<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to________________________
Commission file number 0-25176
------------------------------------------------------
MEDCATH INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina 56-1635096
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7621 Little Avenue, Suite 106, Charlotte, North Carolina 28226
- --------------------------------------------------------------------------------
(Address of principal executive officers)
(Zip Code)
(704) 541-3228
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
As of April 30, 1998, there were 11,787,571 Common Shares outstanding.
<PAGE>
22
MEDCATH INCORPORATED
FORM 10-Q
March 31, 1998
Table of Contents
<TABLE>
<CAPTION>
Page
No.
---
PART I - FINANCIAL INFORMATION (UNAUDITED)
<S> <C>
Item 1. Condensed consolidated financial statements
o Condensed consolidated statements of income 3
o Condensed consolidated balance sheets 4
o Condensed consolidated statements of cash flows 5
o Notes to condensed consolidated financial statements 6-9
Item 2. Management's discussion and analysis of
financial condition and results of operations 10-15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
MedCath Incorporated
Condensed Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
------------------------------ --------------------------
1997 1998 1997 1998
------------------------------ --------------------------
<S> <C> <C> <C> <C>
Net revenue $ 26,709 $ 49,713 $ 49,564 $ 90,511
Operating expenses:
Medical supplies and other 10,814 20,112 19,410 36,965
Personnel costs 6,992 13,708 13,137 25,186
Depreciation 1,783 3,324 3,273 6,395
Amortization 932 2,281 1,682 4,287
Provision for doubtful accounts 487 1,409 938 2,842
Marketing, general and administrative 1,797 2,180 3,699 4,118
------------------------------ --------------------------
Total operating expenses 22,805 43,014 42,139 79,793
------------------------------ --------------------------
Income from operations 3,904 6,699 7,425 10,718
Interest expense (834) (2,665) (1,536) (5,022)
Interest income 582 401 1,257 911
Equity in net earnings of unconsolidated subsidiaries - 12 - 12
Minority interest in earnings of consolidated entities (270) (1,572) (840) (1,758)
------------------------------ --------------------------
Income before income taxes 3,382 2,875 6,306 4,861
Provision for income taxes (1,285) (1,121) (2,454) (1,896)
------------------------------ --------------------------
Net income $ 2,097 $ 1,754 $ 3,852 $ 2,965
============================== ==========================
Net income per weighted average share: $ 0.19 $ 0.15 $ 0.35 $ 0.25
============================== ==========================
Net income per share assuming dilution: $ 0.18 $ 0.14 $ 0.33 $ 0.24
============================== ==========================
Weighted average number of common and common
equivalent shares outstanding (in thousands): 11,147 11,669 11,141 11,669
============================== ==========================
Weighted average number of common and common
equivalent shares outstanding assuming dilution (in thousands): 11,664 12,368 11,667 12,286
============================== ==========================
</TABLE>
See accompanying notes.
3
<PAGE>
MedCath Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
September 30, March 31,
------------------------ -----------------------
1997 1998
------------------------ -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,607 $ 12,921
Short-term investments 25,344 5,610
Accounts receivable, net of allowance 22,360 38,148
Medical supplies 3,168 4,319
Prepaid expenses and other current assets 668 1,067
------------------------ -----------------------
Total current assets 69,147 62,065
Property, plant and equipment, net of accumulated depreciation 139,185 194,482
Other assets 2,470 6,611
Organization and start-up costs, net of accumulated amortization 13,737 17,123
Advances to physician groups 8,194 10,679
Intangible assets, net of accumulated amortization 26,275 42,534
------------------------ -----------------------
Total assets $ 259,008 $ 333,494
======================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,818 $ 5,569
Distribution payable to minority interests 1,081 2,251
Accrued liabilities 9,648 12,330
Current portion of long-term debt 5,503 13,357
Current portion of obligations under capital leases 599 611
------------------------ -----------------------
Total current liabilities 21,649 34,118
Deferred income taxes 3,731 4,298
Long-term debt 96,703 147,644
Obligations under capital leases 2,160 1,854
------------------------ -----------------------
Total liabilities 124,243 187,914
Minority interests in equity of consolidated entities 7,628 6,540
Shareholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized, and 11,168,603
and 11,669,359 shares issued and outstanding
at September 30, 1997 and March 31, 1998, respectively 112 117
Paid-in capital 109,065 117,998
Retained earnings 17,960 20,925
------------------------ -----------------------
Total shareholders' equity 127,137 139,040
------------------------ -----------------------
Total liabilities, minority interests and shareholders' equity $ 259,008 $ 333,494
======================== =======================
</TABLE>
See accompanying notes.
4
<PAGE>
MEDCATH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
---------------------------------------
1997 1998
------------------- ------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net Income $ 3,852 $ 2,965
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,040 10,680
Equity in net earnings of unconsolidated subsidiaries - (12)
Minority interest (404) (374)
Deferred income taxes 78 567
(Increase) decrease in current assets:
Accounts receivable (8,503) (14,588)
Medical supplies (1,107) (1,151)
Prepaid expenses and other current assets (267) (549)
Increase (decrease) in current liabilities:
Accounts payable 412 787
Distribution payable to minority interest 764 1,171
Accrued liabilities 4,081 2,682
Other (43) 15
------------------- ------------------
Net cash provided by operating activities 3,903 2,193
INVESTING ACTIVITIES
Purchases of property, plant and equipment (38,496) (61,779)
Start-up and organization costs (4,852) (9,010)
Advances to physician groups (1,114) (2,689)
Repayments of advances to physician groups 664 204
Net sales of short-term investments 19,099 18,126
Acquisition of management contracts - (5,667)
Other investing activities - (1,466)
------------------- ------------------
Net cash used in investing activities (24,699) (62,281)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 26,671 59,447
Repayments of long-term debt (2,988) (4,035)
Repayments of obligations under capital leases (233) (294)
Investments by minority partners 3,106 716
Other financing activities 90 (432)
------------------- ------------------
Net cash provided by financing activities 26,646 55,402
------------------- ------------------
Net increase (decrease) in cash and equivalents 5,850 (4,686)
Cash and cash equivalents, beginning of period 5,026 17,607
------------------- ------------------
Cash and cash equivalents, end of period $ 10,876 $ 12,921
=================== ==================
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 1- General
- ---------------
The accompanying unaudited condensed consolidated financial statements of
MedCath Incorporated (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the statements of the unaudited interim periods
include all adjustments necessary for fair presentation of results for the
periods and all such adjustments are of a normal recurring nature. The
accompanying unaudited condensed consolidated results of operations for the
three and six month periods ended March 31, 1998, are not necessarily indicative
of the results that may be expected for the year ending September 30, 1998. For
further information, refer to the audited consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended September 30, 1997. Unless otherwise specified, capitalized terms
used herein are used as defined in such Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates and assumptions.
Note 2 - Net Income Per Share
- -----------------------------
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS 128"). SFAS 128 replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement 128 requirements.
Note 3 - Newly Issued Accounting Standard
- -----------------------------------------
In April 1998, the AICPA issued its Statement of Position 98-5 ("SOP 98-5"),
Reporting on the Costs of Start-Up Activities. SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, although early application is encouraged.
Initial application of SOP 98-5 should be as of the beginning of the fiscal year
in which it is first adopted and should be reported as a cumulative effect of a
change in accounting principle.
The Company currently intends to early adopt SOP 98-5 on October 1, 1998. Upon
adoption, the Company estimates it will incur a cumulative effect of a change in
accounting principle that will range from $12.0 to $18.0 million. This estimate
includes net cost capitalized as of March 31, 1998, cost to be capitalized from
April 1, 1998 until September 30, 1998, and is net of additional amortization
expected to be incurred from April 1, 1998 until September 30, 1998.
6
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 4 - Long-Term Debt
- -----------------------
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1997 1998
--------------------------------------
<S> <C> <C>
The REIT Loans (as defined below) $ 58,781 $ 74,043
The Phoenix Loan 11,133 39,510
Convertible Subordinated Debt 4,452 6,019
Notes payable to various equipment lenders 27,638 41,298
Other notes payable 202 131
--------------------------------------
102,206 161,001
Less current portion (5,503) (13,357)
======================================
$ 96,703 $ 147,644
======================================
</TABLE>
The Company entered into mortgage loans with real estate investment trusts
("REITs") from 1994 to 1998 for the purpose of financing the land acquisition
and construction costs of the McAllen, Arkansas, and Tucson Heart Hospitals and
the Heart Hospital of Austin (collectively the "REIT Loans"). The Company
entered into the REIT Loan for the Heart Hospital of Austin in November of 1997.
The interest rates on the REIT Loans are based on a fixed premium above the
seven-year Treasury note rate and the principal and interest is payable monthly
over a seven year term using extended period amortization schedules. As of March
31, 1998, the interest rates on the REIT Loans ranged from 9.50% to 11.54%.
In December 1997, the Company obtained financing from an equipment lender in the
amount of $7 million for the purpose of financing certain medical equipment and
fixtures in the Diagnostics Division. The term of the borrowing is for six years
and the interest rate is based on a fixed premium above the four-year Treasury
note rate and the principal and interest is payable monthly. As of March 31,
1998, the interest rate was 8.09%. Borrowings under the financing agreement are
secured by a pledge of the Company's interest in the financed medical equipment
and fixtures.
In January 1998, the Company obtained financing from an equipment lender
providing up to $18 million for the purpose of financing certain medical
equipment at the Arizona Heart Hospital located in Phoenix, Arizona. The term of
the borrowing is for seven years and the interest rate is based on a fixed
premium above the seven-year Treasury note rate and the principal and interest
is payable monthly. As of March 31, 1998, the interest rate was 9.07%.
Borrowings under the financing agreement are secured by a pledge of the
Company's interest in the financed medical equipment.
7
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 5 - Earnings per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------------------------------------------
1997 1998 1997 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (A) $ 2,097 $ 1,754 $ 3,852 $ 2,965
Interest Expense - Convertible
Subordinated Debt 28 27 54 54
==============================================================
Adjusted net income (B) $ 2,125 $ 1,781 $ 3,906 $ 3,019
==============================================================
Denominator:
Weighted Average Common Shares (C) 11,147 11,669 11,141 11,669
Outstanding
Dilutive effect of stock options 199 204 208 210
Assumed issuance of Contingently
Issuable Shares - 115 - 58
Assumed conversion of Convertible
Subordinated Debt into Common Shares 318 380 318 349
==============================================================
Adjusted weighted average shares (D) 11,664 12,368 11,667 12,286
==============================================================
Basic earnings per share (A)/(C) $ 0.19 $ 0.15 $ 0.35 $ 0.25
==============================================================
Diluted earnings per share (B)/(D) $ 0.18 $ 0.14 $ 0.33 $ 0.24
==============================================================
</TABLE>
Note 6 - Business Combinations and New Operations
- -------------------------------------------------
In October 1997, the Company acquired a management service organization, through
the issuance of common stock valued at approximately $7 million, which changed
its name to MedCath Physician Management, Inc., ("MPM"). MPM has a 40-year
contract to manage Pima Heart Associates ("Pima Heart"), the Company's fourth
Managed Practice. Pima Heart is a 17-member cardiologist group located in
Tucson, Arizona. The Company's consolidated results of operations include the
operating results, which are not significant, of MPM from the date of
acquisition.
The Tucson Heart Hospital, located in Tucson, Arizona, is owned and operated by
MedCath of Tucson L.L.C. (the "Tucson Company"), in which MedCath owns a
majority interest and serves as manager. The Tucson Heart Hospital, which was
completed and opened in October 1997 after a Medicare and Medicaid certification
survey was completed, is a 66-bed hospital with three surgery suites. The Tucson
Heart Hospital has four cardiac catheterization laboratories that are separately
owned and operated by CCT, L.L.C. (the "Tucson Cath Lab Company"). The Company
owns a majority interest in and manages the Tucson Cath Lab Company. The
remaining interests in the Tucson Cath Lab Company are owned by local
cardiologists.
8
<PAGE>
MedCath Incorporated
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Month Period Ended March 31, 1998
Note 6 - Business Combinations and New Operations (continued)
- -------------------------------------------------------------
In January 1998, the Company announced that it had entered into an agreement
with Franciscan Health System of Ohio Valley, Inc. ("FHSOV") to locate the
Company's previously announced Dayton Heart Hospital on the grounds of the
Franciscan Medical Center - Dayton Campus. FHSOV will become a 30% investor in
the hospital, with the Company and local physician investors holding the
remaining interest. Under the terms of the agreement, the Company will be
managing member, with responsibility for the day-to-day operations of the
hospital.
The Company has announced plans to open two new Fixed-Site Facilities by the end
of fiscal year 1998. The Company has agreed to partner with local cardiologists
and own a majority interest in the first facility located in Colorado Springs,
Colorado, and has entered into a long-term agreement to develop and manage the
second facility located in Dakota Dunes, South Dakota. These two cath labs, in
addition to the previously announced cath lab under development in Montgomery,
Alabama, will bring the total number of mobile and fixed-site cath labs operated
by the Company to 33.
In January 1998, MPM acquired a 40-year contract to manage a seven-physician
cardiology practice, Valley Cardiology, Inc. ("Valley Cardiology"), located in
McAllen, Texas, for approximately $5.5 million in cash and equity. Valley
Cardiology is the Company's fifth Managed Practice. The Company's consolidated
results of operations include the operating results, which are not significant,
of Valley Cardiology from the date of acquisition.
In February 1998, the Company announced that is had formed a joint venture to
construct a new heart hospital to be located in Albuquerque, New Mexico, which
will be the Company's eighth heart hospital. To be named the Heart Hospital of
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.
In April 1998, the Company 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 the group of 11 cardiologists. Dayton Heart
Center, Inc. is the Company's sixth Managed Practice
Note 7 - Pending Transaction
- ----------------------------
In March 1998, MedCath, Kohlberg Kravis Roberts & Co. ("KKR") and Welsh Carson,
Anderson & Stowe ("Welsh, Carson") jointly announced that they had signed a
definitive agreement pursuant to which a new company formed by KKR and Welsh,
Carson, in which certain members of MedCath's senior management will be
investors, will acquire MedCath in a merger for $19 per share in cash. The
Company expects to hold a special meeting of its shareholders in July to vote on
a proposal to approve the merger.
9
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
The following discussion and analysis is provided to increase the understanding
of, and should be read in conjunction with, the Unaudited Condensed Consolidated
Financial Statements and accompanying notes. All References to a "Note" are to
the "Notes to Unaudited Condensed Consolidated Financial Statements" contained
herein. Unless otherwise specified, capitalized terms used herein are used as
defined in the Company's Annual Report on Form 10-K for the year ended September
30, 1997.
Acquisitions and New Operations
In October 1997, the Company acquired a management service organization which
changed its name to MedCath Physician Management, Inc., ("MPM"). MPM has a
40-year contract to manage Pima Heart Associates ("Pima Heart"), the Company's
fourth managed practice. Pima Heart is a 17-member cardiologist group located in
Tucson, Arizona.
The Tucson Heart Hospital, located in Tucson, Arizona, is owned and operated by
MedCath of Tucson L.L.C. (the "Tucson Company"), in which MedCath owns a
majority interest and serves as manager. The Tucson Heart Hospital, which was
completed and opened in October 1997 after a Medicare and Medicaid certification
survey was completed, is a 66-bed hospital with three surgery suites. The Tucson
Heart Hospital has four cardiac catheterization laboratories that are separately
owned and operated by CCT, L.L.C. (the "Tucson Cath Lab Company"). The Company
owns a majority interest in and manages the Tucson Cath Lab Company. The
remaining interests in the Tucson Cath Lab Company are owned by local
cardiologists.
In January 1998, the Company announced that it had entered into an agreement
with Franciscan Health System of Ohio Valley, Inc. ("FHSOV") to locate the
Company's previously announced Dayton Heart Hospital on the grounds of the
Franciscan Medical Center - Dayton Campus. FHSOV will become a 30% investor in
the hospital, with the Company and local physician investors holding the
remaining interest. Under the terms of the agreement, the Company will be
managing member, with responsibility for the day-to-day operations of the
hospital.
The Company has announced plans to open two new Fixed-Site Facilities by the end
of fiscal year 1998. The facilities will be located in Colorado Springs,
Colorado, and Dakota Dunes, South Dakota, and will further strengthen the
Company's Diagnostics Division. The Company has agreed to partner with local
cardiologists and own a majority interest in the Colorado Springs facility and
has entered into a long-term agreement to develop and manage the Dakota Dunes
facility. These two cath labs, in addition to the previously announced cath lab
under development in Montgomery, Alabama, will bring the total number of mobile
and fixed-site cath labs operated by the Company to 33.
In January 1998, MPM acquired a 40-year contract to manage a seven-physician
cardiology practice, Valley Cardiology, Inc. ("Valley Cardiology"), located in
McAllen, Texas. In April 1998, the Company 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 the group of 11
cardiologists. Including these transactions, MedCath manages six medical
practices comprised of approximately 115 physicians.
In February 1998, the Company announced that is had formed a joint venture to
construct a new heart hospital to be located in Albuquerque, New Mexico, which
will be the Company's eighth heart hospital. To be named the Heart Hospital of
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.
10
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Pending Transaction
In March 1998, MedCath, Kohlberg Kravis Roberts & Co. ("KKR") and Welsh Carson,
Anderson & Stowe ("Welsh, Carson") jointly announced that they had signed a
definitive agreement pursuant to which a new company formed by KKR and Welsh,
Carson, in which certain members of MedCath's senior management will be
investors, will acquire MedCath in a merger for $19 per share in cash. The
Company expects to hold a special meeting of its shareholders in July to vote on
a proposal to approve the merger.
Results of Operations
- ---------------------
The following table sets forth, for the periods presented, the percentage of the
Company's net revenue represented by the net revenue of each of the Company's
operating divisions and by certain items reflected in the Unaudited Condensed
Consolidated Statements of Income:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------------------------------------------
1997 1998 1997 1998
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue:
Diagnostics Division 36.8% 18.6% 38.7% 19.4%
Practice Management Division 18.4 18.3 19.7 17.9
Hospital Division 44.8 62.5 41.6 61.9
Corporate and Other - 0.6 - 0.8
-------------------------------------------------------------
Total net revenue 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Medical supplies, personnel & other operating expense 66.7 68.0 65.6 68.7
Depreciation and amortization expense 10.2 11.3 10.0 11.8
Provision for doubtful accounts 1.8 2.8 1.9 3.1
Marketing, general and administrative expense 6.7 4.4 7.5 4.6
-------------------------------------------------------------
Total operating expenses 85.4 86.5 85.0 88.2
-------------------------------------------------------------
Income from operations 14.6 13.5 15.0 11.8
Interest expense (3.1) (5.3) (3.1) (5.5)
Interest income 2.2 0.8 2.5 1.0
Minority interest in earnings of consolidated entities (1.0) (3.2) (1.7) (1.9)
Equity in net earnings of unconsolidated subsidiaries - - - -
-------------------------------------------------------------
Income before income taxes 12.7 5.8 12.7 5.4
Provision for income taxes (4.8) (2.3) (4.9) (2.1)
-------------------------------------------------------------
Net income 7.9% 3.5% 7.8% 3.3%
=============================================================
</TABLE>
11
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Results of Operations (continued)
- ---------------------------------
Net revenue
Consolidated net revenue for the second quarter and six months ended March 31,
1998, increased 86.1% to $49.7 million and 82.6% to $90.5 million, respectively,
over the comparable prior year periods. The respective increases of $23.0
million and $40.9 million are primarily attributable to increased net revenue in
the Hospital Division. The increase in net revenue in the Hospital Division is
primarily due to the March 1997 opening of the Company's second Heart Hospital,
the Arkansas Heart Hospital. Additionally, increased procedure volumes at the
McAllen Heart Hospital resulted in 16.7% and 17.0% increases, respectively, in
net revenue at the hospital over the comparable prior year periods. Also, the
opening of the Tucson Heart Hospital in October 1997 contributed to the
increased net revenue in the Hospital Division.
Net revenue in the Practice Management Division for the second quarter and six
months ended March 31, 1998, increased 85.3% to $9.1 million and 66.3% to $16.2
million, respectively, over the comparable prior year periods. The respective
increases of $4.2 and $6.5 million are primarily attributable to the October
1997 acquisition of the contract to manage Pima Heart and to the January 1998
acquisition of the contract to manage Valley Cardiology.
Net revenue in the Diagnostics Division for the second quarter and six months
ended March 31, 1998, decreased 6.1% to $9.2 million and 9.4% to $17.5 million,
respectively, over the comparable prior year periods. The respective decreases
of $597,000 and $1.8 million are partially due to the scheduled July 1997
closing of the Fixed-Site Facility located in Tucson, Arizona, and also due to
lower procedure volumes at several of the Company's other diagnostic facilities.
Operating Expenses and Income from Operations
Consolidated operating expenses for the second quarter and six months ended
March 31, 1998, increased 88.6% to $43.0 million and 89.4% to $79.8 million,
respectively, over the comparable prior year periods. The increase was
attributable primarily to operating expenses in the Hospital Division.
Consolidated income from operations for the second quarter and six months ended
March 31, 1998, increased 71.6% to $6.7 and 44.3% to $10.7 million,
respectively, over the comparable prior year periods due to an overall increase
in consolidated net revenue. Operating margins for the second quarter and six
months ended March 31, 1998, decreased to 13.5% from 14.6%, and to 11.8% from
15.0%, respectively, over the comparable prior year periods. Consolidated EBITDA
margin for the second quarter remained constant at 24.8% and, for the six months
ended March 31, 1998, EBITDA margin decreased to 23.6% from 25.0% over the
comparable prior year periods. These decreases were primarily attributable to
the substantial growth in the Practice Management and Hospital Divisions which
operate at lower margins than those realized in the Diagnostics Division.
Income from operations at the Hospital Division for the second quarter and six
months ended March 31, 1998, increased 366.1% to $3.9 million and 205.2% to $5.7
million, respectively, over the comparable prior year periods. This increase is
primarily due to the opening of the Arkansas Heart Hospital in March 1997 and
improved operating results at the McAllen Heart Hospital. Operating margins for
the second quarter and six months ended March 31, 1998, increased to 12.5% and
10.1%, respectively, over the comparable prior year periods. EBITDA margins for
the second quarter and six months ended March 31, 1998, increased to 25.4% from
19.3%, and to 23.8% from 21.5%, respectively, over the comparable prior year
periods. The Tucson Heart Hospital, which opened in October 1997, continues to
experience operating losses during its initial months of operation. The
operating profits at the McAllen and Arkansas Heart Hospitals offset the
operating losses at the Tucson Heart Hospital resulting in the overall increase
to operating and EBITDA margins. The McAllen and Arkansas Heart Hospitals had
EBITDA margins of 26.2% and 33.8%, respectively, for the quarter ended March 31,
1998, and 25.7% and 32.4%, respectively, for the six months ended March 31,
1998.
12
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Income from operations in the Practice Management Division for the second
quarter and six months ended March 31, 1998, increased 38.2% to $889,000 and
22.0% to $1.4 million, respectively, over the comparable prior year periods.
This increase is primarily due to income from the contracts to manage Pima Heart
and Valley Cardiology, which were acquired in October 1997 and January 1998,
respectively. The Practice Management Division's operating margins for the
second quarter and six months ended March 31, 1998, decreased to 9.8% from
13.1%, and to 8.8% from 12.0%, respectively, over the comparable prior year
periods. The Practice Management Division's EBITDA margins for the second
quarter and six months ended March 31, 1998, decreased to 12.5% from 15.5%, and
to 11.5% from 14.4%, respectively, over the comparable prior year periods. These
decreases from the comparable prior year periods are due to the structure of the
contract to manage Pima Heart.
Income from operations in the Diagnostics Division for the second quarter and
six months ended March 31, 1998, decreased 8.4% to $3.3 million and 11.1% to
$6.2 million, respectively, over the comparable prior year periods due primarily
to lower procedure volumes at several of the Company's diagnostic facilities.
Operating margins in the Diagnostics Division for the second quarter and six
months ended March 31, 1998, decreased to 36.3% from 37.2%, and to 35.2% from
35.9%, respectively, over the comparable prior year periods. This decrease is
primarily due to the additional depreciation expense incurred from new equipment
added throughout fiscal year 1997. EBITDA margins in the Diagnostics Division
for the second quarter and six months ended March 31, 1998, increased to 49.7%
from 48.2%, and to 48.9% from 46.6%, respectively, over the comparable prior
year periods due primarily to an increase in consulting and management fee
income.
Marketing, general and administrative expenses for the second quarter and six
months ended March 31, 1998, increased 21.3% and 11.3%, respectively, over the
comparable prior year periods primarily as a result of the Company's continued
investment in corporate infrastructure to accommodate growth. In the second
quarter of 1998, the Company continued to add personnel to the Human Resources,
Information Systems and Accounting departments. These expenses as a percent of
consolidated net revenue have decreased to 4.6% for the six months ended March
31, 1997, from 7.5% during the comparable prior year period demonstrating the
Company's ability to accommodate growth without a corresponding increase in
corporate overhead.
Interest Expense and Interest Income
Interest expense for the second quarter and six months ended March 31, 1998,
increased 219.5% to $2.7 million and 226.8% to $5.0 million, respectively, over
the comparable prior year periods primarily as the result of interest incurred
on borrowings at the Tucson and Arkansas Heart Hospitals which opened during the
last 12 months. Substantially all of the property, plant and equipment at the
hospitals is financed using borrowings that bear interest at rates ranging from
8.5% to 11.54%. Interest income for the second quarter and six months ended
March 31, 1998, decreased to $401,000 and $911,000, respectively, over the
comparable prior year periods due to a decrease in average short-term investment
balances.
13
<PAGE>
MedCath Incorporated
Management's Discussion and Analysis of Financial Condition and
Results of Operations
For the Three Month Period Ended March 31, 1998
Liquidity and Capital Resources
- -------------------------------
Operating Cash Flows
Net cash provided by operating activities was $2.2 million for the six months
ended March 31, 1998. Accounts receivable increased $15.8 million during the six
months ended March 31, 1998, primarily as a result of the opening of the Tucson
Heart Hospital and increased revenue at the McAllen and Arkansas Heart
Hospitals. At March 31, 1998, the Company had working capital of $27.9 million,
including $18.5 million of cash and short-term investments and $38.1 million in
accounts receivable.
Investing Cash Flows
During the six months ended March 31, 1998, the Company utilized a net of $62.3
million in investing activities primarily for the construction and development
of Heart Hospitals consisting of $10.2 million for the Tucson Heart Hospital,
$37.9 million for the Arizona Heart Hospital, $10.0 million for the Heart
Hospital of Austin and $5.1 million for the Company's other Heart Hospitals. The
Diagnostics Division purchased $4.2 million of new equipment during the six
months ended March 31, 1998. The additional acquisition of management contracts
in the Practice Management Division totaled $5.7 million, and additional
physician advances totaled $2.7 million during the six month period. The Company
utilized a net of $4.6 million in other operations. Offsetting these outflows
was $18.1 million provided from the sale of short-term investments.
Financing Cash Flows
Financing activities provided $55.4 million during the six month period ended
March 31, 1998, primarily from loan proceeds utilized for the construction and
development of the Arizona and Tucson Heart Hospitals, and the Heart Hospital of
Austin. In addition, the Company's Diagnostics Division borrowed $7.0 million
for the purpose of financing certain medical equipment and fixtures.
In November 1997, the Company entered into a mortgage loan with a REIT for the
purpose of financing the land acquisition and construction costs of the Heart
Hospital of Austin. The interest rate is based on a fixed premium above the
seven-year Treasury note rate and the principal and interest is payable monthly
over a seven year term using an extended period amortization schedule. As of
March 31, 1998, the interest rate on the REIT was 9.50%. The Heart Hospital of
Austin's REIT provided $14.3 million of the total loan proceeds during the first
six months of 1998.
In December 1997, the Company obtained a financing commitment for up to $29
million for the purpose of financing the land acquisition, construction and a
portion of the working capital costs of the Bakersfield Heart Hospital. The
interest rate will be at a fixed premium above LIBOR and the outstanding
principal balance will be due and payable in full three years from closing of
the note, if the Company's optional extension of one year is not exercised. The
transaction is expected to be completed in the Company's third fiscal quarter.
In January 1998, the Company obtained financing from an equipment lender
providing up to $18 million for the purpose of financing certain medical
equipment at the Arizona Heart Hospital located in Phoenix, Arizona. The term of
the borrowing is for seven years and the interest rate is based on a fixed
premium above the seven-year Treasury note rate and the principal and interest
is payable monthly. As of March 31, 1998, the interest rate was 9.07%.
Borrowings under the financing agreement are secured by a pledge of the
Company's interest in the financed medical equipment.
The Company expects that each of its Heart Hospitals will require working
capital advances to fund a portion of the pre-opening costs and to fund the
operations subsequent to opening in the initial start-up phase of the hospital.
Substantial investments will be required during the development phase, and the
14
<PAGE>
Company expects operating losses and negative cash flow will be incurred during
the initial months of operation of each Heart Hospital.
The Company anticipates financing its future operations through a combination of
amounts available under the Revolver, financing from other real estate lenders
and various equipment lenders, capital contributions by minority partners, cash
reserves and operating cash flows. The Company believes the combination of these
sources will be sufficient to meet the Company's currently anticipated Heart
Hospital development, acquisition and working capital needs through fiscal year
1998. In addition, in order to provide funds necessary for the continued pursuit
of its business strategy, the Company expects to incur, from time to time,
additional indebtedness to banks and other financial institutions and to issue,
in public or private transactions, equity and debt securities. The availability
and terms of any such financing will depend upon market and other conditions.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company.
Disclosure Regarding Forward-Looking Statements
- -----------------------------------------------
Statements contained herein which are not historical facts may be considered
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are subject to
risks and uncertainties which could cause actual results to differ materially
from those projected. Such risks and uncertainties include construction and
development risks associated with heart hospitals, including without limitation,
unanticipated delays in construction and licensing; increased construction
costs; operating losses and negative cash flows during the initial operation of
heart hospitals continuing longer than anticipated; dependence on physician
relationships; increased competition from existing hospitals in the marketplace;
dependence on the availability and terms of long-term management contracts;
fluctuations in quarterly operating results from seasonality, population shifts
and other factors; dependence on key management; as well as other risks detailed
in the Company's filings with the Securities and Exchange Commission.
15
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1* Master Transaction Agreement dated December 12, 1997
by and between MedCath Physician Management, Inc. and
Valley Cardiology, P.A.
10.2* Service Agreement dated December 12, 1997 between
MedCath Physician Management, Inc. and Valley
Cardiology, P.A.
10.3 Amendment to Operating Agreement of the Dayton
Company dated December 1997 by and among DTO
Management, Inc. and several other parties thereto.
10.4 Operating Agreement of the Heart Hospital of New
Mexico dated as of December 1, 1997 by and among NM
Hospital Management, Inc. and several other parties
thereto.
10.5 Agreement and Plan of Merger dated as of March 12,
1998 by and among the Company, MCTH Acquisition, Inc.
and MedCath Holdings, Inc.
27 Financial Data Schedule (EDGAR version only)
* Portions of these agreements have been deleted pursuant to a
request for confidential treatment made under rule 24b-2
under the securities exchange act of 1934, as amended.
(b) Reports on Form 8-K filed during the three months ended
March 31, 1998 are as follows:
Date of Report Items Reported
-------------- --------------
March 23, 1998 Item 5. OTHER EVENTS
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEDCATH INCORPORATED
Date Signature and Title
May 6, 1998 /s/ Richard J. Post
---------------------------------------
Richard J. Post
Chief Financial Officer, Secretary and
Treasurer
17
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH PHYSICIAN MANAGEMENT, INC.
AND
VALLEY CARDIOLOGY, P.A.
December 12, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS ............................................................................... 1
SECTION 1.1 "Accounts Receivable" ............................................................... 1
SECTION 1.2 "Affiliate".......................................................................... 1
SECTION 1.3 "Assets" ............................................................................ 2
SECTION 1.4 "Closing" ........................................................................... 2
SECTION 1.5 "Closing Date" ...................................................................... 2
SECTION 1.6 "Employment Agreements" ............................................................. 2
SECTION 1.7 "Encumbrances" ...................................................................... 2
SECTION 1.8 "Manager" ........................................................................... 2
SECTION 1.9 "Person" ............................................................................ 2
SECTION 1.10 "Related Party" .................................................................... 2
SECTION 1.11 "Service Agreement" ................................................................ 3
SECTION 1.12 "Territory" ........................................................................ 3
ARTICLE II PRACTICE MANAGEMENT TRANSACTION .......................................................... 3
SECTION 2.1 Practice Management Transaction ..................................................... 3
SECTION 2.2 Consideration for Transaction ....................................................... 3
SECTION 2.3 The Closing ......................................................................... 4
SECTION 2.4 Further Acts and Assurances ......................................................... 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PRACTICE............................................... 5
SECTION 3.1 Organization, Power and Qualification ............................................... 5
SECTION 3.2 Ownership Interests ................................................................. 5
SECTION 3.3 Subsidiaries, Affiliates, Affiliated Companies and Joint Venture .................... 5
SECTION 3.4 Financial Statements ................................................................ 5
SECTION 3.5 Absence of Undisclosed Liabilities................................................... 6
SECTION 3.6 Absence of Certain Recent Changes ................................................... 6
SECTION 3.7 Title to Assets ..................................................................... 7
SECTION 3.8 Contracts and Leases ................................................................ 8
SECTION 3.9 Defaults and Consents ............................................................... 8
SECTION 3.10 Litigation, Etc .................................................................... 9
SECTION 3.11 Court Orders, Decrees and Laws ..................................................... 9
SECTION 3.12 Taxes .............................................................................. 9
SECTION 3.13 Authority, Binding Effect........................................................... 10
SECTION 3.14 Employee Matters ................................................................... 10
SECTION 3.15 Labor Matters ...................................................................... 10
SECTION 3.16 Insurance; Malpractice ............................................................. 10
SECTION 3.17 Books of Account, Reports........................................................... 11
SECTION 3.18 No Finders or Brokers .............................................................. 11
SECTION 3.19 Inventory........................................................................... 11
SECTION 3.20 Equipment........................................................................... 11
SECTION 3.21 Accounts Receivable ................................................................ 11
<PAGE>
SECTION 3.22 Employee Benefit Plans ............................................................. 12
SECTION 3.23 Power of Attorney................................................................... 14
SECTION 3.24 Bank Accounts, Officers ............................................................ 14
SECTION 3.25 Environmental Matters .............................................................. 14
SECTION 3.26 Fraud and Abuse .................................................................... 14
SECTION 3.27 Investment Representation and Access ............................................... 15
SECTION 3.28 Practice Disclosures ............................................................... 16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF MEDCATH ................................................ 16
SECTION 4.1 Organization and Standing of MedCath ................................................ 16
SECTION 4.2 Authority; Binding Effect ........................................................... 16
SECTION 4.3 No Finders or Brokers ............................................................... 17
SECTION 4.4 Validity of Agreement ............................................................... 17
SECTION 4.5 Defaults and Consents ............................................................... 17
SECTION 4.6 Court Orders, Decrees and Laws ...................................................... 17
ARTICLE V COVENANTS OF PRACTICE ..................................................................... 18
SECTION 5.1 Access and Information .............................................................. 18
SECTION 5.2 Conduct of Business ................................................................. 18
SECTION 5.3 Best Efforts to Secure Consents ..................................................... 19
SECTION 5.4 Confidential Information ............................................................ 19
SECTION 5.5 Unusual Events ...................................................................... 19
SECTION 5.6 Departmental Violations ............................................................. 19
SECTION 5.7 Insurance Ratings ................................................................... 20
SECTION 5.8 [Intentionally Omitted.] ............................................................ 20
SECTION 5.9 Employment Agreements ............................................................... 20
ARTICLE VI COVENANTS OF MEDCATH ..................................................................... 20
SECTION 6.1 Information ......................................................................... 20
SECTION 6.2 Corporate Action .................................................................... 21
SECTION 6.3 Confidential Handling of Documents................................................... 21
SECTION 6.4 Access to or Furnishing of Information about MedCath ................................ 21
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRACTICE ..................................... 21
SECTION 7.1 Representations and Warranties True ................................................. 21
SECTION 7.2 Service Agreement ................................................................... 22
SECTION 7.3 No Obstruction Proceeding ........................................................... 22
SECTION 7.4 Consents and Approvals .............................................................. 22
SECTION 7.5 Proceedings And Documents Satisfactory .............................................. 22
SECTION 7.6 Receipt of the Purchase Price and Assumption ........................................ 22
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MEDCATH ..................................... 22
SECTION 8.1 Representations and Warranties True ................................................. 23
SECTION 8.2 No Obstructive Proceeding ........................................................... 23
SECTION 8.3 Opinion of Practice's Counsel ....................................................... 23
<PAGE>
SECTION 8.4 Consents and Approvals .............................................................. 23
SECTION 8.5 Proceedings and Documents Satisfactory .............................................. 23
SECTION 8.6 No Adverse Change ................................................................... 23
SECTION 8.7 Service Agreement ................................................................... 24
SECTION 8.8 Employment Agreements ............................................................... 24
SECTION 8.9 Bonus Agreements .................................................................... 24
SECTION 8.10 Limited Guaranty Agreements ........................................................ 24
ARTICLE IX TERMINATION............................................................................... 24
SECTION 9.1 Optional Termination ................................................................ 24
SECTION 9.2 Notice of Abandonment ............................................................... 25
SECTION 9.3 Termination ......................................................................... 25
ARTICLE X INDEMNIFICATION ........................................................................... 25
SECTION 10.1 Indemnity by Practice .............................................................. 25
SECTION 10.2 Indemnity by MedCath ............................................................... 26
SECTION 10.3 Rules Regarding Indemnification .................................................... 27
SECTION 10.4 Remedies Cumulative ................................................................ 29
SECTION 10.5 Set-Off ............................................................................ 30
SECTION 10.6 Definitions ........................................................................ 30
SECTION 10.7 Survival ........................................................................... 31
ARTICLE XI MISCELLANEOUS ............................................................................ 31
SECTION 11.1 Expenses ........................................................................... 31
SECTION 11.2 Restrictive Covenant ............................................................... 31
SECTION 11.3 Notices ............................................................................ 32
SECTION 11.4 Entire Agreement ................................................................... 32
SECTION 11.5 Governing Law ...................................................................... 32
SECTION 11.6 Section Headings ................................................................... 32
SECTION 11.7 Waiver ............................................................................. 33
SECTION 11.8 Nature and Survival of Representations and Warranties .............................. 33
SECTION 11.9 Successors and Assigns ............................................................. 33
SECTION 11.10 Amendments ........................................................................ 33
SECTION 11.11 Counterpart Executions; Facsimiles ................................................ 33
SECTION 11.12 Press Releases .................................................................... 34
SECTION 11.13 Access to Records After Closing ................................................... 34
SECTION 11.14 Disclosure of Certain Information ................................................. 34
SECTION 11.15 Attorneys' Fees ................................................................... 34
SECTION 11.16 Cure of Default ................................................................... 34
SECTION 11.17 Severability ...................................................................... 34
SECTION 11.18 Third-Party Beneficiary ........................................................... 35
SECTION 11.19 Arbitration ....................................................................... 35
SECTION 11.20 Contract Modifications for Prospective Legal Events ............................... 35
SECTION 11.21 Acknowledgment Regarding Attorney-Client Relationships ............................ 35
</TABLE>
<PAGE>
MASTER TRANSACTION AGREEMENT
THIS MASTER TRANSACTION AGREEMENT (the "Agreement") is made as of the
12th day of December, 1997 by and between VALLEY CARDIOLOGY, P.A., a Texas
professional association (hereinafter referred to as "Practice") and MEDCATH
PHYSICIAN MANAGEMENT, INC., an Arizona corporation ("MedCath").
WHEREAS, Practice is the owner and operator of a group medical practice
in the McAllen, Texas area which provides comprehensive professional cardiology
care to the general public;
WHEREAS, MedCath is in the business of owning, managing and furnishing
such assets to physicians to assist them in their medical practices;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice agrees to sell, lease or sublease to MedCath the
assets described herein, and MedCath agrees to purchase, lease or sublease such
assets from Practice on the terms and conditions provided in this Agreement.
ARTICLE I
DEFINITIONS
Many of the capitalized words and phrases used in this Agreement are
defined below. Some defined terms used in this Agreement are not listed below,
but are defined in the Section in which they are first used because they are
better understood in that context.
SECTION 1.1 "Accounts Receivable" means all accounts and notes
receivable, negotiable instruments and chattel paper the rights to which were
generated by the operations of the Practice, and other evidences of indebtedness
of, and rights to receive payments from, any person which relate to the
operation of the Practice, as such exist on the Closing Date including, without
limitation, charges for services rendered to patients prior to the Closing Date
but not yet billed, all of which, together with the proceeds thereof shall
remain in the Practice and be used for working capital by Manager for the
benefit of the Practice. It is acknowledged and agreed that MedCath is not
acquiring the Accounts Receivable of Practice.
SECTION 1.2 "Affiliate" means, with respect to any Person, (i) any
Person directly or indirectly controlling, controlled by or under common control
with such Person, (ii) any Person directly or indirectly owning or controlling
fifty percent (50%) or more of any class of outstanding equity interests of such
Person or of any Person which such Person directly or indirectly owns or
controls fifty percent (50%) or more of any class of equity interests, (iii) any
officer, director, general partner or trustee of such Person, or any Person of
which such Person is an officer, director, general partner or trustee, or (iv)
any Person who is an officer, director, general partner, trustee or holder of
fifty percent (50%) or more of the equity interests of any
<PAGE>
Person described in clauses (i) through (iii) of this sentence. Practice is not
an Affiliate of Manager.
SECTION 1.3 "Assets" means all of the assets and properties, tangible
and intangible, of and pertaining to or used at or in connection with the
Practice, and in which Practice has any right, title or interest, whether owned
or leased, wherever located, whether known or unknown, and whether or not
appearing on the books and records of Practice, as the same may exist on the
Closing Date.
SECTION 1.4 "Closing" means the effective date of the consummation and
effectuation of the transactions contemplated herein pursuant to the terms and
conditions of this Agreement.
SECTION 1.5 "Closing Date" means the date on which the Closing actually
occurs and such shall be held on the 1st day of January, 1998, at such time and
place as is mutually agreed upon by the parties hereto, it being acknowledged
that this Agreement shall be signed and the Closing shall occur on or about the
same date.
SECTION 1.6 "Employment Agreements" shall mean those employment
agreements between Practice and each of its Shareholders who are physicians.
SECTION 1.7 "Encumbrances" means all security interests, liens, pledges,
claims, charges, escrows, encumbrances, encroachments, rights of first refusal,
subleases, conditional sales agreements, options, mortgages, indentures,
easements, licenses, restrictions or other covenants, agreements,
understandings, obligations, defects or irregularities affecting title to any of
the Assets.
SECTION 1.8 "Manager" means the direct or indirect subsidiary of MedCath
that will provide management services to Practice pursuant to the Service
Agreement.
SECTION 1.9 "Person" means any natural person, partnership, trust,
estate, association, limited liability company, corporation, custodian, nominee,
governmental instrumentality or agency, body politic or any other entity in its
own or any representative capacity.
SECTION 1.10 "Related Party" means (a) with respect to any individual,
such individual's spouse, any descendants (whether natural, adopted or in the
process of adoption), any sibling, a spouse of any descendant or sibling, any
ancestor, any trust twenty-five percent (25%) or more of the beneficial
interests of which are owned by such individuals or any of them, and any
corporation, association, partnership or limited liability company twenty-five
(25%) or more of the equity interests of which are owned by those
above-described individuals or trusts, (b) with respect to any trust, the owners
of twenty-five (25%) or more of the beneficial interests of such trust, and (c)
with respect to any corporation, association, partnership or limited liability
company, the owners of twenty-five percent (25%) or more of the outstanding
equity interests in such entity.
-2-
<PAGE>
SECTION 1.11 "Service Agreement" means the agreement for the provision
of management services by Manager to Practice being executed by such parties as
of the date hereof.
SECTION 1.12 "Territory" means the area within Hidalgo and Starr
Counties, Texas.
ARTICLE II
PRACTICE MANAGEMENT TRANSACTION
SECTION 2.1 Practice Management Transaction.
Practice has sought MedCath's physician practice management expertise
and MedCath desires to provide physician practice management services to
Practice in accordance with the terms of this Agreement and the other agreements
contemplated hereunder. As of the date hereof, Practice and MedCath shall enter
into the Service Agreement dated as of the date hereof under which MedCath shall
provide physician practice management services to Practice. In consideration
therefor, MedCath shall, as of the Closing Date, deliver the Consideration (as
defined below) to Practice. Contemporaneously therewith, in order to ensure the
availability to Practice of the continued services of the Physicians, the
Physicians and Practice shall enter into the Bonus Agreements dated as of the
date hereof in order to adequately compensate such Physicians. Each Physician
and Practice shall also enter into the appropriate Employment Agreement. The
transactions contemplated by this Section 2.1 and as otherwise set forth in this
Agreement and any other agreements and documents contemplated hereunder are
referred to collectively as the "Transaction".
SECTION 2.2 Consideration for Transaction.
The Consideration due from MedCath to Practice for entering into the
Transaction, subject to (c) below, shall equal Five Million Five Hundred Five
Thousand Four Hundred Sixty Seven Dollars ($5,505,467.00) which shall be
composed of and paid as follows:
(a) On January 2, 1998 a cash payment of [
]
($[ ]) shall be paid to Practice (the "Cash Payment") which
constitutes [ ] percent ([ ]%) of the Consideration; and
(b) On the second anniversary of the Closing Date MedCath
shall deliver to Practice the number of MedCath Incorporated Shares of
Common Stock, ($.01 par value) (the "Common Stock") determined by
dividing [ ] ($[ ]), which constitutes [
] percent ([ ]%) of the Consideration, by the average closing price
for one share of
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
-3-
<PAGE>
Common Stock quoted on the Nasdaq National Market System during the
thirty (30) day period ending three (3) days prior to the Closing Date.
In the event of an acquisition of, or a merger between MedCath
Incorporated and any other party, MedCath may deliver all of such
Common Stock to Practice prior to the closing of such transaction.
(c) Following the sixth (6th) full calendar month after the
Closing Date, MedCath and Practice shall reasonably agree upon the net
income earned by Practice, after payment of all expenses including
without limitation related physician compensation, bonuses and fringe
benefits, as a result of the direct professional services provided by
Dr. Luis Padula, M.D. on behalf of Practice during such period
determined consistent with the manner in which net income of Practice
was determined by MedCath prior to the Closing Date ("Additional Net
Income"). The Consideration provided to Practice pursuant to this
Section 2.2 shall be increased by an amount equal (a) to such
Additional Net Income, multiplied by (b) two (2), multiplied by (c)
twenty percent (20%) multiplied by, (d) seven (7), which amount shall
be paid within ten (10) days of its final determination, sixty-five
percent (65%) in cash and thirty-five percent (35%) in Common Stock
valued using the same methodology used to value Common Stock as of the
Closing Date pursuant to subsection (b) above except applied as of the
last day of such six (6) month period. Such additional shares of Common
Stock shall be delivered on the same date the Common Stock is to be
delivered under subsection (b) above. In the event of an acquisition or
merger between MedCath Incorporated and any other party, MedCath may
deliver all of such Common Stock to Practice prior to the closing of
such transaction or if such transaction has closed prior to the date
amounts are determined to be due hereunder, MedCath may pay such
amounts in cash rather than in shares of Common Stock.
SECTION 2.3 The Closing.
The Closing shall be effective as of 12:01 a.m. on January 1, 1998 and
all adjustments set forth in this Article II shall be made as of such date.
It is the intent of the parties that this Agreement, and all documents
and agreements executed in connection herewith, be legally binding as of
December 12, 1997. However, the parties intend that the services provided by
MedCath and the fees to be paid to MedCath under the Service Agreement commence
as of January 1, 1998. The parties agree to execute and deliver such additional
documents and agreements as may be necessary to effect the intent of the parties
expressed herein, including, transferring assets to the appropriate parties and
causing liabilities to be paid by the appropriate parties.
SECTION 2.4 Further Acts and Assurances.
Practice shall, at any time and from time to time at and after the
Closing, upon the reasonable request of MedCath, take any and all steps
necessary to provide to MedCath the full benefit of the transaction contemplated
by this Agreement.
-4-
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PRACTICE
Practice hereby represents and warrants to MedCath as follows:
SECTION 3.1 Organization, Power and Qualification.
Practice is a professional association duly organized, validly existing
and in good standing under the laws of the State of Texas and has full power to
own, lease and operate its properties and assets and to carry on its business as
now being conducted, and is duly qualified and in good standing to do business
in each jurisdiction in which the nature of Practice's business or the ownership
or leasing of Practice's properties make such qualification necessary. Practice
has full power to enter into this Agreement and to consummate the transactions
contemplated hereby. A copy of Practice's Articles of Incorporation and Bylaws
and all amendments thereto as of the date hereof, are included as Schedule 3.1
and are true, accurate and complete as of the date hereof.
SECTION 3.2 Ownership Interests.
The ownership interests of Practice are owned in the manner set forth in
Schedule 3.2 and, except as set forth on such Schedule, there are no outstanding
options, warrants rights or commitments for the sale or issuance of any
additional ownership interests in Practice. Except for the transactions
contemplated by this Agreement, insofar as is known to Practice, there are not
any agreements or understandings among the owners of Practice with respect to
the voting on any matter.
SECTION 3.3 Subsidiaries, Affiliates, Affiliated Companies and Joint
Venture.
Practice has no direct or indirect interest in, by way of stock
ownership or otherwise, any corporation, partnership, joint venture, association
or business enterprise except as listed in Schedule 3.3.
SECTION 3.4 Financial Statements.
The balance sheets of Practice at December 31, 1995 and 1996 and for the
year to date through November 31, 1997, and the related statements of income and
changes in financial position for the periods then ended, are included as
Schedule 3.4 (such financial statements and the related notes together with the
Year-to-Date Balance Sheet being herein called "Financial Statements"). The
Financial Statements are prepared using the cash method of accounting on a
consistent basis throughout the periods involved, and on that basis, the
financial statements are true, complete and accurate in all material respects
and present fairly the assets, liabilities and financial condition of Practice
at the respective dates thereof and the results of its operations for the
periods ended.
-5-
<PAGE>
SECTION 3.5 Absence of Undisclosed Liabilities.
Except as and to the extent reflected or reserved against in the
Financial Statements and except for commitments and obligations incurred in the
ordinary course of business, consistent with past practice, accruing after the
date of the Financial Statements, Practice has no liabilities, claims or
obligations which would have a material adverse effect on the operations
(whether accrued, absolute, contingent or otherwise) of Practice other than such
liabilities that have been specifically disclosed on Schedule 3.5.
SECTION 3.6 Absence of Certain Recent Changes.
Except as disclosed on Schedule 3.6 or reflected on the Financial
Statements, Practice has not, since January 1, 1997, except in the ordinary
course of business consistent with past practice:
(a) incurred any indebtedness or other liabilities (whether
accrued, absolute, contingent or otherwise), guaranteed any
indebtedness or sold any of its assets;
(b) suffered any damage, destruction or loss, to any of the
tangible Assets, whether or not covered by insurance;
(c) increased the regular rate of compensation payable to any
employee or any physician; or increased such compensation by bonus,
percentage, compensation service award or similar arrangement
theretofore in effect for the benefit of any of its employees, and no
such increase is required;
(d) established or agreed to establish any pension, retirement
or welfare plan for the benefit of its employees not theretofore in
effect;
(e) suffered any change in its financial condition, assets,
liabilities or business or suffered any other event or condition of any
character which individually or in the aggregate has or might
reasonably be expected to have a material adverse effect on its
business;
(f) experienced any labor organizational efforts, strikes or
formal complaints or entered into any collective bargaining agreements
with any union;
(g) made any single capital expenditure which exceeded $2,500
or made aggregate capital expenditures which exceeded $10,000;
(h) disposed of any of the Assets or written down the value of
any of the Assets, or written off as uncollectible any Accounts
Receivable, or revalued any of the Assets;
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(i) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise);
(j) canceled any debts or waived any claims or rights of
substantial value;
(k) entered into, amended or terminated any contract,
agreement or license to which it is a party;
(l) entered into a material transaction or made any change in
any method of accounting or accounting practice;
(m) canceled, or failed to continue, insurance coverages;
(n) agreed, whether in writing or otherwise, to take any
action described in this Section 3.6;
(o) declared any dividend or made any distribution to its
shareholders other than in accordance with its historic practices; or
(p) operated its business other than in the ordinary course
consistent with past practice.
SECTION 3.7 Title to Assets.
(a) Except as disclosed in Schedule 3.7(a), Practice has, or
will have on the Closing Date, good and marketable title to all its
Assets, free and clear of all Encumbrances.
(b) The Assets consisting of owned personal property are
subject to no Encumbrances except the security interests of record set
forth on Schedule 3.7(b), which Schedule is a copy of UCC searches duly
obtained by Practice and which searches show security interests of
record relating to such Assets in every place where such security
interests are legally required to be filed and includes copies of all
such financing statements.
(c) The Assets constitute all of the non-real estate operating
assets of Practice necessary or appropriate for the continued operation
of the Practice other than the Excluded Assets.
SECTION 3.8 Contracts and Leases.
Schedule 3.8 is a copy of each contract, lease, sublease, agreement and
other instrument to which Practice is a party or are bound that is for an amount
in excess of $5,000 or for a term in excess of twelve (12) months in duration.
Except as noted in such Schedule, all such contracts, leases, subleases and
agreements are in full force and effect, there has been no threatened
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cancellation thereof, there are no outstanding disputes thereunder, each is with
unrelated third parties and was entered into on an arms-length basis in the
ordinary course of business and, assuming the receipt of the appropriate
consents, all will continue to be binding in accordance with their terms after
consummation of the transaction contemplated herein; except as noted in such
Schedule, there are no contracts, subleases, agreements or other instruments to
which Practice is a party or bound (other than physician employment contracts
and insurance policies) which could either singularly or in the aggregate have
an adverse effect on the value to MedCath of the Assets or which could inhibit
or prevent Practice in its ability to transfer to or vest in MedCath good and
sufficient title to the Assets; and, except as disclosed on Schedule 3.8, and
except for physician employment contracts, Practice is not a party to or bound
by any employment agreements or any agreements that contain any bonus, severance
or termination pay liabilities or obligations or by any agreements to loan to or
guarantee any loan to an employee. In every instance when consent is necessary,
Practice shall, on or before the Closing Date, obtain and deliver to MedCath in
writing, effective as of the Closing Date, such consents as are necessary to
effect a valid and binding transfer or assignment so as to enable MedCath to
enjoy all of the rights now enjoyed by Practice under such contracts. Said
consent shall be in a form acceptable to MedCath and shall contain an
acknowledgment by the consenting party that Practice has fully complied with and
is not in default under any provision of the particular contract or agreement.
SECTION 3.9 Defaults and Consents.
Except as disclosed in Schedule 3.9, Practice is not in default under,
nor has any event occurred which, with notice or the lapse of time or action by
a third party, could result in a default under, any outstanding indenture,
mortgage, contract, lease or agreement to which Practice is a party or by which
Practice may be bound or under any provision of the Articles of Incorporation,
Bylaws, or other governing documents of Practice. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated by this Agreement will not (a) result in a significant liability to
Practice; (b) constitute a violation of or a default under, or a conflict with,
(i) any term or provision of the Articles of Incorporation, Bylaws, or other
governing documents of Practice or (ii) any order, writ, injunction or decree of
any court, governmental agency or arbitration tribunal, or (iii) any contract,
commitment, indenture, lease, sublease or other agreement, or (iv) any other
restriction of any kind to which Practice is a party or by which Practice is
bound; (c) cause, or give any party grounds to cause (with or without notice,
the passage of time or both) the maturity of any liability or obligation of
Practice to be accelerated, or increase any such liability or obligation; or (d)
require any consent, approval or authorization of, or declaration, filing or
registration with any governmental or regulatory authority.
SECTION 3.10 Litigation, Etc.
Except as disclosed in Schedule 3.10, there is no litigation,
arbitration, governmental claim, investigation or proceeding pending or, to the
best knowledge of Practice, threatened against Practice at law or in equity,
before any court, arbitration tribunal or governmental agency.
No such proceeding set forth in Schedule 3.10 concerns the ownership or other
rights with
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respect to the Assets. Except as disclosed on Schedule 3.10, Practice knows of
no facts based on which material claims may be hereafter made against it. Except
as set forth on Schedule 3.10, Practice has been informed by its carriers that
all claims and litigation against Practice and its employees involving
allegations of medical malpractice are fully covered by insurance, less
co-payments and deductibles.
SECTION 3.11 Court Orders, Decrees and Laws.
There are no outstanding or, to the best of Practice knowledge,
threatened orders, writs, injunctions or decrees of any court, governmental
agency or arbitration tribunal against or affecting Practice or the Assets.
Practice is in compliance with all applicable federal, state and local laws,
regulations and administrative orders which are material to the operation of the
Practice, including, without limitation, matters relating to antitrust and
anti-competitive practices, discrimination, employment, and health and safety,
and has received no notices of alleged violations thereof except as disclosed in
Schedule 3.11(a) hereof. No governmental authorities are presently conducting
proceedings against Practice and no such investigation or proceeding is pending
or being threatened. Practice has all federal, state and local permits,
certificates, licenses, approvals and other authorizations necessary in the
conduct and operation of the Practice. Schedule 3.11(b) contains a list of all
such governmental licenses and permits. All such licenses and permits of
Practice are in full force and effect, and no violations are or have been
recorded in respect thereof for which a fine or penalty may be levied, and no
proceeding is pending or threatened to revoke or limit any thereof. Practice
agrees to assume responsibility for the payment, if any, of any such future
fines for activities occurring in the Practice prior to the Closing Date.
Practice shall cooperate with and assist MedCath in all respects concerning the
transfer or re-issuance to MedCath of all permits, licenses, consents or
approvals required by all applicable laws or which are included in the Assets.
SECTION 3.12 Taxes.
All federal, state and other tax returns of Practice required by law to
be filed have been timely filed, and Practice has paid or adequately provided
for all taxes (including taxes on properties, income, franchises, licenses,
sales and payrolls) which have become due pursuant to such returns or pursuant
to any assessment, except for any taxes and assessments, the amount,
applicability or validity of which is currently being contested in good faith by
appropriate proceedings and with respect to which Practice has set aside on its
books adequate reserves. There are no tax liens on any of the Assets except
those with respect to taxes not yet due and payable. There are no pending tax
examinations of any Practice tax return nor has Practice received a revenue
agent's report asserting a tax deficiency in the last twelve (12) months. There
are not and will not be at the Closing Date, any claims pending or asserted
against the Assets for unpaid taxes by any federal, state or other governmental
body. Practice has withheld from each payment made directly or indirectly to its
employees (including persons who under the tax laws could be classified as its
employees) the amount of all taxes (including, but not limited to, federal,
state and local income taxes and Federal Insurance Contribution Act taxes)
required to be withheld therefrom and all amounts customarily withheld
therefrom, and has set aside all other employee contributions or payments
customarily set aside with respect to such wages and has
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paid or will pay the same to, or has deposited or will deposit such payment
with, the proper tax receiving officers or other appropriate authorities, except
to the extent of any liabilities, to be assumed by MedCath hereunder. Neither
Practice nor any Physician Shareholder is relying on MedCath, Manager, or any of
their affiliates, employees, professional advisors or consultants regarding any
tax implications arising from or relating to the transactions contemplated
herein and Practice and its Physicians have obtained their own tax advice in
that regard.
SECTION 3.13 Authority, Binding Effect.
Practice has full power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby. The directors, shareholders
and officers of Practice have taken all action required, whether by law, by
their governing documents or otherwise, to authorize the execution and delivery
of this Agreement and the performance of the transactions contemplated hereby.
The execution, delivery, and performance of this Agreement constitutes the valid
and binding agreement of Practice enforceable in accordance with its terms.
SECTION 3.14 Employee Matters.
Included as Schedule 3.14 is a list of all current employees, officers
and consultants of Practice and their annual compensation.
SECTION 3.15 Labor Matters.
Except as disclosed in Schedule 3.15, Practice has no collective
bargaining agreements with any labor union and is not currently negotiating with
a labor union. No employee of Practice has ever petitioned for a representation
election. Practice is in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours, and are not engaged in any unfair labor practice. There is no
unfair labor practice complaint against Practice pending before the National
Labor Relations Board or strike, dispute, slowdown or stoppage actually pending
or, to its knowledge, threatened against or affecting Practice.
SECTION 3.16 Insurance; Malpractice.
Schedule 3.16(a) is a list and brief description of all policies or
binders of fire, liability, product liability, worker's compensation, health and
other forms of insurance policies or binders currently in force insuring against
risks which will remain in full force and effect at least through the Closing
Date. Schedule 3.16(b) contains a description of all malpractice liability
insurance policies of Practice since 1992. Except as set forth on Schedule
3.16(c), (i) Practice has never filed a written application for any insurance
coverage which has been denied by an insurance agency or carrier and (ii)
Practice has been continuously insured for professional malpractice claims for
at least the past five (5) years. Schedule 3.16(c) also sets forth a list of all
claims for any loss in excess of Five Thousand Dollars ($5,000) per occurrence,
filed by Practice during the three (3) year period immediately preceding the
Closing Date, including but not limit to, worker's compensation, general
liability, environmental liability and professional malpractice
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liability claims. Practice is not in material default with respect to any
provision contained in any such policy and has not failed to give any notice or
present any claim under any such policy when due in a timely fashion.
SECTION 3.17 Books of Account, Reports.
The books of account of Practice are in reasonable detail and accurately
and fairly reflect its transactions and the disposition of its assets consistent
with the past practices of Practice. Practice has filed all reports and returns
required by any law or regulation to be filed by it.
SECTION 3.18 No Finders or Brokers.
Practice has not engaged any finder or broker in connection with the
transactions contemplated hereunder. No commitments have been made to any
individuals for payments or stock options in connection with this Agreement
except for payments to certain employees of Practice in such capacities.
SECTION 3.19 Inventory.
All Assets consisting of inventory are of a quality and quantity
currently usable in the ordinary course of business. The present quantity of all
current and usable inventory is at a level consistent with the past operation of
Practice.
SECTION 3.20 Equipment.
All Assets consisting of equipment are located at the Practice and are
in good condition except for reasonable wear and tear and are sufficient for the
purposes for which currently used. Such Assets are reflected in the Financial
Statements at book value.
SECTION 3.21 Accounts Receivable.
The Accounts Receivable of Practice arose from bona fide transactions
and such Accounts Receivable have been carried on the books of Practice at
values in conformity with past practices, and reflect all facts reasonably known
to Practice as of the date hereof pertaining to the valuation thereof. Schedule
3.21 contains an aging of all Accounts Receivable.
SECTION 3.22 Employee Benefit Plans.
(a) Practice has delivered to MedCath true and complete copies,
in the case of documented plans, and a written description in the case of
undocumented plans, of each pension, retirement, profit-sharing, stock purchase,
stock option, severance, vacation, deferred compensation, bonus or other
incentive plan, or other employee benefit program, arrangement, agreement or
understanding, or medical, vision, dental or other health plan, or life
insurance or disability plan, retiree medical or life insurance plan or any
other employee benefit plans or fringe benefit arrangements, including, without
limitation, any
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"employee benefit plan" as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), to which Practice contributes
or is a party or by which it is bound or under which it may have liability and
under which employees or former employees of Practice (or their beneficiaries)
are eligible to participate or derive a benefit (the `Plans"). Each Plan which
is a "group health plan" (as such term is defined in Section 4980B(g)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")) satisfies the applicable
requirements in order to avoid the imposition of tax under Section 4980B of the
Code. Except as set forth on Schedule 3.22, Practice has no formal plan or
commitment, whether legally binding or not, to create any additional plan,
practice or agreement or modify or change any existing plan, practice or
agreement that would affect any of the employees or former employees of
Practice. Benefits under all Plans are as represented and will not be increased
subsequent to the date documents are provided.
(b) The following representations are made with regard to the
Plans:
(i) any and all Plans which are pension plans within
the meaning of Section 3(2) of ERISA ("Pension Plans") are
intended to be qualified plans under Sections 401 and 501 of
the Code, have remained qualified under the Code since
inception and have been determined by the Internal Revenue
Service ("IRS") to be so qualified, and the IRS has taken no
action to revoke such determination or qualification;
(ii) Practice has, in all material respects,
performed all obligations, whether arising by operation of
law, contract, or past custom, required to be performed under
or in connection with the Plans, and Practice has no knowledge
of any default or violation by any other party with respect to
the Plans;
(iii) Practice has complied in all material respects
with ERISA and, where applicable, the Code, regarding the
Plans;
(iv) all reports and disclosures relating to the
Plans required to be filed with or furnished to governmental
agencies, plan participants or plan beneficiaries have been or
will be filed or furnished in accordance with applicable law
in a timely manner;
(v) there are no actions, suits or claims (other than
routine claims for benefits) pending, or, to the best of
Practice's knowledge, threatened, against any Plan or against
the assets funding any Plan;
(vi) no transactions have occurred with respect to
the Plans or assets thereof which could result in the
imposition on Practice, MedCath, the administrators or
trustees under the Pension Plans or the assets funding the
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Pension Plan, either directly or indirectly, of taxes or
penalties imposed under Section 4975 of the Code or Section
502(i) of ERISA;
(vii) except as identified on Schedule 3.22, no
Pension Plan is a "defined benefit plan" as defined in Section
3(35) of ERISA;
(viii) other than applications for determination, no
action is pending with respect to the Plans before the
Internal Revenue Service, the Department of Labor, or before
any state or local governmental agency;
(ix) no act or omission constituting a breach of
fiduciary duties has occurred with respect to the Plans or the
assets thereof which could subject Practice, MedCath, or the
Assets, either directly or indirectly, to any liability;
(x) any bonding required by applicable provisions of
ERISA with respect to any of the Plans has been obtained and
is in full force and effect;
(xi) the transactions contemplated by this Agreement
will not result in liability for severance pay, or for events
occurring or expenses incurred after termination of employment
(except as required to avoid tax under Section 4980B of the
Code), or any similar payment to the employees of Practice;
and
(xii) no Plan is a "multi-employer plan" within the
meaning of Section 3(37) of ERISA.
(c) Practice has delivered to MedCath and its counsel prior to
the Closing Date, true and complete copies of (i) all documents
governing the Plans, including, without limitation, all amendments
thereto which will become effective at a later date, or if a Plan is
not documented, a written description thereof; (ii) the latest Internal
Revenue Service determination letter obtained with respect to each of
the Pension Plans; (iii) Form 5500 for the most recent completed plan
year for each of the Plans, together with all schedules forming a part
thereof; (iv) all summary plan descriptions relating to the Plans; (v)
annuity contracts funding obligations of any Plan; (vi) all employment
manuals; and (vii) insurance policies or contracts with respect to the
Plans.
SECTION 3.23 Power of Attorney.
Practice has not given any power of attorney, whether limited or
general, to any person which is continuing in effect.
SECTION 3.24 Bank Accounts, Officers.
Schedule 3.24 sets forth a list of all bank accounts and safe deposit
boxes in the name of or controlled by Practice and details about the persons
having access thereto. Schedule 3.24 also
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contains a list of all officers of Practice as such have been designated or
elected by the Board of Directors of Practice.
SECTION 3.25 Environmental Matters.
Practice is in compliance with all federal, state and local
environmental laws, rules, regulations, standards and requirements, including,
without limitation, those respecting hazardous or biomedical materials and/or
wastes. Except as disclosed on Schedule 3.25, Practice has not engaged in any
storage, holding, release, emission, discharge, generation, processing,
disposition, handling or transportation of any biomedical wastes or hazardous
substances or materials, as defined in any applicable federal or state law or
regulation from, into or on any portion of the Practice premises.
SECTION 3.26 Fraud and Abuse.
To the best of its knowledge after due inquiry, neither Practice, its
officers and directors, or persons and entities providing professional services
for the Practice, have engaged in any activities which are prohibited under 42
U.S.C. Sec. 1320a-7b, or the regulations promulgated thereunder pursuant to such
statutes, or related state or local statutes or regulations, or which are
prohibited by rules, of professional conduct, including but not limited to the
following: (a) knowingly and willfully making or causing to be made a false
statement or representation of a material fact in any application for any
benefit or payment; (b) knowingly and willfully making or causing to be made any
false statement or representation of a material fact for use in determining
rights to any benefit or payment; (c) failure to disclose knowledge by a
claimant of the occurrence of any event affecting the initial or continued right
to any benefit or payment on its own behalf or on behalf of another, with intent
to fraudulently secure such benefit or payment; and (d) knowingly and willfully,
soliciting or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in kind or
offering to pay or receive such remuneration (i) in return for referring an
individual to a person for the furnishing or arranging for the furnishing of any
item or service for which payment may be made in whole or in part by Medicare or
Medicaid, or (ii) in return for purchasing, leasing, or ordering or arranging
for or recommending purchasing, leasing, or ordering any good, facility,
service, or item for which payment may be made in whole or in part by Medicare
or Medicaid.
SECTION 3.27 Investment Representation and Access.
Practice represents and warrants to and covenants with MedCath as
follows:
(a) The Common Stock of MedCath to be acquired by Practice
will be acquired for its own account for the purpose of investment
only.
(b) Practice has received and reviewed the 1996 Annual Report
of Parent and its 10-K for the period ended September 30, 1996 and its
10-Q for the period ending June 30, 1997 (the "SEC Filings"). Practice
confirms that MedCath has made available to it or to its
representatives, the opportunity to ask questions of its officers and
directors
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and to acquire such additional information about the Common Stock and
the business and financial condition of MedCath as Practice has
requested, which additional information has been satisfactory received.
(c) In deciding to acquire the Common Stock, Practice has
relied upon consultations with its legal, financial and tax advisers
with respect to this transaction and the nature of the investment
together with the additional information concerning MedCath set forth
in the SEC Filings, and any additional information provided under
subsection (b) above.
(d) The financial condition of Practice is such that it can
bear the risk of this investment indefinitely. Practice either alone or
with its representatives has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and
risks of an investment in MedCath.
(e) Practice will not transfer or otherwise dispose of the
Common Stock or any interest therein (other than to its physician
employees in accordance with the Securities Act, and who make the
representations to MedCath which are set forth in this Section 3.27) in
such manner as to violate any registration provision of the Securities
Act of 1933, as amended (the "Securities Act"), or of any applicable
state securities law regulating the disposition thereof. Practice is
aware that the Common Stock has not been registered under the
Securities Act or any state securities laws or any other applicable
securities legislation and that the Common Stock must be held
indefinitely unless it is subsequently registered or an exemption from
such registration is available. MedCath will permit transfer of the
Common Stock only in compliance with any applicable state securities
law and any other applicable securities legislation or when the request
is accompanied by an opinion of counsel, acceptable to MedCath, to the
effect that the sale or proposed transfer does not require registration
under the Securities Act, any state securities law or any other
applicable securities legislation and as set forth above. Practice
agrees that the following legend to such effect and any other legends
required by applicable state securities law will be placed on the
Common Stock and a stock transfer order shall be placed with respect
thereto, for as long as MedCath deems it necessary:
THIS COMMON STOCK HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF EFFECTIVE REGISTRATION STATEMENTS UNDER SUCH ACTS
OR AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO MEDCATH THAT
SUCH REGISTRATION IS NOT REQUIRED.
In addition, a legend similar to the above legend shall be
placed on the Common Stock acquired by Practice pursuant to Section
2.4(a)(iii).
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(f) The representations, warranties and covenants of Practice
contained herein shall survive the execution and delivery of this
Agreement and the issuance of the Common Stock.
SECTION 3.28 Practice Disclosures.
No representations, warranties or disclosures of information made by
Practice, including disclosures made in any Exhibit, Schedule or certificate or
other writing delivered or to be delivered in connection with the transactions
contemplated hereby, contains or will contain any untrue statement of a material
fact or omits to state any material fact which is necessary in order to make the
disclosures not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MEDCATH
MedCath represents and warrants as follows:
SECTION 4.1 Organization and Standing of MedCath.
MedCath is a corporation duly organized, validly existing and in good
standing under the laws of the State of Arizona and has full corporate power to
own, lease and operate its properties and assets and to carry on its business as
and where it is now being conducted, to enter into this Agreement and to
consummate the transactions contemplated hereby.
SECTION 4.2 Authority; Binding Effect.
MedCath has full power and authority to enter into this Agreement and to
carry out the transactions contemplated hereby. MedCath has taken all action
required by law and by MedCath's Articles of Incorporation and Bylaws to
authorize the execution and delivery of this Agreement and the transactions
contemplated hereby. The execution, delivery, and performance of this Agreement
constitute the valid and binding agreements of MedCath enforceable in accordance
with its terms.
SECTION 4.3 No Finders or Brokers.
Neither MedCath nor any officer or director thereof has engaged any
finder or broker in connection with the transactions contemplated hereunder.
MedCath will indemnify and hold Practice harmless against claims (and expenses
in the defense thereof) of any person, firm or corporation for finder's fees,
broker's fees, brokerage commission, sales commissions or the like alleged in
connection with the transactions contemplated hereunder due to acts of MedCath.
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SECTION 4.4 Validity of Agreement.
Upon execution and delivery of this Agreement and all documents executed
in connection herewith, they will constitute the valid and binding obligation of
MedCath and be binding against MedCath in accordance with its terms.
SECTION 4.5 Defaults and Consents.
MedCath is not in default under, nor has any event occurred which, with
notice or the lapse of time or action by a third party, could result in a
default under, any outstanding indenture, mortgage, contract, lease or agreement
to which MedCath is a party or by which MedCath may be bound and which is
material to the operations of MedCath and its subsidiaries taken as a whole, or
under any provision of the Articles of Incorporation, Bylaws, or other governing
documents of MedCath. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated by this Agreement will not
(i) constitute a violation of or a default under, or a conflict with, (A) any
term or provision of the Articles of Incorporation, Bylaws, or other governing
documents of MedCath or (B) any order, writ, injunction or decree of any court,
governmental agency or arbitration tribunal, or (C) any contract, commitment,
indenture, lease, sublease or other agreement, or (D) any other restriction of
any kind to which MedCath is a party or by which MedCath is bound; (ii) cause,
or give any party grounds to cause (with or without notice, the passage of time
or both) the maturity of any liability or obligation of MedCath to be
accelerated, or increase any such liability or obligation or (iii) other than
the consent of bankers, filings with respect to the registration of the Common
Stock, and filings under the Hart-Scott-Rodino Antitrust Improvements Act,
require any consent, approval or authorization of, or declaration, filing or
registration with any governmental or regulatory authority.
SECTION 4.6 Court Orders, Decrees and Laws.
There are no outstanding or, to the best of MedCath's knowledge,
threatened orders, writs, injunctions or decrees of any court, governmental
agency or arbitration tribunal against or affecting MedCath. MedCath is in
compliance with all applicable federal, state and local laws, regulations and
administrative orders which are material to the operations of MedCath and has
not received any notices of alleged violations thereof. No governmental
authorities are presently conducting proceedings against MedCath and no such
investigation or proceeding is pending or being, threatened. MedCath has all
federal, state and local permits, certificates, licenses, approvals and other
authorizations necessary in the conduct and operation of MedCath. All such
licenses and permits of MedCath are in full force and effect, and no violations
are or have been recorded in respect thereof for which a fine or penalty may be
levied, and no proceeding is pending or threatened to revoke or limit any
thereof
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ARTICLE V
COVENANTS OF PRACTICE
Practice hereby covenants and agrees as follows:
SECTION 5.1 Access and Information.
Between the date hereof and the Closing Date, Practice shall give to
representatives of MedCath reasonable access during normal business hours to the
Practice's premises, books, accounts and records and all other relevant
documents and will make available copies of all such documents and information
with respect to the business and properties of Practice as representatives of
MedCath may from time to time reasonably request, including, without limitation,
the working papers used to prepare the Financial Statements and income tax
returns filed and in preparation, all in such manner as not unduly to disrupt
Practice's normal business activities. Such access shall include consultations
with the employees of Practice. During the period from the date of this
Agreement to the Closing Date, Practice shall confer on a regular and frequent
basis with one or more representatives of MedCath to report material operational
matters and to report the general status of on-going operations. Practice shall
notify MedCath of any material adverse change in the financial position,
earnings or business of Practice after the date hereof and prior to the Closing
Date and any unexpected emergency or other unanticipated change in the business
of Practice and of any governmental complaints, investigations or hearings or
adjudicatory proceedings (or communications indicating that the same may be
contemplated) or of any other matter which may be material to Practice or which
would cause the representations contained in Article III not to be true and
correct and shall keep MedCath fully informed of such events and permit its
representatives to participate in all discussions relating thereto.
SECTION 5.2 Conduct of Business.
Between the date hereof and the Closing Date, except as otherwise
approved by MedCath or necessary to consummate the transactions contemplated by
this Agreement, Practice shall conduct its business only in the ordinary course
thereof consistent with past practice and in such a manner that the
representations and warranties contained in Article III shall be true and
correct at and as of the Closing Date (except for changes contemplated,
permitted or required by this Agreement) and so that the conditions to be
satisfied by Practice at the Closing Date shall have been satisfied. Practice
shall (a) carry on its business in the usual and ordinary course, (b) use its
best efforts to preserve its business organization intact and maintain the good
will and relationships of its physicians and other employees, its patients, and
others having business relations with it, (c) conduct its business in a manner
which will cause the representations and warranties contained in Article III to
be true and correct on the Closing Date in each case, as if made on and as of
such date, (d) not grant any increases in wages, bonuses, benefits or other
compensation to any director, officer, employee or agent, (e) not enter into any
agreement or series of related agreements which would obligate Practice to
expend more than $25,000 or which has a term of more than thirty (30) days
beyond the Closing Date without MedCath's
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consent, (f) not waive any right or benefit, or (g) not incur any liability or
obligation outside the ordinary course of business or which involves the receipt
or expenditure of more than $5,000 without MedCath's consent.
SECTION 5.3 Best Efforts to Secure Consents.
Practice shall take the necessary corporate actions and shall, on or
before the Closing Date, obtain and deliver to MedCath in writing, effective as
of the Closing Date, such consents as are necessary to effect a valid and
binding transfer or assignment so as to enable MedCath to enjoy all of the
rights now enjoyed by Practice under such contracts; provided, Practice shall
use its reasonable best efforts to secure assignments of data processing
licenses. Said consent shall use in a form acceptable to MedCath and shall
contain an acknowledgment by the consenting party that Practice has fully
complied with and is not in default under any provision of the particular
contract or agreement.
SECTION 5.4 Confidential Information.
Practice shall keep confidential all information provided by MedCath
regarding the business plan, financial condition and operations of MedCath,
which is not in the public domain, and shall exercise the same care in handling
such information as it would exercise with similar information of its own.
Practice may disclose information it deems advisable to its physician employees
provided such physician employees are advised of the confidential nature of such
information and agree to keep such information confidential as provided herein.
MedCath shall be a third party beneficiary of such agreements.
SECTION 5.5 Unusual Events.
Until the Closing Date, Practice shall supplement or amend all relevant
Exhibits and Schedules with respect to any matter thereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in such Exhibits or Schedules.
SECTION 5.6 Departmental Violations.
Practice shall make all reasonable attempts to comply with all notices
of violations of law or municipal ordinances, orders or requirements noted in or
issued by government agencies or departments having authority with respect to
buildings, fire, labor, health, or any other federal, state or municipal
department having jurisdiction against or affecting the operation of the
Practice or the Assets prior to the Closing Date unless contesting the same in
good faith. All such notices, after the date hereof and prior to the Closing
Date, shall be complied with by Practice prior to the Closing Date. Upon written
request, Practice shall furnish MedCath with an authorization to make the
necessary searches for such notices.
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SECTION 5.7 Insurance Ratings.
Practice shall take all action reasonably requested by MedCath to enable
it to succeed to the Worker's Compensation and Unemployment Insurance ratings,
insurance policies, deposits and other interests of Practice and other ratings
for insurance or other purposes established by Practice. MedCath shall not be
obligated to succeed to any such rating, insurance policy, deposit or other
interest, except as it may elect to do so.
SECTION 5.8 [Intentionally Omitted.]
SECTION 5.9 Employment Agreements.
Practice shall ensure that each of the physician employees of Practice
who are shareholders of Practice as of the date hereof execute an employment
agreement for the provision of the full time services of such individual to
Practice and that each such physician employee who is a shareholder of Practice
shall remain employed by Practice pursuant to the terms of the Employment
Agreement for at least five (5) years from the Closing Date subject only to the
death or permanent disability of any such physician employee. Practice and the
applicable physician employees shall have breached their covenants set forth in
this Section 5.9 in the event that any such physician employee who is a
shareholder of Practice fails to so remain employed by Practice for at least
five (5) years from the Closing Date.
ARTICLE VI
COVENANTS OF MEDCATH
SECTION 6.1 Information.
MedCath shall promptly provide to Practice upon request any information
or documents reasonably necessary for Practice, or its owners to make an
informed judgment as to the advisability of consummating the transactions
contemplated hereby or to verify the representations and warranties of MedCath
herein. Until the Closing Date MedCath shall notify Practice of any matter which
may be materially adverse to MedCath and its subsidiaries considered as a whole
and shall keep Practice fully informed of such events.
SECTION 6.2 Corporate Action.
MedCath will take all necessary corporate and other action and obtain
all consents, approvals and amendments of agreements required of them to carry
out the transactions contemplated by this Agreement and to satisfy the
conditions specified herein.
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SECTION 6.3 Confidential Handling of Documents.
Subject to the provisions of Section 11.14, MedCath shall keep
confidential all information provided by Practice pursuant to this Agreement
which is not in the public domain, and shall exercise the same care in handling
such information as it would exercise with similar information of its own.
SECTION 6.4 Access to or Furnishing of Information about MedCath.
(a) Practice, its offeree representative(s), or both, shall
have been furnished, during the course of the transactions described
herein and prior to the asset sale, by MedCath, or any person acting on
its behalf, the SEC Filings.
(b) MedCath shall make available, during the course of the
transactions described herein, to Practice and its advisors, the
opportunity to ask questions of, and receive answers from, MedCath or
any person acting on its behalf concerning the Common Stock to be
acquired pursuant to Section 2.2 and to obtain any additional
information including regularly prepared financial statements with
notes thereto, to the extent MedCath possesses such information or can
acquire it without unreasonable effort or expense, necessary to verify
the accuracy of the information delivered to Practice by or on behalf
of MedCath.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PRACTICE
All obligations of Practice which are to be discharged under this
Agreement on the Closing Date are subject to the performance, at or prior to the
Closing Date, of all covenants and agreements contained herein which are to be
performed by MedCath at or prior to the Closing Date and to the fulfillment at,
or prior to, the Closing Date, of each of the following conditions (unless
expressly waived in writing by Practice at any time at or prior to the Closing
Date):
SECTION 7.1 Representations and Warranties True.
All of the representations and warranties made by MedCath contained in
Article IV of this Agreement shall be true as of the date of this Agreement,
shall be deemed to have been made again at and as of the Closing Date, and shall
be true at and as of the Closing Date in all material respects; MedCath shall
have performed and complied in all material respects with all covenants and
conditions required by this Agreement to be performed or complied with by it
prior to or on the closing Date; and Practice shall have been furnished with a
certificate of the President or any Vice President of MedCath dated the Closing
Date, in their corporate capacities, certifying to the truth of such
representations and warranties as of the Closing Date and to the fulfillment of
such covenants and conditions.
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SECTION 7.2 Service Agreement.
Practice and MedCath Physician Management, Inc., a subsidiary of MedCath
("Manager") shall have entered into a Service Agreement acceptable to them (the
"Service Agreement").
SECTION 7.3 No Obstruction Proceeding.
No action or proceeding shall have been instituted against, and no
order, decree or judgment of any court, agency, commission or governmental
authority shall be subsisting against MedCath or Practice which seeks to, or
would, render it unlawful to effect the asset sale in accordance with the terms
hereof, and no such action shall seek damages in a material amount by reason of
the transactions contemplated hereby. Also, no substantive legal objection to
the transactions contemplated by this Agreement shall have been received from or
threatened by any governmental department or agency.
SECTION 7.4 Consents and Approvals.
Any consents required from any public or regulatory agency having
jurisdiction shall have been received.
SECTION 7.5 Proceedings And Documents Satisfactory.
All proceedings in connection with the asset sale and all certificates
and documents delivered to the parties pursuant to this Agreement shall be
satisfactory in form and substance to the parties acting reasonably and in good
faith.
SECTION 7.6 Receipt of the Purchase Price and Assumption.
Practice shall have received the portion of the Purchase Price required
to be paid in cash on the Closing Date.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MEDCATH
All obligations of MedCath which are to be discharged under this
Agreement on the Closing Date are subject to the performance, at or prior to the
Closing Date, of all covenants and agreements contained herein which are to be
performed by Practice at or prior to the Closing Date and to the fulfillment at
or prior to the Closing Date of each of the following conditions (unless
expressly waived in writing by MedCath at any time at or prior to the Closing
Date):
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SECTION 8.1 Representations and Warranties True.
All of the representations and warranties of Practice contained in
Article III of this Agreement shall be true as of the date of this Agreement,
shall be deemed to have been made again at and as of the Closing Date, and shall
be true at and as of the Closing Date in all material respects; Practice shall
have performed or complied in all material respects with all covenants and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date; and MedCath shall be furnished with a
certificate of the President and Secretary of Practice, dated the Closing Date,
certifying to the truth of such representations and warranties as of the Closing
Date and to the fulfillment of such covenants and conditions.
SECTION 8.2 No Obstructive Proceeding.
No action or proceedings shall have been instituted against, and no
order, decree or judgment of any court, agency, commission or governmental
authority shall be subsisting against MedCath or Practice which seeks to, or
would, render it unlawful as of the Closing Date to effect the asset sale in
accordance with the terms hereof, and no such action shall seek damages in a
material amount by reason of the transactions contemplated hereby. Also, no
substantive legal objection to the transactions contemplated by this Agreement
shall have been received from or threatened by any governmental department or
agency.
SECTION 8.3 Opinion of Practice's Counsel.
Practice shall have delivered to MedCath on the Closing Date an opinion
of counsel to Practice, dated the Closing Date, in form and substance
satisfactory to MedCath.
SECTION 8.4 Consents and Approvals.
Any consents required from any public or regulatory agency having
jurisdiction shall have been received and any consents required from third
parties to the assignment to MedCath of any of the Assets shall have been
received.
SECTION 8.5 Proceedings and Documents Satisfactory.
All certificates and documents delivered to the parties pursuant to this
Agreement shall be satisfactory in form and substance to the parties acting
reasonably and in good faith.
SECTION 8.6 No Adverse Change.
From the date of this Agreement until the Closing Date the operations of
the Practice shall have been conducted in the ordinary course of business,
consistent with past practice, and from the date of the Financial Statements
until the Closing Date no event shall have occurred or have been threatened
which has or would have a material and adverse effect upon the operation of the
Practice including the departure of any physicians and Practice shall not have
sustained any loss or damage to the Assets, whether or not insured, or been the
subject of any union
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activity that affects materially and adversely, in the opinion of MedCath, the
value of the Assets or the operations of the Practice.
SECTION 8.7 Service Agreement.
Practice and Manager shall have entered into the Service Agreement.
SECTION 8.8 Employment Agreements.
All physicians actively employed by Practice as of the date of this
Agreement shall have executed employment agreements acceptable to them and to
MedCath.
SECTION 8.9 Bonus Agreements.
Practice and its key physicians shall have entered into Bonus Agreement
acceptable to them and to MedCath.
SECTION 8.10 Limited Guaranty Agreements.
Practice and its shareholders shall have executed Limited Guaranty
Agreements acceptable to them and to MedCath.
ARTICLE IX
TERMINATION
SECTION 9.1 Optional Termination.
This Agreement may be terminated and the asset sale abandoned at any
time prior to the Closing Date as follows:
(a) By the mutual consent of MedCath and Practice;
(b) By Practice, if any of the conditions set forth in Article
VII shall not have been met by the Closing Date; or
(c) By MedCath, if any of the conditions set forth in Article
VIII hereof have not been met by the Closing Date.
SECTION 9.2 Notice of Abandonment.
In the event of such termination by either MedCath or Practice pursuant
to Section 9.1 above, written notice shall forthwith be given to the other party
or parties hereto.
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SECTION 9.3 Termination.
In the event this Agreement is terminated as provided above, (a) MedCath
and Practice shall deliver to the other party all documents previously delivered
(and copies thereof in its possession) concerning one another and the
transactions contemplated hereby and (b) none of the parties nor any of their
respective stockholders, partners, owners, directors, officers, or agents shall
have any liability to the other party for costs, expenses, loss of anticipated
profits, consequential damages, or otherwise, except for any deliberate breach
or deliberate omission resulting in breach of any of the provisions of this
Agreement. Except as provided in Section 11.14 which shall survive termination,
after termination each party shall keep confidential all information provided by
the other pursuant to this Agreement which is not in the public domain, and
shall exercise the same care in handling such information as it would exercise
with similar information of its own.
ARTICLE X
INDEMNIFICATION
SECTION 10.1 Indemnity by Practice.
Subject to the conditions and provisions herein set forth, Practice
agrees to indemnify, defend and hold harmless MedCath, its officers, directors,
shareholders, subsidiaries, affiliates and agents from and against the
following, except as caused by the acts or omissions of MedCath:
(a) Any and all damages, losses, settlement payments,
obligations, liabilities, claims, actions or causes of action,
encumbrances and reasonable costs and expenses suffered, sustained,
incurred or paid by any indemnified party because of:
(i) the claims of any broker or finder engaged by
Practice;
(ii) the untruth, inaccuracy or breach of any
representation, warranty, agreement or covenant of Practice
contained in or made in connection with this Agreement;
(iii) the assertion against MedCath or any of its
affiliates of any liability or obligation relating to the
operation or ownership of Practice prior to the Closing Date;
(iv) all claims and litigation and potential claims
and litigation against MedCath or any of its affiliates with
respect to incidents or other matters which occurred prior to
the Closing Date; and
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(v) any other liabilities of Practice, including any
professional malpractice liability of Practice or any
individual physicians associated therewith, whether absolute
or contingent, known or unknown, matured or unmatured.
(b) In recognition of the fact that MedCath is willing to
enter into this Agreement only if Practice and its physician employees
who are shareholders of Practice enter into the Service Agreement and
the employment agreements and that the parties thereto fulfill their
obligations thereunder, Practice and each of the physician employees
who are shareholders of Practice hereby acknowledge and agree that
MedCath will incur substantial losses and damages in the event that any
such physician employee of Practice fails to fulfill his obligations to
remain employed by the Practice for at least five (5) years from the
Closing Date. Accordingly, in the event that any physician employee who
are shareholders of Practice (the "Breaching Physician") as of the date
hereof ceases to be employed on a full-time basis for any reason by
Practice for at least five (5) years from the Closing Date (other than
due to the death or permanent disability of such physician employee)
which shall constitute a breach of their covenants in Section 5.9
hereof, then Practice and the Breaching Physician jointly and severally
agree to indemnify MedCath for its losses and damages suffered as a
result of such failure. Due to the difficulty in measuring such loss,
MedCath, Practice and each of its physician employees agree that upon
any such Breaching Physician's failure to fulfill his obligation to so
remain employed for five (5) years by Practice from the Closing Date,
Practice and any such Breaching Physician shall be jointly and
severally obligated to pay to MedCath as indemnification, liquidated
damages in an amount determined and set forth in Schedule 10.1(b)
hereof; provided that nothing herein shall release Practice or its
physician employees from any noncompetition covenant or restriction to
which they are a party during such five (5) year period and for the two
(2) year period thereafter. Such amounts shall be due in full within
fifteen (15) days of demand therefore by MedCath.
(c) All reasonable costs and expenses (including, without
limitation, attorneys' fees, interest and penalties) incurred by any
indemnified party in connection with any action, proceeding, demand,
assessment or judgment incident to any of the matters for which
indemnity is provided in this Section 10.1.
SECTION 10.2 Indemnity by MedCath.
Subject to the conditions and provisions herein set forth, MedCath
agrees to indemnify, defend and hold harmless Practice, its shareholders,
subsidiaries, officers, directors and agents, from and against the following,
except as caused by the acts or omission of Practice:
(a) Any and all damages, losses, settlement payments,
obligations, liabilities, claims, actions or causes of action,
encumbrances and reasonable costs and expenses suffered, sustained,
incurred or paid by any indemnified party because of:
(i) the claims of any broker or finder engaged by
MedCath;
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(ii) the untruth, inaccuracy or breach of any
representation, warranty, agreement or covenant of MedCath
contained in or made pursuant to this Agreement, and
(iii) all liabilities or obligations of and claims
against Practice expressly assumed by MedCath in the
Assumption.
(b) All reasonable costs and expenses (including, without
limitation, attorneys' fees, interest and penalties) incurred by any
indemnified party in connection with any action, suit, proceeding,
demand, assessment or judgment incident to any of the matters for which
indemnity is provided in this Section 10.2.
SECTION 10.3 Rules Regarding Indemnification.
The obligations and liabilities of each indemnifying party hereunder
with respect to claims resulting from the assertion of liability by the other
party or third parties shall be subject to the following terms and conditions:
(a) All claims for indemnification by any Indemnified Party
under this Article X shall be asserted and resolved as provided in this
Section 10.3 except as otherwise set forth in Schedule 10.1(b). In the
event any Indemnified Party shall have a claim for indemnification
under Section 10.1 or 10.2 hereof against any Indemnifying Party, the
Indemnified Party shall deliver an Indemnity Notice to the Indemnifying
Party within a period of forty-five (45) days following the date on
which the Indemnified Party becomes aware of such claim. The failure by
any Indemnified Party to give such Indemnity Notice shall not impair
such party's rights hereunder, except to the extent that the
Indemnifying Party demonstrates that it has been irreparably prejudiced
thereby. If the Indemnifying Party notifies the Indemnified Party that
it does not dispute the claim described in such Indemnity Notice, or
fails to notify the Indemnified Party within the Dispute Period whether
the Indemnifying Party disputes the claim described in such Indemnity
Notice, the Losses in the amount specified in the Indemnity Notice will
be conclusively deemed a liability of the Indemnifying Party under
Section 10.1, hereof, as the case may be, and the Indemnifying Party
shall immediately pay the amount of such Losses to the Indemnified
Party on demand. If the Indemnifying Party notifies the Indemnified
Party within the Dispute Period that it disputes the claim described in
the Indemnity Notice, the Indemnifying Party and the Indemnified Party
will proceed in good faith to negotiate a resolution of such dispute,
and, if not resolved through negotiations within the Resolution Period,
such dispute shall be resolved by any lawful manner.
(b) If any written claim is made by a third party, or if any
suit or proceeding (including, but not limited to, an arbitration or an
audit by any taxing authority) is instituted, in each case against
Indemnified Party which, if prosecuted successfully, would, in the
judgment of Indemnified Party, be a matter for which Indemnified Party
is entitled to indemnification under this Agreement (a "Third Party
Claim"), the obligations
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and liabilities of the parties hereunder with respect to such Third
Party Claim shall be subject to the following terms and conditions:
(i) Indemnified Party shall give Indemnifying Party
an Indemnity Notice of any such Third Party Claim within
twenty (20) days after receipt by Indemnified Party of written
notice thereof, provided, however, that the failure of
Indemnified Party to furnish written notice to Indemnifying
Party of a Third Party Claim shall not release Indemnifying
Party from Indemnifying Party's obligations under this Article
X, except to the extent Indemnifying Party is actually
prejudiced by such failure. Indemnifying Party may undertake
the defense of such Third Party Claim at its expense by
representatives of its own choosing; provided that (A) the
Indemnifying Party shall obtain the prior approval by the
Indemnified Party of such counsel, which approval shall not be
unreasonably withheld, (B) the Third Party Claim does not
involve a claim for specific performance, or injunctive or
other equitable relief (such claims being dealt with under
subsection (a) above) and (C) nothing herein shall prejudice
the right of the Indemnified Party to participate in such
defense at its own expense through counsel of its choosing.
The assumption of the defense of any Third Party Claim by
Indemnifying Party shall constitute the agreement of
Indemnifying Party to assume, without condition or
reservation, full responsibility for such Third Party Claim.
Thereafter, Indemnifying Party shall pay as and when due all
costs and expenses related to the defense of such Third Party
Claim and shall pay and satisfy in full the Final Amount of
any and all Losses arising therefrom or related thereto.
(ii) If Indemnifying Party does not so undertake the
defense of such Third Party Claim within fifteen (15) days
after written notice of such claim has been given to
Indemnifying Party by Indemnified Party, Indemnified Party
shall have the right to undertake the defense, compromise and
settlement of such Third Party Claim with counsel of its own
choosing. Under such circumstances, Indemnified Party shall,
promptly upon its assumption of the defense of such Third
Party Claim, give an Indemnity Notice which shall thereafter
be deemed to be an Indemnity Notice that is not with respect
to a Third Party Claim subject to the procedures set forth in
this Section 10.3(b).
(iii) The Indemnified Party and Indemnifying Party
shall cooperate with each other in all reasonable respects in
connection with the defense of any Third Party Claim,
including, but not limited to, making available records
relating to such claim and furnishing employees of Indemnified
Party or Indemnifying Party as may be reasonably necessary for
the preparation of the defense of any such Third Party Claim
or for testimony as witnesses in any proceeding relating to
such claim. All costs and expenses incurred by Indemnifying
Party or Indemnified Party in connection with the foregoing
shall be the responsibility of the party requesting such
cooperation.
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(iv) The Indemnified Party shall have the right to
participate fully in all proceedings, including settlement
discussions, shall be provided copies of notices, orders and
all other papers, and shall be given prior notice by the
Indemnifying Party of any meetings, hearings and other
discussions in any such suit or proceeding. The Indemnifying
Party shall consult with the Indemnified Party and keep the
Indemnified Party fully advised of the progress of any such
suit or proceeding, and shall make no admissions or otherwise
act in a manner which might be prejudicial to the Indemnified
Party's rights in connection with any such suit or proceeding.
(v) The Indemnifying Party agrees that any
controversy between it and the Indemnified Party concerning
its obligations under this indemnity may be litigated in the
same forum and concurrently with any lawsuit against the
Indemnified Party to which such controversy may relate, and
the Indemnified Party agrees to voluntarily appear in such
forum and submit to the jurisdiction thereof.
(vi) Unless Indemnifying Party has failed or refused
to undertake the defense of such third party claim, no
settlement by Indemnified Party of a Third Party Claim shall
be made without the prior written consent of Indemnifying
Party, which consent shall not be unreasonably withheld or
delayed. If Indemnifying Party has assumed the defense of a
Third Party Claim as contemplated by this Section 10.3(b), no
settlement of such Third Party Claim may be made by
Indemnifying Party without the prior written consent of
Indemnified Party, which consent shall not be unreasonably
withheld or delayed.
(c) No amount shall be due by any Indemnifying Party for
claims for indemnification under Sections 10.1(a)(ii) or 10.2(a)(ii)
arising from the violation of a representation or warranty only, except
to the extent Losses from such violation exceed Ten Thousand Dollars
($10,000.00).
SECTION 10.4 Remedies Cumulative.
Except as herein expressly provided, the remedies provided in this
Article X shall be cumulative and shall not preclude assertion by any party of
any other rights or the seeking of any other rights or remedies against any
other party hereto.
SECTION 10.5 Set-Off.
MedCath shall be entitled to offset the amount of any Losses to which it
is entitled hereunder against any amounts of Common Stock (valued using the
Valuation Method as of the date of such offset) which it is obligated to deliver
to Practice or against any amounts owed to or held for Practice by Manager under
the Service Agreement.
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SECTION 10.6 Definitions.
For purposes of this Article X the following terms shall have the
following meanings:
(a) "Dispute Period" means the period ending thirty (30) days
following receipt by an Indemnifying Party of an Indemnity Notice.
(b) "Final Amount" means the amount of any Losses or Loss
determined in accordance with this Article X.
(c) "Indemnified Party" means any Person claiming
indemnification under any provision of Article X.
(d) "Indemnifying Party" means any Person against whom a claim
for indemnification is being asserted under any provision of this
Article X.
(e) "Indemnity Notice" means written notification pursuant to
Section 10.3 of a claim for indemnity under Article X by an Indemnified
Party, specifying the nature of and basis for such claim, together with
the amount or, if not then reasonably ascertainable, the estimated
amount, determined in good faith, of such claim.
(f) "Losses" shall mean any and all claims, liabilities,
obligations, losses, damages, deficiencies, penalties, fines,
assessments, encumbrances, judgments, costs and expenses (including,
without limitation, reasonable fees and expenses of attorneys,
consultant's and expert's fees and expenses and reasonable costs and
expenses incurred in investigating, preparing, defending against or
prosecuting any litigation or claim, action, suit, proceeding,
administrative proceeding (including informal proceeding or demand),
but not including special, indirect or consequential damages and
without giving effect to any multiple of earnings.
(g) "Person" means any natural person, corporation, general
partnership, limited partnership, trust, other business organization or
other entity and shall include, without limitation, MedCath and
Practice.
(h) "Resolution Period" means the period ending thirty (30)
days following receipt by an Indemnified Party of a written notice from
an Indemnifying Party stating that it disputes all or any portion of
the claim set forth in an Indemnity Notice.
SECTION 10.7 Survival.
The representations and warranties and the covenants of Practice and/or
its physician employees, and MedCath contained in this Agreement or in any
Schedule or Exhibit hereto shall survive the Closing; provided that the
representations and warranties of the parties hereto, other than those under
Sections 3.1, 3.2, 3.7, 4.1 and 4.2, shall survive only for a period of eighteen
(18) months after the Closing Date.
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ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Expenses.
All expenses of the preparation of this Agreement (and any related
documents) and of the asset sale, including, without limitation, counsel fees,
accounting fees, sales taxes, recording fees, investment advisers' fees and
disbursements, shall be borne by the respective parties incurring such expense,
whether or not such transactions are consummated and none of such expenses shall
be treated in such a way as to reduce the Management Fee due to Manager under
the Service Agreement.
SECTION 11.2 Restrictive Covenant.
(a) The parties recognize that the services to be provided by
Manager shall be feasible only if Practice operates an active medical
practice to which the physicians associated with Practice devote their
full time and attention. To that end, Practice agrees that it shall not
establish, operate or provide physician services at any medical office,
clinic or other health care facility providing services, including but
not limited to ancillary services, substantially similar to those to be
provided by Practice other than pursuant to the Service Agreement for
the term of the Service Agreement and for a period of two (2) years
thereafter if the Service Agreement is terminated due to a default
thereunder by Practice, including extensions thereof, at any location
within the Territory.
(b) The parties acknowledge and agree that since a remedy at
law for any breach or attempted breach of the provisions of this
restrictive covenant shall be inadequate, the aggrieved party shall be
entitled to specific performance and injunctive or other equitable
relief in case of any such breach or attempted breach by the other, in
addition to whatever other remedies may exist at law. The parties waive
any requirement for the securing or posting of any bond in connection
with the obtaining of any such injunctive or other equitable relief.
The provisions of this restrictive covenant shall be deemed to be valid
to the extent of any lesser area and for any lesser duration permitted
by law if the area and duration set forth herein is deemed to be too
broad by a court of competent jurisdiction. The invalidity or
nonenforceability of this restrictive covenant in any respect shall not
affect the validity or enforceability of the remainder nor of any other
provisions of this Agreement.
SECTION 11.3 Notices.
All notices, demands and other communications required or permitted
hereunder shall be sufficiently given if delivered in person or mailed by
certified mail, postage prepaid, addressed as follows:
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<PAGE>
Practice: Valley Cardiology, P.A.
500 East Ridge Road, Suite 101
McAllen, Texas 78503
Attention: President
MedCath: MedCath Physician Management, Inc.
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attention: President
With a copy to: Moore & Van Allen, PLLC
NationsBank Corporate Center
100 N. Tryon Street, Floor 47
Charlotte, NC 28202-4003
Attention: Hal A. Levinson
or to such other address as either Practice or MedCath may designate by notice
to the other.
SECTION 11.4 Entire Agreement.
This Agreement, the Exhibits, and the Schedules delivered pursuant
hereto, constitute the entire contract between the parties hereto pertaining to
the subject matter hereof and supersede all prior and contemporaneous
agreements, understandings, negotiations and discussions, whether written or
oral, of the parties, and there are no representations, warranties or other
agreements between the parties in connection with the subject matter hereof,
except as specifically set forth herein.
SECTION 11.5 Governing Law.
The validity and construction of this Agreement shall be governed by the
laws of the State of Texas.
SECTION 11.6 Section Headings.
The section headings are for reference only and shall not limit or
control the meaning of any provision of this Agreement.
SECTION 11.7 Waiver.
No delay or omission on the part of any party hereto in exercising any
right hereunder shall operate as a waiver of such right or any other right under
this Agreement.
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<PAGE>
SECTION 11.8 Nature and Survival of Representations and Warranties.
All statements contained in any certificate delivered by or on behalf of
any of the parties to this Agreement pursuant hereto in connection with the
transactions contemplated hereby shall be deemed to be representations and
warranties made by the respective parties hereunder. The covenants,
representations and warranties made by the parties each to the other in this
Agreement or pursuant hereto shall survive the asset sale and any investigation
made by MedCath or Practice. All Exhibits and Schedules referred to in this
Agreement are integral parts of this Agreement as if fully set forth herein and
all statements appearing therein shall be deemed to be representations and
warranties.
SECTION 11.9 Successors and Assigns.
This Agreement shall inure to the benefit of and bind the respective
successors and assigns of the parties hereto. Nothing expressed or referred to
in this Agreement is intended or shall be construed to give any person other
than the parties to this Agreement or their respective successors or permitted
assigns any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision contained herein, it being the intention of the
parties to this Agreement that the Agreement be for the sole and exclusive
benefit of such parties or such successors and assigns and not for the benefit
of any other person. Notwithstanding the above, neither MedCath nor Practice
shall have the right to assign their rights and obligations hereunder, except
that MedCath may assign this Agreement to any Person that is its Affiliate or is
a Related Party to it, NationsBank, N.A., or to any other lending institution(s)
with whom MedCath shall enter into a credit agreement, or any purchaser of
substantially all of the assets of MedCath.
SECTION 11.10 Amendments.
This Agreement may be amended, but only in writing, signed by the
parties hereto.
SECTION 11.11 Counterpart Executions; Facsimiles.
This Agreement may be executed in any number of counterparts with the
same effect as if all of the parties had signed the same document. Such
executions may be transmitted to the parties by facsimile and such facsimile
execution shall have the full force and effect of an original signature. All
fully executed counterparts, whether original executions or facsimile executions
or a combination, shall be construed together and shall constitute one and the
same agreement.
SECTION 11.12 Press Releases.
MedCath and Practice shall each approve any press releases regarding
this Agreement and its consummation; provided, however, MedCath shall be
entitled to release any information it deems necessary or appropriate as a
public company without the consent of Practice provided MedCath will use
reasonable efforts to provide Practice an advance copy of any such release and
the opportunity to comment.
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<PAGE>
SECTION 11.13 Access to Records After Closing.
Practice will cause its counsel and certified public accountants to
afford to the representatives of MedCath, including its counsel and accountants,
reasonable access to, and copies of, any records not transferred to MedCath,
including, but not limited to, audit and tax work papers. MedCath will afford to
the representatives of Practice reasonable access to, and copies of, the records
transferred to MedCath at the Closing during normal business hours after the
Closing Date. Copies furnished to the party gaining such access shall be
furnished at the cost of the recipient.
SECTION 11.14 Disclosure of Certain Information.
Practice grants MedCath authorization to disclose aggregate financial
history and financial and other information about Practice and about the
Practice (a) in order for MedCath to comply with disclosure requirements in
connection with the sale and registration of its securities, (b) to parties with
which MedCath is considering entering into a joint venture relationship or
corporate reorganization transaction, and (c) to lenders, investment bankers and
other officials as deemed necessary by MedCath.
SECTION 11.15 Attorneys' Fees.
If legal action is commenced to enforce this Agreement, the prevailing
party in such action shall be entitled to recover its costs and reasonable
attorneys' fees in addition to any other relief granted.
SECTION 11.16 Cure of Default.
MedCath shall have the right, but not the obligation, upon notice to
Practice and upon such party's failure to cure within a reasonable time, to cure
any default of Practice and to satisfy any condition precedent to MedCath's
obligation to close which can be cured and to deduct the amount so paid from the
amounts payable by MedCath at the Closing.
SECTION 11.17 Severability.
If any provision of this Agreement shall be held invalid under any
applicable law, such invalidity shall not affect any other provision of this
Agreement that can be given effect without the invalid provision, and, to this
end, the provisions hereof are severable.
SECTION 11.18 Third-Party Beneficiary.
The parties acknowledge and agree that Manager is a third-party
beneficiary of this Agreement and shall be independently entitled to the
benefits hereof and shall have an independent right to enforce the rights of
MedCath and/or Manager hereunder.
-34-
<PAGE>
SECTION 11.19 Arbitration.
Other than with respect to any claim or action for equitable or
injunctive relief, any controversy, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration, which shall be conducted in Corpus Christi, Texas in accordance
with the National Health Lawyers Association Alternative Dispute Resolution
Service Rules of Procedure for Arbitration, and judgment on the award rendered
by the arbitrator may be entered into any court having jurisdiction thereof.
SECTION 11.20 Contract Modifications for Prospective Legal Events.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision or regulatory agency or legal counsel in such a
manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, MedCath and Practice shall amend this Agreement as
necessary to eliminate such economic and financial arrangements between MedCath
and Practice. To the extent the parties cannot agree on any such amendment or
changes, the matter shall be submitted to binding arbitration upon the request
of either party and through the arbitration process an equitable modification
shall be implemented or an equitable termination of the Agreement and the
relationship shall be made based on all of the facts and circumstances.
SECTION 11.21 Acknowledgment Regarding Attorney-Client Relationships.
Practice and Shareholders acknowledge and agree that they have elected
from time to time to communicate directly with MedCath's attorneys, that they
have initiated such communications and that they have been advised and were
aware at all times of their rights and the advisability of retaining and
utilizing legal counsel for all purposes related to the transactions and
agreements contemplated by this Agreement.
Such parties further acknowledge and agree that Moore & Van Allen, has
served solely as legal counsel for MedCath Incorporated and MedCath Physician
Management, Inc. and not as legal counsel to Valley Cardiology, P.A. or its
Shareholders.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) effective as of the day and year first above
written.
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<PAGE>
EXECUTION PAGE
TO THE
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH PHYSICIAN MANAGEMENT, INC.
AND
VALLEY CARDIOLOGY, P.A.
December 12, 1997
VALLEY CARDIOLOGY, P.A.
By: /s/ Paul Manoharan
-------------------------------------
Title: /s/ President
----------------------------------
MEDCATH PHYSICIAN MANAGEMENT, INC.
By: /s/ Ken Petronis
-------------------------------------
Title: /s/ President, PPM Division
----------------------------------
<PAGE>
The undersigned individuals hereby also individually make to MedCath the
representation and warranties regarding Practice contained in Sections 3.1, 3.2,
3.13 and 3.27 of this Agreement and acknowledge and agree to be bound by the
terms and conditions of Section 5.9, Section 10.1(b) and Section 11.21 and
Schedule 10.1(b) of this Agreement, and thus the undersigned hereby execute this
Agreement.
/s/ Paul Manoharan
-----------------------------------
Paul Manoharan, M.D.
/s/ Benjamin Robolino
-----------------------------------
Benjamin Robolino, M.D.
/s/ Ofsman Quintana
-----------------------------------
Ofsman Quintana, M.D.
/s/ Tawhid Shuaib
-----------------------------------
Tawhid Shuaib, M.D.
<PAGE>
LIST OF SCHEDULES
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
3.1 Practice's Articles of Incorporation and Bylaws
3.2 List of Ownership Interests
3.3 List of Subsidiaries, Affiliates, Affiliated Companies and Joint Ventures
3.4 Practice's Financial Statements
3.5 List of Undisclosed Liabilities
3.6 List of Recent Changes
3.7(a) List of Encumbrances
3.7(b) List of Security Interests (Lien Search)
3.8 Contracts and Leases
3.9 Defaults and Consents
3.10 Pending Litigation and Claims
3.11(a) Governmental Actions
3.11(b) List of Governmental Licenses and Permits
3.14 List of Employees with Annual Compensation
3.15 Labor Matters
<PAGE>
3.16(a) List of Insurance Policies
3.16(b) List of Past Malpractice Insurance Policies
3.16(c) List of Claims in Excess of $5,000
3.21 Accounts Receivable
3.22 Employee Benefit Plans
3.24 List of Bank Accounts and Officers
3.25 Environmental Matters
10.1(b) Liquidated Damages
</TABLE>
<PAGE>
SCHEDULE 10.1(b)
TO THE
MASTER TRANSACTION AGREEMENT
BY AND BETWEEN
MEDCATH PHYSICIAN MANAGEMENT, INC.
AND
VALLEY CARDIOLOGY, P.A.
December 12, 1997
Liquidated Damages
1. In the event of a breach of Section 5.9 of the Agreement due to a
Shareholder's ceasing to be employed by Practice for any reason other than as a
result of his death or permanent disability (a "Breaching Physician"), the
amount of "Liquidated Damages" immediately due to MedCath from Shareholders and
Practice shall equal the Breaching Physician's Consideration Allocation.
"Consideration Allocation" shall mean the amount listed in Paragraph 2 below
that is in turn allocated to the Breaching Physician as provided in Paragraph 3
below. Such obligation to pay the Liquidated Damages shall be a joint and
several liability of the Practice and the Breaching Physicians.
2. The "Consideration Allocation" to be allocated among the Shareholders
shall equal:
$[ ] If the breach occurs between Closing and the last
day of the twelfth (12th) month after Closing.
$[ ] If the breach occurs between the first day of the
thirteenth (13th) month and the last day of the
twenty-fourth (24th) month after Closing.
$[ ] If the breach occurs between the first day of the
twenty-fifth (25th) month and the last day of the
thirty-sixth (36th) month after Closing.
$[ ] If the breach occurs between the first day of the
thirty-seventh (37th) month and the last day of the
forty-eighth (48th) month after Closing.
$[ ] If the breach occurs between the first day of the
forty-ninth (49th) month and the last day of the
sixtieth (60th) month after Closing.
In the event that Liquidated Damages are due to MedCath hereunder as result of
events occurring after the second (2nd) anniversary of the Closing Date, the
Consideration Allocation due hereunder from Practice and the Shareholders shall
be reduced by an amount determined by multiplying the Consideration Allocation
as provided above in this paragraph 2 by a fraction, the numerator of which
shall be the number of months which have passed after the second (2nd)
anniversary of the Closing Date
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
<PAGE>
at the time of the events giving rise to MedCath's right to Liquidated Damages
under this Agreement, and the denominator of which shall equal to thirty six
(36).
3. Listed below is the allocation of the Consideration Allocation among
the Shareholders as determined by Practice for which such Shareholder shall be
liable to MedCath if such Shareholder becomes a Breaching Physician:
Percentage of Consideration Allocation
Shareholder Allocated to each Shareholder
- ----------- -----------------------------
Paul Manoharan, M.D. [ ]%
Benjamin Robolino, M.D. [ ]%
Ofsman Quintana, M.D. [ ]%
Tawhid Shuaib, M.D. [ ]%
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
4. Notwithstanding the payment of Liquidated Damages as set forth above,
nothing herein shall release the Practice or the Breaching Physician from any
noncompetition covenant or restriction which shall remain in full force and
effect and MedCath shall also be entitled to any other equitable relief to which
it is entitled under this Agreement, the Service Agreement, any employment
agreement or otherwise (e.g., injunctive relief).
SERVICE AGREEMENT
BETWEEN
MEDCATH PHYSICIAN MANAGEMENT, INC.
AND
VALLEY CARDIOLOGY, P.A.
December 12, 1997
<PAGE>
TABLE OF CONTENTS
TO THE
SERVICE AGREEMENT
BETWEEN
MEDCATH PHYSICIAN MANAGEMENT, INC.
AND
VALLEY CARDIOLOGY, P.A.
December 12, 1997
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I RELATIONSHIP OF THE PARTIES............................................................................1
SECTION 1.1 Independent Relationship.....................................................................1
SECTION 1.2 Responsibilities of the Parties..............................................................2
SECTION 1.3 Practice's Matters...........................................................................2
SECTION 1.4 Patient Referrals............................................................................2
ARTICLE II DEFINITIONS...........................................................................................2
ARTICLE III FACILITIES TO BE PROVIDED BY MANAGER.................................................................6
SECTION 3.1 Facilities...................................................................................6
SECTION 3.2 Independence of Practice.....................................................................7
ARTICLE IV DUTIES OF THE POLICY BOARD............................................................................7
SECTION 4.1 Formation and Operation of the Policy Board..................................................7
SECTION 4.2 Duties and Responsibilities of the Policy Board..............................................7
ARTICLE V ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER......................................................9
SECTION 5.1 Performance of Management Functions..........................................................9
SECTION 5.2 Financial Planning Goals.....................................................................9
SECTION 5.3 Audits and Statements.......................................................................10
SECTION 5.4 Inventory and Supplies......................................................................10
SECTION 5.5 Management Services and Administration......................................................11
SECTION 5.6 Executive Director..........................................................................14
SECTION 5.7 Personnel...................................................................................15
SECTION 5.8 Events Excusing Performance.................................................................15
SECTION 5.9 Compliance with Applicable Laws.............................................................15
SECTION 5.10 Quality Assurance..........................................................................15
SECTION 5.11 Ancillary Services.........................................................................16
i
<PAGE>
ARTICLE VI OBLIGATIONS OF PRACTICE..............................................................................16
SECTION 6.1 Professional Services.......................................................................16
SECTION 6.2 Medical Practice............................................................................16
SECTION 6.3 Physician Employees.........................................................................16
SECTION 6.4 Professional Insurance Eligibility..........................................................17
SECTION 6.5 Fees for Professional Services..............................................................17
SECTION 6.6 Name........................................................................................17
SECTION 6.7 Material Decisions..........................................................................17
SECTION 6.8 Employment of Physician Shareholders........................................................18
SECTION 6.9 Life Insurance..............................................................................19
SECTION 6.10 Profit Sharing Plan........................................................................19
ARTICLE VII RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES........................................................20
SECTION 7.1 Restrictive Covenants by Practice...........................................................21
SECTION 7.2 Restrictive Covenants By Current Physician Shareholders and Physician Employees.............21
SECTION 7.3 Restrictive Covenants By Future Physician Employees.........................................22
SECTION 7.4 Physician Shareholder and Physician Employee Liquidated Damages.............................22
SECTION 7.5 Development of Exclusive Ventures...........................................................23
SECTION 7.6 Enforcement.................................................................................23
ARTICLE VIII FINANCIAL ARRANGEMENTS.............................................................................24
SECTION 8.1 Management Fees.............................................................................24
SECTION 8.2 Collection of Management Fee................................................................25
SECTION 8.3 Limited Guaranty Agreement..................................................................25
ARTICLE IX RECORDS..............................................................................................26
SECTION 9.1 Patient Records.............................................................................26
SECTION 9.2 Records Owned by Manager....................................................................26
SECTION 9.3 Access to Records...........................................................................26
ARTICLE X INSURANCE AND INDEMNITY...............................................................................26
SECTION 10.1 Insurance to be Maintained by Practice.....................................................26
SECTION 10.2 Insurance to be Maintained by Manager......................................................26
SECTION 10.3 Tail Insurance Coverage....................................................................27
SECTION 10.4 Additional Insureds........................................................................27
SECTION 10.5 Indemnification............................................................................27
SECTION 10.6 Rules Regarding Indemnification............................................................28
SECTION 10.7 Offset.....................................................................................28
ARTICLE XI TERM AND TERMINATION.................................................................................29
SECTION 11.1 Term of Agreement..........................................................................29
SECTION 11.2 Extended Term..............................................................................29
SECTION 11.3 Termination by Practice....................................................................29
SECTION 11.4 Termination by Manager.....................................................................30
ii
<PAGE>
SECTION 11.5 Actions after Termination..................................................................30
SECTION 11.6 Closing of Repurchase by Practice and Effective Date of Termination........................31
ARTICLE XII GENERAL PROVISIONS..................................................................................31
SECTION 12.1 Assignment.................................................................................31
SECTION 12.2 Whole Agreement, Modification..............................................................32
SECTION 12.3 Notices....................................................................................32
SECTION 12.4 Binding on Successors......................................................................32
SECTION 12.5 Waiver of Provisions.......................................................................32
SECTION 12.6 Governing Law..............................................................................32
SECTION 12.7 Severability...............................................................................33
SECTION 12.8 Additional Documents.......................................................................33
SECTION 12.9 Attorneys' Fees............................................................................33
SECTION 12.10 Time is of the Essence....................................................................33
SECTION 12.11 Confidentiality...........................................................................33
SECTION 12.12 Contract Modifications for Prospective Legal Events.......................................34
SECTION 12.13 Remedies Cumulative; Survivability........................................................34
SECTION 12.14 Language Construction.....................................................................34
SECTION 12.15 No Obligation to Third Parties............................................................34
SECTION 12.16 Communications............................................................................35
SECTION 12.17 Counterpart Executions; Facsimiles........................................................35
SECTION 12.18 Arbitration...............................................................................35
</TABLE>
iii
<PAGE>
SERVICE AGREEMENT
THIS SERVICE AGREEMENT is made and entered into the 12th day of
December, 1997 by and between MEDCATH PHYSICIAN MANAGEMENT, INC., an Arizona
corporation ("Manager") and VALLEY CARDIOLOGY, P.A., a Texas professional
association ("Practice"), is binding upon execution, and is effective the 1st
day of January, 1998.
RECITALS:
WHEREAS, Practice is a group medical practice with offices in Hidalgo
County, Texas which provides medical care to the general public;
WHEREAS, Manager is in the business of owning certain assets of and
managing and administering medical clinics, and providing support services to
and furnishing medical practices with the necessary facilities, equipment,
personnel, supplies and support staff while recognizing that each such practice,
through its physicians, must retain sole responsibility for the medical care of
its patients and thereby respecting the physician-patient relationship which
shall be maintained strictly between the physicians of such a practice and their
patients;
WHEREAS, Practice desires to obtain the services of Manager in
performing such management functions so as to permit the physicians of Practice
to devote their efforts on a concentrated and continuous basis to the rendering
of medical services to their patients;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Practice hereby agrees to purchase the management and support
services herein described and Manager agrees to provide such services on the
terms and conditions provided in this Agreement.
ARTICLE I
RELATIONSHIP OF THE PARTIES
SECTION 1.1 Independent Relationship.
Practice and Manager intend to act and perform as independent
contractors, and the provisions hereof are not intended to create any
partnership, joint venture, agency or employment relationship between the
parties. Notwithstanding the authority granted to Manager herein, Manager and
Practice agree that Practice shall retain the authority to direct the medical,
professional, and ethical aspects of its medical practice. Each party shall be
solely responsible for and shall comply with all state and federal laws
pertaining to employment taxes, income withholding, unemployment compensation
contributions and other employment related statutes applicable to that party.
<PAGE>
SECTION 1.2 Responsibilities of the Parties.
As more specifically set forth herein, Manager shall provide Practice
with offices and facilities, equipment, supplies, support personnel, and
management and financial advisory services. As more specifically set forth
herein, Practice shall be responsible for the recruitment and hiring of
physicians. Manager shall neither exercise control over nor interfere with the
physician-patient relationship, which shall be maintained strictly between the
physicians of Practice and their patients.
SECTION 1.3 Practice's Matters.
Tax preparation, tax planning, and pension and investment planning (and
expenses relating solely to these internal business matters) shall remain the
sole responsibility of Practice and the individual Physician Shareholders.
SECTION 1.4 Patient Referrals.
The parties agree that the benefits to Practice hereunder do not
require, are not payment for, and are not in any way contingent upon the
admission, referral or any other arrangement for the provision of any item or
service offered by Manager to any of Practice's patients in any facility or
laboratory controlled, managed or operated by Manager.
ARTICLE II
DEFINITIONS
Many of the capitalized words and phrases used in this Agreement are
defined below. Some defined terms used in this Agreement are not listed below,
but are defined in the Section in which they are first used because they are
better understood in that context.
"Adjustments" means any adjustments for uncollectible
accounts, discounts, Medicare and Medicaid disallowances, worker's
compensation, employee/dependent health care benefit programs,
professional courtesies according to historical operation of Practice
and other activities that do not generate a collectible fee.
"Affiliate" means, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common
control with such Person, (ii) any Person directly or indirectly owning
or controlling twenty five percent (25%) or more of any class of
outstanding equity interests of such Person or of any Person which such
Person directly or indirectly owns or controls twenty five percent
(25%) or more of any class of equity interests, (iii) any officer,
director, general partner or trustee of such Person, or any Person of
which such Person is an officer, director, general partner or trustee,
or (iv) any Person who is an officer, director, general partner,
trustee or holder of twenty five percent (25%) or more of the equity
interests of any Person described in clauses (i) through (iii) of this
sentence. Practice is not an Affiliate of Manager.
2
<PAGE>
"Agreement" means this Service Agreement between Practice and
Manager.
"Ancillary Revenues" means (a) all fees or revenues actually
recorded each month (net of Adjustments) by or on behalf of Practice
which are not Physician Services Revenues or Capitation Revenues,
including medical director fees, global and technical fees from medical
ancillary services, and fees for medical management and utilization,
and other distributions to Practice from health care related
investments, and including any interest, investment, rental or similar
payments or income made or payable to Practice, plus (b) revenues from
capitation allocated to Ancillary Revenues which are not otherwise
included in Capitation Revenues or Physician Services Revenues;
excluding however (a) revenue from investments made individually by
Physician Shareholders; and (b) revenue from medical director fees of a
Physician Shareholder if (i) such medical directorships are not in
violation of any agreement to which the Physician Shareholder is bound,
and (ii) such revenue was not included or reflected in financial
information or statements of Practice which were provided to Manager in
order to induce Manager to enter into the transactions contemplated by
the Master Transaction Agreement.
"Asset Purchase Agreement" means that Asset Purchase Agreement
between Practice and Parent to which this Agreement is an exhibit.
"Capitation Revenues" means all payments received or due from
managed care organizations or other payors when payment is made
periodically on a per member basis for the partial or total medical
care needs of a patient, co-payments and all HMO incentive bonuses
including hospital incentive bonuses.
"Executive Director" means that individual hired by Manager
pursuant to Section 5.6 hereof to manage and administer all of the
day-to-day business functions of Practice.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards
Board or in such other statements by such other entity or other
practices and procedures as may be approved by a significant segment of
the accounting profession, which are applicable to the circumstances as
of the date of determination. For purposes of this Agreement, GAAP
shall be applied in a manner consistent with the historic practices
used by Parent.
"Manager Account" means the bank account of Manager described
in Section 5.5(b)(ii).
"Manager Expenses" means, in addition to those expenses
identified elsewhere herein, all operating and non-operating expenses
of Manager incurred in the operation of Practice, including, without
limitation:
(i) Salaries, benefits and other direct
costs of all employees of Manager at Practice (but excluding
all other Physician Employees);
3
<PAGE>
(ii) Direct costs of all employees or
consultants of Manager (including Affiliates of Manager) or
Practice engaged by the Executive Director with Policy Board
approval to provide services at or in connection with Practice
or who actually provide services at or in connection with
Practice required for improved clinic performance; provided,
however, only that portion of such employee's or consultant's
costs without mark-up by Manager that is allocable to work
performed at or for the benefit of Practice will be a Manager
Expense;
(iii) Obligations of Manager under leases or
subleases relating to the operations of Practice;
(iv) Personal property and intangible taxes
assessed against Manager's assets utilized in the management
of Practice, commencing on the date of this Agreement;
(v) The amount of interest on all advances
made pursuant to Section 5.5(b)(iii) to provide financing or
working capital to cover Manager Expenses, Physician Expenses,
Practice Surplus and the Management Fee (interest expense will
be charged for funds borrowed from outside sources as well as
from Manager; in the latter case, charges will be computed at
a floating rate that is equal to the prime rate of interest
charged by NationsBank plus one percentage point) per annum;
(vi) Malpractice insurance expenses to the
extent provided in Article X hereof;
(vii) Other expenses incurred by Manager in
carrying out its obligations under the Service Agreement in
accordance with the budget adopted by the Policy Board or
otherwise approved by the Policy Board;
(viii) Payment of interest on indebtedness
incurred by Manager or its Affiliates for the use or benefit
of Practice; and
(ix) Amortization or depreciation or
write-off of assets acquired by Manager for the use or benefit
of Practice (exclusive of amortization of the goodwill
acquired from Practice by Parent pursuant to the Asset
Purchase Agreement).
The term "Manager Expenses" shall not include (A) any corporate
overhead charges, other than the kind of items listed above, from
Parent; (B) any federal or state income taxes of Manager; or (C) any
expenses which are expressly designated herein as Physician Expenses
which are expenses or responsibilities directly of Practice.
"Net Practice Revenues" means the sum of Ancillary Revenues,
Capitation Revenues and Physician Services Revenues excluding however
(a) revenue from investments made individually by Physician
Shareholders; and (b) revenue from medical
4
<PAGE>
director fees of a Physician Shareholder if (i) such medical
directorships are not in violation of any agreement to which the
Physician Shareholder is bound, and (ii) such revenue was not included
or reflected in financial information or statements of Practice which
were provided to Manager in order to induce Manager to enter into the
transactions contemplated by the Master Transaction Agreement.
"Operating Account" means the bank account of Practice
established as described in Section 5.5(b)(ii).
"Parent" means MedCath Incorporated, the sole shareholder of
Manager.
"Person" means any natural person, partnership, trust, estate,
association, limited liability company, corporation, custodian,
nominee, governmental instrumentality or agency, body politic or any
other entity in its own or any representative capacity.
"Physician Employees" means those individuals who are
employees of Practice or are otherwise under contract with or under the
control of Practice to provide professional services to Practice
patients and are duly licensed physicians to provide professional
medical services in the State of Texas and any other employee of the
Practice who must continue to be employed by Practice in order for
Practice to be reimbursed for such employee's services;
"Physician Expenses" means interest on debts of Practice
approved by the Policy Board and compensation paid by Practice to any
employee of Practice who is not a physician, exclusive in all events,
however, of compensation, benefits, bonuses and any other expenses
historically categorized or treated by Practice as optional expenses
("Optional Expenses") paid by Practice to or on behalf of any of its
physicians including both those who are and are not Physician
Shareholders. It is acknowledged and agreed, however, that the
following expenses to the extent not provided otherwise in Section
6.10(f) (collectively, "Extra Expenses") shall not constitute Physician
Expenses and shall instead be paid out of Practice Surplus: (i) all
contributions allocable to any participant under any pension or
profit-sharing plan qualified under Section 401(a) of the Internal
Revenue Code sponsored or maintained by the Practice to the extent
provided under Section 6.10; (ii) all costs relating to sponsoring,
maintaining, and operating any other employee benefit plan, program, or
arrangement, such as a group health plan or other welfare benefit
program, sponsored or maintained by the Practice to the extent provided
in Section 6.10; (iii) all administrative expenses incurred by the
Practice in sponsoring, maintaining, and operating any plan, program,
or arrangement as set forth above in (i) or (ii) to the extent provided
in Section 6.10.
"Physician Services Revenues" means (a) all fees actually
recorded each month (net of Adjustments), by or on behalf of Practice
as a result of professional medical services personally furnished to
patients by Physician Employees and other fees or income generated in
their capacity as professionals, whether rendered in an inpatient or
outpatient setting, plus (b) revenues from capitation allocated to
Physician Services
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Revenues which are not otherwise included in Capitation Revenues or
Ancillary Revenues.
"Physician Shareholders" means those physicians who are
shareholders of Practice at the time this Agreement is executed
(whether or not they remain shareholders) and any physicians who
subsequently become shareholders of Practice (whether or not they
remain shareholders).
"Policy Board" means the board composed of members as
established pursuant to Section 4.1.
"Practice Account" means the bank account of Practice
established as described in Section 5.5(b)(ii).
"Practice Surplus" means an amount equal to Net Practice
Revenue minus accrued but unpaid Management Fee minus Physician
Expenses minus reserves for debt repayment, for the applicable period.
"Professional Compensation" means compensation, bonuses,
benefits and related expenses, including without limitation, Optional
Expenses, and taxes, social security and unemployment insurance or
other required withholdings with respect to certain licensed health
care personnel of Practice. Professional Compensation due to any
physician employed or engaged by Practice shall be paid solely from
Practice Surplus.
"Related Party" means (a) with respect to any individual, such
individual's spouse, any descendants (whether natural, adopted or in
the process of adoption), any sibling, a spouse of any descendant or
sibling, any ancestor, any trust twenty-five percent (25%) or more of
the beneficial interests of which are owned by such individuals or any
of them, and any corporation, association, partnership or limited
liability company twenty-five (25%) or more of the equity interests of
which are owned by those above-described individuals or trusts, (b)
with respect to any trust, the owners of twenty-five (25%) or more of
the beneficial interests of such trust, and (c) with respect to any
corporation, association, partnership or limited liability company, the
owners of twenty-five percent (25%) or more of the outstanding equity
interests in such entity.
"Territory" means the area within Hidalgo and Starr Counties,
Texas.
ARTICLE III
FACILITIES TO BE PROVIDED BY MANAGER
SECTION 3.1 Facilities.
Upon the effective date of this Agreement, Practice shall provide to
Manager Practice's office and facilities in order to enable Manager to fulfill
its obligations under this Agreement. Manager shall consult with Practice
regarding the condition, use and needs for the offices,
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facilities and improvements. The Policy Board shall determine any changes to the
office and facility locations of Practice.
SECTION 3.2 Independence of Practice.
Manager and Practice agree that Practice, as an independent contractor,
is a separate organization that retains the authority to direct the medical,
professional, and ethical aspects of its medical practice.
ARTICLE IV
DUTIES OF THE POLICY BOARD
SECTION 4.1 Formation and Operation of the Policy Board.
The parties shall establish a Policy Board which shall be responsible
for developing management and administrative policies for the overall operation
of Practice. The Policy Board shall consist of the shareholders of Practice and
Manager shall designate, in its sole discretion, two (2) members of the Policy
Board. Except as may otherwise be provided, the act of a majority of the members
of the Policy Board shall be the act of the Policy Board.
SECTION 4.2 Duties and Responsibilities of the Policy Board.
The Policy Board shall have the following duties and obligations:
(a) Capital Improvements and Expansion. Any renovation and
expansion plans and capital equipment expenditures and the financing
thereof with respect to Practice shall be reviewed and approved by the
Policy Board, which for this purpose must include the approval of at
least one member designated by Manager, and shall be based upon
economic feasibility, physician support, productivity and then current
market conditions.
(b) Annual Budgets. All annual capital and operating budgets
prepared by Manager, as set forth in Section 5.2, shall be subject to
the review and approval of the Policy Board, and to final approval of
Practice.
(c) Advertising. All advertising and other marketing of the
services performed at Practice, other than advertising or marketing
programs historically implemented by Practice within the budget
approved by the Policy Board shall be subject to the prior review and
approval of the Policy Board and final approval of Practice.
(d) Patient Fees. As a part of the annual operating budget, in
consultation with Practice and Manager, the Policy Board shall review
and adopt the fee schedule for all physician and ancillary services
rendered by Practice subject to final approval of Practice.
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(e) Ancillary Services. The Policy Board shall approve
Practice provided ancillary services based upon the pricing, access to
and quality of such services.
(f) Provider and Payor Relationships. Decisions regarding the
establishment or maintenance of relationships with institutional health
care providers and payors and approval of managed care contracts shall
be made by the Policy Board in consultation with Practice.
(g) Strategic Planning. The Policy Board shall develop
long-term strategic planning objectives.
(h) Financing. All loans, leases and other financing obtained
or proposed to be obtained for the benefit of Practice for any reason
shall be subject to the review and approval of the Policy Board.
(i) Physician Hiring. The Policy Board shall determine the
number and type of physicians required for the efficient operation of
Practice, provided Practice shall have the final authority over
physician hiring and termination. The approval of the Policy Board,
which for this purpose must include the approval of at least one member
designated by Manager, shall be required for any variations to, or any
exceptions from, the restrictive covenants which must be included in
any physician employment contract in conformance with Article VII
hereof. Notwithstanding anything herein to the contrary, all decisions
with respect to hiring and terminating the employment of physicians
shall be subject to the final approval of Practice.
(j) Executive Director. The selection and retention of the
Executive Director pursuant to Section 5.6 by Manager shall be subject
to the reasonable approval of the Policy Board, which for this purpose
must include the approval of at least one member designated by Manager.
If Practice is dissatisfied with the services provided by the Executive
Director, Practice shall refer the matter to the Policy Board. Manager
and the Policy Board shall each in good faith determine whether the
performance of the Executive Director could be brought to acceptable
levels through counsel and assistance, or whether the Executive
Director should be terminated. Manager shall have the ultimate
authority to terminate the Executive Director. Prior to the time the
initial Executive Director commences work in connection with the Clinic
or during any time period for which there is no Executive Director,
Manager shall use its other personnel (or personnel of its affiliates)
to perform the function of the Executive Director and shall be
compensated at the rate of two hundred dollars ($200) for each eight
(8) hour day for doing so and such compensation shall be a Manager
Expense.
(k) Grievance Referrals. The Policy Board shall consider and
make final decisions regarding grievances pertaining to matters not
specifically addressed in this Agreement as referred to it by
Practice's governing body.
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ARTICLE V
ADMINISTRATIVE SERVICES TO BE PROVIDED BY MANAGER
SECTION 5.1 Performance of Management Functions.
Beginning with the effective date of this Agreement, Manager shall
provide or arrange for the services set forth in this Article V and otherwise as
set forth in this Agreement, the cost of all of which shall be included in
Manager Expenses. Manager is hereby expressly authorized to perform its services
hereunder in whatever manner it deems reasonably appropriate to meet the
day-to-day requirements of Practice operations in accordance with the decisions
of the Policy Board, including, without limitation, performance of some of the
business office functions at locations other than Practice. Practice will not
act in a manner which would prevent Manager from efficiently managing the
day-to-day operations of Practice in a business-like manner.
SECTION 5.2 Financial Planning Goals.
(a) Preparation of Budgets. Annually and at least thirty (30)
days prior to the commencement of each fiscal year of Practice, Manager
shall prepare and deliver to the Policy Board for its approval an
operational and capital budget for such fiscal year ("Annual Budget"),
setting forth an estimate of the operating revenues and expenses
associated with the provision of professional services by Practice
(including, without limitation, all costs associated with the leased
premises used by Practice, equipment, supplies, services, and personnel
provided by Manager to Practice pursuant to this Agreement, and all
compensation costs associated with Practice and Practice personnel) and
sources and uses of capital expenditures. Such budget shall separately
address Physician Expenses, Manager Expenses and Practice Surplus which
shall be in line with historical expenses of Practice and which are
reasonable and customary for Practice and shall include reasonable
reserves for the repayment of principal on all borrowings of Practice.
Any non-budgeted expenses shall be reviewed and approved by the Policy
Board. Any such non-budgeted expense in excess of $5,000 per year
undertaken by Practice without approval by the Policy Board, which for
this purpose must include the approval of at least one member
designated by Manager, shall be deducted from Practice Surplus (except
for emergency circumstances). Manager shall use its best efforts to
perform its duties and obligations under this Agreement such that the
actual revenues, costs, and expenses associated with the provision of
professional services during any applicable period of Practice's fiscal
year shall be consistent with the Annual Budget. Manager shall prepare
and submit to the Policy Board for its approval, and shall thereafter
adopt, an Annual Budget for the current fiscal year as soon as
practicable. In the event that the Policy Board does not approve any
such Annual Budget, then the Annual Budget for the previous year shall
be used until the Policy Board, using its best efforts, approves a new
Annual Budget.
(b) Service Development. Manager realizes that Practice has
opportunities to provide new services and utilize new technologies that
will require capital expenditures
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and Manager anticipates that such opportunities may include new and
replacement equipment as may be economically justified and medically
necessary. Development of new services will depend on, among other
factors, physician composition, anticipated volume, reimbursement and
number of physicians, physician support, Practice performance, and
appropriate physician specialty mix, be subject to the requirements of
any applicable leases and subleases, and will require Policy Board
approval as a precondition to any capital expenditure.
(c) Capital Investment. Manager will use its commercially
reasonable best efforts to obtain funds for all capital expenditures
approved by the Policy Board. Sources of capital, including working
capital, for such funds shall be determined by the Policy Board and may
be (i) borrowings from Manager or its Affiliates (at the rate set forth
in Article II at subparagraph (v) of the definition of Manager
Expenses) or (ii) borrowings, leases or other financing methods through
independent third-party financial institutions in accordance with
Section 4.2(h) hereof. It is acknowledged and agreed that the payment
of interest on any such indebtedness shall constitute Manager Expenses.
Manager shall use its reasonable efforts to make funds available for
borrowing by Practice but Manager only shall be obligated to make such
loans as it determines in its sole and absolute discretion that it
should make.
In the event Practice obtains a commitment for financing a
particular project at a rate less than that obtained or charged by
Manager hereunder, and on other terms no less favorable than those
obtained by or available to Manager, and the Policy Board approves such
alternate financing, the project will be financed with such alternate
financing or the excess interest will not be charged as a Manager
Expense.
SECTION 5.3 Audits and Statements.
Manager shall cause to be prepared annual financial statements for the
operations of Practice and Manager and shall cause the financial statements of
Manager to be included in the audited financial statements of Parent by a
certified public accountant selected by Manager in connection with the audit of
the financial statements of Parent. All financial statements shall be prepared
in accordance with GAAP on a consistent basis and the cost thereof shall be a
Manager Expense. Manager shall prepare monthly unaudited financial statements
containing a balance sheet and statements of income from Practice operations,
which shall be delivered to Practice within thirty (30) days after the close of
each calendar month. In addition, Practice shall be solely responsible for the
cost of the preparation and any audit of the financial statements or tax returns
of Practice.
SECTION 5.4 Inventory and Supplies.
Manager shall order and purchase inventory and supplies, and such other
ordinary, necessary or appropriate materials of a quality consistent with the
past customary course of conduct and manner of operating Practice, the cost of
which shall be a Manager Expense.
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SECTION 5.5 Management Services and Administration.
(a) Practice hereby appoints Manager as its sole and exclusive
manager and administrator of all day-to-day business functions and
Manager hereby accepts such appointment subject to the terms of this
Agreement. Practice agrees that the purpose and intent of this Service
Agreement is to relieve the Physician Employees to the maximum extent
possible of the administrative, accounting, personnel and business
aspects of the medical practice, the current business of Practice
handled by employees who will become employees of Manager and
administrative duties with respect to property leased or subleased by
Practice to Manager, with Manager assuming responsibility and being
given all necessary authority to perform these functions in accordance
with the general standards approved by the Policy Board. Manager agrees
that Practice and only Practice will perform the medical functions of
its medical practice. Manager will have no authority, directly or
indirectly, to perform, and will not perform, any medical function.
Manager may, however, advise Practice as to the relationship between
its performance of medical functions and the overall administrative and
business functioning of its medical practice. To the extent that they
assist Practice in performing medical functions, all clinical personnel
performing patient care services shall be subject to the professional
direction and supervision of Practice and, in the performance of such
medical functions, shall not be subject to any direction or control by,
or liability, to, Manager, except as may be specifically authorized by
Practice.
(b) (i)Manager shall, on behalf of Practice, bill
patients and collect the professional fees for medical
services rendered by Practice in its medical practice, for
services performed outside Practice for its hospitalized
patients, and for all other professional and Practice
services. Practice hereby appoints Manager for the term hereof
to be its true and lawful attorney-in-fact, for the following
purposes: (A) to bill patients in Practice's name and on its
behalf; (B) to collect accounts receivable resulting from such
billing in Practice's name and on its behalf; (C) to receive
payments and prepayments from Blue Shield, insurance
companies, from health care plans, Medicare, Medicaid and all
other third party payors; (D) to take possession of and
endorse in the name of Practice (and/or in the name of an
individual physician providing services on behalf of Practice,
such payment intended for purpose of payment of a physician's
bill) any notes, checks, money orders, insurance payments and
other instruments received in payment of accounts receivable;
and (E) to initiate the institution of legal proceedings in
the name of Practice to collect any accounts and monies owed
to Practice in accordance with policies and procedures adopted
by the Policy Board, to enforce the rights of Practice as
creditors under any contract or in connection with the
rendering of any service, and to contest adjustments and
denials by governmental agencies (or their fiscal
intermediaries) as third-party payors. All Adjustments shall
be made in a reasonable manner consistent with past customary
course of conduct of Practice subject to any final adjustments
required by auditors under Section 5.3.
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(ii) Practice shall establish and control a bank
account at a bank (the "Bank") acceptable to Manager (the
"Practice Account"). In connection herewith and throughout the
term of this Agreement, Practice hereby appoints Manager as
Practice's true and lawful agent and attorney-in-fact, and
grants Manager a special power of attorney and Manager hereby
accepts such special power of attorney and appointment, to
deposit in the Practice Account all funds, fees, and revenues
generated by Practice and collected by Manager. Practice shall
execute any and all additional documents required by the Bank
where the Practice Account is held to effectuate the power of
attorney granted herein. Practice shall not draw checks on the
Practice Account. Practice also agrees to establish this
account with the Bank under terms which provide that the
balance of the Practice Account at the close of each working
day is transferred to a bank account of Manager (the "Manager
Account") by means to be designated by Manager. Practice shall
not revoke such daily transfer to the Manager's Account.
Manager shall pay from funds in the Manager Account all
Manager Expenses and the Management Fee as required under the
terms of this Agreement. Practice shall establish a second
account (the "Operating Account") to which Manager shall be a
signatory and to which Manager shall deposit from time to time
out of the Practice Account (to the extent available) amounts
sufficient to enable Manager to pay from that account, on
behalf of Practice, Physician Expenses and Practice Surplus to
be paid by Practice as Professional Compensation as provided
under the terms of this Agreement and principal payment on
debts of Practice which were approved by the Policy Board,
when such repayments are due.
If the balance in the Practice Account after
subtraction of reserves for repayment of debts (to the extent
the debts are not then being repaid) is insufficient to
satisfy the obligations and liabilities of Practice at a
particular point in time, disbursements from the Practice
Account shall be made in the following priority:
(A) Payments of interest and principal on debts of
Practice that were approved by the Policy Board to the extent
then due;
(B) Payments of Management Fee attributable to
collections by Practice from physicians pursuant to Section
7.4;
(C) Payments of Manager Expenses;
(D) Payments of Physician Expenses; and
(E) Pro Rata between the Management Fee (to the
extent not paid pursuant to B above) and Practice Surplus.
(iii) The Accounts Receivable of Practice as of the
Closing Date and thereafter, and the proceeds thereof, shall
be provided by Practice to Manager as working capital to
enable Manager to pay Manager Expenses, Physician
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Expenses, Management Fee and Professional Compensation. If
reasonably necessary, Manager will use its reasonable efforts
to arrange for a third party commercial lender to provide a
working capital line of credit to Practice in excess of that
amount, to enable Manager or Practice as provided herein, to
pay Manager Expenses, Physician Expenses, Management Fee and
Practice Surplus when due (subject however to the obligation
to repay agreed upon working capital advances or other third
party financing) and in accordance with the Annual Budget. In
the event any such advances are provided by Manager or any of
its Affiliates, such advances shall bear interest at the rate
set forth in Article II at subparagraph (v) of the definition
of Manager Expenses except as otherwise provided herein. The
obligation of Practice to repay any such advances to Manager
or its Affiliates shall be evidenced by one or more promissory
notes and shall be secured in accordance with the terms of a
Security Agreement entered into as of December 12, 1997
granting a security interest in the accounts receivable of
Practice to Manager. Interest on such advances shall be paid
monthly. Prior to making advances hereunder, the Policy Board
and Manager shall agree upon the term over which such
principal amounts shall be repaid to Manager, including the
priority of the utilization of Net Practice Revenues for the
repayment of such loans. In addition, Practice shall cooperate
with Manager and execute all necessary documents in connection
with the pledge of such accounts receivable either to Manager,
Manager's lenders or any other lender providing such financing
to Practice.
(c) Manager shall supervise and, to the extent necessary,
maintain custody of all files and records relating to the operation of
Practice, including but not limited to accounting, billing, patient
medical records, and collection records. Patient medical records shall
at all times be and remain the property of Practice and shall be
located at Practice facilities so that they are readily accessible for
patient care. The management of all files and records shall comply with
applicable state and federal statutes. Manager shall use its reasonable
efforts consistent with the past operation of Practice to preserve the
confidentiality of patient medical records and use information
contained in such records only for the limited purpose necessary to
perform the services set forth herein; provided, however, in no event
shall a breach of said confidentiality be deemed a default under this
Agreement.
(d) Manager shall supply to Practice necessary clerical,
accounting, bookkeeping and computer services, printing, postage and
duplication services, medical transcribing services and any other
ordinary, necessary or appropriate service for the operation of
Practice.
(e) Manager shall provide the data necessary for Practice to
prepare its annual income tax returns and financial statements. Manager
personnel shall continue to provide the preparatory work currently
provided by Practice personnel. Except as provided above, Manager shall
have no responsibility for the preparation of Practice's federal or
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state income tax returns or the payment of such income taxes and such
costs shall not be Manager Expenses or Physician Expenses, and shall be
borne solely by Practice.
(f) Manager shall assist Practice in recruiting additional
physicians, carrying out such administrative functions as may be
appropriate such as advertising for and identifying potential
candidates, checking credentials, and arranging interviews; provided,
however, Practice shall interview and make the ultimate decision as to
the suitability of any physician to become associated with Practice.
Candidate screening and interviewing procedures shall be consistent
with the past operation of Practice or as otherwise adopted by the
Policy Board. All physicians recruited by Manager and accepted by
Practice shall be the sole employees of Practice, to the extent such
physicians are hired as employees. Any expenses incurred in the
recruitment of physicians, including, but not limited to, employment
agency fees, relocation and interviewing expenses shall be budgeted
Manager Expenses. Such expenses shall be pre-approved by the Executive
Director.
(g) Subject to Policy Board approval, Manager shall negotiate
and administer all managed care contracts on behalf of Practice and
shall consult with Practice on all professional or clinical matters
relating thereto.
(h) Subject to the provisions of Sections 5.3 and Section
5.5(e), Manager shall arrange for legal and accounting services related
to Practice operations, the expense for which has been incurred
traditionally in the ordinary course of business, including the cost of
enforcing any physician contract containing restrictive covenants, but
any cost and all other aspects of malpractice suits against Practice
shall be governed by Article X hereof.
(i) Manager shall provide for the proper cleanliness of the
premises in compliance with applicable federal and state regulations,
and maintenance and cleanliness of the equipment, furniture and
furnishings located upon such premises.
(j) Manager shall make payment for the cost of professional
licensure fees, board certification fees, medical staff dues, and
national organization fees required to maintain professional licenses,
all as historically paid by Practice in accordance with its past
operation.
SECTION 5.6 Executive Director.
Subject to the provisions of Section 4.2(j), Manager shall hire and
appoint an Executive Director to manage and administer all of the day-to-day
business functions of Practice. Manager shall determine the salary and fringe
benefits, of the Executive Director consistent with the budget adopted by the
Policy Board. At the direction, supervision and control of Manager, the
Executive Director, subject to the terms of this Agreement, shall implement the
policies established by the Policy Board and shall generally perform the duties
and have the responsibilities of an administrator. The Executive Director shall
be responsible for organizing
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the agenda for the meetings of the Policy Board referred to in Article IV. As of
the date hereof, Manager shall hire the Practice's current office manager as the
Executive Director at his/her current rate of compensation. Any replacement for
such employee shall be subject to the reasonable consent of Practice.
SECTION 5.7 Personnel.
Manager shall hire as of the date hereof all employees of Practice
other than Physician Employees and shall hereafter provide such personnel as are
reasonably necessary for the conduct of Practice operations. Manager shall
determine and cause to be paid the salaries and fringe benefits of all such
personnel. Such personnel shall be under the direction, supervision and control
of Manager, with those personnel performing patient care services subject to the
professional supervision of Practice. Practice shall consult with Manager if
Practice is dissatisfied with the services of any person. Manager shall in good
faith determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance or whether such employee should
be terminated. All of Manager's obligations regarding staff shall be governed by
the overriding principle and goal of providing high quality medical care
consistent with past practice of Practice. Employee assignments shall be made to
assure consistent and continued rendering of high quality medical support
services and to ensure prompt availability and accessibility of individual
medical support personnel to physicians in order to develop constant, familiar
and routine working relationships between individual physicians and individual
members of the medical support personnel. Manager shall maintain established
working relationships wherever possible and Manager shall make every effort
consistent with sound business practices to honor the specific requests of
Practice with regard to the assignment of its employees.
SECTION 5.8 Events Excusing Performance.
So long as Manager uses its commercially reasonable best efforts,
Manager shall not be liable to Practice for failure to perform any of the
services required herein in the event of strikes, lockouts, calamities, acts of
God, unavailability of supplies or other events over which Manager has no
control for so long as such events continue, and for a reasonable period of time
thereafter.
SECTION 5.9 Compliance with Applicable Laws.
Manager shall comply in all material respects with all applicable
federal, state and local laws, regulations and restrictions in the conduct under
this Agreement of its obligations under this Agreement.
SECTION 5.10 Quality Assurance.
Manager shall assist Practice in fulfilling its obligations to its
patients to maintain a high quality of medical and professional services.
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SECTION 5.11 Ancillary Services.
Manager shall provide its services hereunder in the operation of such
ancillary services as approved by the Policy Board.
ARTICLE VI
OBLIGATIONS OF PRACTICE
SECTION 6.1 Professional Services.
Practice shall provide professional services to patients in compliance
at all times with ethical standards, laws and regulations applying to the
medical profession. Practice shall ensure that each of its physicians providing
medical care to patients in the State of Texas are licensed by the State of
Texas. In the event that any disciplinary actions or medical malpractice actions
are initiated against any such physician, Practice shall immediately inform
Manager of such action and the underlying facts and circumstances. Practice
shall carry out a program to monitor the quality of medical care which it
provides.
SECTION 6.2 Medical Practice.
Manager shall not interfere with the physician-patient relationship
between Practice's physicians and their patients. Practice shall use and occupy
the facilities provided by Manager exclusively for the practice of medicine, and
shall comply with all applicable local rules, ordinances and all standards of
medical care. It is expressly acknowledged by the parties that the medical
practice or practices conducted at Practice shall be conducted solely by
physicians associated with Practice, and no other physician or medical
practitioner shall be permitted to use or occupy Practice without the prior
written consent of the Policy Board.
SECTION 6.3 Physician Employees.
(a) Practice shall employ physicians and other licensed health
care personnel who must be employed by Practice in order for Practice
to be reimbursed for such employee's services, as Practice deems
reasonably necessary and appropriate, subject to the Annual Budget, for
Practice's operation of its medical practice and provision of
professional services each of whom shall be subject to the applicable
provisions of this Agreement, all of whom shall be Physician Employees.
Practice shall have the sole responsibility for paying for its
personnel all Professional Compensation provided that Manager shall
arrange for and supervise the administration of such responsibilities
from funds available and due to Practice from Manager as set forth in
Section 8.1. Manager shall, in the name of and on behalf of Practice,
establish and administer and pay when due the compensation with respect
to such professional personnel and, on behalf of Practice and out of
funds available in the Operating Account, ensure that proper tax
withholdings from such compensation are made and timely remitted to the
appropriate governmental
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entities. Each physician retained by Practice shall at all times hold
and maintain a valid and unlimited license to practice in the State of
Texas. Practice shall enter into and maintain with each such physician
a written agreement which shall include, without limitation, the
provisions of Section 7.2 hereof. Practice shall ensure that each of
its Physician Employees participates in such continuing medical
education as is consistent with past practice.
(b) Practice, through its Physician Employees, shall
continuously and uninterruptedly, during the term hereof, during all
business hours and on such days as businesses of like nature in the
area are open for business, provide services in a manner calculated to
produce the maximum volume of revenue which is consistent with the
professional obligation of Practice and in the best interest of
Practice's patients. Practice shall cause the work load, patient load
and criteria for its Physician Employees, taken as a whole, to remain
substantially the same as their historical practice during the
immediate past three (3) years; provided that in no event shall it be a
breach of this Agreement if Practice's revenues decrease after the date
for reasons beyond the Practice's and the Physician Employee's control.
(c) Practice and the Physician Shareholders shall take all
actions necessary, including without limitation adjusting Professional
Compensation on at least a quarterly basis, to ensure from time to time
that the Professional Compensation paid, distributed or provided to all
physicians employed or engaged by Practice under their employment
agreements or otherwise, in the aggregate, never exceeds Practice
Surplus.
SECTION 6.4 Professional Insurance Eligibility.
Practice shall cooperate in the obtaining and retaining of professional
liability insurance by assuring that its Physician Employees are insurable, and
by participating in an on-going risk management program.
SECTION 6.5 Fees for Professional Services.
Practice shall be solely responsible for legal, accounting and other
professional services fees incurred and retained by Practice, and not approved
by the Policy Board, except as set forth in Article V herein.
SECTION 6.6 Name.
Manager shall be entitled to use the name "Valley Cardiology, P.A." in
connection with the operation of Practice.
SECTION 6.7 Material Decisions.
In addition to any other rights of Manager in this Agreement, the
following actions or decisions shall be made or taken, directly or indirectly,
by Practice or the Physician Shareholders only with the consent of Manager:
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(a) Entering into any merger unless Practice is the surviving
entity and after which the Physician Shareholders immediately prior to
the date of the closing of such merger own at least seventy-five
percent (75%) of the capital stock of Practice after the closing;
(b) Entering into any sale or series of related sales by
Practice or by the Physician Shareholders of the capital stock of
Practice during the term of this Agreement to any party who is not a
Physician Shareholder as of the date hereof, provided such sales may be
made to individual physicians who become full-time employees of
Practice in the ordinary course of Practice's operations and business
but only if the Physician Shareholders as of the date hereof continue
to own in the aggregate at least seventy-five percent (75%) of the
Capital Stock of Practice thereafter;
(c) Entering into any agreement or consummating any
transaction for the sale of any of the material assets of Practice;
(d) Paying money or other property by Practice for a majority
of the capital stock or all or substantially all of the assets
constituting a business of any person or entity;
(e) Entering into a managed care agreement or arrangement or
entering into a capitation arrangement or agreement;
(f) Opening any new location or the relocation of the primary
office of Practice or failure to maintain offices in McAllen, Texas
comparable in size to that maintained by Practice as of the date
hereof;
(g) Paying compensation, benefits or distributions, directly
or indirectly, of any type or nature to any Physician Shareholder until
all amounts due as Physician Expenses, Manager Expenses and Management
Fee currently due and payable have been paid in full;
(h) Deviating from the collection policies generally followed
by Practice prior to the date hereof with respect to any patient
account or other amount due for Practice's services; or
(i) Entering into any new relationship or agreement with a
Physician Shareholder or an Affiliate of or a Related Party to a
Physician Shareholder or continuing any existing relationship or
agreement with any such Person to the extent such relationship or
agreement is not fully reflected in a written contract that has been
provided to Manager as of the date hereof.
SECTION 6.8 Employment of Physician Shareholders.
Practice and each of the Physician Shareholders agree that each of the
Physician Shareholders shall be employed by Practice in accordance with the
terms of his employment
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agreement with Practice dated as of the date hereof or entered into to be
effective as of the effective date of this Agreement, the term of which
employment shall not be less than five (5) years from the effective date hereof
(whether or not he remains an owner of Practice), unless attributable to the
termination of an employment agreement upon the death or disability of the
Physician Shareholder.
SECTION 6.9 Life Insurance.
Practice shall cause each of its physician employees to and the
Physician Shareholders shall cooperate fully with any efforts by Manager to
obtain insurance policies on the life of any such physicians under which Manager
would be the owner and beneficiary. Manager will be responsible for the costs of
any such insurance and such costs shall not be Manager Expenses.
SECTION 6.10 Profit Sharing Plan.
(a) Practice may sponsor or maintain a profit-sharing plan
that is intended to be qualified under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), which contains (i) a
salary reduction, elective contribution feature which qualified as a
cash or deferred arrangement within the meaning of Section 401(k) of
the Code and (ii) an employer matching contribution provision within
the meaning of Section 401(m) of the Code ("Practice Qualified Plan").
The employer matching contribution provision in the Practice Qualified
Plan shall match elective contributions at a rate, and in the aggregate
amount, that is at least equivalent to the employer matching
contribution provision contained in the MedCath Incorporated 401(k)
Profit-Sharing Plan and Trust ("MedCath Plan").
(b) All contributions to the Practice Qualified Plan made on
behalf of, or with respect to, any participant thereunder (including,
without limitation, Physician Shareholders, Physician Employees who are
not Physician Shareholders, and Manager employees who are treated as
Practice employees because they are "leased employees" within the
meaning of Section 414(n) of the Code with respect to the Practice),
shall be paid solely by the Physician Shareholders from Practice
Surplus; provided, however, that any elective contributions to the
Practice Qualified Plan by Physician Employees that are not Physician
Shareholders shall be considered Professional Compensation and any
elective contributions to the Practice Qualified Plan by Physician
Employees that are not Physician Shareholder shall be considered
Professional Compensation and any elective contributions to the
Practice Qualified Plan by any Manager employees who are treated as
Practice employees because they are "leased employees" within the
meaning of Section 414(n) of the Code with respect to the Practice
shall be considered a Manager Expense.
(c) In addition to the Practice Qualified Plan, Practice shall
be solely responsible for any other employee benefit plan, program, or
arrangement, such as a group health plan or other welfare benefit
program, it chooses to sponsor or maintain for the benefit of Practice
employees (including, without limitation, Physician Shareholders,
Physician Employees who are not Physician Shareholders, and any Manager
employees
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who are treated as Practice employees because they are "leased
employees" within the meaning of Section 414(n) of the Code). The costs
relating to sponsoring and maintaining any such plans, programs, or
arrangements shall be paid solely by the Physician Shareholders from
Practice Surplus.
(d) Unless such expenses are, pursuant to its terms and
applicable law, expenses of such plans or of individual participants,
the compensation of counsel, accountants, corporate trustees,
investment managers, and other agents and service providers necessary
in the administration of the Practice Qualified Plan and any other
employee benefit plan, program, or arrangement adopted and maintained
by Practice shall be an Extra Expense, and shall not be a Physician
Expense, a Manager Expense, or an expense of or borne by Manager.
Similarly, unless such expenses are, pursuant to its terms and
applicable law, expenses of such plans or of individual participants,
all such expenses necessary in the administration of the MedCath Plan
and any other employee benefit plan, program, or arrangement adopted
and maintained by Manager shall be a Manager Expense to the extent such
expenses are allocable to Manager employees who are providing services
to Practice on a substantially full-time basis.
(e) From and after the Closing, employees of the Manager who
were employed by Practice (or its predecessors) shall be credited under
all of Manager's employee benefit plans, programs, or arrangements with
service, for eligibility and vesting purposes, equal to the service
credited to them for such purposes under the terms of the corresponding
employee benefit plan, program, or arrangement of the Practice (or its
predecessors).
(f) Notwithstanding anything else in this Agreement to the
contrary, all contributions (i.e., employee elective contributions,
employer matching contributions, and discretionary nonelective employer
contributions) to the MedCath Plan made on behalf of, or with respect
to, any participant thereunder who is a Manager employee providing
services to Practice on a substantially full-time basis shall be
considered a Manager Expense.
ARTICLE VII
RESTRICTIVE COVENANTS AND LIQUIDATED DAMAGES
The parties recognize that Parent paid a substantial amount in
connection with this Agreement and Manager will incur substantial costs in
providing the premises, personnel, management, equipment, supplies and other
goods and services being provided hereunder and that the services to be provided
by Manager shall be feasible only if Practice operates an active medical
practice to which the physicians associated with Practice devote their full time
and attention. To that end:
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SECTION 7.1 Restrictive Covenants by Practice.
During the term of this Agreement, Practice and the Physician
Shareholders shall not, directly or indirectly, either as a shareholder,
partner, member, consultant, independent contractor, manager or otherwise
establish, operate or provide physician, medical or other professional services
at any medical office, clinic or other health care facility providing services,
including but not limited to ancillary services, substantially similar to those
provided by Practice pursuant to this Agreement anywhere within the Territory
other than as contemplated by the terms of this Agreement. Additionally, during
the term of this Agreement and for a period of twenty-four (24) months following
the termination hereof prior to the 40th anniversary of the date hereof for any
reason other than due to a default by Manager, Practice and the Physician
Shareholders shall not, directly or indirectly, enter into any agreement or
arrangement similar to this Agreement with any other person or party (whether in
a single transaction or series of related transactions) or sell substantially
all the assets of Practice or sell or issue ownership interests (whether through
a sale, merger or otherwise) in Practice except to individual physicians who
become full-time employees of Practice in the ordinary course of Practice's
operations and business.
SECTION 7.2 Restrictive Covenants By Current Physician
Shareholders and Physician Employees.
(a) Practice shall obtain and enforce formal written
agreements from its current Physician Shareholders and Physician
Employees, other than Technical Employees and Physician Extender
Employees pursuant to which the Physician Shareholders and Physician
Employees agree not to within the Territory, directly or indirectly,
whether as a shareholder, partner, employee, director, independent
contractor, consultant, agent or otherwise (i) establish, operate or
provide physician, medical or other professional services at any
medical office, hospital, clinic or outpatient and/or ambulatory
treatment or diagnostic facility providing services, including but not
limited to ancillary services, substantially similar to those provided
by Practice except as an employee of Practice, or (ii) accept any
direct or indirect compensation or benefit (income or expense
guarantees, etc.) from any medical office, hospital, clinic or
outpatient and/or ambulatory treatment or diagnostic facility other
than as an employee of Practice and which compensation or benefit is
paid directly to Practice, or (iii) solicit or employ any employee or
consultant of Practice or of Manager, in all cases during the term of
their employment and for a period of twenty-four (24) months after any
termination of employment with Practice for any reason (unless this
Agreement has been terminated as of such date as a result of a default
hereunder by Manager).
(b) In addition to the other restrictions in this Article VII,
the Physician Shareholders hereby agree with Manager (and all future
Physician Shareholders of Practice shall be required to agree in
writing) and shall enter into a similar covenant with Practice, which
Practice agrees to fully enforce, that they shall (unless this
Agreement has been terminated as of such date as a result of a default
hereunder by Manager) neither accept employment to practice medicine or
become a consultant for the purpose of
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providing such medical services from or with any other party or entity,
or group of affiliated parties or entities (a "New Employer") if at
least fifty-one percent (51%) of the then current Physician
Shareholders of Practice within any twelve (12) month period accept
employment or enter into any consulting or other similar arrangement
with such New Employer at the same time or in a series of related
circumstances, nor engage in any other transaction which is
substantially similar to that described in this sentence (a "Group
Departure") unless such New Employer or the Physician Shareholders
personally assume all liabilities and obligations of Practice to
Manager under Article VIII with respect to such Physician Shareholders
and under other provisions herein related to such obligations and
liabilities plus any amount due from Practice to Manager under Section
5.5(b)(iii).
SECTION 7.3 Restrictive Covenants By Future Physician Employees.
Practice shall obtain and enforce formal agreements from each of its
future Physician Employees (and future Physician Shareholders who are not
currently Physician Employees), other than Technical Employees and Physician
Extender Employees which contain the restrictions and covenants set forth in
Section 7.2.
SECTION 7.4 Physician Shareholder and Physician Employee
Liquidated Damages.
The Restrictive Covenants described above may provide that the
Physician Shareholders and Physician Employees (existing or future) with the
written consent of Manager may be released from their Restrictive Covenants by
paying liquidated damages under this Agreement in an amount as follows:
For Physician Shareholders and Physician Employees who are physicians
employed by Practice on the date of this Agreement and for future Physician
Shareholders or Physician Employees who are employed by Practice after the date
of this Agreement, "Liquidated Damages" means an amount with respect to the
physician equal to the greater of (a) such physician's Form W-2 taxable
compensation paid by Practice to him for the most recently ended calendar year,
and (b) the average of such physician's Form W-2 taxable compensation paid by
Practice to him for the three most recently ended calendar years.
Such payment of Liquidated Damages or any recovery for breach shall be
made to Manager by Practice simultaneously with the physician being released
from the restrictive covenants (if consented to by Manager) or any collection of
a judgment. Such payment shall be first applied to all costs incurred by Manager
in the enforcement of the restrictive covenants for that departing physician and
in recruiting a replacement physician for that departing physician. The
remainder, if any, shall become an additional Management Fee to be paid to
Manager pursuant to Article VIII hereof.
Manager shall be entitled to designate which remedies shall be sought
by Practice for breaches of restrictive covenants or such employment agreements
and Practice shall diligently pursue those remedies.
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SECTION 7.5 Development of Exclusive Ventures.
(a) During the term of this Agreement (the "Exclusive Period")
subject to applicable law, Manager, Practice and the Physician
Shareholders, including any future shareholders of Practice may discuss
and explore the feasibility of acquiring or developing in the Territory
a managed care plan or organization (e.g., an HMO, etc.) (the
"Exclusive Ventures"). Subject to applicable law, each such Exclusive
Venture shall be owned by a joint venture to include Manager or its
designee, the Physician Shareholders and other Shareholders. Each
Exclusive Venture would be managed by Manager or its designee for a
management fee which would not exceed reasonable management fees which
are paid to other parties for managing similar facilities or activities
in bona fide transactions involving unrelated persons or entities.
Capital shall be contributed to the joint venture on a pro rata basis
by Manager or its designee, on the one hand, and Practice and/or the
Physician Shareholders on the other hand, in accordance with their
ownership percentages. No additional payment would be due to Manager,
Practice or the Physician Shareholders in connection with the
development or ownership of any Exclusive Venture other than pro rata
distributions to them from the joint venture. Manager, Practice and the
Physician Shareholders agree to cooperate and negotiate with one
another in good faith with respect to the development or acquisition of
the Exclusive Venture and to enter into all such additional agreements
and to take all such additional actions as are reasonably necessary or
appropriate to fulfill the purpose and intent of this Section 7.5.
In the event that health care counsel of Manager, which is
reasonably acceptable to Practice, advises that the legal entity owning
any such health care facility or service should be owned only by
Practice, the Physician Shareholders or Affiliates thereof, then the
parties hereto shall instead enter into a management and service
agreement which will provide Manager with substantially all of the
benefits which it would have received had it been legally entitled to
be an owner of such facility or service.
(b) During the Exclusive Period, Practice agrees that it will
not, directly or indirectly, develop or acquire an interest in any
Exclusive Venture, and each Physician Shareholder agrees that he will
not develop or acquire an interest in any venture, entity or investment
whose business is similar to that which would be conducted by the
Exclusive Ventures as long as such Physician Shareholder is a
shareholder or employee of Practice and for a period of two (2) years
thereafter, other than through a joint venture between Manager or its
designee, on the one hand, and Practice and/or the Physician
Shareholders on the other hand, as provided in (a) above.
SECTION 7.6 Enforcement.
Manager, Practice and the Physician Shareholders acknowledge and agree
that since a remedy at law for any breach or attempted breach of the provisions
of this Article VII shall be inadequate, either party shall be entitled to
specific performance and injunctive or other equitable relief in case of any
such breach or attempted breach, in addition to whatever other remedies may
exist by law. All parties hereto also waive any requirement for the securing or
posting of any
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bond in connection with the obtaining of any such injunctive or other equitable
relief. If any provision of Article VII relating to the restrictive period,
scope of activity restricted and/or the territory described therein shall be
declared by a court of competent jurisdiction to exceed the maximum time period,
scope of activity restricted or geographical area such court deems reasonable
and enforceable under applicable law, the time period, scope of activity
restricted and/or area of restriction held reasonable and enforceable by the
court shall thereafter be the restrictive period, scope of activity restricted
and/or the territory applicable to the restrictive covenant provisions in this
Article VII. The invalidity or non-enforceability of this Article VII in any
respect shall not affect the validity or enforceability of the remainder of this
Article VII or of any other provisions of this Agreement.
ARTICLE VIII
FINANCIAL ARRANGEMENTS
SECTION 8.1 Management Fees.
Practice and Manager agree that the compensation set forth in this
Article VIII is being paid to Manager in consideration of the substantial
commitment made by Manager hereunder and that such fees are fair and reasonable.
(a) Manager shall be paid as its management fee (the
"Management Fee") the following amounts:
(i) An amount equal to all Manager Expenses;
(ii) [ ] ($[ ])
per annum (the "Base Fee"), to be earned and accrued in
equal monthly installments;
(iii) The Performance Bonus (as defined below); and
(iv) Amounts due to Manager pursuant to Section 7.4.
(b) Practice has retained Manager to provide services
hereunder due to Manager's unique expertise and Practice desires to
provide an additional incentive to Manager with respect to Manager's
performance of its obligations under this Agreement. Practice has
established the following goals for Manager: providing efficient and
uniform management services to Practice in a manner which enables
Practice's physicians to focus on patient care and to avoid
administrative responsibilities, provide updated management systems
which Practice would not otherwise be aware from time to time, assist
the practice in providing its services in a more efficient and cost
effective manner, assist Practice in analyzing the provision of
additional services and facilities, obtaining additional financing
sources for the expansion of Practice and its facilities, developing
relationships and agreements with managed care providers and other
health
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
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care providers and developing and administering positive and uniform
employment policies. Practice acknowledges that these goals will have
been met if Manager earns the Performance Bonus as set forth below.
In the event that the Net Practice Revenues minus Physician
Expenses, Manager Expenses and the Base Fee, ("Net Income") exceeds
[ ] ($[ ]) for the then current
year (pro rated on a monthly basis), then Manager shall be entitled to
a performance bonus (the "Performance Bonus") for such year equal to
[ ] ([ ]%) of Net Income in excess of [
] ($[ ]). The Performance Bonus shall be earned and
accrued on a monthly basis.
(c) Notwithstanding anything herein to the contrary, in no
event shall Manager's Management Fee due under Section 8.1(a)(ii) and
(iii) exceed [ ] ([ ]%) of Net Income.
[ ] These portions have been omitted and filed separately with the Commission
pursuant to a request for confidential treatment.
SECTION 8.2 Collection of Management Fee.
(a) Manager shall be paid any portion of the Management Fee
resulting from Manager Expenses upon Manager's presentation to Practice
of reasonable documentation of such Manager Expenses and resulting from
Section 7.4 immediately upon the receipt of such amounts by Practice.
(b) The remaining amounts to be paid to Manager under this
Article VIII shall be payable monthly. The amounts shall be estimated
based upon the previous month's operating results of Practice (subject
however to the obligations to repay agreed upon working capital
advances or other third-party financing). Adjustments to the estimated
payments shall be made to reconcile actual amounts due under this
Article VIII, by the end of the following month during each calendar
quarter. Upon preparation of quarterly financial statements, final
adjustments to the service fee for the quarter shall be made and any
additional payments owing to Manager or Practice shall then be made.
Any audit adjustments shall be reflected in the calculation for the
fourth quarter. Operating results shall be prepared on a consistent
basis in accordance with GAAP.
SECTION 8.3 Limited Guaranty Agreement.
Each existing and any future Physician Shareholder shall execute the
Limited Guaranty Agreement dated as of the date hereof.
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ARTICLE IX
RECORDS
SECTION 9.1 Patient Records.
Upon termination of this Agreement, Practice shall retain all patient
medical records maintained by Practice or Manager in the name of Practice.
Practice shall, at its option, be entitled to retain copies of financial and
accounting records relating to all services performed by Practice.
SECTION 9.2 Records Owned by Manager.
All records relating in any way to the operation of Practice which are
not the property of Practice under the provisions of Section 9.1 above, shall at
all times be the property of Manager.
SECTION 9.3 Access to Records.
During the term of this Agreement, and thereafter, Practice or its
designee shall have reasonable access during normal business hours to Practice's
and Manager's financial records which relate to Practice, including, but not
limited to, records of collections, expenses and disbursements as kept by
Manager in performing Manager's obligations under this Agreement, and Practice
may copy any or all such records.
ARTICLE X
INSURANCE AND INDEMNITY
SECTION 10.1 Insurance to be Maintained by Practice.
Throughout the term of this Agreement, Practice shall maintain
comprehensive professional liability insurance with limits of not less than
$200,000.00 per claim and with aggregate policy limits of not less than
$600,000.00 for Practice with such carrier as is approved by the Policy Board.
Malpractice premiums, deductibles and such accruals shall be a Manager Expense.
Practice shall be responsible for all liabilities in excess of the limits of
such policies. Manager shall have the option, with Policy Board approval, of
providing such professional liability insurance through an alternative program,
provided such program meets the requirements of the Insurance Commissioner of
the State of Texas.
SECTION 10.2 Insurance to be Maintained by Manager.
Throughout the term of this Agreement, Manager will provide and
maintain, as a Manager Expense, comprehensive professional liability insurance
for all professional employees of Manager, if any, with limits and with such
carrier as provided above and comprehensive
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general liability and property insurance covering Practice premises and
operations with limits and with such carrier as determined reasonable by Manager
in its national program.
SECTION 10.3 Tail Insurance Coverage.
Practice will cause each individual physician who becomes associated
with Practice after the date hereof to enter into an agreement with Practice
that upon termination of such physician's relationship with Practice, for any
reason, and in the event tail insurance is not provided for such physician under
Practice's insurance policies, tail insurance coverage will be purchased by the
individual physician; provided however, in the event that such physician's
relationship with Practice is terminated due to death or disability or due to an
uncured event of default by Practice under its agreement for the services of
such physician, then Practice, rather than such physician, shall pay the costs
of such tail insurance. Such provisions may be contained in employment
agreements, restrictive covenant agreements or other agreements entered into by
Practice and the individual physicians, and Practice hereby covenants with
Manager to enforce such provisions relating to the tail insurance coverage or to
provide such coverage at the expense of Practice. The Policy Board may determine
to provide coverage for such a physician as a Manager Expense on a physician by
physician basis. The Policy Board may also decide to require other categories of
physicians currently employed by Practice to provide tail coverage upon
termination of employment with Practice.
SECTION 10.4 Additional Insureds.
Practice and Manager agree to use their reasonable efforts to have each
other named as an additional insured on the other's respective professional
liability insurance programs.
SECTION 10.5 Indemnification.
Practice shall indemnify, hold harmless and defend Manager, its
officers, directors, shareholders and employees, from and against any and all
liability, loss, damage, claim, causes of action, and expenses (including
reasonable attorneys' fees), whether or not covered by insurance, caused or
asserted to have been caused, directly or indirectly, by or as a result of the
performance of medical services or the performance of any intentional acts,
negligent acts or omissions by Practice and/or its shareholders, agents,
employees and/or subcontractors (other than Manager, Parent or their agents)
during the term hereof. Manager shall indemnify, hold harmless and defend
Practice, its officers, shareholders, directors and employees, from and against
any and all liability, loss, damage, claim causes of action, and expenses
(including reasonable attorneys' fees), whether or not covered by insurance,
caused or asserted to have been caused, directly or indirectly, by or as a
result of the performance of any intentional acts, negligent acts or omissions
by Manager and/or its shareholders, agents, employees and/or subcontractors
(other than Practice) during the term of this Agreement.
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SECTION 10.6 Rules Regarding Indemnification.
The obligations and liabilities of each indemnifying party hereunder
with respect to claims resulting from the assertion of liability by the other
party or third parties shall be subject to the following terms and conditions:
(a) The indemnified party shall give prompt written notice to
the indemnifying party of any claim which might give rise to a claim by
the indemnified party against the indemnifying party based on the
indemnity agreement contained in Section 10.5 hereof, stating the
nature and basis of said claims and the amounts thereof, to the extent
known. If written notice is not given to the indemnifying party within
thirty (30) days from receipt of notice of the claim to be indemnified,
in sufficient detail to apprise the indemnifying party of the nature of
the claim (in each instance taking into account the facts and
circumstances known by the indemnified party with respect to such
claim), the indemnifying party shall not be liable to the party seeking
indemnification to the extent that the indemnifying party can
demonstrate that its rights were irreparably prejudiced thereby. The
indemnifying party shall have the right, at its option, to compromise
or defend, at its own expense and by its own counsel, any claim
involving the asserted liability of the party seeking indemnification.
If any indemnifying party shall undertake to compromise or defend any
such asserted liability, it shall promptly notify the party seeking
indemnification of its intention to do so, and the party seeking
indemnification agrees to cooperate fully with the indemnifying party
and its counsel in the compromise of, or defense against, any such
asserted liability. All costs and expenses incurred in connection with
such cooperation shall become by the indemnifying party. In any event,
the indemnified party shall have the right, at its own expense and by
its own counsel to participate in the defense of such asserted
liability.
(b) The indemnified party shall not make any settlement of any
claims without the written consent of the indemnifying party, which
consent shall not be unreasonably withheld or delayed.
SECTION 10.7 Offset.
Manager is hereby authorized upon written notice to Practice to offset
or apply any funds or Common Stock of MedCath of Practice or the Physician
Shareholders which Manager holds from time to time or which Manager owes to
Practice or to the Physician Shareholders against or to any amounts owed by
Practice or the Physician Shareholders to Manager under this Agreement or the
Master Transaction Agreement; provided however, if within ten (10) days of such
written notice Practice objects thereto, such funds or Common Stock of MedCath
shall be placed with an escrow agent pursuant to a mutually acceptable escrow
agreement until any dispute with respect thereto is finally resolved through
binding arbitration.
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ARTICLE XI
TERM AND TERMINATION
SECTION 11.1 Term of Agreement.
This Agreement shall commence on the date hereof and shall expire on
the 40th anniversary hereof unless earlier terminated pursuant to the terms
hereof.
SECTION 11.2 Extended Term.
Unless earlier terminated as provided for in this Agreement, the term
of this Agreement shall be automatically extended for additional terms of five
(5) years each, unless Manager delivers to Practice, not less than six (6)
months nor earlier than twelve (12) months prior to the expiration of the
preceding term, written notice of Manager's intention not to extend the term of
this Agreement. If the preceding sentence would result in this Agreement being
in violation of any applicable law or would render this Agreement void or
unenforceable, such sentence shall be void and of no further force or effect.
SECTION 11.3 Termination by Practice.
Practice may elect to terminate this Agreement as follows:
(a) In the event or the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Manager, or
upon other action taken or suffered, voluntarily or involuntarily,
under any federal or state law for the benefit of debtors by Manager,
except for the filing of a petition in involuntary bankruptcy against
Manager which is dismissed within ninety (90) days thereafter, Practice
may give notice of the immediate termination of this Agreement; or
(b) In the event Manager shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement and such default shall continue for a period of forty-five
(45) days after written notice thereof has been given to Manager by
Practice or Manager shall fail to remit any material payments due as
provided in Article VIII hereof and such failure to remit shall
continue for a period of fifteen (15) days after written notice
thereof, Practice may terminate this Agreement. Termination of this
Agreement pursuant to this subsection (b) by Practice shall require the
affirmative vote of Physician Shareholders holding at least
seventy-five (75%) of the ownership of Practice.
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SECTION 11.4 Termination by Manager.
Manager may elect to terminate this Agreement as follows:
(a) In the event of the filing of a petition in voluntary
bankruptcy or an assignment for the benefit of creditors by Practice,
or upon other action taken or suffered, voluntary or involuntarily,
under any federal or state law for the benefit of debtors by Practice,
except for the filing of a petition in involuntary bankruptcy against
Practice which is dismissed within ninety (90) days thereafter, Manager
may give notice of the immediate termination of this Agreement;
(b) In the event Practice shall materially default in the
performance of any material duty or obligation imposed upon it by this
Agreement, and such default shall continue for a period of forty-five
(45) days after written notice thereof has been given to Practice by
Manager, Manager may give notice of the immediate termination of this
Agreement;
(c) In the event that prior to the fifth (5th) anniversary of
the effective date of this Agreement, two (2) or more of the physicians
employed by Practice during the prior twelve (12) months are no longer
employed by Practice for any reason (other than due to death or
disability), Manager may give notice of the immediate termination of
this Agreement, provided this provision shall not apply for so long as
at least three of Paul Manoharan, Benjamin Robolino, Ofsman Quintana
and Tawhid Shuaib are still employed by Practice on a full-time basis;
or
(d) In the event at any time prior to the fifth (5th)
anniversary of the date of this Agreement, two (2) or more of the
physicians employed by Practice during the prior twelve (12) months
shall fail by omission or co-omission in any substantial matter to
provide professional services in a competent manner or such physicians'
licenses to practice medicine are revoked, suspended, canceled or
limited in any manner or such physicians fail to comply with the terms
of their employment agreements with Practice, Manager may give notice
of the immediate termination of this Agreement, provided this provision
shall not apply for so long as at least three of Paul Manoharan,
Benjamin Robolino, Ofsman Quintana and Tawhid Shuaib shall not have had
any such failure or have had such a revocation or suspension.
SECTION 11.5 Actions after Termination.
(a) Upon termination of this Agreement by either party for any reason
or upon expiration of this Agreement, Practice agrees to:
(i) Purchase from Manager at book value all
intangible assets set forth on the balance sheet of Manager
and relating to Practice or this Service Agreement, all as
adjusted through the last day of the month most recently ended
prior to the date of such termination in accordance with GAAP
to reflect amortization or depreciation of intangibles; and
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(ii) Assume all debt and all contracts,
payables and leases which are obligations of Manager and which
relate principally to the performance of its obligations under
this Agreement or the properties leased or subleased by
Manager.
(b) To secure Practice's obligations to Manager and to MedCath
Incorporated under this Agreement and under the Master Transaction Agreement,
Practice hereby agrees to grant a security interest in all of the accounts
receivable of Practice and to execute a Security Agreement and related financing
statements as of the date hereof.
SECTION 11.6 Closing of Repurchase by Practice and Effective Date of
Termination.
Practice shall pay cash for the repurchased assets (exclusive of fixed
assets). The amount of the purchase price shall be reduced by the amount of debt
and liabilities of Manager assumed by Practice. Practice and any physician
associated with Practice shall execute such documents as may be required to
assume the liabilities set forth in Section 11.5 and to remove Manager from any
liability with respect to such repurchased assets and with respect to any
property leased or subleased by Manager, Manager will execute and deliver such
documents as are customary in asset sales with general warranties of title, and
such assets shall be in no worse condition than when delivered to Manager by
Practice, normal wear and tear excepted, and such documents to be executed and
delivered by Manager shall be similar to the documents executed by Practice in
connection with the asset sale to Parent. The closing date for the repurchase
shall be determined by Practice, but shall in no event occur later than 120 days
from the date of the notice of termination. The termination of this Agreement
shall become effective upon the closing of the sale of the assets. Manager shall
have the right, in its sole and absolute discretion, to waive the repurchase
requirements herein, in which event, the termination of this Agreement shall
become effective upon the execution and delivery of such waiver notice. From and
after any termination, each party shall provide the other party with reasonable
access to books and records then owned by it to permit such requesting party to
satisfy reporting and contractual obligations which may be required of it.
ARTICLE XII
GENERAL PROVISIONS
SECTION 12.1 Assignment.
Manager shall have the right to assign its rights hereunder to any
Person that is an Affiliate of or Related Party to Manager and to any lending
institution, for security purposes or as collateral, from which Parent or
Manager obtains financing, or to any purchaser of substantially all of the
assets of Parent. Except as set forth above, neither Manager nor Practice shall
have the right to assign their respective rights and obligations hereunder
without the written consent of the other party.
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SECTION 12.2 Whole Agreement, Modification.
This Agreement constitutes the entire agreement between the parties.
There are no other agreements or understandings, written or oral between the
parties regarding this Agreement, the Exhibits and the Schedules, other than as
set forth herein. This Agreement shall not be modified or amended except by a
written document executed by both parties to this Agreement, and such written
modification(s) shall be attached hereto.
SECTION 12.3 Notices.
All notices required or permitted by this Agreement shall be in writing
and shall be addressed as follows:
To Manager: MedCath Physician Management, Inc.
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
Attn: President
With a copy to: Moore & Van Allen, PLLC
NationsBank Corporate Center
100 N. Tryon Street, Floor 47
Charlotte, North Carolina 28202-4003
Attn: Hal A. Levinson
To Practice: Valley Cardiology, P.A.
500 East Ridge Road, Suite 101
McAllen, Texas 78503
Attn: President
or to such other address as either party shall notify the other.
SECTION 12.4 Binding on Successors.
Subject to Section 12.1, this Agreement shall be binding upon the
parties hereto, and their successors, assigns, heirs and beneficiaries.
SECTION 12.5 Waiver of Provisions.
Any waiver of any terms and conditions hereof must be in writing, and
signed by the parties hereto. The waiver of any of the terms and conditions of
this Agreement shall not be construed as a waiver of any other terms and
conditions hereof.
SECTION 12.6 Governing Law.
The validity, interpretation and performance of this Agreement shall be
governed by and construed in accordance with the laws of the State of Texas. The
parties acknowledge that Manager is not authorized or qualified to engage in any
activity which may be construed or
32
<PAGE>
deemed to constitute the practice of medicine. To the extent any act or service
required of Manager in this Agreement should be construed or deemed, by any
governmental authority, agency or court to constitute the practice of medicine,
the performance of said act or service by Manager shall be deemed waived and
forever unenforceable and the provisions of Section 12.12 shall be applicable.
SECTION 12.7 Severability.
The provisions of this Agreement shall be deemed severable and if any
portion shall be held invalid, illegal or unenforceable for any reason, the
remainder of this Agreement shall be effective and binding upon the parties.
SECTION 12.8 Additional Documents.
Each of the parties hereto agrees to execute any document or documents
that may be requested from time to time by the other party to implement or
complete such party's obligations pursuant to this Agreement.
SECTION 12.9 Attorneys' Fees.
If legal action is commenced by either party to enforce or defend its
rights under this Agreement, the prevailing party in such action shall be
entitled to recover its costs and reasonable attorneys' fees in addition to any
other relief granted.
SECTION 12.10 Time is of the Essence.
Time is hereby expressly declared to be of the essence in this
Agreement.
SECTION 12.11 Confidentiality.
Except for disclosure to its attorneys, accountants, bankers,
underwriters or lenders, or as necessary or desirable for conduct of business,
including negotiations with other acquisition candidates, neither party hereto
shall disseminate or release to any third party any information regarding any
provision of this Agreement, or any financial information regarding the other
(past, present or future) that was obtained by the other in the course of the
negotiation of this Agreement or in the course of the performance of this
Agreement, without the other party's written approval; provided, however, the
foregoing shall not apply to information which (i) is generally available to the
public other than as a result of a breach of confidentiality provisions, (ii)
becomes available on a non-confidential basis from a source other than the other
party, or its affiliates or agents, which source was not itself bound by a
confidentiality agreement, or (iii) which is required to be disclosed by law,
including securities laws or pursuant to court order. Notwithstanding the
foregoing, Practice may disclose information it deems advisable to its physician
employees provided such physician employees are advised of the confidential
nature of such information and agree to keep such information confidential as
provided herein. Manager shall be a third party beneficiary of such agreements.
33
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SECTION 12.12 Contract Modifications for Prospective Legal Events.
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the effective date of this Agreement, are
interpreted by judicial decision or regulatory agency or legal counsel in such a
manner as to indicate that the structure of this Agreement may be in violation
of such laws or regulations, Practice and Manager shall amend this Agreement as
necessary to eliminate such violation. To the maximum extent possible, any such
amendment shall preserve the underlying economic and financial arrangements
between Practice and Manager. To the extent the parties cannot agree on any such
amendment or changes, the matter shall be submitted to binding arbitration upon
the request of either party and through the arbitration process an equitable
modification shall be implemented based on all of the facts and circumstances or
the Agreement will terminate.
SECTION 12.13 Remedies Cumulative; Survivability.
No remedy set forth in this Agreement or otherwise conferred upon or
reserved to any party shall be considered exclusive of any other remedy
available to any party, but the same shall be distinct separate and cumulative
and may be exercised from time to time as often as occasion may arise or as may
be deemed expedient. Pursuit of any remedy set forth in this Agreement shall not
preclude pursuit of any other remedy provided in this Agreement or any other
remedy provided for in this Agreement constitute a waiver of any amount due from
a defaulting party under this Agreement or of any damages accruing by reason of
the violation of any of its terms, provisions and covenants. No waiver of any
violation shall be deemed or construed to constitute a waiver of any other
violation or breach of any of the terms, provisions and covenants contained in
this Agreement, and forbearance to enforce one or more of the remedies provided
on an event of default shall not be deemed or construed to constitute a waiver
of such default or of any other remedy provided for in this Agreement. The
termination of this Agreement shall not affect the remedies and rights of a
party hereunder with respect to a breach of this Agreement occurring on or
before such termination.
SECTION 12.14 Language Construction.
The language in all parts of this Agreement shall be construed, in all
cases, according to its fair meaning, and not for or against either party
hereto. The parties acknowledge that each party and its counsel have reviewed
and revised this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement.
SECTION 12.15 No Obligation to Third Parties.
None of the obligations and duties of Manager or Practice under this
Agreement shall in any way or in any manner be deemed to create any obligation
of Manager or of Practice to, or any rights in, any person or entity not a party
to this Agreement.
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SECTION 12.16 Communications.
Practice and Manager agree that good communication between the parties
is essential to the successful performance of this Agreement, and each pledges
to communicate fully and clearly with the other on matters relating to the
successful operation of Practice.
SECTION 12.17 Counterpart Executions; Facsimiles.
This Agreement may be executed in any number of counterparts with the
same effect as if all of the parties had signed the same document. Such
executions may be transmitted to the parties by facsimile and such facsimile
execution shall have the full force and effect of an original signature. All
fully executed counterparts, whether original executions or facsimile executions
or a combination, shall be construed together and shall constitute one and the
same agreement.
SECTION 12.18 Arbitration.
Other than with respect to any claim or action for equitable or
injunctive relief, any controversy, dispute or disagreement arising out of or
relating to this Agreement, or the breach thereof, shall be settled by
arbitration, which shall be conducted in Corpus Christi, Texas in accordance
with the National Health Lawyers Association Alternative Dispute Resolution
Service Rules of Procedure for Arbitration, and judgment on the award rendered
by the arbitrator may be entered into any court having jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s) effective as of the day and year first above
written.
35
<PAGE>
EXECUTION PAGE
TO THE
SERVICE AGREEMENT
BETWEEN
MEDCATH PHYSICIAN MANAGEMENT, INC.
AND
VALLEY CARDIOLOGY, P.A.
December 12, 1997
PRACTICE:
VALLEY CARDIOLOGY, P.A.
By: /s/ P. Manoharan
----------------------------------
Title: President
-------------------------------
MANAGER:
MEDCATH PHYSICIAN MANAGEMENT, INC.
By: /s/ Ken Petronis
----------------------------------
Title: President, PPM Division
-------------------------------
36
<PAGE>
The Physician Shareholders of Practice hereby execute this Agreement
for purposes of acknowledging and agreeing to be bound by the terms of Sections
5.5, 6.3, 6.8, 6.9, 6.10, Article VII, Sections 8.3 and 10.7 hereof.
/s/ Paul Manoharan /s/ Benjamin Robolino
- --------------------------------- -------------------------------------
Paul Manoharan, M.D. Benjamin Robolino, M.D.
/s/ Ofsman Quintana, M.D. /s/ Tawhid Shuaib, M.D.
- --------------------------------- -------------------------------------
Ofsman Quintana, M.D. Tawhid Shuaib, M.D.
37
FIRST AMENDMENT
TO
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
THIS FIRST AMENDMENT (the "Amendment") is entered into as of this ___
day of December, 1997 by and among HEART HOSPITAL OF DTO, LLC, a North Carolina
limited liability company (the "Company"), DTO MANAGEMENT, INC., a North
Carolina corporation ("DTO MANAGEMENT"), each of the Investor Members (as
defined in the Operating Agreement of the Company) and FRANCISCAN HEALTH SYSTEM
OF THE OHIO VALLEY, INC., an Ohio non-profit corporation ("FHS").
RECITALS:
1. On or about April 18, 1997, DTO Management and certain Investor
Members formed the Company in accordance with the original Operating Agreement
of Heart Hospital of DTO, LLC (the "Agreement");
2. The Company was formed to own and operate an acute care hospital to
be located in the Dayton, Ohio area to specialize in cardiology and
cardiovascular care and surgery;
3. It is intended that the Hospital will be a cost efficient, quality
provider of medical services within the Dayton, Ohio area in a manner which is
consistent with the national health care goals of lowering the cost of health
care;
4. The capital contributions and active involvement of the Investor
Members are necessary to enable the Company to achieve its objectives;
5. FHS is willing to become a member of the Company in order to provide
the Company with additional capital and to provide the Company with other
assistance which will enhance the Company's prospects of achieving its
objectives;
6. The parties hereto desire to amend the Agreement in order to provide
for the admission of FHS as a member of the Company and to make certain
additional related changes to the Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
<PAGE>
1. The Agreement is hereby amended as follows:
(a) Section 2.3(a) is amended as follows:
(i) Sections 2.3(a)(ii) and (iii) are
amended by deleting the reference to "53,000" and
"40" and substituting "83,000" and "48" in lieu
thereof; it being acknowledged that the final size,
number and scope of facilities of the Hospital shall
finally be determined by the Managers;
(ii) Section 2.3(a) is further amended by
removing the period at the end of (vii) thereof,
replacing it with "; and" and adding the following
new subsection (viii) thereafter:
(viii) Satellite diagnostic
cardiac centers intended to be
located in areas to the north and
south of the Hospital.
(b) Section 2.3(b) is amended by adding the following at the
end thereof:
it being the plan of the Members that such real
property be acquired or leased pursuant to a
long-term ground lease from FHS, consisting of a to
be agreed upon parcel located on or adjacent to FHS's
existing hospital campus, and that the purchase price
or rent therefore shall be its fair market value as
established by an independent appraisal, which amount
and the other terms of which purchase or lease shall
finally be approved by DTO Management and the
Investor Managers and reflected in a written purchase
or lease agreement between FHS and the Company. Such
written agreement shall obligate the Company and FHS
to (i) cooperate with one another to develop a site
plan for the Hospital which will allow FHS to
continue to have access to all of its current
facilities (ii) to develop a mutually acceptable
signage plan and system in order to direct members of
the public to each of the facilities of FHS and the
Company and (iii) if a ground lease for the real
property is utilized, to provide lenders of funds for
the development and construction of the Hospital with
customary nondisturbance, attornment, estoppel and
other similar assurance agreements;
(c) The following additional purposes are hereby added as
subsection 2.3(d):
The Company and Hospital shall be operated in a
manner consistent with (i) the Ethical and Religious
Directives for Catholic
2
<PAGE>
Health Care Services, as promulgated by the United
States Catholic Conference; (ii) the mission of the
Franciscan Health Partnership and its affiliates,
which include FHS; and (iii) the policies of FHS with
respect to providing indigent care to its patients.
(d) Section 3.1(a) is amended and restated to provide that DTO
Management shall own at least a thirty-five percent (35%) Membership
Interest in the Company and shall contribute to the Company for its
Membership Interest One Million Four Hundred Seventy Thousand Dollars
($1,470,000.00);
(e) Section 3.1(b) is amended by deleting "49%" therefrom and
substituting 35% in lieu thereof and by adding the following sentence
to the end thereof:
It is acknowledged and agreed that after the date
hereof the Company may continue to seek qualified
individuals to become Investor Members who will
subscribe for any portion of the aggregate Membership
Interest described in this subsection (b) which has
not been subscribed for as of the date hereof, which
Investor Members shall be subject to the unanimous
approval of DTO Management and the Investor Manager
designated by the Investor Members as provided in
Section 5.1(x);
(f) The following is added as Section 3.1(c):
FHS shall own at least a thirty percent (30%)
Membership Interest in the Company and shall
contribute to the Company for its Membership Interest
One Million Two Hundred Sixty Thousand Dollars
($1,260,000.00);
(g) The following is added as Section 3.7:
Guarantees of or Collateral for Indebtedness of the
Company. In the event that following written notice
from time to time by DTO Management to the Investor
Managers, DTO Management determines that DTO
Management or its Affiliates must provide, and they
have elected to so provide, guarantees or collateral
security to any lender or lessor who is providing
loans or lease financing to the Company only on the
condition that adequate guarantees or collateral
security be provided to such lender or lessors, then
FHS agrees to provide, on a several basis, guarantees
of any such loans or lease financing, or additional
collateral security for such loans or leases, on the
same terms and conditions as are then being provided
from time to time by DTO Management and its
Affiliates, it be acknowledged and agreed that 53.85%
of
3
<PAGE>
any such guarantees or collateral security shall be
provided by DTO Management and its affiliates, and
46.15% thereof shall be provided by FHS. FHS agrees
to provide such financial statements as are required
from time to time by parties providing loans or lease
financing to the Company.
(h) The following is added as Section 3.8:
Additional Obligations of FHS.
(a) From time to time subject to applicable
law and any applicable billing and reimbursement
rules and regulation, including, without limitation
all licensure requirements, FHS shall provide the
hospital, support and ancillary services to the
Hospital which are listed on Exhibit B attached
hereto, the pricing of which shall be reasonably
agreed upon by FHS and the Company and which
arrangement shall be evidenced by written agreements
to be entered into by FHS and the Company. Such
written agreement shall contain commercially
reasonable performance criteria which will allow the
Company to provide FHS written notice of any material
default, provide FHS with a reasonable cure period
and allow the Company thereafter to provide such
services itself in the event FHS has been unable to
cure such default;
(b) The Company and FHS shall cooperate with
one another and work together on terms acceptable to
each such party to develop joint marketing and
managed care programs and strategies under which they
shall market their respective services to residents
of the Dayton area and to appropriate payors;
(c) FHS shall lease to the Company and
Investor Members thereof, at fair market value, space
in FHS' medical office building subject to the
availability thereof;
(d) Subject to satisfying FHS' credentialing
requirements, in order to enable the Hospital and
physicians practicing at the Hospital to provide
their services for their patients on an efficient and
a coordinated basis, upon the opening of the Hospital
physicians with privileges to practice at the
Hospital shall also be given privileges to read EKG,
ultrasound and cardiac nuclear camera studies and
tests (provided that FHS' obligation with respect to
cardiac nuclear camera studies shall be limited to
FHS using its commercially reasonable best efforts in
light of existing FHS obligations and commitments) at
Franciscan Medical Center.
4
<PAGE>
(i) The following is added at the end of Section 5.1(g):
it being acknowledged and agreed that employees of
FHS who are affected by the closure of FHS' heart
program and who are acceptable to the Company shall
be offered employment by the Company to the extent
that the Company has positions available for such
employees. Such former employees of FHS shall be
given credit for their years of service with FHS for
purposes of the Company's employee benefit programs,
which benefit programs shall be established at
appropriate levels in light of local market
conditions.
(j) The following are added to Section 5.1:
(bb) Develop and operate satellite cardiac
centers at locations to the north and south of the
Hospital as approved from time to time by the
Investor Managers. These centers will each provide
cardiac diagnostic and rehabilitative services. For
the north location, DTO Management anticipates
entering into an agreement, on behalf of the Company,
not later than July 1, 1998, with the Dayton Heart
Center, P.A. to sublease the second floor of the
medical office building in Dayton at which the Dayton
Heart Center, P.A. has its primary offices, and to
lease certain cardiac rehabilitation equipment from
the Dayton Heart Center, P.A. based upon such
equipment's depreciated book value, at which location
the Company would operate one of such satellite
centers. Such agreements to be entered into by DTO
Management on behalf of the Company with Dayton Heart
Center, P.A. shall provide for the right of the
Company to terminate such agreements in the event
that the services of the Company at such satellite
cardiac center are operating at a cash flow deficit
at the end of the three month period of operations
which commences with the opening of the Hospital.
(cc) The Company shall lease parking spaces
to FHS in the parking facilities to be developed by
the Company based upon fair market value terms
therefore.
(dd) It is acknowledged and agreed that FHS
shall be an eligible provider with respect to the
Company's welfare benefit plans.
(ee) DTO Management is authorized to enter
into a land purchase or lease agreement and lease on
behalf of the Company
5
<PAGE>
with FHS in accordance with the terms and conditions
of Sections 2.3(b) and 5.1(cc).
(ff) Subject to the approval of the Investor
Manager elected by the Investor Members, DTO
Management, on behalf of the Company, may agree to
purchase from FHS any medical equipment required by
the Hospital which will no longer be needed by FHS
based upon such equipment's net book value, the
purchase price for which shall be paid in cash upon
the delivery of such equipment to the Hospital.
(k) The following shall be added at the end of Section 5.2:
(k) Approve, repay, refinance or exercise
any material rights with respect to any loans, leases
or other financing provided by third parties to the
Company without the approval of DTO Management and
the Investor Manager, which shall not be unreasonably
withheld or delayed;
(l) Waive or fail to enforce any material
provision of the Agreement without the consent of DTO
Management and the Investor Manager;
(m) Enter into any agreement under which the
Company is obligated to make any payment of any type
or nature to any Investor Member or its affiliates
without the consent of DTO Management and the
Investor Manager;
(n) Act in any manner which would cause the
Company and the Hospital to violate the purposes set
forth in Section 2.3(d) hereof.
(l) Section 5.6(b) is amended:
(i) Subsection 5.6(b)(ii) is hereby amended
by deleting therefrom the phrase "collected gross
revenues" and substituting in lieu thereof "net
revenues";
(ii) Section 5.6(b)(ii) is amended by
deleting the word "the" in front of each reference in
such subsection to "Investor Manager" and adding the
word "each" in front of the words "Investor Manager"
on the first and eighth lines thereof and by deleting
the word "Investor" in front of the word "Members" on
the eighth line of such subsection.
6
<PAGE>
(m) Section 5.9(b) is amended by adding ("Cardiac Services")
after the word "services" in the eighth line of that subsection, and by
inserting after the word "Hospital" on such eighth line the phrase
"provided however in all events Hamilton County, Ohio is expressly
excluded from such territory";
(n) Section 5.9(b) is further amended by adding the following
paragraph at the end thereof:
Notwithstanding anything herein to the
contrary, FHS may continue to operate Franciscan
Medical Center in the ordinary course prior to the
date upon which the Hospital is ready to receive its
first patient, following which date FHS and its
Affiliates shall be bound by the terms and conditions
of this Section 5.9 to the same extent as each other
member hereof, it being acknowledged and agreed that
as of such opening of the Hospital, the Cardiac
Services which are the subject of this restrictive
covenant shall be provided by FHS only through its
interest in the Company. The Company and FHS shall
enter into mutually acceptable agreements or
subcontracts under which the Hospital shall provide,
on behalf of FHS, all Cardiac Services which FHS is
obligated to provide or does provide under any
managed care agreement or arrangement to which FHS is
a party.
In the event that during the term of this
Agreement and after the Hospital has been opened for
at least one (1) year, the Hospital ceases to hold
any license or certification which is necessary in
order for the Hospital to provide the material
Cardiac Services which it is then providing, and such
loss of licensure or certification is not cured
within the following one hundred twenty (120) day
period, then FHS may thereafter provide any and all
Cardiac Services at the Franciscan Medical Center
until the Hospital has regained such licensure and
certification and maintained it in good standing for
at least twelve (12) consecutive months at which time
FHS and its affiliates shall again be subject to the
restrictions set forth above in this Section 5.9(b).
In the event that at any time hereafter
either DTO Management or its Affiliates on the one
hand, or FHS or its Affiliates on the other, desire
to develop, own, operate or manage a heart hospital
substantially similar to that contemplated by this
Agreement but to be located in Hamilton County, Ohio,
then each such parties shall give the other
reasonable first rights of refusal to participate in
such venture or transaction on substantially the same
terms and conditions as provided in this Agreement.
7
<PAGE>
The Company and its Hospital shall provide
its services and facilities primarily to patients
needing cardiology and cardiovascular care and
surgery and the Company shall not, directly or
indirectly, provide home health care services, own or
operate an endoscopy suite, or operate an emergency
room except as required by applicable law, including,
without limitation, any licensing requirements (and
subject to FHS fulfilling its obligations to the
Hospital with respect to emergency room services)
provided however, nothing shall prevent the Company
or the Hospital from providing any service or
facility which is required by a patient of the
Hospital whose needs relate primarily to cardiology
and cardiovascular care and surgery.
Notwithstanding anything herein to the
contrary, FHS may continue to own and operate one (1)
cardiac catheterization laboratory which may be used
solely for diagnostic cardiac catheterization and
peripheral vascular studies.
(o) Section 5.9(e) is amended by deleting therefrom all
references to "Investor";
(p) Section 5.13 is amended by adding "(a)" in front of the
existing provision and deleting therefrom the word "the" in front of
the first reference to Investor Manager in the last sentence of such
provision and replacing it with "such";
(q) Section 5.13 is further amended by adding the following as
Section 5.13(b):
From time to time, FHS shall designate an
individual to serve as an Investor Manager to serve
for one (1) year terms or until a successor is duly
designated by FHS. At any time FHS may replace its
Investor Manager and designate a new Investor
Manager.
(r) Section 5.14 is amended by retitling such provision as
"Role of and Decisions by Investor Manager" and adding "(a)" at the
front of such provision;
(s) Section 5.14 is further amended by adding the following
new subsection (b) thereto:
Except as provided in Section 5.13 and in the
definition of "Investor Manager" as provided in this
Agreement, all references in this Agreement to
"Investor Manager" shall mean the two (2) Investor
Managers elected and designated as set forth in
Section
8
<PAGE>
5.13. Except as provided in Section 3.1(b) with
respect to the admission of new Investor Members
(which requires the unanimous approval of DTO
Management and the Investor Manager designated by the
Investor Members) all decisions to be made and
actions to be taken under the terms of this Agreement
by the "Investor Manager" shall be deemed to have
been approved or consented to by the "Investor
Manager" if following notice to the two (2) Investor
Managers elected or designated under Section 5.13 at
least one of such Investor Managers provides its
consent or approval of any such decision or action.
(t) Section 7.2(b) is deleted from the Agreement in its
entirety and replaced with the following:
(b) Intentionally omitted.
(u) Section 7.2(i) of the Agreement is deleted in its
entirety;
(v) Section 8.1(b) is deleted from the Agreement and the
following is substituted in lieu thereof:
(b) The Investor Managers may not assign
their rights to be a Manager herein. Upon the
withdrawal or resignation of the Investor Manager
elected by the Investor Members, a substitute
therefore, who must be an Investor Member, may be
elected by a Majority Vote of Investor Members.
(w) Section 8.4 is amended as follows:
(i) The phrase "of FHS or" is added after
the words "Investor Member or" on the third line of
the first paragraph thereof;
(ii) The phrase "or FHS" is added after the
words "Investor Member" on the ninth and twelfth
lines of the first paragraph of Section 8.4;
(iii) The words "or of FHS" are added after
the words "Investor Member" on the fifth line of the
second paragraph of Section 8.4;
(iv) The words "or FHS, as the case may be,"
are added after the word "Member" on the ninth line
of the second paragraph of Section 8.4 and in that
same paragraph the words "Investor
9
<PAGE>
Members" are deleted therefrom and the word
"Member's" is substituted in lieu thereof.
(x) Section 10.1(a) is amended by adding the words "either by"
after the words "DTO Management" in the second line thereof and by
adding the words "or by FHS" after the words "Investor Manager" in the
second line of such subsection;
(y) Section 11.1(g) is amended by adding the following
sentence at the end of the second sentence of such section:
Two (2) of such Managers shall be elected by FHS.
(z) The fifth sentence of Section 11.2(g) is deleted in its
entirety and the following is substituted in lieu thereof:
Notwithstanding the foregoing, in the event the
number of Managers is expanded, the Investor Members
and FHS shall continue to have the right to elect
Investor Managers who shall be designated to make
decisions which are specifically authorized to be
made by the Investor Manager under this Agreement and
DTO Management shall continue to have the right to
make decisions with respect to matters which are
reserved for DTO Management under this Agreement at
the time the number of Managers is so expanded.
(aa) Exhibit A is hereby amended to show FHS as a Member with
an Initial Capital Contribution of One Million Two Sixty Thousand
Dollars ($1,260,000.00) and a Maximum Mandatory Additional Capital
Contribution of Two Million Five Hundred Twenty Thousand Dollars
($2,520,000.00);
(bb) The following definitions in the Glossary of Terms are
hereby amended:
(i) The definition of "Affiliate" is amended
by adding at the end thereof:
"or (iv) with respect to a Person which is a
non-profit corporation or association, any
member of such non-profit corporation or any
other non-profit corporation of which such
Person is itself a member;
(ii) The definition of "Investor Manager" is
deleted and the following is substituted in lieu
thereof:
"Investor Manager" means the two
individuals, one elected by Investor Members
in accordance with Section 5.13(a)
10
<PAGE>
and a second to be designated by FHS in
accordance with Section 5.13(b), who shall
serve as Managers of the Company;
(iii) The definition of "Prime Rate" is
amended by substituting "NationsBank" in lieu of
"First Union National Bank";
(iv) The definition of "Super Majority Vote
of Members" is amended by replacing "67%" with "75%".
(cc) Each of the parties hereto acknowledges and agrees that
they have been provided the revised capital expenditure budget and pro
formas for the Company which are attached hereto as Exhibit X.
(dd) The second sentence of Section 5.16 is hereby deleted
from the Agreement.
2. Except as provided in this Amendment, the Agreement remains in full
force and effect.
3. This Amendment may be signed in counterparts.
4. FHS shall be entitled to make a due diligence visit to a heart
hospital developed by an affiliate of MedCath Incorporated on or prior to
December 24, 1997. FHS may rescind its agreement to the terms hereof in writing
on or before December 24, 1997 if it is not satisfied with the results of its
due diligence.
5. DTO Management, Inc., on behalf of the Company, may rescind this
Amendment, and thereby terminate FHS as a member of the Company, if the Company
is unable to acquire or lease real property for the Hospital from FHS on terms
satisfactory to the Company.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
effective as of the day and year first above written.
DTO MANAGEMENT, INC.
By: /s/ Charles W. Johnson
---------------------------
Title: Vice President
---------------------------
FRANCISCAN HEALTH SYSTEM OF
THE OHIO VALLEY, INC.
By: /s/ R. Christopher West
------------------------------------
Title: President
---------------------------------
Cardiology Specialists of Dayton, Inc.
By: /s/ Stephen P. Young, D.O.
------------------------------------
Title: President
---------------------------------
/s/ Robert E. Bulow
---------------------------------------
Robert E. Bulow
/s/ Janis A. Roberts
---------------------------------------
Janis A. Roberts
/s/ Thomas M. Ruff
---------------------------------------
Thomas M. Ruff, D.O.
/s/ Stephen P. Young, D.O.
---------------------------------------
Stephen P. Young, D.O.
12
<PAGE>
HZ & Associates Health Care Investments LLC
By: /s/ Hans Zwart
------------------------------------
Title: Investment Manager
---------------------------------
Hans Zwart M.D. & Associates, Inc.
By: /s/ Hans Zwart
------------------------------------
Title: President
---------------------------------
/s/ Scot W. Denmark, M.D.
---------------------------------------
Scot W. Denmark, M.D.
/s/ Jeffrey K. Hoffman
---------------------------------------
Jeffrey K. Hoffman
/s/ Thomas J. Merle, M.D.
---------------------------------------
Thomas J. Merle, M.D.
---------------------------------------
Surender R. Neravetla, M.D.
/s/ Bruce H. Rank, D.O.
---------------------------------------
Bruce H. Rank, D.O.
/s/ Cheryl Zwart
---------------------------------------
Cheryl Zwart
/s/ Hans Zwart
---------------------------------------
Hans Zwart, M.D.
13
<PAGE>
AKMS Investments LLC
By: /s/ Tajuddin Ahmed
------------------------------------
Title: Manager
---------------------------------
Cardiologist of Clark & Champaign Counties Inc.
By: /s/ Tajuddin Ahmed
------------------------------------
Title: President
---------------------------------
/s/ Tajuddin Ahmed
---------------------------------------
Tajuddin Ahmed
/s/ Mohammed S. Khan
---------------------------------------
Mohammed S. Khan
/s/ Akber Mohammed
---------------------------------------
Akber Mohammed, M.D.
---------------------------------------
Sagar S. Satyavolu
TDHC Investment, LLC
By: /s/ Joel H. Tobiansky
------------------------------------
Title: Authorized Signature
---------------------------------
Dayton Heart Center, Inc.
By: /s/ C. David Joffe
------------------------------------
Title: President
---------------------------------
14
<PAGE>
/s/ Rohit Bhaskar
---------------------------------------
Rohit Bhaskar, M.D.
/s/ Henry H. Chong
---------------------------------------
Henry H. Chong, M.D.
/s/ Gary J. Fishbein
---------------------------------------
Gary J. Fishbein, M.D.
/s/ Amit Goyal
---------------------------------------
Amit Goyal, M.D.
/s/ C. David Joffe
---------------------------------------
C. David Joffe, M.D.
/s/ Kevin D. Kravitz
---------------------------------------
Kevin D. Kravitz, M.D.
/s/ Sudhakar Maraboyina
---------------------------------------
Sudhakar Maraboyina, M.D.
/s/ Timothy D. Markus, M.D.
---------------------------------------
Timothy D. Markus, M.D.
/s/ Enayatollah Tabesh
---------------------------------------
Enayatollah Tabesh, M.D.
/s/ Joel H. Tobiansky
---------------------------------------
Joel H. Tobiansky, M.D.
/s/ Charles S. Walker
---------------------------------------
Charles S. Walker
15
<PAGE>
/s/ Raymond G. Pratt
---------------------------------------
Raymond G. Pratt, M.D.
Joseph A. Solomito, M.D. & Associates, Inc.
By:
------------------------------------
Title:
---------------------------------
Solomito Family Limited Partnership
By:
------------------------------------
Title:
---------------------------------
---------------------------------------
Joseph A. Solomito, M.D.
/s/ Maria E. Babicki
---------------------------------------
Maria E. Babicki, M.D.
---------------------------------------
Patrick J. Lytle, D.O.
/s/ Carla M. Kingsley, D.O.
---------------------------------------
Carla M. Kingsley, D.O.
/s/ John R. Ribic
---------------------------------------
John R. Ribic, D.O.
16
<PAGE>
---------------------------------------
Wilhelm H. Kalweit, M.D.
/s/ J.E. Appleman
---------------------------------------
J.E. Appleman, M.D.
---------------------------------------
E.M. Gullia, M.D.
/s/ Todd L. Sobol
---------------------------------------
Todd L. Sobol
JTJJ, LLC
By:
------------------------------------
Title:
---------------------------------
17
<PAGE>
Exhibit B
Ancillary Services
Dietary, meals on demand
Lab and Blood Bank
Pharmacy, Pharmacists only
Maintenance & Engineering
Central Supply
Bio-med
Security
Housekeeping
Hemodyalasis
Respiratory Care
Rehab
Speech
Occupational Therapy
Ambulance
Anesthesia
Emergency Room
Marketing
Infection Control
Social Service and Spiritual Care
It is acknowledged and agreed that the Company shall have the obligation to
attempt to enter into acceptable professional service agreements between the
Company and the anesthesiologists, pathologists and radiologists who currently
provide their services to FHS.
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
<PAGE>
TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I DEFINITIONS............................................................................................1
ARTICLE II FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY..................................................2
Section 2.1 Company Formation: Effective Date............................................................2
Section 2.2 Name of Company..............................................................................2
Section 2.3 Purposes and Business Objectives.............................................................2
Section 2.4 Statement of Philosophy and Values...........................................................3
Section 2.5 Registered Agent and Office; Principal Place of Business.....................................4
Section 2.6 Commencement and Term........................................................................4
ARTICLE III MEMBERS AND CAPITAL CONTRIBUTIONS....................................................................4
Section 3.1 Names and Addresses of Members...............................................................4
Section 3.2 Initial Capital Contributions of Members.....................................................4
Section 3.3 Liability of Members - For Capital...........................................................5
Section 3.4 Maintenance of Capital Accounts: Withdrawals of Capital......................................5
Section 3.5 Interest on Capital Contributions or Capital Accounts........................................5
Section 3.6 Additional Funding...........................................................................5
Section 3.7 Enforcement of Commitments...................................................................7
Section 3.8 Reserved Powers of Members...................................................................7
Section 3.9 Other Business of Members....................................................................8
Section 3.10 Appointment of Board of Directors..........................................................10
ARTICLE IV MANAGEMENT OF THE COMPANY............................................................................11
Section 4.1 General Authority and Powers of Board of Directors..........................................11
Section 4.2 Restrictions on Authority of the Board of Directors.........................................11
Section 4.3 Duties of the Board of Directors............................................................12
Section 4.4 Delegation by the Board of Directors........................................................13
Section 4.5 Right to Rely Upon the Authority of the Manager.............................................13
Section 4.6 No Management by Members....................................................................13
Section 4.7 Consent by Members to Exercise of Certain Rights and
Powers by Board of Directors........................................................................14
Section 4.8 Meetings, Quorum and Vote of the Board of Directors.........................................14
i
<PAGE>
Section 4.9 Board of Directors' Standard of Care........................................................15
Section 4.10 Limitation of Liability....................................................................15
Section 4.11 Indemnification of Directors...............................................................15
ARTICLE V DISTRIBUTIONS AND ALLOCATIONS.........................................................................16
Section 5.1 Distributions of Cash Flow from Operations
and Cash from Sales or Refinancing..................................................................16
Section 5.2 Profits.....................................................................................16
Section 5.3 Losses......................................................................................17
Section 5.4 Code Section 704(c) Tax Allocations.........................................................17
Section 5.5 Miscellaneous...............................................................................17
ARTICLE VI DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS................................................18
Section 6.1 No Termination by Certain Acts of Member....................................................18
Section 6.2 Dissolution.................................................................................18
Section 6.3 Dissolution and Final Liquidation...........................................................19
Section 6.4 Termination.................................................................................20
Section 6.5 Payment in Cash.............................................................................20
Section 6.6 Goodwill and Trade Name.....................................................................20
Section 6.7 Termination of Noncompetition Covenants.....................................................20
ARTICLE VII REMOVAL OR WITHDRAWAL OF MEMBERS AND................................................................21
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS........................................................21
Section 7.1 Withdrawal of Member........................................................................21
Section 7.2 Conditions Precedent to Transfer of Membership Interest.....................................22
Section 7.3. Substitute Member - Conditions to Fulfill..................................................22
Section 7.4 Allocations Between Transferor and Transferee...............................................22
Section 7.5 Rights, Liabilities of, and Restrictions on Assignee........................................23
Section 7.6 Repurchase of Interests in Certain Event....................................................23
ARTICLE VIII RECORDS, ACCOUNTINGS AND REPORTS...................................................................24
Section 8.1 Books of Account............................................................................24
Section 8.2 Access to Records...........................................................................24
Section 8.3 Bank Accounts and Investment of Funds.......................................................24
Section 8.4 Fiscal Year.................................................................................24
Section 8.5 Accounting Reports..........................................................................24
Section 8.6 Tax Returns.................................................................................25
ii
<PAGE>
ARTICLE IX MEETINGS AND VOTING RIGHTS OF MEMBERS................................................................25
Section 9.1 Meetings....................................................................................25
Section 9.2 Voting Rights of Members....................................................................26
ARTICLE X AMENDMENTS............................................................................................26
ARTICLE XI MISCELLANEOUS........................................................................................27
Section 11.1 Waiver of Provisions.......................................................................27
Section 11.2 Interpretation and Construction............................................................27
Section 11.3 Governing Law..............................................................................27
Section 11.4 Partial Invalidity.........................................................................27
Section 11.5 Binding on Successors......................................................................27
Section 11.6. Notices and Delivery......................................................................27
Section 11.7. Counterpart Execution: Facsimile Execution................................................28
Section 11.8 Statutory Provision........................................................................28
Section 11.9 Waiver of Partition........................................................................28
Section 11.10 Change In Law.............................................................................28
Section 11.11 Investment Representations of the Members.................................................29
Section 11.12 Exhibits..................................................................................30
</TABLE>
iii
<PAGE>
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE NEW MEXICO SECURITIES ACT
IN RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
THIS OPERATING AGREEMENT (the "Agreement") of Heart Hospital of New
Mexico, LLC (the "Company"), a New Mexico Limited Liability Company, is made and
entered into by and among Persons whose names, addresses and taxpayer
identification numbers are listed on the Information Exhibit (Exhibit B).
RECITALS
A. The Company has been formed to develop, own and operate an acute
care hospital, located in Albuquerque, New Mexico and specializing in all
aspects of cardiology and cardiovascular care and surgery which the Board of
Directors may agree upon;
B. It is intended that the hospital will be a cost effective, high
quality provider of medical services within New Mexico in a manner which is
consistent with the national health care goals of lowering the costs of health
care;
C. The Capital Contributions and active involvement of the Members are
necessary to enable the Company to achieve its objectives.
ARTICLE I
DEFINITIONS
Unless otherwise indicated, capitalized words and phrases in this
Operating Agreement shall have the meanings set forth in the attached Glossary
of Terms (Exhibit C).
<PAGE>
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
Section 2.1 Company Formation: Effective Date.
The Company was formed upon the filing of the Articles of Organization
with the New Mexico State Corporation Commission in accordance with the
provisions of the Act. Upon the effectiveness of this Agreement, the Persons
listed on the attached Information Exhibit (Exhibit B) shall be admitted to the
Company as Members and the Persons who executed the Articles shall be withdrawn
as Members (unless they are listed on the Information Exhibit), all without the
necessity of any further act or instrument and without causing the dissolution
of the Company. The Company shall cause to be executed all other such
certificates or documents, and shall do or cause to be done all such filing,
recording, or other acts, as may be necessary or appropriate from time to time
to comply with the requirements of law for the continuation and/or operation of
a limited liability company in the State of New Mexico and other documents to
reflect the admission of additional Members to the Company. The Agreement shall
be effective as of the date the Company was formed.
Section 2.2 Name of Company.
The name of the Company is Heart Hospital of New Mexico, LLC.
Section 2.3 Purposes and Business Objectives.
The principal purposes and business objectives of the Company are as
follows:
(a) To develop, own and operate a Hospital specializing in the
diagnosis and treatment of cardiac and vascular diseases in
Albuquerque, New Mexico, which includes, but is not limited to, the
following:
(i) Services and facilities which meet the
requirements of the State of New Mexico, Medicare, JCAHO and other
agencies for licensing, credentialing and certification as a general
acute care hospital specializing in cardiology and cardiovascular and
vascular surgical services of every type or nature and to be eligible
to obtain appropriate reimbursements therefor;
(ii) Approximately 90,000 square feet in a building
to be constructed in accordance with plans and specifications approved
by the Company;
(iii) Approximately 60 medical/surgical beds;
(iv) Five heart catheterization laboratories with
available space for one additional heart catheterization lab;
2
<PAGE>
(v) Three heart surgical suites with space for the
development of one additional heart surgical suite; and
(vi) All appropriate support services and systems;
(The above size, number and scope of facilities of the Hospital are
only preliminary estimates. The Board of Directors are authorized to finally
make all determinations with respect thereto.)
(b) To acquire real property and to construct a suitable
building in which the Hospital shall be located;
(c) Any other purpose reasonably related to (a) and (b) above.
Section 2.4 Statement of Philosophy and Values.
The Company and the Hospital shall be operated in accordance with the
following philosophy and values at all times:
(a) As part of the annual operating budget, the Board shall
include a level of indigent care to be provided to those patients who
are unable to pay for Hospital care;
(b) The Hospital shall participate in all public health care
financing programs applicable to its business including the Medicare
and Medicaid programs;
(c) The medical staff of the Hospital shall be open to any
physician who meets the qualifications stated in the Bylaws, Rules and
Regulations of the Medical Staff;
(d) The Company shall adopt and adhere to a conflict of
interest policy with respect to contracts between the Company and
Members or Directors requiring full disclosure of all conflicts;
(e) Within the first two years of its operation, the Company
shall adopt and thereafter adhere to a Corporate Compliance Program to
assure compliance with all State and federal laws governing the
delivery of health care services;
(f) The Company and the Hospital shall be operated in
accordance with the Ethical and Religious Directives for Catholic
Health Care Facilities; and
(g) All medical decisions and all policies and procedures
relating to the delivery of medical services at the Hospital shall be
made by those physicians who are members of the medical staff of the
Hospital as provided in the Bylaws, Rules and Regulations of the
medical staff.
3
<PAGE>
Section 2.5 Registered Agent and Office; Principal Place of
Business.
The registered agent and office of the Company shall be as indicated in
the Articles of Organization, as amended from time to time. The principal place
of business of the Company shall be at such location in Albuquerque, New Mexico
as selected by the Board of Directors from time to time.
Section 2.6 Commencement and Term.
The Company commenced on the filing of the Articles of Organization in
the Office of the New Mexico State Corporation Commission, as required by
Section 2.1 hereof, and shall continue until December 31, 2097 or until
terminated or dissolved as provided herein.
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
Section 3.1 Names and Addresses of Members.
The names and addresses of the Members are as indicated on the
Information Exhibit (Exhibit B), attached hereto and as amended from time to
time.
Section 3.2 Initial Capital Contributions of Members.
The Members shall make the following initial Capital Contributions,
which may be paid in two equal installments, with the first installment due on
January 1, 1998 and the second installment due on or before April 1, 1998:
(a) SWCA, LLC shall own a fifteen percent (15%) Membership
Interest in the Company and shall contribute to the Company for its
Membership Interest the sum of Six Hundred Thousand and No/100 Dollars
($600,000.00);
(b) NMHI, LLC shall own a twenty-six percent (26%) Membership
Interest in the Company and shall contribute to the Company for its
Membership Interest the sum of One Million Forty Thousand and No/100
Dollars ($1,040,000.00);
(c) St. Joseph Healthcare System shall own a thirty-five
percent (35%) Membership Interest in the Company and shall contribute
to the Company for its Membership Interest the sum of One Million Four
Hundred Thousand and No/100 Dollars ($1,400,000.00); and
(d) NM Hospital Management, Inc. ("NMHM") shall own a
twenty-four percent (24%) Membership Interest in the Company and shall
contribute to the Company
4
<PAGE>
for its Membership Interest the sum of Nine Hundred Sixty Thousand and
No/100 Dollars ($960,000.00).
Section 3.3 Liability of Members - For Capital.
The liability of each Member for capital shall be limited to the amount
of its agreed Capital Contribution as a Member as provided in Section 3.2 and
Section 3.6. The Members shall not be required to contribute any additional
capital to the Company except as provided in Section 3.6.
Section 3.4 Maintenance of Capital Accounts: Withdrawals of
Capital.
An individual Capital Account shall be maintained for each Member in
accordance with requirements of the Code and the Regulations promulgated
thereunder. No Member shall be entitled to withdraw or to make demand for
withdrawal of any part of its Capital Account or to receive any distribution
except as provided herein. Each Member shall look solely to the assets of the
Company for the return of its Capital Contributions and shall have no right or
power to demand or receive property other than cash from the Company. No Member
shall have priority over any other Member as to the return of its Capital
Contributions, distributions or allocations, except as provided in this
Agreement.
Section 3.5 Interest on Capital Contributions or Capital
Accounts.
No interest shall be paid to any Member based solely on its Capital
Contributions or Capital Account.
Section 3.6 Additional Funding.
If from time to time, the Board of Directors determines that funds in
addition to those contemplated by Sections 3.2 are necessary or appropriate for
the development or operation of the Hospital, then:
(a) First, the Board shall instruct the Manager to use
commercially reasonable efforts to arrange a loan for the Company of
such funds from a bank or other lender (which could include a Member)
on terms and conditions reasonably acceptable to the Board of
Directors. All Members agree to pledge their Membership Interests, if
required by lenders or lessors, to secure Company's financing. The
Board of Directors shall obtain such loans without the requirement of
guarantees by the Members if it is economically feasible to do so.
(i) If loan guarantees are required for financing the
construction and equipping of the Hospital, each Member agrees to
provide the required guarantee. The aggregate amount of the loans for
the construction and equipping of the hospital (and the commensurate
aggregate amount of the guarantees) shall not exceed $45 million. The
guarantees shall be several and in proportion to the equity interest of
the Member. Each Member shall provide its guarantee promptly and in the
form reasonably approved by the
5
<PAGE>
Board of Directors and required by the lenders or lessors to the
Company. Each Member agrees to promptly provide financial statements
and other information customarily required by the lender or lessor.
(ii) Other than as required to finance the
construction and equipping of the Hospital, no Member is required to
guarantee any other loan to the Company.
(b) Second, if loans as provided in (a) above are not
available, the Board of Directors shall request in writing that the
Members contribute additional capital to the Company in proportion to
their respective Membership Interests. Each Member may elect whether or
not to contribute its proportionate share of the additional Capital
Contribution. Membership Interests shall be adjusted as necessary as
provided in (c)(i) below.
(c) Third, if the Board determines that adequate funds are not
available under (a) or (b) above, the Board shall so notify all of the
Members. Any Member shall then have the right to contribute all or some
portion of the additional funds required. If more than one Member
elects to advance the funds to the Company, preference will be given to
maintaining the relative equity interests of the Members making the
additional contributions in the Company. In the event that either SWCA,
LLC or NMHI, LLC does not elect to make all of its proportionate share
of additional Capital Contributions which its is entitled to make under
(b) above, then the other of them shall have the first opportunity to
make the pro rata Capital Contribution which such noncontributing
Member declined to make pursuant to (b) above. Thereafter the other
Members may elect to contribute such amounts. Each contributing Member
shall be entitled at its election to treat the amounts contributed
pursuant to this Section either as a Capital Contribution or as a loan
from the contributing Member to the Company.
(i) If the contributing Member elects to contribute
the amount as a Capital Contribution, the percentage Membership
Interests of the Members shall again be adjusted proportionately. As a
Member's Membership Interest in the Company increases or decreases by
ten percentage points (e.g., from 30% to 40% or 25% to 15%) the Member
shall gain or lose the right to appoint one Board member for each ten
percent increase or decrease as the case may be.
(ii) If the contributing Member elects to contribute
such amount as a loan to the Company, the loan shall bear interest as
agreed by the Contributing Member and the Company. The loan shall be a
general obligation of the Company, but repaid before a cash
distribution, other than a required minimum distribution under Section
5.1, is made to any of the Members.
(d) Fourth, if funds are not available in accordance with (a),
(b) or (c) above, then the Board of Directors may elect to dissolve the
Company.
6
<PAGE>
(e) All adjustments to Membership Interests as provided in
this Section 3.6 shall be made based solely upon the actual total
Capital Contributions made by the Members as of the date of each such
adjustment.
Section 3.7 Enforcement of Commitments.
In the event any Member (a "Delinquent Member") fails to make a
mandatory Capital Contribution as provided in Section 3.2 or an optional Capital
Contribution as agreed to by the Member under Section 3.6 (the "Commitment"),
the Board of Directors shall give the Delinquent Member a Notice of the failure
to meet the Commitment. If the Delinquent Member fails to perform the Commitment
(including any costs associated with the failure to meet the Commitment and
interest on such obligation at the Default Interest Rate) within ten (10)
business days of the giving of Notice, the Board of Directors shall give notice
of such failure to the other Members. The other Members may elect to contribute
additional amounts equal to any amount of the Commitment not contributed by such
Delinquent Member. The contributing Member shall be entitled at its election to
treat the amounts contributed pursuant to this Section either (i) as a Capital
Contribution of the contributing Member or (ii) as a loan from the contributing
Member to the Delinquent Member bearing interest at the Default Rate secured by
the Delinquent Member's Interest in the Company and the proceeds of which loan
shall be applied to meet the Delinquent Member's commitment. If the contributing
Member elects to contribute such amount as a Capital Contribution, the
percentage Membership Interests of the Members shall be adjusted
proportionately. Until the contributing Member is fully repaid for such loan
made as a result of the default by the Delinquent Member, the contributing
Member shall be entitled to all distributions to which the Delinquent Member
would have been entitled had such Commitment been fulfilled thereby, and any
such distribution shall be applied first to accrued interest and then to
principal in repayment of the loan. Notwithstanding the foregoing, no Commitment
or other obligation to make an additional Capital Contribution may be enforced
by a creditor of the Company unless the Member expressly consents to such
enforcement or to the assignment of the obligation to such creditor.
Section 3.8 Reserved Powers of Members.
The following actions are the only actions which can be taken by the
Members and shall require the unanimous consent of the Members:
(a) Amendments to or waivers of the rights and obligations
provided by the Articles of Organization or this Operating Agreement;
(b) A merger, consolidation, liquidation, or similar
reorganization or transfer of a substantial portion of the Company's
assets;
(c) A sale, lease encumbrance or other transfer of all or
substantially all of the Company's assets, except for encumbrances
incurred in connection with financing provided to the Company;
7
<PAGE>
(d) Creation by the Company of subsidiaries and/or
establishment of corporate joint ventures or interest in partnerships
or limited liability companies;
(e) Election of new Members into the Company;
(f) Any alteration or amendment of the Company's Statement of
Philosophy and Values;
(g) Dissolution of the Company for reasons other than those
expressly delegated to the Board of Directors; and
(h) Any action, which in the opinion of counsel, would
substantially jeopardize the status of SJHS as a corporation exempt
from taxes under Section 501(c)(3) of the Code or would prevent it from
receiving referrals of patients.
Section 3.9 Other Business of Members.
(a) Subject to (b) below, any Member may engage independently
or with others in other business ventures of every nature and
description, including without limitation the purchase of medical
equipment, the rendering of medical services of any kind, and the
making or management of other investments and neither the Company nor
any Member shall have any right by virtue of this Agreement or the
relationship created hereby in or to such other ventures or activities
or to the income or proceeds derived therefrom, and the pursuit of such
ventures.
(b) As long as a Member owns a Membership Interest in the
Company, and for a period of five (5) years after a Member ceases for
any reason to own a Membership Interest in the Company, neither such
Member nor any of its Affiliates shall do any of the following:
(i) hold, directly or indirectly, any investment
ownership or other beneficial equity interest in, or be associated in a
consulting, management or advisory role with, any hospital or other
facility specializing primarily in the diagnosis or treatment of
cardiac or vascular disease within the Territory;
(ii) hold, directly or indirectly, any investment
ownership or other beneficial equity interest in, or be associated in a
consulting, management or advisory role with any Entity, hospital or
sole proprietorship which provides any of the following services or
facilities: cardiac catheterization, cardiac or peripheral angioplasty,
atherectomy, stenting or cardiac or vascular surgical procedures
("Cardiac Services") within a fifty (50) mile radius of the Hospital;
8
<PAGE>
Except that,
(A) nothing herein shall prevent a Member who is a
medical group, its Affiliates or employed physicians from having medical staff
privileges and participating fully as a member of the medical staff (including
service on committees and medical directorships, which do not violate the terms
of any other agreement to which a Member or its Affiliates are bound) of any
hospital or medical facility in the Territory, or from providing any diagnostic
procedures customarily performed on an outpatient basis in medical offices or
cardiac rehabilitation services;
(B) nothing herein shall prevent any Member who owns
or operates a hospital, directly or through an Affiliate, within the Territory
at the time of the formation of the Company from (i) continuing to provide
diagnostic cardiac catheterization and such other Cardiac Services as are
necessary to provide emergency care within the standard of the community or to
stabilize the medical condition of its patients in preparation for transfer to
another facility for treatment of the cardiac condition, (ii) providing
peripheral angioplasty, peripheral stenting and vascular surgery as long as such
procedures are not being performed on patients who have been admitted to the
Member's hospital primarily for treatment of any cardiac disease or condition,
or (iii) continuing to provide all cardiology and cardiovascular services
currently offered by such Member until the earlier to occur of the date on which
sixty-six percent (66%) of the Hospital's beds are open and ready to receive
patients or the date which is forty-five (45) days after Medicare certification
of the Hospital, on which date this subsection (B)(iii) shall be deemed to be
deleted from this Agreement;
(C) a Member who is a nonprofit corporation may
acquire or become affiliated with other corporations which operate general
hospitals that provide or may provide Cardiac Services in the Territory but
outside the 50 mile radius of the Hospital. Within a 50 mile radius of the
Hospital, a Member who is a nonprofit corporation may (a) acquire, manage or
become affiliated with other entities which operate general hospitals providing
Cardiac Services, as of the date hereof, and (b) acquire, affiliate with or
manage a program which provides Cardiac Services on behalf of an entity which
operates, as of the date hereof, such a program (including any cardiac program
related to Section 3.9(b)(ii)(C)(a), so long as in any event the nonprofit
Member uses its reasonable effort to provide either the Hospital or each of
SWCA, LLC, NMHI, LLC and NMHM with an opportunity to participate therein.
Provided, however, no such nonprofit Member may initiate, or be involved with
the initiation of, any new Cardiac Services at its existing hospital or at any
such other affiliated or acquired hospital or at any new hospital;
(D) nothing herein shall prevent any Member from
operating directly or through an Affiliate a mobile catheterization laboratory
within the Territory so long as such service is provided pursuant to a lease of
six (6) months or less (including all renewals and extensions) to a provider
which is already providing catheterization laboratory services in the Territory
at the time of the inception of the lease;
(E) nothing herein shall prohibit a Member from
owning up to three percent (3%) of the outstanding stock of a company whose
stock is publicly traded and listed on a nationally recognized securities
exchange or from investing in a publicly traded mutual fund;
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(F) nothing herein shall prevent SWCA, LLC, NMHI,
LLC, NMHM or their Affiliates from owning, operating, advising or managing,
together or with other third parties, any hospital, facility, clinic or service
which provides any diagnosis or treatment, of any type or nature, of any cardiac
or vascular condition as long as (i) each such party uses its reasonable efforts
to provide the others (SWCA, LLC, NMHI, LLC or NMHM) with an opportunity to
participate therein and (ii) it is located outside of the 50 mile radius of the
Hospital; and
(G) Nothing herein shall prevent any Member from
offering a service which the Company does not offer after the first anniversary
of the opening of the Hospital.
All parties agree that the Territory is the reasonable and
anticipated business service area of the Company.
(c) The Members, including the Directors, have reviewed the
term and geographical restrictions in Section 3.9(b), and in light of
the interests of the parties hereto, agree that such restrictions are
fair and reasonable.
(d) If there is a breach or threatened breach of the
provisions of this Section 3.9, in addition to other remedies at law or
equity, the non-breaching party shall be entitled to injunctive relief.
The parties desire and intend that the provision of this Section 3.9
shall be enforced to the fullest extent permissible under the law and
public policies applied, but the enforceability or modification of any
particular paragraph, subparagraph, sentence, clause, phrase, word or
figure shall not be deemed to render unenforceable the remainder of
this Section 3.9. Should any paragraph, subparagraph, sentence, clause,
phrase, word or figure be adjudicated to be wholly invalid or
unenforceable, the balance of this Section 3.9 shall thereupon be
modified in order to render the same valid and enforceable and the
unenforceable portion of this Section 3.9 shall be deemed to have been
deleted from this Agreement.
(e) The benefits to any Member hereunder do not require, are
not payment for, and are not in any way contingent upon the referral,
admission or any other arrangement for the provision of any item or
service offered by the Company to patients of such Member in any
facility, laboratory, cardiac catheterization facility or other health
care operation controlled, managed or operated by the Company and
nothing herein is intended to prohibit any party from practicing
medicine at any other facility.
Section 3.10 Appointment of Board of Directors.
The Members shall appoint a Board of Directors as follows:
(a) SWCA, LLC shall appoint two (2) Directors;
(b) NMHI, LLC shall appoint two (2) Directors;
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(c) St. Joseph Healthcare System shall appoint two (2) Directors;
and
(d) NM Hospital Management, Inc. shall appoint two (2) Directors.
A Member shall have the right, with or without cause, to remove,
substitute or replace any Director which it appointed.
ARTICLE IV
MANAGEMENT OF THE COMPANY
Section 4.1 General Authority and Powers of Board of Directors.
Except as set forth elsewhere in this Agreement, the Board of Directors
shall have complete authority and exclusive control over the management of the
business and affairs of the Company and all Material Agreements and Material
Decisions with respect to the business and affairs of the Company shall be made
by the Board of Directors. No Member has the actual or apparent authority to
cause the Company to become bound in any contract, agreement or obligation, and
no Member shall take any action purporting to be on behalf of the Company. The
Board of Directors shall, in consultation with the medical staff and according
to the terms of the Medical Staff Bylaws, Rules and Regulations of the Hospital,
establish procedures for quality assurance, peer review and grant privileges to
physicians at the Hospital. Decisions relating to medical and clinical practice
at the Hospital, however, shall be made exclusively by the medical staff of the
Hospital, as provided in the Bylaws, Rules and Regulations of the Medical Staff.
Section 4.2 Restrictions on Authority of the Board of Directors.
The Board of Directors shall not do any of the following:
(a) Act in contravention of this Agreement;
(b) Act in any manner which would make it impossible to carry
on the express business purposes of the Company;
(c) Commingle the Company funds with those of any other
Person;
(d) Admit an additional Member, except as provided in this
Agreement;
(e) Alter or act inconsistently with the primary purposes of
the Company as set forth in Section 2.3;
(f) Possess any property or assign the rights of the Company
in specific property for other than a Company purpose;
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(g) Employ, or permit the employ of, the funds or assets of
the Company in any manner except for the exclusive benefit of the
Company;
(h) Make or cause the making of any payments of any type,
directly or indirectly, to anyone for the referral of patients to the
Hospital in order to use the Hospital or to provide other services
payable by Medicare or Medicaid;
(i) Sell all or substantially all of the assets of the Company
or merge the Company with or into any other Entity without the approval
of all of the Members;
(j) Delegate authority to make Material Decisions or enter
into Material Agreements; or
(k) Dissolve the Company, except as provided in this
Agreement.
Section 4.3 Duties of the Board of Directors.
The Board of Directors shall do the following:
(a) Diligently and faithfully devote such of its time to the
business of the Company as may be necessary to properly conduct the
affairs of the Company, however, the individual Directors shall not be
required to devote full time to such duties;
(b) Use its best efforts to cause the Company to comply with
such conditions as may be required from time to time to permit the
Company to be classified for federal income tax purposes as a
partnership and not as an association taxable as a corporation;
(c) File and publish all certificates, statements, or other
instruments required by law for the formation and operation of the
Company as a limited liability company in all appropriate
jurisdictions;
(d) Cause the Company to obtain and keep in force during the
term of the Company fire and extended coverage, public liability and
professional liability insurance and other insurance policies, with
such issuers and in such amounts as the Board of Directors shall deem
advisable, but in amounts not less (and deductible amounts not greater)
than those customarily maintained with respect to the business
equipment and property comparable to the Company's;
(e) Have a fiduciary duty to conduct the affairs of the
Company in the best interests of the Company and of the Members,
including the safekeeping and use of all funds and assets, whether or
not in its immediate possession and control, and it shall not employ or
permit others besides the Board of Directors to employ such funds or
assets in any manner except for the benefit of the Company;
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(f) When this Operating Agreement or circumstances affecting
the business of the Company require the Directors to take certain
action or to make a determination, the Board of Directors shall take
such action or make such determination in a reasonable and timely
manner;
(g) Deliver to the New Mexico State Corporation Commission for
filing an annual statement in accordance with the Act;
(h) Employ legal counsel, public accountants and such other
advisors and consultants for the Company as it deems necessary; and
(i) Establish and adhere to a conflict of interest policy.
Section 4.4 Delegation by the Board of Directors.
Subject to restrictions otherwise provided herein, the Board of
Directors may at any time employ a Manager, including a Manager affiliated with,
or related to any member of the Board of Directors or any Member to perform
services for the Company and its business, and may delegate all or part of their
duties, authority or control to such Manager, provided that such employment or
delegation shall not relieve the Board of Directors of its respective
responsibilities and obligations under this Agreement or under the laws of the
State of New Mexico nor will it make any such Manager a Member of the Company.
Section 4.5 Right to Rely Upon the Authority of the Manager.
Persons dealing with the Company may rely upon the representation of
the Manager that such Manager is manager of the Company and that such Manager
has the authority to make any commitment or undertaking on behalf of the
Company. No Person dealing with the Manager shall be required to determine its
authority to make any such commitment or undertaking.
Section 4.6 No Management by Members.
Other than as set forth in Article III hereof, the Members shall take
no part in, or at any time interfere in any manner with, the management,
conduct, or control of the Company's business and operations and shall have no
right or authority to act for or bind the Company. The rights and powers of such
Members shall not extend beyond those set forth in this Agreement and those
granted under the Articles of Organization and any attempt to participate in the
control of the Company in a manner contrary to the rights and powers granted
herein and under the Articles of Organization shall be null and void and without
force and effect. The exercise by any other Member of any of the rights granted
to the Member hereunder shall not be deemed to be taking part in the control of
the business of the Company and shall not constitute a violation of this
Section.
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Section 4.7 Consent by Members to Exercise of Certain Rights and
Powers by Board of Directors.
By its execution hereof, each Member expressly consents to the exercise
by the Board of Directors of the rights, powers, and authority conferred on the
Board of Directors by this Agreement.
Section 4.8 Meetings, Quorum and Vote of the Board of Directors.
(a) The Board of Directors shall meet at least quarterly. A meeting may
be called by any Director or the Manager. Notice of any meeting, regular or
special, shall be delivered to each Director personally, by telephone, by
electronic mail, by facsimile transmission or in writing at least five (5)
business days before the meeting. If a request for additional funding pursuant
to Section 3.6(b) is to be considered at the meeting, it must be so stated
specifically in the Notice of Meeting. The Director calling the meeting or the
Manager shall be responsible for preparing and delivering the Notice of Meeting.
(b) An emergency meeting of the Board of Directors may be called by the
Manager upon shorter notice. Action taken at the emergency meeting shall be
valid so long as the meeting is attended by at least one Board member appointed
by each of SWCA, LLC, NMHI, LLC, NMHM and St. Joseph Healthcare System and the
action is unanimously approved by the Board members in attendance.
(c) The Board of Directors shall elect one of its members to preside
over the meetings as the Chairperson and one of its members, as the Secretary,
to oversee the preparation and delivery of meeting notices and the preparation
of minutes of the meetings of the Board of Directors and Members.
(d) A quorum of the Board of Directors shall be necessary to conduct
business at any meeting, except as provided in Section 4.8(b). A quorum shall
consist of a majority of the Directors. The Directors present at a meeting at
which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of Directors, so long as any action taken is
approved by at least a majority of the required quorum for such meeting and one
of such remaining Directors must have been appointed by each of the Members for
there to be business transacted. A Director may attend a meeting by telephone or
other electronic means and be considered present for purposes of a quorum so
long as the telephone or other connection allows each Director to hear and be
heard by all other Directors.
(e) Subject to (d) above, any action taken by the Board of Directors
shall require the affirmative vote of at least a majority of the Directors (at
least one of which must have been a Board member appointed by either NMHM or St.
Joseph Healthcare System) present.
(f) Any action which is required to be or may be taken at a meeting of
the Board of Directors may be taken without a meeting if consent in writing,
either collectively or in counterparts, setting forth the action so taken, is
signed unanimously by all Directors.
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(g) Minutes of the meetings of the Board of Directors shall be taken.
The original of the minutes shall be signed by the Secretary of the Board and
kept with the records of the Company. A copy of the minutes shall be sent to
each of the Directors.
(h) Attendance at a meeting of the Board of Directors constitutes
waiver of any objection to the Notice of the meeting.
Section 4.9 Board of Directors' Standard of Care.
Each Director and the Board of Directors shall act in a manner it
believes in good faith to be in the best interest of the Company and with such
care as an ordinarily prudent Person in a like position would use under similar
circumstances. In discharging its duties, each Director shall be fully protected
in relying in good faith upon the records required to be maintained under this
Agreement and upon such information, opinions, reports and statements by any of
its other Directors, Members, or agents, or by any other Person as to matters
each Director reasonably believes are within such other Person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Company, including information, opinions, reports or statements as to the
value and amount of the assets, liabilities, income or losses of the Company or
any other facts pertinent to the existence and amount of assets from which
distributions to members might properly be paid.
Notwithstanding anything herein to the contrary, a Director or Member
shall have the right to vote or approve Company matters in accordance with the
terms of this Agreement regardless of the personal interest of any Director or
Member in the outcome of any vote, decision or matter, subject to the obligation
to disclose conflicts in advance under Section 2.4(d).
Section 4.10 Limitation of Liability.
A Director shall not be liable to the Company or its Members for any
action taken in managing the business or affairs of the Company if it performs
the duty of its office in compliance with the standard contained in Sections 4.3
and 4.9. No Director has guaranteed nor shall have any obligation with respect
to the return of a Member's Capital Contribution or share of income from the
operation of the Company. Furthermore, no Director shall be liable to the
Company or to any Member for any loss or damage sustained by the Company or any
Member except loss or damage resulting from gross negligence or intentional
misconduct or knowing violation of law or a transaction for which such Director
or Agent received a personal benefit in violation or breach of the provisions of
this Agreement.
Section 4.11 Indemnification of Directors.
(a) Each Director shall be indemnified by the Company against any
losses, judgments, liabilities, expenses, including attorneys' fees and amounts
paid in settlement of any claims sustained by such Director arising out of any
action or inaction of the Director in its capacity as a Director of the Company
to the fullest extent allowed by law, provided that the same were not the
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result of willful misconduct or gross negligence on the part of the Director and
provided that the Director, in good faith, reasonably determined that such
course of conduct was in the best interest of the Company; provided, however,
that such indemnification and agreement to hold harmless shall be recoverable
only out of Company assets. Subject to applicable law, the Company shall advance
expenses incurred with respect to matters for which a Director may be
indemnified hereunder.
(b) If at any time, the Company has insufficient funds to furnish
indemnification as herein provided, it shall provide such indemnification if and
as it generates sufficient funds and prior to any cash distributions, pursuant
to Article V or Article VI hereof, to the Members.
ARTICLE V
DISTRIBUTIONS AND ALLOCATIONS
Section 5.1 Distributions of Cash Flow from Operations and Cash
from Sales or Refinancing.
Prior to the dissolution of the Company, Cash Flow from Operations and
Cash from Sales or Refinancing, if any, remaining after repayment of any amounts
then due on loans made by the Members to the Company shall be distributed
quarterly as Cash Distributions according to the relative percentage Membership
Interests of the Members. The Board shall make a minimum distribution of Cash
Flow from Operations equal to fifty percent (50%) of net profit, after taking
into consideration the requirement for cash reserves or other limitations
established by any lender. Notwithstanding anything herein to the contrary, no
distributions shall be made to Members if prohibited by the Act or any other
applicable law.
Section 5.2 Profits.
Except as provided in the Regulatory Allocations Exhibit (Exhibit E),
Profits shall be allocated as follows:
(a) First, to the Members who have been allocated Losses pursuant to
Subsection 5.3(a) below until the cumulative Profits allocated pursuant to this
Subsection 5.2(a) equal the cumulative prior allocations of Losses under that
Subsection.
(b) Next, to the Members who have been allocated Losses pursuant to
Subsection 5.3(b) below until the cumulative Profits allocated pursuant to this
Subsection 5.2(b) equal the cumulative prior allocations of Losses under that
Subsection.
(c) All remaining Profits shall be allocated to the Members in
accordance with their percentage Membership Interests.
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Section 5.3 Losses.
Except as provided in the Regulatory Allocations Exhibit (Exhibit E),
Losses shall be allocated as follows:
(a) First, Losses shall be allocated to the Members with positive
Adjusted Capital Account balances in proportion to those balances.
(b) All remaining Losses shall be allocated to the Members in
accordance with their percentage Membership Interests.
Section 5.4 Code Section 704(c) Tax Allocations.
Income, gain, loss, and deduction with respect to any property
contributed to the capital of the Company shall, solely for tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for federal income tax purposes
and its initial Agreed Value pursuant to any method allowable under Code Section
704(c) and the Regulations promulgated thereunder.
In the event the Agreed Value of any Company asset is adjusted after
its contribution to the Company, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and its
Agreed Value pursuant to any method allowable under Code Section 704(c) and the
Regulations promulgated thereunder.
Any elections or other decisions relating to allocations under this
Section shall be determined by the Board of Directors. Absent a determination by
the Board of Directors, the remedial allocation method under Regulation Section
1.704-3(d) shall be used. Allocations pursuant to this Section are solely for
purposes of federal, state, and local taxes and shall not be taken into account
in computing any Member's Capital Account or share of Profits, Losses, other
items, or distributions pursuant to any provision of this Agreement.
Section 5.5 Miscellaneous.
(a) Allocations Attributable to Particular Periods. For
purposes of determining Profits, Losses or any other items allocable to
any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Board of Directors using any
permissible method under Code Section 706 and the Regulations
thereunder.
(b) Other Items. Except as otherwise provided in this
Agreement, all items of Company income, gain, loss, deduction, credit
and any other allocations not otherwise provided for shall be divided
among the Members in the same proportion as they share Profits or
Losses, as the case may be, for the year.
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(c) Tax Consequences Consistent Reporting. The Members are
aware of the income tax consequences of the allocations made by this
Article and by the Regulatory Allocations and hereby agree to be bound
by those allocations as reflected on the information returns of the
Company in reporting their shares of Company income and loss for income
tax purposes. Each Member agrees to report its distributive share of
Company items of income, gain, loss, deduction and credit on its
separate return in a manner consistent with the reporting of such items
to it by the Company. Any Member failing to report consistently, and
who notifies the Internal Revenue Service of the inconsistency as
required by law, shall reimburse the Company for any legal and
accounting fees incurred by the Company in connection with any
examination of the Company by federal or state taxing authorities with
respect to the year for which the Member failed to report consistently.
ARTICLE VI
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
Section 6.1 No Termination by Certain Acts of Member.
Neither the transfer of interest, withdrawal from the Company,
bankruptcy, insolvency, dissolution, liquidation or other disability, nor the
legal incompetency of any Member shall result in the termination or dissolution
of the Company or affect its continuance in any manner whatsoever.
Section 6.2 Dissolution.
The Company shall be dissolved upon the happening of any of the
following events, whichever shall first occur:
(a) The election by the Directors to dissolve the Company in
accordance with the terms of Section 3.6(c) hereof;
(b) The expiration of the term provided in Section 2.6 hereof.
(c) The adjudication of bankruptcy of the Company;
(d) In accordance with Section 11.10 hereof; and
(e) The entry of a decree of judicial dissolution or the
administrative dissolution of the Company as provided in the Act.
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Section 6.3 Dissolution and Final Liquidation.
(a) Upon any dissolution of the Company, the Company shall not
terminate, but shall cease to engage in further business except to the
extent necessary to perform existing contracts and preserve the value
of its assets. Its assets shall be liquidated and its affairs shall be
wound up as soon as practical thereafter by the Board of Directors or
by another Person designated by the Members. In winding up the Company
and liquidating assets, the Board of Directors, or other Person so
designated for such purpose, may arrange, either directly or through
others, for the collection and disbursement to the Members of any
future receipts from the Hospital or other sums to which the Company
may be entitled, and shall sell the Company's interest in the Hospital
and the Equipment to any Person, including a Member or any Affiliate
thereof, on such terms and for such consideration as shall be
consistent with obtaining the fair market value thereof, as such fair
market value is approved by the Members.
(b) Upon any such dissolution and liquidation of the Company,
the net assets, if any, of the Company available for distribution,
including any cash proceeds from the liquidation of Company assets,
shall be applied and distributed in the following manner or order, to
the extent available:
(i) To the payment of or creation of reserves for all
debts, liabilities, and obligations to all creditors of the Company
(other than the Members or their Affiliates) and the expenses of
liquidation;
(ii) To the payment of all debts and liabilities
(including interest) owed to the Members or their Affiliates as
creditors; and
(iii) The balance to the Members with positive
Capital Account balances after taking into account all other
adjustments during the Fiscal Year in which liquidation occurs.
(c) The Members shall look solely to the assets, if any, of
the Company for any return of their Capital Contributions and, if the
assets of the Company remaining after payment or discharge of the
Company's debts and liabilities, or provision therefor, are
insufficient to return all or any part of the Capital Contributions, no
Member shall have any right of recourse against the Directors or other
Members or to charge the Board of Directors or other Members for any
amounts except as provided herein and except to the extent otherwise
provided by the Act and/or New Mexico law.
(d) Upon such dissolution, reasonable time shall be allowed
for the orderly liquidation of the assets of the Company and the
discharge of liabilities to creditors so as to minimize the losses
normally attendant to a liquidation.
(e) The Capital Accounts of the Members, as adjusted, shall be
utilized by the Company for the purpose of making distributions to
those Members with positive balances
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in their respective Capital Accounts pursuant to Section 6.3(b). In
making such distributions, the Board of Directors or the Person winding
up the affairs of the Company shall distribute all funds available for
distribution to the Members (after establishing any reserves that the
Board of Directors deem or the Person winding up the affairs of the
Company deems reasonably necessary pursuant to Section 6.3(b)) prior to
the later of (a) the end of the taxable year in which the event occurs
which caused the termination and dissolution of the Company, or (b)
ninety (90) days after the occurrence of such event. The Board of
Directors in their sole discretion, or the Person winding up the
affairs of the Company, in its discretion, may elect to have the
Company retain any installment obligations owed to the Company until
collected in full so long as any portion of the reserves which are
later determined to be unnecessary, and all collections on such
installment obligations which are not deemed to be reasonably necessary
by the Board of Directors or the Person winding up the affairs of the
Company to add to such reserves are distributed as soon as practicable
in accordance with the provisions of Section 6.3(b) as modified by this
Section.
Section 6.4 Termination.
Upon completion of the dissolution, winding up, distribution of the
liquidation proceeds and any other Company assets, the Company shall terminate.
Section 6.5 Payment in Cash.
Any payments made to any Member pursuant to this Article VI shall be
made only in cash.
Section 6.6 Goodwill and Trade Name.
Upon the dissolution of the Company, the firm or trade name of the
Company and any goodwill associated therewith shall become the sole property of
the Members, provided that distributions and allocations otherwise due to the
Members shall not be reduced as a result of the Members becoming entitled to
such assets.
Section 6.7 Termination of Noncompetition Covenants.
Upon the later of the dissolution of the Company and the completion of
the liquidation process, the Members shall have no continuing liability or
obligation under Section 3.9(b), except that Section 3.9(b) shall continue to be
binding upon a Member whose breach of this Agreement caused a dissolution of the
Company and any action for a breach of this Agreement, including a breach of
Section 3.9(b), shall not be impaired by the dissolution or completed
liquidation.
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ARTICLE VII
REMOVAL OR WITHDRAWAL OF MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS
Section 7.1 Withdrawal of Member.
(a) Except as provided in this Section 7.1, without the
unanimous consent of the nonwithdrawing Members, a Member shall not
voluntarily withdraw from the Company as a Member at any time prior to
its termination, or transfer or assign any of its rights and duties,
provided that a Member may assign its Membership Interest in the
Company and its rights to appoint one or more Directors to wholly-owned
Affiliates (for NMHM, including MedCath, Incorporated and its
wholly-owned Affiliates) and lenders. A Member shall give written
notice to the remaining Members if it desires to otherwise sell its
Membership Interest. In that event, the other Members shall first have
an option to purchase such Membership Interest in accordance with
Section 7.1(b) below. The foreclosure of a Member's Interest by a
lender shall give the remaining Members a right to purchase the
Interest being foreclosed for either the amount due and owing to the
lender or pursuant to Section 7.1(b). A sale or transfer in a single
transaction or in a series of related transactions of 50% or more of
the direct or indirect ownership interests in SWCA, LLC or NMHI, LLC
(other than to another entity owned solely by either or both of such
Members or their Affiliates) shall constitute an offer by such Member
to sell its Membership Interest to the Company and the other Members in
accordance with (b) below.
(b) Except as otherwise set forth in this Agreement, no
Membership Interest or any portion thereof, shall be validly sold or
assigned whether voluntarily, involuntarily or by operation of law, and
no purported assignee shall be recognized by the Company for any
purpose, unless such Membership Interest shall have been transferred in
accordance with the provisions of this Agreement and in compliance with
such additional restrictions as may be imposed by any federal or state
securities law and with the consent of the Board of Directors. In no
event, however, shall a Member transfer or sell all or any of its
Membership Interest to any party which, if a Member, would be in
violation of Section 3.9(b) hereof. Except as otherwise set forth in
this Section or in this Agreement, a Member may transfer, sell or
assign its entire Membership Interest if it has received the consent of
the Board of Directors, not to be unreasonably withheld, provided
however: (a) the Company first for a period of fifteen (15) days, and
thereafter the other Members for a period of fifteen (15) days, shall
have the right, but not the obligation, to purchase all, but not less
than all, of the Membership Interest proposed to be transferred, which
right shall be exercisable on the terms and for the purchase price set
forth in a bona fide offer made for the Interest by a third-party (the
"Right of First Refusal"), and (b) there shall have been filed with the
Company a duly executed and acknowledged counterpart of the instrument
making such assignment signed by both the assignor and assignee and
such instrument evidences the written acceptance by the assignee of all
of the terms and provisions of the Agreement, represents that such
assignment was made in accordance with all applicable laws and
regulations and the assignee shall have represented to the Company in
writing
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that it meets the investor suitability standards established by the
appropriate state of residence, or, in the absence thereof, the
investor suitability standards established by the Company. The Board of
Directors shall use reasonable care to determine that transfers are in
accordance with applicable laws and regulations, which may include
obtaining an opinion of counsel to that effect.
Section 7.2 Conditions Precedent to Transfer of Membership
Interest.
Notwithstanding anything herein to the contrary, no transfer of a
Membership Interest may be made if such transfer (a) constitutes a violation of
the registration provisions of the Securities Act of 1933, as amended, or the
registration provisions of any applicable state securities laws; (b) if after
such transfer the Company will not be classified as a partnership for federal
income tax purposes; and (c) if when taken together with other prior transfers,
results in a "termination" of the Company for federal income tax purposes. The
Company may require, as a condition precedent to transfer of a Membership
Interest, delivery to the Company, at the proposed transferor's expense, of an
opinion of counsel satisfactory (both as to the counsel and substance of the
opinion) to the Company that the transfer will not violate any of the foregoing
restrictions.
Section 7.3. Substitute Member - Conditions to Fulfill.
No assignee of a Member's Membership Interest in the Company shall have
the right to become a Substitute Member in place of its assignor unless, in
addition to any other requirement herein, all of the following conditions are
satisfied:
(a) The Company has waived its right pursuant to Section to
purchase the Membership Interest held by the assignee;
(b) The duly executed and acknowledged written instrument of
assignment which has been filed with the Company sets forth that the
assignee becomes a Substitute Member in place of the assignor;
(c) The assignor and assignee execute and acknowledge such
other instruments as the Board of Directors may deem reasonably
necessary or desirable to effect such admission, including, but not
limited to, the written acceptance and adoption by the assignee of the
provisions of this Agreement;
(d) The payment by the assignee of all costs to the Company
associated with the transaction, including but not limited to legal
fees, transfer fees, and filing fees.
Section 7.4 Allocations Between Transferor and Transferee.
Upon the transfer of a Member's Interest, all items of income, gain,
loss, deduction and credit attributable to the Membership Interest so
transferred shall be allocated between the transferor and the transferee in such
manner as the transferor and transferee agree at the time of transfer; provided
such allocation does not violate federal or state income tax law. If the Board
of
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Directors deems such laws violated, then such allocation shall be made pro rata
for the fiscal year based upon the number of days during the applicable fiscal
year of the Company that the Membership Interest so transferred was held by the
transferor and transferee, without regard to the results of Company activities
during the period in which each was the holder, or in such other manner as the
Board of Directors deems necessary to comply with federal or state income tax
laws. Distributions as called for by this Agreement shall be made to the holder
of record of the Membership Interest on the date of distribution.
Notwithstanding anything contained in this Agreement to the contrary, the
Company shall be entitled to treat the assignor of any assigned Membership
Interest as the absolute owner thereof in all respects, and shall incur no
liability for distributions made in good faith to such assignor in reliance on
the Company records as they exist until such time as the written assignment has
been received by, and recorded on the books of the Company. For purposes of this
Article VII, the effective date of an assignment of any Membership Interest
shall be the last day of the month specified in the written instrument of
assignment.
Section 7.5 Rights, Liabilities of, and Restrictions on Assignee.
No assignee of a Member's Interest shall have the right to participate
in the Company, inspect the books of account of the Company or exercise any
other right of a Member unless and until admitted as a Substitute Member.
Notwithstanding the failure or refusal to admit an assignee as a Substitute
Member, such assignee shall be entitled to receive the share of income, credit,
gain, expense, loss and deduction and cash distributions provided hereunder that
is assigned to it, and, upon demand, may receive copies of all reports
thereafter delivered pursuant to the requirements of this Agreement; provided,
the Company shall have first received notice of such assignment and all required
consents thereto shall have been obtained and other conditions precedent to
transfer thereof shall have been satisfied. The Company's tax returns shall be
prepared to reflect the interests of assignees as well as Members.
Section 7.6 Repurchase of Interests in Certain Event.
(a) In the discretion of the Board of Directors, the Company
may, but is not obligated to, repurchase a Member's Interest upon such
Member's breach of the Member's obligations contained in Article III,
Sections 7.1 and 7.2 of this Agreement, unless the breach is cured
promptly after notice thereof by the Company.
(b) Any Member who is in breach of this Operating Agreement
agrees to sell its Membership Interest to the Company in the event the
Company elects to exercise the right of repurchase granted under
Section 7.6(a) and the purchase price shall be the lower of (x) the
Capital Contributions of the Member less all amounts distributed to
such Member by the Company or (y) the fair market value of such
Member's Membership Interest determined by an independent appraiser
reasonably selected by the Board of Directors.
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ARTICLE VIII
RECORDS, ACCOUNTINGS AND REPORTS
Section 8.1 Books of Account.
At all times during the continuance of the Company, the Board of
Directors shall maintain or cause to be maintained true and full financial
records and books of account showing all receipts and expenditures, assets and
liabilities, income and losses, and all other records necessary for recording
the Company's business and affairs including those sufficient to record the
allocations and distributions required by the provisions of this Agreement.
Section 8.2 Access to Records.
The books of account and all documents and other writings of the
Company, including the Articles of Organization and any amendments thereto,
shall at all times be kept and maintained at the principal office of the Company
or elsewhere as decided by the Board of Directors. Each Member or its designated
representatives shall, upon reasonable notice to the Company, have access to
such financial books, records and documents during reasonable business hours and
may inspect and make copies of any of them.
Section 8.3 Bank Accounts and Investment of Funds.
(a) The Board of Directors shall open and maintain, on behalf
of the Company, a bank account or accounts in a federally insured bank
or savings institution as it shall determine, in which all monies
received by or on behalf of the Company shall be deposited. All
withdrawals from such accounts shall be made upon the signature of such
Person or Persons as the Board of Directors may from time to time
designate.
(b) Any funds of the Company which the Board of Directors may
determine are not currently required for the conduct of the Company's
business may be deposited with a federally insured bank or savings
institution or invested in short-term debt obligations (including
obligations of federal or state governments and their agencies,
commercial paper, certificates of deposit of commercial banks, savings
banks or savings and loan associations) as shall be determined by the
Board of Directors.
Section 8.4 Fiscal Year.
The Fiscal Year and accounting period of the Company shall end on
September 30 of each year, unless otherwise determined by the Board of
Directors.
Section 8.5 Accounting Reports.
As soon as reasonably practicable after the end of each fiscal year but
in no event later than 120 days after the end thereof, each Member shall be
furnished an annual accounting showing the
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financial condition of the Company at the end of such fiscal year and the result
of its operations for the fiscal year then ended, which annual accounting shall
be prepared on an accrual basis in accordance with generally accepted accounting
principles applied on a consistent basis and shall be delivered to each of the
Members promptly after it has been prepared. It shall include a balance sheet as
of the end of such Fiscal Year and statements of income and expense, each
Member's equity, and cash flow for such Fiscal Year. The Company shall be
audited by a firm of independent certified public accountants regularly engaged
by the Board of Directors on behalf of the Company. (For so long as NMHM is a
Member of the Company, the Company shall endeavor to use the same firm of
accountants as used by MedCath.) The report shall set forth the distributions to
the Members for such Fiscal Year and shall separately identify distributions
from (i) operating revenue during such Fiscal Year, (ii) operating revenue from
a prior period which had been held as reserves, (iii) proceeds from the sale or
refinancing of the Equipment, and (iv) unexpended proceeds received from the
sale of Membership Interests. Following the opening of the Hospital, Board of
Directors shall also cause to be prepared and distributed to the Members
quarterly financial statements.
Section 8.6 Tax Returns.
It is the intention of all Members that the Company be treated for tax
purposes as a partnership under Subchapter J of the Code, and that this
Agreement be construed in accordance with such intent. All Members agree to
construe and/or amend the Agreement as may be necessary from time to time to
effect such intent. The Board of Directors shall cause income tax returns for
the Company to be prepared, at Company expense, and timely filed with the
appropriate authorities. As soon as is reasonably practicable, and in any event
on or before the expiration of 75 days following the end of each Fiscal Year,
each Member shall be furnished with a statement to be used in the preparation of
the Member's tax returns, showing the amounts of any Profits or Losses allocated
to the Member, and the amount of any distributions made to the Member, pursuant
to this Agreement, along with a reconciliation of the annual report with
information furnished to Members for income tax purposes.
ARTICLE IX
MEETINGS AND VOTING RIGHTS OF MEMBERS
Section 9.1 Meetings.
(a) Meetings of the Members of the Company for any purpose may
be called by the Board of Directors, or any Member. Such meetings shall
be held in Albuquerque, New Mexico.
(b) A notice of any such meeting shall be given in person, by
mail, by overnight courier or by facsimile transmission not less than
seven (7) days nor more than sixty (60) days before the date of the
meeting, to each Member at its address as specified in Section 11.6.
Such notice shall be in writing, and shall state the place, date and
hour of the
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meeting. The notice shall state the purpose or purposes of the meeting.
If a meeting is adjourned to another time or place, and if any
announcement of the adjournment of time or place is made at the
meeting, it shall not be necessary to give notice of the adjourned
meeting.
(c) Each Member may authorize any Person or Persons to act for
the Member by proxy in all matters in which a Member is entitled to
participate, whether by waiving notice of any meeting, or voting or
participating at a meeting. Every proxy must be signed by the Member or
its attorney-in-fact. No proxy shall be valid after the expiration of
eleven months from the date thereof unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the Member
executing it, by filing a written notice of such revocation with each
Director.
Section 9.2 Voting Rights of Members.
(a) No Member shall take part in or interfere in any manner
with the control, conduct or operation of the Company, nor have any
right or authority to act for or bind the Company except as provided
herein. Votes or decisions, to the extent taken or to be made, of the
Members may be cast at any duly called meeting of the Company or in
writing within ten (10) days after written request therefor by filing
such writing with each Director. Each Member shall be entitled to the
number of votes equal to the percentage Membership Interest of such
Member.
(b) No Member shall have the right or power to vote to: (i)
withdraw or reduce the Member's Capital Contributions except as a
result of the dissolution and liquidation of the Company or as
otherwise provided by law or this Agreement; (ii) bring an action for
partition against the Company; (iii) cause the termination and
dissolution of the Company by court decree or otherwise, except as set
forth in this Agreement; or (iv) demand or receive property other than
cash in return for its Capital Contributions.
ARTICLE X
AMENDMENTS
This Agreement and the Articles of Organization of the Company may be
amended only with the unanimous consent of the Members.
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ARTICLE XI
MISCELLANEOUS
Section 11.1 Waiver of Provisions.
The waiver of compliance at any time with respect to any of the
provisions, terms or conditions of this Agreement shall not be considered a
waiver of such provision, term or condition itself or of any of the other
provisions, terms or conditions hereof.
Section 11.2 Interpretation and Construction.
Any modification or amendment hereto must be accomplished in accordance
with the provisions of Article X. Where the context so requires, the masculine
shall include the feminine and the neuter, and the singular shall include the
plural. The headings and captions in this Agreement are inserted for convenience
and identification only and are in no way intended to define, limit or expand
the scope and intent of this Agreement or any provision thereof. The references
to Section and Article in this Agreement are to the Sections and Articles of
this Agreement.
Section 11.3 Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New Mexico exclusive of its conflict of law rules.
Section 11.4 Partial Invalidity.
In the event that any part or provision of this Agreement shall be
determined to be invalid or unenforceable, the remaining parts and provisions of
said Agreement which can be separated from the invalid or unenforceable
provision and shall continue in full force and effect.
Section 11.5 Binding on Successors.
The terms, conditions and provisions of this Agreement shall inure to
the benefit of, and be binding upon the parties hereto and their respective
heirs, successors, distributees, legal representatives, and assigns. However,
none of the provisions of this Agreement shall be for the benefit of or
enforceable by any creditors of the Company.
Section 11.6. Notices and Delivery.
(a) To Members. Any notice to be given hereunder at any time
to any Member or any document reports or returns required by this
Agreement to be delivered to any Member, may be delivered personally or
mailed to such Member, certified mail, postage prepaid, addressed to
the Member at such times as the Member shall by notice to the Company
have designated as the Member's address for the mailing of all notices
hereunder
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or, in the absence of such notice, to the address set forth in the
Information Exhibit (Exhibit B) hereof. Any notice, or any document,
report or opinion so delivered or mailed shall be deemed to have been
given or delivered to such Member at the time it is mailed, as the case
may be.
(b) To the Company. Any notice to be given to the Company
hereunder shall be delivered personally or mailed to the Company, by
certified mail, postage prepaid, addressed to the Company at its
registered office. Any notice so delivered or mailed shall be deemed to
have been given to the Company at the time it is delivered or mailed,
as the case may be.
Section 11.7. Counterpart Execution: Facsimile Execution.
This Agreement may be executed in any number of counterparts with the
same effect as if all of the Members had signed the same document. Such
executions may be transmitted to the Company and/or the other Members by
facsimile and such facsimile execution shall have the full force and effect of
an original signature. All fully executed counterparts, whether original
executions or facsimile executions or a combination, shall be construed together
and constitute one and the same agreement.
Section 11.8 Statutory Provision.
Any statutory reference in this Agreement shall include a reference to
any successor to such statute and/or revision thereof.
Section 11.9 Waiver of Partition.
Each party does hereby waive any right to partition or the right to
take any other action which might otherwise be available to such party for the
purpose of severing its relationship with the Company or such party's interest
in the assets held by the Company from the interests of other Members until the
end of the term of both this Company and any successor company formed pursuant
to the terms hereof.
Section 11.10 Change In Law.
If due to any new law, rule or regulation, or due to an interpretation
or enforcement of any existing law, rule or regulation, health care counsel
selected by the Board of Directors determines in writing that it is reasonably
likely that the relationships established between any of the parties to this
Agreement including any of their Affiliates and/or successors or assigns will
not comply with any law, rule, regulation or interpretation thereof ("Applicable
Law"), then the parties hereto hereby agree first, to negotiate in good faith to
restructure the relationships established under this Agreement so as to bring
them into compliance with such applicable laws while at the same time preserving
the material benefits of each of the parties hereto. In the event that a
specific proposal for the restructuring of this Agreement is approved
unanimously by the Members, such restructured agreement shall become binding
upon all Members of the Company. Second, in the
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event that within forty-five (45) days following the Company's receipt of legal
advice in writing from such health care counsel regarding Applicable Law the
parties hereto are unable to negotiate an acceptable restructuring of their
relationship, then the Company shall have the option, within the following
forty-five (45) day period, to purchase the Membership Interests of some or all
of the Members whose ownership is involved with such noncompliance with
Applicable Law for a purchase price equal to the greater of: (a) five times the
net income of the Company for the prior 12 month period times the percentage of
the selling Member's Membership Interest or (b) the amount of the Capital
Contributions made by each such Member to the Company together with interest
thereon computed at the Prime Rate as of the date of this Agreement from the
date of such contribution through the date upon which the Company pays all
amounts due under the terms of this Section 11.10. For the purpose of
Subparagraph (b), distributions to the Members by the Company after the
effective date of this Agreement (and whether before or after health care
counsel determined there was a problem under an Applicable Law or before or
after the exercise of the purchase option) shall be treated as payments by the
Company. Such purchase prices shall be paid in accordance with the Payment
Method. Third, in the event that the Company does not exercise its option to
purchase Membership Interests of a Member whose ownership causes the Company not
to be in compliance with Applicable Law, such Members may elect in writing
within the following forty-five (45) day period, to require that the Company be
dissolved, in which event the Company shall be dissolved in accordance with the
terms of this Agreement.
Section 11.11 Investment Representations of the Members.
(a) Each Member or individual executing this Agreement on
behalf of an Entity which is a Member hereby represents and warrants to
the Company and to the Members that such Member has acquired such
Member's Membership Interest in the Company for investment solely for
such Member's own account with the intention of holding such Membership
Interest for investment, without any intention of participating
directly or indirectly in any distribution of any portion of such
Membership Interest and without the financial participation of any
other Person in acquiring such Membership Interest in the Company.
(b) Each Member or individual executing this Agreement on
behalf of an entity which is a Member hereby acknowledges that such
Member is aware that such Member's Membership Interest in the Company
has not been registered (i) under the Securities Act of 1933, as
amended (the "Federal Act"), (ii) under applicable New Mexico
securities laws, or (iii) under any other state securities laws. Each
Member or individual executing this Agreement on behalf of an Entity
which is a Member further understands and acknowledges that his
representations and warranties contained in this Section are being
relied upon by the Company and by the Members as the basis for the
exemption of the Members' Membership Interest in the Company from the
registration requirements of the Federal Act and from the registration
requirements of applicable New Mexico securities laws and all other
state securities laws. Each Member or individual executing this
Agreement on behalf of an Entity which is a Member further acknowledges
that the Company will not and has no obligation to recognize any sale,
transfer, or assignment of
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all or any part of such Member's Membership Interest in the Company to
any Person unless and until the provisions of this Agreement hereof
have been fully satisfied.
(c) Each Member or individual executing this Agreement on
behalf of an Entity which is a Member hereby acknowledges that prior to
his execution of this Agreement, such Member received a copy of this
Agreement and that such Member has examined this Agreement or caused
this Agreement to be examined by such Member's representative or
attorney. Each Member or individual executing this Agreement on behalf
of an Entity which is a Member hereby further acknowledges that such
Member or such Member's representative or attorney is familiar with
this Agreement and with the Company's business plans. Each Member or
individual executing this Agreement on behalf of an Entity which is a
Member acknowledges that such Member or such Member's representative or
attorney has made such inquiries and requested, received, and reviewed
any additional documents necessary for such Member to make an informed
investment decision and that such Member does not desire any further
information or data relating to the Company or to the Members. Each
Member or individual executing this Agreement on behalf of an Entity
which is a Member hereby acknowledges that such Member understands that
the purchase of such Member's Membership Interest in the Company is a
speculative investment involving a high degree of risk and hereby
represents that such Member has a net worth sufficient to bear the
economic risk of such Member's investment in the Company and to justify
such Member's investing in a highly speculative venture of this type.
Section 11.12 Exhibits.
The Exhibits to this Agreement, each of which is incorporated by
reference, are:
EXHIBIT A: Articles of Organization.
EXHIBIT B: Information Exhibit.
EXHIBIT C: Glossary of Terms.
EXHIBIT D: Development Budget Exhibit.
EXHIBIT E: Regulatory Allocations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s), to be effective as of the date described in
Article II.
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EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
NMHI, LLC
a New Mexico limited liability company,
By: ____________________________________
William M. Deane, M.D.
Manager
SWCA, LLC
a New Mexico limited liability company
By:____________________________________
Harvey J. White, Jr., M.D.
Manager
ST. JOSEPH HEALTHCARE SYSTEM,
a New Mexico nonprofit corporation
By:____________________________________
Steven Smith
President
NM Hospital Management, Inc.,
a North Carolina corporation
By:____________________________________
Title:_________________________________
<PAGE>
EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
[REMOVE THIS PAGE AND INSERT AS EXHIBIT A THE FILE-STAMPED COPY OF
THE COMPANY'S ARTICLES OF ORGANIZATION.]
<PAGE>
EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
INFORMATION EXHIBIT
Percentage Initial
Interest Capital
Name, Address & TIN Membership Contribution
- ------------------- ---------- ------------
SWCA, LLC 15% $600,000.00
c/o Harvey J. White, Jr., M.D.
1101 Medical Arts Avenue NE, Bldg. 5
Albuquerque, NM 87106
NMHI, LLC 26% $1,040,000.00
c/o William Deane, M.D.
201 Cedar, SE, Suite 810
Albuquerque, NM 87106
St. Joseph Healthcare System 35% $1,400,000.00
7850 Jefferson, NE, Suite 100
Albuquerque, NM 87109
NM Hospital Management, Inc. 24% $ 960,000.00
7621 Little Avenue, Suite 106
Charlotte, NC 28226
<PAGE>
EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
GLOSSARY OF TERMS
As used in this Agreement, the following terms shall have the following
definitions (unless otherwise expressly provided herein).
"Act" means the New Mexico Limited Liability Company Act, set forth at
"53-19-1, et seq. N.M.S.A. (1993 Rep. Pamp.), as amended or any corresponding
provisions of succeeding law.
"Adjusted Capital Account" means, with respect to any Member, such
Person's Capital Account (as defined below) as of the end of the relevant Fiscal
Year increased by any amounts which such Person is obligated to restore, or is
deemed to be obligated to restore pursuant to the penultimate sentences of
Regulations Section 1.704-2(g)(1) (share of minimum gain) and Regulations
Section 1.704-2(i)(5) (share of member nonrecourse debt minimum gain) and
decreased by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(-4), (5) and (,6).
"Affiliate" means (i) with respect to a person--the spouse and a child
or children of such person; (ii) with respect to a business corporation or
limited liability company--any officer, director, trustee, partner, manager,
employee, holder of ten percent (10%) or more of any class of the outstanding
voting securities or of an equity interest of such corporation or limited
liability corporation, or holder of ten percent (10%) or more of the outstanding
voting securities or of an equity interest of any Entity, controlling,
controlled by, or under common control with such corporation or limited
liability company and (iii) with respect to a nonprofit corporation--any member,
director, officer, employee or wholly-owned subsidiary corporation, but it shall
not include either Catholic Healthcare Initiatives ("CHI"), CHI--Mountain Region
or Centura Health with regard to their operations outside of the State of New
Mexico; and (iv) each of the direct and indirect owners of NMHI, LLC and SWCA,
LLC.
"Agreed Value" means with respect to any noncash asset of the Company
an amount determined and adjusted in accordance with the following provisions:
(a) The initial Agreed Value of any noncash asset contributed to the
capital of the Company by any Member shall be its gross fair market value, as
agreed to by the contributing Member and the Company.
<PAGE>
(b) The initial Agreed Value of any noncash asset acquired by the
Company other than by contribution by a Member shall be its adjusted basis for
federal income tax purposes.
(c) The initial Agreed Values of all the Company's noncash assets,
regardless of how those assets were acquired, shall be reduced by depreciation
or amortization, as the case may be, determined in accordance with the rules set
forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
(d) The Agreed Values, as reduced by depreciation or amortization, of
all noncash assets of the Company, regardless of how those assets were acquired,
shall be adjusted from time to time to equal their gross fair market values, as
agreed to unanimously by the Members in writing, as of the following times:
(i) the acquisition of a Membership Interest or an additional
Membership Interest in the Company by any new or existing Member in exchange for
more than a de minimis Capital Contribution;
(ii) the distribution by the Company of more than a de minimis
amount of money or other property as consideration for all or part of a
Membership Interest in the Company; and
(iii) the termination of the Company for federal income tax
purposes pursuant to Code Section 708(b)(1)(B).
If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree unanimously in writing on the gross fair
market values of the Company's assets, it shall be deemed that the fair market
values of all the Company's assets equal their respective Agreed Values
immediately prior to the occurrence of the event and thus no adjustment to those
values shall be made as a result of such event.
"Agreement" means this Operating Agreement, as amended from time to
time.
"Articles of Organization" means the Articles of Organization of the
Company, as filed with the New Mexico State Corporation Commission as the same
may be amended from time to time.
"Board of Directors," "Director" or "Directors" means those persons
appointed by the Members, pursuant to Section 3.10 of the Operating Agreement,
and given the power and authority under Article IV of the Operating Agreement to
manage the Company. The terms "Director" or "Directors" is used for convenience,
but is intended to have the same meaning as the terms "Manager" or "Managers" in
the Act.
"Capital Account" means with respect to each Member or assignee an
account maintained and adjusted in accordance with the following provisions:
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(a) Each Person's Capital Account shall be increased by Person's
Capital Contributions, such Person's distributive share of Profits, any items in
the nature of income or gain that are allocated pursuant to the Regulatory
Allocations and the amount of any Company liabilities that are assumed by such
Person or that are secured by Company property distributed to such Person.
(b) Each Person's Capital Account shall be decreased by the amount of
cash and the Agreed Value of any Company property distributed to such Person
pursuant to any provision of this Agreement, such Person's distributive share of
Losses, any items in the nature of loss or deduction that are allocated pursuant
to the Regulatory Allocations, and the amount of any liabilities of such Person
that are assumed by the Company or that are secured by any property contributed
by such Person to the Company.
In the event any Membership Interest is transferred in accordance with
the terms of this Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred Membership
Interest.
In the event the Agreed Values of the Company assets are adjusted
pursuant to the definition of Agreed Value contained in this Agreement, the
Capital Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such regulations. In the event the Board of Directors shall
determine that it is prudent to modify the manner in which the Capital Accounts,
or any debits or credits thereto, are computed to comply with such Regulation.
the Board of Directors may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Member
pursuant to Articles V or VI hereof upon the dissolution of the Company. In the
event the Board of Directors shall determine such adjustments are necessary or
appropriate to comply with Regulations Section 1.704-1(b)(2)(iv), the Board of
Directors shall adjust the amounts debited or credited to Capital Accounts with
respect to (i) any property contributed by the Members or distributed to the
Members and (ii) any liabilities secured by such contributed or distributed
property or assumed by the Members. The Board of Directors shall also make any
other appropriate modifications in the event unanticipated events might
otherwise cause this Agreement not to comply with Regulations Section
1.704-1(b). In the event any Membership Interest in the Company is transferred
in accordance with the terms of this Agreement, the transferee shall succeed to
the Capital Account of the transferor to the extent it relates to the
transferred Membership Interest.
"Capital Contribution" means with respect to any Member, the amount of
money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.
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"Cash Distribution" means net cash distributed to Members resulting
from Cash Flow from Operations or Cash from Sales or Refinancing.
"Cash Flow from Operations" means net cash funds provided from
operations, exclusive of Cash from Sales or Refinancing, of the Company or
investment of any Company funds, without deduction for depreciation, but after
deducting cash funds used to pay or establish a reserve for expenses, debt
payments, capital improvements, and replacements and for such other items as the
Board of Directors reasonably determines to be necessary or appropriate.
"Cash from Sales or Refinancing" means the net cash proceeds received
by the Company from or as a result of any Sale or Refinancing of property after
deducting (i) all expenses incurred in connection therewith, (ii) any amounts
applied by the Board of Directors in their sole and absolute discretion toward
the payment of any indebtedness and other obligations of the Company then due
and payable, including payments of principal and interest on mortgages, (iii)
the payment of any other expenses or amounts owed by the Company to other
parties to the extent then due and payable, and (iv) the establishment of any
reserves deemed necessary by the Board of Directors in their sole and absolute
discretion. If the proceeds of any sale or refinancing are paid in more than one
installment, each such installment shall be treated as a separate Sale or
Refinancing for the purposes of this definition.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time. Any reference herein to a specific section(s) of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"Company" means and shall refer to Heart Hospital of New Mexico, LLC,
which was created upon the filing of the Articles of Organization with the New
Mexico State Corporation Commission to be operated under the name Heart Hospital
of New Mexico, LLC, a New Mexico limited liability company, and to continue
under this Agreement, as amended from time to time.
"Default Rate" means a per annum rate of onium on a specified principal
sum, compounded monthly, equal to the greater of (a) the Prime Rate plus 500
basis points, or (b) 18%, but in no event greater than the highest rate allowed
by law.
"Economic Interest" means and shall refer to that portion of the
Membership Interest of a Member in the economic rights and benefits of the
Company, including but not limited to all Profits, Losses and Cash
Distributions. Such an Economic Interest will be measured by an amount equal to
the Member's percentage Membership Interest in the Company as the same may be
adjusted from time to time.
"Economic Interest Owner" means a Person who has validly acquired a
Member's Economic Interest as permitted under this Agreement but who has not
become a Member. Such Person shall be entitled to the allocations of Profits and
Losses and Cash Distributions under Article V and VI to which the previous owner
of the Economic Interest would have been entitled had such previous owner
retained the Economic Interest. Unless and until such Economic Interest Holder
is admitted as a Substitute Member, it shall be a mere assignee of a Member.
4
<PAGE>
"Entity" means any general partnership, limited partnership, limited
liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
"Equipment" means the appropriate equipment and supplies required from
time to time in connection with the development and operation of the Hospital.
"Fiscal Year" means, with respect to the first year of the Company, the
Period beginning upon the formation of the Company and ending on the next
September 30, with respect to subsequent years of the Company, the twelve month
period beginning October 1 and ending September 30, and, with respect to the
last year of the Company, the portion of the period beginning October 1 and
ending with the date of the final liquidating distributions.
"Hospital" means an acute care hospital specializing in all aspects of
cardiology and cardiovascular care and surgery in New Mexico, as further
described in Section 2.3 of the Agreement.
"Manager" means and shall refer to those persons designated by the
Board of Directors to oversee the operation of the Company in accordance with
the terms of a Management Agreement.
"Material Agreement" means any binding agreement which may not be
canceled upon less than ninety (90) days notice and which calls for the
expenditure of funds, or involves an obligation for financing, in excess of
$100,000.00 exclusive of agreements or obligations contemplated by any budget,
development plan, financing or construction contract approved by the Board of
Directors or agreements incurred in the ordinary course of business such as
employment agreements, purchases of supplies and routine services and the like.
"Material Decision" means any decisions regarding approvals of the
development and operating budgets for the Hospital, the selection of the site
for the Hospital, the design of the Hospital, the selection of the Hospital's
senior administrator, strategic planning, the execution of managed care
contracts, the execution of exclusive contracts to provide physician services to
the Hospital and any request for additional funding pursuant to Section 3.6(b)
of this Operating Agreement.
"Member" means and shall refer to the organizers of the Company (unless
or until any such organizer has withdrawn) and each of the Persons identified as
"Members" in the then applying Information Exhibit attached hereto and
incorporated herein by this reference. If a Person is already a Member
immediately prior to the purchase or other acquisition by such Person of an
Economic Interest or Membership Interest, such Person shall have all the rights
of a Member with respect to such purchased or otherwise acquired Membership
Interest or Economic Interest, as the case may be.
5
<PAGE>
"Membership Interest" or "Interest" means all of a Member's rights in
the Company, including without limitation the Member's share of Profits, Losses,
Cash Distributions and other benefits of the Company, any right to vote, any
right to participate in the management of the business and affairs of the
Company, including the right to vote on, consent to, or otherwise participate in
any decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the
Information Exhibit. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.
"Person" means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.
"Prime Rate" means the rate of interest as of the relevant day or time
period in the Wall Street Journal from time to time as the prime or reference
rate.
"Profits and Losses" means, for each Fiscal Year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(a) Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses shall be
added to such taxable income or loss;
(b) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses, shall be subtracted from such taxable income or
loss;
(c) Gain or loss resulting from dispositions of Company assets shall be
computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.
"Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.
"Regulations" means rules, orders, and regulations issued pursuant to
or under the authority of the Code and shall include revisions to and succeeding
provisions as appropriate.
"Regulatory Allocations" means those allocations of items of Company
income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit
and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section
6
<PAGE>
1.704-1(b)(2)(ii)(d), and the safe-harbor rules for allocations attributable to
nonrecourse liabilities prescribed in Regulations Section 1.704-2.
"Sale" means the sale, exchange, involuntary conversion (other than a
casualty followed by reconstruction), condemnation, or other disposition of
property by the Company, except for dispositions of inventory items and personal
property in the ordinary course of business and in connection with the
replacement of such property.
"Substitute Member" means an assignee of a Member who has been admitted
to the Company and granted all of the rights of a Member in place of its
assignor pursuant to the provisions of this Agreement. A Substitute Member, upon
its admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Member from whom it acquired its interest in the Company, to
the extent of the Economic Interest assigned.
"Territory" means the State of New Mexico and an area extending one
hundred (100) miles beyond the border of the State of New Mexico.
7
<PAGE>
EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
A New Mexico Limited Liability Company
DEVELOPMENT BUDGET EXHIBIT
[TO BE INSERTED]
<PAGE>
EXHIBIT E
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF NEW MEXICO, LLC
a New Mexico limited liability company
REGULATORY ALLOCATIONS
This Exhibit contains special rules for the allocation of items of
Company income, gain, loss and deduction that override the basic allocations of
Profits and Losses in the Agreement only to the extent necessary to cause the
overall allocations of items of Company income, gain, loss and deduction to have
substantial economic effect pursuant to Regulations Section 1.704-1(b) and shall
be interpreted in light of that purpose. Subsection (a) below contains special
technical definitions. Subsections (b) through (h) contain the Regulatory
Allocations themselves. Subsections (i), (j) and (k) are special rules
applicable in applying the Regulatory Allocations.
(a) Definitions Applicable to Regulatory Allocations. For
purposes of the Agreement, the following terms shall have the meanings
indicated:
(i) "Company Minimum Gain" means the same as the
meaning of "partnership minimum gain" set forth in Regulations Section
1.704-2(d), and is generally the aggregate gain the Company would
realize if it disposed of its property subject to Nonrecourse
Liabilities in full satisfaction of each such liability, with such
other modifications as provided in Regulations Section 1.704-2(d). In
the case of Nonrecourse Liabilities for which the creditor's recourse
is not limited to particular assets of the Company, until such time as
there is regulatory guidance on the determination of minimum gain with
respect to such liabilities, all such liabilities of the Company shall
be treated as a single liability and allocated to the Company's assets
using any reasonable basis selected by the Board of Directors.
(ii) "Member Nonrecourse Deductions" means losses,
deductions or Code Section 705(a)(2)(B) expenditures attributable to
Member Nonrecourse Debt under the general principles applicable to
"partner nonrecourse deductions" set forth in Regulations Section
1.704-2(i)(2).
(iii) "Member Nonrecourse Debt" means any Company
liability with respect to which one or more but not all of the Members
or related Persons to one or more but not all of the Members bears the
economic risk of loss within the meaning of Regulations Section 1.752-2
as a guarantor, lender or otherwise.
(iv) "Member Nonrecourse Debt Minimum Gain" means the
minimum gain attributable to Member Nonrecourse Debt as determined
pursuant to Regulations
<PAGE>
Section 1.704-2(i)(3). In the case of Member Nonrecourse Debt for which
the creditor's recourse against the Company is not limited to
particular assets of the Company, until such time as there is
regulatory guidance on the determination of minimum gain with respect
to such liabilities, all such liabilities of the Company shall be
treated as a single liability and allocated to the Company's assets
using any reasonable basis selected by the Board of Directors.
(v) "Nonrecourse Deductions" means losses,
deductions, or Code Section 705(a)(2)(B) expenditures attributable to
Nonrecourse Liabilities (see Regulations Section 1.704-2(b)(1)). The
amount of Nonrecourse Deductions for a Fiscal Year shall be determined
pursuant to Regulations Section 1.704-2(c), and shall generally equal
the net increase, if any, in the amount of Company Minimum Gain for
that taxable year, determined generally according to the provisions of
Regulations Section 1.704-2(d), reduced (but not below zero) by the
aggregate distributions during the year of proceeds of Nonrecourse
Liabilities that are allocable to an increase in Company Minimum Gain,
with such other modifications as provided in Regulations Section
1.704-2(c).
(vi) "Nonrecourse Liability" means any Company
liability (or portion thereof) for which no Member bears the economic
risk of loss under Regulations Section 1.752-2.
(vii) "Regulatory Allocations" means allocations of
Nonrecourse Deductions provided in Paragraph (b) below, allocations of
Member Nonrecourse Deductions provided in Paragraph (c) below, the
minimum gain chargeback provided in Paragraph (d) below, the member
nonrecourse debt minimum gain chargeback provided in Paragraph (e)
below, the qualified income offset provided in Paragraph (f) below, the
gross income allocation provided in Paragraph (g) below, and the
curative allocations provided in Paragraph (h) below.
(b) Nonrecourse Deductions. All Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Members in accordance with their
percentage Membership Interests.
(c) Member Nonrecourse Deductions. All Member Nonrecourse
Deductions for any Fiscal Year shall be allocated to the Member who
bears the economic risk of loss under Regulations Section 1.752-2 with
respect to the Member Nonrecourse Debt to which such Member Nonrecourse
Deductions are attributable.
(d) Minimum Gain Chargeback. If there is a net decrease in
Company Minimum Gain for a Fiscal Year, each Member shall be allocated
items of Company income and gain for such year (and, if necessary,
subsequent years) in an amount equal to such Member's share of such net
decrease in Company Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g)(2) and the definition of Company Minimum
Gain set forth above. This provision is intended to comply with the
minimum
2
<PAGE>
gain chargeback requirement in Regulations Section 1.704-2(f) and shall
be interpreted consistently therewith.
(e) Member Nonrecourse Debt Minimum Gain Chargeback. If there
is a net decrease in Member Nonrecourse Debt Minimum Gain attributable
to a Member Nonrecourse Debt for any Fiscal Year, each Member who has a
share of the Member Nonrecourse Debt Minimum Gain attributable to such
Member Nonrecourse Debt as of the beginning of the Fiscal Year,
determined in accordance with Regulations Section 1.704-2(i)(5), shall
be allocated items of Company income and gain for such year (and, if
necessary, subsequent years) in an amount equal to such Member's share
of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance
with Regulations Sections 1.704-2(i)(4) and (5) and the definition of
Member Nonrecourse Debt Minimum Gain set forth above. This Paragraph is
intended to comply with the member nonrecourse debt minimum gain
chargeback requirement in Regulations Section 1.7()4-2(i)(4) and shall
be interpreted consistently therewith.
(f) Qualified Income Offset. In the event any Member
unexpectedly receives any adjustments, allocations, or distributions
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4),(5), or (6),
items of Company income and gain (consisting of a pro rata portion of
each item of Company income, including gross income, and gain for such
year) shall be allocated to such Member in an amount and manner
sufficient to eliminate, to the extent required by the Regulations, any
deficit in such Member's Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible.
(g) Gross Income Allocation. In the event any Member has a
deficit in its Adjusted Capital Account at the end of any Fiscal Year,
each such Member shall be allocated items of Company gross income and
gain, in the amount of such Adjusted Capital Account deficit, as
quickly as possible.
(h) Curative Allocations. When allocating Profits and Losses
under Article VI, such allocations shall be made so as to offset any
prior allocations of gross income under Paragraph (g) above to the
greatest extent possible so that overall allocations of Profits and
Losses shall be made as if no such allocations of gross income
occurred.
(i) Ordering. The allocations in this Exhibit to the extent
they apply shall be made before the allocations of Profits and Losses
under Article VI and in the order in which they appear above.
(j) Waiver of Minimum Gain Chargeback Provisions. If the Board
of Directors determine that (i) either of the two minimum gain
chargeback provisions contained in this Exhibit would cause a
distortion in the economic arrangement among the Members, (ii) it is
not expected that the Company will have sufficient other items of
income and gain to correct that distortion, and (iii) the Members have
made Capital Contributions or received net income allocations that have
restored any previous
3
<PAGE>
Nonrecourse Deductions or Member Nonrecourse Deductions, then the Board
of Directors shall have the authority, but not the obligation, after
giving notice to the Members, to request on behalf of the Company the
Internal Revenue Service to waive the minimum gain chargeback or member
nonrecourse debt minimum gain chargeback requirements pursuant to
Regulations Sections 1.704-2(f)(4) and 1.704-2(i)(4). The Company shall
pay the expenses (including attorneys' fees) incurred to apply for the
waiver. The Board of Directors shall promptly copy all Members on all
correspondence to and from the Internal Revenue Service concerning the
requested waiver.
(k) Code Section 754 Adjustments. To the extent an adjustment
to the adjusted tax basis of any Company asset pursuant to Code Section
734(b) or Code Section 743(b) is required, pursuant to Regulations
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining
Capital Accounts, the amount of such adjustment to the Capital Accounts
shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis),
and such gain or loss shall be specially allocated to the Members in a
manner consistent with the manner in which their Capital Accounts are
required to be adjusted pursuant to such Section of the Regulations.
[THE REMAINDER OF THIS PAGE INTENTIONALLY HAS BEEN LEFT BLANK.]
4
<PAGE>
AGREEMENT AND PLAN OF MERGER
Dated as of March 12, 1998
by and among
MEDCATH INCORPORATED,
MCTH ACQUISITION, INC.
AND
MEDCATH HOLDINGS, INC.
<PAGE>
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".
A-1
<PAGE>
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.
(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
A-2
<PAGE>
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
A-3
<PAGE>
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 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
A-4
<PAGE>
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.
(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.
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(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
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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, 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
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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
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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, 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;
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(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;
(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;
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(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
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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 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
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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 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
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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
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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
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
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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.
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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.
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
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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.
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(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.
(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.
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(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, otherwise in compliance with all applicable Environmental Laws
and there are no circumstances that might prevent or interfere with such
compliance in the future;
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(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:
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"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.
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.
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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.
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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.
(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
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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
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Agreement 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,
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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.
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
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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
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(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 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;
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(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
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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.
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).
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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
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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 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,
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(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.
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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.
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.
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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, 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.
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<PAGE>
(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
A-40
<PAGE>
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:
Name:
Title:
MCTH ACQUISITION INC.,
a North Carolina corporation
By:
Name:
Title:
MEDCATH HOLDINGS, INC.
a Delaware corporation
By:
Name:
Date:
A-41
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at March 31, 1998
(Unaudited) and the Condensed Conosolidated Statement of Income for the six
months ended March 31, 1998 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000931782
<NAME> MedCath Incorporated
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> SEP-30-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 12,921
<SECURITIES> 5,610
<RECEIVABLES> 40,991
<ALLOWANCES> (2,843)
<INVENTORY> 4,319
<CURRENT-ASSETS> 62,065
<PP&E> 220,916
<DEPRECIATION> (26,434)
<TOTAL-ASSETS> 333,494
<CURRENT-LIABILITIES> 34,118
<BONDS> 149,498
0
0
<COMMON> 117
<OTHER-SE> 138,923
<TOTAL-LIABILITY-AND-EQUITY> 333,494
<SALES> 0
<TOTAL-REVENUES> 91,434
<CGS> 0
<TOTAL-COSTS> 76,951
<OTHER-EXPENSES> 1,758
<LOSS-PROVISION> 2,842
<INTEREST-EXPENSE> 5,022
<INCOME-PRETAX> 4,861
<INCOME-TAX> 1,896
<INCOME-CONTINUING> 2,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,965
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
