<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE
ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
MEDCATH INCORPORATED
(Name of Registrant as Specified In Its Charter)
Not Applicable
-----------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: Common
Stock, $.01 par value
(2) Aggregate number of securities to which transaction applies: 11,807,571
shares
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The filing fee was computed using the $19 per share
in cash to be received by the shareholders in the
merger proposal to which this Proxy Statement relates
(4) Proposed maximum aggregate value of transaction: $224,343,849
(5) Total fee paid: $44,869
[X] $44,793 of fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
<PAGE>
(1) Amount Previously Paid:______________________
(2) Form, Schedule or Registration Statement No.:_______________
(3) Filing Party:________________________________
(4) Date Filed:__________________________________
<PAGE>
MEDCATH INCORPORATED
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
June __, 1998
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders
(the "Special Meeting") of MedCath Incorporated (the "Company" or "MedCath") to
be held on July 14, 1998, at 10:00 a.m., local time, at Raintree Country Club,
located at 8600 Raintree Lane, Charlotte, North Carolina. The purpose of the
Special Meeting is to consider and vote upon a merger (the "Merger") that, if
approved and subsequently consummated, will result in the public shareholders of
MedCath receiving $19 in cash per share for their stock and MedCath becoming a
privately-owned company.
If approved by MedCath's shareholders, the Merger would be accomplished
pursuant to an Agreement and Plan of Merger (the "Merger Agreement") as follows.
MCTH Acquisition, Inc. (the "Acquiror"), a newly-formed North Carolina
corporation which is a wholly-owned subsidiary of MedCath Holdings, Inc., a
newly-formed Delaware corporation (the "Parent"), would merge with and into
MedCath, which would be the surviving corporation in the Merger. If the Merger
is consummated, each outstanding share of common stock, $.01 par value, of
MedCath (the "Common Stock"), other than shares held by shareholders who are
entitled to and who have perfected their dissenters' rights and shares held by
the Acquiror, will be canceled and converted automatically into the right to
receive $19 in cash, payable to the holder thereof, without interest.
The Parent was organized at the direction of two private investment
partnerships that have jointly agreed, together with certain affiliated entities
and individuals, to acquire (indirectly through the Parent and the Acquiror in
the Merger) the stock of the public shareholders of MedCath. The first
partnership is KKR 1996 Fund, L.P. (the "KKR Partnership"), an affiliate of
Kohlberg Kravis Roberts & Co., L.P. ("KKR"). The second partnership is Welsh,
Carson, Anderson & Stowe VII, L.P.("WCAS VII"). One other private investment
partnership and 10 individuals affiliated with WCAS VII will also participate in
the transaction (together with WCAS VII, the "WCAS Investors").
Three other members of MedCath's management and I (the "Management
Group") have each agreed to contribute to the Parent in kind at least 50% of the
value of our equity interests in MedCath, which includes both shares of Common
Stock and the difference between $19 per share and the exercise prices of our
stock options. Certain of the WCAS Investors have also agreed to contribute a
portion of their shares of Common Stock to the Parent. In addition, the
approximately 80 physicians who own shares of Common Stock issued to them in
connection with the Company's acquisition of contracts to manage their practices
(the "Physicians") will be individually offered the opportunity to contribute to
the Parent up to 50% of their shares of Common Stock. All of the approximately
30 employees of MedCath (not including members of the Management Group) who hold
options to purchase shares of Common Stock (the "Employees") will individually
be offered the opportunity to exchange their existing options for options to
purchase shares of common stock of the Parent.
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If the Merger is consummated, the Management Group, the WCAS Investors
and the Physicians will not receive any cash in the Merger for the value of
their equity interests in MedCath contributed to the Parent. Instead, they will
receive shares, and (in the case of the Management Group) options to purchase
shares, of common stock of the Parent and will continue to have indirect
ownership interests in MedCath following the Merger. They will, however, receive
cash in the Merger (on the same terms as the other shareholders) for their
shares of Common Stock that they do not contribute to the Parent. The Management
Group will also receive cash on the same basis as all other optionees for the
difference between $19 per share and the exercise prices of any stock options
they do not agree to exchange for substantially equivalent options to purchase
shares of common stock of the Parent.
A special committee of the Board of Directors of MedCath (the "Special
Committee"), consisting of two independent directors (who are neither members of
the Management Group nor affiliated with WCAS VII or the KKR Partnership) was
formed nearly a year ago to investigate, consider and evaluate strategic
alternatives to maximize shareholder value. The Special Committee has
unanimously recommended to MedCath's Board of Directors that the Merger and
related agreements be approved. In connection with its evaluation of strategic
alternatives, the Special Committee engaged Goldman, Sachs & Co. ("Goldman
Sachs") to act as its financial advisor. Goldman Sachs has rendered its opinion
that, as of the date of this Proxy Statement, based upon and subject to the
assumptions, limitations and qualifications set forth in such opinion, the cash
merger consideration of $19 per share to be received in the Merger is fair from
a financial point of view to the shareholders of the Company (other than the
Management Group, the KKR Partnership and the WCAS Investors). The written
opinion of Goldman Sachs, dated the date of this Proxy Statement, is attached as
Appendix B to the enclosed Proxy Statement and should be read carefully and in
its entirety by shareholders.
The Special Committee and the Board of Directors believe that the terms
of the Merger are fair to, and in the best interests of, the Company's
shareholders and unanimously recommend that shareholders approve the Merger.
Four of the six members of MedCath's Board of Directors are either members of
the Management Group or WCAS Investors and, consequently, have conflicts of
interest in connection with this recommendation. None of those directors
participated in the vote on the Merger. As a result, the two independent
directors (who also constituted the Special Committee) were the only members of
the Board of Directors who voted on the Merger.
Approval of the Merger at the Special Meeting will require the
affirmative vote of holders of a majority of the outstanding shares of Common
Stock entitled to vote at the Special Meeting. Shareholders (including the
Management Group, the other executive officers of MedCath ,the WCAS Investors,
Welsh, Carson, Anderson & Stowe V, L.P. and the members of the Special
Committee) who as of the record date beneficially owned approximately 24% of the
outstanding shares of Common Stock, have either agreed to or expressed their
intention to vote their shares for approval of the Merger.
The accompanying Proxy Statement provides you with a summary of the
proposed Merger and additional information about the parties involved and their
interests. Please give all this information your careful attention. WHETHER OR
NOT YOU PLAN TO ATTEND, IT IS IMPORTANT THAT
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YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING. A FAILURE TO VOTE WILL COUNT
AS A VOTE AGAINST THE MERGER. ACCORDINGLY, YOU ARE REQUESTED TO PROMPTLY
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE
PROVIDED.
Stephen R. Puckett
Chairman, President and Chief Executive Officer
<PAGE>
MEDCATH INCORPORATED
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD JULY 14, 1998
To Our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Special Meeting") of MedCath Incorporated, a North Carolina corporation (the
"Company" or "MedCath"), will be held on July 14, 1998 at 10:00 a.m., local
time, at Raintree Country Club, located at 8600 Raintree Lane, Charlotte, North
Carolina, for the following purposes:
(1) To consider and vote on a proposal to approve an Agreement and
Plan of Merger pursuant to which MCTH Acquisition, Inc., a
newly-formed company (the "Acquiror"), will be merged (the
"Merger") with and into MedCath and each shareholder of the
Company (other than shareholders who are entitled to and have
perfected their dissenters' rights and the Acquiror) will
become entitled to receive $19 in cash for each outstanding
share of common stock, $.01 par value, of the Company (the
"Common Stock") owned immediately prior to the effective time
of the Merger. A copy of the Agreement and Plan of Merger
dated as of March 12, 1998 is attached as Appendix A to and is
described in the accompanying Proxy Statement.
(2) To consider and act upon such other matters as may properly
come before the Special Meeting or any adjournment or
adjournments thereof.
The Board of Directors has determined that only holders of Common Stock of
record at the close of business on June 4, 1998, will be entitled to notice of,
and to vote at, the Special Meeting or any adjournment or adjournments thereof.
By Order of the Board of Directors,
Richard J. Post
Chief Financial Officer, Secretary and Treasurer
YOUR VOTE IS IMPORTANT
IF YOU ARE UNABLE TO ATTEND THE MEETING, PLEASE DATE, SIGN AND RETURN THE
ACCOMPANYING PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO
POSTAGE IF MAILED IN THE UNITED STATES. PLEASE DO NOT SEND IN ANY CERTIFICATES
FOR YOUR SHARES AT THIS TIME.
<PAGE>
ANY SHAREHOLDER SHALL HAVE THE RIGHT TO DISSENT FROM THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED BY THE AGREEMENT AND PLAN OF MERGER AND TO RECEIVE
PAYMENT OF THE "FAIR VALUE" OF HIS OR HER SHARES UPON COMPLIANCE WITH THE
PROCEDURES SET FORTH IN CHAPTER 55, ARTICLE 13 OF THE GENERAL STATUTES OF NORTH
CAROLINA. SEE "RIGHTS OF DISSENTING SHAREHOLDERS" IN THE PROXY STATEMENT THAT
ACCOMPANIES THIS NOTICE AND THE FULL TEXT OF CHAPTER 55, ARTICLE 13 OF THE
GENERAL STATUTES OF NORTH CAROLINA, WHICH IS ATTACHED AS APPENDIX C AND IS
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT.
<PAGE>
MEDCATH INCORPORATED
7621 Little Avenue, Suite 106
Charlotte, North Carolina 28226
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of MedCath
Incorporated, a North Carolina corporation (the "Company" or "MedCath"), in
connection with the solicitation by its Board of Directors (the "Board") of
proxies to be used at a Special Meeting of Shareholders (the "Special Meeting")
to be held on July 14, 1998 at 10:00 a.m., local time, at Raintree Country Club,
located at 8600 Raintree Lane, Charlotte, North Carolina, and at any adjournment
or adjournments thereof. This Proxy Statement, the Notice of Special Meeting of
Shareholders and the enclosed proxy card are first being mailed to shareholders
of MedCath on or about June __, 1998.
The Special Meeting has been called to consider and vote on a proposal
to approve an Agreement and Plan of Merger (the "Merger Agreement"), which is
attached to this Proxy Statement as Appendix A. Pursuant to the Merger
Agreement, MCTH Acquisition, Inc. (the "Acquiror"), a newly-formed North
Carolina corporation, will be merged with and into MedCath (the "Merger"). In
the Merger, each outstanding share of common stock, $.01 par value, of MedCath
(the "Common Stock") (other than shares held by shareholders who are entitled to
and who have perfected their Dissenters' Rights (as defined below) and shares
held by the Acquiror) will be canceled and converted automatically into the
right to receive $19 in cash, payable to the holder thereof, without interest.
The Acquiror is a wholly-owned subsidiary of MedCath Holdings, Inc.
(the "Parent"), a newly-formed Delaware corporation organized at the direction
of two private investment partnerships, KKR 1996 Fund, L.P. (the "KKR
Partnership"), which is an affiliate of Kohlberg Kravis Roberts & Co., L.P.
("KKR") and Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII"). One other
private investment partnership and 10 individuals affiliated with WCAS VII
(together with WCAS VII, the "WCAS Investors") will also participate in the
transactions. Welsh, Carson, Anderson & Stowe V, L.P. ("WCAS V"), a private
investment partnership related to WCAS VII that currently holds approximately
7.5% of the outstanding Common Stock, will not participate in the transaction
and will receive $19 per share in cash for its shares on the same basis as other
MedCath shareholders. Four members of MedCath's management, Stephen R.
1
<PAGE>
Puckett, Chairman, President and Chief Executive Officer; David Crane, Executive
Vice President and Chief Operating Officer; Charles W. (Todd) Johnson, Senior
Vice President, Development and Managed Care; and Richard J. Post, Chief
Financial Officer, Secretary and Treasurer (together, the "Management Group")
are participating in the transactions and will remain the executive officers of
the Company immediately following the Merger and will become the executive
officers of the Parent. Mr. Puckett and Mr. Crane will become directors of the
Parent. The Management Group, the KKR Partnership and the WCAS Investors are
sometimes referred to together as the "Investor Group."
Immediately prior to the Effective Time (as defined below), certain
parties will contribute to the Parent shares of Common Stock or options to
purchase Common Stock in exchange for shares of common stock or stock options of
the Parent as follows:
o THE MANAGEMENT GROUP. Each member of the Management Group
has agreed to contribute to the Parent in kind at least
50% of the value of his equity interest in MedCath,
including both shares of Common Stock and the difference
between $19 per share and the exercise prices of his
MedCath stock options times the number of shares issuable
upon exercise of such options (the "Aggregate Unrealized
Gain"). In exchange for shares of Common Stock
contributed, each member of the Management Group will
receive shares of common stock of the Parent. In exchange
for MedCath stock options, each member of the Management
Group will receive similar options with the same Aggregate
Unrealized Gain to purchase shares of common stock of the
Parent that will be fully vested and immediately
exercisable.
o THE WCAS INVESTORS. Certain of the WCAS Investors,
including two non-management members of MedCath's Board of
Directors, Patrick J. Welsh and Andrew M. Paul (the "WCAS
Directors"), have also agreed to contribute to the Parent
a portion of their shares of Common Stock in exchange for
shares of the Parent.
o THE PHYSICIANS. The approximately 80 physicians who own
shares of Common Stock issued to them in connection with
the Company's acquisition of a contract to manage their
practices (the "Physicians") will be individually offered
the opportunity to contribute to the Parent up to 50% of
their shares of Common Stock in exchange for shares of
common stock of the Parent.
o THE EMPLOYEES. All of the approximately 30 employees of
MedCath (not including members of the Management Group)
who hold options to purchase shares of Common Stock (the
"Employees") will individually be offered the opportunity
to exchange their existing options for options to purchase
shares of common stock of the Parent. The new options will
be fully vested at the time of grant and will have the
same Aggregate Unrealized Gain as the canceled options to
purchase Common Stock.
2
<PAGE>
The Board of Directors of the Parent will reserve shares of the
Parent's common stock representing 15% of the fully diluted equity of the Parent
for the grant after consummation of the Merger of stock options at an exercise
price of $19 per share (the "New Options"). It is anticipated that the
Management Group will receive a substantial portion of the New Options, which
will vest as described under "SPECIAL FACTORS - Conflicts of Interest."
If the Merger is consummated, the Management Group, the WCAS Investors
and the Physicians will not receive any cash in the Merger for the shares of
Common Stock contributed to the Parent. Similarly, the Management Group and the
Employees will not receive any cash in the Merger for the Aggregate Unrealized
Gain on the options to purchase shares of Common Stock that they exchange for
options to purchase shares of common stock of the Parent. Instead, they will all
receive equity interests in the Parent and will continue to have indirect
ownership interests in MedCath following the Merger. The Management Group, the
WCAS Investors and the Physicians will, however, receive cash in the Merger on
the same terms as other MedCath shareholders for the shares of Common Stock that
they do not contribute to the Parent. The Management Group and the Employees
will also receive cash for the Aggregate Unrealized Gain on any stock options
that they do not exchange for similar options to purchase shares of common stock
of the Parent.
The aggregate consideration payable in the Merger is approximately $242
million. The amount to be paid in cash will be reduced by the aggregate value of
the equity interests in MedCath that the Management Group, the WCAS Investors,
the Physicians and the Employees contribute to the Parent.
Approval of the Merger at the Special Meeting will require the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock entitled to vote at the Special Meeting. Shareholders (including
the Management Group and the other executive officers of MedCath, the WCAS
Investors, WCAS V and the members of the Special Committee) who, as of the
record date beneficially owned 24% of the outstanding shares of Common Stock,
have either agreed to or expressed their intention to vote their shares for
approval of the Merger.
The consummation of the Merger is subject to a number of conditions.
Accordingly, even if shareholders approve the Merger, there can be no assurance
that the Merger will be consummated. This Proxy Statement, the Notice of Special
Meeting and the enclosed proxy card are first being mailed to shareholders of
the Company on or about June ___, 1998.
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
THE MERGER NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
AVAILABLE INFORMATION...........................................................................................iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................iv
SUMMARY...........................................................................................................1
Date, Time and Place of the Special Meeting..............................................................1
Purpose of the Special Meeting...........................................................................1
Record Date and Quorum...................................................................................1
Vote Required............................................................................................1
Parties to the Merger....................................................................................2
The Merger...............................................................................................4
Effective Time of the Merger and Payment for Shares......................................................4
The Special Committee's and Board's Recommendation.......................................................5
Opinion of Financial Advisor.............................................................................5
Purpose and Reasons of the Affiliates for the Merger.....................................................6
Position of the Affiliates as to Fairness of the Merger..................................................7
Conflicts of Interest....................................................................................7
Certain Effects of the Merger............................................................................9
Conditions to the Merger, Termination and Expenses......................................................10
Federal Income Tax Consequences.........................................................................11
Rights of Dissenting Shareholders.......................................................................11
Accounting Treatment....................................................................................12
Financing of the Merger.................................................................................12
Market Prices of Common Stock and Dividends.............................................................12
SELECTED CONSOLIDATED FINANCIAL DATA.............................................................................14
SPECIAL FACTORS..................................................................................................14
Background of the Merger................................................................................14
The Special Committee's and the Board's Recommendation..................................................25
Opinion of Financial Advisor............................................................................32
Purpose and Reasons of the Affiliates for the Merger....................................................37
Position of the Parent and the Acquiror as to Fairness of the Merger....................................38
Conflicts of Interest...................................................................................39
Certain Effects of the Merger...........................................................................45
Conduct of MedCath's Business After the Merger..........................................................46
Certain Forward Looking Information.....................................................................46
THE SPECIAL MEETING..............................................................................................46
Proxy Solicitation......................................................................................46
Record Date and Quorum Requirement......................................................................46
Voting Procedures.......................................................................................47
Voting and Revocation of Proxies........................................................................47
Effective Time..........................................................................................48
THE MERGER.......................................................................................................48
Conversion of Securities................................................................................48
Cash-out of MedCath Stock Options.......................................................................49
Transfer of Shares......................................................................................49
<PAGE>
Conditions..............................................................................................49
Representations and Warranties..........................................................................51
Covenants...............................................................................................52
Nonsolicitation Covenant................................................................................54
Indemnification and Insurance...........................................................................54
Expenses................................................................................................55
Termination, Amendment and Waiver.......................................................................55
Termination Fee.........................................................................................56
Financing...............................................................................................57
Expenses of the Transaction.............................................................................58
Regulatory Approvals....................................................................................59
Accounting Treatment....................................................................................59
RIGHTS OF DISSENTING SHAREHOLDERS................................................................................59
FEDERAL INCOME TAX CONSEQUENCES..................................................................................62
BUSINESS OF THE COMPANY..........................................................................................63
Overview................................................................................................63
Hospital Division.......................................................................................63
Practice Management Division............................................................................65
Diagnostics Division....................................................................................66
CERTAIN FORWARD LOOKING INFORMATION..............................................................................68
The June Projection.....................................................................................68
The December Projection.................................................................................70
The March Projection....................................................................................71
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT.........................................................73
CERTAIN INFORMATION CONCERNING THE PARENT, THE ACQUIROR AND OTHER AFFILIATES.....................................74
SHAREHOLDER PROPOSALS............................................................................................77
INDEPENDENT AUDITORS.............................................................................................77
OTHER MATTERS....................................................................................................78
APPENDICES
APPENDIX A - The Agreement and Plan of Merger...................................................................A-1
APPENDIX B - Opinion of Goldman, Sachs & Co.....................................................................B-1
APPENDIX C - Text of Chapter 55, Article 13 of the General Statues of North Carolina............................C-1
</TABLE>
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements, and other information filed with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549 and at the following
Regional Offices of the Commission: 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W. Judiciary
Plaza, Washington, D.C. 20549. The Commission maintains a World Wide Web site on
the Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, including the Company. The same information is also
available on the Internet at http://www.FreeEDGAR.com.
The Company, the Parent, the Acquiror, the Management Group, WCAS VII and
the WCAS Directors (the "Affiliates") have filed a Schedule 13E-3 with the
Commission with respect to the transactions contemplated by the Merger
Agreement. As permitted by the rules and regulations of the Commission, this
Proxy Statement omits certain information contained in the Schedule 13E-3. The
Schedule 13E-3, including any amendments and exhibits filed or incorporated by
reference as a part thereof, is available for inspection or copying as set forth
above. Statements contained in this Proxy Statement or in any document
incorporated herein by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete and in each
instance reference is made to such contract or other document filed as an
exhibit to the Schedule 13E-3 or such other document, and each such statement
shall be deemed qualified in its entirety by such reference.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION IN CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY OTHER
THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE PARENT OR THE ACQUIROR. THIS PROXY
STATEMENT DOES NOT CONSTITUTE A SOLICITATION OF A PROXY IN ANY JURISDICTION
WHERE, OR TO OR FROM ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH PROXY
SOLICITATION IN SUCH JURISDICTION. THE DELIVERY OF THIS PROXY STATEMENT SHALL
NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by the Company
(File No. 0-25176) pursuant to the Exchange Act are incorporated herein by this
reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 (as amended by Form 10-K/A-3 filed June ___, 1998);
2. The Company's Current Report on Form 8-K dated March 23, 1998;
3. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 1997 (as amended by Form 10-Q/A filed June ___, 1998); and
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1998 (as amended by Form 10-Q/A filed June ___, 1998).
All documents filed by the Company with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the date of the Special Meeting are hereby incorporated by reference
into this Proxy Statement and shall be deemed a part hereof from the date of
filing such documents or reports. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Proxy Statement to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN REQUEST TO THE COMPANY AT
7621 LITTLE AVENUE, SUITE 106, CHARLOTTE, NORTH CAROLINA 28226, RICHARD J. POST,
SECRETARY. SUCH DOCUMENTS WILL BE PROVIDED TO SUCH PERSON BY FIRST CLASS MAIL OR
OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST.
IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING,
REQUESTS SHOULD BE RECEIVED BY JUNE ___, 1998.
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE
IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN
ITS ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE OR
INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT. SHAREHOLDERS ARE URGED TO
READ THIS PROXY STATEMENT AND ITS APPENDICES IN THEIR ENTIRETY BEFORE VOTING.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A Special Meeting of Shareholders (the "Special Meeting") of MedCath
Incorporated (the "Company" or "MedCath") will be held on July 14, 1998, at
10:00 a.m., local time, at Raintree Country Club, located at 8600 Raintree Lane,
Charlotte, North Carolina.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders of the Company will consider
and vote on a proposal to approve an Agreement and Plan of Merger (the "Merger
Agreement"), which is attached to this Proxy Statement as Appendix A, pursuant
to which MCTH Acquisition, Inc. (the "Acquiror"), a newly-formed North Carolina
corporation which is a wholly-owned subsidiary of MedCath Holdings, Inc., a
newly-formed Delaware corporation (the "Parent"), would merge with and into
MedCath (the "Merger"), which would be the surviving corporation in the Merger,
and each outstanding share of common stock, $.01 par value, of MedCath (the
"Common Stock"), other than shares held by shareholders who are entitled to and
who have perfected their Dissenters' Rights (as defined below) and shares held
by the Acquiror will be converted automatically into the right to receive $19 in
cash payable to the holders thereof, without interest (the "Cash Merger
Consideration"). See "THE MERGER."
RECORD DATE AND QUORUM
The Board of Directors of the Company (the "Board") has fixed the close
of business on June 4, 1998 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the Special
Meeting and any adjournment or adjournments thereof. Each holder of record of
Common Stock at the close of business on the Record Date is entitled to one vote
for each share then held on each matter submitted to a vote of shareholders. At
the close of business on the Record Date, there were ___________ shares of
Common Stock outstanding. The holders of a majority of the outstanding shares of
Common Stock entitled to vote at the Special Meeting must be present in person
or represented by proxy to constitute a quorum for the transaction of business.
See "THE SPECIAL MEETING."
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Special Meeting is required to
approve the Merger Agreement.
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Thus, a failure to vote or a vote to abstain will have the same legal effect as
a vote cast against approval. In addition, brokers who hold shares of Common
Stock as nominees will not have discretionary authority to vote such shares in
the absence of instructions from the beneficial owners. A broker non-vote will
have the same effect as a vote against the Merger. See "THE SPECIAL
MEETING--Voting Procedures."
Shareholders (including the Management Group, the other executive
officers of MedCath, the WCAS Investors, WCAS V, and the members of the Special
Committee) who as of the record date beneficially owned 2,774,724, or
approximately 24%, of the outstanding shares of Common Stock have either agreed
or expressed their intention to vote their shares for approval of the Merger.
Holders of 9,032,847 shares of Common Stock, or approximately 76%, of the
outstanding shares of Common Stock, remain uncommitted with respect to how they
will vote on the Merger. Accordingly, the affirmative vote by holders of Common
Stock representing approximately 3,129,062 of such uncommitted shares, or
approximately 27% of the outstanding shares, will be required to approve the
Merger.
PARTIES TO THE MERGER
THE COMPANY
The Company is a provider of cardiology and cardiovascular services
through the development, operation and management of specialized cardiac
facilities and the management of physician practices. The Company operates three
specialty heart hospitals: The McAllen Heart Hospital in McAllen, Texas (which
opened in January 1996), the Arkansas Heart Hospital in Little Rock, Arkansas
(which opened in March 1997) and the Tucson Heart Hospital in Tucson, Arizona
(which opened in October 1997). (These hospitals are sometimes referred to in
this Proxy Statement as "McAllen," "Little Rock" and "Tucson," respectively.)
The Company has five additional heart hospitals under development, including the
Arizona Heart Hospital, which is expected to open in June 1998. (The Company's
existing and planned heart hospitals are referred to in this Proxy Statement as
"Heart Hospitals.") The Company also manages six medical practices comprising
approximately 115 physicians, manages eight fixed-site cardiac diagnostic and
therapeutic centers, and owns and operates 23 mobile cardiac catheterization
laboratories serving networks of hospitals. The principal executive offices of
the Company are located at 7621 Little Avenue, Suite 106, Charlotte, North
Carolina 28226. The Company's telephone number is (704) 541-3228. See "BUSINESS
OF THE COMPANY."
THE ACQUIROR
The Acquiror is a newly-formed North Carolina corporation organized at
the direction of the Parent for the sole purpose of effecting the Merger and has
not conducted any prior business. The principal executive offices of the
Acquiror are located at 2800 Sand Hill Road, Suite 200, Menlo Park, California
94025. The Acquiror's telephone number is (650) 233-6560.
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THE PARENT
The Parent is a newly-formed Delaware corporation organized at the
direction of the KKR Partnership and WCAS VII, each of which is a private
investment partnership. See "CERTAIN INFORMATION CONCERNING THE PARENT AND THE
ACQUIROR." Prior to the consummation of the Merger, certain members of the
Investor Group will contribute to the Parent shares of Common Stock or options
to purchase Common Stock in exchange for shares of common stock or stock options
of the Parent as follows:
o THE KKR PARTNERSHIP. The KKR Partnership will contribute $105
million in cash.
o THE WCAS INVESTORS. The WCAS Investors will contribute an
aggregate of 267,106 shares of Common Stock (valued at $19 per
share with an aggregate value of approximately $5 million), plus
approximately $100 million of cash, such that the total amount of
the WCAS Investors' contribution to the Parent is equal to $105
million. The WCAS Investors include WCAS VII, WCAS Healthcare
Partners, L.P., a private investment limited partnership, and 10
individuals who are general partners of the sole general partner
of WCAS VII, including Patrick J. Welsh and Andrew M. Paul, who
are, and have been since 1991, directors of the Company (the "WCAS
Directors").
o THE MANAGEMENT GROUP. Each member of the Management Group has
agreed to contribute to the Parent in kind at least 50% of the
value of his equity interest in MedCath, including both shares of
Common Stock and the difference between $19 per share and the
exercise prices of his MedCath stock options times the number of
shares issuable upon exercise of such options (the "Aggregate
Unrealized Gain"). In exchange for shares of Common Stock
contributed, each member of the Management Group will receive
shares of common stock of the Parent. In exchange for MedCath
stock options, each member of the Management Group will receive
similar options with the same Aggregate Unrealized Gain to
purchase shares of common stock of the Parent that will be fully
vested and immediately exercisable. The members of the Management
Group are the following executive officers of MedCath: Stephen R.
Puckett, Chairman of the Board, President and Chief Executive
Officer; David Crane, Executive Vice President and Chief Operating
Officer; Charles W. (Todd) Johnson, Senior Vice President,
Development and Managed Care; and Richard J. Post, Chief Financial
Officer, Secretary and Treasurer. Following consummation of the
Merger, the current executive officers of MedCath will retain
their positions with MedCath and become the executive officers of
the Parent.
o THE PHYSICIANS. The Physicians include the approximately 80
physicians who are shareholders of and have a business
relationship with MedCath through one of its Heart Hospitals,
managed medical practices or diagnostic facilities. They will be
individually offered the opportunity to contribute to the Parent
up to 50% of their shares of Common Stock in exchange for shares
of common stock of the Parent.
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o THE EMPLOYEES. All of the approximately 30 employees of MedCath
(not including members of the Management Group) who hold options
to purchase shares of Common Stock (the "Employees") will
individually be offered the opportunity to exchange their existing
options for options to purchase shares of common stock of the
Parent. The new options will be fully vested at the time of grant
and will have the same Aggregate Unrealized Gain as the canceled
options to purchase Common Stock.
The executive offices of Parent are located at 2800 Sand Hill Road, Suite 200,
Menlo Park, California 94025. The Parent's telephone number is (650) 233-6560.
THE MERGER
The Merger Agreement provides that subject to satisfaction of certain
conditions, the Acquiror will be merged with and into MedCath, and that
following the Merger, the separate existence of the Acquiror will cease and
MedCath will continue as the surviving corporation and a wholly-owned subsidiary
of the Parent. At the effective time of the Merger, which shall be the date and
time of filing of Articles of Merger with the Secretary of State of the State of
North Carolina (the "Effective Time"), and subject to the terms and conditions
set forth in the Merger Agreement, each share of issued and outstanding Common
Stock (other than shares as to which Dissenters' Rights (as defined below) are
properly perfected and not withdrawn and shares held by the Acquiror) will, by
virtue of the Merger, be canceled and converted into the right to receive $19 in
cash, without interest (the "Cash Merger Consideration"). As a result of the
Merger, MedCath's Common Stock will no longer be publicly traded and will be
100% owned by the Parent. See "THE MERGER."
EFFECTIVE TIME OF THE MERGER AND PAYMENT FOR SHARES
The Effective Time is currently expected to occur as soon as
practicable after the Special Meeting, subject to approval of the Merger
Agreement at the Special Meeting and satisfaction or waiver of the terms and
conditions of the Merger Agreement. See "THE MERGER--Conditions." Detailed
instructions with regard to the surrender of share certificates, together with a
letter of transmittal, will be forwarded to shareholders by the Company's
transfer agent, LaSalle National Bank (the "Disbursing Agent"), promptly
following the Effective Time. SHAREHOLDERS SHOULD NOT SUBMIT THEIR CERTIFICATES
TO THE DISBURSING AGENT UNTIL THEY HAVE RECEIVED SUCH materials. The Disbursing
Agent will send payment of the Cash Merger Consideration to shareholders as
promptly as practicable following receipt by the Disbursing Agent of their
certificates and other required documents. No interest will be paid or accrued
on the cash payable upon the surrender of certificates. See "THE
MERGER--Conversion of Securities." SHAREHOLDERS SHOULD NOT SEND ANY SHARE
CERTIFICATES AT THIS TIME.
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THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
In July 1997, because of the possibility of a sale of the Company in a
transaction in which management and the WCAS Directors might have a continuing
financial interest, the Board appointed a committee of disinterested directors
to review and evaluate the Company's strategic options, including a possible
sale of the Company (the "Special Committee"). Based on the factors set forth in
this Proxy Statement (see "SPECIAL FACTORS--The Special Committee's and the
Board's Recommendation"), the Special Committee unanimously recommended to the
Board that the Merger Agreement be approved and that it be recommended to the
shareholders of the Company. Following the unanimous recommendation of the
Special Committee, the Board approved the Merger Agreement and recommended that
the shareholders of the Company approve the Merger Agreement. The Special
Committee and the Board each reconfirmed, as of the date of this Proxy
Statement, the bases on which it recommended approval of the Merger Agreement.
At the meetings of the Board at which the Merger Agreement was considered, all
directors other than the members of the Special Committee either abstained from
voting or absented themselves from the meeting due to their conflicts of
interests. See "SPECIAL FACTORS--Conflicts of Interest." In connection with
their recommendations, the Special Committee and the Board each adopted the
analyses and findings of the Special Committee's financial advisor, Goldman,
Sachs & Co. See "SPECIAL FACTORS --Opinion of Financial Advisor." THE SPECIAL
COMMITTEE AND THE BOARD RECOMMEND THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF THE MERGER AGREEMENT.
OPINION OF FINANCIAL ADVISOR
Goldman, Sachs & Co. ("Goldman Sachs") provided its oral opinion to the
Special Committee on March 12, 1998 that, as of the date of such opinion, the
Cash Merger Consideration pursuant to the Merger Agreement was fair from a
financial point of view to the holders of the outstanding shares of Common Stock
(excluding the Investor Group). Goldman Sachs subsequently confirmed its earlier
opinion by delivery of its written opinion dated the date hereof.
The full text of the written opinion of Goldman Sachs, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached hereto as Appendix B and is
incorporated herein by reference. The opinion of Goldman Sachs referred to
herein does not constitute a recommendation as to how any holder of such shares
should vote with respect to the Merger. HOLDERS OF SHARES OF COMMON STOCK ARE
URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "SPECIAL
FACTORS--Opinion of Financial Advisor."
The Company has agreed to pay Goldman Sachs, contingent upon
consummation of the Merger, a transaction fee of 1% of the aggregate
consideration (the total value of the Common Stock valued at $19 per share plus
the outstanding debt of MedCath assumed by Acquiror), subject to a minimum of
$3.25 million. The Company has agreed to reimburse Goldman Sachs
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for its reasonable out-of-pocket expenses, including attorney's fees, and to
indemnify Goldman Sachs against certain liabilities, including certain
liabilities under the federal securities laws.
PURPOSE AND REASONS OF THE AFFILIATES FOR THE MERGER
The purpose of the Parent, the Acquiror, the members of the Management
Group, WCAS VII and the WCAS Directors (the "Affiliates") for engaging in the
transactions contemplated by the Merger Agreement is to acquire, together with
any participating Physicians and Employees, up to 100% of the ownership of the
Company. The Affiliates believe that as a private company MedCath will have
greater operating flexibility to focus on enhancing value by emphasizing growth
and operating cash flow without the constraint of the public market's emphasis
on quarterly earnings and the potentially disruptive effect associated with
losses in connection with the construction and start-up of new Heart Hospitals.
The members of the Management Group beneficially own, in the aggregate,
approximately 14.9% of the outstanding Common Stock. The two WCAS Directors may
be deemed to beneficially own, in the aggregate, approximately 8.2% and 7.7%,
respectively, of the outstanding Common Stock, including 7.5% that is held of
record by WCAS V. See "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF
MANAGEMENT."
Prior to consummation of the Merger, members of the Management Group
have agreed to contribute a portion of their equity interests in MedCath to the
Parent, representing an investment of approximately $_____ million in the Parent
(based on the $19 per share to be received by shareholders in the Merger), in
exchange for ________ shares of common stock of the Parent and options to
purchase ____ shares of common stock of the Parent. The WCAS Investors have
agreed to contribute an aggregate of 267,106 shares of Common Stock to the
Parent (of which 104,786 will be contributed by the WCAS Directors) in exchange
for an equivalent number of shares of common stock of the Parent. In addition,
the Physicians who accept the Parent's offer to contribute up to 50% of their
shares of Common Stock to the Parent will receive in exchange shares of common
stock of the Parent.
As a result of the Merger, the KKR Partnership will acquire, indirectly
through the Parent for an investment of $105 million, approximately 43% of the
equity interest in the Company; the WCAS Investors will acquire, indirectly
through the Parent for an investment of $105 million, approximately 43% of the
equity interest in the Company, and the Management Group will acquire,
indirectly through the Parent for an investment of $_____ million, approximately
______% of the equity interest in the Company. See "SPECIAL FACTORS--Background
of the Merger." Members of the Management Group, the Physicians and the WCAS
Investors will also receive the Cash Merger Consideration for the remainder of
their investment in the Company on the same terms as other shareholders.
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POSITION OF THE AFFILIATES AS TO FAIRNESS OF THE MERGER
Each of the Affiliates has considered the analyses and findings of the
Special Committee and the Board (described in detail in "SPECIAL FACTORS -- The
Special Committee's and the Board's Recommendation") with respect to the
fairness of the Merger to the unaffiliated shareholders of the Company. Each of
the Affiliates adopts the analyses and findings of the Special Committee and the
Board with respect to the fairness of the Merger and believes that the Merger is
fair to the Company's shareholders, including the Company's unaffiliated
shareholders. None of the Affiliates makes any recommendation as to how the
Company's shareholders should vote on the Merger Agreement. See "SPECIAL FACTORS
- -- Position of the Affiliates as to Fairness of the Merger." The WCAS Directors
have financial interests in the Merger and the members of the Management Group
have financial and employment interests in the Merger. See "SPECIAL FACTORS --
Conflicts of Interest."
CONFLICTS OF INTEREST
In considering the recommendation of the Board with respect to the
Merger, shareholders should be aware that certain officers and directors of
MedCath and affiliates of these officers and directors have interests in
connection with the Merger which may present them with actual or potential
conflicts of interest, which are described in more detail under "SPECIAL
FACTORS--Conflicts of Interest."
THE MANAGEMENT GROUP. After consummation of the Merger, members of the
Management Group will own shares of common stock of the Parent, and fully vested
options to purchase such shares, representing approximately ____% of such shares
expected to be then issued and outstanding (assuming exercise of such options).
The Parent, the KKR Partnership and WCAS VII have also agreed with the
Management Group that the Parent will reserve for issuance, pursuant to future
grants of additional options, shares of common stock of the Parent representing
15% of the fully diluted equity of the Parent. It is contemplated that members
of the Management Group will receive a substantial portion of such option
grants. In addition, the Management Group will become executive officers of the
Parent and will designate two persons, Stephen R. Puckett and David Crane, to
serve on the Board of the Parent immediately following the Merger. As a
condition to the Merger Agreement, the members of the Management Group have
entered into a voting agreement with the Acquiror and the Parent pursuant to
which they have agreed to vote their shares of Common Stock in favor of the
Merger.
Shares of Common Stock held by the Management Group that are not
contributed to the Parent will be converted into the right to receive the same
Cash Merger Consideration as shares of Common Stock held by other shareholders
of MedCath. Options to purchase shares of Common Stock held by the members of
the Management Group that are not exchanged for similar options to purchase
shares of common stock of the Parent will be converted into the right to receive
a cash payment equal to the Aggregate Unrealized Gain on such stock options. See
"THE MERGER--Cash-out of MedCath Stock Options."
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The members of the Management Group will, upon consummation of the
Merger, enter into new employment agreements with the Parent replacing their
existing employment agreements with MedCath. The new employment agreements will
provide for the payment to them of base salaries, possible annual cash bonuses,
potential severance benefits and a separate payment in respect of the
termination of their previously existing employment agreements. The base
salaries for each of Stephen R. Puckett, David Crane, Charles W. (Todd) Johnson
and Richard J. Post pursuant to each of their employment agreements will
initially remain at their current levels of $375,680, $263,172, $189,996 and
$157,992, respectively. The possible annual cash bonuses for each of the members
of the Management Group pursuant to each of their employment agreements will
equal a percentage of each of their base salaries, be calculated using a bonus
formula comparable to the bonus formula in effect immediately prior to the
Merger, and will depend upon the Company meeting or exceeding certain
performance targets to be established yearly by the Board. The new employment
agreements will also provide for a separate payment in respect of a covenant not
to compete. In addition, the members of the Management Group will be entitled to
"stay bonuses," in amounts to be determined, which will be payable over the
first two years of their employment after consummation of the Merger.
The consummation of the Merger will constitute a "change of control"
triggering severance payment obligations under their existing employment
agreements. In connection with entering into their new employment agreements,
each member of the Management Group has agreed to waive any rights and forego
any severance payments that he may have under his current employment agreement
or that he might otherwise be entitled to upon a "change of control" of the
Company. See "SPECIAL FACTORS -- Conflicts of Interest."
After consummation of the Merger, the Parent and the members of the
Management Group will enter into a stockholders agreement that will restrict the
Management Group's ability to transfer the shares of common stock of the Parent
to be owned by them. The agreement will give them (or their estates) the right
in certain events to sell, and will obligate the Parent to purchase, their
shares of common stock of the Parent. The agreement will also grant them certain
registration rights for their shares of the Parent and will further give the
Parent the right to call their shares at a specified price upon the occurrence
of certain events.
THE WCAS DIRECTORS. After consummation of the Merger, the WCAS
Directors may be deemed to beneficially own shares of common stock of the Parent
representing approximately ___% of such shares expected to be then issued and
outstanding (including approximately ____% that will be held of record by WCAS
VII, which the WCAS Directors and the other individual WCAS Investors may be
deemed to indirectly beneficially own). In addition, the WCAS Investors will
designate three persons to serve on the Board of Directors of the Parent
following the Merger.
THE SPECIAL COMMITTEE. The members of the Special Committee
beneficially own shares of Common Stock or options to purchase shares of Common
Stock which will be converted into the Cash Merger Consideration or, in the case
of MedCath stock options, a cash payment equal to the Aggregate Unrealized Gain
on such options. As a result, the members of the Special Committee will receive
a payment for their shares of Common Stock and the Aggregate Unrealized Gain on
such options in the aggregate amount of $1,212,750 upon consummation of
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the Merger. As compensation for serving on the Special Committee, which met more
than ___ times from July 1997 through May 1998, the members of the Special
Committee each received fees in the amount of $_______, which were paid pursuant
to the Board's policy for compensation of directors for attendance at committee
meetings. Members of the Special Committee will be entitled to certain
indemnification rights granted under the Merger Agreement to the current and
former directors and officers of the Company. See "SPECIAL FACTORS--Conflicts of
Interest."
INDEMNIFICATION RIGHTS. The Merger Agreement provides that the current
and former directors and officers of the Company (including the members of the
Special Committee) will be indemnified by the Company, to the full extent
permitted by applicable law, against all liabilities (including reasonable
attorneys' fees) relating to actions or omissions arising out of such directors
or officers being a director, officer, employee or agent of the Company at or
prior to the Effective Time (including the transactions contemplated by the
Merger Agreement). In addition, the directors and executive officers of the
Company will be provided with continuing directors' and officers' liability
insurance coverage following the Merger, subject to certain limitations. See
"SPECIAL FACTORS--Conflicts of Interest."
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest in the Company
will be owned (indirectly through the Parent) by the Investor Group, the
Physicians and Employees who elect to invest in the Parent. The public
shareholders will no longer have any interest in, and will not be shareholders
of, MedCath, and therefore will not participate in MedCath's future earnings and
potential growth. Instead, the public shareholders will have the right to
receive $19 in cash, without interest, for each share held (other than shares in
respect of which Dissenters' Rights (as defined below) have been perfected). An
equity investment in the Company (indirectly through an equity investment in the
Parent) following the Merger involves substantial risk resulting from the
limited liquidity of any such investment and the leverage resulting from the
future borrowings that will be required to fund the substantial capital
expenditures necessary to execute the Company's business strategy. Nonetheless,
if the Company successfully executes its business strategy, the value of such an
equity investment would be considerably greater than the original cost thereof.
See "SPECIAL FACTORS--Conflicts of Interest" and "CERTAIN FORWARD LOOKING
INFORMATION."
In addition, the Common Stock will no longer be traded on the Nasdaq
National Market and price quotations with respect to sales of shares in the
public market will no longer be available. The registration of the Common Stock
under the Exchange Act will terminate, and this termination will eliminate the
Company's obligation to file periodic financial and other information with the
Commission and will make most other provisions of the Exchange Act inapplicable.
See "SPECIAL FACTORS--Certain Effects of the Merger."
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CONDITIONS TO THE MERGER, TERMINATION AND EXPENSES
Each party's obligation to effect the Merger is subject to satisfaction
of a number of conditions, each of which may be waived by a specified party or
parties, including with respect to one or both parties: (i) the Merger Agreement
shall have been approved by holders of a majority of the outstanding shares of
Common Stock, (ii) all required consents and approvals shall have been obtained,
(iii) the Acquiror shall have obtained financing on terms satisfactory to it,
(iv) the representations and warranties of the parties shall be true and correct
in all material respects as of the Effective Time except as contemplated by the
Merger Agreement, and (v) neither MedCath nor any of its subsidiaries shall be
under investigation for any violation of the "Stark" laws, anti-kickback laws or
the laws relating to Medicare, Medicaid, CHAMPUS, or any rules or regulations
related thereto. See "THE MERGER--Conditions." Even if the shareholders approve
the Merger Agreement, there can be no assurance that the Merger will be
consummated.
At any time prior to the Effective Time, the Merger Agreement may be
terminated by the mutual consent of the Board and the Board of Directors of the
Acquiror. In addition, any of the parties may terminate the Merger Agreement
prior to the Effective Time if (i) the conditions precedent to effecting the
Merger have not occurred on or before August 31, 1998 (which failure to become
effective shall not be the result primarily of the breach of any representation,
warranty or covenant by the party desiring to terminate), (ii) the requisite
approval by the shareholders of MedCath has not been obtained, or (iii) a court
or other governmental entity permanently enjoins, restrains or prohibits the
Merger and such action is final and non-appealable. See "THE
MERGER--Termination, Amendment and Waiver."
The Merger Agreement may be terminated by the Acquiror prior to the
Effective Time by written notice to MedCath if (i) MedCath breaches any
representation, warranty or covenant and fails to cure such breach within thirty
days after written notice, (ii) the Board withdraws or modifies its approval or
recommendation of the Merger Agreement or the Merger, (iii) MedCath enters into
a definitive agreement with any party regarding an Acquisition Proposal (as
defined below), or (iv) a third party commences a tender or exchange offer for
25% or more of the Common Stock and the Board has recommended that MedCath's
shareholders tender their shares in connection with such offer.
An "Acquisition Proposal" is defined under the Merger Agreement to
include any offer or proposal by any corporation, partnership, person or other
entity or group concerning any tender or exchange offer, proposal for a merger,
share exchange, recapitalization, consolidation or other business combination
involving MedCath or any of its subsidiaries or divisions, or any proposal or
offer to acquire in any manner, directly or indirectly, a significant equity
interest in, or a substantial portion of the assets, of MedCath or any of its
subsidiaries, other than pursuant to the transactions contemplated by the Merger
Agreement.
MedCath may terminate the Merger Agreement if (i) the Board or Special
Committee determines the continued recommendation of the Merger or the Merger
Agreement would violate fiduciary duties of the Board under applicable law, (ii)
the Board or Special Committee
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determines that MedCath has entered into a definitive agreement with any party
regarding an Acquisition Proposal, provided the Board first determines that
failing to take such action would violate the Board's fiduciary duties under
applicable law, or (iii) a third party commences a tender or exchange offer for
25% or more of the Common Stock and the Board has recommended that the
shareholders of MedCath tender their shares in connection with such offer,
provided that the Board or Special Committee first determines that failing to
take such action would violate the Board's fiduciary duties under applicable
law. See "THE MERGER--Termination, Amendment and Waiver."
MedCath has agreed to pay a termination fee (the "Termination Fee") in
the amount of $6,774,640 to the Acquiror in the event the Merger Agreement is
terminated by MedCath due to certain events, including (i) the Board or the
Special Committee withdrawing or modifying its approval or recommendation of the
Merger Agreement or the Merger in connection with the exercise of its fiduciary
duties, (ii) MedCath entering into a definitive agreement with any party with
respect to an Acquisition Proposal following a determination that the Company's
failure to do so would violate the Board's fiduciary duties or (iii) the
commencement by a third party of a tender offer for 25% or more of the Common
Stock which the Board has recommended to MedCath's shareholders. See "THE
MERGER--Termination Fee."
Each of the parties has agreed to pay its own costs and expenses in
connection with the Merger. In the event, however, that the Merger Agreement is
terminated due to the failure of MedCath's shareholders to approve the
transaction, MedCath has agreed to reimburse the Acquiror for its reasonable
out-of-pocket fees and expenses. See "THE MERGER--Expenses" and "--Termination
Fee."
FEDERAL INCOME TAX CONSEQUENCES
The receipt of the Cash Merger Consideration by holders of Common Stock
pursuant to the Merger will be a taxable transaction for federal income tax
purposes. All holders of Common Stock are urged to consult their tax advisors to
determine the effect of the Merger on such holders under federal, state, local
and foreign tax laws. See "FEDERAL INCOME TAX CONSEQUENCES."
RIGHTS OF DISSENTING SHAREHOLDERS
Any shareholder of MedCath who does not vote in favor of the proposal
to approve the Merger Agreement and who complies strictly with the applicable
provisions of Article 13 of Chapter 55 of the North Carolina General Statutes
("Article 13") has the right to dissent and be paid cash for the "fair value"
for such holder's shares of Common Stock ("Dissenters' Rights"). The applicable
provisions of Article 13 are attached to this Proxy Statement as Appendix C. To
perfect Dissenters' Rights with respect to the Merger, a MedCath shareholder
must follow the procedures set forth therein precisely. Those procedures are
summarized in this Proxy Statement under "RIGHTS OF DISSENTING SHAREHOLDERS."
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Shares of Common Stock held by persons properly exercising Dissenters'
Rights (the "Dissenting Shares") will not be converted into the Cash Merger
Consideration in the Merger and after the Effective Time will represent only the
right to receive such consideration as is determined to be due such dissenting
shareholder pursuant to Article 13. If after the Effective Time any dissenting
shareholder fails to perfect or loses such right to payment or appraisal under
Article 13, each share of Common Stock of such shareholder shall be treated as a
share that had been converted as of the Effective Time into the right to receive
the Cash Merger Consideration.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase business combination for
accounting purposes.
FINANCING OF THE MERGER
It is estimated that approximately $242 million will be required to
consummate the Merger and pay related fees and expenses. This sum will be
provided by equity contributions to the Parent of $105 million from currently
available funds by each of the KKR Partnership and the WCAS Investors and a draw
of approximately $32 million under the MedCath revolving credit facility. See
"THE MERGER--Financing." The aggregate Cash Merger Consideration will be reduced
by the value of the equity interests in MedCath that the Management Group, the
WCAS Investors, the Physician, and the Employees contribute to the Parent.
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
The Common Stock is traded on the Nasdaq National Market (symbol:
MCTH). The following table sets forth the high and low sales prices for each
quarterly period for the two most recent fiscal years and for the current fiscal
year to date.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OR ENDING SEPTEMBER 30,
----------------------------------------------------------------------------------
1996 1997 1998
---------------------- ---------------------- --------------------------
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
First Quarter $25 3/4 $17 $17 1/2 $12 1/8 $18 1/8 $13
Second Quarter 30 18 1/2 16 14 18 3/8 12 3/4
Third Quarter 42 5/8 10 3/4 16 12 3/8 18 9/16* 17 3/4*
Fourth Quarter 19 1/4 7 3/4 20 1/4 14 5/8
- ----------
* Through May 29, 1998
</TABLE>
On March 12, 1998, the last trading day prior to announcement of the
execution of the Merger Agreement, the closing price per share of Common Stock
as reported by Nasdaq was $16.50. On June ____, 1998, the last trading day prior
to printing of this Proxy Statement, the closing price per share of Common Stock
as reported by Nasdaq was $___________.
12
<PAGE>
At June 4, 1998, there were approximately __________ holders of record
of Common Stock and approximately ________ persons or entities holding in
nominee name.
The Company has never paid any cash dividends on its Common Stock.
Under the Merger Agreement, the Company has agreed not to pay any dividends on
the Common Stock prior to the Effective Time.
In April 1996, MedCath made an underwritten public offering of
2,300,000 shares of Common Stock. The offering price per share was $28.75, and
the net proceeds received by MedCath were approximately $62.5 million.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical financial data and
other operating information of the Company for each of the five fiscal years
ended September 30, 1997, which are derived from the audited consolidated
financial statements of the Company. The consolidated financial statements for
the five fiscal years ended September 30, 1997 have been audited by Ernst &
Young LLP, independent auditors, except that the financial statements for the
two years ended December 31, 1994 of HealthTech Corporation, a consolidated
subsidiary acquired in April 1995, in a business combination accounted for as a
pooling of interests, have been audited by other independent auditors. The
historical financial data of the Company for the six month periods ended March
31, 1997 and 1998 are derived from unaudited condensed consolidated financial
statements included in the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 1998, incorporated herein by reference. The unaudited
condensed consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of the consolidated financial position and consolidated results of
operations for these periods. The data are qualified by reference to, and should
be read in conjunction with, the Consolidated Financial Statements, related
Notes and other financial information included in the Company's Annual Report on
Form 10-K (as amended) for the year ended September 30, 1997, incorporated by
reference herein.
<TABLE>
<CAPTION>
MedCath Incorporated
Selected Consolidated Financial Data
Six Months Ended
INCOME STATEMENT DATA (1) Year Ended September 30, March 31,
----------------------------------------------------------- --------------------
(Dollars in thousands, except per share data) 1993 1994 1995 (2) 1996 1997 1997 1998
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue $ 17,635 $ 25,892 $ 40,106 $ 66,191 $ 110,910 $ 49,564 $ 90,511
Medical supplies, personnel and other operating
expenses 9,113 13,239 23,586 43,502 73,109 32,547 62,151
Depreciation and amortization expense 2,179 2,767 3,633 6,649 12,855 4,955 10,682
Provision for doubtful accounts - - - 735 2,083 938 2,842
Marketing, general and administrative expense 2,601 3,492 4,438 5,408 7,037 3,699 4,118
----- ----- ----- ----- ------ ----- ------
Income from operations 3,742 6,394 8,449 9,897 15,826 7,425 10,718
Interest expense, net (1,235) (1,632) (8) (523) (3,018) (279) (4,111)
Minority interest in earnings of consolidated
entities (654) (893) (1,530) (979) (1,539) (840) (1,758)
Equity in net earnings of unconsolidated joint
venture - 93 117 104 - - 12
Income before income taxes and extraordinary ----- ----- ----- ----- ------ ----- ------
item 1,853 3,962 7,028 8,499 11,269 6,306 4,861
Provision for income taxes (551) (1,497) (2,777) (3,297) (4,315) (2,454) (1,896)
----- ----- ----- ----- ------ ----- ------
Income before extraordinary item 1,302 2,465 4,251 5,202 6,954 3,852 2,965
Extraordinary loss - - (228) - (230) - -
--------- --------- --------- --------- --------- --------- ---------
Net income $ 1,302 $ 2,465 $ 4,023 $ 5,202 $ 6,724 $ 3,852 $ 2,965
========= ========= ========= ========= ========= ========= =========
Net income per weighted average share: (4)
Income before extraordinary item $ 0.38 $ 0.73 $ 0.55 $ 0.53 $ 0.62 $ 0.35 $ 0.25
Extraordinary loss - - (0.03) - (0.02) - -
--------- --------- --------- --------- --------- --------- ---------
Net income $ 0.38 $ 0.73 $ 0.52 $ 0.53 $ 0.60 $ 0.35 $ 0.25
========= ========= ========= ========= ========= ========= =========
Shares used in computation 3,388 3,395 7,760 9,875 11,149 11,141 11,669
========= ========= ========= ========= ========= ========= =========
Net income per share assuming dilution: (4)
Income before extraordinary item $ 0.22 $ 0.42 $ 0.51 $ 0.51 $ 0.60 $ 0.33 $ 0.24
Extraordinary loss - - (0.03) - (0.02) - -
--------- --------- --------- --------- --------- --------- ---------
Net income $ 0.22 $ 0.42 $ 0.48 $ 0.51 $ 0.58 $ 0.33 $ 0.24
========= ========= ========= ========= ========= ========= =========
Shares used in computation 5,832 5,918 8,381 10,193 11,686 11,667 12,286
========= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA SEPTEMBER 30, MARCH 31,
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- ---------
(UNAUDITED)
Cash and short-term investments $ 3,452 $ 5,466 $ 18,525 $ 61,693 $ 42,951 $ 18,531
Working capital 2,186 2,893 17,240 64,816 47,498 27,947
Total assets 23,034 37,905 78,372 181,681 259,008 333,494
Long-term debt and capital leases, excluding
current maturities 5,810 13,198 15,734 45,896 98,863 149,498
Subordinated debt 3,766 3,842 - - - -
Redeemable convertible preferred stock 6,763 6,763 - - - -
Shareholders' equity 1,479 4,256 50,494 120,245 127,137 139,040
SIX MONTHS ENDED
CASH FLOW AND OTHER DATA (1) YEAR ENDED SEPTEMBER 30, MARCH 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- --------
(UNAUDITED)
Net cash provided by operating activities $ 4,237 $ 6,061 $ 7,963 $ 7,115 $ 14,992 $ 3,903 $ 2,193
Net cash used in investing activities (7,273) (9,572) (31,299) (98,693) (55,016) (24,699) (62,281)
Net cash provided by financing activities 5,255 3,524 26,496 89,782 52,605 26,646 55,402
EBITDA 5,921 9,161 12,082 16,456 28,681 12,380 21,400
</TABLE>
(1) The ratio of earnings to fixed charges for the fiscal years ended September
30, 1996 and 1997 was 2.60x and 2.09x, respectively. The ratio of earnings
to fixed charges for the six month periods ended March 31, 1997 and 1998
was 2.75x and 1.66x, respectively. The book value per share as of September
30, 1997 and March 31, 1998 was $11.38 and $11.92 per share, respectively.
(2) Includes the results of operations of PhysMed Management Services, Inc.,
which was acquired in a purchase business combination effective October 1,
1994. See Note 3 of Notes to Consolidated Financial Statements included in
the Company's Annual Report on Form 10-K (as amended) for the year ended
September 30, 1997, incorporated by reference herein.
(3) EBITDA represents income from operations before depreciation, amortization,
interest, minority interests, equity in income of unconsolidated
subsidiaries and income taxes. While EBITDA should not be construed as a
substitute for income from operations or a better indicator of liquidity
than cash flows from operating activities, which are determined in
accordance with generally accepted accounting principles, it is included
herein to provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the Company's
ability to fund its cash needs.
(4) The net income per share amounts prior to the three months ended December
31, 1997, have been restated to comply with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). For further
discussion of earnings per share and the impact of SFAS 128, see note 16 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K (as amended) for the year ended September 30, 1997,
incorporated herein by reference.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
MANAGEMENT'S PRELIMINARY DISCUSSIONS REGARDING A SALE OF THE COMPANY.
During the Spring of 1997, the Management Group discussed the effect on the
market price of the Common Stock (which during the Spring frequently had traded
below the Company's initial public offering price of $14 per share) of start-up
losses experienced by new Heart Hospitals, the large capital expenditure budget
associated with the development of Heart Hospitals and fluctuations in the
Company's profitability. Management concluded that, under the Company's existing
operating strategy, shareholders likely would not begin to realize the value
management believed is inherent in the Company's business strategy until a
significant number of Heart Hospitals had achieved profitability. Once this had
occurred, management believed the cash flow and earnings generated by its
existing Heart Hospitals would be sufficient to absorb the development costs and
start-up expenses associated with opening new hospitals, which management
believed had historically depressed the market price of the Common Stock.
Management believed such a critical mass of profitable hospitals would not exist
for a minimum of two years. See "--The Special Committee's and the Board's
Recommendation" for a discussion of these factors.
Management considered that a sale of the Company to a strategic or
financial buyer having the financial resources to absorb the short-term losses
that are inherent in the Company's operating strategy might constitute a viable
option to accelerate the recognition by shareholders of the Company's long-term
value. In May 1997, management met informally with an
14
<PAGE>
investment banking firm on behalf of the Company to discuss in general terms a
possible sale of the Company. Based on the Company's historical performance
through the first half of fiscal year 1997 and the Company's projected
operations for the balance of the fiscal year and through fiscal year 2002,
management believed that a sale of the Company at an appropriate price might be
achievable.
Later in May 1997, Stephen R. Puckett discussed with John B. McKinnon,
a director of the Company since 1996, management's views about a possible sale
of the Company. Mr. McKinnon recommended that Mr. Puckett, on behalf of the
Company, contact Goldman Sachs (which is not the investment banking firm with
which management met informally in May 1997 as described above) to obtain its
views regarding possible buyers for the Company. In order to gauge the interest
of strategic buyers in acquiring a business meeting the Company's general
description, Mr. Puckett, on behalf of the Company, requested Goldman Sachs to
evaluate on a preliminary basis a number of health care providers as potential
acquirors of the Company. Based on the results of these evaluations, which were
made in June and July 1997, management concluded that a sale of the Company to a
strategic buyer at an appropriate price might be a possibility.
Concurrently with management's discussions with Mr. McKinnon and
Goldman Sachs described above, management explored other avenues relating to a
possible sale of the Company. Believing that institutional investors that
previously had invested in MedCath might be potential buyers of the Company, Mr.
Puckett and Mr. Post in May 1997 approached the WCAS Directors, Patrick J. Welsh
and Andrew M. Paul, and the principal investment group of Goldman Sachs
regarding whether they might be interested in participating with management in a
potential purchase of the Company. (Certain investment partnerships affiliated
with Goldman Sachs had been early venture capital investors in the Company.)
Consideration of this alternative ended in July 1997, however, when the parties
decided they were not interested in such a transaction.
APPOINTMENT OF SPECIAL COMMITTEE. In July 1997, Mr. Puckett reported to
Mr. McKinnon his recent conversations with the WCAS Directors and Goldman Sachs.
Because of the possibility of a sale of the Company in a transaction in which
management and the WCAS Directors might have a continuing financial interest,
Mr. McKinnon and Mr. Puckett agreed that the Board should appoint a committee of
disinterested directors to review and evaluate the Company's strategic options,
including a possible sale of the Company (the "Special Committee"). Mr. McKinnon
and Mr. Puckett further agreed that it would be appropriate to recommend to the
Board that it appoint to the Special Committee the only directors not affiliated
with WCAS V or management, Mr. McKinnon and Dr. W. Jack Duncan, a director of
the Company since 1994. Mr. McKinnon, the former President and a director of
Integon Corporation (positions he relinquished in October 1997), served as
President of Sara Lee Corporation from 1986 to 1988 and Dean of the Babcock
Graduate School of Management at Wake Forest University from 1989 to 1995. He
currently serves as a director of Premark International, Inc., Morrison's Health
Care, Inc., Ruby Tuesday, Inc. and two privately-held companies. Mr. McKinnon
received an A.B. from Duke University and an M.B.A. from Harvard Business
School. (Mr. McKinnon had been a director of and investor in HealthTech
15
<PAGE>
Corporation, an operator of mobile cath labs acquired by the Company in 1995
("HealthTech"). HealthTech had been founded in 1991 by Charles W. (Todd)
Johnson, who became employed by the Company following its acquisition of
HealthTech and is a member of the Management Group. Mr. Johnson and Mr. McKinnon
also have been co-investors in other ventures unrelated to HealthTech and the
Company.) Dr. Duncan, a personal friend of Mr. Puckett since 1970, has served as
Acting Dean of the School of Business at the University of Alabama at Birmingham
("UAB") since June 1997. Since 1987, he has been a Professor and University
Scholar in Management in the Graduate School of Management and Professor of
Health Care Organization and Policy and a Senior Scholar in the Lister Hill
Center for Health Policy in the School of Public Health of UAB. Dr. Duncan
received a B.S. in Economics from Howard College and an M.B.A. and a Ph.D. from
Louisiana State University. Neither Mr. McKinnon nor Dr. Duncan has any material
business, financial or other relationship with KKR or any of the WCAS Investors.
In anticipation of Mr. McKinnon's and Dr. Duncan's formal appointment
as members of the Special Committee, Mr. McKinnon engaged Womble Carlyle
Sandridge & Rice, PLLC of Charlotte, North Carolina ("Womble Carlyle") to advise
the Special Committee regarding its duties in connection with a possible sale of
the Company. On July 28, 1997, Mr. McKinnon, Dr. Duncan and Womble Carlyle met
with Mr. Puckett, Mr. Crane and Mr. Post and with representatives of Goldman
Sachs at the Company's headquarters in Charlotte, North Carolina. At the
meeting, Mr. Puckett reviewed with Mr. McKinnon and Dr. Duncan management's
views concerning a possible sale of the Company, and Goldman Sachs summarized
its views on possible market interest, all as described above. In addition,
Goldman Sachs confirmed that, although it had considered participating as
principal in a sale of the Company, it was no longer interested in pursuing such
opportunity.
Mr. Puckett first informed the Board as a whole of management's views
concerning a possible sale of the Company at a regular meeting of the Board held
on July 29, 1997. Mr. Puckett summarized for the Board the discussions that had
occurred regarding a possible sale of the Company beginning in the Spring of
1997 (as discussed above under "Management's Preliminary Discussions Regarding
a Sale of the Company"). At the meeting, the Board formally appointed Mr.
McKinnon and Dr. Duncan as the members of the Special Committee and authorized
the Special Committee to review and evaluate strategic options that might be
available to the Company and independently to solicit proposals to acquire the
Company. The Board granted the Special Committee exclusive authority on behalf
of the Board to review, evaluate and negotiate any transaction proposed by a
group which included one or more members of management or the Board or an
affiliate of any member of management or the Board and any competing offer to
acquire the Company not involving a conflict of interest. The Board retained
authority to review, evaluate and negotiate proposals only in the absence of any
proposal which would create a conflict of interest.
SOLICITATION AND RECEIPT OF PRELIMINARY PROPOSALS. Pursuant to a letter
dated August 8, 1997, the Special Committee formally engaged Goldman Sachs to
act as its financial advisor in connection with the proposed sale of the
Company. The Special Committee engaged Goldman
16
<PAGE>
Sachs based primarily on Goldman Sachs' nationally recognized reputation as an
investment banking firm that has substantial experience in acquisitions
involving public companies, including companies in the health care industry. The
Special Committee also considered Mr. McKinnon's experience with Goldman Sachs,
which had provided investment banking services to two companies (Sara Lee
Corporation and Integon Corporation) that Mr. McKinnon had served as President
as described above. The Special Committee also considered Goldman Sachs'
specific knowledge of the Company based on its informal discussions with Mr.
Puckett who, on behalf of the Company and upon Mr. McKinnon's recommendation,
had requested Goldman Sachs to evaluate a number of health care providers as
possible acquirors of the Company as described above. The Special Committee
considered management's prior contacts with Goldman Sachs to have focused
primarily on the feasibility of a sale of the Company to an unaffiliated
strategic buyer and, therefore, not to have created a conflict of interest with
respect to the Special Committee's engagement of Goldman Sachs. The Special
Committee further considered the possible interest of Goldman Sachs' principal
investment group in participating in an acquisition of the Company and retained
Goldman Sachs only after obtaining Goldman Sachs' confirmation that its
principal investment group would not participate in such an acquisition. Neither
Mr. McKinnon nor Dr. Duncan has any material professional, financial or other
relationship with Goldman Sachs.
Based on discussions with management and the Special Committee and its
own knowledge of the Company's industry, Goldman Sachs assembled an initial list
of 13 potential buyers of the Company that the Special Committee and Goldman
Sachs believed were most likely to have an interest. The initial list included
seven strategic buyers and six financial buyers. At the request of management,
and with the concurrence of the Special Committee, Goldman Sachs omitted from
the list one strategic buyer that is a major competitor of the Company in
markets served by two of its existing three Heart Hospitals and in certain
markets to be served by Heart Hospitals under development. Such competitor was
eliminated because, in the view of management and the Special Committee, it
would be able to use information concerning a possible sale of the Company to
the Company's competitive disadvantage. The initial list also did not include
WCAS VII, which was aware of the possible sale of the Company because of the
service on the Board of the WCAS Directors and which the Special Committee
believed would decide whether to participate in the process independently of the
marketing efforts undertaken by the Special Committee and Goldman Sachs. Five
additional financial buyers (including WCAS VII) were later added to the initial
list of 13.
Beginning in August 1997, Goldman Sachs circulated a confidential
offering memorandum (the "Offering Memorandum") concerning the Company to
potential buyers that had agreed to enter into confidentiality agreements,
including nine of the potential buyers on the initial list and the five that
were later added to such list as referred to above. Of the 14 potential buyers
that received the Offering Memorandum, 10 initiated a due diligence
investigation and participated in management presentations. The Offering
Memorandum contained a projection, prepared by management in June 1997, of the
Company's operations for the balance of the fiscal year ending September 30,
1997 and for each year in the five year period ending September 30, 2002 (the
"June Projection"). The June Projection and the principal assumptions on which
it is
17
<PAGE>
based are summarized in this Proxy Statement under "CERTAIN FORWARD LOOKING
INFORMATION."
On October 30, 1997, each of the parties that had participated in
management presentations was invited to submit by November 7, 1997 a written,
preliminary non-binding proposal to acquire the Company. Three proposals
representing four financial buyers, including KKR, were submitted. No strategic
buyer submitted a proposal. All of the proposals contemplated an acquisition of
the Company for cash at prices ranging between $18 and $24 per share, with
management retaining a significant equity interest in the surviving company
through the rollover of a portion of their equity interest in the Company. The
KKR proposal was priced at $20 to $22 per share. All of the proposals were
subject to customary conditions, including the completion of due diligence.
The Special Committee met with Goldman Sachs on November 9, 1997, to
review and discuss the three preliminary proposals. On November 10, 1997, the
Special Committee and Goldman Sachs met with Mr. Puckett and Mr. Post to review
the proposals with them and determine whether management anticipated significant
issues in reaching an agreement with any of the four potential buyers. Mr.
Puckett expressed his initial impression that management could work with any of
the potential buyers, although management would need to be comfortable with the
capitalization of the surviving company. At a meeting of the Board on November
11, 1997, the Special Committee reported to the Board the status of the bidding
process for the Company.
On November 13, 1997, the Company issued a press release announcing
results of operations for the fiscal year ended September 30, 1997 (the
"November Press Release"). The November Press Release disclosed that the
openings of the Tucson Heart Hospital in October and the Arizona Heart Hospital
(expected in the second quarter of fiscal year 1998) were expected to have a
dampening effect on earnings in the first and second quarters of fiscal year
1998, but that the ramp-up of the two new hospitals was expected to accelerate
earnings momentum in the second half of the fiscal year, allowing the then
current earnings projection of approximately $0.72 per share for the fiscal year
ending September 30, 1998 to be met.
Subsequent to the Board meeting on November 11, 1997, the Special
Committee decided not to pursue the lowest of the three proposals, at $18 to $20
per share, because it was regarded as too low and the buyer required a
significantly longer timeline prior to entering into a transaction than either
of the other bidders. In due diligence sessions during November and December
with the bidder that had submitted the highest proposal, at $22 to $24 per
share, such bidder concluded that it would not be able to finance a bid and
subsequently withdrew its proposal. Such bidder advised the Company that its bid
required the participation of an additional equity partner, which it had been
unable to obtain, and that, given the Company's existing debt levels, such
bidder believed additional debt financing was impracticable.
In mid-December 1997, Paul B. Queally, a general partner of the sole
general partner of WCAS VII, met with representatives of both KKR and the
Company to conduct due diligence and discuss the terms of a possible joint bid
by KKR and WCAS VII. While Andrew M. Paul, a
18
<PAGE>
WCAS Director, had had preliminary conversations with KKR representatives
immediately prior to the submission of KKR's November 7 proposal regarding a
joint bid, WCAS VII indicated that it was not, at that time, interested in
making a joint bid and did not join KKR's November proposal.
DEVELOPMENTS RELATING TO TUCSON. During the first two weeks of December
1997, management provided to Goldman Sachs, which in turn provided to KKR,
operating data relating to the ramp-up of Tucson, which had opened in October.
While the June Projection assumed that the Company's Heart Hospitals would incur
start-up losses for a period of approximately six to nine months following their
opening, Tucson's progress was unexpectedly slow, as evidenced by December data
in particular. In December, the average daily census for Tucson (which has a
capacity of 66 beds, approximately 21 of which were then staffed) was eight. In
addition, the number and overall mix of procedures were far short of
expectations as reflected in the June Projection. Based primarily on this
information, KKR advised Goldman Sachs on or about December 18, 1997 that it no
longer believed it would be able to submit a bid in the $20-$22 range set forth
in its first proposal submitted November 7, 1997. Goldman Sachs discussed the
matter with the Special Committee on December 19, 1997. Goldman Sachs reported
to the Special Committee that it had discussed KKR's concerns with Mr. Puckett
and Mr. Post, who stated that management was in the process of evaluating the
situation but believed that the problems that were contributing to the slow
ramp-up of Tucson were potentially long-term in nature and that Tucson's
performance would materially and adversely impact the Company's ability to
achieve the June Projection.
The Special Committee thereafter requested a meeting with management on
December 22, 1997 to discuss recent developments at Tucson. During this meeting,
management outlined the estimated impact of Tucson on the June Projection and
outlined certain preliminary action steps designed to address Tucson's slow
ramp-up. While management expressed to the Special Committee its confidence in
the Company's Heart Hospital concept and business strategy, management also
expressed concern regarding whether Tucson's operating problems could be
successfully resolved.
On December 22, 1997, KKR submitted a revised, non-binding proposal to
acquire the Company for a cash purchase price of $18 per share (the "Revised
Proposal"). WCAS VII joined in the Revised Proposal, subject to reaching an
agreement with KKR regarding corporate governance and other stockholder rights
issues for the surviving company. The proposal indicated that before a
definitive agreement could be reached, KKR and WCAS VII would need to conduct
additional due diligence.
Following receipt of the Revised Proposal on December 22, 1997, the
Special Committee and Goldman Sachs met with management. The Special Committee
expressed its view that, while there may have been a change in the current
operating environment, the Special Committee was unwilling, based on information
currently available to it, to reduce its price expectations. The Special
Committee requested management to analyze the Tucson situation, consider the
19
<PAGE>
implications for the Company's business strategy, prepare a revised projection
and make a formal presentation to the Special Committee as soon as practicable.
Representatives of Goldman Sachs had further due diligence
conversations with individual members of management following the Special
Committee's meeting with management on December 22. During these conversations,
Goldman Sachs explored in more detail the basis for management's concerns
regarding Tucson and the effect of Tucson on the June Projection.
On December 31, 1997, at a meeting held at the Company's headquarters
in Charlotte, North Carolina, the Management Group presented the Special
Committee with a revised projection of the Company's operations for the balance
of fiscal year 1998 and through fiscal year 2003 (the "December Projection").
The December Projection, which was also provided to KKR and WCAS VII, and the
principal assumptions on which it is based are summarized in this Proxy
Statement under "CERTAIN FORWARD LOOKING INFORMATION." The performance of the
Company as reflected in the December Projection, when compared to the June
Projection, demonstrated the estimated impact of Tucson on the Company's future
operations. The Special Committee engaged the Management Group in an extensive
discussion of the revised assumptions underlying the December Projection,
including management's assumptions regarding the reduced roll-out rate for new
hospitals, the assumed annual growth rate for new and existing Heart Hospitals
and the ramp-up period for new Heart Hospitals. During the presentation, the
Management Group confirmed its preliminary view, communicated to Goldman Sachs
prior to its meeting with the Special Committee on December 19, 1997, that the
performance of Tucson would materially and adversely affect the Company's
ability to achieve the June Projection, as evidenced by the December Projection.
During the December 31, 1997 meeting, the Management Group also expressed its
view that the market's concern regarding the Company's Heart Hospital concept is
reflected in the performance of the Common Stock and, accordingly, the market
price of the Common Stock is a barometer of the Company's desirability as a
business partner for physicians with whom the Company may desire to develop
future Heart Hospitals. This view is based on discussions between the Company
and market analysts, institutional shareholders and physicians (including
physicians who have contracted with the Company and physicians who have elected
not to contract with the Company). The Management Group expressed concern that
Tucson's performance could have a continuing impact on the market price of the
Common Stock and thus could materially and adversely affect the Company's
development plans.
Immediately after the December 31, 1997 meeting, Mr. McKinnon met
individually with certain members of management to ascertain their views of the
Company's business prospects, including in particular the business prospects for
Tucson. Their views were consistent with the views expressed by the Management
Group at the December 31, 1997 meeting with the Special Committee.
Based on information provided by management at the December 31, 1997
meeting, the Special Committee believes that the operating problems experienced
at the Tucson Heart
20
<PAGE>
Hospital in December 1997 were significant and likely long-term in nature.
Tucson's average daily census for December was eight, which was far short of the
Company's projection. In addition, the number and type of cardiovascular
procedures being performed at Tucson in December fell far short of expectations.
As a result, Tucson's revenues were significantly below the June Projection and
resulted in a pre-tax loss at Tucson for the quarter ended December 31, 1997 of
twice the pre-tax loss for the quarter assumed for the purpose of the June
Projection. Based on its discussions with management, the Special Committee
believes that the principal factors contributing to Tucson's poor performance in
December include the large number of competing cardiology service providers in
the Tucson market, the significant penetration of the Tucson market by managed
care providers and HMOs, the low cost health care environment in the Tucson
market and the geographic dispersion of the physicians who are on the medical
staff of the Tucson Heart Hospital and their lack of proximity to the hospital.
The Special Committee believes these factors explain the significant shortfall
in Tucson's performance in December 1997 and, because they are structural
to the Tucson market, indicate that Tucson's operating problems likely are
long-term in nature.
On January 2, 1998, representatives of Goldman Sachs met with
management to review the December Projection. On January 5, 1998, the Special
Committee and its legal counsel met in New York City with Goldman Sachs. During
the meeting, the Special Committee and Goldman Sachs reviewed progress to date
and again discussed in detail the December Projection, including the
reasonableness of management's assumptions underlying the projection. The
Special Committee focused particularly on the following assumptions underlying
the December Projection that reflected a slower growth rate for the Heart
Hospitals than had been provided for in the June Projection:
o The December Projection assumed a ramp-up period for the
Heart Hospitals of four quarters, compared to the two quarter
ramp-up period provided for in the June Projection. This
change was consistent with the Company's experience with the
three Heart Hospitals currently in operation. The actual
ramp-up periods for McAllen and Little Rock were 11 months and
eight months, respectively, and the projected ramp-up period
for Tucson, which had been lengthened due to its significant
start up problems, was 15 months, resulting in an average
ramp-up period for the three Heart Hospitals of 11.3 months or
approximately four quarters.
o The December Projection assumed the rate of increase in
revenue for the 10 quarters immediately following a post
ramp-up base year would be 10% annually, compared to 20%
annually provided for in the June Projection. This change was
consistent with the Company's experience with McAllen, which
is the only Heart Hospital which had been in operation for
more than nine months. The Special Committee also believed the
reduction in the assumed rate of increase in revenue was
justified by the unforeseen start-up difficulties the Company
had experienced with two out of its three Heart Hospitals.
Management believed such difficulties would discourage
physicians in other markets from participating in the
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development of new Heart Hospitals and thus would adversely
affect the Company's growth prospects in such markets.
Management also believed that the fact that the Company had
experienced unforeseen difficulties with two out of its three
existing Heart Hospitals (McAllen and Tucson) indicated a
likelihood that the Company's future Heart Hospitals might
also experience unforeseen difficulties.
o The December Projection assumed the Company would open two
new Heart Hospitals per year beginning in the year 2000,
compared to three new Heart Hospitals provided for in the June
Projection. The Special Committee believed this reduction in
the roll-out rate for new Heart Hospitals was justified by a
combination of factors, including construction delays the
Company had experienced with certain of its Heart Hospitals
then under construction, the likelihood that issues involving
the Tucson Heart Hospital would continue to absorb a
significant amount of management's time and the likelihood
that similar issues and corresponding demands on management's
time might arise with respect to future Heart Hospitals.
Based on the Special Committee's and Goldman Sachs' meetings with
management on December 31, 1997 and January 2, 1998, and the Special Committee's
review of the December Projection and discussion of the December Projection with
Goldman Sachs (including the reasons for changes in the assumptions on which the
June Projection had been based, as discussed above), the Special Committee
concluded that management's rationale for modifying the assumptions underlying
the June Projection was reasonable. The Special Committee further concluded that
the operating uncertainties represented by Tucson and the Company's Heart
Hospital concept justified selling the Company at a price below the range that
earlier had appeared appropriate and that negotiations with KKR and WCAS VII
should continue.
NEGOTIATIONS WITH KKR AND WCAS VII. On January 14, 1998, KKR submitted
a formal offer to acquire all of the outstanding shares of Common Stock for $18
per share in cash on the terms and conditions set forth in a mark-up of the
Company's form of merger agreement that accompanied the offer. The offer
contemplated that the Management Group would roll over no less than 50% of the
value of their equity interest in the Company, and it was made subject to KKR's
ability to structure a mutually acceptable arrangement with management. The
offer was further conditioned on, among other things, KKR's receipt of financing
on terms acceptable to KKR, resolution of legal due diligence issues and
negotiation and execution of a definitive merger agreement. WCAS VII did not
join in the offer, but WCAS VII did discuss the offer's terms with KKR, as well
as initial KKR proposals for corporate governance and stockholder rights in the
acquiring company.
The Special Committee and Goldman Sachs met on January 15,
1998, following the Special Committee's receipt of the KKR offer. Also attending
the meeting were Mr. Puckett and Mr. Post, representing the Management Group,
Womble Carlyle and representatives of the Company's law firm, Moore & Van Allen,
PLLC of Charlotte, North Carolina ("Moore & Van
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Allen"). During the meeting, the Special Committee reviewed and discussed with
management, Goldman Sachs, Womble Carlyle and Moore & Van Allen the revised
offer by KKR, recent performance of the Tucson Heart Hospital, results of
operations of the Company for the quarter ended December 31, 1997 (which were
more favorable than had been reflected in the December Projection due to certain
recent developments of a nonrecurring nature that were unrelated to Tucson),
issues arising in connection with the mark-up of the Company's form of merger
agreement which accompanied KKR's offer and the status of the Management Group's
progress in reaching an agreement with KKR relating to management's
participation in the proposed transaction. The Special Committee concluded that
while further improvements in the terms of the KKR offer should be sought, it
was prepared to enter into substantive negotiations with KKR.
From January 16 to January 18, 1998, Womble Carlyle and Goldman Sachs
on behalf of the Special Committee, together with the Management Group, Moore &
Van Allen, and KKR and WCAS VII and their legal counsel, met in New York City to
negotiate a definitive merger agreement. The Management Group's personal
counsel, Wilmer Cutler & Pickering of Washington, D.C., also was present to
advise the Management Group in negotiating the terms of its participation in the
transaction with KKR and WCAS VII. Aside from the purchase price, the principal
points of negotiation among the parties under the Merger Agreement included (i)
the "fiduciary out" provisions of the agreement, permitting the Board to
consider alternative proposals or offers to acquire the Company submitted after
the date of the Merger Agreement, (ii) the circumstances under which the Company
would be required to pay a termination fee to KKR and WCAS VII and to reimburse
KKR and WCAS VII for their out-of-pocket expenses, as well as the amount of such
termination fee, (iii) KKR and WCAS VII's ability to terminate the Merger
Agreement based on matters relating to the Tucson Heart Hospital and the results
of KKR's and WCAS VII's due diligence investigations, and (iv) the scope of
certain representations and warranties of the Company. While the parties made
substantial progress in resolving the issues under the Merger Agreement, they
were unable to reach a definitive agreement. The parties agreed that KKR and
WCAS VII should complete their remaining due diligence prior to the parties'
resuming negotiations.
Prior to the opening of the market on January 29, 1998, the Company
issued a press release announcing results of operations for the first quarter of
fiscal year 1998 (the "January Press Release"). The January Press Release
disclosed, among other things, that the ramp-up of the Tucson Heart Hospital had
been slower than expected and that, primarily as a result of Tucson's
performance (as well as a delay in the opening of the Arizona Heart Hospital),
the Company no longer expected to achieve its earnings projection of $0.72 per
share for fiscal year 1998, which had been disclosed in the November Press
Release. The closing price of the Common Stock on the day prior to the
announcement was $13.88 per share. The low sale and closing prices of the Common
Stock on January 29 were $12.88 and $13.13 per share, respectively.
In early March 1998, Goldman Sachs was contacted by a party which
stated it might be interested in pursuing an acquisition of the Company. Such
party was advised that if it was interested in pursuing such a possibility it
should promptly submit an indicative bid. Such party
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did not submit any bid or thereafter contact the Company or its representatives
regarding the possibility of an acquisition of the Company.
From the end of January through February 1998, KKR and WCAS VII
continued their due diligence investigation of the Company. In late February
1998, KKR advised Goldman Sachs that KKR and WCAS VII were prepared to resume
negotiations to acquire the Company at a purchase price of $18 per share.
On March 4, 1998, management provided the Special Committee and Goldman
Sachs with an updated projection (the "March Projection") which management had
prepared at the request of the Special Committee. The March Projection, which
was also provided to KKR and WCAS VII, and the principal assumptions on which it
is based are summarized in this Proxy Statement under "CERTAIN FORWARD LOOKING
INFORMATION." The Special Committee and Goldman Sachs met with representatives
of the Management Group on March 10, 1998 to review the March Projection. During
the meeting, management reported that each of the Heart Hospitals had performed
well above the levels reflected in the December Projection. Management further
reported, however, that Tucson had failed to sustain this performance in
February and through the first week of March. In addition, the March Projection
was negatively impacted by an estimated four-month delay in the opening of the
Arizona Heart Hospital in Phoenix due to damage resulting from a burst water
pipe that occurred immediately prior to the scheduled occupancy of the Heart
Hospital in January 1998. Thus, although the March Projection reflected the
improved January performance of the Heart Hospitals, the overall business of the
Company was not materially different from that reflected in the December
Projection.
On March 10 and 11, 1998, Mr. McKinnon on behalf of the Special
Committee communicated with Mr. Welsh and Mr. Queally on behalf of WCAS VII
regarding the proposed purchase price for the Company and the structure of the
transaction. Mr. McKinnon expressed to Mr. Welsh and Mr. Queally the Special
Committee's view that it would not negotiate with WCAS VII and KKR on an
exclusive basis based on a valuation of $18 per share. Mr. McKinnon also stated
that the Special Committee would need to be satisfied that the "fiduciary out"
provisions of the Merger Agreement would not be unduly restrictive. In a series
of conversations between Mr. McKinnon and Mr. Queally, Mr. Queally offered to
increase the purchase price from $18 to $18.50 per share (which Mr. McKinnon
rejected) and, finally, to $19 per share, in consideration of an increase in the
termination fee payable to KKR and WCAS VII under certain circumstances from $4
million to approximately $6.8 million. Mr. McKinnon agreed to recommend the $19
per share purchase price and the increase in the termination fee. Mr. McKinnon
and Mr. Queally expressed confidence that counsel to the parties could work out
satisfactorily the "fiduciary out" provisions of the Merger Agreement. During
this period, legal counsel for the respective parties negotiated certain
provisions of the Merger Agreement to reflect the foregoing understandings and
KKR and WCAS reached an agreement in principle regarding corporate governance
and stockholder rights in the surviving company.
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On March 12, 1998, the Special Committee met to consider the Merger
Agreement, including Mr. McKinnon's recommendation relating to the $19 per share
purchase price and the increased termination fee. Following the Special
Committee's vote to recommend the Merger Agreement to the Board, the Board met
to approve the Merger Agreement and recommend it to the shareholders of the
Company. Because of the financial interest in the merger of four of the members
of the Board (Mr. Puckett, Mr. Crane, Mr. Welsh and Mr. Paul), a majority of the
Board could not independently review and determine the fairness of the Merger to
the shareholders of the Company other than the Investor Group. Mr. Welsh and Mr.
Paul did not attend the Board meeting because of their conflicts of interest,
and Mr. Puckett and Mr. Crane abstained from voting with respect to the Merger
because of their conflicts of interest. Therefore, the remaining directors (who
also constituted the Special Committee) were the only directors who voted on the
Merger. The parties executed the definitive Merger Agreement after the close of
business on March 12, 1998.
THE SPECIAL COMMITTEE'S AND THE BOARD'S RECOMMENDATION
The Special Committee met on 17 occasions between July 28, 1997 and
March 12, 1998, in person or by telephone conference, to consider developments
relating to a possible sale of the Company, including meetings on 13 occasions
to consider successive proposals by KKR and WCAS VII. The Special Committee was
assisted in its deliberations by its financial advisor, Goldman Sachs, and its
legal counsel, Womble Carlyle. At a meeting held on March 12, 1998, the Special
Committee determined that the consideration to be paid to the shareholders of
the Company other than the Investor Group (the "Public Shareholders") pursuant
to the Merger Agreement was fair and recommended that the full Board approve the
Merger Agreement. The Special Committee reconfirmed, as of the date of this
Proxy Statement, the bases on which it recommended approval of the Merger
Agreement.
The material factors the Special Committee evaluated in its decision to
recommend approval of the Merger Agreement are described below. Except as noted
above, the Special Committee considered the following factors to be positive
factors supporting its recommendation that the shareholders approve the Merger
Agreement. In arriving at its decision, the Special Committee gave the most
weight to:
(i) The Special Committee's view that the market price of the
Common Stock has not reflected, and for an indefinite period
of time would not reflect, the value that may be inherent in
the Company's business strategy due to the risk (which the
Special Committee believed to be significant) that the Company
may not successfully execute its business strategy relating to
Heart Hospitals. The following factors contributed to the
Special Committee's assessment of the risk of execution of the
Company's business strategy:
o The Company has experienced unanticipated start-up
problems at two of the Company's first three Heart
Hospitals (McAllen and Tucson). Such start-up problems are
a basis for uncertainty relating to the Company's Heart
Hospital
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concept, including uncertainty relating to the extent to
which the Heart Hospital concept is transportable
nationwide without significant alteration of the model to
address local factors.
o The Common Stock is susceptible to significant declines
based on negative developments relating to the performance
of the Company's Heart Hospitals. Because the market price
of the Common Stock is viewed as a barometer of the
Company's desirability as a business partner, a
precipitous decline in the market price could lead to the
Company's inability to attract physician participation in
the development of, and to obtain financing to fund, new
Heart Hospitals and thus significantly impede the
Company's opening of Heart Hospitals in the future.
o The Company's operating strategy requires it to incur
significant debt to fund new Heart Hospitals. The
Company's ability to generate cash flow sufficient to
service its debt is highly dependent on the operations of
the Company's existing Heart Hospitals. The failure of the
Company's Heart Hospitals to generate positive cash flow
in accordance with the Company's projections, such as the
Company has experienced with Tucson, may have a material
and adverse effect on the Company's ability to develop new
Heart Hospitals. In this connection, the March Projection
showed that the Company might encounter cash flow deficits
in certain years included in the March Projection. Such
deficits assume no increase in the Company's revolving
credit facility, which management believes could be
increased based on the projected increase in the Company's
accounts receivable through such period. Nevertheless, the
Special Committee believes, and management acknowledges,
that the continued underperformance of Tucson could make
it difficult for the Company to obtain capital to finance
future Heart Hospitals.
o The Company operates in a highly regulated environment in
which changes in regulations or in their interpretations
could force the Company to modify the way it does
business.
(ii) The impact on the value of the Company resulting from the
start-up problems at the Tucson Heart Hospital, which the
Special Committee believes justifies selling the Company at a
price below the range that earlier had appeared appropriate.
Primarily as a result of Tucson's operating problems, the
Company projects that its earnings per share for fiscal year
1998 will be $0.43 per share, compared to $0.78 per share
assumed for the purpose of the June Projection. As reflected
in the March Projection, such problems are expected to
continue to materially and adversely affect the Company's
earnings per share, which according to the June Projection
would have increased from $0.78 per share in fiscal year 1998
to $2.85 in fiscal year 2002 but, according to the March
Projection, are now expected to increase from only $0.43 in
fiscal year 1998 to only $1.65 in fiscal year 2002.
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<PAGE>
The Special Committee's original understanding of the
Company's value was based on the June Projection, which was
prepared months before Tucson opened and its start-up problems
surfaced. As described above under "--Developments Relating to
Tucson," the Special Committee believes the factors that have
given rise to the operating problems experienced at Tucson to
date, most of which are structural to the Tucson market,
indicate such problems likely will be long-term in nature.
(iii) The belief of the Special Committee that the Merger represents
a more desirable alternative than continuing to operate the
Company as a public company. In this connection, the Special
Committee gave strong consideration to rejecting the KKR and
WCAS VII proposal in favor of maintaining the Company's
independence and enabling the Public Shareholders to share in
the Company's future earnings and growth potential. However,
the Special Committee believes that continuing to operate the
Company as an independent entity would subject the Company and
its shareholders to the risk of execution of the Company's
business strategy as described above. After evaluating such
risk (including the factors described under item (i) above),
the Special Committee concluded that, while the Company's
business strategy could ultimately prove successful, the risk
that the Company's Heart Hospitals will continue to experience
significant operating problems adversely impacting the
performance of the Common Stock justifies a sale of the
Company pursuant to the terms of the Merger Agreement. The
Special Committee did not consider alternatives to the Merger,
other than continuing to operate the Company as an independent
entity and the preliminary proposals that are described above
under "--Solicitation and Receipt of Preliminary Proposals."
(iv) Information with respect to the financial condition, results
of operations and business of the Company. The Special
Committee focused in particular on the March Projection, which
reflected substantially lower earnings for future periods than
had been anticipated prior to fiscal year 1998. The March
Projection projected earnings per share for the Company for
fiscal years 1998 through 2002 of $0.43, $0.75, $1.10, $1.35
and $1.65, respectively, compared to earnings per share
reflected in the June Projection of $0.78, $1.19, $1.67, $2.26
and $2.85, respectively.
(v) The scope of efforts to sell the Company, including the number
and identity of potential buyers from which indications of
interest were solicited. In this connection, the Special
Committee considered that Goldman Sachs received only three
indications of interest and that several firms that declined
to submit an indication of interest cited as reasons for their
decision concerns relating to the Company's ability to execute
its business strategy. The Special Committee also considered
the terms of two preliminary proposals submitted by bidders
other than KKR (which had been submitted prior to the
occurrence of developments relating
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to the Tucson Heart Hospital that were reflected in the
December Projection), the withdrawal of one of such proposals
and the prospects for consummating such proposals.
(vi) The oral opinion of Goldman Sachs that the $19 per share to be
received by the Public Shareholders was fair to such holders
from a financial point of view. The full text of the
confirming written opinion of Goldman Sachs, which sets forth
assumptions made, matters considered and limitations on the
review undertaken in connection with its opinion, is attached
hereto as Appendix B and is incorporated herein by reference.
The Special Committee and the Board adopted the analyses and
findings of Goldman Sachs in their consideration and approval
of the Merger Agreement. The Company's shareholders are urged
to and should read such opinion in its entirety.
In addition to the factors referred to in subparagraphs (i) - (vi) above, the
other material factors considered by the Special Committee in reaching its
determination are as follows:
(vii) The proposed terms and conditions of the Merger Agreement. In
particular, the Special Committee considered the fact that the
Merger Agreement does not provide for unreasonable termination
fees and expense reimbursement obligations which would have
the effect of unreasonably discouraging competing bids and
that, subject to the satisfaction of certain conditions, the
Board would be able to withdraw or modify its recommendation
to the shareholders regarding the Merger and enter into an
agreement with respect to a more favorable transaction with a
third party, if such a transaction becomes available prior to
the consummation of the Merger. See "THE MERGER."
(viii) The market price of the Common Stock, which as recently as
January and February 1998 had traded at prices below the
Company's initial public offering price of $14, and the
premium over such prices (as well as over the then prevailing
market price) represented by the $19 per share to be received
by the Public Shareholders in the Merger. The closing price of
the Common Stock had increased from $14.63 on February 18,
1998 to $16.50 on March 12, 1998. The Special Committee
considered the possibility that the market price of the Common
Stock in the weeks preceding March 12, 1998 may have reflected
speculation concerning a possible sale of the Company. This
possibility was based on rumors reported to management by
analysts and shareholders in early 1998. In addition, the
Special Committee considered Goldman Sachs' analysis of the
premiums paid in comparable merger transactions, which ranged
from 25% to 40% of the 90 day average price prior to
announcement of the transaction. See "--Opinion of Financial
Advisor."
(ix) The unpredictability of the Company's earnings, the effect of
such unpredictability on the market price of the Common Stock,
and the effect of such factors on
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management's ability to execute the Company's business
strategy. In this connection, the Special Committee considered
that the Company may be capable of being managed more
effectively as a private company not subject to pressures from
public shareholders and market professionals to maintain and
grow earnings per share, and that the Company might be unable
to retain certain members of management if the Company were to
remain public. The Special Committee believes that as a
private company the Company would have greater flexibility to
consider business strategies that have long-term benefits but,
if the Company were public, would adversely impact earnings
per share and the market price of the Common Stock in the
short term.
(x) The financial ability and willingness of KKR and WCAS VII to
consummate the Merger. The Merger Agreement conditions the
Acquiror's obligations to consummate the Merger on the
Acquiror's having obtained financing for the Merger on terms
satisfactory to the Acquiror. In this connection, the Special
Committee reviewed commitment letters for equity financing
supplied by the KKR Partnership and WCAS VII and for debt
financing supplied by the Acquiror's lender. In addition, the
Special Committee, through its financial and legal advisors,
discussed the proposed financing with the Acquiror and its
lender. Based on the foregoing, the Special Committee viewed
as remote the risk that the financing condition of the Merger
Agreement would not be satisfied. Further, the Special
Committee did not consider it to be material that a portion of
the financing of the Merger would be provided under a
revolving credit facility to be entered into by the Company
with the Acquiror's lender. The Special Committee considered
the financing risk to be a neutral factor in its
recommendation that the shareholders approve the Merger
Agreement.
(xi) Actual or potential conflicts of interest to which certain
officers and directors of the Company and their affiliates are
subject in connection with the Merger, as follows:
o The Special Committee considered that members of the
Management Group will own shares of common stock of
the Parent and fully vested options to purchase such
shares, representing approximately ____% of the
Parent's fully diluted equity. The Special Committee
also considered that the Parent will reserve for
issuance to employees of the Company, pursuant to
future grants of additional options, shares of common
stock of the Parent representing 15% of the fully
diluted equity of the Parent, a substantial portion
of which are anticipated to be granted to the
Management Group. The Special Committee further
considered that members of the Management Group will
enter into new employment agreements with the Parent
replacing their existing employment agreements with
the Company, and that such new employment agreements
will provide for the payment to them of base
salaries, possible annual cash
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<PAGE>
bonuses, potential severance benefits, separate
payments in respect of the termination of their
previously existing employment agreements and in
respect of a covenant not to compete, and "stay
bonuses" in amounts to be determined and to be
payable over the first two years of their employment
after consummation of the Merger. The Special
Committee considered these conflicts of interest to
be a negative factor in its consideration of the
Merger, although the compensation and benefits
payable to members of the Management Group referred
to above and disclosed in more detail elsewhere in
this Proxy Statement are intended primarily to
provide for the payment of compensation and benefits
to the Management Group substantially equivalent to
the compensation and benefits they are currently
entitled to receive from the Company.
o The Special Committee considered that the Parent has
given each member of the Management Group an
opportunity to roll over up to 100% of his equity
investment in the Company into an investment in the
Parent, provided each member rolls over a minimum of
50%. The Special Committee considered that the
rollover of substantially more than 50% of a member's
current equity investment in the Company would
indicate a level of confidence in the Company's
prospects that might be inconsistent with the Special
Committee's assessment of the risks associated with
the Company's Heart Hospital concept. Three members
of the Management Group elected to roll over the
minimum 50% investment, and a fourth member elected
to roll over only slightly in excess of the 50%
minimum. The Special Committee viewed this as a
neutral factor in its recommendation that the
shareholders approve the Merger Agreement.
o The Special Committee considered the foregoing
conflicts of interest in connection with management's
preparation of the December Projection and the March
Projection, which, as disclosed elsewhere in this
Proxy Statement, reflect a significantly slower rate
of growth for the Company and supports a
significantly lower value for the Company than
reflected in the June Projection. While the Special
Committee recognized that the conflicts of interest
to which the Management Group were subject might be a
basis for doubting the reasonableness of the December
Projection and the March Projection, the Special
Committee concluded, based on its discussions with
the Management Group during January and March 1998 as
described above, that management's assumptions
underlying the December Projection and the March
Projection are reasonable. The Special Committee
considered the Management Group's conflicts of
interest in connection with preparation of the
December Projection and the March Projection to be a
negative factor in its recommendation that the
shareholders approve the Merger Agreement.
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<PAGE>
The Special Committee believes that the Company's existing and planned
Heart Hospitals are the dominant factor in determining the value of the Company.
The Special Committee's analysis of the Company's other two operating divisions,
the Practice Management Division and the Diagnostics Division, in its
consideration of the fairness of the Merger was limited primarily to its
adoption of Goldman Sachs' analysis of such Divisions.
Except to the extent noted above, the Special Committee did not assign
relative weights to the factors it considered, and it did not consider any
relative weighting to be necessary in reaching its determination.
The Special Committee noted that approximately 24% of the outstanding
shares of Common Stock are held by persons who have committed or expressed their
intention to vote their shares of Common Stock in favor of the Merger, including
members of the Management Group, members of the Board and other members of the
Investor Group. The Special Committee also considered that the obligation of the
Company to consummate the Merger is not conditioned upon the favorable vote of a
majority of the Public Shareholders. Notwithstanding the absence of such a
voting requirement, the Special Committee believes that the procedure that was
followed in determining the purchase price to be paid to the shareholders of the
Company was procedurally fair to the Public Shareholders. As described above,
the six person Board of Directors of the Company (a majority of whom are members
of the Management Group or affiliated with WCAS VII) appointed as the only
members of the Special Committee two non-employee directors who were independent
of the Management Group and WCAS VII and granted the Special Committee authority
independently to solicit proposals to acquire the Company, including exclusive
authority on behalf of the Board to review, evaluate and negotiate any
transaction proposed by a group which included one or more members of management
or the Board or an affiliate of any member of management or the Board and any
competing offer to acquire the Company not including a conflict of interest. The
Board retained authority to review, evaluate and negotiate proposals only in the
absence of any proposal which would create a conflict of interest. Goldman
Sachs, the Special Committee's financial advisor, solicited indications of
interest from 18 potential buyers, which resulted in the submission of three
preliminary proposals by financial buyers all of which required management's
participation in the buyout. With the assistance of its financial advisor and
legal counsel, the Special Committee evaluated, and ultimately rejected,
proposals by KKR and WCAS VII that would have paid the shareholders less than
$19 per share in cash. The Merger Agreement negotiated by the Special Committee
contains provisions that would enable the Board to withdraw or modify its
recommendation to the shareholders regarding the Merger and to enter into an
agreement with respect to a more favorable transaction with a third party, and
contains provisions (without which the Special Committee believes KKR and WCAS
VII would not have entered into the Merger Agreement) imposing upon the Company
termination fee and expense reimbursement obligations that, in the view of the
Special Committee, are reasonable and would not have the effect of unreasonably
discouraging competing bids. Further, the shareholders of the Company may
dissent from the Merger and be paid cash for the "fair value" of their shares as
determined in accordance with North Carolina law. Thus, although the Merger is
not structured to require approval of a majority of the unaffiliated
shareholders (which the Special Committee considered to be a negative factor),
the Special Committee nevertheless believes, for the reasons set forth above,
the Merger is procedurally fair to the shareholders.
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Based on the foregoing, the Special Committee unanimously recommended
to the Board approval of the Merger Agreement and that it be recommended to the
shareholders of the Company.
The Board approved the Merger on March 12, 1998 and reconfirmed, as of
the date of this Proxy Statement, the bases on which it approved the Merger
Agreement. THE BOARD RECOMMENDS THAT THE SHAREHOLDERS APPROVE THE MERGER.
Because of the financial interest in the Merger of four of the members of the
Board (Mr. Puckett, Mr. Crane, Mr. Welsh and Mr. Paul), a majority of the Board
could not independently review and determine the fairness of the Merger to the
Public Shareholders. Mr. Welsh and Mr. Paul did not attend the meetings of the
Board at which the Merger Agreement was considered because of their conflicts of
interest, and Mr. Puckett and Mr. Crane abstained from voting with respect to
the Merger because of their conflicts of interest. Therefore, the remaining
directors (who also constituted the Special Committee) were the only directors
who voted on the Merger. In their consideration of the Merger, such remaining
directors, in their capacities as members of the Board and not in their
capacities as members of the Special Committee, adopted the analyses and
conclusions of the Special Committee.
In considering the fairness of the Merger, the Special Committee and
the Board did not consider such factors as the Company's net book value or
liquidation value, which are not believed to be indicative of the value of the
Company as a going concern. In addition, neither the Company nor, to the
knowledge of the Special Committee and the Board, any affiliate of the Company
has purchased securities of the Company (except pursuant to stock option plans
of the Company) since October 1, 1995. Accordingly, the purchase prices paid in
such transactions were not considered by the Special Committee or the Board in
their fairness determinations.
OPINION OF FINANCIAL ADVISOR
On March 12, 1998, Goldman Sachs delivered its oral opinion to the
Special Committee that, as of the date of such opinion, the Cash Merger
Consideration pursuant to the Merger Agreement was fair from a financial point
of view to the shareholders of the Company (other than the Investor Group).
Goldman Sachs subsequently confirmed its earlier opinion by delivery of its
written opinion dated as of the date hereof.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED THE DATE OF
THIS PROXY STATEMENT, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED
HERETO AS APPENDIX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. SHAREHOLDERS OF THE COMPANY ARE URGED TO, AND SHOULD, READ SUCH
OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other
things, (i) the Merger Agreement; (ii) this Proxy Statement; (iii) the Annual
Reports to Shareholders and Annual Reports on Form 10-K of the Company for each
of the three fiscal years ended
32
<PAGE>
September 30, 1997; (iv) the Company's Prospectus for its initial public
offering dated December 6, 1994; (v) certain interim reports to shareholders and
Quarterly Reports on Form 10-Q of the Company; (vi) certain other communications
from the Company to its shareholders; and (vii) certain internal financial
analyses and projections for the Company prepared by its management. Goldman
Sachs also held discussions with members of the senior management of the Company
regarding the past and current business operations, financial condition, and
future prospects of the Company. In addition, Goldman Sachs reviewed the
reported price and trading activity for the Common Stock, compared certain
financial and stock market information for the Company with similar information
for certain other companies the securities of which are publicly traded,
reviewed the financial terms of certain recent business combinations in the
hospital industry and the physician practice management industry specifically
and in other industries generally and performed such other studies and analyses
as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and has assumed such accuracy and
completeness for purposes of rendering its opinion. In addition, Goldman Sachs
has not made an independent evaluation or appraisal of the assets and
liabilities of the Company or any of its subsidiaries and Goldman Sachs has not
been furnished with any such evaluation or appraisal. The opinion of Goldman
Sachs referred to herein was provided for the information and assistance of the
Special Committee in connection with its consideration of the transaction
contemplated by the Merger Agreement and such opinion does not constitute a
recommendation as to how any holder of Common Stock should vote with respect to
such transaction.
The following is a summary of all material financial analyses used by
Goldman Sachs in connection with providing its oral opinion to the Special
Committee on March 12, 1998. Goldman Sachs utilized the same type of financial
analyses in connection with providing its written opinion attached hereto as
Appendix B. All implied per share values referred to below reflect the value of
the Company as a whole, including all of its Divisions.
(i) HISTORICAL STOCK TRADING ANALYSIS. Goldman Sachs reviewed
the historical trading prices and volumes for the Common Stock both
separately and in comparison to the S&P 500 index and to the Selected
Hospital and PPM Companies (each as defined herein) for the six-month,
one-year and three-year periods prior to the date of the delivery of
its oral opinion to the Special Committee. In addition, Goldman Sachs
analyzed the consideration to be received by holders of the Common
Stock pursuant to the Merger Agreement in relation to the market price
of the Common Stock. Such analysis indicated that the price per share
to be paid pursuant to the Merger Agreement represented a premium of
23% based on the closing price of $15.50 per share on March 4, 1998,
and a premium of 29% based on the 90-day average market price of $14.77
per share.
(ii) DISCOUNTED CASH FLOW ANALYSIS. Goldman Sachs performed a
discounted cash flow analysis using the March Projection prepared by
management. Goldman Sachs created separate discounted cash flow models
for each of the three divisions of the
33
<PAGE>
Company: the Diagnostics Division, the Practice Management Division and
the Hospital Division.
For the Diagnostics Division and the Practice Management
Division, Goldman Sachs calculated a net present value of free cash
flows for the years 1998 through 2003 using discount rates ranging from
11% to 13%. Goldman Sachs calculated the two divisions' terminal values
in the year 2003 based on terminal perpetuity growth rates ranging from
2% to 5%. These terminal values were then discounted to present value
using discount rates from 11% to 13%.
For the Hospital Division, Goldman Sachs analyzed separately
each of fifteen hospitals, which were classified in three groups based
on the development stage: those already completed, those under
development and those planned for the future. The operational results
of each hospital were projected for each year up to the year when its
operation was deemed to have reached a steady state (the "Steady State
Year"). The Steady State Year for the fifteen hospitals ranged from
2001 to 2008. Goldman Sachs calculated a net present value of free cash
flows of each hospital for the years 1998 through the Steady State Year
of that hospital using discount rates ranging from 11% to 13%, from 13%
to 15%, or from 15% to 17% depending on the development stage of that
hospital. Goldman Sachs calculated such hospital's terminal value in
its Steady State Year based on terminal perpetuity growth rates ranging
from 2% to 5%. These terminal values were then discounted to present
value using discount rates ranging from 11% to 13%, from 13% to 15%, or
from 15% to 17% depending on the development stage of that hospital.
The various ranges for discount rates and terminal perpetuity
growth rates were chosen to reflect appropriate risk of capital
deployed. Based on this analysis, the implied per share values ranged
from $15 to $23.
(iii) SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed and
compared certain financial information relating to the Company to
corresponding financial information, ratios and public market multiples
of:
(a) six publicly traded corporations in the hospital industry:
Columbia/HCA Healthcare Corporation, Health Management
Associates, Inc., Paracelsus Healthcare Corporation, Quorum
Health Group, Inc., Tenet Healthcare Corporation and Universal
Health Services, Inc. (the "Selected Hospital Companies"); and
(b) eighteen publicly traded corporations in the physician
practice management industry, six of which are
primary/multispecialty physician practice management
companies: Advanced Health Corporation, Coastal Physician
Group, Inc., FPA Medical Management, Inc., MedPartners, Inc.,
PhyCor, Inc., PhyMatrix Corp. and Sheridan Healthcare, Inc.
(the "Selected Primary PPM Companies");
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<PAGE>
and twelve of which are specialty physician practice
management companies: American Oncology Resources, Inc.,
Apogee, Inc., Complete Management, Inc., EquiMed, Inc.,
Concentra Managed Care, Inc., Omega Health Systems, Inc.,
Orthodontic Centers of America, Inc., Pediatrix Medical Group,
Inc., Physician Reliance Network, Inc., Physicians Resource
Group, Inc. and Specialty Care Network, Inc. (the "Selected
Specialty PPM Companies", and together with the Selected
Primary PPM Companies, the "Selected PPM Companies"; the
Selected PPM Companies and the Selected Hospital Companies
being the "Selected Companies").
The Selected Hospital Companies and the Selected PPM Companies
were chosen because they are publicly traded companies with operations
that for purposes of analysis may be considered similar to the Hospital
Division and the Practice Management Division, respectively, of the
Company. There was only one publicly traded company comparable to the
Diagnostics Division: Raytel Medical Corporation. Goldman Sachs
calculated and compared various financial multiples and ratios. The
multiples of the Company were calculated using a price of $15.50 per
share, the closing price of the Common Stock on the Nasdaq National
Market on March 4, 1998. The multiples and ratios for the Company were
based on information provided by the Company's management and the
multiples for each of the Selected Companies were based on the most
recent publicly available information.
Goldman Sachs considered, among other ratios, levered market
capitalization (i.e., market value of common equity plus estimated
market value of debt less cash) as a multiple of earnings before
interest, taxes, depreciation and amortization ("EBITDA") for the
latest twelve-month ("LTM") period. Goldman Sachs' analyses indicated
multiples ranging from 6.3x to 17.2x with a median of 9.8x for the
Selected Hospital Companies, multiples ranging from 3.1x to 62.7x with
a median of 8.8x for the Selected Primary PPM Companies, and multiples
ranging from 2.5x to 46.5x with a median of 15.0x for the Selected
Specialty PPM Companies.
Goldman Sachs also considered for the Selected Hospital
Companies and the Selected PPM Companies estimated price/earnings
ratios (based on Institutional Broker Estimate System (IBES) median
estimates as of February 27, 1998), which ranged from 12.5x to 31.3x
and from 7.1x to 30.4x, respectively, for the 1998 calendar year, and
from 6.3x to 24.9x and from 8.0x to 23.5x, respectively, for the 1999
calendar year; estimated LTM EBITDA margins and LTM earnings before
interest and taxes ("EBIT") margins, which ranged from 8.2% to 26.5%
and 3.3% to 22.4%, respectively, for the Selected Hospital Companies,
and from 1.4% to 68.7% and 0.8% to 61.3%, respectively, for the
Selected PPM Companies; and price/book value ratios, which ranged from
1.9x to 7.2x for the Selected Hospital Companies and from 0.2x to 6.7x
for the Selected PPM Companies. Applied to the Common Stock and
management's March Projection, including estimated earnings per share
for 1998, the above median range of EBITDA and
35
<PAGE>
price/earnings multiples implied a price per share of the Common Stock
in the range of $9 to $13.
(iv) SELECTED TRANSACTIONS ANALYSIS. Goldman Sachs analyzed
certain information relating to selected transactions in the hospital
industry since 1989 (the "Selected Hospital Transactions") and selected
transactions in the physician practice management industry since 1991
(the "Selected PPM Transactions"). The Selected Hospital Transactions
included the following: the acquisition of Deaconess Incarnate Word
Health System by Tenet Healthcare Corp. announced in January 1997, the
acquisition or OrNda HealthCorp by Tenet Healthcare Corp. announced in
October 1996, the acquisition of Champion Healthcare Corp. by
Paracelsus Healthcare Corp. announced in April 1996, the acquisition of
HealthTrust Inc. -- The Hospital Co. by Columbia HCA Healthcare Corp.
announced in October 1994, the acquisition of American Medical Holdings
Inc. by National Medical Enterprises Inc. announced in September 1994,
the acquistion of EPIC Healthcare Group Inc. by HealthTrust Inc. -- The
Hospital Co. announced in Janaury 1994, the acquisition of Summit
Health Ltd. by OrNda HealthCorp announced in December 1993, the
acquisition of American Healthcare Management Inc. by OrNda HealthCorp
announced in November 1993, the acquisition of HCA Hospital Corp of
America by Columbia Healthcare Corp. announced in October 1993, the
acquisition of 10 Hospitals of Charter Medical Corp. by Quorum Health
Group Inc. announced in October 1993, the acquisition of Galen Health
Care Inc. by Columbia Hospital Corp. announced in June 1993, the
acquisition of American Medical International Inc. by IMA Holdings
Corp. announced in July 1989, and the acquisition of of Hospital Corp.
of America by a management group announced in March 1989. The Selected
PPM Transactions constituted a total of 95 transactions.
Such analysis indicated that, for the Selected Hospital
Transactions and the Selected PPM Transactions, the median of the
levered consideration (i.e., the price paid for the equity securities
acquired plus the estimated market value of any debt less cash assumed)
was: as a multiple of LTM sales, 1.1x for the
<PAGE>
Selected Hospital Transactions and 0.7x for the Selected PPM
Transactions; as a multiple of LTM EBIT, 11.9x for the Selected
Hospital Transactions and 21.7x for the Selected PPM Transactions; and
as a multiple of LTM EBITDA, 6.9x for the Selected Hospital
Transactions and 17.4x for the Selected PPM Transactions. Applied to
the Common Stock and the March Projection, including management's
estimate of earnings per share for 1998, the median range of
transaction multiples implied a price per share of the Common Stock in
the range of $7 to $10.
Goldman Sachs also analyzed the premiums paid in such merger
transactions, which ranged from 25% to 40% of the 90 day average price
prior to announcement of the transaction. Applied to the Common Stock
of the Company and the March Projection, including the estimate made
therein of earnings per share for 1998, these merger premiums implied a
price per share of $14 to $18 when the transaction premium analysis is
combined with the trading multiples analysis as described in Section
(iii) above.
(v) IMPLIED FUTURE PRICES ANALYSIS. Goldman Sachs calculated
implied future prices of the Common Stock at the end of each year for
the five-year period ending in 2003 on the basis of the management's
earnings estimates in the March Projection and the assumption of a
price/earnings ratio of 21.0x (the median of price/earnings ratio in
1998 for the Selected Hospital Companies). The implied future prices of
the Common Stock reflected an average compound annual growth rate of
34.0% for the price of the Common Stock between 1998 and 2003. Goldman
Sachs then discounted the implied future prices of the Common Stock at
a discount rate of 12% to arrive at implied per share values ranging
from $9 to $21.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
the Company or the contemplated transaction. The analyses were prepared solely
for purposes of Goldman Sachs' providing its opinion to the Special Committee as
to the fairness from a financial point of view of the Cash Merger Consideration
pursuant to the Merger Agreement to holders of outstanding
36
<PAGE>
shares of the Common Stock (excluding the members of the Investor Group) and do
not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon projections
of future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Because such analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors, none of the Company, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those projected.
As described above, Goldman Sachs' opinion to the Special Committee was one of
many factors taken into consideration by the Special Committee in making its
determination to approve the Merger Agreement. The foregoing summary does not
purport to be a complete description of the analysis performed by Goldman Sachs
and is qualified in its entirety by reference to the written opinion of Goldman
Sachs set forth in Appendix B hereto.
Goldman Sachs, as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. The Special
Committee selected Goldman Sachs as its financial advisor because it is a
nationally recognized investment banking firm that has substantial experience in
transactions similar to the Merger. Goldman Sachs has provided certain
investment banking services to KKR and its affiliates from time to time and may
provide investment banking services to KKR and its affiliates from time to time
in the future.
Pursuant to a letter agreement dated August 8, 1997 (the "Engagement
Letter"), the Special Committee engaged Goldman Sachs to act as its financial
advisor in connection with the contemplated transaction. Pursuant to the terms
of the Engagement Letter, the Company has agreed to pay Goldman Sachs upon
consummation of the Merger a transaction fee of 1% of the aggregate
consideration (the total value of the Common Stock at $19 per share plus the
outstanding debt of MedCath assumed by Acquiror), subject to a minimum of $3.25
million. The Company has agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorney's fees, and to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.
PURPOSE AND REASONS OF THE AFFILIATES FOR THE MERGER
The purpose of the Affiliates for engaging in the transactions
contemplated by the Merger Agreement is to acquire, together with any
participating Physicians and Employees, 100% of the ownership of the Company.
The Affiliates believe that as a private company MedCath will have greater
operating flexibility to focus on enhancing value by emphasizing growth and
operating cash flow without the constraint of the public market's emphasis on
quarterly earnings and the potentially disruptive effect associated with losses
in connection with the construction and start-up of new Heart Hospitals.
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<PAGE>
The members of the Management Group beneficially own, in the aggregate,
approximately 14.9% of the outstanding Common Stock. The two WCAS Directors may
be deemed to beneficially own, in the aggregate, approximately 8.2% and 7.7%,
respectively, of the outstanding Common Stock, including 7.5% that is held of
record by WCAS V. See "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF
MANAGEMENT."
Prior to consummation of the Merger, members of the Management Group
have agreed to contribute a portion of their equity interests in MedCath to the
Parent, representing an investment of approximately $_____ million in the Parent
(based on the $19 per share to be received by shareholders in the Merger), in
exchange for ________ shares of common stock of the Parent and options to
purchase ____ shares of common stock of the Parent. The WCAS Investors have
agreed to contribute an aggregate of 267,106 shares of Common Stock to the
Parent (of which 104,786 will be contributed by the WCAS Directors) in exchange
for an equivalent number of shares of common stock of the Parent. In addition,
the Physicians who accept the Parent's offer to contribute up to 50% of their
shares of Common Stock to the Parent will receive in exchange shares of common
stock of the Parent.
As a result of the Merger, the KKR Partnership will acquire, indirectly
through the Parent for an investment of $105 million, approximately 43% of the
equity interest in the Company; the WCAS Investors will acquire, indirectly
through the Parent for an investment of $105 million, approximately 43% of the
equity interest in the Company; and the Management Group will acquire,
indirectly through the Parent for an investment of $____ million approximately
_____% of the equity interest in the Company. See "SPECIAL FACTORS--Background
of the Merger." Members of the Management Group, such Physicians and the WCAS
Investors will also receive the Cash Merger Consideration for the remainder of
their investment in the Company on the same terms as other shareholders.
POSITION OF THE AFFILIATES AS TO FAIRNESS OF THE MERGER
Each of the Affiliates has considered the analyses and findings of the
Special Committee and the Board (described in detail in "SPECIAL FACTORS -- The
Special Committee's and the Board's Recommendation") with respect to the
fairness of the Merger to the unaffiliated shareholders of the Company. Each of
the Affiliates adopts the analyses and findings of the Special Committee and the
Board with respect to the fairness of the Merger and believes that the Merger is
fair to the Company's shareholders, including the Company's unaffiliated
shareholders. None of the Affiliates makes any recommendation as to how the
Company's shareholders should vote on the Merger Agreement. The WCAS Directors
have financial interests in the Merger and the members of the Management Group
have financial and employment interests in the Merger. See "SPECIAL FACTORS --
Conflicts of Interest."
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<PAGE>
CONFLICTS OF INTEREST
In considering the recommendations of the Board with respect to the
Merger, shareholders should be aware that certain officers and directors of
MedCath and affiliates, and associates and persons related to the officers and
directors are members of the Investor Group or otherwise have interests in
connection with the Merger which may present them with actual or potential
conflicts of interest as summarized below. The Special Committee and the Board
were aware of these interests and considered them among the other matters
described under "--The Special Committee's and the Board's Recommendation." The
Special Committee considered the Management Group's conflicts of interest to be
a negative factor in its consideration of the Merger, even though the
compensation and benefits payable to members of the Management Group are
intended to provide for the payment of compensation and benefits to the
Management Group substantially equivalent to the compensation and benefits they
are currently entitled to receive from the Company.
VOTING AGREEMENT. As a condition to the Merger Agreement, the members
of the Management Group have entered into an agreement with the Acquiror and the
Parent pursuant to which they have agreed to vote their shares of Common Stock
(i) in favor of the adoption and approval of the Merger Agreement and the
transactions contemplated thereby and (ii) except as otherwise agreed to in
writing by the Parent, against any extraordinary corporate transaction involving
MedCath or its subsidiaries; any reorganization, recapitalization, dissolution
or liquidation of MedCath or its subsidiaries; any change in a majority of the
directors, material amendment to MedCath's Articles of Incorporation or Bylaws;
or any other action involving MedCath or its subsidiaries that has the effect of
impeding, delaying or impairing the consummation of the Merger or the
transactions contemplated thereby.
39
<PAGE>
POST-MERGER OWNERSHIP AND CONTROL OF THE PARENT. It is anticipated that
immediately after the Merger the following individuals and entities will
beneficially own the number of shares of common stock of the Parent shown in the
table below. The table does not reflect the beneficial ownership of any shares
of common stock of the Parent by Physicians or Employees. To the extent any of
the Physicians accept the Parent's offer to issue to them shares of common stock
of the Parent in exchange for shares of Common Stock, and to the extent that any
of the Employees accept the Parent's offer to grant them stock options in
exchange for the cancellation of their options to purchase shares of Common
Stock, the percentages shown in the table below will decrease.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF PARENT
PARENT COMMON STOCK COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
<S> <C> <C>
THE KKR PARTNERSHIP
WCAS VII
WCAS HEALTHCARE PARTNERS, L.P.
WCAS DIRECTORS(1)
Patrick J. Welsh
Andrew M. Paul
OTHER WCAS INVESTORS (8 INDIVIDUALS)
MANAGEMENT GROUP(2)
Stephen R. Puckett
David Crane
Charles W. (Todd) Johnson
Richard J. Post
</TABLE>
- -----------
(1) See "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT" for number
of shares of Common Stock and percentage of Common Stock beneficially owned
before the Merger by these persons and entities.
(2) Includes an aggregate of ____ shares of common stock of the Parent issuable
upon exercise of options to be received in exchange for MedCath stock
options held by members of the Management Group, which will be fully vested
and immediately exercisable. Does not include an aggregate of ____ shares
of common stock of the Parent issuable upon exercise of New Options
expected to be granted to the Management Group at the Effective Time. See
"--Grant of New Options of the Parent to the Management Group."
Following consummation of the Merger, the members of the Management
Group will continue as the executive officers of the Company, and the Management
Group will designate
40
<PAGE>
Stephen R. Puckett and David Crane to serve on the Board of Directors of the
Company. In addition, the Management Group will become the executive officers of
the Parent.
The Board of Directors of the Parent will have ten members. The
Management Group will designate Stephen R. Puckett and David Crane to serve on
the Board of Directors of the Parent. The WCAS Investors will designate three
persons to serve on such board.
CONTRIBUTION TO THE PARENT OF EQUITY INTERESTS IN MEDCATH BY THE
MANAGEMENT GROUP AND WCAS DIRECTORS. Each member of the Management Group has
agreed to contribute in kind at least 50% of the value of his equity interest in
MedCath, including both shares of Common Stock and the Aggregate Unrealized Gain
on options held by him to purchase shares of Common Stock. In exchange for
shares of Common Stock contributed, each member of the Management Group will
receive shares of common stock of the Parent. In exchange for the Aggregate
Unrealized Gain on MedCath stock options, each member of the Management Group
will receive options to purchase shares of common stock of the Parent that will
be fully vested and immediately exercisable. This contribution will occur prior
to consummation of the Merger. If the Merger is consummated, the Management
Group will not receive any cash in the Merger for their shares of Common Stock
contributed to the Parent or the Aggregate Unrealized Gain on their MedCath
stock options exchanged for Parent stock options, but, instead, will receive
common stock of the Parent and options to purchase shares of such common stock
and, therefore, will continue to have indirect ownership interests in MedCath
following the Merger. Shares of Common Stock held by the Management Group that
are not contributed to the Parent will be converted into the right to receive
the same Cash Merger Consideration as shares of Common Stock held by other
shareholders of the Company. The Management Group will also receive cash on the
same basis as all other optionees for the Aggregate Unrealized Gain on any stock
options they do not agree to exchange for substantially equivalent options to
purchase shares of common stock of the Parent.
Certain of the WCAS Investors have agreed to contribute to the Parent
an aggregate of 267,106 shares of Common Stock (of which an aggegate of 104,786
shares will be contributed by the WCAS Directors) in exchange for shares of
common stock of the Parent. The value (at $19 per share) of the shares of
Common Stock contributed plus cash contributed (approximately $5 million) to
the Parent by the WCAS Investors will aggregate $105 million.
GRANT OF NEW OPTIONS OF PARENT TO THE MANAGEMENT GROUP. The Board of
Directors of the Parent will reserve shares of the Parent's common stock
representing 15% of the fully diluted equity of the Parent for the grant of
Parent stock options at an exercise price of $19 per share (the "New Options").
Fifty percent of the New Options will vest in equal portions annually over the
four years following the grant. The remaining fifty percent of the New Options
will become exercisable after the eighth anniversary of grant, subject to
acceleration if the Parent achieves certain performance targets, which will be
consistent with the June Projection, to be established by the Board of Directors
of the Parent. The New Options are also subject to a number of other conditions.
See "CERTAIN FORWARD LOOKING INFORMATION."
41
<PAGE>
The New Options will be granted as follows:
o the Management Group will receive between 70% and 80% of the New
Options upon consummation of the Merger;
o other key employees of the Company will receive 90% of the
remaining New Options upon consummation of the Merger; and
o the remaining 10% of the New Options will remain available for
grant to future employees of the Parent.
No determination has yet been made as to the number of New Options to
be granted to any individual.
"CHANGE OF CONTROL" PAYMENTS TO MEMBERS OF THE MANAGEMENT GROUP. The
consummation of the Merger will constitute a "Change in Control" of the Company
pursuant to the terms of the respective employment agreements between the
members of the Management Group and the Company. Upon such a Change in Control,
each of them becomes entitled to a lump-sum payment equal to two times the total
cash compensation earned by such employee during the immediately preceding
fiscal year of the Company, plus the present value of two years of normal
health, life insurance and retirement benefits. Each member of the Management
Group has agreed to forego such payment, however, in consideration of the
payments to be received pursuant to the new employment agreements described
immediately below. If they had not agreed to forego such payments, then Stephen
R. Puckett, David Crane, Charles W. (Todd) Johnson and Richard J. Post would
have been entitled to receive $778,337, $613, 321, $530,147 and $444,977
respectively, under their current employment agreements upon the occurrence of a
"Change of Control."
NEW EMPLOYMENT AGREEMENTS WITH THE MANAGEMENT GROUP. Upon consummation
of the Merger, the employment agreements that each member of the Management
Group currently has with the Company will terminate. At such time, each member
of the Management Group will enter into a new employment agreement with the
Parent. The principal terms of the employment agreements are summarized below:
o each agreement will have a term of four years with an extension
for an additional year, unless terminated or not renewed in
accordance with the agreement's terms;
o each agreement will provide for compensation consisting of base
salary (the amount of which is intended to be, at all times, no
less than the median base salary for each of the four highest paid
officers of companies of similar size and character as the
Parent), and a potential cash bonus (the eligibility formula for
which is intended to be comparable to the current cash bonus
formula of the Company and based upon performance targets to be
determined by the Board of Directors of the Parent); and
42
<PAGE>
o each agreement will provide for a severance payment in the event
of termination by the Parent without cause or resignation by the
employee for good reason, consisting of two years' payment of base
salary and bonus and continuation of normal health, life
insurance, retirement and other benefits.
The initial base salaries for Stephen R. Puckett, David Crane, Charles
W. (Todd) Johnson and Richard J. Post pursuant to their new employment
agreements with the Parent will be $352,680, $263,172, $189,996 and $157,992,
respectively. The possible annual cash bonuses for each of the members of the
Management Group will equal a percentage of each of their base salaries, be
calculated using a bonus formula comparable to the bonus formula in effect
immediately prior to the Merger, and will depend upon the Company meeting or
exceeding certain performance targets to be established yearly by the Board.
Each member of the Management Group will also be entitled to a separate
payment in respect of the termination of his previously existing employment
agreement and a separate payment in respect of a covenant not to compete. In
addition, each member of the Management Group will be entitled to a "stay
bonus," in an amount to be determined, which will be payable over the first two
years of employment with the Company after consummation of the Merger. The
amounts of such payments to be received by each member of the Management Group
either immediately after or over the two-year period following consummation of
the Merger are set forth in the table below.
<TABLE>
<CAPTION>
MANAGEMENT GROUP MEMBER TERMINATION PAYMENT NON-COMPETE PAYMENT STAY BONUS
<S> <C> <C> <C>
Stephen R. Puckett $ $ $
David Crane
Charles W. (Todd) Johnson
Richard J. Post
</TABLE>
STOCKHOLDERS AGREEMENT. After consummation of the Merger, the Parent
and the members of the Management Group will enter into a stockholders agreement
that will restrict the Management Group's ability to transfer the shares of
common stock of the Parent to be owned by them. The Agreement will give them (or
their estates) the right in certain events to sell, and will obligate the Parent
to purchase, their shares of common stock of the Parent. The agreement will also
grant them certain registration rights for their shares of the Parent and will
give the Parent the right to call their shares at a specified price upon the
occurrence of certain events.
INDEMNIFICATION AND INSURANCE. The Merger Agreement requires that
MedCath provide indemnification to its current and former directors and officers
against liabilities (including reasonable attorneys' fees) relating to actions
or omissions arising out of their being a director, officer, employee or agent
of the Company at or prior to the Effective Time (including the transactions
contemplated by the Merger Agreement). In addition, MedCath is obligated for a
period of six years from the Effective Time to continue in effect directors' and
officers' liability insurance with respect to matters occurring prior to the
Effective Time, which insurance must contain terms and conditions no less
advantageous than are contained in MedCath's current
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directors' and officers' liability insurance policy; provided that MedCath is
not obligated to expend annually more than 200% of the current cost of such
coverage.
TREATMENT OF STOCK OPTIONS. Pursuant to the terms of the Merger
Agreement, all holders of outstanding MedCath stock options will be entitled to
receive a cash payment equal to the Aggregate Unrealized Gain. Any options to
purchase shares of Common Stock that are not exchanged by the Management Group
for similar options to purchase shares of the Parent's common stock will be
terminated upon the effectiveness of the Merger and the members of the
Management Group will receive cash in an amount equal to the Aggregate
Unrealized Gain of such options on the same basis as all other holders of
MedCath stock options. Prior to the Effective Time, MedCath has agreed, pursuant
to the terms of the Merger Agreement, to take all necessary action to cancel all
outstanding options to purchase Common Stock, whether or not exercisable, other
than options exchanged by the Management Group for similar options to purchase
shares of common stock of the Parent. See "THE MERGER--Cash-out of MedCath Stock
Options" and "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT." As of
May ___, 1998, there were options outstanding to purchase an aggregate of
________ shares of Common Stock at a weighted average exercise price of $_____
per share.
The following table sets forth information as to the options held by
members of the Management Group as of May ___, 1998 for which cash payment will
be received upon consummation of the Merger, and the proceeds to be received
upon termination of such options by the members of the Management Group.
<TABLE>
<CAPTION>
AMOUNT OF CASH
MANAGEMENT GROUP MEMBER SHARES SUBJECT TO OPTIONS TO BE RECEIVED
<S> <C> <C>
Stephen R. Puckett
David Crane
Charles W. (Todd) Johnson
Richard J. Post
</TABLE>
SPECIAL COMMITTEE. As compensation for serving on the Special
Committee, which met more than ___ times from July 1997 through May 1998, the
members of the Special Committee each received fees in the amount of $______
pursuant to the Board's standard policy for compensating directors for
attendance at committee meetings.
Each member of the Special Committee, as an outside director,
automatically received on the date of each annual meeting options to purchase
2,000 shares of Common Stock at the market price of the Common Stock on such
date. Dr. Duncan and Mr. McKinnon each received a total of 4,000 such options,
none of which have been exercised. In addition, Dr. Duncan was granted upon
appointment to the Board options to purchase 3,531 shares of Common Stock at an
exercise price of $7.51 per share, of which 1,177 have not been exercised. Under
the terms of the Merger
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Agreement, the options held by the members of the Special Committee will be
terminated and each holder thereof will receive an amount in cash equal to the
Aggregate Unrealized Gain on such options on the same basis as other holders of
MedCath stock options.
In addition to the options described in the preceding paragraph, Dr.
Duncan owns 2,354 shares of Common Stock, and Mr. McKinnon owns 60,000 shares of
Common Stock, all of which will, upon consummation of the Merger, be canceled
and for which they will receive the Cash Merger Consideration. Accordingly, upon
consummation of the Merger, the members of the Special Committee will receive
the following cash payments: Dr. Duncan will receive $20,774 for the Aggregate
Unrealized Gain on his stock options and $44,726 for his shares of Common Stock,
for a total cash payment of $65,500. Mr. McKinnon will receive $7,250 for the
Aggregate Unrealized Gain on his stock options and $1,140,000 for his shares of
Common Stock, for a total cash payment of $1,147,250.
Members of the Special Committee will also be entitled to certain
indemnification rights granted under the Merger Agreement to the current and
former directors and officers of the Company. See "--Conflicts of
Interest--Indemnification and Insurance."
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, other than the Management Group, the
Physicians and the WCAS Investors, the current shareholders of MedCath will not
have an opportunity to continue their equity interest in MedCath as an ongoing
corporation and therefore will not share in the future earnings and potential
growth of MedCath. Upon consummation of the Merger, the Common Stock will no
longer be traded on the Nasdaq National Market, price quotations will no longer
be available and the registration of the Common Stock under the Exchange Act
will be terminated. The termination of registration of the Common Stock under
the Exchange Act will eliminate the requirement to provide information to the
Commission and will make most of the provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b) and the requirement of
furnishing a proxy or information statement in connection with shareholders'
meetings, no longer applicable.
The members of the Management Group, the Physicians and the WCAS
Directors will own an equity interest in the Parent that will allow them
indirectly to share in the future earnings and potential growth of MedCath,
which will upon consummation of the Merger become a wholly-owned subsidiary of
the Parent. An investment in MedCath (indirectly through an equity investment in
the Parent) following the Merger involves substantial risk resulting from the
limited liquidity of any such investment and the increased leverage associated
with future borrowings that will be necessary to fund the substantial capital
expenditures required to execute the Company's business strategy. Nonetheless,
if the Company is able to successfully implement its business strategy, the
value of such an equity investment would be considerably greater than the
original cost thereof. See "CERTAIN FORWARD LOOKING INFORMATION."
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The receipt of cash pursuant to the Merger will be a taxable
transaction. See "FEDERAL INCOME TAX CONSEQUENCES."
CONDUCT OF MEDCATH'S BUSINESS AFTER THE MERGER
The Parent is continuing to evaluate MedCath's business, assets,
practices, operations, properties, corporate structure, capitalization,
management and personnel and discussing what changes, if any, will be desirable.
Subject to the foregoing, the Parent expects that the day-to-day business and
operations of MedCath will be conducted substantially as they are currently
being conducted by MedCath. The Parent does not currently intend to dispose of
any assets of MedCath, other than in the ordinary course of business.
Additionally, the Parent does not currently contemplate any material change in
the composition of MedCath's current management, although after the Merger, the
Board will consist of four designees of the KKR Partnership, three designees of
the WCAS Investors, Stephen R. Puckett and David Crane of the Management Group
and one independent director to be elected by the other directors.
CERTAIN FORWARD LOOKING INFORMATION
Certain projections prepared by management of MedCath are included
elsewhere in this Proxy Statement under the heading "CERTAIN FORWARD LOOKING
INFORMATION."
THE SPECIAL MEETING
PROXY SOLICITATION
This Proxy Statement is being delivered to MedCath's shareholders in
connection with the solicitation by the Board of proxies to be voted at the
Special Meeting to be held July 14, 1998 at 10:00 a.m., local time, at Raintree
Country Club, located at 8600 Raintree Lane, Charlotte, North Carolina. All
expenses incurred in connection with solicitation of the enclosed proxy will be
paid by the Company. Officers, directors and regular employees of the Company,
who will receive no additional compensation for their services, may solicit
proxies by telephone or personal call. In addition, the Company has retained
Corporate Communications, Inc. to solicit proxies for a fee of $________ plus
expenses. The Company has requested brokers and nominees who hold stock in their
names to furnish this proxy material to their customers and the Company will
reimburse such brokers and nominees for their related out-of-pocket expenses.
This Proxy Statement and the accompanying proxy card are being mailed to
shareholders on or about June ___, 1998.
RECORD DATE AND QUORUM REQUIREMENT
The Common Stock is the only outstanding voting security of the
Company. The Board has fixed the close of business on June 4, 1998 as the record
date (the "Record Date") for the determination of shareholders entitled to
notice of, and to vote at, the Special Meeting and any
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adjournment or adjournments thereof. Each holder of record of Common Stock at
the close of business on the Record Date is entitled to one vote for each share
then held on each matter submitted to a vote of shareholders. At the close of
business on the Record Date, there were _______ shares of Common Stock issued
and outstanding held of record by ____ holders.
The holders of a majority of the outstanding shares entitled to vote at
the Special Meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Abstentions are counted for
purposes of determining the presence or absence of a quorum for the transaction
of business.
VOTING PROCEDURES
Approval of the Merger Agreement, which is attached as Appendix A
hereto, will require the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting. A
failure to vote or a vote to abstain will have the same legal effect as a vote
cast against approval. Brokers and, in many cases, nominees will not have
discretionary power to vote on the proposal to be presented at the Special
Meeting. Accordingly, beneficial owners of shares should instruct their brokers
or nominees how to vote. A broker non-vote will have the same effect as a vote
against the Merger.
Under North Carolina law, holders of Common Stock who do not vote in
favor of the Merger Agreement and who comply with certain notice requirements
and other procedures will have the right to dissent and to be paid cash for the
"fair value" of their shares as finally determined under such procedures, which
may be more or less than the consideration to be received by other shareholders
of MedCath under the terms of the Merger Agreement. Failure to follow such
procedures precisely may result in loss of Dissenters' Rights. See "RIGHTS OF
DISSENTING SHAREHOLDERS."
VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of MedCath an instrument
revoking it, (ii) submitting a duly executed proxy bearing a later date or (iii)
voting in person at the Special Meeting. Subject to such revocation, all shares
represented by each properly executed proxy received by the Secretary of MedCath
will be voted in accordance with the instructions indicated thereon, and if no
instructions are indicated, will be voted to approve the Merger and in such
manner as the persons named on the enclosed proxy card in their discretion
determine upon such other business as may properly come before the Special
Meeting or any adjournment thereof.
The shares represented by the accompanying proxy card and entitled to
vote will be voted if the proxy card is properly signed and received by the
Secretary of the Company prior to the Special Meeting.
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EFFECTIVE TIME
The Merger will be effective as soon as practicable following
shareholder approval of the Merger Agreement and upon the filing of articles of
merger with the Secretary of State of the State of North Carolina. The Effective
Time is currently expected to occur as soon as practicable after the Special
Meeting, subject to approval of the Merger Agreement at the Special Meeting and
satisfaction or waiver of the terms and conditions set forth in the Merger
Agreement. See "THE MERGER--Conditions."
THE MERGER
The Merger Agreement provides that the Acquiror, a newly-formed North
Carolina corporation which is a wholly-owned subsidiary of the Parent, will be
merged with and into MedCath, and that following the Merger, the separate
existence of the Acquiror will cease and MedCath will continue as the surviving
corporation.
The terms of and conditions to the Merger are contained in the Merger
Agreement which is included in full as Appendix A to this Proxy Statement and is
incorporated herein by reference thereto. The discussion in this Proxy Statement
of the Merger and the summary description of the principal terms of the Merger
Agreement are subject to and qualified in their entirety by reference to the
more complete information set forth in the Merger Agreement.
CONVERSION OF SECURITIES
At the Effective Time, subject to the terms, conditions and procedures
set forth in the Merger Agreement, each share of Common Stock issued and
outstanding immediately prior to the Effective Time (other than the Dissenting
Shares and shares held by the Acquiror ) will, by virtue of the Merger, be
converted into the right to receive the Cash Merger Consideration. Except for
the right to receive the Cash Merger Consideration, from and after the Effective
Time, all shares (other than the Dissenting Shares and shares held by the
Acquiror), by virtue of the Merger and without any action on the part of the
holders, will no longer be outstanding and will be canceled and retired and will
cease to exist. Each holder of a certificate formerly representing any shares
(other than the Dissenting Shares and shares held by the Acquiror) will after
the Effective Time cease to have any rights with respect to such shares other
than the right to receive the Cash Merger Consideration for such shares upon
surrender of the certificate.
No interest will be paid or accrued on the amount payable upon the
surrender of any certificate. Payment to be made to a person other than the
registered holder of the certificate surrendered is conditioned upon the
certificate so surrendered being properly endorsed and otherwise in proper form
for transfer, as determined by the Disbursing Agent. Further, the person
requesting such payment will be required to pay any transfer or other taxes
required by reason of the payment to a person other than the registered holder
of the certificate surrendered or establish to the satisfaction of the
Disbursing Agent that such tax has been paid or is not payable.
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Six months following the Effective Time, MedCath will be entitled to cause the
Disbursing Agent to deliver to it any funds (including any interest received
with respect thereto) made available to the Disbursing Agent which have not been
disbursed to holders of certificates formerly representing shares outstanding
prior to the Effective Time, and thereafter such holders will be entitled to
look to MedCath only as general creditors with respect to cash payable upon due
surrender of their certificates. Notwithstanding the foregoing, neither the
Disbursing Agent nor any party to the Merger Agreement will be liable to any
holder of certificates formerly representing shares for any amount paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Except as described in this paragraph, MedCath will pay all charges
and expenses, including those of the Disbursing Agent, in connection with the
exchange of shares for the Cash Merger Consideration.
Each share of the Acquiror's common stock that is issued and
outstanding immediately prior to the Merger will be converted at the Effective
Time into one share of Common Stock of MedCath.
CASH-OUT OF MEDCATH STOCK OPTIONS
In general, outstanding stock options to purchase shares of MedCath
shall be canceled or terminated as of the Effective Time. Holders of such
options shall receive cash equal to the Aggregate Unrealized Gain on such
options. Options contributed by the Management Group to the Parent for similar
options to purchase shares of common stock of the Parent will be canceled, and
the members of the Management Group will not receive any cash payment upon the
cancellation thereof.
TRANSFER OF SHARES
No transfers of shares of Common Stock will be made on the stock
transfer books at or after the Effective Time. If, after the Effective Time,
certificates representing such shares are presented to MedCath, such shares will
be canceled and exchanged for the Cash Merger Consideration.
CONDITIONS
Each party's respective obligation to effect the Merger is subject to
the satisfaction, at or prior to the Effective Time, of each of the following
conditions, any or all of which may be waived at the appropriate party's
discretion, to the extent permitted by applicable law:
(i) the Merger Agreement and the transactions contemplated
therein shall have been approved in the manner required by applicable
law by the holders of a majority of the outstanding shares entitled to
vote thereon;
(ii) there is no action, suit or proceeding pending before any
court or governmental body that may have the effect of making illegal
or otherwise preventing,
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<PAGE>
prohibiting or substantially delaying consummation of the Merger or
would result in an award of damages that would have a material adverse
effect on MedCath; and
(iii) the waiting period applicable to the consummation of the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), shall have expired or terminated.
The obligations of MedCath to effect the Merger are subject to the
satisfaction, at or prior to the Effective Time, of each of the following
conditions, unless waived by MedCath:
(i) the representations and warranties of the Acquiror and the
Parent in the Merger Agreement shall be true and correct in all
material respects as of the date of execution thereof and as of the
Effective Time as though made at the Effective Time, except for changes
specifically permitted by the Merger Agreement;
(ii) the Acquiror and the Parent shall have performed in all
material respects their agreements contained in the Merger Agreement
required to be performed at or prior to the Effective Time; and
(iii) MedCath shall have received a certificate of the
President and a Vice President of the Acquiror and the Parent
certifying to the effect of the preceding clauses (i) and (ii).
The obligations of the Acquiror and the Parent to effect the Merger are
subject to the satisfaction at or prior to the Effective Time of each of the
following conditions, unless waived by the Acquiror:
(i) the representations and warranties of MedCath contained in
the Merger Agreement shall be true and correct in all material respects
as of the date of execution thereof and, except as contemplated by the
Merger Agreement, as of the Effective Time, as though all of such
representations were made by MedCath at the Effective Time;
(ii) MedCath shall have performed in all material respects its
agreements contained in the Merger Agreement required to be performed
at or prior to the Effective Time;
(iii) the Acquiror shall have received a certificate of the
President and a Vice President of MedCath certifying, as applicable, to
the effect of the preceding clauses (i) and (ii);
(iv) the Acquiror shall have obtained the financing for the
Merger on terms satisfactory to the Acquiror;
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(v) all consents, approvals or notices to any governmental
authority or other person or entity whose consent or approval or to
whom notice is required in connection with the execution or delivery
and performance of the Merger Agreement and the transactions
contemplated by those agreements shall have been obtained or made;
(vi) the Management Group shall have invested in the Parent at
least 50% of the value of their equity interest in the Company,
including both shares of Common Stock and the Aggregate Unrealized Gain
or MedCath stock options held by them;
(vii) the directors of MedCath, other than those who are also
directors of the Acquiror, shall have resigned; and
(viii) to MedCath's knowledge, no investigation of MedCath for
any violation of the "Stark" laws, anti-kickback laws or laws or
regulations relating to Medicare, Medicaid or CHAMPUS shall be pending.
REPRESENTATIONS AND WARRANTIES
MedCath has made representations and warranties in the Merger Agreement
regarding, among other things, its organization and good standing, authority to
enter into the transaction, its capitalization, its financial statements, the
absence of certain changes in the business of MedCath since September 30, 1997,
the content and submission of forms and reports required to be filed by MedCath
with the Commission, requisite governmental and other consents and approvals,
compliance with all applicable laws, including without limitation those relating
to billing and coding for healthcare services, absence of litigation to which
MedCath is a party, brokers and finders, requisite tax filings, absence of
defaults under material contracts, employee benefits and coding and
environmental matters.
The Parent and the Acquiror have made representations and warranties in
the Merger Agreement regarding, among other things, their organization and good
standing, authority to enter the transaction, the Acquiror's capitalization,
compliance with all applicable laws, requisite governmental and other consents
and approvals, accuracy of information supplied by the Acquiror for submission
on forms and reports required to be filed by MedCath with the Commission,
financing for the Merger, brokers and finders, the absence of prior activities
and absence of litigation to which the Acquiror or the Parent is a party.
The representations and warranties of the parties in the Merger
Agreement will expire upon consummation of the Merger, and upon such expiration
none of such parties or their respective officers, directors or principals will
have any liability whatsoever with respect to any such representations or
warranties.
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COVENANTS
In the Merger Agreement, MedCath has agreed that prior to the Effective
Time, unless otherwise agreed to in writing by the Acquiror or as otherwise
contemplated by the Merger Agreement, MedCath and each of its subsidiaries will
conduct business only in the ordinary course substantially consistent with past
practice and will not:
(i) amend its articles of incorporation or bylaws or the
organizational documents of any of MedCath's subsidiaries;
(ii) declare, set aside or pay any dividend or make any other
distribution in respect of any of its shares of capital stock;
(iii) issue, grant, sell, pledge, or transfer any shares of
its capital stock, stock options, warrants, securities or rights to
acquire any such shares, securities or rights of MedCath or propose or
agree to do any of the foregoing or acquire directly or indirectly any
shares of its capital stock or make any other changes in its equity
capital structure;
(iv) incur any indebtedness, directly or through guarantees or
otherwise, other than under existing credit facilities for current
operations in the ordinary course of its business or make loans other
than to its subsidiaries;
(v) acquire directly or indirectly by redemption or otherwise
any shares of the capital stock of MedCath of any class or any options,
warrants or other rights to purchase any such shares, fail to use their
reasonable best efforts to conduct their relations with employees and
their employee benefit plans only in the ordinary and usual course
consistent with past practices;
(vi) amend, or enter into any additional, employment
agreements with officers or directors of MedCath or make increases in
employee compensation or benefits except as permitted by the Merger
Agreement;
(vii) fail to use their reasonable best efforts to keep in
place its current insurance policies which are material;
(viii) make any investment of a capital nature or otherwise
enter into any material transaction;
(ix) make any material tax election or settle or compromise
any material tax liability;
(x) not make any change in its accounting principles or
methods except insofar as may be required by a change in generally
accepted accounting principles;
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(xi) split, combine or reclassify any of the capital stock of
MedCath or issue other securities in respect of or in substitution for
such existing capital stock;
(xii) acquire any other business or entity whether by
acquisition of assets or stock, merger or consolidation;
(xiii) agree to engage in any new developments;
(xiv) sell, lease, mortgage or otherwise encumber any of its
assets other than in the ordinary course of business;
(xv) make capital expenditures in amounts which exceed
MedCath's annual capital expenditure budget for fiscal year 1998;
(xvi) pay, discharge or satisfy material claims other than in
the ordinary course of business;
(xvii) adopt a plan of complete or partial liquidation or
merger with respect to MedCath or any of its subsidiaries;
(xviii) enter into any new collective bargaining agreement;
(xix) settle or compromise any litigation against MedCath or
its subsidiaries;
(xx) engage in any transaction or enter into any agreement
with any affiliate or other person covered under Item 404 of the
Commission's Regulation S-K;
(xxi) adopt new, or amend existing, employee benefit plans;
(xxii) grant employees any new or modified severance;
(xxiii) effectuate a plant closing or mass layoff without
complying with applicable law;
(xxiv) fail to grant to the Acquiror and its representatives,
on a confidential basis, access to the records and facilities of
MedCath; and
(xxv) fail to use its reasonable best efforts to cooperate
with and assist the Acquiror with respect to financing necessary to
effect the Merger.
The Merger Agreement also provides that the Acquiror will use its
reasonable best efforts to consummate the financing necessary to effect the
Merger and pay the expenses related to the Merger. See "THE MERGER--Financing."
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MedCath has also agreed to provide prompt notice to the Acquiror upon
obtaining knowledge of:
(i) material litigation and claims;
(ii) notices of default under agreements and instruments where
the default would have a material adverse effect;
(iii) notice from a third party claiming that its consent is
required in connection with the transactions contemplated by the Merger
Agreement; and
(iv) any material adverse change in the condition (financial
or otherwise), results of operations, properties, assets, liabilities
or business of MedCath and its subsidiaries, taken as a whole, or the
occurrence of an event which could result in any such change.
NONSOLICITATION COVENANT
Under the terms of the Merger Agreement, MedCath has agreed not to
permit any of its officers, directors, affiliates, representatives or agents to,
directly or indirectly, solicit, initiate or knowingly encourage any Acquisition
Proposal or participate in any discussions or negotiations with any other party
to facilitate an Acquisition Proposal. Further, the Merger Agreement provides
that all of MedCath's representatives will be instructed to cease these
activities. However, MedCath may furnish information and participate in
discussions and negotiations with a party who has made an unsolicited
Acquisition Proposal if either MedCath's Board or its Special Committee has
determined in good faith, based upon the reasonably concluded written advice of
outside counsel, that failing to take such action would violate fiduciary duties
under applicable law. MedCath is obligated to inform the Acquiror immediately of
any Acquisition Proposal, provide the Acquiror notice of its material terms and
conditions and keep the Acquiror advised of all material developments.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that the current and former directors and
officers of MedCath and any of its subsidiaries (including the members of the
Special Committee) will be indemnified by MedCath, to the fullest extent
permitted by applicable law, against any costs, expenses, judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation, and will be advanced reasonable costs and expenses
(including attorneys' fees), in connection with any claim, action, suit,
proceeding or investigation arising out of or pertaining to the approval and
consummation of the transactions contemplated by the Merger Agreement. In
addition, MedCath is required to maintain in effect, for a period of six years
after the Effective Time, MedCath's policies of directors' and officers'
liability insurance (provided that MedCath may substitute therefor policies of
at least the same amounts and comparable coverage).
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However, in no event will MedCath be required to pay premiums for such insurance
in excess of 200% of premiums currently paid by MedCath.
EXPENSES
The parties have agreed to pay their own costs and expenses in
connection with the Merger Agreement and the transactions contemplated thereby.
MedCath has agreed, however, to pay or reimburse the Acquiror for all reasonable
out-of-pocket expenses incurred by or on behalf of the Acquiror in connection
with the Merger Transaction upon certain events. See "THE MERGER--Termination
Fee."
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Time, the Merger Agreement may be
terminated by the mutual consent of the Boards of Directors of MedCath and the
Acquiror.
Any of the parties may terminate the Merger Agreement prior to the
Effective Time by written notice to the other parties if (i) the conditions
precedent to closing have not occurred by August 31, 1998 unless the failure to
close results from such party's breach of any representation, warranty or
covenant, (ii) approval of the shareholders of MedCath necessary to consummate
the Merger has not been obtained or (iii) any court of competent jurisdiction or
other governmental entity issues an order, decree or ruling or takes any action
enjoining, restraining or prohibiting the Merger and such order, decree, ruling
or action becomes final and nonappealable.
In addition, the Acquiror may terminate the Merger Agreement prior to
the Effective Time by written notice to MedCath if (i) MedCath breaches any
representation, warranty or covenant and fails to cure such breach within thirty
days after written notice, (ii) the Board withdraws or modifies its approval or
recommendation of the Merger Agreement or the Merger, (iii) MedCath enters into
a definitive agreement with any party regarding an Acquisition Proposal or (iv)
a third party commences a tender or exchange offer for 25% or more of the Common
Stock and the Board has recommended that MedCath's shareholders tender their
shares in connection with such offer.
MedCath may terminate the Merger Agreement prior to the Effective Time
by written notice to the Acquiror if (i) the Board or the Special Committee
withdraws or modifies its approval or recommendation of the Merger Agreement or
the Merger after having determined in good faith, and based upon the reasonably
concluded written advice of counsel, that continuing to recommend the Merger
Agreement and the Merger would violate fiduciary duties of the Board, (ii) the
Board or the Special Committee has determined that MedCath has entered into a
definitive agreement with any party with respect to a transaction the proposal
of which qualifies as an Acquisition Proposal, provided that the Board or the
Special Committee has first determined in good faith based upon reasonably
concluded written advice of counsel that failing to take such action would
violate the Board's fiduciary duties or (iii) a third party commences a tender
or exchange offer for 25% or more of the Common Stock which has not been
solicited by
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MedCath and the Board has recommended that the shareholders of MedCath tender
their shares in connection with such offer, provided that the Board or the
Special Committee has first determined in good faith based upon the reasonably
concluded written advice of counsel that failing to take such action would
violate the Board's fiduciary duties.
Subject to the provisions of applicable law, the Merger Agreement may
be modified or amended, and provisions thereof waived, by written agreement of
the parties. However, after approval of the principal terms of the Merger
Agreement by the shareholders of MedCath, no amendment or waiver of a provision
may be made which reduces the amount or changes the form of the Cash Merger
Consideration to be received by the shareholders or that would adversely affect
the shareholders of MedCath unless such amendment or waiver of a provision is
approved by the shareholders. With respect to any decision regarding a proposed
modification, amendment or waiver of the Merger Agreement, the Board, in the
exercise of its fiduciary duty, will make a determination as to whether
resolicitation of shareholders is required.
TERMINATION FEE
In the event that the Merger Agreement is terminated by MedCath due to
(i) the Board or the Special Committee withdrawing or modifying its approval or
recommendation of the Merger Agreement or the Merger in connection with the
exercise of its fiduciary duties, (ii) MedCath entering into a definitive
agreement with any party with respect to an Acquisition Proposal following a
determination that the Company's failure to do so would violate the Board's
fiduciary duty or (iii) the commencement by a third party of a tender offer for
25% or more of the Common Stock which the Board has recommended to MedCath's
shareholders, then in any of such events, MedCath is required to promptly pay to
the Acquiror $6,774,640 plus the Acquiror's reasonable out-of-pocket fees and
expenses (the "Termination Fee").
The Termination Fee shall also be due in the event that (i) the Merger
Agreement is terminated by the Acquiror due to the Board's withdrawal or
modification of its approval or recommendation of the Merger Agreement or the
Merger, (ii) MedCath enters into a definitive agreement with any party with
respect to an Acquisition Proposal or (iii) a third party commences a tender or
exchange offer for 25% or more of the Common Stock which has been recommended by
the Board to MedCath's shareholders.
Additionally, the Termination Fee will be due to the Acquiror if an
Acquisition Proposal is made to MedCath at any time after the date of the Merger
Agreement and either five months following the termination of the Merger
Agreement due to the failure of the shareholders of MedCath to approve the
Merger Agreement, or one year after termination of the Merger Agreement for any
other reason (other than a default by the Acquiror), MedCath consummates a
transaction the proposal of which qualifies as an Acquisition Proposal.
Further, in the event that the Merger Agreement is terminated due to
the failure of the shareholders of MedCath to approve the transaction, MedCath
shall be obligated to reimburse the Acquiror for its reasonable out-of-pocket
fees and expenses. Upon a breach of the Merger
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<PAGE>
Agreement by either party which is not cured within thirty days following
written notice, the breaching party shall be obligated to reimburse the other
party hereto for its reasonable out-of-pocket fees and expenses incurred in
connection with the Merger Agreement.
FINANCING
CASH FINANCING FOR THE MERGER. Financing for the Merger and the initial
working capital needs of MedCath after the Merger will be provided as follows:
<TABLE>
<CAPTION>
SOURCE OF FUNDS AMOUNT
--------------- ------
<S> <C>
Cash contribution to the Parent by the KKR Partnership.......................... $105,000,000
Cash contribution to the Parent by the WCAS Investors............................ 100,000,000
Revolving credit agreement of MedCath(1)........................................ 32,000,000
--------------
$237,000,000
==============
</TABLE>
- -----------
(1) The amount of the draw to be made on the revolving credit agreement will be
reduced to the extent of the value of the equity interests contributed by
the Management Group, the Physicians and the Employees.
57
<PAGE>
CONTRIBUTED EQUITY FINANCING. Members of the Management Group and the
WCAS Investors will invest approximately 50% of the value of their equity
interest in MedCath in shares of common stock of the Parent and in options to
purchase shares of common stock of the Parent in the respective amounts shown
below and thereby relieve the Parent of the need to finance the payment of Cash
Merger Consideration for equity interests in MedCath totaling approximately $___
million. The value of the equity interests in MedCath to be contributed to the
Parent by the Physicians and the Employees, which is not included in the table
below, will also reduce the amount of the cash equity portion of the Aggregate
Merger Consideration.
<TABLE>
<CAPTION>
VALUE OF EQUITY PERCENTAGE OF EQUITY
VALUE OF EQUITY INTEREST IN MEDCATH INTEREST IN MEDCATH
INVESTOR GROUP MEMBER INTEREST IN MEDCATH(1) CONTRIBUTED TO PARENT(1) CONTRIBUTED
- --------------------- ---------------------- ------------------------ -----------
<S> <C> <C> <C>
MANAGEMENT GROUP
Stephen R. Puckett
David Crane
Charles W. (Todd) Johnson
Richard J. Post
WCAS DIRECTORS 1,545,612 1,395,968 90.3%
Patrick J. Welsh
Andrew M. Paul
445,322 300,010 67.7%
OTHER WCAS INVESTORS 4,116,692 3,379,036 82.1%
</TABLE>
- -----------
(1) Includes, in the case of the members of the Management Group, the
Aggregate Unrealized Gain on options to purchase shares of Common Stock
that will be exchanged for options to purchase shares of common stock
of the Parent.
EXPENSES OF THE TRANSACTION
Assuming the Merger is consummated, the estimated costs and fees in
connection with the Merger, financing and the related transactions, which will
be paid by MedCath, are as follows:
<TABLE>
<CAPTION>
COST OR FEE ESTIMATED AMOUNT
----------- ----------------
<S> <C>
Financial advisory fees ............................... $
Bank commitment fees...................................
Legal fees.............................................
Accounting fees........................................
Printing and mailing fees..............................
58
<PAGE>
Solicitation expenses..................................
Commission filing fees.................................
Other regulatory filing fees...........................
Miscellaneous..........................................
$
=================
</TABLE>
See "SPECIAL FACTORS--Opinion of Financial Advisor" for a description of the
fees to be paid to Goldman Sachs in connection with its engagement. For a
description of certain fees payable to the members of the Special Committee, see
"SPECIAL FACTORS--Conflicts of Interest."
For a description of MedCath's obligation, even if the Merger is not
consummated, to pay or reimburse the Acquiror for expenses incurred by the
Acquiror in connection with the Merger, see "THE MERGER--Expenses" and "--
Termination Fee."
REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger cannot be consummated until certain notifications are given and certain
information is furnished to the FTC and the Antitrust Division of the Department
of Justice and specified waiting period requirements are satisfied. The
applicable waiting period expired on May 15, 1998.
MedCath is not aware of any license or regulatory permit which is
material to the business of MedCath and which is likely to be adversely affected
by the Merger or of any approval or other action by any state, federal or
foreign government or governmental agency that would be required prior to
effecting the Merger.
ACCOUNTING TREATMENT
The Merger will be treated as a purchase business combination for
accounting purposes.
RIGHTS OF DISSENTING SHAREHOLDERS
Under North Carolina law, holders of Common Stock who do not vote in
favor of the Merger and who comply with certain notice requirements and other
procedures will have the right to dissent and to be paid cash for the "fair
value" of their shares. The "fair value" of the Common Stock as finally
determined under such procedures may be more or less than the $19 per share cash
which will be paid in respect of shares held by non-dissenting shareholders in
the Merger. Failure to follow such procedures precisely may result in loss of
Dissenters' Rights.
The following discussion is not a complete statement of the law
pertaining to Dissenters' Rights under Article 13 and is qualified in its
entirety by the full text of Article 13 which is reprinted in its entirety as
Appendix C to this Proxy Statement.
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<PAGE>
A record shareholder may assert Dissenters' Rights as to fewer than all
the shares of Common Stock registered in his name only if he dissents with
respect to all shares beneficially owned by any one person and notifies the
Company in writing of the name and address of each person on whose behalf he
asserts Dissenters' Rights. The rights of a partial dissenter will be determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders. A beneficial owner may assert Dissenters'
Rights as to shares of Common Stock held on his behalf only if he: (a) submits
to the Company the record shareholder's written consent to the dissent not later
than the time the beneficial shareholder asserts Dissenters' Rights and (b)
asserts Dissenters' Rights with respect to all shares of which he is the
beneficial owner.
A holder of shares of Common Stock wishing to exercise Dissenters'
Rights must: (a) give to the Company, and the Company must actually receive
before the vote on the Merger is taken, written notice of the holder's intent to
demand payment for his shares if the Merger is consummated, and (b) must not
vote his shares in favor of the Merger. Such notice may be sent to the Company
at the following address: 7621 Little Avenue, Suite 106, Charlotte, North
Carolina 28226, Attn: Richard J. Post, Secretary. If the Merger Agreement is
approved by holders of the requisite number of outstanding shares of Common
Stock, the Company will, no later than 10 days following the consummation of the
Merger, mail a written dissenters' notice to all of its shareholders who gave
the aforementioned notice of intent to demand payment. Such dissenters' notice
will: (a) state where the payment demand must be sent and where and when
certificates for shares must be deposited; (b) supply a form for demanding
payment; (c) set a date by which the Company must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date on
which the dissenters' notice is sent; and (d) be accompanied by a copy of
Article 13. To exercise his Dissenters' Rights, a shareholder sent a dissenters'
notice must demand payment and deposit his share certificates in accordance with
the terms of the notice. A shareholder failing to do so will not be entitled to
payment for his shares under Article 13. A shareholder who demands payment and
deposits his share certificates in accordance with the terms of the notice will
retain all other rights of a shareholder until consummation of the Merger.
As soon as the Merger is completed, or within 30 days after the
Company's receipt of a payment demand by a shareholder made in compliance with
the above-described procedures, the Company will pay such shareholder the amount
the Company estimates to be the value of his shares, plus interest accrued to
the date of payment. Such payment will be accompanied by: (a) the Company's
balance sheet as of the fiscal year ended September 30, 1997, an income
statement and a statement of cash flows for that year and the latest available
interim financial statements; (b) an explanation of how the Company estimated
the fair value of the shares; (c) an explanation of how the interest was
calculated; (d) a statement of the dissenter's right to notify the Company of
his own estimate of the value of his shares and the amount of interest due if
(i) he believes the amount paid by the Company is less than the fair value of
his shares or that the interest due was incorrectly calculated, (ii) the Company
fails to make a payment within the time period described in the first sentence
of this paragraph, or (iii) the Company, having failed to
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<PAGE>
consummate the Merger, fails to return deposited share certificates within 60
days after the date set for demanding payment; and (iv) a copy of Article 13.
If: (a) a dissenter believes that the amount paid by the Company is
less than the fair value of his shares, or that the interest due is incorrectly
calculated; (b) the Company fails to make payment within the time period set
forth in the first sentence of the immediately preceding paragraph; or (c) the
Company, having failed to consummate the Merger, fails to return deposited stock
certificates to a dissenter within 60 days after the date set for demanding
payment, the dissenter may notify the Company in writing of his own estimate of
the fair value of his shares and amount of interest due and demand payment of
the amount in excess of the Company's payment to him. Such notice and demand may
be sent to the Company at the address set forth in the second immediately
preceding paragraph. A dissenter will waive his right to demand payment as
described in this paragraph, and will be deemed to have withdrawn his dissent
and demand for payment, unless he notifies the Company of his demand in writing
within 30 days after the Company (x) made payment for his shares or (y) fails to
take the actions described in clauses (b) and (c) of this paragraph, as the case
may be.
If a demand for payment as described above remains unsettled, a
shareholder may commence a proceeding within 60 days after the earlier of (i)
the date of the Company's payment to him as described in the second immediately
preceding paragraph, or (ii) the date of his payment demand as described in the
immediately preceding paragraph and file a complaint with the Superior Court
Division of the North Carolina Court of Justice to determine the fair value of
the shares and accrued interest. A dissenter who does not commence a proceeding
within this 60 day period will be deemed to have withdrawn his dissent and
demand for payment.
The court may, in its discretion, make all dissenters whose demands
remain unsettled parties to the proceeding as in an action against their shares
and all parties must be served with a copy of the complaint. The jurisdiction of
the Superior Court is plenary and exclusive. The court may appoint one or more
appraisers to receive evidence and recommend a decision on the question of fair
value. Parties to the proceeding are entitled to the same discovery rights as
parties in other civil proceedings. The proceeding will be tried as in other
civil actions; however, since the Company is a "public corporation," no party to
any proceeding described herein will have the right to trial by jury.
Each dissenter made a party to the proceeding by the court will be
entitled to judgment for the amount, if any, by which the court finds that the
fair value of his shares, plus interest, exceeds the amount paid by the Company.
The court may assess the costs of a proceeding described above, including the
compensation and expenses of appointed appraisers, as it finds equitable. With
respect to the fees and expenses of counsel and experts for the parties to the
proceeding, the court may assess such costs as it finds equitable (a) against
the Company, and in favor of any or all dissenters, if it finds that the Company
did not substantially comply with the above-described procedures or (b) against
either the Company or a dissenter or in favor of either or any other party, if
it finds that the party against whom such costs are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to the Dissenters' Rights
provided under Article 13.
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<PAGE>
In addition, if the court finds that the services of counsel to any dissenter
were of substantial benefit to other dissenters and that the costs of such
services should not be assessed against the Company, the court may award to such
counsel reasonable fees to paid out of the amounts owed to the dissenters who
were benefited.
THE PROVISIONS OF ARTICLE 13 ARE TECHNICAL IN NATURE AND COMPLEX.
SHAREHOLDERS DESIRING TO EXERCISE DISSENTERS' RIGHTS AND TO OBTAIN A
DETERMINATION OF THE FAIR VALUE OF THEIR SHARES SHOULD CONSULT COUNSEL, SINCE
THE FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF CHAPTER 13 MAY RESULT IN A
WAIVER OR FORFEITURE OF THEIR DISSENTERS' RIGHTS.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Merger that are generally applicable to holders
of Common Stock. This discussion is based on currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury Regulations thereunder and current administrative rulings and
court decisions, all of which are subject to change. Any such change, which may
or may not be retroactive, could alter the tax consequences to the holders of
Common Stock as described herein. Special tax consequences not described below
may be applicable to particular classes of taxpayers, including financial
institutions, broker-dealers, persons who are not citizens or residents of the
United States or who are foreign corporations, foreign partnerships or foreign
estates or trusts as to the United States and holders who acquired their stock
through the exercise of an employee stock option or otherwise as compensation.
The receipt of the Cash Merger Consideration in the Merger by holders
of Common Stock will be a taxable transaction for federal income tax purposes.
Each holder's gain or loss per share will be equal to the difference between $19
and the holder's basis per share in the Common Stock. Such gain or loss
generally will be a capital gain or loss. In the case of individuals, trusts and
estates, such capital gain will be subject to a maximum federal income tax rate
of 20% for shares of Common Stock held for more than 18 months prior to the date
of disposition and 28% for Common Stock held for more than one year but for not
more than 18 months prior to the date of disposition.
A holder of Common Stock may be subject to backup withholding at the
rate of 31% with respect to Cash Merger Consideration received pursuant to the
Merger, unless the holder (a) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (b) provides a
correct taxpayer identification number ("TIN"), certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholdings rules. To prevent the possibility of
backup federal income tax withholding on payments made to certain holders with
respect to shares of Common Stock pursuant to the Merger, each holder must
provide the Disbursing Agent with his correct TIN by completing a Form W-9 or
Substitute Form W-9. A holder of Common Stock who does not provide MedCath with
his or her correct TIN may be subject to penalties imposed by the Internal
Revenue Service
62
<PAGE>
(the "IRS"), as well as backup withholding. Any amount withheld under these
rules will be creditable against the holder's federal income tax liability.
MedCath (or its agent) will report to the holders of Common Stock and the IRS
the amount of any "reportable payments," as defined in Section 3406 of the Code,
and the amount of tax, if any, withheld with respect thereto.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY
AND IS BASED UPON PRESENT LAW. EACH HOLDER OF COMMON STOCK SHOULD CONSULT SUCH
HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO
SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND
OTHER TAX LAWS AND THE POSSIBLE EFFECT OF CHANGES IN SUCH TAX LAWS.
BUSINESS OF THE COMPANY
OVERVIEW
MedCath provides cardiology and cardiovascular services through the
development, operation and management of Heart Hospitals and other specialized
cardiac care facilities and provides practice management services. The Company
affiliates with leading cardiologists and cardiovascular and vascular surgeons
in targeted geographic markets in the U.S. and provides state-of-the-art
facilities, financial resources and management services. The Company partners
with cardiologists and cardiovascular and vascular surgeons to develop, co-own
and operate specialty Heart Hospitals dedicated to providing comprehensive
professional services to diagnose and treat heart disease. MedCath operates
Heart Hospitals in McAllen, Texas (since January 1996); Little Rock, Arkansas
(since March 1997), and Tucson, Arizona (since October 1997). In addition,
MedCath plans to open Heart Hospitals in Phoenix, Arizona; Austin, Texas;
Bakersfield, California; Dayton, Ohio; and Albuquerque, New Mexico over the next
two fiscal years. Two of the Company's three existing Heart Hospitals have
experienced unanticipated problems during the ramp-up period. For a discussion
of these unanticipated problems and their effect on the Company's current and
projected results of operations, see "SPECIAL FACTORS -- Background of the
Merger."
The Company has long-term contracts to manage six physician group
practices, which include leading cardiologists and cardiovascular surgeons
("Managed Practices"), located in Arizona, Virginia, Texas and Ohio. In
addition, MedCath manages eight fixed-site cardiac diagnostic and therapeutic
facilities ("Fixed-Site Facilities") located in Arizona, New Jersey,
Massachusetts North Carolina, and Alabama and operates 23 mobile cardiac
diagnostic centers ("Mobile Cath Labs"), principally serving networks of
hospitals located in smaller communities throughout the United States.
HOSPITAL DIVISION
GENERAL. The Company structures its ownership of Heart Hospitals through
limited liability companies and limited partnerships with local cardiologists,
cardiovascular and vascular
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<PAGE>
surgeons and other physicians. MedCath owns a majority or substantial interest
in each limited liability company or partnership and serves as its manager.
Information concerning the Company's three operating Heart Hospitals and
its five Heart Hospitals under development is presented in the tables below:
<TABLE>
<CAPTION>
OPERATING HEART HOSPITALS
LICENSED OPERATING MEDCATH
HOSPITAL LOCATION OPENING DATE BEDS CATH LABS ROOMS OWNERSHIP %
-------- -------- ------------ ---- --------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
McAllen Heart Hospital McAllen, Texas January 1996 60 3 3 51%
Arkansas Heart Hospital Little Rock, Arkansas March 1997 84 6 3 51%
Tucson Heart Hospital(1) Tucson, Arizona October 1997 66 4 3 51%
</TABLE>
- -----------
(1)The Tucson Heart Hospital has four cardiac catheterization laboratories that
are separately owned and operated by CCT, LLC in which the Company owns a
majority interest and which the Company manages.
<TABLE>
<CAPTION>
HEART HOSPITALS UNDER DEVELOPMENT
EXPECTED LICENSED CATH OPERATING MEDCATH
HOSPITAL LOCATION OPENING DATE BEDS LABS ROOMS OWNERSHIP %
-------- -------- ------------ ---- ---- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Arizona Heart Hospital Phoenix, Arizona June 1998 56 4 3 51%
Heart Hospital of Austin Austin, Texas October 1998 58 4 3 51%
Bakersfield Heart Hospital Bakersfield, California Fiscal Year 48 4 3 51%
1999
Dayton Heart Hospital Dayton, Ohio Fiscal Year 48 4 3 35%
1999
Heart Hospital of New Mexico Albuquerque, New Mexico Fiscal Year 55 4 3 24%
1999
</TABLE>
RECENT DEVELOPMENTS IN THE HOSPITAL DIVISION. The Company intends to
develop future Heart Hospitals in selected markets as three-way ventures, which
involve an existing local hospital as well as local physicians. In the typical
three-way venture, the local hospital partner would close its existing heart
program and become a substantial investor in MedCath's Heart Hospital. The
MedCath Heart Hospital would generally purchase a wide range of existing
services from the hospital partner, including emergency department services,
pharmacy services, lab services, social services and rehabilitation care. The
Company will account for its three-way ventures by the equity method of
accounting. Under this method, the Company's share of the earnings or losses of
the venture will be shown in the Company's Consolidated Statements of
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<PAGE>
Income as a single amount. Accordingly, no revenues, expenses, assets or
liabilities of the three-way ventures will be recorded in the Consolidated
Financial Statements of the Company.
DAYTON HEART HOSPITAL. In January 1998, MedCath announced that it had
entered into an agreement with Franciscan Health System of Ohio Valley, Inc.
("FHSOV") to locate MedCath's previously announced Dayton Heart Hospital on the
grounds of the Franciscan Medical Center - Dayton Campus. FHSOV has subsequently
become a 30% investor in the hospital, with MedCath and local physician partners
holding the remaining interests. MedCath is the managing partner, with
responsibility for the day-to-day operation of the hospital. FHSOV will close
its existing heart program.
HEART HOSPITAL OF NEW MEXICO. In February 1998, MedCath announced that it
had formed a venture to construct a new Heart Hospital to be located in
Albuquerque, New Mexico. The hospital will be a three-way venture between
MedCath, two leading local physician groups and St. Joseph Healthcare System, a
leading not-for-profit system in Albuquerque. Under the terms of the agreement,
St. Joseph Healthcare System will close its existing heart program, and the
Heart Hospital of New Mexico, which will be located adjacent to the St. Joseph
Medical Center, will purchase a wide variety of existing services from St.
Joseph. MedCath, as manager, will be responsible for the day-to-day operations
of the hospital.
TUCSON HEART HOSPITAL. The Company has experienced unforeseen problems
during the start-up period at the Tucson Heart Hospital which opened in October
1997. For a discussion of these problems and their impact on the current and
future operating results of the Company, see "SPECIAL FACTORS -- Background of
the Merger." On April 7, 1998, MedCath signed a non-binding letter of intent
with Carondelet Health Systems, Inc., a not-for-profit healthcare provider
("Carondelet"), pursuant to which Carondelet may become an investor in MedCath's
Tucson Heart Hospital. If the transaction is completed, all or part of the heart
programs of the Tucson Heart Hospital and Carondelet's two hospitals may be
consolidated. The letter of intent with Carondelet is non-binding and does not
obligate either party to complete the transaction. The successful negotiation
and closing of a definitive agreement would be subject to the satisfaction of
numerous and material conditions. It is entirely possible that MedCath and
Carondelet will not proceed beyond the letter of intent stage of negotiations,
or even if they do, that they will not complete the proposed transaction.
PRACTICE MANAGEMENT DIVISION
GENERAL. As part of the Company's strategy of establishing and
maintaining fully integrated cardiac care networks, the Company enters into
long-term management services agreements with established physician groups that
include leading local cardiologists and cardiovascular and vascular surgeons.
Under these management services agreements, the Company performs the principal
financial and administrative functions for physician groups, including billing,
recruiting, record keeping, and negotiating with HMOs and other managed care
plans for the services of the physicians. In some cases, the Company makes
advances for working capital purposes to these practices. The Company's Managed
Practices operate under
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<PAGE>
various cost-reimbursement-plus-fee contracts. The Company recognizes revenue
under such contracts on the basis of costs incurred during the period plus the
fee earned. The Company's fee for the services provided to each practice is
typically calculated as a percentage of the net revenue or operating income of
the practice. Set forth below is a brief description of each of the Managed
Practices.
ARIZONA MEDICAL CLINIC. In October 1994, MedCath acquired PhysMed
Management Services, Inc., which, under a 40-year agreement, manages the Arizona
Medical Clinic ("AMC"), a 57-physician multi-specialty medical clinic that
serves the Sun City, Arizona area. Approximately one-half of the physicians at
AMC are primary care specialists, and the balance practice various medical and
surgical specialties. The group represents approximately one half of all primary
care physicians in the Sun City market. Two AMC cardiologists were among the
founders of the Sun City Cardiac Center, a Fixed-Site Facility that the Company
has managed since November 1992.
MID-ATLANTIC MEDICAL SPECIALISTS. In January 1996, the Company acquired
MedCath Physician Management of Virginia, Inc., which under a 40-year agreement
manages Mid-Atlantic Medical Specialists, Inc., a 12-physician practice that
includes two cardiologists and is located in southwest Virginia.
HEART CLINIC. In October 1996, the Company acquired a 40-year contract
to manage Heart Clinic, P.A. a nine member cardiologist group located in
McAllen, Texas that has four offices throughout the Rio Grande Valley of South
Texas.
PIMA HEART ASSOCIATES. In October 1997, the Company acquired a
management service organization which changed its name to MedCath Physician
Management, Inc. ("MPM"). MPM has a 40-year contract to manage Pima Heart
Associates, a 17-member cardiologist group located in Tucson, Arizona.
RECENT DEVELOPMENTS IN THE PRACTICE MANAGEMENT DIVISION. In January
1998, the Company announced that it had completed a transaction with McAllen,
Texas-based Valley Cardiology under which MedCath would provide long-term
management services to this group of seven cardiologists. In April 1998, MedCath
announced that it had completed a transaction with Dayton, Ohio-based Dayton
Heart Center, Inc. under which MedCath would provide long-term management
services to this group of 11 cardiologists.
DIAGNOSTICS DIVISION
FIXED-SITE FACILITIES. Through affiliations with physician groups or
medical facilities, the Company either manages or co-owns eight Fixed-Site
Facilities. Physicians practicing in each Fixed-Site Facility may perform either
invasive or non-invasive diagnostic procedures, and two of the facilities also
offer a broad range of invasive therapeutic procedures. The Company's Fixed-Site
Facilities operate under various fixed-fee per case contracts. In the Fixed-Site
Facilities under management, the Company's management fee is based on a
percentage of the Facilities' net
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<PAGE>
income, plus the reimbursement of certain operating expenses, and in the
co-owned Fixed-Site Facilities, the Company receives its pro-rata share of the
earnings of the Facility. Information concerning the eight Fixed-Site Facilities
is presented in the table below:
<TABLE>
<CAPTION>
COMMENCEMENT OF
YEAR OPERATIONS OR MANAGED OR
NAME OF FIXED-SITE FACILITY LOCATION FOUNDED MANAGEMENT CO-OWNED
- --------------------------- -------- ------- ---------- --------
<S> <C> <C> <C>
Sun City Cardiac Center Sun City, Arizona 1985 November 1992 Managed
Cardiac Testing Centers New Providence, New Jersey 1986 July 1992 Managed
Cardiac Testing Centers Summit, New Jersey 1994 January 1994 Managed
Heart Institute of Northern Kingman, Arizona 1994 August 1994 Managed
Arizona
Cape Cod Cardiology Services Hyannis, Massachusetts 1996 September 1996 Co-owned
Cardiac Diagnostic Center Raleigh, North Carolina 1996 October 1996 Managed
Gaston Cardiology Services Gastonia, North Carolina 1996 November 1996 Co-owned
Southeastern Cardiology Heart Montgomery, Alabama 1998 April 1998 Co-owned
Center
</TABLE>
The Company expects to open its ninth and tenth Fixed-Site Facilities to be
located in Colorado Springs, Colorado and Dakota Dunes, South Dakota by the end
of fiscal year 1999.
MedCath serves as manager in all of the Fixed-Site Facilities and the
management services include providing all non-physician personnel required to
deliver patient care at these Fixed-Site Facilities and the administrative,
management and support functions required in their operation. MedCath co-owns
two Fixed-Site Facilities through limited liability companies and limited
partnerships with acute care hospitals. MedCath owns a majority interest in the
respective venture and serves as manager. Each Fixed-Site Facility has an
agreement to provide cardiology and cardiovascular services to the hospital
investor under agreements having initial terms of 20 to 32 years, subject to
extension at the option of the investors.
MOBILE CATH LABS. The Company owns or operates 23 Mobile Cath Labs that
serve networks of hospitals throughout the United States or are leased to
hospitals and other medical facilities that directly operate such laboratories
on their campuses. The Mobile Cath Labs operated by the Company to service
hospital networks are moved, usually on a daily basis, from one hospital to
another within each network and are fully equipped and operated by highly
skilled, non-physician MedCath technologists and nurses to enable cardiologists
to perform cardiac catheterization procedures for hospital patients. The cardiac
catheterization procedures are performed by cardiologists located in the
communities served by the hospitals or, in some instances, by cardiologists with
whom MedCath has contracted or arranged to perform, as independent contractors,
such procedures. Under the Company's existing contracts, the hospitals typically
pay for the use of the Mobile Cath Labs on a fixed-fee-per-procedure basis and
reimburse MedCath for certain costs incurred in performing procedures. In most
instances, the hospitals are obligated to pay a minimum monthly amount,
regardless of the number of procedures performed, while the Mobile Cath Lab is
made available to the hospital.
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CERTAIN FORWARD LOOKING INFORMATION
The Company does not, as a matter of course, make public projections as
to future financial results. However, management of the Company, in connection
with the possible sale of the Company, prepared at various times during fiscal
years 1997 and 1998 and provided to KKR, WCAS VII, the Special Committee and
Goldman Sachs certain projections for fiscal years 1997 through 2003. None of
these projections were prepared with a view to public disclosure or compliance
with published guidelines of the Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections. Ernst
& Young LLP, the Company's independent auditors, have not performed any
procedures with respect to the projections and assume no responsibility for
them. Such forward looking statements are subject to risks and uncertainties
which could cause actual results to differ materially from those projected. Such
risks and uncertainties include construction and development risks associated
with Heart Hospitals, including, without limitation, unanticipated delays in
construction and licensing; increased construction costs; operating losses and
negative cash flows during the initial operation of Heart Hospitals continuing
longer than anticipated; dependence on physician relationships; increased
competition from existing hospitals in the marketplace; the lack of managed care
arrangements or agreements for the Company's Heart Hospitals and other
facilities, especially during their start-up periods; dependence on the
availability and terms of long-term management contracts; fluctuations in
quarterly operating results from seasonality, population shifts and other
factors; and dependence on key management. Nevertheless, the Company believes
that the assumptions underlying these projections were reasonable at the time
the projections were prepared.
THE JUNE PROJECTION
In June 1997, MedCath's management prepared a projected income
statement (the "June Projection") for the balance of the fiscal year ending
September 30, 1997 and for each of the fiscal years in the five year period
ending September 30, 2002 (the "Projection Period"). Projections for the fiscal
year ending September 30, 1997 were based upon the Company's actual performance
through June 30 of that year and the Company's budgeted financial performance
for the fourth quarter. For subsequent periods, management projected revenue and
EBITDA separately for each of the Company's operating divisions and then
calculated the resulting net income and earnings per share. Management assumed
that corporate overhead would increase at a rate necessary to support the growth
in the Company's three principal operating divisions. The June Projection was
included in the Offering Memorandum provided by Goldman Sachs to potential
purchasers of the Company.
With respect to the Diagnostics Division of the Company, management
made the following assumptions:
o Revenue would increase at a rate consistent with historical
financial performance.
o The division's EBITDA margins would remain stable.
o The Company would develop two new Fixed-Site Labs annually.
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<PAGE>
o Beginning in fiscal year 1999, the division would begin receiving
additional revenue both from consulting and management agreements
and the development of therapeutic procedures in diagnostic labs.
With respect to the Practice Management Division of the Company,
management made the following assumptions:
o Revenue would increase at a rate consistent with the division's
historical financial performance.
o The division's EBITDA margins would remain stable.
o The Company would make two new practice acquisitions annually.
The projection for the Hospital Division of the Company was prepared by
management as follows:
o Revenue and EBITDA margins for Heart Hospitals in operation
(McAllen and Little Rock) were projected based on the Company's
previous revenue and EBITDA assumptions for those hospitals as
revised to reflect their historical financial performance.
o For each Heart Hospital under development other than Tucson,
management prepared a market-specific "base year" projection of
revenue and EBITDA margin based upon projected patient census
levels and procedure volumes for the hospital. Management assumed
for each new hospital that the hospital would operate for two full
fiscal quarters (the "Ramp-up Period") before reaching the base
year level and that the hospital would then operate at the base
year level for four fiscal quarters. Thereafter, each new hospital
would enter a growth period during which revenue would increase at
a 20% annual rate for ten fiscal quarters. Management assumed that
revenue would increase thereafter at a more modest rate reflecting
overall market (as opposed to hospital-specific) growth and
inflation. In the case of the Tucson Heart Hospital, management
made all of the same assumptions described above except that
management assumed that revenue of the Tucson Heart Hospital would
increase during the growth period at only a 5% annual rate for ten
fiscal quarters.
o Management assumed that the hospitals under development which the
Company had previously announced (the "Specific Hospitals") would
open in accordance with their construction schedules.
o Management assumed that hospitals to be announced in the future
(the "Generic Hospitals") would open at a rate such that the
Company would open three hospitals per year during the Projection
Period.
69
<PAGE>
Set forth below is a summary of the June Projection:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
---------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... $109,328 $200,578 $351,805 $506,710 $679,838 $863,627
EBITDA..................... 28,436 57,462 104,244 152,169 206,063 262,887
Net income (before
extraordinary items)..... 7,023 9,553 15,447 23,386 33,801 45,646
Earnings per share
(assuming dilution)...... 0.60 0.78 1.19 1.67 2.26 2.85
</TABLE>
THE DECEMBER PROJECTION
The December Projection reflected the following changes in the
assumptions management made when it prepared the June Projection:
o The Company's operating budget for fiscal year 1998 (as updated to
reflect actual results in October and November and estimated
results for December of such fiscal year) was used in lieu of the
projections for fiscal year 1998 that were used in the June
Projection.
o The projection for the Tucson Heart Hospital for the entire
Projection Period was revised based upon the actual performance of
the hospital in its first two months of operations and an estimate
of its performance in December 1997. In its revised projection for
the hospital, management projected average daily patient census
would increase gradually to 50% of capacity by the end of fiscal
year 1998 and remain at that level through the entire Projection
Period.
o The assumed opening dates of the Arizona Heart Hospital and the
Heart Hospital of Austin were moved to March 1998 and October
1998, respectively, to reflect delays in their construction
schedules.
o The growth rate assumptions made for both Specific Hospitals and
Generic Hospitals were revised as follows: The Ramp-up Period was
increased from two to four quarters to track more closely the
Company's actual experience with its three operating hospitals.
The rate of increase in revenue during the ten quarters
immediately following the four-quarter long base year was reduced
from 20% to 10% annually to take into account the possibility that
the Company may experience problems in operating future hospitals
similar to those experienced at the Tucson Heart Hospital.
o Beginning in fiscal year 2000, the number of Generic Hospitals
opening each year was reduced from three to two to reflect
anticipated difficulties in attracting physicians to participate
in future hospitals resulting in part from public perception of
the Company's experience with the Tucson Heart Hospital.
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<PAGE>
o Management revised its assumptions about Generic Hospitals to
provide that, beginning in fiscal year 2000, one of the two
Generic Hospitals projected to open each year in the Projection
Period would be a three-way venture between MedCath (with a 33%
ownership interest), local physicians and an established local
hospital.
o The revenue projection for the Diagnostics Division beginning in
fiscal year 1999 from consulting fees and therapeutic procedures
was removed.
Set forth below is a summary of the December Projection:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $200,282 $315,018 $399,254 $469,082 $546,927 $621,623
EBITDA.............................. 47,839 84,140 109,472 129,140 151,545 170,788
Net income (before
extraordinary items).............. 4,829 9,698 15,054 19,763 26,005 31,146
Earnings per share
(assuming dilution)............... 0.39 0.73 1.06 1.30 1.60 1.81
</TABLE>
THE MARCH PROJECTION
The March Projection reflected (in addition to the changes in the
assumptions management made when it prepared the December Projection) the
following changes:
o Adjustments to reflect actual operating performance for the month
of December 1997, which, as the result of factors not related to
the performance of Tucson, were more favorable than had been
estimated when management prepared the December Projection.
o Projected performance of McAllen and Little Rock for fiscal year
1998 was revised to reflect management's expectations that their
results of operations would exceed those projected for them in the
Company's fiscal year 1998 operating budget and in the December
Projection.
o The projection for Tucson was revised to reflect revised
expectations for patient census and procedure volumes. Management
assumed that census would be in the high teens for the remainder
of fiscal year 1998 and that certain cost savings would be
achieved in the latter months of the fiscal year. Management
further assumed that a slight increase in patient census levels
would occur in fiscal year 1999 and that the hospital would
operate at an approximately break-even level beginning in fiscal
year 2000.
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<PAGE>
o As the result of a burst water pipe during construction, the
opening of the Arizona Heart Hospital was moved to July 1998 and
the projected results during the Ramp-up Period of the hospital
were revised to reflect the lower patient census and procedure
volume associated with the opening of a hospital in the Southwest
during the summer.
o To reflect a revised construction schedule, the opening of the
Bakersfield Heart Hospital was moved to June 1999.
o The projection for the Dayton Heart Hospital was revised to
reflect the Company's announcement in January that Franciscan
Health System of Ohio Valley, Inc. would become a 30% investor in
the Dayton Heart Hospital and the Company's interest would be
reduced to 35%. To reflect a revised construction schedule, the
opening of the Dayton Heart Hospital was moved to the third
quarter of fiscal year 1999.
Set forth below is a summary of the March Projection:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING SEPTEMBER 30,
-----------------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue.................... $187,992 $290,289 $372,764 $440,525 $514,914 $587,371
EBITDA..................... 45,263 77,170 101,466 120,380 141,803 160,389
Net income (before
extraordinary items)..... 5,276 9,951 15,693 20,543 26,887 31,999
Earnings per share
(assuming dilution)........ 0.43 0.75 1.10 1.35 1.65 1.86
</TABLE>
72
<PAGE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of June 1, 1998 by: (i) each person
known to the Company to beneficially own more than 5% of the Common Stock, (ii)
each director of the Company, (iii) each executive officer named in the Summary
Compensation Table included in the Company's Annual Report on Form 10-K, and
(iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
OF COMMON
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) STOCK
<S> <C> <C> <C>
Stephen R. Puckett(2)...................................... 1,258,311 10.6%
Patrick J. Welsh(3)........................................ 966,177 8.2
Andrew M. Paul(3).......................................... 908,267 7.7
Welsh, Carson, Anderson & Stowe V, L.P.(4)................. 884,829 7.5
The Northwestern Mutual Life Insurance Company(5).......... 981,905 8.3
Crown Advisors, Ltd.(6).................................... 748,629 6.3
The TCW Group, Inc.(7)..................................... 600,600 5.1
Charles W. (Todd) Johnson (8).............................. 265,526 2.2
David Crane(8)............................................. 254,886 2.1
John B. McKinnon(8)........................................ 61,999 *
R. William Moore(8)........................................ 20,882 *
Richard J. Post(8)......................................... 19,793 *
W. Jack Duncan(8).......................................... 5,530 *
All executive officers and directors as
a group (11 persons)(9).................................. 2,884,233 24.4
</TABLE>
- ------------
*Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named
in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
(2) The address of Mr. Puckett is 7621 Little Avenue, Suite 106, Charlotte,
North Carolina 28226. Includes 1,165,650 shares held by two limited
partnerships of which Mr. Puckett is the sole general partner and
92,661 shares issuable upon exercise of options that are exercisable
within 60 days of June 1, 1998.
(3) Includes 884,829 shares of Common Stock held by Welsh, Carson, Anderson
& Stowe V, L.P. ("WCAS V"). Each of Mr. Welsh and Mr. Paul is a general
partner of the sole general partner of WCAS V. The address of Mr. Welsh
and Mr. Paul is 320 Park Avenue, Suite 2500, New York, New York 10022.
73
<PAGE>
(4) The address of WCAS V is 320 Park Avenue, Suite 2500, New York, New
York 10022. Mr. Welsh and Mr. Paul each serves as a general partner of
the sole general partner of WCAS V.
(5) The address of The Northwestern Mutual Life Insurance Company is 720 E.
Wisconsin Avenue, Milwaukee, Wisconsin 53202. The number of shares
shown as beneficially owned is based upon a statement on Schedule 13G
filed February 4, 1998, which indicates the reporting person has sole
voting and dispositive power over 521,605 shares and shared voting and
dispositive power over an additional 460,300 shares.
(6) The address of Crown Advisors, Ltd. is 60 East 42nd Street, New York,
New York 10165. The number of shares shown as beneficially owned is
based upon a statement on Schedule 13G filed February 19, 1998 and
information provided to the Company by Crown Advisors, Ltd. Includes
402,400 shares held by certain investment partnerships for which Crown
Advisors Ltd. serves as investment advisor, and as to which Crown
Advisors, Ltd. has shared voting and investment power, 294,100 shares
held by a co-advisor to such partnerships and 52,129 shares held by an
affiliate of Crown Advisors, Ltd.
(7) The address of The TCW Group, Inc. is 865 South Figueroa Street, Los
Angeles, California 90017. The number of shares shown as beneficially
owned is based upon a statement on Schedule 13G filed February 12,
1998, which indicates the reporting person has sole voting and
dispositive power over 600,600 shares.
(8) Includes for each of these beneficial owners the number of shares set
forth below that are issuable upon exercise of options that are
exercisable within 60 days of June 1, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Charles W. (Todd) Johnson............. 28,656 R. William Moore..................... 19,372
David Crane........................... 152,769 Richard J. Post....................... 19,793
John B. McKinnon.................... 1,999 W. Jack Duncan........................ 3,176
</TABLE>
(9) Includes 326,177 shares of Common Stock issuable upon exercise of
options that are exercisable within 60 days of June 1, 1998.
CERTAIN INFORMATION CONCERNING THE
PARENT, THE ACQUIROR AND OTHER AFFILIATES
PARENT AND THE ACQUIROR. The Parent is a newly-formed Delaware
corporation organized at the direction of (i) the KKR Partnership, an affiliate
of KKR, and (ii) WCAS VII, each of which is a private investment partnership.
KKR PARTNERSHIP. The KKR Partnership, a Delaware limited partnership,
is principally engaged in the business of investing in other companies. Its
principal executive offices are located at 9 West 57th Street, New York, New
York 10019. The sole general partner of the KKR Partnership is KKR Associates
1996 L.P., a Delaware limited partnership principally engaged in the business of
investing through partnerships in other companies with its principal executive
offices at 9 West 57th Street, New York, New York 10019.
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<PAGE>
KKR ASSOCIATES 1996 L.P. The sole general partner of KKR Associates
1996 L.P. is KKR 1996 GP LLC, a Delaware limited liability company principally
engaged in the business of investing through partnerships in other companies
with its principal executive offices at 9 West 57th Street, New York, New York
10019.
KKR 1996 GP LLC. The managing members of KKR 1996 GP LLC are Henry R.
Kravis and George R. Roberts. The other members of KKR 1996 GP LLC are Robert I.
MacDonnell, Paul E. Raether, Michael W. Michelson, James H. Greene, Jr., Michael
T. Tokarz, Perry Golkin, Clifton S. Robbins, Scott M. Stuart and Edward A.
Gilhuly. Each such individual is a citizen of the United States, and the
principal occupation of each is as a managing member or member of KKR & Co.
L.L.C., which is the general partner of KKR. The principal business address of
each of Messrs. Kravis, Raether, Golkin, Tokarz, Robbins and Stuart is 9 West
57th Street, New York, New York 10019. The principal business address of each of
Messrs. Roberts, MacDonnell, Michelson, Greene and Gilhuly is 2800 Sand Hill
Road, Suite 200, Menlo Park, California 94025.
WCAS VII. The principal business of WCAS VII, a Delaware limited
partnership, is that of a private investment partnership. Its principal
executive offices are located at 320 Park Avenue, Suite 2500, New York, New York
10022. The sole general partner of WCAS VII is WCAS VII Partners, L.P., a
Delaware limited partnership.
WCAS VII PARTNERS, L.P. The principal business of WCAS VII Partners,
L.P. is that of acting as the general partner of WCAS VII and its principal
executive offices are located at 320 Park Avenue, Suite 2500, New York, New York
10022. Each of the general partners of WCAS VII Partners, L.P. is a citizen of
the United States and each of their principal occupations is as a general
partner of WCAS VII Partners, L.P. and other associated partnerships. The
general partners are Patrick J. Welsh, Russell L. Carson, Bruce K. Anderson,
Richard H. Stowe, Andrew M. Paul, Thomas E. McInerney, Laura VanBuren, Robert A.
Minicucci, Anthony J. deNicola and Paul B. Queally. The principal business
address of each of them is Welsh, Carson, Anderson & Stowe, 320 Park Avenue,
Suite 2500, New York, New York 10022.
WCAS DIRECTORS. The WCAS Directors are Patrick J. Welsh and Andrew M.
Paul. The principal business address of each of them is Welsh, Carson, Anderson
& Stowe, 320 Park Avenue, New York, New York 10022. Each of the WCAS Directors
is a citizen of the United States.
PATRICK J. WELSH, a director of the Company since 1991, serves as a
general partner of the respective sole general partners of WCAS V, WCAS VII and
other associated partnerships. Mr. Welsh has been a general partner of the sole
general partner of associated limited partnerships since 1979. Prior to 1979,
Mr. Welsh was President and a director of Citicorp Venture Capital, Ltd., an
affiliate of Citicorp engaged in venture capital investing. Mr. Welsh serves as
a director of Walsh International, Inc., Pharmaceutical Marketing Services Inc.
and several privately-held companies.
75
<PAGE>
ANDREW M. PAUL has been a director of the Company since 1991. He joined
Welsh, Carson, Anderson & Stowe in 1984, where he currently serves as a general
partner of the sole general partner of WCAS V, WCAS VII and other associated
partnerships. From 1983 to 1984, he was an associate in Hambrecht & Quist's
venture capital group. From 1978 to 1981, he was a systems engineer and then a
marketing representative for IBM. Mr. Paul received a B.A. from Cornell
University and an M.B.A. from Harvard Business School. Mr. Paul serves as a
director of Lincare, Inc., Centennial Healthcare, Inc., Housecall Medical
Resources, Inc. and several privately-held companies.
MANAGEMENT GROUP. The members of the Management Group are the following
executive officers of MedCath: Stephen R. Puckett, Chairman of the Board,
President and Chief Executive Officer; David Crane, Executive Vice President and
Chief Operating Officer; Charles W. (Todd) Johnson, Senior Vice President -
Development and Managed Care; and Richard J. Post, Chief Financial Officer,
Secretary and Treasurer. The business address for each member of the Management
Group is the principal executive offices of MedCath, 7621 Little Avenue, Suite
106, Charlotte, North Carolina 28226. Each member of the Managements Group is a
citizen of the United States.
STEPHEN R. PUCKETT was a founder of the Company in 1988 and has served
as Chairman of the Board of Directors and President of the Company since that
time. From 1984 to 1989, Mr. Puckett served as Executive Vice President and
Chief Operating Officer of Charlotte Mecklenburg Hospital Authority (the
"Authority"), a 1,677-bed multi-hospital system, and from 1981 to 1983, he
served as Senior Vice President of the Authority. Carolinas Medical Center, an
853-bed hospital and the largest facility in the Authority's system, operates
one of the largest heart programs in the Southeast. While he was associated with
the Authority, Mr. Puckett was active in managing many of the additions to the
Carolinas Medical Center, including an 80,000 square foot heart institute with
four surgical suites and several cardiac diagnostic and therapeutic
laboratories. From 1976 to 1981, Mr. Puckett worked for the University of
Alabama hospital and served in a variety of management positions with increasing
responsibilities for hospital operations. Mr. Puckett serves as a director of
Cardiovascular Diagnostics, Inc. Mr. Puckett received a B.A. and an M.S. in
Health Management from the University of Alabama.
DAVID CRANE has served as a director and Chief Operating Officer of the
Company since 1989 and Executive Vice President since 1997. From 1985 to 1989,
Mr. Crane was employed by MediVision, Inc., an owner/manager of ophthalmic
outpatient surgery centers and private ophthalmic surgical practices, and he
served as Chief Operating Officer of MediVision from 1987 to 1989. While he was
associated with MediVision, Mr. Crane managed the construction of several
ophthalmic outpatient surgical centers. From 1982 to 1985, he was a business and
health care consultant with Bain & Company, a consulting firm. Mr. Crane
received a B.A. from Yale University and an M.B.A. from Harvard Business School.
CHARLES W. (TODD) JOHNSON has served as a Vice President of the Company
since April 1995 when the Company acquired all of the outstanding shares of
HealthTech Corporation and as Senior Vice President - Development and Managed
Care since 1997. Mr. Johnson was the founder and President of HealthTech
Corporation, a company whose principal business was the
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<PAGE>
ownership and operation of mobile cardiac catheterization laboratories. Prior to
founding HealthTech Corporation in July 1991, Mr. Johnson was a partner in
Paragon Group, a national real estate development and investment company. Mr.
Johnson received a B.A. from the University of North Carolina and an M.B.A. from
Wake Forest University.
RICHARD J. POST joined MedCath in September 1996 as Chief Financial
Officer, Secretary and Treasurer. From 1986 to 1996, Mr. Post was employed as an
investment banker, assisting clients in the execution of a wide variety of
public and private debt and equity financings and merger and acquisition
transactions. He served as a Senior Vice President, Corporate Finance with Price
Waterhouse LLP from 1994 to 1996. From 1992 to 1994, he was a Senior Manager in
the Corporate Finance Department of Ernst & Young LLP and from 1988 to 1992, he
was a Vice President in the Investment Banking Department of Bear, Stearns & Co.
Inc. From 1986 to 1988, he was an Associate in the Corporate Finance Group at
The First Boston Corporation. Mr. Post served as a Military Intelligence Officer
in the United States Army from 1977 to 1986. He received a B.A. in English and
Philosophy from the University of Notre Dame and an M.B.A. from Harvard Business
School.
SHAREHOLDER PROPOSALS
MedCath's annual meeting of shareholders is normally held in February
of each year. In February 1998, management postponed the date of the annual
meeting of shareholders to April 1998. When the proposed Merger was announced in
March, management again postponed the annual meeting of shareholders. If the
proposal to approve the Merger is not approved at the Special Meeting, the
annual meeting of shareholders will be held in November 1998. Proposals of
shareholders intended to be presented at the 1998 annual meeting of shareholders
must be submitted, by registered or certified mail, to the attention of the
Company's secretary at its principal executive offices by September 1, 1998 in
order to be considered for inclusion in the Company's proxy statement and form
of proxy for such meeting. If the Merger is consummated, the annual meeting of
shareholders may be scheduled for an earlier or later date consistent with the
Company's organizational documents.
INDEPENDENT AUDITORS
The Consolidated Balance Sheets as of September 30, 1997 and September
30, 1996, and the related Consolidated Statements of Income, Shareholders'
Equity and Cash Flows for each of the three fiscal years in the period ended
September 30, 1997, included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997, as amended, incorporated herein by
reference, have been audited by Ernst & Young LLP, independent auditors, as
stated in their report. A representative of Ernst & Young LLP will be at the
Special Meeting to answer appropriate questions from shareholders and will have
the opportunity to make a statement if so desired.
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<PAGE>
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named in
the proxy to vote on such matters according to their best judgment unless the
authority to do so is withheld in such proxy.
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<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
Dated as of March 12, 1998
by and among
MEDCATH INCORPORATED,
MCTH ACQUISITION, INC.
AND
MEDCATH HOLDINGS, INC.
<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
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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
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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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(b) Subject to and not in any way limiting the preceding Section 9.13(a),
each of the parties hereto irrevocably consents and submits to the jurisdiction
in any action brought in connection with this Agreement in the United States
District Court for the Southern District of New York or for the District of
North Carolina, including, but not limited to, any action to enforce an award
rendered pursuant to the preceding Section 9.13(a). Parent hereby appoints CT
Corporation System as their agent for service of process in New York.
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers as of the date first above written.
MEDCATH INCORPORATED,
a North Carolina corporation
By:
Name:
Title:
MCTH ACQUISITION INC.,
a North Carolina corporation
By:
Name:
Title:
MEDCATH HOLDINGS, INC.
a Delaware corporation
By:
Name:
Date:
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<PAGE>
APPENDIX B
OPINION OF GOLDMAN, SACHS & CO.
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APPENDIX C
TEXT OF ARTICLE 13 OF THE
GENERAL STATUTES OF NORTH CAROLINA
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APPENDIX C
TEXT OF CHAPTER 55, ARTICLE 13 OF THE GENERAL STATUTES OF NORTH CAROLINA
ARTICLE 13.
DISSENTER'S RIGHTS.
PART I. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
ss. 55-13-01. Definitions.
In this Article:
(1) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or
acquiring corporation by merger or share exchange of that
issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent
from corporate action under G.S. 55-13-02 and who exercises
that right when and in the manner required by G.S. 55-13-20
through 55-13-28.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at a rate that is
fair and equitable under all the circumstances, giving due
consideration to the rate currently paid by the corporation on
its principal bank loans, if any, but not less than the rate
provided in G.S. 24-1.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial
owner of shares to the extent of the rights granted by a
nominee certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the
record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
ss. 55-13-02. Right to Dissent.
(a) In addition to any rights granted under Article 9, a
shareholder is entitled to dissent from, and obtain payment of
the fair value of his shares in the event of, any of the
following corporate actions:
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(1) Consummation of a plan of merger to which the
corporation (other than a parent corporation in a
merger under G.S. 55-11-04) is a party unless (i)
approval by the shareholders of that corporation is
not required under G.S. 55-11-03(g) or (ii) such
shares are then redeemable by the corporation at a
price not greater than the cash to be received in
exchange for such shares;
(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose
shares will be acquired, unless such shares are then
redeemable by the corporation at a price not greater
than the cash to be received in exchange for such
shares;
(3) Consummation of a sale or exchange of all, or
substantially all, of the property of the corporation
other than as permitted by G.S. 55-12-01, including a
sale in dissolution, but not including a sale
pursuant to court order or a sale pursuant to a plan
by which all or substantially all of the net proceeds
of the sale will be distributed in cash to the
shareholders within one year after the date of sale;
(4) An amendment of the articles of incorporation that
materially and adversely affects rights in respect of
a dissenter's shares because it (i) alters or
abolishes a preferential right of the shares; (ii)
creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the
shares; (iii) alters or abolishes a preemptive right
of the holder of the shares to acquire shares or
other securities; (iv) excludes or limits the right
of the shares to vote on any matter, or to cumulate
votes; (v) reduces the number of shares owned by the
shareholder to a fraction of a share if the
fractional share so created is to be acquired for
cash under G.S. 55-6-04; or (vi) changes the
corporation into a nonprofit corporation or
cooperative organization;
(5) Any corporate action taken pursuant to a shareholder
vote to the extent the articles of incorporation,
bylaws, or a resolution of the board of directors
provides that voting or nonvoting shareholders are
entitled to dissent and obtain payment for their
shares.
(b) A shareholder entitled to dissent and obtain payment for his
shares under this Article may not challenge the corporate
action creating his entitlement, including without limitation
a merger solely or partly in exchange for cash or other
property, unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
(c) Notwithstanding any other provision of this Article, there
shall be no right of dissent in favor of holders of shares of
any class or series which, at the record date fixed to
determine the shareholders entitled to receive notice of and
to vote at the meeting at which the plan of merger or share
exchange or the sale or exchange of
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property is to be acted on, were (i) listed on a national
securities exchange or (ii) held by at least 2,000
recorded shareholders, unless in either case:
(1) The articles of incorporation of the corporation
issuing the shares provide otherwise;
(2) In the case of a plan of merger or share exchange,
the holders of the class or series are required under
the plan of merger or share exchange to accept for
the shares anything except:
a. Cash;
b. Shares, or shares and cash in lieu of
fractional shares of the surviving or
acquiring corporation, or of any other
corporation which, at the record date fixed
to determine the shareholders entitled to
receive notice of and vote at the meeting at
which the plan of merger or share exchange
is to be acted on, were either listed
subject to notice of issuance on a national
securities exchange or held of record by at
least 2,000 record shareholders; or
c. A combination of cash and shares as set
forth in sub-subdivisions a. and b. of this
subdivision.
ss. 55-13-03. Dissent by Nominees and Beneficial Owners.
(a) A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his name only if he
dissents with respect to all shares beneficially owned by any
one person and notifies the corporation in writing of the
name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under
this subsection are determined as if the shares as to which
he dissents and his other shares were registered in the names
of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(1) He submits to the corporation the record
shareholder's written consent to the dissent not
later than the time the beneficial shareholder
asserts dissenters' rights; and
2) He does so with respect to all shares of which he is
the beneficial shareholder.
ss. 55-13-04 TO 55-13-19. Reserved for Future Codification Purposes.
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PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS.
ss. 55-13-20. Notice of Dissenters' Rights.
(a) If proposed corporate action creating dissenters' rights under
G.S. 55-13-02 is submitted to a vote at a shareholders'
meeting, the meeting notice must state that shareholders are
or may be entitled to assert dissenters' rights under this
Article and be accompanied by a copy of this Article.
(b) If corporate action creating dissenters' rights under G.S.
55-13-02 is taken without a vote of shareholders, the
corporation shall no later than 10 days thereafter notify in
writing all shareholders entitled to assert dissenters' rights
that the action was taken and send them the dissenters' notice
described in G.S. 55-13-22.
(c) If a corporation fails to comply with the requirements of this
section, such failure shall not invalidate any corporate
action taken; but any shareholder may recover from the
corporation any damage which he suffered from such failure in
a civil action brought in his own name within three years
after the taking of the corporate action creating dissenters'
rights under G.S.
55-13-02 unless he voted for such corporate action.
ss. 55-13-21. Notice of Intent to Demand Payment.
(a) If proposed corporate action creating dissenters' rights under
G.S. 55-13-02 is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters'
rights:
(1) Must give to the corporation, and the corporation
must actually receive, before the vote is taken
written notice of his intent to demand payment for
his shares if the proposed action is effectuated; and
(2) Must not vote his shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of
subsection (a) is not entitled to payment for his shares under
this Article.
ss. 55-13-22. Dissenters' Notice.
(a) If proposed corporate action creating dissenters' rights under
G.S. 55-13-02 is authorized at a shareholders' meeting, the
corporation shall mail by registered or certified mail, return
receipt requested, a written dissenters' notice to all
shareholders who satisfied the requirement of G.S. 55-13-21.
(b) The dissenters' notice must be sent no later than 10 days
after shareholder approval, or if no shareholder approval is
required, after approval of the board of
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directors, of the corporate action creating dissenters'
rights under 6.S.55-13-02, and must:
(1) State where the payment demand must be sent and where
and when certificates for certificated shares must be
deposited;
(2) Inform holders of uncertificated shares to what
extent transfer of the shares will be restricted
after the payment demand is received;
(3) Supply a form for demanding payment;
(4) Set a date by which the corporation must receive the
payment demand, which date may not be fewer than 30
nor more than 60 days after the date the subsection
(a) notice is mailed; and
(5) Be accompanied by a copy of this Article.
ss. 55-13-23. Duty to Demand Payment.
(a) A shareholder sent a dissenters' notice described in G.S.
55-13-22 must demand payment and deposit his share
certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share
certificates under subsection (a) retains all other rights of
a shareholder until these rights are canceled or modified by
the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the
dissenters' notice, is not entitled to payment for his shares
under this Article.
ss. 55-13-24. Share Restriction.
(a) The corporation may restrict the transfer of uncertificated
shares from the date the demand for their payment is received
until the proposed corporate action is taken or the
restrictions released under G.S. 55-13-26.
(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a
shareholder until these rights are canceled or modified by the
taking of the proposed corporate action.
ss. 55-13-25. Payment.
(a) As soon as the proposed corporate action is taken, or within
30 days after receipt of a payment demand, the corporation
shall pay each dissenter who complied with G.S. 55-13-23 the
amount the corporation estimates to be the fair value of his
shares, plus interest accrued to the date of payment.
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(b) The payment shall be accompanied by:
(1) The corporation's most recent available balance sheet
as of the end of a fiscal year ending not more than
16 months before the date of payment, an income
statement for that year, a statement of cash flows
for that year, and the latest available interim
financial statements, if any;
(2) As explanation of how the corporation estimated the
fair value of the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand
payment under G.S. 55-13-28; and
(5) A copy of this Article.
ss. 55-13-26. Failure to Take Action.
(a) If the corporation does not take the proposed action within 60
days after the date set for demanding payment and depositing
share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on
uncertificated shares.
(b) If after returning deposited certificates and releasing
transfer restrictions, the corporation takes the proposed
action, it must send a new dissenters' notice under G.S.
55-13-22 and repeat the payment demand procedure.
ss. 55-13-27. Reserved for Future Codification Purposes.
ss. 55-13-28. Procedure if Shareholder Dissatisfied with Corporation's Offer or
Failure to Perform.
(a) A dissenter may notify the corporation in writing of his own
estimate of the fair value of his shares and amount of
interest due, and demand payment of the amount in excess of
the payment by the corporation under G.S. 55-13-25 for the
fair value of his shares and interest due, if;
(1) The dissenter believes that the amount offered under
G.S. 55-13-25 is less than the fair value of his
shares or that the interest due is incorrectly
calculated;
(2) The corporation fails to make payment under G.S.
55-13-25; or
(3) The corporation, having failed to take the proposed
action, does not return the deposited certificates or
release the transfer restrictions imposed on
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uncertificated shares within 60 days after the date
set for demanding payment.
(b) A dissenter waives his rights to demand payment under this
section unless he notifies the corporation of his demand in
writing (i) under subdivision (a)(1) within 30 days after the
corporation made payment for his shares or (ii) under
subdivisions (a)(2) and (a)(3) within 30 days after the
corporation has failed to perform timely. A dissenter who
fails to notify the corporation of his demand under subsection
(a) within such 30-day period shall be deemed to have
withdrawn his dissent and demand for payment.
ss. 55-13-29. Reserved for Future Codification Purposes.
PART 3. JUDICIAL APPRAISAL OF SHARES.
ss. 55-13-30. Court Action.
(a) If a demand for payment under G.S. 55-13-28 remains unsettled,
the dissenter may commence a proceeding within 60 days after
the earlier of (i) the date payment is made under G.S.
55-13-25, or (ii) the date of the dissenter's payment demand
under G.S. 55-13-28 by filing a complaint with the Superior
Court Division of the General Court of Justice to determine
the fair value of the shares and accrued interest. A dissenter
who takes no action within the 60-day period shall be deemed
to have withdrawn his dissent and demand for payment.
(a)(1) Repealed by Session Laws 1997-202, s.4, effective October 1,
1997.
(b) Reserved for future codification purposes.
(c) The court shall have the discretion to make all dissenters
(whether or not residents of this State) whose demands remain
unsettled parties to the proceeding as in an action against
their shares and all parties must be served with a copy of the
complaint. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is
commenced under subsection (a) is plenary and exclusive. The
court may appoint one or more persons as appraisers to receive
evidence and recommend decision on the question of fair value.
The appraisers have the powers described in the order
appointing them, or any amendment to it. The parties are
entitled to the same discovery rights as parties in other
civil proceedings. The proceeding shall be tried as in other
civil actions. However, in a proceeding by a dissenter in a
corporation that was a public corporation immediately prior to
consummation of the corporate action giving rise to the right
of dissent under G.S. 55-13-02, there is no right to a trial
by jury.
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(e) Each dissenter made a party to the proceeding is entitled to
judgment for the amount, if any, by which the court finds the
fair value of his shares, plus interest, exceeds the amount
paid by the corporation.
ss. 55-13-31. Court Costs and Counsel Fees.
(a) The court in an appraisal proceeding commenced under G.S.
55-13-30 shall determine all costs of the proceeding,
including the reasonable compensation and expenses of
appraisers appointed by the court, and shall assess the costs
as it finds equitable.
(b) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amount the court finds
equitable;
(1) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not
substantially comply with the requirements of G.S.
55-13-20 through 55-13-28; or
(2) Against either the corporation or a dissenter, in
favor of either or any other party, if the court
finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights
provided by this Article.
(c) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters
similarly situated, and that the fees for those services
should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
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