii) the date of the
dissenter's payment demand under G.S. 55-13-28 by filing a complaint with
the Superior Court Division of the General Court of Justice to determine
the fair value of the shares and accrued interest. A dissenter who takes no
action within the 60-day period shall be deemed to have withdrawn his
dissent and demand for payment.
(a)(1) Repealed by Session Laws 1997-202, s.4, effective October 1, 1997.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters (whether
or not residents of this State) whose demands remain unsettled parties to
the proceeding as in an action against their shares and all parties must be
served with a copy of the complaint. Nonresidents may be served by
registered or certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (a) is plenary and exclusive. The court may appoint one or
more persons as appraisers to receive evidence and recommend decision on
the question of fair value. The appraisers have the powers described in the
order appointing them, or any amendment to it. The parties are entitled to
the same discovery rights as parties in other civil proceedings. The
proceeding shall be tried
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as in other civil actions. However, in a proceeding by a dissenter in a
corporation that was a public corporation immediately prior to consummation
of the corporate action giving rise to the right of dissent under G.S.
55-13-02, there is no right to a trial by jury.
(e) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his
shares, plus interest, exceeds the amount paid by the corporation.
ss. 55-13-31. Court Costs and Counsel Fees.
(a) The court in an appraisal proceeding commenced under G.S. 55-13-30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court, and shall
assess the costs as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amount the court finds equitable;
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of G.S. 55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in favor of either
or any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not in
good faith with respect to the rights provided by this Article.
(c) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and
that the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be
paid out of the amounts awarded the dissenters who were benefited.
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APPENDIX
MEDCATH INCORPORATED
PROXY SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF MEDCATH INCORPORATED
The undersigned hereby appoints Stephen R. Puckett, David Crane and
Richard J. Post, and each of them, proxies, with power of substitution, to
represent the undersigned at the Special Meeting of Shareholders of MedCath
Incorporated (the "Company"), to be held at 10:00 a.m., on July 14, 1998, at
Raintree Country Club, 8600 Raintree Lane, Charlotte, North Carolina, and at any
adjournments thereof, to vote the number of shares which the undersigned would
be entitled to vote if present in person in such manner as such proxies may
determine, and to vote on the following proposal as specified below by the
undersigned.
(1) Proposal to approve an Agreement and Plan of Merger pursuant to which
MCTH Acquisition, Inc., a newly-formed company (the "Acquiror), will be
merged with and into the Company and each shareholder of the Company
(other than shareholders who are entitled to and have perfected their
dissenters' rights and the Acquiror) will become entitled to receive
$19 in cash for each outstanding share of common stock, $.01 par value,
of the Company owned immediately prior to the effective time of the
Merger.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. IN THE ABSENCE OF SPECIFIED DIRECTIONS, THIS PROXY
WILL BE VOTED IN FAVOR OF THE PROPOSAL SET FORTH ABOVE. The proxies are also
authorized to vote in their discretion upon such other matters as may properly
come before the meeting or any adjournment thereof.
If signing as attorney, administrator,
executor, guardian, trustee or as a
custodian for a minor, please add your title
as such. If a corporation, please sign in
full corporate name and indicate the
signer's office. If a partner, please sign
in the partnership's name.
X
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X
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Dated_________________________________, 1996
