SCHEDULE 14A
(RULE 14a-101)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Pursuant to
Section 240.14a-12
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MEDCATH CORPORATION
(Name of Registrant as Specified In
Its Charter)
N/A
(Name of Person(s) Filing Proxy
Statement)
Payment of Filing Fee (Check the appropriate box):
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No
fee required.
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Fee
computed on table below per Exchange Act
Rules 14a-6(i)(4)
and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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(2)
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Aggregate number of securities to which transaction applies:
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(3)
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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):
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(4)
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Proposed maximum aggregate value of transaction:
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Fee
paid previously with preliminary materials.
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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.
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(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
MEDCATH CORPORATION
10720 Sikes Place, Suite 200
Charlotte, North Carolina 28277
June 27, 2011
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of
Stockholders of MedCath Corporation (the Company or
MedCath) to be held at Moore & Van Allen
PLLC, 100 North Tryon Street, Suite 4700, Charlotte, North
Carolina 28202, on July 26, 2011 at
10:00 a.m. Eastern Time (the Annual
Meeting). We look forward to greeting personally those
stockholders who are able to attend.
Whether or not you plan to attend the Annual Meeting, it is
important that your shares be represented.
To ensure that
your vote will be received and counted, please sign, date and
mail the enclosed proxy at your earliest convenience. Your vote
is important regardless of the number of shares you own.
Please submit your proxy as soon as possible so your shares
will be voted at the Annual Meeting. This is your Annual
Meeting, and your participation is important.
By order of the Board of Directors,
O. Edwin French
President and Chief Executive Officer
Charlotte, North Carolina
June 27, 2011
MEDCATH CORPORATION
10720 Sikes Place, Suite 200
Charlotte, North Carolina 28277
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
To Be Held July 26, 2011
You are cordially invited to attend the Annual Meeting of
Stockholders of MedCath Corporation (the Company or
MedCath) to be held at Moore & Van Allen
PLLC, 100 North Tryon Street, Suite 4700, Charlotte, North
Carolina 28202, on July 26, 2011 at
10:00 a.m. Eastern Time (the Annual
Meeting) for the following purposes:
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1.
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to elect two individuals to the Board of Directors to serve for
a three-year term as a Class I director;
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2.
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to consider and vote upon a proposal to approve the sale of
substantially all of the assets of Heart Hospital of New Mexico
to Lovelace Health Services, Inc. an affiliate of Ardent Health
Services, pursuant to the Asset Purchase Agreement dated
May 6, 2011;
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3.
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to consider and vote upon a proposal to approve the sale of all
of the Companys equity interest in Arkansas Heart Hospital
to AR-MED, LLC, which is majority owned by Dr. Bruce
Murphy, a physician affiliated with Little Rock Cardiology
Clinic, P.A. and a current investor in Arkansas Heart Hospital,
pursuant to the Equity Purchase Agreement dated May 6, 2011;
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4.
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to cast a non-binding advisory vote on MedCaths executive
compensation as disclosed in the accompanying proxy statement;
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5.
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to cast a non-binding advisory vote on the frequency of holding
a non-binding advisory vote on executive compensation;
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6.
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to cast a non-binding advisory vote on certain compensation and
other payments to executives as disclosed in the accompanying
proxy statement;
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7.
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to ratify the appointment of Deloitte & Touche LLP as
the Companys independent registered public accounting firm
for the fiscal year ending September 30, 2011;
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8.
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to consider and vote upon a proposal to adjourn the Annual
Meeting if necessary or appropriate, including to solicit
additional proxies for the proposals to be acted upon at the
Annual Meeting in the event there are insufficient votes at the
time of the Annual Meeting or any adjournment thereof to approve
one or more of the proposals; and
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9.
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to transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
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These items of business are described more thoroughly in the
accompanying proxy statement. The proxy statement and its
appendices form a part of this Notice. Only holders of record of
the Companys common stock on June 24, 2011 are
entitled to notice of, and to vote at, the Annual Meeting and
any adjournments or postponements of the Annual Meeting. The
Companys Board of Directors is soliciting proxies for the
Annual Meeting and recommends that you vote
FOR
the foregoing proposals numbers 1-4 and 6-8 and for
1 YEAR
in proposal number 5.
Your vote is important.
Whether or not you
plan to attend the Annual Meeting, it is important that your
shares are represented. Please sign and date the enclosed proxy
card and return it in the envelope provided today. No postage
need be affixed if the proxy card is mailed in the United
States. Returning the proxy card will not limit your right to
attend or vote at the Annual Meeting. Your prompt cooperation
will be greatly appreciated.
By the order of the Board of Directors,
O. Edwin French
President and Chief Executive Officer
Charlotte, NC
June 27, 2011
MEDCATH CORPORATION
10720 Sikes Place, Suite 200
Charlotte, North Carolina 28277
(704) 815-7700
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
To Be Held on July 26, 2011
INFORMATION
ABOUT THE ANNUAL MEETING AND VOTING
This proxy statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of MedCath
Corporation for use at the annual meeting of stockholders (the
Annual Meeting) to be held at Moore & Van
Allen PLLC, 100 North Tryon Street, Suite 4700, Charlotte,
North Carolina 28202, on July 26, 2011 at
10:00 a.m. Eastern Time and at any adjournments or
postponements of the meeting. Stockholders may obtain directions
to Moore & Van Allen PLLC by contacting James A.
Parker, MedCaths Secretary, at
(704) 815-7700.
In this proxy statement, the terms MedCath
Corporation, MedCath, Company,
we, our, ours, and
us refer to MedCath Corporation, a Delaware
corporation. References to the Board or the Board of Directors
are to the Board of Directors of MedCath Corporation.
Stockholders are urged to review carefully this proxy statement
(including supplemental materials, if any) and the annexes
hereto and information incorporated by reference herein in their
entirety before casting their vote.
Two of the matters to be acted upon at the Annual Meeting are
the result of our previously announced strategic options
process, including the following: (i) the sale of
substantially all of the assets of Heart Hospital of New Mexico
to Lovelace Health Services, Inc., an affiliate of Ardent Health
Services, pursuant to an Asset Purchase Agreement dated
May 6, 2011 (see Proposal No. 2
Sale of Substantially All of the Assets of Heart Hospital of New
Mexico); and (ii) the sale of all of the
Companys equity interest in Arkansas Heart Hospital to
AR-MED, LLC, which is majority owned by Dr. Bruce Murphy, a
physician affiliated with Little Rock Cardiology Clinic, P.A.
and a current investor in the Arkansas Heart Hospital, pursuant
to an Equity Purchase Agreement dated May 6, 2011 (see
Proposal No. 3 Sale of All of
MedCaths Equity Interests in Arkansas Heart
Hospital).
In addition to the matters relating to our strategic options
process, stockholders entitled to vote at the Annual Meeting
will be asked to vote on the election of directors, the
ratification of our audit committees appointment of
Deloitte & Touche LLP as MedCaths independent
registered public accounting firm and three non-binding advisory
votes relating to executive compensation.
The Companys Annual Report on
Form 10-K,
as amended, containing its consolidated financial statements for
the fiscal year ended September 30, 2010 is being mailed
together with this proxy statement to all stockholders entitled
to vote. It is anticipated that this proxy statement and the
accompanying form of proxy will be mailed to stockholders on or
about June 27, 2011.
TABLE OF
CONTENTS
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1
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3
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9
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12
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F-1
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F-15
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F-25
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F-40
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F-50
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F-52
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2
QUESTIONS
AND ANSWERS
The following are some questions that we believe you, as a
stockholder of MedCath, may have regarding certain of the
proposals contained in this proxy statement and brief answers to
those questions. We urge you to read the entire proxy statement
(including supplemental materials, if any), including the
annexes and information incorporated by reference, carefully
before submitting your proxy or casting your vote.
What am I
being asked to vote on?
Our Board of Directors is asking MedCaths stockholders of
record at the close of business on June 24, 2011 (the
Record Date) to consider and vote upon: (i) the
election of two individuals currently serving on the Board of
Directors to serve as directors for a three-year term as
Class I directors or until their successors are duly
elected and qualified; (ii) a proposal to approve the sale
of substantially all of the assets of Heart Hospital of New
Mexico to Lovelace Health Services, Inc., an affiliate of Ardent
Health Services, pursuant to the Asset Purchase Agreement dated
May 6, 2011, a copy of which is attached hereto as
Annex A (the New Mexico Sale);
(iii) a proposal to approve the sale of all of the
Companys equity interests in Arkansas Heart Hospital to
AR-MED, LLC, which is majority owned by Dr. Bruce Murphy, a
physician affiliated with Little Rock Cardiology Clinic, P.A.
and a current investor in the Arkansas Heart Hospital, pursuant
to the Equity Purchase Agreement dated May 6, 2011, a copy
of which is attached hereto as Annex B (the Arkansas
Sale and together with the New Mexico Sale, the
Sales); (iv) a non-binding advisory vote on
MedCaths executive compensation as disclosed in this proxy
statement; (v) a non-binding advisory vote on the frequency
of holding a non-binding advisory vote on executive
compensation; (vi) a non-binding advisory vote on certain
compensation and other payments to executives as disclosed in
this proxy statement; (vii) a proposal to ratify the
appointment of Deloitte & Touche LLP as the
Companys independent registered public accounting firm for
the fiscal year ending September 30, 2011; (viii) a
proposal to adjourn the Annual Meeting if necessary or
appropriate, including to solicit additional proxies for the
proposals to be acted upon at the Annual Meeting in the event
there are insufficient votes at the time of the Annual Meeting
or any adjournment thereof to approve one or more of the
proposals (the Adjournment); and (ix) such
other business as may properly come before the Annual Meeting
and any adjournment or postponement thereof. Throughout this
proxy statement, we use the term Sale Proposals to
refer to the proposals for the Sales.
We encourage you to review carefully this proxy statement
(including supplemental materials, if any) and the annexes
hereto relating to each of the proposals and any other
information incorporated by reference herein, including our
Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010, as amended.
The Board of Directors currently knows of no other business that
will be presented for consideration at the Annual Meeting. In
the event any matters other than those referred to in the
accompanying Notice of Meeting and this proxy statement should
properly come before and be considered at the Annual Meeting, it
is intended that proxies in the form MedCath provides to
its stockholders will be voted thereon in accordance with the
judgment of the person or persons voting such proxies.
Does the
Board of Directors recommend that I vote FOR the
Proposals?
Yes. The Board of Directors recommends that you vote
FOR
proposal numbers 1-4 and 6-8 and for
1 YEAR
in proposal number 5.
What
happens if stockholders approve the Sale Proposals?
If stockholders owning shares representing at least a majority
of the outstanding voting power of our shares entitled to vote
on the Sale Proposals approve the Sale Proposals then the
Company will seek to consummate each of the Sales prior to the
end of our fourth fiscal quarter ending September 30, 2011.
See Proposal No. 2 Sale of
Substantially All of the Assets of Heart Hospital of New
Mexico and Proposal No. 3 Sale of
All of MedCaths Equity Interest in Arkansas Heart
Hospital.
3
Why is
stockholder approval being sought for the Sale
Proposals?
Under the General Corporation Law of the State of Delaware
(DGCL), stockholder approval by the holders of a
majority of the outstanding voting power of the shares entitled
to vote on the matter is required for certain fundamental
corporate transactions, such as a sale of all or substantially
all of the assets of the corporation. In light of the prior
dispositions by the Company (See Background of the Sale
Proposals Closed Transactions), the Board has
determined that the transactions contemplated by the Sale
Proposals could be considered a sale of substantially all of the
assets of the Company and, therefore, has determined to seek
stockholder approval of the Sales.
What are
the tax implications to the Company of the approval of the Sale
Proposals?
The Company estimates that it will incur in the range of
$20,500,000 to $23,500,000 of federal and state income taxes
with respect to taxable gains associated with the Sales.
However, after the Sales are completed, we expect that the
remaining assets of the Company will be sold at a substantial
loss for income tax purposes. Some of those losses may be
recognized in the Companys fiscal year ending
September 30, 2011 (fiscal 2011) and offset
against fiscal 2011 gains, but all or a substantial portion of
such losses, and wind down operating losses, may be recognized
in fiscal 2012 or fiscal 2013. Such losses, if recognized in
fiscal 2011 will be used to offset gains in fiscal 2011. If such
losses are recognized in the fiscal years ending in 2012 or
2013, they will be carried back for income tax purposes to the
Companys fiscal 2011, and the Company will be entitled to
a refund of a substantial portion of the income taxes that were
paid in connection with the Sales and the other sales occurring
in the fiscal 2011. If, however, an ownership
change, as that term is defined in Section 382 of the
Internal Revenue Code, occurs and such ownership change occurs
before such losses are recognized, most of the losses recognized
after the ownership change may not be usable to offset gains
recognized before the ownership change. The Company believes
that an ownership change is unlikely to occur; in part because
the Company has adopted a stockholders rights agreement that
should discourage certain of the activities that could cause an
ownership change to occur. See
Proposal No. 2 Sale of Substantially
All of the Assets of Heart Hospital of New Mexico
Material U.S. Federal Income Tax Consequences of the New
Mexico Sale, Proposal No. 3
Sale of All of MedCaths Equity Interest in Arkansas Heart
Hospital Material U.S. Federal Income Tax
Consequences of the Arkansas Sale and the Companys
current report on
Form 8-K
filed on June 14, 2011.
What
happens if stockholders do not approve the Sale
Proposals?
If stockholders owning shares representing at least a majority
of the voting power of our outstanding shares entitled to vote
on the Sale Proposals fail to approve each of the Sale
Proposals, the Board of Directors will continue to consider our
strategic options with respect to our assets.
At the Annual Meeting, we may ask our stockholders to vote on a
proposal to adjourn the Annual Meeting if necessary or
appropriate in the sole discretion of our Board of Directors,
including to solicit additional proxies for one or more
proposals in the event that there are not sufficient votes at
the time of the Annual Meeting or any adjournment thereof to
approve one or more of the proposals. See
Proposal No. 8 Adjournment.
If the
Sale Proposals are approved and the Sales are completed, what
are the Companys plans with respect to its remaining
assets?
If stockholders owning shares representing at least a majority
of the voting power of our outstanding shares entitled to vote
on the Sale Proposals approve each of the Sale Proposals and we
are successful in completing the Sales, the Board of Directors
will continue to consider our strategic options with respect to
our remaining assets. See Background of the Sale
Proposals Sale of our Remaining Assets.
How may I
vote?
Holders of shares of our common stock entitled to vote may have
their shares voted by proxy or may vote in person at the Annual
Meeting. Proxies in the form provided by MedCath, properly
executed and duly
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returned and not revoked, will be voted at the Annual Meeting,
including any adjournments or postponements thereof. Where a
specification is made in such proxy regarding each of the
proposals, such proxy will be voted in accordance with the
specification. If no specification is made, proxies will be
voted: (i)
FOR
the two nominees to the
Board of Directors; (ii)
FOR
the New
Mexico Sale proposal; (iii)
FOR
the
Arkansas Sale proposal; (iv)
FOR
the
non-binding advisory vote on MedCaths executive
compensation as disclosed in this proxy statement; (v) for
1 YEAR
on the non-binding advisory vote on
the frequency of holding non-binding advisory votes on executive
compensation; (vi)
FOR
the non-binding
advisory vote on certain compensation and other payments to
executives as disclosed in this proxy statement;
(vii)
FOR
the proposal to ratify the
appointment of Deloitte & Touche LLP as MedCaths
independent registered public accounting firm for the year ended
September 30, 2011; and (viii)
FOR
the Adjournment proposal. Proxies will be voted in the
discretion of the proxy holders on any other business that may
properly come before the Annual Meeting.
Proxies should be sent to:
American Stock Transfer & Trust Co., LLC
Operations Center Proxy Dept.
6201 15th Ave
Brooklyn, NY
11219-9821
May I
change my vote or revoke my proxy after I return my proxy
card?
Yes. Stockholders who execute proxies may revoke or change them
at any time before they are voted by delivering a written
revocation to James A. Parker, the Secretary of MedCath, either
at the Annual Meeting or prior to the meeting date at
MedCaths principal executive offices 10720 Sikes Place,
Suite 200, Charlotte, North Carolina 28277, by
executing and delivering a later-dated proxy, or by attending
the Annual Meeting and voting in person. Attendance at the
Annual Meeting alone will not revoke your proxy.
What vote
is required to approve the proposals?
The presence, in person or by proxy, of at least a majority of
the outstanding shares of common stock entitled to vote at the
Annual Meeting is necessary to establish a quorum for the
transaction of business. Shares represented by proxies that
contain one or more abstentions or broker non-votes will be
counted as present for purposes of determining the presence or
absence of a quorum for the Annual Meeting. Only stockholders of
record at the close of business on the Record Date are entitled
to notice of, and to vote at, the Annual Meeting and at any
adjournments or postponements of the meeting. As of
June 13, 2011, there were 20,327,069 shares of our
common stock outstanding. Each share of common stock is entitled
to one vote per share on all matters presented to our
stockholders for approval. MedCath has no other class of voting
securities outstanding.
Directors will be elected by a plurality of the votes cast, in
person or by proxy, at the Annual Meeting. The two nominees
receiving the highest number of affirmative votes of the shares
present or represented and voting on the election of directors
at the Annual Meeting will be elected for a three-year term or
until their successors are duly elected and qualified. Each of
the Sale Proposals require the affirmative vote of the holders
of a majority of the outstanding shares of common stock entitled
to vote. Each of the proposals on non-binding advisory vote on
executive compensation as disclosed in this proxy statement,
non-binding advisory vote on certain compensation and other
payments to executives as disclosed in this proxy statement, the
ratification of the appointment of the independent registered
public accounting firm and the adjournment of the Annual Meeting
will be approved if a proposal receives an affirmative vote of a
majority of shares present or represented and entitled to vote
at the Annual Meeting. The frequency of holding non-binding
advisory votes on executive compensation will be determined by
the interval (once every 1, 2 or 3 years) receiving the
highest number of votes. All other proposals will become
effective if it receives the affirmative vote of a majority of
the votes present in person or represented by proxy and entitled
to vote on those proposals are cast in favor thereof. Although
three of these votes are advisory and therefore not binding on
MedCath, our Compensation Committee and Board of Directors will
review these voting results and consider them when
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making future decisions on the compensation of our named
executive officers, the frequency of future non-binding advisory
votes on executive compensation and certain compensation and
other payments to executives as disclosed in this proxy
statement.
Broker non-votes occur when nominees, such as brokers and banks,
holding shares on behalf of street name owners do
not receive voting instructions from those owners regarding a
matter and do not have discretionary authority to vote on the
matter under Nasdaq Stock Market rules. Those rules allow
nominees to vote in their discretion on routine
matters, such as the ratification of the appointment of
independent registered public accountants, even if they do not
receive voting instructions from the street name
owner. On non-routine matters, such as the election
of directors, the Sale Proposals, the Adjournment proposal, the
non-binding advisory vote on executive compensation as disclosed
in this proxy statement, the non-binding advisory vote on the
frequency of non-binding advisory votes on executive
compensation and the non-binding advisory vote on certain
compensation and other payments to executives as disclosed in
this proxy statement, nominees cannot vote unless they receive
instructions from the street name owner. The failure
to receive such instructions as to a non-routine matter results
in a broker non-vote. Other than with respect to Sale Proposals,
broker non-votes and abstentions will be counted to determine a
quorum, but will not be counted as votes for or against any
proposal and therefore have the practical effect of reducing the
number of affirmative votes required to achieve a majority by
reducing the total number of shares from which the majority is
calculated.
With respect to the Sale Proposals, only shares affirmatively
voted
FOR
the proposals will be counted as
favorable votes. Shares of our common stock held by persons
attending the Annual Meeting but not voting, broker non-votes
and shares of our common stock for which we received proxies but
with respect to which holders of those shares have abstained
from voting, will have the same effect as votes
AGAINST the Sale Proposals for purposes of
determining whether or not the requisite vote was received.
If you hold your shares of MedCath common stock through a broker
and wish to vote on the proposals described in this proxy
statement that are non-routine, you must instruct
your broker how to vote your shares. IF YOU FAIL TO INSTRUCT
YOUR BROKER HOW TO VOTE WITH RESPECT TO THE SALE PROPOSALS, THE
RESULTING BROKER NON-VOTE ON SUCH PROPOSALS WILL HAVE THE
EFFECT OF A VOTE AGAINST SUCH PROPOSALS.
Who bears
the costs of the solicitation of proxies?
MedCath will pay the cost of solicitation of proxies, including
the cost of assembling and mailing this proxy statement and the
enclosed materials and fees and expenses of MacKenzie Partners,
Inc. (MacKenzie), the proxy solicitation firm the
Company has engaged in connection with the Annual Meeting.
MacKenzie was engaged to assist in the solicitation of proxies
by mail, personally, by telephone, facsimile or other means of
communication, and such firm will receive a fee estimated to be
$25,000 and will be reimbursed for
out-of-pocket
expenses. In addition to the use of the mails, proxies may be
solicited personally or by telephone or email by corporate
officers and employees of MedCath without additional
compensation. MedCath intends to request brokers and banks
holding stock in their names or in the names of nominees to
solicit proxies from their customers who own our stock, where
applicable, and will reimburse them for their reasonable
expenses of mailing proxy materials to their customers.
Q&A
Relating to the Sale Proposals
What will
happen if the Sales are authorized by our
stockholders?
If the Sale Proposals are authorized by the requisite
stockholder vote, we will proceed with our efforts to close the
Sales. Although we currently intend to complete the Sales as
expeditiously as possible during our fourth fiscal quarter of
2011, we cannot predict when or if the Sales will be consummated.
6
What will
happen if either or both of the Sales are not authorized by our
stockholders?
If either or both of the Sales are not authorized by the
requisite stockholder vote, the Board of Directors will continue
its efforts to determine what, if any, other alternatives would
be in the best interests of our stockholders. While we cannot
predict what alternatives might be available to the Company, the
Board of Directors believes such alternatives are likely to be
less favorable to our stockholders than the Sales.
What is
the Board of Directors estimate of the net proceeds of
each of the Sales?
Purchase terms relating to Arkansas Heart Hospital
(AHH) are based on AHHs valuation of
$73,000,000 plus a percentage of AHHs available cash,
which is anticipated to net approximately $60,000,000 to MedCath
after closing costs and taxes. The net amount anticipated to be
received by MedCath includes repayment of inter-company debt
owed by AHH to MedCath.
The transaction involving Heart Hospital of New Mexico
(HHNM) values HHNMs assets at $119,000,000.
The limited liability company that currently owns HHNM, of which
74.8% is owned by MedCath, will retain its net working capital.
MedCath anticipates receiving approximately $62,000,000 in net
proceeds from the HHNM transaction including its share of
HHNMs cash, and after collection of all accounts
receivable, payment of all known liabilities, including taxes,
and repayment of inter-company debt owed by HHNM to MedCath,
pro-rata minority interest payments and an allocation of
additional funds to the limited liability companys
minority partners by MedCath in consideration for such minority
partners consent to the transaction that was required
under the limited liability companys Operating Agreement
as a condition to entering into this transaction. The
anticipated net proceeds do not include any reserves for unknown
or contingent liabilities retained by HHNM, including without
limitation any liability which may arise from the New Mexico ICD
Investigation.
How would
the proceeds from the Sales be used?
We currently expect to use the proceeds from the Sales to pay
any outstanding liabilities and obligations and establish a
contingency reserve or make other provision for any contingent
liabilities that may exist upon completion of the Sales, fund
operations and use any remaining cash to fund future
distributions to our stockholders as described further below.
Will the
Company file additional proxy statements as part of its
strategic options process?
As described in the current report on
Form 8-K
filed with the SEC on June 15, 2011 regarding future proxy
statements, the Company currently anticipates that it will file
one or more additional proxy statements during our fourth fiscal
quarter of 2011 to request stockholder approval of the sale of
all or substantially all of our remaining assets and of the
liquidation and dissolution of the Company. The Company
currently anticipates that its transfer books will remain open
until a certificate of dissolution is filed in accordance with
the DGCL. The Company also currently anticipates that a
certificate of dissolution would not be filed until (i) the
sale of all or substantially all of our remaining assets is
approved by the Companys Board of Directors and
stockholders and a substantial portion of, but not necessarily
all of, our remaining assets are sold, (ii) the liquidation
and dissolution of the Company is approved by the Companys
Board of Directors and stockholders, and (iii) the Company
is better able to estimate its potential liabilities, including
but not limited to, those liabilities which might arise from the
pending ICD Investigation as described in the Companys
filings with the SEC. The Company currently anticipates that,
following the occurrence of these milestones, our transfer books
will close concurrently with the filing of a certificate of
dissolution.
What
distributions to stockholders are being considered by the
Company?
The Company currently anticipates that it will disclose in the
proxy statement to be filed during our fourth fiscal quarter of
2011 information regarding future liquidating distributions,
including factors that could impact the amount or timing of any
liquidating distribution(s) and, if available, a range of
estimated liquidating distributions. We currently anticipate
making a preliminary liquidating distribution of $6.75 per share
of our common stock prior to the filing of the certificate of
dissolution if the Arkansas Sale and the New Mexico
7
Sale are completed and if stockholders have approved both the
sale of all or substantially all of our remaining assets and the
dissolution and liquidation of the Company. The Board of
Directors also intends to consider authorizing additional
liquidating distributions prior to the filing of a certificate
of dissolution based upon, among other factors, the occurrence
of certain milestones, including the Companys ability to
complete sales of its remaining assets and estimate its
potential liabilities prior to dissolution described in the
response to the prior question. The total amount of liquidating
distributions is anticipated to be reduced by at least $0.13 per
share in comparison to the amount of liquidating distribution
previously anticipated in our preliminary proxy statement filed
with the SEC on May 27, 2011 as a result of increased costs
which the Company expects to incur in connection with remaining
a public company, including the maintenance of its transfer
books and costs associated with complying with SEC reporting
requirements for an extended period of time. In all events,
liquidating distributions, if any, would be made based on the
judgment of the Board of Directors and otherwise in accordance
with Delaware law.
What does
the Board of Directors recommend regarding the Sales?
Our Board of Directors unanimously recommends that you vote
FOR
the authorization of the Sales.
Do I have
appraisal rights in connection with the Sales?
No, under the DGCL, appraisal rights are not available to
stockholders in connection with the transactions contemplated by
the Sale Proposals.
Are there
any risks to the Sales?
Yes. You should carefully read the section entitled Risk
Factors.
Q&A
Relating to Adjournment Proposal
What is
the effect of voting to approve the proposal to adjourn the
Annual Meeting, if necessary or appropriate, to solicit
additional proxies?
If you vote in favor of the proposal to adjourn the Annual
Meeting, if necessary or appropriate, to solicit additional
proxies, you will be voting to permit the Annual Meeting to be
adjourned in order to solicit additional votes in favor of the
proposals, including the Sales. In the event that both of the
Sales have not received the requisite stockholder approval, it
is likely that MedCath would seek to adjourn the Annual Meeting
to solicit additional proxies in favor of both Sale Proposals.
In the event that only one of the Sales Proposals has not
received the requisite stockholder approval, it is likely that
MedCath would seek to adjourn the Annual Meeting to solicit
additional votes only with respect to such proposal while
closing the polls on the proposal which has received the
requisite stockholder approval. For example, in the event that
the requisite stockholder vote in favor of the Arkansas Sale has
been obtained but the requisite stockholder vote in favor of the
New Mexico Sale has not been obtained, it is likely that MedCath
would seek to close the polls and register the authorization of
the Arkansas Sale in order to proceed with efforts to consummate
the Arkansas Sale, while adjourning the Annual Meeting for the
sole purpose of soliciting additional votes to obtain approval
of the New Mexico Sale. The receipt of sufficient votes in favor
of the adjournment proposal would allow MedCath to take such
actions.
8
RISK
FACTORS
Risks, uncertainties and other factors may affect our future
business and results. In addition to the risks, uncertainties,
and other factors discussed below and elsewhere in this proxy
statement, the risks, uncertainties, and other factors that
could cause or contribute to actual results differing materially
from those expressed or implied in any forward-looking
statements include, without limitation, those set forth under
Part I, Item 1A Risk Factors in
MedCaths Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010 filed with the
SEC on December 14, 2010, as amended by MedCaths
Annual Report on
Form 10-K/A
filed with the Securities and Exchange Commission (the
SEC) on January 28, 2011 and those contained in
MedCaths other filings with the SEC. The matters discussed
below could cause our future results to materially differ from
past results or those described in forward-looking statements
and could have a material adverse effect on our business,
financial condition and stock price.
Risks
Related to the Sales (Proposals No. 2 and 3)
The
fact that the Sales are pending could have a material and
adverse effect on our business, financial condition and results
of operations.
While the Sales are pending, they create uncertainty about our
future and the future operation of the hospitals. As a result of
this uncertainty, our business partners may decide to delay,
defer or cancel entering into new business arrangements with us
and patients and physicians who refer patients to us may use
other hospitals, pending completion of the Sales or termination
of thereof.
In addition, while the Sales are pending, we are subject to a
number of risks, including:
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the diversion of management and employee attention from the
day-to-day
business of the Company;
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the potential disruption to our business partners, suppliers and
other service providers;
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the loss of employees who may depart due to their concern about
losing their jobs following the Sales; and
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the potential inability to respond effectively to competitive
pressures, industry developments and future opportunities.
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The occurrence of any of these events individually or in
combination could have a material adverse effect on our
business, financial condition and results of operation.
Either
or both of the Sales may not be completed, which could
materially and adversely impact our business, financial
condition and results of operations.
To complete the Sales, our stockholders must approve the Sale
Proposals. Additionally, we must be able to satisfy all of the
closing conditions for which we are obligated under the
applicable agreements relating to each of the Sales. If we are
unable to complete either or both of the Sales, the Company
would be subject to a number of risks, including the following:
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The Company may not be able to identify alternative sale
transactions, and if alternative sale transactions are
identified, such alternative sale transactions may not result in
an equivalent price to what is proposed in the Sales;
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The trading price of our common stock may decline to the extent
that the current market price reflects a market assumption that
the Sales will be completed;
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Our relationships with our physicians, suppliers, the
communities in which our patients reside and employees may be
damaged and our business may be harmed; and
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The Company will incur significant transaction, compliance and
other transaction related fees and costs which will need to be
paid out of current cash on hand and cash from operations. These
expenses include, but are not limited to, financial advisory,
legal and accounting fees and expenses, employee expenses,
filing fees, printing expenses, proxy solicitation and other
related charges.
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The occurrence of any of these events individually or in
combination could have a material adverse effect on our
business, financial condition and results of operation.
A
delay in the closing of either or both of the Sales is likely to
decrease the funds ultimately available for distribution to
stockholders.
Claims, liabilities and expenses from operations (including
operating costs such as salaries, directors fees,
directors and officers insurance, federal and state income
taxes, payroll and local taxes, legal and accounting fees and
miscellaneous office expenses) will continue to be incurred by
us as we seek to close the Sales. In the event the closing of
either or both of the Sales is delayed, we will incur additional
claims, liabilities and expenses from operations that will
reduce the net funds ultimately available for distribution to
our stockholders.
Even
if our stockholders approve the Sales, either or both of the
Sales may not be completed.
The completion of the Sales are subject to numerous closing
conditions, some of which are out of the Companys control,
and there can be no guarantee that the Company will be able to
satisfy all of the closing conditions set forth in the New
Mexico Purchase Agreement and the Arkansas Purchase Agreement,
respectively. See Proposal No. 2
Sale of Substantially All of the Assets of Heart Hospital of New
Mexico The New Mexico Purchase
Agreement Conditions to Closing and
Proposal No. 3 Sale of All of
MedCaths Equity Interests in Arkansas Heart
Hospital The Arkansas Purchase Agreement
Conditions to Closing.
If
either or both of the Sales are not completed, there will be
fewer funds ultimately available for distribution to our
stockholders.
If either or both of the Sales are not consummated, we believe
that the Company will have limited alternative strategic options
available to it with respect to these assets, and there is a
substantial risk that our stockholders will realize less value
from any alternative strategic options that might be pursued
with respect to these assets. As of this time, we are not aware
of any alternatives that would enable the Company to deliver
similar or higher value to our stockholders as compared to the
value to be received in connection with the New Mexico Sale and
the Arkansas Sale, respectively.
The
Arkansas Purchase Agreement limits our ability to pursue
alternatives to the Arkansas Sale, and the New Mexico Purchase
Agreement limits our ability to pursue alternatives to the New
Mexico Sale.
Each of the Arkansas Purchase Agreement and the New Mexico
Purchase Agreement contains provisions that make it more
difficult for us to sell AHH or its assets to a party other than
AR-MED and to sell HHNM or its assets to a party other than LHS,
respectively. These provisions include a no-shop provision that
limits our ability to market AHH or its assets and HHNM or its
assets, as applicable, and, with respect to the New Mexico
Purchase Agreement, a termination fee and an expense
reimbursement requirement payable by the Company under certain
circumstances in the event the New Mexico Sale is not
consummated. See Proposal No. 2 Sale
of Substantially All of the Assets of Heart Hospital of New
Mexico The New Mexico Purchase
Agreement No Shop Clause,
Proposal No. 3 Sale of All of
MedCaths Equity Interests in Arkansas Heart
Hospital The Arkansas Purchase Agreement
No Shop Clause and
Proposal No. 2 Sale of Substantially
All of the Assets of Heart Hospital of New Mexico
The New Mexico Purchase Agreement Expense
Reimbursement; Termination Fee.
We may
not receive all regulatory approvals required in order for us to
consummate the New Mexico Sale.
Under the HSR Act and the rules promulgated under it by the FTC,
the New Mexico Sale cannot be completed until notifications have
been given and certain information has been furnished to the FTC
and the Antitrust Division of the DOJ (the Antitrust
Division) and the specified waiting periods have expired
or been terminated. The Company and Ardent filed notification
and report forms under the HSR Act with the FTC and the
Antitrust Division on May 13, 2011. The Company received
notice of early termination of the applicable waiting period
from the FTC on May 27, 2011. Although we do not expect
regulatory authorities to raise any significant objections in
connection with their review of the New Mexico Sale, we cannot
assure you that we
10
will obtain all required regulatory approvals or that any such
regulatory approvals will not contain terms, conditions or
restrictions that would be detrimental to the Company or LHS.
Cash
available to stockholders could be substantially limited and
delayed due to pending ICD Investigations.
On March 12, 2010, the United States Department of Justice
(DOJ) issued a Civil Investigative Demand
(CID) to HHNM regarding ICD implantations (the
New Mexico ICD Investigation). The CID was issued in
connection with an ongoing, national investigation relating to
ICDs and Medicare coverage requirements for these devices. The
CID requested certain documents and patient medical records
regarding the implantation of ICDs for the period 2002 to the
present. The Company has provided materials responsive to the
CID.
On September 17, 2010, consistent with letters received by
other hospitals and hospital systems, DOJ sent a letter
notifying the Company of DOJs investigation of eight
Company hospitals regarding ICD implantations (the ICD
Investigation). In its letter, DOJ stated that its review
was preliminary and its data suggests that Company hospitals may
have submitted claims for ICDs and related services that were
inconsistent with Medicare policy.
Based upon our legal advisors discussions and meetings
with DOJ, the primary focus of the investigations involves ICDs
implanted since October 1, 2003 within prohibited
timeframes (
i.e.
, timeframe violations). A
timeframe violation involves an ICD implanted for
primary prevention (
i.e
, prevention of sudden
cardiac death in patients without a history of induced or
spontaneous arrhythmias) within 30 days of a myocardial
infarction, or within 90 days of a coronary artery bypass
graft or percutaneous transluminal coronary angioplasty. The
timeframes do not apply to ICDs implanted for secondary
prevention (
i.e
., prevention of sudden cardiac
death in patients who have survived a prior cardiac arrest or
sustained ventricular tachyarrhythmia).
On November 19, 2010, DOJ provided the Company a
spreadsheet detailing instances (based upon DOJs data) in
which an ICD was implanted at the eight Company hospitals in
potential violation of the applicable timeframes. The data
provided by DOJ is raw, and we understand that, as
of this date, such data had not been analyzed by DOJ.
Additionally, DOJ confirmed that some of the ICDs identified in
its data as alleged timeframe violations were in fact
appropriately implanted and billed to Medicare, including those
implanted for secondary prevention.
On February 17, 2011, legal counsel for the Company and
HHNM met with representatives of DOJ to discuss the
agencys review of the patient medical records provided in
response to the CID. In addition to discussing DOJs review
process, DOJ reconfirmed that certain ICD implantations were not
being examined by the agency. As noted above, these include
implantations prior to October 1, 2003 and implantations
for secondary (rather than primary) prevention. With respect to
primary prevention implantations, we discussed clinical comments
supporting the implantations, and agreed to additional meetings
and presentations regarding those implantations for other
Company hospitals. In that regard, the Company has engaged a
physician-expert to assist with patient medical record reviews.
On March 23, 2011, legal counsel for the Company met with
representatives of DOJ to present findings regarding an internal
review of a Company hospital other than HHNM. These findings
were submitted to DOJ, and detail explanations and arguments
demonstrating that the implantations were appropriate. DOJ and
its experts are reviewing these findings. DOJ has stated that
the Company will similarly have the opportunity to present and
submit findings for its other hospitals under investigation.
As discussed above, the Company has complied with all requests
from DOJ for information, is actively engaged in discussions
with DOJ regarding the issues involved in the investigations,
and continues developing and presenting arguments supporting the
ICD implantations. Pursuant to DOJs request, the Company
has entered into a tolling agreement that tolls the statute of
limitations for allegations related to ICDs until October 2011.
To date, DOJ has not asserted any claims against the Company and
we expect to continue to have input into the investigation.
Because the investigation is in its early stages, however, the
Company is unable to evaluate the outcome of the investigations.
Total ICD revenue is a material component of total net patient
revenue and this investigation, and any resulting liability,
could have a material adverse effect on the Companys
financial condition and results of the Companys operations
and reduce the amount of cash available for distribution to our
stockholders.
11
CORPORATE
GOVERNANCE
Meetings
and Committees
The Board of Directors of the Company held 11 meetings during
the fiscal year ended September 30, 2010. The Company has
standing audit, compensation, compliance and corporate
governance and nominating committees.
Bailey, Casey and McCoy currently serve as members of the
compensation committee of the Board of Directors (the
compensation committee). The compensation committee
determines the amount and type of compensation paid to senior
management, establishes and reviews general policies relating to
compensation and benefits of employees, and administers the
Companys equity award plans. The compensation committee
held four scheduled meetings and six additional meetings during
fiscal 2010. The compensation committee does not operate
pursuant to a written charter.
McCoy, Grossman and Deal currently serve as members of the audit
committee of the Board of Directors (the audit
committee). The audit committee oversees the accounting
and financial reporting processes of the Company and independent
audits of its financial statements. The audit committee held
four scheduled quarterly meetings and eight additional meetings
during fiscal 2010. The audit committee operates pursuant to a
written charter, a copy of which was filed as Appendix A to
our proxy statement filed January 29, 2009. We do not post
Board of Directors committee charters on our website.
Sokolov and Bailey currently serve as members of the compliance
committee of the Board of Directors (the compliance
committee). The compliance committee oversees the
implementation of the Companys compliance program, which
seeks to ensure that the Companys operations at all levels
are conducted in compliance with applicable federal and state
laws regarding both public and private healthcare programs. The
compliance committee held four meetings during fiscal 2010. The
compliance committee does not operate pursuant to a written
charter.
McCoy, Casey, and Grossman currently serve as members of the
corporate governance and nominating committee of the Board of
Directors (the nominating committee). The Board of
Directors has delegated to the nominating committee the
authority to nominate individuals for election to the Board of
Directors and to consider nominations submitted by stockholders
who comply with the notice procedures provided under the
Companys bylaws. The nominating committee utilizes
independent search firms, such as Caldwell Partners, to perform
national searches for director candidates who meet
qualifications identified by the nominating committee at the
time a search is initiated. In addition, new directors may be
identified by members of the Board of Directors, management, or
stockholders. Such qualifications have included, among others,
the ability to qualify as an independent director and financial,
compliance and health care experience. Once qualified candidates
are identified, the nominating committee personally interviews
each qualified candidate and evaluates the candidates
references and credentials. At the conclusion of its evaluation,
the nominating committee determines whether to recommend a
candidate to the Board of Directors for nomination. The
nominating committees process for evaluating director
candidates is the same for nominees identified by search firms,
members of the Board of Directors, management, or stockholders.
The corporate governance and nominating committee held three
meetings during fiscal 2010. The nominating committee operates
pursuant to a written charter, a copy of which was filed as
Appendix A to our proxy statement filed January 28,
2010. The nominating committee operates pursuant to a written
charter. We do not post Board of Directors committee charters on
our website.
Grossman, McCoy, Casey, Sokolov and Deal serve as members of the
strategic options committee. Mr. Grossman serves as the
chairman of this committee. The strategic options committee was
formed by the Board of Directors during fiscal 2010 to oversee
the Companys strategic options process. The strategic
options committee held nine meetings during fiscal 2010. The
strategic options committee does not operate pursuant to a
written charter.
12
Nominations
by Stockholders
Nominations may be made by any stockholder who is entitled to
vote for the election of the director so nominated. To be
considered by the committee, nominations must be received in
writing by the secretary of the Company (i) in the case of
an annual meeting, not less than 45 days or more than
75 days prior to the first anniversary of the preceding
years annual meeting, and (ii) in the case of a
special meeting at which directors are to be elected, not later
than the close of business on the later of 90 days prior to
the special meeting or 10 days following the day on which
public announcement of the date of the meeting was first made.
The notice must include all information relating to the nominee
that would be required to be disclosed in solicitations of
proxies for election of directors under regulations promulgated
by the SEC. The notice also must include (A) the name and
address, as they appear on the records of the Company, of the
stockholder of record submitting the nomination and, if
different, the name and address of the beneficial owner on whose
behalf the nomination is made and (B) the class and number
of shares of the Company which are beneficially owned and owned
of record by the stockholder of record and, if applicable, such
other beneficial owner.
Director
Independence
Information about transactions involving related parties is
reviewed by the Audit Committee. Related parties include Company
directors and executive officers, as well as their immediate
family members. If a related party has a direct or indirect
material interest in any Company transaction, then the audit
committee would decide whether or not to approve or ratify the
transaction. The audit committee will use any process and review
any information that it determines is appropriate. All related
party transactions will be disclosed in accordance with SEC
rules.
The Board of Directors has determined that all non-employee
directors are free from any relationship that would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director and, accordingly, are
independent as such term is defined by the rules and
regulations of the SEC and the listing standards of the NASDAQ
Global Select Market (NASDAQ).
During the course of its analysis regarding
Mr. Grossmans independence, the Board of Directors
considered that Mr. Grossman and his wife are retired
partners of PricewaterhouseCoopers, LLP, (PwC), that
Mr. Grossman and his wife receive pensions from PwC, and
that PwC has and may continue to perform non-audit related
accounting services for the Company.
Director
Nominations and Evaluation of Candidates
Although the Governance and Nominating Committee (the
Nominating Committee) does not have a formal policy
with regard to the consideration of diversity in identifying
nominees for director, the Nominating Committee is committed to
having a diverse set of individuals serving as directors. As
part of its process of identifying qualified candidates for
nomination and election to the Board of Directors, the
Nominating Committee considers persons with a variety of
professional experiences, perspectives, education, skills and
backgrounds that will add to the effectiveness of the Board of
Directors. The Board of Directors believes that having a diverse
set of individuals serving as directors is necessary and seeks
to nominate individuals that fill a need or possess skills so as
to compliment the existing Board of Directors.
Upon notice of a director position to be vacated or upon
discernment of the Nominating Committee new directors should be
sought to complement the current roster, the Nominating
Committee will meet to determine:
a. the director skills needed;
b. the director skills available; and
c. the best approach to supplementing existing skills with
new director recruitment.
The Nominating Committee examines these questions at least
annually when reappointment time is evident. To the extent the
Nominating Committee determines the current director(s) fill a
need and contribute based on experience and participation, and
given the desire of the director to be reappointed, the
Nominating
13
Committee may recommend reappointment. To the extent the
Nominating Committee, annually or at any other time, determines
a need exists or anticipates a skill needed that does not exist,
the committee will recommend to the Board of Directors that a
search be conducted. The Companys practice has been to
engage an independent search firm with national reputation and
experience in director recruitment to develop a specification
depicting the skills, experience, and personal attributes needed
to complement the board. Through examination of an expanded
roster, culling the roster to a manageable list, conducting
telephonic and personal interviews with the Nominating Committee
and management, and conducting references the Nominating
Committee will identify candidate(s) to advance for nomination.
Based on the results of the evaluation process, the Nominating
Committee will select, by majority vote, the most qualified
candidate or candidates, as the case may be, to recommend to the
Board of Directors for selection as a director nominee. Upon
selection of one or more director nominees by the Board of
Directors, the chairman of the Board of Directors will extend an
invitation to the individual to become a director nominee to be
included on the proxy card for election at the next annual
meeting of stockholders. In consultation with the chairman of
the Board of Directors and the Companys chief executive
officer, the committee may also recommend candidates for the
Boards selection as nominees for appointment to the
various committees of the Board of Directors.
Board
Leadership Structure
The Board of Directors elects the Companys chief executive
officer and its chairman. The Board of Directors is currently
led by a non-executive chairman, John T. Casey. While the
position of chairman and chief executive officer may be held by
the same person, the Boards current preferred governance
structure is to separate the roles of chairman and chief
executive officer. The chairmans primary responsibilities
are to manage the Board of Directors and serve as the primary
liaison between the Board of Directors and the chief executive
officer, while the primary responsibility of the chief executive
officer is to manage the
day-to-day
affairs of the Company, taking into account the policies and
directions of the Board of Directors. The Board believes that
the Companys current leadership structure with two
different individuals serving as chairman and chief executive
officer promotes more open and robust communication among the
Board and provides an efficient decision making process with
proper independent oversight.
The Company is managed with a management team headed by the
chief executive officer with accountability to the Board of
Directors. The Board of Directors is organized with a committee
structure that places focused accountability for Audit,
Compensation, Governance and Nominations, and Compliance with
experienced directors. Management members possessing requisite
skill, experience and accountability serve as non-voting
ad
hoc
members and staff to the committees. Each committee
meets at least quarterly, is chaired by an independent director
and reports to the full Board of Directors at least quarterly
for routine committee business. For special projects or focused
matters, committee chairs engage committee members and
management as frequently as necessary, properly noticing and
documenting each meeting. Organizational controls are many
including:
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a.
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Identified capital approval thresholds
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b.
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Rigorous business planning and capital planning processes
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c.
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Compliance and legal review for all material contracts
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d.
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Policies and procedures that define culturally acceptable
behaviors and performance that sets a high standard for all
management and employees
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e.
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Surveys to measure physician, patient, and employee engagement
and satisfaction
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f.
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An annual strategic plan is presented by management and
introduced proximate to the budget discussions to match strategy
with financial and service goals; compensation plan that align
the Company strategic goals and compensation for management
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g.
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Board Committee and Board of Directors oversight through
regular financial, operations, and compliance reporting and
monitoring.
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14
Risk
Oversight
While the Companys management is responsible for the
day-to-day
management of risk to the Company, the Board of Directors has
broad oversight responsibility for the Companys risk
management programs. The Board of Directors believes that this
division of responsibilities is the most effective risk
management approach and that our Board leadership structure
supports this approach as the chief executive officer is
involved directly in risk management as a member of management,
while our chairman maintains an oversight role as part of the
non-management directors of the Board.
The various committees of the Board of Directors assist in its
efforts to fulfill its oversight responsibilities in certain
areas of risk. In particular, the audit committee focuses on
financial and enterprise risk exposures, including internal
controls, and discusses with management, the Companys Vice
President of Internal Audit, and the Companys independent
registered public accountants the Companys policies with
respect to risk assessment and risk management. The compensation
committee is responsible for considering those risks that may be
implicated by the Companys compensation programs and
reviews those risks with the Board of Directors and chief
executive officer. For more information on the compensation
committees risk assessment review, see Executive
Compensation and Other Information Compensation
Discussion and Analysis Risks Related to
Compensation Policies and Practices in this proxy
statement. Our Board leadership structure is consistent with our
approach to risk oversight, as the chief executive officer is
involved directly in risk management as a member of management,
while our chairman maintains an oversight role as part of the
non-management directors of the Board.
Code of
Ethics for Directors and Financial Professionals
The Board of Directors has adopted a Code of Ethics for
Directors and Financial Professionals (the Ethics
Code) that meets the criteria for a code of ethics
established by regulations promulgated by the SEC. The Ethics
Code applies to each of the Companys directors including
its chairman, and its chief executive officer, chief operating
officer, chief financial officer, principal accounting officer
and controller, treasurer, hospital chief financial officers,
and any other employee designated by the chief financial officer
who has significant responsibility for preparing or overseeing
the preparation of the Companys financial statements and
the other financial data included in the Companys periodic
reports to the SEC and in other public communications made by
the Company. The Company will provide a copy of the Ethics Code
upon request to any person without charge. Such requests should
be submitted in writing to the Secretary of the Company at the
Companys principal executive offices. In the event of an
amendment to or waiver from a provision of the Ethics Code, the
Company intends to post such information on its website at
www.medcath.com
. The information on our website is not a
part of this proxy statement.
Stockholder
Communications and Annual Stockholder Meetings
Stockholders who wish to communicate with directors may do so
via the Internet by going to
www.medcath.com,
clicking on
For Investor, then Contact and Info
Request, and then the electronic mail address
IR@medcath.com. Alternatively, stockholders may mail
their communications to the attention of Investor
Relations at the Companys principal executive
offices. All correspondence to directors received electronically
or otherwise will be forwarded by the Companys investor
relations department to individual directors per the
stockholders instructions or, absent instructions, to the
chairman of the Board of Directors.
The Board of Directors has not adopted a formal policy regarding
director attendance at annual meetings. One of MedCaths
directors attended last years annual meeting.
15
PROPOSAL NO. 1
ELECTION
OF CLASS I DIRECTORS
The Companys certificate of incorporation permits the
Board of Directors to fix the number of directors, provided
there are no less than two or more than twelve directors.
Currently the Company has seven directors. The Board of
Directors is divided into three classes, with two directors
currently serving in Class I, three directors currently
serving in Class II and two directors currently serving in
Class III. Each director serves for a three-year term and
until their successors are duly elected and qualified, with one
class of directors being elected at each annual meeting. The
term of the Class I directors will expire at the Annual
Meeting. All of the nominees are currently directors of the
Company. Our Class I directors standing for re-election are
Robert S. McCoy and James A. Deal.
Board of
Directors of the Registrant
Class I
Directors Standing for Re-Election
Robert S. McCoy, Jr.
, 72, has been a director since
October 2003. Prior to his retirement in August 2003, he served
as vice chairman of Wachovia Corporation (Wachovia)
and co-chaired the effort to integrate Wachovia and First Union
Corporation after their merger in September 2001. Prior to the
merger, he served as vice chairman and chief financial officer
of Wachovia. Mr. McCoy had been with Wachovia since its
1991 acquisition of South Carolina National Corporation,
where he served as president. Prior to that, he was a partner
with Price Waterhouse (now PricewaterhouseCoopers).
Mr. McCoy serves as a director of Krispy Kreme Doughnuts,
Inc., a retailer and wholesaler of doughnuts and packaged
sweets, and Web.com Group, Inc., a provider of website building
tools and internet marketing. Mr. McCoy brings to MedCath
extensive leadership, risk-management, and financial experience
gained in his
50-year
business experience as an accountant, chief financial officer of
two public bank holding companies, and director of three public
companies. Mr. McCoys experience in the financial
services industry and roles involving integration,
risk-management, finance, accounting matters, and preparation of
financial statements serve as the foundation for
Mr. McCoys contribution to the Board.
Mr. McCoys financial and accounting expertise is
invaluable in his roles on the Board and as the Chairman of
MedCaths Audit Committee. Mr. McCoy qualifies as an
audit committee financial expert under SEC
guidelines. Mr. McCoy serves on the Companys
compensation committee, the audit committee, the corporate
governance and nominating committee, and the strategic options
committee.
James A. Deal
, 61, was named a director in August 2009.
Mr. Deal has served as President and Chief Executive
Officer of Hospice Compassus, a provider of hospice care, since
July 2006. During 2006 Mr. Deal served as Chairman of
INSPIRIS, Inspired Care for the Frail Elderly, and from November
2001 to December 2005, Mr. Deal served as Chairman and
Chief Executive Officer of INSPIRIS. From September 1998 to June
2001, Mr. Deal served as President, Chief Executive Officer
and a director of Center for Diagnostic Imaging, Inc., a
national network of outpatient diagnostic imaging centers.
Mr. Deal served as Executive Vice President of Healthways,
Inc. from January 1991 to August 1998, and as President of
Diabetes Treatment Centers of America, Inc. (now American
Healthways Services, Inc.), a Healthways subsidiary, from 1985
to August 1998. Mr. Deal has served on the Board of
Directors for AmSurg Corp. since 1992, chairing the audit
committee since 1999, and previously spent three years on the
Board of Directors of the Pediatric Nursing Services of America.
Mr. Deal earned a Master of Public Administration in Health
Services Administration from the University of Arizona and a
Bachelor of Business in Economics from Western Illinois
University. Mr. Deals qualifications to serve on our
Board of Directors include over 30 years in the healthcare
industry, including as a senior executive and Chief Executive
Officer of multi-site healthcare services companies. He has
executive experience in finance and accounting, management,
operations and strategic planning. Mr. Deal serves on the
Companys audit committee and strategic options committee.
Class II
Directors
Woodrin Grossman
, 66, has been a director since April
2008. Mr. Grossman served as partner and health care
practice leader of PricewaterhouseCoopers LLP, before retiring
in June 2005 after 37 years with the firm.
16
While with PricewaterhouseCoopers LLP, he also served as the
audit partner for audits of Fortune 500 and other companies.
Mr. Grossman later served as Senior Vice President-Strategy
and Development of Odyssey HealthCare Inc. from January 2006 to
December 2007. He currently serves on the Board of Directors of
Kinetic Concepts Inc. and IPC The Hospitalist Company, Inc.
Mr. Grossman holds an MBA from the University of
Pennsylvanias Wharton School and a bachelors degree
in economics from Moravian College. Mr. Grossmans
qualifications to serve on our Board of Directors include his
experience as a partner and practice leader at a large
international public accounting firm providing auditing and
consulting services to multi-state healthcare companies, his
experience as a senior executive responsible for strategy and
development for a public healthcare services company and his
experience serving on the Board of Directors of directors of
other public and private healthcare companies, together with his
deep understanding of healthcare finance, accounting and
auditing. Mr. Grossman serves on the Companys audit
committee, corporate governance and nominating committee, and is
the chairman of the strategic options committee.
John T. Casey
, 65, has served as Chairman of
MedCaths Board of Directors since September 2003 and as a
director since May 2000. From September 3, 2003 to
February 21, 2006 he also served as President and Chief
Executive Officer of MedCath. Mr. Casey continued to be
employed by the Company through August 21, 2006, when he
became non-executive Chairman of the Board. From 1997 to 1999,
Mr. Casey served as chairman and chief executive officer of
Physician Reliance Network, Inc., a publicly traded company that
was, prior to its merger with US Oncology, Inc., the largest
oncology practice management company in the United States.
From 1995 to 1997, Mr. Casey was the chief executive
officer of Intecare, LLC, a company formed for the purpose of
developing joint venture partnerships with hospitals and
integrated healthcare systems. From 1991 to 1995, he served as
president and chief operating officer of American Medical
International, which, at that time, was the third largest
publicly held owner and operator of hospitals in the country. In
1995, American Medical merged with National Medical Enterprises
to create Tenet Healthcare Corporation, where Mr. Casey
served as vice-chairman until 1997. Mr. Casey served as a
director of Eclipsys Corporation (ECLP: Nasdaq) from 2008 until
it was sold in September 2010. Eclipsys Corporation was a
publicly traded corporation that provided hospitals and other
healthcare organizations with electronic medical record,
computerized physician order and other technology, as well as
revenue cycle management software. Mr. Caseys
qualifications to serve on our Board of Directors include
extensive executive experience leading major
not-for-profit
and for-profit provider type health service organizations for
almost 40 years, and extensive experience serving as
director of several publicly owned health service companies
during the past 20 years, including membership/chairmanship
of audit, compensation and nominating/governance committees of
same companies. Mr. Casey serves on the Companys
compensation committee, corporate governance and nominating
committee, and the strategic options committee.
O. Edwin French
, 64, has been director and has served as
MedCaths President and Chief Executive Officer since
February 2006. Mr. French served as MedCaths Interim
Chief Operating Officer from October 2005 to February 2006.
Prior to joining MedCath, Mr. French served as president of
the Acute Care Hospital Division of Universal Health Services,
Inc. until his early retirement in 2005. From 2005 to January
2006, he served as president of French Healthcare Consulting,
Inc., a consulting firm specializing in operations improvement
and joint ventures. He also served as president and chief
operating officer of Physician Reliance Network from 1997 to
2000, as senior vice president for healthcare companies of
American Medical from 1992 to 1995, as executive vice president
of Samaritan Health Systems of Phoenix Samaritan
from 1990 to 1991 and as senior vice president of Methodist
Health Systems, Inc. (Methodist) in Memphis from 1985 to 1991.
Both Samaritan and Methodist are large
not-for-profit
hospital systems. Mr. French received his undergraduate
degree in occupational education from Southern Illinois
University. Mr. Frenchs qualifications to serve on
our Board of Directors include his substantial public-company
senior executive experience in three publicly-traded health care
companies and his experience in governance of
not-for-profit
health care organizations. Through his extensive consulting
experience Mr. French advised and guided executive and
senior management teams in organizational design and operations
including for-profit and
not-for-profit
hospitals and hospital systems.
17
Class III
Directors
Pamela G. Bailey
, 62, has been a director since April
2008. Mrs. Bailey currently serves as President and Chief
Executive Officer of The Grocery Manufacturers Association
(GMA), a Washington, D.C. based trade association. From
April 2005 until January 2009, she was President and Chief
Executive Officer of the Personal Care Products Council.
Ms. Bailey served as President and Chief Executive Officer
of the Advanced Medical Technology Association, the worlds
largest association representing the medical technology
industry, from June 1999 to April 2005. From 1970 to 1999, she
served in the White House, the Department of Health and Human
Services (HHS) and other public and private
organizations with responsibilities for health care public
policy. Mrs. Bailey also serves as a director of
Greatbatch, Inc. a developer and manufacturer of critical
products used in medical devices for the cardiac rhythm
management, neuromodulation, vascular, orthopedic and
interventional radiology markets. Mrs. Bailey served as a
director of Albertsons, Inc., a national grocery chain,
until its sale to Supervalu in June 2006.
Mrs. Baileys qualifications to serve on our Board of
Directors include over 30 years of health care public
policy experience both in the public and private sectors. In
addition, Mrs. Bailey has served as a Presidential
appointee at HHS, in the White House for three US Presidents and
as CEO of three health care trade associations, including as CEO
of AdvaMed, the medical technology trade association, from
1999-2005.
Mrs. Bailey serves on the Companys compliance
committee and is the chairman of the compensation committee.
Jacque J. Sokolov
, 56, has been a director since March
2004. From
1987-1992,
Dr. Sokolov served as the Vice President of Healthcare
for Southern California Edison (NYSE:EIX). In 1992
Dr. Sokolov became CEO of Advanced Health Plans Inc. which
was acquired in 1994 by Coastal Physicians Group Inc. From
1994-1997,
Dr. Sokolov served as Chairman of the Board of the Board of
Directors, Chairman of the Executive Committee, and Chairman of
the Management Action Committee of Coastal Physician Group, Inc.
(NYSE:ERDR), which later became PhyAmerica Physician Group, Inc.
(NYSE:PHY). In 2002, PhyAmerica was party to the bankruptcy of
NCFE (National Century Financial Enterprises) during which
Dr. Sokolov served as Chairman of the Creditor Committee.
Since 1998, he has served as the Chairman and Managing Partner
of SSB Solutions, Inc. a national healthcare management,
development and investment firm. Dr. Sokolov also serves as
a director of Hospira, Inc. (NYSE:HSP). As a director of
Hospira, he served as the founding Chairman of the Science,
Technology and Quality Committee and a member of the Audit
Committee. He currently serves as a member of the Compensation
Committee, CEO Search Committee, and the Science, Technology and
Quality Committee. Dr. Sokolov also serves as a director
for the National Health Foundation, Phoenix Childrens
Hospital, and White House Health Project. He previously served
as a director of the American College of Medical Quality (ACMQ)
and the National Business Group on Health (formerly WBGH).
Dr. Sokolovs qualifications to serve on our Board of
Directors include over 17 years of public company Board
experience in three separate public companies including service
in the following positions: Chairman of the Board, Chairman of
the Executive Committee, Chairman of the Science, Technology and
Quality Committee, and Chairman of the Quality and Compliance
Committee. He is currently serving as the Chairman of our
Quality and Compliance Committee and has been a member of that
committee since 2004. Professionally, Dr. Sokolov has
strong management experience in the healthcare field as a senior
corporate officer and chairman/managing partner of a national
healthcare management, development and investment firm. Over the
years, Dr. Sokolov has worked extensively with physicians,
physician organizations, hospitals/health systems, health plans,
and pharmaceutical and medical device companies. This experience
and his understanding of
clinical/business
models of healthcare make Dr. Sokolov well qualified to
serve on the Board of Directors. Mr. Sokolov serves as the
chairman of the Companys compliance committee and also
serves on the strategic options committee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
DIRECTORS NOMINATED
FOR REELECTION IN THIS PROPOSAL NO. 1.
18
BACKGROUND
OF THE SALE PROPOSALS
General
This section provides general background of the Sale Proposals.
For background relating to each of the transactions previously
closed by the Company since the establishment of the Committee,
background relating to the New Mexico Sale and background
relating to the Arkansas Sale, see Background of the Sale
Proposals Completed Transactions,
Proposal No. 2 Sale of Substantially
All of the Assets of Heart Hospital of New Mexico
Events Leading to the New Mexico Sale and
Proposal No. 3 Sale of All of
MedCaths Equity Interests in Arkansas Heart
Hospital Events Leading to the Arkansas Sale
below, respectively.
Over the last several years, due substantially to (i) lack
of growth in the Companys share price and earnings and
(ii) legislative proposals which, if adopted, would
severely restrict the Companys business model which is
based upon the development and ownership of additional
physician-owned hospitals, the Company began to explore new
strategies for growth in order to enhance its financial
performance and increase stockholder value. Specifically, the
legislative proposals, while grandfathering existing
physician-owned hospitals, eliminate the right to develop
additional physician-owned hospitals and effectively prohibit
existing physician-owned hospitals from expanding their number
of operating rooms, procedure rooms,
and/or
beds,
and from increasing the existing number of physician-investors
(the Legislative Reforms).
As a part of this effort to enhance its financial performance
and increase stockholder value, in October 2009, the Board of
Directors established a Strategic Assessment Committee (the
Assessment Committee) comprised of independent
directors to review and assess growth strategies and
opportunities for the future. The Assessment Committee consisted
of Woodrin Grossman, James A. Deal, Robert S. McCoy, Jr.,
Edward R. Casas, M.D. and Jacque J. Sokolov, M.D. In
connection with that effort, the Assessment Committee also began
to solicit proposals from prospective external advisors to
assist in this review and assessment.
In October 2009, the Assessment Committee held numerous meetings
with management aimed at developing a sustainable business model
in light of the Legislative Reforms and market forces
threatening the Companys ability to enter into new
partnerships with physicians to develop and own hospitals. The
Assessment Committee reviewed the possible retention of external
advisors to assist the Committee in evaluating the
Companys existing business model and new models for the
development or acquisition of hospitals. The Assessment
Committee considered Navigant Consulting, Inc. (Navigant
Consulting) at the suggestion of a member of the
Assessment Committee who, in connection with an unrelated
company, had previously worked with a consultant who was now an
employee of Navigant Consulting. The member of the Assessment
Committee suggested that Navigant Consulting had unique
expertise that suited the Companys current needs. In
connection with the Assessment Committees review,
Dr. Casas reminded the Committee that he was employed by
Navigant Consulting, serving as a Senior Managing Director and
Practice Leader for Navigant Capital Advisors, the firms
corporate finance business unit, and that he was also an officer
of Navigant Capital Advisors, LLC (NCA), a
subsidiary of Navigant Consulting. Accordingly, Dr. Casas
recused himself from all discussions and determinations as to
the retention of the external advisor. Dr. Casas informed
the Assessment Committee that the practice area of Navigant
Consulting that would advise the Assessment Committee was a
separate business segment from the Navigant Capital Advisors
business unit, that neither NCA nor Dr. Casas would receive
any compensation related to the engagement of Navigant
Consulting and that Dr. Casas would not be involved in the
negotiation of the terms of the engagement or the provision of
services to the Company.
At its meeting on October 14, 2009, the Assessment
Committee (without Dr. Casas voting or participating in the
discussions) determined, following discussion with management,
to recommend to the Board of Directors that the Company retain
Navigant Consulting. Another external advisor was reviewed and
considered, but the Assessment Committee determined that
Navigant Consulting would best serve the needs of the Assessment
Committee due to their extensive expertise and experience with
healthcare and physician-owned ventures. As part of its
deliberations, the Assessment Committee considered the
possibility of a conflict of interest as a result of
Dr. Casas relationship with Navigant Consulting.
After considering the qualifications of Navigant Consulting,
other relevant factors and the information provided by
Dr. Casas, the Board of
19
Directors determined (without Dr. Casas voting or
participating in the discussions), to retain Navigant Consulting.
Between November 2009 and February 2010, the Assessment
Committee met periodically with management and advisors present
to continue evaluating the Companys business model and
strategic options. The Assessment Committee considered several
potential growth opportunities and strategic options aimed at
increasing earnings
and/or
increasing stockholder value, including the following
growth-related options: (i) the development of new joint
venture hospitals, (ii) the purchase of physician interests
in the Companys existing joint ventures, (iii) the
acquisition of existing third-party owned hospitals and
(iv) the commencement of several physician integration
strategies, including the purchase by the Company of certain
physicians practices directly and seeking partnerships
with other area hospitals. The Assessment Committee determined,
with the advice of Navigant Consulting, that option (i) was
not viable due to, among other reasons, the significant risks
arising from the Legislative Reforms and the possible direction
of proposed healthcare reform, and that options (ii) and
(iii) above were not viable because of, among other
reasons, their cost-prohibitive nature, given the market
limitations on accessing additional capital. Accordingly, the
Assessment Committee and management viewed option (iv) as
the only potentially viable option for consideration by the
Company.
The Assessment Committee discussed with management and Navigant
Consulting the substantial risks involved in focusing on
physician integration strategies (including the acquisition of
individual physician practices and seeking partnerships with
other area hospitals) as a catalyst for growth, such as the
time-consuming nature of pursuing and completing such
transactions and the difficulty of implementation because of, in
part, the changing regulatory and reimbursement rules which are
leading physicians to affiliate with larger, general hospitals
rather than specialty hospitals (such as those owned by the
Company). The Assessment Committee directed Navigant Consulting
to further investigate and provide additional insights with
respect to both the potential for the Companys pursuit of
physician integration strategies and seeking partnerships with
other area hospitals (option (iv) above) and alternative
non-growth related strategic options through which the Company
might maximize stockholder value. Management also expressed
concern to the Assessment Committee over whether revenue growth
could be achieved even with the pursuit of physician integration
strategies.
During January 2010 the Assessment Committee, together with the
Board of Directors and management, considered and evaluated the
Companys strategic options to maximize stockholder value,
including the Companys pursuit of physician integration
strategies and the possible sale of the Company or its assets.
Navigant Consulting and one of the investment banks the Company
had retained in the past participated in a February 2, 2010
Board of Directors meeting to discuss the exploration of
strategic options to maximize stockholder value. The Board of
Directors also requested that management present its
recommendations regarding strategic options to maximize
stockholder value at the meeting.
At its February 2, 2010 meeting, the Board of Directors
reviewed with representatives of Navigant Consulting and the
investment bank referred to above possible strategic options for
maximizing stockholder value, related financial and tax issues
and, on a preliminary basis, the ranges of possible share value
to be realized in connection with a sale of the Company or its
assets. The investment bank had not been retained by the Board
of Directors and participated in the discussion on an informal
basis due to its prior relationship with the Company and in
anticipation that they may be considered for a future engagement
if the Board of Directors determined to pursue certain strategic
options. Management also made a presentation regarding strategic
options for maximizing stockholder value at the February 2,
2010 meeting. Management described the Companys current
business model and the challenges posed by both the Legislative
Reforms and the difficulties and risks in implementing physician
integration strategies. Management identified a number of
factors for the Board of Directors consideration,
including (i) the challenges and risks involved with
transforming MedCath away from its historic physician
partnership model, noting that efforts to date to expand its
hospitals and affiliated medical staffs had not resulted in
earnings growth, (ii) reductions in physician reimbursement
for 2010 which management believed would likely encourage its
physician partners to elect to affiliate or integrate with
larger, more diversified hospital systems, (iii) the
inability to develop new physician owned hospitals, or to expand
existing hospitals, due to the Legislative Reforms,
(iv) changes in medical technologies which led to a
relative increase in outpatient procedures with lower hospital
reimbursement and a
20
corresponding decrease in inpatient procedures, (v) a
general decrease in cardiology related hospital procedures due
to improvements in cardiac care, and (vi) the risks of
failing to meet financial covenants in that certain Amended and
Restated Credit Agreement dated as of November 10, 2008
among the Company, MedCath Holdings Corp., the other guarantors
party thereto, Bank of America, N.A., as administrative agent
(BofA), Wells Fargo Bank, National Association (as
successor to Wachovia Bank, National Association), Fifth Third
Bank, Raymond James Bank FSB and Branch Banking and Trust, and
the other lenders party thereto (the MedCath Credit
Agreement) in the long-term if new growth opportunities
were not developed successfully. Management also reviewed with
the Board of Directors each of the Companys individual
hospitals. For these reasons and other reasons, including lack
of growth in the Companys share price and earnings,
management recommended to the Board of Directors that it
consider a merger of the Company or other enterprise-level
transaction or a sale of its individual assets.
The Companys outside legal advisor made a presentation to
the Board of Directors regarding its fiduciary duties in the
context of a possible merger of the Company or other
enterprise-level transaction or a sale of its individual assets
at the February 2, 2010 meeting. The Board of Directors
decided to reconvene later in February to give each Board member
an opportunity to consider the reports, analyses and
recommendations provided in connection with the Board of
Directors evaluation of strategic options available to the
Company.
The Board of Directors met on February 19, 2010 to further
discuss the possible strategic options for the Company. The
Board of Directors further discussed and reviewed all of the
reports, analyses and recommendations of management and the
Companys advisors and unanimously concluded that it was in
the best interests of the Companys stockholders to further
explore simultaneously considering a sale of the Company and
sales of its individual assets. The Board of Directors
determined to retain a qualified financial advisor to assist the
Board of Directors with respect to the exploration of such a
transaction or transactions. The Board of Directors discussed
the merits of retaining various financial advisors to assist
with such a possible transaction or transactions.
Because of the possibility that NCA might be considered for
retention as a financial advisor, Dr. Casas recused himself
from all discussions and determinations as to the retention of
the financial advisor. In addition, Dr. Casas committed
that in connection with any such retention, he would not
negotiate with the Company the terms of NCAs possible
engagement and that, if NCA were to be selected by the Board of
Directors as a financial advisor, Dr. Casas would resign
from the Board of Directors in order to avoid a possible
conflict of interest.
During the February 19, 2010 meeting, the Board of
Directors (other than Dr. Casas) considered proposals from
four financial advisors and management provided an overview of
each of the financial advisors, including their respective
qualifications and a comparison of their fee proposals. After a
discussion regarding the needs of the Company and the
qualifications of each financial advisor, the Board of Directors
concluded that NCA was best qualified to advise the Company,
primarily due to NCAs significant advisory experience
involving healthcare companies with physician-partnership
business models and the associated operational and regulatory
challenges, along with experience advising on sales of
individual hospitals and other individual health care
facilities. The Board of Directors also determined that if the
Company were to be sold through a strategy involving individual
asset sales followed by a dissolution of the Company rather than
a merger or other enterprise-level transaction, NCA had the
capability to offer assistance during that process. Furthermore,
the Board of Directors believed that Dr. Casas would be
uniquely skilled at interacting with individual physician
partners based upon his professional background as a physician
and his familiarity with the Companys business. In light
of these factors, the Board of Directors unanimously (with
Dr. Casas not voting or participating in the discussions)
authorized the Companys engagement of NCA, subject to a
number of conditions, including that Dr. Casas resign from
the Board of Directors and not participate in the negotiations
with the Company related to NCAs engagement, that NCA not
be requested to and not render any fairness opinion in
connection with any of the anticipated transactions and that if
it were determined to seek such a fairness opinion or opinions,
the Company engage another financial advisor to render the
fairness opinions.
At the February 19, 2010 meeting, the Board of Directors
formed a Strategic Options Committee (the Committee)
comprised of the following independent directors:
Messrs. Grossman, McCoy, Deal and
21
Dr. Sokolov, with Mr. Grossman as its chairman. The
Committee was directed to work with the Companys advisors
to pursue, consider and evaluate strategic options available to
the Company. The Committee was given the further authority to
negotiate the terms of a transaction or transactions, subject to
the final approval of the full Board of Directors with respect
to each such transaction.
On February 25, 2010, the Committee met for the first time.
The Companys outside legal advisor advised the Committee
members regarding their fiduciary duties to the Company and its
stockholders in the context of a possible sale of the Company or
its individual assets. Management reported to the Committee that
it had negotiated the terms of NCAs engagement as
financial advisor, which terms included a reduction of
NCAs original fee proposal. The Committee approved the
engagement of NCA subject to the conditions previously mandated
by the Board of Directors. On February 25, 2010,
Dr. Casas resigned from the Board of Directors.
The Committee met on March 8, 2010. At this meeting, NCA
presented significant aspects of a recommended strategy and
proposed a timeline for the process. NCA also presented
preliminary observations as to potential bidders for the entire
Company and for individual assets. The Committee reviewed with
NCA and management the recommended strategy and process, as well
as communication strategies with hospital teams and physician
partners.
During March and April 2010, the Committee received updates from
NCA on preparation of a data room, drafts of Confidential
Information Memoranda and the compilation of preliminary lists
of potential buyers for both the entire Company and for its
individual assets.
On March 29, 2010, the Committee met, with NCA, management
and legal advisors present. The Committee, management and NCA
discussed the merits of a stock buyback of a portion of our
outstanding common stock, an action which one of the
Companys major stockholders had asked to be considered.
Committee members expressed concern as to whether a buyback
would be in the best interests of the Company and the
stockholders at that time. The Committee agreed that additional
advice would be sought on the issue and the matter would be
discussed again at a later meeting.
The Committee also discussed the possibility of seeking an
amendment to certain financial covenants and other requirements
of the MedCath Credit Agreement to provide additional financial
and liquidity flexibility if the individual assets of the
Company were to be sold in separate transactions, rather than a
sale of the entire Company in a single transaction.
Mr. James A. Parker, the Companys Executive Vice
President and Chief Financial Officer, had responsibility for
developing the terms of the proposed amendment for the Committee
and for negotiating such terms with BofA once the terms of a
proposed amendment, in particular those relating to the
application of proceeds of individual asset sales, were approved
by the Committee.
On April 7, 2010, the Committee met, with NCA and the
Companys legal advisors present. The Committee reviewed
the need to limit retained and other post-closing liabilities if
the strategic option of pursuing individual asset sales and
dissolution of the Company was to be pursued. The Committee
discussed the importance of limiting post-closing liabilities in
the individual asset sale transactions to the extent possible to
facilitate an efficient wind down of the Company and to maximize
stockholder value.
On April 19, 2010, the Committee met, with management, NCA
and the Companys legal advisors present. NCA briefed the
Committee on NCAs marketing efforts and indicated that NCA
planned to begin delivery of the Confidential Information
Memoranda during the last two weeks of April 2010. The Committee
also discussed a preliminary draft memorandum on tax issues
prepared by the Companys special tax counsel.
NCA presented to the Committee its preliminary estimates, which
were subject to certain identified qualifications and
limitations which materially affect the reliability and accuracy
of such preliminary estimates, of net distributable proceeds to
the Company and its stockholders which might result from the
cumulative sales of individual assets. The estimates included
initial entity valuation assessments, analysis of estimated net
proceeds to the Company from each entity disposition, assessment
of the tax situation and overall operating and wind down costs.
The estimates did not reflect estimates of potential contingent
liabilities, whether accrued as retained liabilities at the
corporate level or those retained by the partnerships or limited
liability companies that own our hospitals which may result from
or in connection with individual asset sales or
22
otherwise. The Committee discussed the estimates, and related
analysis and findings, including certain tax matters related to
individual asset sales and operating and wind down of the
Company.
At this meeting, at every subsequent regular Board of Directors
meeting and at certain Committee meetings, following the
retention of NCA and throughout the strategic options evaluation
process, NCA updated the Board of Directors (or the Committee,
as applicable) regarding the status of developments involving
each individual hospital asset and negotiations with potential
buyers of each such asset and the estimates described in the
preceding paragraph. During and following NCAs
presentation at each such meeting, the Board of Directors
discussed with NCA and management strategic options and
developments involving the Companys individual assets and
the effect of such developments on the estimates.
The Committee also discussed at its April 19, 2010 meeting
the issue of whether a stock buyback was advisable. A
presentation was made by a representative of an investment
banking firm that had been requested to provide a presentation
to the Committee regarding a possible stock buyback due to its
expertise on such strategies. In addition to this firms
presentation, the Committee discussed legal issues which would
arise in connection with a stock buyback. The Committee reviewed
potential concerns regarding a stock buyback, including risks
regarding the Companys possible needs for liquidity during
the strategic options process and potential difficulties with
the disclosure requirements that might arise in connection with
the purchase of the Companys common stock at a time it was
attempting to confidentially negotiate sales of its assets or
the sale of the Company. The Committee determined that a stock
buyback was not an advisable strategy for the Company to pursue
under the circumstances at that time.
A Board of Directors meeting was convened on May 4, 2010.
NCA outlined the steps it had taken to contact and develop
strategies for dealing with potential buyers of both the entire
Company and its individual assets. NCA noted that based upon
preliminary feedback from potential bidders, individual asset
sales appeared likely to result in the realization of greater
value for the Companys stockholders when compared to the
value that would be realized from a merger of the Company or
other enterprise-level transaction. In addition to reviewing
preliminary feedback from potential buyers of the Companys
individual assets, the Committee reviewed with the Board of
Directors its deliberations regarding a possible stock buyback
transaction and the considerations raised in review of such
matter by Committee members, senior management, outside legal
advisors to the Company and NCA. The Committee reviewed its
determination that a stock buyback was not an advisable strategy
for the Company to pursue under the circumstances at that time,
and, following discussion, the Board of Directors concurred with
this determination.
On May 25, 2010, the Board of Directors met, with NCA,
management and the Companys legal advisors present.
Mr. Parker presented to the Board of Directors an update on
negotiations to revise the MedCath Credit Agreement, noting that
the key points under discussion with BofA included the asset
dispositions covenant, the EBITDA definition and the
fixed charge coverage ratio financial covenant. The Board of
Directors discussed the proposed revisions to the MedCath Credit
Agreement and instructed Mr. Parker to proceed with
finalizing the MedCath Credit Agreement amendments with BofA.
On June 2, 2010, the Board of Directors met, with NCA,
management and the Companys legal advisors present. NCA
updated the Board of Directors with respect to potential
transactions involving the Companys individual assets and
reported that to date 80 potential buyers had been contacted,
resulting in 52 executed confidentiality agreements, 25
indications of interest, 11 pending non-binding offers and 25
responses from potential buyers that they had no further
interest. NCA updated the Board of Directors on its solicitation
of proposals for a merger of the Company or other
enterprise-level transaction and related discussions with
numerous private equity firms and other companies, including
hospital companies and healthcare real estate investment trusts
(REITs). NCA reported that as of that time no viable
bids for the entire Company had been received. The Board of
Directors discussed various aspects of the strategic options
evaluation process with NCA and management, including the need
to continue to proactively manage relationships with the
Companys various physician partners at each of its
hospitals in connection with the strategic options evaluation
process.
On June 30, 2010, the Committee met, with NCA, management
and the Companys legal advisors present. Management
reported that negotiations with BofA to amend the MedCath Credit
Agreement to permit
23
additional individual asset sales, provide for a six-month
moratorium on covenants related to the fixed charge coverage
ratio and revise the EBITDA definition were proceeding and
results were progressing. The Committee then discussed the
MedCath Credit Agreement amendment and its timing and impact on
the process of pursuing strategic options with respect to the
Companys individual assets. The Committee discussed the
status of individual asset sales with NCA and management.
On July 20, 2010, the Committee met, with NCA, management
and the Companys legal advisors present. Management
updated the Committee on progress made negotiating an amendment
to the MedCath Credit Agreement with BofA. A proposed amendment
was slated for distribution to the banking syndicate for its
review and would also be presented to the Board of Directors for
approval. The Committee discussed the amendment to the MedCath
Credit Agreement and the status of individual asset sales with
NCA and management.
The Companys legal advisors then addressed several points
related to requirements of the DGCL and the potential
dissolution process that would become relevant if the Company
pursued the strategic option of selling the Companys
individual assets, winding down and subsequently dissolving the
Company. The Companys legal advisors advised the Board of
Directors that special Delaware counsel should be engaged to
assist with this process. The Committee discussed these issues
and agreed that the issues regarding dissolution would be
further considered by the Board of Directors at its
August 23, 2010 meeting.
At the August 23, 2010 Board of Directors meeting, the
Companys legal advisors outlined steps to be taken by the
Company and its advisors if the Board of Directors decided to
seek a vote of the stockholders to approve the sale of
substantially all of the Companys assets and the
Companys dissolution. Mr. Grossman informed the Board
of Directors that the Committee had unanimously voted to
recommend to the Board of Directors the engagement of special
Delaware counsel. The Board of Directors discussed this
recommendation and unanimously approved such engagement.
At the September 8, 2010 Board of Directors meeting, the
Board of Directors discussed the status of individual asset
sales with NCA and management.
At the September 14, 2010 Board of Directors meeting, NCA
made a presentation related to the potential dissolution of the
Company, focusing on wind down issues, employee and management
incentives and related processes for facilitating an orderly
transition of MedCaths business to maximize stockholder
value. The Companys legal advisors discussed issues
related to the possible dissolution of the Company. The Board of
Directors was advised, given the nature of the Companys
business, of the importance of knowledge continuity when
considering potential governance structures as well as
management and staffing duties. The Companys special
Delaware counsel discussed the processes related to
creditors notices and the establishment and management of
reserves required to be maintained under the Delaware
dissolution statute.
Also at the September 14, 2010 Board of Directors meeting,
Mr. Parker presented managements recommendations for
maintaining its provision of hospital support and transition
services, including the possibility of outsourcing information
technology and billing services. Managements
recommendations focused on ensuring uninterrupted and
cost-effective support for any hospitals retained by the Company
as well as for those hospitals where the Company had agreed, or
may in the future agree, to provide transition services
following individual asset sales. Mr. Parker also reviewed
managements preliminary findings for estimated wind down
costs. Following further discussion of the dissolution process,
the Board of Directors requested that management continue to
develop a plan to include a summary of alternatives and costs of
operation during a possible dissolution and wind down period.
At the September 28, 2010 Board of Directors meeting, the
Board of Directors discussed the status of individual asset
sales with NCA and management. The Companys special
healthcare counsel described the status of the ICD
Investigation, and the Board of Directors discussed the ICD
Investigation with its legal advisors and management.
At the October 12, 2010 Committee meeting, the Committee
discussed the status of individual asset sales with NCA and
management.
24
At the November 3, 2010 Board of Directors meeting, the
Board of Directors discussed the status of individual asset
sales with NCA and management.
At the Board of Directors November 9, 2010 meeting,
the Companys special Delaware counsel provided an overview
of the DGCL relating to the dissolution and winding up of a
Delaware corporation, including a discussion of the rights,
duties and potential liabilities of directors in that process.
The Companys special Delaware counsel explained that
because the Company could significantly benefit from having its
directors and certain of its officers remain employed to guide
it through the remainder of the Companys strategic review
and possible dissolution process, the Board of Directors could
appropriately consider adopting additional director and officer
indemnification provisions consistent with those set forth in
the Companys certificate of incorporation. The
Companys special Delaware counsel advised the Board of
Directors to consider both indemnification agreements comparable
to those adopted by other public companies and amendments to the
Companys bylaws to ensure that indemnification rights
could not be eliminated in the future with respect to prior
periods. The Companys special Delaware counsel advised
that the rights in the proposed indemnification agreements and
bylaw amendment were consistent with what many other public
companies had adopted. The directors elected to take these items
into consideration, but made no decision about their adoption at
that time.
The Board of Directors also discussed the benefits of a merger
or other enterprise-level transaction involving the sale of the
whole Company once certain assets had been sold. The Board of
Directors acknowledged that such a transaction, if feasible,
would potentially expedite the realization of proceeds by the
Companys stockholders and simplify the strategic options
process. The Board of Directors agreed that the Committee had
the authority to continue to evaluate transaction options, and,
if feasible, pursue a merger of the Company or other
enterprise-level transaction as well as the sale of individual
assets.
At the November 23, 2010 Board of Directors meeting,
Mr. Grossman updated the Board of Directors on the
preparations by management and the Companys advisors to
effect the eventual conclusion of the strategic options process.
Multiple options were being explored, including
(i) additional individual asset sales followed by an
eventual dissolution and wind down of the Company and
(ii) additional individual asset sales followed by a
subsequent merger or other enterprise-level transaction at a
time at which the Company would still hold certain individual
assets, all retained liabilities and cash to capitalize the
retained liabilities. The Board of Directors discussed the
advantages and disadvantages of each strategy. Mr. Grossman
said that the Committee would continue to consider these options
with its advisors and keep the Board of Directors updated on
these alternatives.
At the Board of Directors December 21, 2010 meeting,
the Companys legal advisors reviewed the process through
which the Company might seek stockholder approval of both a sale
of substantially all of its assets and the dissolution of the
Company. Additionally, Mr. Parker and Mr. O. Edwin
French, the Companys President and Chief Executive
Officer, delivered a management presentation which
Mr. Grossman had requested regarding the Companys
continued consideration of a merger or other enterprise-level
transaction following the disposition of certain additional
individual assets. After discussions with its financial
advisors, the Board of Directors concluded that the Company
should continue to pursue this strategic option due to the
relative simplicity of a final, enterprise-level transaction
when compared to the complexity and duration of the dissolution
and wind down processes.
At the January 4, 2011 Board of Directors meeting, the
Companys legal advisors summarized healthcare regulatory
compliance issues related to possible sale transactions. The
Board of Directors discussed the status of on-going sale
negotiations and regulatory compliance issues with NCA,
management and the Companys legal advisors.
At the January 18, 2011 Committee meeting, the Committee
discussed the prospects for a transaction involving a business
combination and issues related to the wind down of the Company
following the sale of its assets.
At the February 1, 2011 Committee meeting, the Committee
also discussed with NCA and management NCAs efforts to
seek potential buyers interested in a business combination,
including the possibility of
25
attempting to engage in a wider solicitation of potential buyers
that, through such a business combination would be interested in
assuming the wind down of a properly capitalized Company with
its limited remaining assets, retained liabilities and cash.
At the February 8, 2011 Board of Directors meeting, the
Board of Directors discussed the prospects for a business
combination and strategic alternatives and issues to be
considered in connection with such a transaction as compared to
individual asset sales followed by a dissolution and wind down
of the Company. At that time there were no identified potential
buyers interested in pursuing such a business combination. The
Board of Directors also discussed with management and its
special healthcare regulatory counsel, the status of the ICD
Investigation and its impact on the Companys evaluation of
its strategic options.
At its March 1, 2011 meeting, the Board of Directors
discussed the Companys on-going sale processes and
authorized NCA to move forward with potential buyers of
individual assets.
At the March 24, 2011 Board of Directors meeting, NCA
presented to the Board of Directors the status of discussions
with potential buyers for each of the Companys remaining
individual assets. The Board of Directors discussed these
on-going negotiations with NCA and management. The Board of
Directors discussed with NCA and its legal advisors the possible
timing of distributions in the context of the Companys
prospective wind down, DGCL issues and tax considerations. The
Companys special healthcare regulatory counsel updated the
Board of Directors regarding the status of the ICD
Investigation. The Board of Directors discussed the ICD
Investigation and its impact on the strategic options under
exploration and prospective wind down of the Company with NCA,
management and its legal advisors. Management presented a
preliminary report to the Board of Directors describing
operational issues arising during the prospective wind down
process, including the need to maintain adequate corporate
support for so long as the Company continued to operate
individual assets. The Board of Directors discussed the
operational issues raised by management with management and
legal advisors.
At its April 12, 2011 meeting, the Board of Directors
discussed with the Companys legal advisors and management
anticipated securities filings and related timing requirements
arising from the execution of transaction documentation related
to the sales of the Companys assets.
At the May 10, 2011 Board of Directors meeting, in addition
to receiving its regular updates from NCA, the Board of
Directors discussed the retention of key employees through the
anticipated dissolution and wind down process. The Board of
Directors noted that while certain current executives were
likely to cease working for the Company in the coming months as
it was anticipated that such executives service to the
Company would not be required during the entire wind down
process, the dissolution and wind down process would require at
least a minimum level of experienced leadership to manage
through to completion. The Board of Directors also discussed the
status of the ICD Investigation and its impact on the wind down
process and the Companys ability to make distributions to
stockholders.
At its May 24, 2011 meeting the Board of Directors met with
its legal advisors, management and NCA to discuss the process of
seeking stockholder approval of a sale of substantially all of
the Companys assets and the liquidation and dissolution of
the Company pursuant to the DGCL. Following discussion, the
Board of Directors unanimously adopted resolutions declaring the
sale of substantially all of the assets of HHNM, the sale of the
Companys interests in AHH, and the liquidation and
dissolution of the Company advisable and in the best interests
of the Companys stockholders, and recommending that the
stockholders vote in favor of each proposal. See
Proposal No. 2 Sale of
Substantially All of the Assets of Heart Hospital of New
Mexico, and Proposal No. 3
Sale of All of MedCaths Equity Interest in Arkansas Heart
Hospital. The Board of Directors also unanimously adopted
resolutions approving the filing of the preliminary proxy
statement.
On May 27, 2011, the Company filed the preliminary proxy
statement with the SEC.
At its June 7, 2011 meeting, the Board of Directors
discussed the unsolicited feedback received by management from
certain of the Companys stockholders in response to the
preliminary proxy statement. The Board of Directors discussed
that a significant number of stockholders had expressed concern
with the restrictions on the liquidity of the Companys
common stock once its transfer books were closed (which would
occur upon the filing of a certificate of dissolution pursuant
to the proposed plan of dissolution described in the preliminary
proxy statement filed on May 27, 2011). Stockholders also
expressed concern that sales of
26
significant amounts of the Companys common stock by the
Companys institutional stockholders prior to the closing
of the transfer books could have a negative impact on the
ability of the Company to benefit from certain income tax
benefits related to the tax losses the Company expects to incur
after the completion of the Sales (the Tax
Attributes). As a result of these concerns, a number of
stockholders, who in the aggregate hold a significant number of
shares of the Companys common stock, had indicated that
they were unlikely to vote in favor of the dissolution proposal.
Following discussion, the Board of Directors determined that it
would be in the best interests of the Company and our
stockholders to remove the dissolution proposal from the proxy
statement and to seek approval of the liquidation and
dissolution of the Company from our stockholders at a later date.
The Companys special Delaware counsel then made a
presentation to the Board of Directors describing the
ramifications of adopting a Section 382 stockholders rights
plan to protect the Companys Tax Attributes. Such a plan
was designed to reduce the likelihood of an ownership
change, as defined in Section 382 of the Internal
Revenue Code, by restricting or deterring the acquisition of the
Companys common stock by existing or potential 5%
stockholders. The Board of Directors then discussed the
possibility of adopting a Section 382 stockholders rights
plan to protect the Companys Tax Attributes and the
potential responses the Companys stockholders may have to
such a plan. Following discussion, the Board of Directors
directed management and the Companys legal advisors to
prepare a Section 382 stockholders rights plan and related
documentation for the Board of Directors to review and consider
in more detail.
At the June 13, 2011 Board of Directors meeting, the Board
of Directors reviewed the terms and provisions of the
Section 382 stockholders rights plan (the
Section 382 Rights Plan) that had been prepared
by the Companys special Delaware counsel. The Board of
Directors was advised by the Companys financial officers
that as of June 13, 2011, the Company currently has Tax
Attributes which may entitle the Company to either reduce income
taxes that may otherwise become due or to seek a refund of
income taxes due with respect to the Companys current
fiscal 2011 tax year totaling up to as much as approximately
$40,000,000 of tax reductions. The Companys Chief
Financial Officer reviewed the Companys financial records
with the Board of Directors and advised the Board of Directors
that the Company could pay the rights dividend contemplated by
the Section 382 Rights Plan without violating the surplus
requirements of the DGCL. After discussion, the Board determined
that it was in the best interests of the Company and its
stockholders to seek to preserve for the Companys
stockholders the value and availability of the Tax Attributes by
adopting the Section 382 Rights Plan. In connection with
its adoption of the Section 382 Rights Plan, the Board of
Directors authorized a new series of Preferred Stock of the
Company to be designated the Series A Junior
Participating Preferred Stock and declared a dividend of
one Series A Junior Participating Preferred Stock purchase
right on each outstanding share of the Companys common
stock to be payable to holders of record as of the close of
business on June 29, 2011.
On June 16, 2011, the Company filed the revised preliminary
proxy statement with the SEC.
Agreements
entered into granting MedCath the authority to sell individual
hospitals
The operating agreements and limited partnership agreements
governing the limited liability companies and limited
partnerships which own the Companys affiliated hospitals
state that the hospital itself, and frequently the
Companys equity interest in the partnership or limited
liability company that own the hospital, cannot be sold without
the approval or consent of a
majority-in-interest
of the Companys physician partners in the applicable
hospital. Such approval is not required if the Company enters
into a merger of the Company or other enterprise-level
transaction under certain additional circumstances which were
reflected in certain of those agreements.
Accordingly, the consent of such physician partners is generally
a condition to the sale of the Companys hospital assets.
To provide, where possible, the Company with the authority to
negotiate and enter into binding sale agreements to sell its
hospital, the Company has entered into, and may in the future
enter into, agreements with its physician partners under which
the Company receives the authority to select a hospital
purchaser and to agree to binding transaction terms and
conditions, in exchange for a commitment from the Company to the
applicable physicians partners that they will receive no less
than the amount of their net unreturned capital contributions (a
Fixed Price) to the hospital upon the closing of the
applicable asset sale (each such
27
agreement, a Consent Agreement). If the physician
partners pro rata share of net sale proceeds, taking into
consideration reserves for liabilities known and unknown
liabilities, exceeds that amount, they would instead receive
their pro rata share of net sales proceeds (a Share of Net
Proceeds). Such a Consent Agreement may involve either the
purchase of the equity interests of the physician partners for a
purchase price based upon the amounts described above or a
payment from the Company to the applicable physician partners at
the closing of the applicable asset sale. If the amount due to
physician partners under a Consent Agreement is based upon a
Share of Net Proceeds, then it is anticipated that any
contingent liabilities of the applicable hospital incurred
post-closing will be shared pro rata by the Company and by the
applicable physician partners. If the amount due to physician
partners under a Consent Agreement is based upon a Fixed Price,
then it is anticipated that any contingent liabilities of the
applicable hospital incurred post-closing will be the
responsibility only of the Company and will not be shared with
the applicable physician partners.
A Consent Agreement was entered into in August 2010 with respect
to the sale of TexSAn Heart Hospital (TexSAn) which
closed December 31, 2010. With respect to TexSAn, the
physician partners sold their equity interests to the Company
based upon a Share of Net Proceeds. See Background of the
Sale Proposals Completed Transactions
TexSAn Heart Hospital below.
Consent Agreements have also been entered into with physician
partners at three of the Companys hospitals, including
Hualapai Mountain Medical Center (HMMC) and
Louisiana Medical Center & Heart Hospital
(LMCHH), though no agreement to sell either of those
hospitals has been entered into as of the date of this proxy
statement. Consent Agreements have also been entered into with
physician partners at Heart Hospital of New Mexico
(HHNM), as more fully described in
Proposal No. 2 Sale of Substantially
All of the Assets of Heart Hospital of New Mexico below.
The terms of future Consent Agreements may be equivalent to or
may vary materially from the Consent Agreements described above.
Completed
Transactions
Arizona
Heart Hospital
Due to a decline of earnings and local market challenges
experienced during 2008 and 2009, the Company began exploring a
possible sale of Arizona Heart Hospital (AzHH) in
2009. This effort pre-dated and was initially unrelated to the
commencement of the Companys Strategic Assessment
Committee process. As a part of this process, the Company
engaged Cain Brothers & Company, LLC (Cain
Brothers), an investment bank, in February, 2009. Cain
Brothers has expertise in the healthcare area and had
successfully assisted the Company in prior years with respect to
the sale of the Companys Milwaukee Heart Hospital and a
refinancing of the Harlingen Medical Center.
On October 30, 2009, management reported to the Assessment
Committee on available strategic options for improving
AzHHs declining financial performance
and/or
maximizing stockholder value by engaging in a transaction
involving this hospital. Management suggested several strategic
options should be considered, including (i) implementation
of a cash call and recapitalization of AzHH, (ii) formation
of a joint venture with a another hospital or healthcare
provider not currently affiliated with AzHH or the Company,
(iii) recapitalization and continuation of on-going
operations after unwinding the existing arrangement with the
Companys physician partners at AzHH and (iv) an
outright sale of the assets of AzHH. Mr. French summarized
the proposals received by Cain Brothers to date involving
strategic options for AzHH, including potential asset sale
transactions. Mr. David Bussone
(Mr. Bussone), Executive Vice President and
President, Operations Division, presented an operations plan and
budget for strategic options involving both continuing
operations at AzHH without consolidation and the Companys
acquiring all of the equity interests in AzHH from the physician
investors and continuing to operate the hospital. The Assessment
Committee discussed various strategic options involving AzHH and
instructed management to continue the consideration of strategic
options, including potential asset sale transactions, for AzHH
with the assistance of Cain Brothers.
Following the Board of Directors formation of the
Committee and the retention of NCA to act as the Companys
financial advisor in connection with the exploration of the
Companys strategic options in February 2010, the Committee
included AzHH among the individual assets which were within the
scope of NCAs engagement. At that time, the Cain Brothers
engagement had expired.
28
The Committee convened a meeting on March 29, 2010 at which
NCA presented a letter of intent (the Vanguard LOI)
with Vanguard Health Systems (Vanguard), which
contemplated the sale of substantially all of the assets of AzHH
for a purchase price of $32,000,000. The Committee directed NCA
to pursue the transaction described in the Vanguard LOI. The
approval of the Companys physician partners at AzHH was
required to approve the transaction terms set forth in the
Vanguard LOI under the terms of the operating agreement of AzHH.
The physician investors consented on April 15, 2010 to the
sale of AzHH to Vanguard on the terms set forth in the Vanguard
LOI.
Despite providing the Vanguard LOI to the Company, Vanguard
indicated to the Company that it desired to proceed with the
purchase of AzHH contemporaneously with its purchase of the
medical practice of a group of physician investors in AzHH whose
physicians provide services to AzHH. Discussions between the
Company and the physician investors in the AzHH regarding the
proposed sale to Vanguard continued through July 2010. During
this time, the Committee, NCA and management monitored and
discussed the progress of the proposed transaction at the
Committees meetings and provided updates to the Board of
Directors.
In early August, 2010 Vanguard entered into an agreement to
purchase the medical practice of the physician investors in AzHH
out of a bankruptcy proceeding that had been initiated by the
medical practice of those physicians. On August 3, 2010,
the Board of Directors met and reviewed the proposed terms of
the sale of substantially all of the assets of AzHH to Vanguard.
The Board of Directors received NCAs analysis of net
proceeds expected to result from the sale of AzHH to Vanguard.
The Board of Directors also received a fairness opinion from
Houlihan Lokey Capital, Inc. (Houlihan Lokey) as to
the fairness to AzHH, from a financial point of view, of the
consideration to be received by AzHH in the sale of
substantially all of its assets to Vanguard, which was
$32,000,000, subject to working capital adjustments.
On August 6, 2010, the Company signed the AzHH purchase
agreement with Vanguard. The AzHH sale closed on October 1,
2010.
Yuma
Cardiac Catheterization Laboratory
On October 12, 2010, the Committee learned that the member
physicians at Southwest Arizona Heart and Vascular Center (the
Yuma Physicians, and, the Yuma Facility)
had expressed interest in exercising a contractual right of
first refusal which they held (ROFR) to buy the
Companys interest in the Yuma Facility. The contractual
ROFR called for a purchase price of $7,900,000 payable over two
years. The Yuma Physicians alternatively offered a one-time
payment of $7,000,000 in cash. The Committee and the Board of
Directors considered this alternative proposal conditioned on a
November 2010 closing. Following discussion among the Committee,
NCA and management, the Committee approved this proposal to sell
the Companys interest in the Yuma Facility.
The Board of Directors approved the proposed sale of the Yuma
Facility proposal on October 19, 2010. The Yuma transaction
closed on November 1, 2010.
Heart
Hospital of Austin
In 2009, Austin Heart, P.A., a medical practice and an affiliate
of the Companys physician partner and minority owner of
Heart Hospital of Austin (HHA), entered into an
agreement to be acquired by an affiliate of HCA, Inc.
(HCA and the Austin Physicians
Transaction). HCA is affiliated with St. Davids
Hospital, which was a competitor of HHA in the Austin, Texas
market. The Company subsequently entered into negotiations with
HCA to sell HHA to HCA. At the direction of the Board of
Directors, representatives of management also discussed the sale
of HHA with several other possible buyers, including owners of
other hospitals located in Texas. None of those parties elected
to actively pursue the purchase of HHA. Prior to the
commencement of the Companys decision to explore its
alternative strategic options, HCA and the Company explored a
hospital exchange whereby the Company would exchange HHA for an
operating hospital of HCA in a different market. After an
evaluation of the Companys broader strategic options, the
Board of Directors declined to pursue such an asset exchange. At
its meeting on January 14, 2010, the Assessment Committee
directed management to terminate negotiations regarding the
proposed asset exchange and to pursue only a sale of HHA or its
assets.
29
On February 2, 2010, the Board of Directors approved the
sale of substantially all of the assets of HHA to St.
Davids Healthcare Partnership L.P. (St.
Davids), an affiliate of HCA, for $83,800,000,
subject to customary post-closing adjustments (the HHA
Transaction). An asset purchase agreement was signed with
St. Davids on February 16, 2010. The Board of
Directors determined it did not require, and did not seek, a
fairness opinion with respect to HHA Transaction.
The closing of the HHA Transaction was delayed by information
requests from the Federal Trade Commission (the
FTC), which were made in response to the
Companys
Hart-Scott-Rodino
Anti-Trust Act (HSR) filing. The FTC reviewed
the HHA Transaction for several months.
In late October 2010, the FTC completed its review of the HHA
Transaction which allowed the HHA Transaction to subsequently
close on November 1, 2010.
South
Dakota
NCA began soliciting offers for the Companys 33.3% equity
interest in Avera Heart Hospital of South Dakota
(AHHSD) in connection with the Companys
exploration of strategic options in April 2010. Prior to the
sale, AHHSD was owned equally by the Company, Avera McKennan, a
South Dakota based health system (Avera), and
Northern Cardiology Institute (NCI), a group of
cardiologists based in South Dakota. Avera indicated to the
Company that it was interested in acquiring the Companys
indirect 33.3% equity interest in AHHSD (the AHHSD
Interest) shortly after the Company announced it was
considering strategic options. Under the terms of AHHSDs
limited liability company operating agreement, Avera along with
the Company and NCI, each held (i) approval rights over any
proposed sale of the equity interest or assets of AHHSD to a
third party and (ii) each held a right of first refusal to
purchase the AHHSD Interest for a purchase price equal to 33.3%
of the amount determined by multiplying five by the net income
of AHHSD for the 12 month period ended as of the most
recent calendar quarter. However, after the passage of the
Legislative Reforms, NCI was no longer legally permitted to
purchase the AHHSD Interest without causing AHHSD to lose its
Medicare provider number.
Between April and August 2010, NCA negotiated the terms of the
sale with Avera at the direction of the Board of Directors. In
addition, NCA continued to market the AHHSD Interest in
connection with a broader sale of MedCath. However, NCA noted
the challenges in obtaining a competing offer for AHHSD based
upon the fact that Avera had the right, under the operating
agreement entered into between the Company, Avera and NCI upon
the formation of the limited liability company which owned
AHHSD, to purchase the AHHSD Interest at a purchase price based
upon a valuation equal to five multiplied by the net income of
AHHSD for the twelve months prior to such purchase.
The terms of an equity purchase agreement (the AHHSD
Purchase Agreement) whereby Avera would purchase the AHHSD
Interest were finalized during August 2010, pursuant to which
the Company agreed to sell a subsidiary which was the owner of
the AHHSD Interest to Avera for cash consideration equal to
$20,000,000 adjusted based upon AHHSDs net working capital
as of closing. The AHHSD Purchase Agreement did not include an
indemnity provision for Averas benefit and included only
limited rights to make claims for damages in connection with
breaches of the AHHSD Purchase Agreement.
On August 23, 2010, the Board of Directors received a
fairness opinion from Houlihan Lokey as to the fairness to SFHM,
Inc., a subsidiary of the Company, from a financial point of
view, of the consideration to be received by SFHM, Inc. in the
sale of its indirect interest in AHHSD to Avera, which at such
time was estimated to be $20,000,000, subject to working capital
adjustments. The Board of Directors also received NCAs
analysis of net proceeds to be received in connection with the
sale of the AHHSD Interest to Avera. Following further
discussion, the Board of Directors voted to approve the sale of
the Companys interest in AHHSD to Avera.
The sale of the Companys AHHSD Interest to Avera closed on
October 1, 2010.
30
TexSAn
Heart Hospital
NCA began soliciting offers for TexSAn in connection with the
Companys exploration of strategic options in April 2010.
In connection with this process, NCA contacted over 30 parties
interested in evaluating all the hospital assets of MedCath and
seven potential buyers regarding their specific interest in
TexSAn. As a result, 20 parties executed confidentiality
agreements to receive a Confidential Information Memorandum for
all MedCath assets and four parties executed confidentiality
agreements to receive a Confidential Information Memorandum only
for TexSAn.
At the Committee meeting on June 30, 2010, NCA informed the
Committee that NCA had received four preliminary bids for
TexSAn. A fifth party had previously submitted a proposal
involving the acquisition of multiple MedCath hospitals but
subsequently withdrew its bid.
In order to avoid delays in its efforts to sell TexSAn arising
from the need to obtain required approvals from S.A.H.H.
Hospital Management, LLC and S.A.H.H. Investment Group, Ltd.,
the minority physician partners in TexSAn (collectively, the
TexSAn Physicians), the Company sought to enter into
a Consent Agreement (the TexSAn Consent Agreement)
with the TexSAn Physicians. See Background of the Sale
Proposals Agreements entered into granting MedCath
the authority to sell individual hospitals.
At its August 3, 2010 meeting, NCA reported to the Board of
Directors that two potential buyers were completing due
diligence and that NCA was negotiating with those third parties
in order to obtain the most favorable price and other material
terms for TexSAn. By August 15, 2010, one of the potential
buyers, Methodist Healthcare System of San Antonio, a
subsidiary of HCA (MHS), had confirmed the terms of
its offer, which was subject to final due diligence and included
a purchase price of $77,000,000 for substantially all of the
assets of TexSAn, which was greater than the purchase price
proposed by the other remaining potential buyer.
At the August 17, 2010 Committee meeting, the Committee
discussed the terms of the TexSAn Consent Agreement being
negotiated by NCA at the Committees direction with the
TexSAn Physicians. After consideration by the Committee and
discussion with NCA, management and the Companys legal
advisors, the Consent was approved by the Committee on
August 17, 2010.
On August 20, 2010, the Company executed the TexSAn Consent
Agreement with the TexSAn Physicians. NCA and the Companys
legal advisors, at the Committees direction, then sought
to complete the asset purchase agreement with MHS.
During September and October 2010, the Company and NCA continued
to negotiate the terms of the TexSAn asset purchase agreement
with MHS.
On November 5, 2010, the Board of Directors received a
fairness opinion from Houlihan Lokey as to the fairness to
TexSAn, from a financial point of view, of the consideration to
be received by TexSAn in the sale of substantially all of
TexSAns assets to MHS, which at such time was estimated to
be $76,193,850, subject to working capital adjustments and
certain de minimus obligations. The Board of Directors also
received NCAs analysis of net proceeds to be received in
connection with the sale of substantially all of TexSAns
assets to MHS. Following further discussion, the Board of
Directors voted to approve the sale of substantially all of
TexSAns assets to MHS.
The Company entered into a definitive agreement with MHS on
November 5, 2010. The final purchase price was reduced from
$77,000,000 to $76,250,000 as a result of further negotiations
between MHS and the Company regarding the terms of certain
contracts held by TexSAn. The Company submitted an HSR filing
for the TexSAn transaction to the FTC on November 11, 2010,
which was supplemented with amendments to the HSR filing on
November 29, 2010. Early termination of the HSR waiting
period was granted by the FTC on December 15, 2010. The
Company closed its sale of substantially all of TexSAns
assets to MHS on December 31, 2010.
31
MedCath
Partners
NCA began soliciting offers for MedCath Partners, LLC
(MedCath Partners) in connection with the
Companys exploration of strategic options in April 2010.
MedCath Partners focused on the ownership and management of
cardiac catheterization facilities in North Carolina and in
several other states. The material portion of MedCath
Partners assets and operations were in North Carolina and
were conducted pursuant to a the settlement agreement with the
State of North Carolina (the CON Settlement
Agreement) which provides that MedCath Partners nine
North Carolina cardiac catheterization labs are exempt from
North Carolina Certificate of Need requirements (the NC
Business).
At the April 19, 2010 Committee meeting, NCA reported that
it had made preliminary contact with six potential buyers of
MedCath Partners but only one confidentiality agreement had been
executed.
At the May 4, 2010 Board meeting, the Board discussed with
management and its legal advisors legal issues arising under
North Carolina law in connection with a prospective transaction
involving MedCath Partners, including whether the CON Settlement
Agreement was transferable to a third party. Following this
discussion, the Board instructed the Companys legal
advisors to research the matter further. By that time, NCA had
distributed Confidential Information Memoranda related to
MedCath Partners to two potential buyers.
At the June 30, 2010 Committee meeting, the Companys
legal advisors reported on recent meetings with North Carolina
officials regarding legal issues potentially raised by a
transaction involving MedCath Partners. Preliminary discussions
with North Carolina officials indicated that the Company could
sell MedCath Partners and the buyer would retain the benefits of
the CON Settlement Agreement. At this point, NCA had received
four preliminary bids for MedCath Partners. During July 2010,
two potential buyers conducted site visits and attended
management presentations in order to discuss and investigate
prospective transactions involving MedCath Partners.
At the August 3, 2010 Board of Directors meeting,
management informed the Board of Directors that certain of
MedCath Partners operations unrelated to the NC Business
were in the process of either being sold or terminated and
described the terms thereof. See Background of the Sale
Proposals Completed Transactions Yuma
Cardiac Catheterization Laboratory. NCA reported that two
potential buyers continued to perform due diligence on certain
of MedCath Partners operations.
At the September 28, 2010 Board of Directors meeting, NCA
reported to the Board of Directors that five potential buyers
were conducting due diligence on MedCath Partners.
Through October and November 2010, the Committee continued to
evaluate strategic options with respect to MedCath Partners.
From December 2010 through March 2011, the Company negotiated
the terms of a purchase with a potential buyer that had made a
favorable preliminary bid to purchase the NC Business of MedCath
Partners, subject to confirmatory due diligence and the
satisfaction of certain closing conditions. However, a
disagreement over specific closing conditions ultimately halted
the negotiations with this potential buyer. Additional bids from
two other potential buyers of MedCath Partners were received by
the Company, with an initial preliminary bid from a potential
buyer received on January 14, 2011 and a subsequent
preliminary bid received from DLP Cardiac Partners, LLC, an
affiliate of Historic Lifepoint Hospitals, Inc. and Duke
University Health System (DLP), on March 18,
2011. The Committee determined that the bid received on
January 14, 2011 was not viable because it also required an
unacceptable closing condition.
At the March 24, 2011 Board of Directors meeting, the Board
of Directors discussed the March 18, 2011 offer from DLP
with NCA, management and the Companys other advisors.
Following discussion, the Board concluded that the DLP offer
represented the preferable transaction relating to MedCath
Partners and instructed NCA to move forward with negotiations
with DLP.
During March and April 2011, DLP conducted due diligence on
MedCath Partners, and the Company and NCA negotiated the terms
of a purchase agreement with DLP (the MedCath Partners
Purchase Agreement) pursuant to which DLP would acquire
the assets of the NC Business of MedCath Partners (the DLP
Transaction) other than the Companys minority
interest in Coastal Carolina Heart, LLC, and a related cardiac
32
catheterization laboratory management agreement which involved a
relationship with New Hanover Regional Medical Center and area
physicians (the New Hanover Assets).
The terms of the DLP Transaction were negotiated during April
2011, pursuant to which the DLP offered to purchase the NC
Business, other than the New Hanover Assets, for $25,000,000,
with the Company retaining net working capital and liability for
pre-closing ownership and operations. The MedCath Partners
Purchase Agreement included limited indemnity provisions for
DLPs benefit related to the Companys ownership,
authority and good title to the assets and included limited
rights of DLP to make claims for damages upon the Companys
failure to satisfy pre-closing liabilities.
At its April 28, 2011 meeting, the Board of Directors
received a summary from NCA of the proposed terms of the DLP
Transaction and a fairness opinion from Stout Risius Ross, Inc.
(SRR) on the fairness to the Company from a
financial point of the consideration to be received by the
Company from the DLP Transaction. The Board of Directors voted
to approve the DLP Transaction subject to the Company completing
negotiations of the MedCath Partners Purchase Agreement. The
Board of Directors also approved the sale of the New Hanover
Assets to New Hanover Regional Medical Center, including the
cancellation of a management agreement, for total consideration
of $5,000,000 (the New Hanover Transaction).
Negotiation regarding all terms of the DLP Transaction were
completed, and the transaction closed, effective May 1,
2011. Negotiation regarding all terms of the New Hanover
Transaction were completed, and the transaction closed,
effective May 5, 2011.
Sale of
Remaining Assets
The Board of Directors currently intends to continue to consider
a number of scenarios for disposing of MedCaths remaining
assets to maximize stockholder value. These scenarios include
sales of individual hospitals or other assets, transactions that
would involve the sale of the equity of our subsidiaries holding
those assets in one or more transactions or a merger or other
transaction involving the outstanding common stock of MedCath.
The Board of Directors determination(s) regarding these
scenario(s) will be based upon, without limitation,
consideration of seeking the highest purchase prices obtainable
under the circumstances, certainty and time periods for closing
sales of our remaining assets, the risk that the value of our
remaining assets will decrease over time and the costs of
continuing operations of a limited number of hospitals and other
factors the Board of Directors deems relevant to its
determination. We cannot assure you which, if any, of these
scenarios will result from the evaluation of our strategic
options or that our efforts to dispose of our remaining assets
will be successful or on terms favorable to us. Our remaining
assets include the following:
Bakersfield
Heart Hospital
The Company owns a 53.3% equity interest in Bakersfield Heart
Hospital (BHH) and physician investors hold the
remainder. The Company also holds a first mortgage and security
interest in all of the assets of BHH. NCA began soliciting
offers for BHH in connection with the Companys exploration
of strategic options in April 2010. Since that time, NCA has
contacted 16 potential buyers regarding their interest in BHH as
an individual asset. Each of these potential buyers was willing
to execute confidentiality agreements in order to receive a
Confidential Information Memorandum relating to BHH. As of June
2011, five potential buyers continued to express interest in
acquiring MedCaths interest in BHH and continue to conduct
due diligence on BHH. The timing and material terms upon which
MedCath may enter into an agreement to sell its interests in BHH
are uncertain and subject to material change.
Louisiana
Medical Center & Heart Hospital
The Company owns an 89.2% equity interest in Louisiana Medical
Center & Heart Hospital (LMCHH) and
physician investors hold the remainder. The Company also holds a
first mortgage and security interest in all of the assets of on
LMCHH. NCA began soliciting offers for LMCHH in connection with
the Companys exploration of strategic options in April
2010. Since that time, NCA has contacted 22 potential buyers
regarding their interest in LMCHH as an individual asset, and 19
of these potential buyers were willing to execute
confidentiality agreements in order to receive a Confidential
Information Memorandum and other
33
information relating to LMCHH. As of June 2011, five potential
buyers continued to express interest in acquiring MedCaths
interest in LMCHH and continue to conduct due diligence on
LMCHH. The timing and material terms upon which the MedCath may
enter into an agreement to sell its interests in LMCHH are
uncertain and subject to material change.
Hualapai
Mountain Medical Center
The Company owns an 82.5% equity interest in Hualapai Mountain
Medical Center (HMMC) and physician investors hold
the remainder. The Company also holds a first mortgage and
security interest in all of the assets of HMMC. NCA began
soliciting offers for HMMC in connection with the Companys
exploration of strategic options in April 2010. Since that time,
NCA has contacted 15 potential buyers regarding their interest
in HMMC as an individual asset, and 12 of these potential buyers
were willing to execute confidentiality agreements in order to
receive a Confidential Information Memorandum and other
information relating to HMMC. As of June 2011, four
potential buyers continued to express interest in acquiring
MedCaths interest in HMMC and continue to conduct due
diligence on HMMC. The timing and material terms upon which
MedCath may enter into an agreement to sell its interests in
HMMC are uncertain and subject to material change.
Harlingen
Medical Center
The Company owns a 34.8% equity interest in Harlingen Medical
Center Limited Partnership, the partnership that owns Harlingen
Medical Center (HMC) and a 36% equity interest in
HMC Realty LLC, the limited liability company that owns the
underlying real estate of HMC. NCA has contacted nine potential
buyers regarding their specific interest in acquiring
MedCaths interest in HMC. Each of these potential buyers
was willing to execute confidentiality agreements in order to
receive a Confidential Information Memorandum relating to HMC.
As of June 2011, four potential buyers continued to express
interest in acquiring MedCaths interest in HMC and
continue to conduct due diligence on HMC. The timing and
material terms upon which MedCath may enter into an agreement to
sell its interests in HMC, or the real estate related thereto,
are uncertain and subject to material change.
34
PROPOSAL NO. 2
SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF HEART HOSPITAL OF
NEW MEXICO
The following discussion is qualified in its entirety by
reference to that certain Asset Purchase Agreement dated as of
May 6, 2011(the New Mexico Purchase Agreement)
by and among Heart Hospital of New Mexico, LLC and Lovelace
Health Systems, Inc., a copy of which is attached hereto as
Annex A. You should read the New Mexico Purchase Agreement
carefully because it, and not this description, governs the
terms of the sale of substantially all the assets (the New
Mexico Sale) of HHNM.
General
Description of the New Mexico Sale
If this proposal is approved and the New Mexico Sale is
consummated, HHNM will sell substantially all of its assets to
Lovelace Health System, Inc. (LHS) for approximately
$119,000,000. We will also retain all net working capital and
responsibility for pre-closing liabilities. See
Proposal No. 2 Sale of Substantially
All of the Assets of Heart Hospital of New Mexico
The New Mexico Purchase Agreement. As described below, in
order to obtain the required approval of our physician partners
to the New Mexico Sale, we will pay $22,000,000 of the
Companys net proceeds from the sale to such physician
partners.
Parties
to the New Mexico Sale
HHNM opened to patients in October 1999 and became New
Mexicos first hospital dedicated to the prevention and
treatment of heart disease. Today, HHNM offers a comprehensive
range of cardiac and other hospital services.
The Company owns 74.8% of HHNM and physician investors hold the
remainder. Of the remaining interests, 15% is held by NMHI, LLC
(NMHI), an affiliate of a medical practice known as
the New Mexico Heart Institute, and 10% is held by SWCA, LLC
(SWCA and, together with NMHI, the HHNM
Physicians). SWCA is owned by five physicians who
previously were a part of a single medical practice, but who
currently do not practice medicine as a single group. Individual
physicians hold the remaining 0.2% interest in HHNM.
HHNMs principal executive offices are located at: 504 Elm
Street, NE, Albuquerque, New Mexico 87102.
LHSs principal executive offices are located at
:
c/o Ardent
Health Services, One Burton Boulevard, Suite 250,
Nashville, Tennessee 37215. LHS is an affiliate of Ardent Health
Services (Ardent) which is headquartered in
Nashville, Tennessee.
Events
Leading to the New Mexico Sale
The Company commenced its evaluation of strategic options for
HHNM as part of its broader strategic options review. See
Background of the Sale Proposals General
above.
In April, 2010, NCA began soliciting offers for HHNM in
connection with the Companys exploration of strategic
options. In commencing this process, NCA contacted (i) over
30 parties interested in evaluating all of the hospital assets
of MedCath and (ii) eight parties regarding their specific
interest in HHNM as an individual asset. As a result, 20 parties
executed confidentiality agreements to receive a Confidential
Information Memorandum relating to all of the Companys
assets, and three parties executed confidentiality agreements to
receive a Confidential Information Memorandum only for HHNM. In
connection with its solicitation, Ardent indicated interest in
preparing a preemptive bid for HHNM. As a result, Ardent was
granted access to the dataroom for HHNM and was permitted, along
with its advisors, to conduct
on-site
due
diligence at HHNM during April and May 2010. During May 2010,
NCA and the Companys legal advisors negotiated the terms
of an asset purchase agreement whereby Ardents affiliate,
LHS, would purchase substantially all of the assets of HHNM.
On May 16, 2010, NCA notified representatives of the
Committee that LHS had substantially completed its due diligence
and that a purchase agreement, which provided for the purchase
by LHS of substantially all of the assets of HHNM for
$119,000,000 and the retention by HHNM of net working capital
amounts, had
35
been negotiated and was in substantially final form subject to
approval by the Board of Directors (the New Mexico
Purchase Agreement). LHS communicated to NCA that it
(i) had submitted its offer at the high end of its range of
values attributable to HHNM because of HHNMs strategic
importance to LHS and (ii) wanted to discourage the Company
from continuing to actively pursue alternative transactions
involving HHNM.
On May 18, 2010, NCA and representatives of the
Companys management met to review the proposed terms of
the LHS transaction with representatives of NMHI and SWCA, the
consent of both of which are required to approve a sale of HHNM.
In addition, that evening the board of directors of HHNM met and
received a presentation from Ardent management regarding
LHSs proposal and plans for HHNM. The board of directors
of HHNM agreed to reconvene on May 25, 2010 to further
discuss the proposal.
At the May 25, 2010 Board of Directors meeting, NCA
informed the Board of Directors and management that, in addition
to the LHS proposal, NCA had received two additional proposals
for HHNM. Of the three indications of interest received, NCA
noted LHSs proposed purchase price of $119,000,000
exceeded that of the other potential buyers other than that of
one potential buyer who had indicated a higher price for HHNM on
a preliminary basis; however NCA suggested there was likely
significant execution risk and hence lower probability of
realization because of uncertainty regarding the likelihood of
the interested party to actually close the transaction for
reasons including, among other reasons, that the offer was from
a foreign potential buyer that owned no hospitals in the United
States. The prospective higher bidder ultimately withdrew its
indication of interest as a result of its concerns relating to
physician ownership interests. Further, NCA noted that LHS had
agreed in principle to a favorable asset purchase agreement with
the Company, the terms of which NCA believed would likely be
difficult to obtain from another potential buyer. While the
proposed New Mexico Purchase Agreement provided that the Company
would retain pre-closing liabilities, it did not contain a
post-closing indemnification provision and did not include a
financing contingency for LHS. The Board of Directors discussed
with NCA and management the potential transaction with LHS as
well as transactions with other potential buyers.
In addition, at the May 25, 2010 meeting, the Board of
Directors discussed with NCA and management, the fact that the
terms of the Companys operating agreement for HHNM by and
among the Company and the HHNM Physicians provided that the
affirmative vote of each of NMHI, SWCA and the Company is
required to agree to a sale of substantially all of the assets
of HHNM. NCA indicated that this provision in the operating
agreement of HHNM could complicate any sale transaction
involving HHNM as the HHNM Physicians had indicated to the
Company that they (i) were satisfied with their existing
ownership arrangements in HHNM, (ii) preferred to continue
to hold those interests rather than sell HHNM as proposed by the
Company and (iii) had concerns regarding autonomy in
clinical decision making and a potential lack of input into
medical director appointments. The Board of Directors, NCA and
management discussed alternative transaction structures,
including the sale of the Companys equity interest in
HHNM; however, NCA noted that potential buyers of HHNM had
primarily expressed an interest in the acquisition of
substantially all of HHNMs assets and the resulting
benefits of owning 100% of same. Additionally, the Board of
Directors noted that the HHNM Physicians also hold certain
approval rights under the HHNM operating agreement with respect
to a potential purchaser of the Companys interest in HHNM.
The Company confirmed with its legal counsel that pursuant to
the terms of the HHNM operating agreement, NMHI and SWCA each
maintained discretionary voting rights for the approval or
disapproval of any asset sale of HHNM. Further, legal counsel
confirmed that New Mexico law contains no specific relief from
the HHNM Physicians voting rights set forth in the
operating agreement.
On May 25, 2010, the board of directors of HHNM met.
Representatives from SWCA and NMHI requested that an anticipated
vote on the LHS proposal be postponed in order to provide them
with additional time to evaluate the LHS proposal and to have
the opportunity to meet further with LHS to discuss the future
strategy, and respective governance and management
responsibilities that SWCA and NMHI might have with respect to
HHNM following the proposed transaction.
At the June 2, 2010 Board of Directors meeting, management
reported that certain of the HHNM Physicians had postponed a
vote on the proposed sale to LHS. The Board of Directors
discussed with NCA and management the proposed sale to LHS and
the process for seeking approvals needed from the HHNM
36
Physicians. The Board of Directors directed NCA to continue the
negotiations with LHS and to seek the approval of the HHNM
Physicians. In addition, the Board of Directors directed NCA to
move forward with the due diligence process for the other
interested parties and to continue to solicit additional
proposals. During June 2010, NCA received one additional
proposal for HHNM. On June 18, 2010, a previously
interested potential buyer withdrew its offer for HHNM, and on
July 11, 2010, the other then remaining potential buyer
withdrew its bid, leaving LHS as the sole remaining bidder for
the assets of HHNM at that time.
In July 2010, NCA continued to regularly update the Committee
regarding efforts being made to reach an agreement with the HHNM
Physicians to obtain their approval of the LHS transaction as
required by the HHNM operating agreement. Despite what the
Company viewed as a favorable purchase price, the HHNM
Physicians had not agreed to the sale based upon their expressed
desire to continue to own their interests in HHNM.
At the July 20, 2010 Board of Directors meeting, NCA noted
that the HHNM Physicians had indicated that they were still in
discussions with LHS and were not prepared to vote on the LHS
proposal at that time.
During its August 3, 2010 a meeting, the Board of Directors
discussed among other things, the status of the LHS transaction
and strategic options under consideration with respect to HHNM.
While discussions among HHNM Physicians and LHS were continuing,
the required approval from the HHNM Physicians had not been
obtained. In addition, an additional potential buyer submitted a
proposal for HHNM, although the proposal included a lower
purchase price than the LHS proposal and was subject to the same
approval requirements as the LHS proposal.
On August 12, 2010 a meeting of the members of HHNM was
held to vote on the LHS proposal. At that meeting, NCA discussed
the following points with the HHNM Physicians in an effort to
gain their support for the sale to LHS: (i) threats to
HHNMs position in the marketplace, (ii) the hospital
industrys trend towards consolidation, (iii) the
Legislative Reforms impact on reimbursement and
physician-owned hospital expansion, (iv) HHNMs
contingent liabilities, including those arising from the New
Mexico ICD Investigation and (v) limitations on HHNMs
ability to continue providing distributions to its members due
to its need to retain funds to pay possible liabilities and to
make anticipated capital expenditures at HHNM. At the end of the
member meeting, NMHI and SWCA abstained from voting, and
approval for the LHS proposal was not obtained. The HHNM
Physicians communicated that they were not willing to approve
the proposed sale to LHS, preferring instead to maintain their
existing ownership interest in HHNM. Because of the resistance
encountered from the HHNM Physicians, the Board of Directors
considered, and sought advice from NCA and its legal advisors
regarding, an alternative structure with LHS involving a sale of
the Companys equity interest in HHNM. However, the Board
of Directors determined that this was not a viable alternative
because the approval of that transaction by the HHNM Physicians
was still required under the terms of HHNMs operating
agreement since LHS was an in-market competitor of HHNM.
Due to the favorable terms offered by LHS which would inure to
the benefit of the Companys stockholders, and the refusal
to date of the HHNM Physicians to approve the sale to LHS, on
August 17, 2010, the Board of Directors, NCA and
management, in consultation with the Companys legal
advisors, discussed the allocation of net sales proceeds on a
non-pro rata basis which would increase the consideration
payable to the HHNM Physicians and decrease the amount payable
to the Company, in connection with the LHS sale in order to
obtain the approval of the HHNM Physicians. Following this
discussion, the Board of Directors instructed NCA to offer to
allocate approximately $11,000,000 of the Companys share
of sale proceeds to the HHNM Physicians in order to obtain the
affirmative vote of the HHNM Physicians (the HHNM Sale
Payment). See Background of the Sale
Proposals Agreements entered into granting MedCath
the authority to sell individual hospitals. This amount
was arrived at following discussion based upon the Board of
Directors and NCAs estimation of the additional
benefit it would take to obtain such approval from the HHNM
Physicians.
Following the offer of the HHNM Sale Payment, NMHI indicated
they would consent to the sale to LHS, however, SWCA continued
to withhold their consent. Through September, October and
November 2010, NCA and management continued negotiations with
SWCA, but were unsuccessful in reaching an agreement for their
37
collective approval of the proposed sale transaction with LHS
despite the offer to make the HHNM Sale Payment.
Though the board of directors of HHNM (with abstentions from
certain of the HHNM Physicians) approved the proposed sale of
the assets of HHNM to LHS on September 26, 2010, and
recommended such approval by HHNMs members (whose approval
was required to agree to the proposed asset sale transaction),
SWCA continued to withhold its approval of the proposed sale to
LHS. The HHNM Physicians withholding their approval continued to
express their desire to instead maintain their existing
ownership in HHNM.
At its meeting on September 28, 2010, the Board of
Directors, NCA and management discussed the feasibility of
alternative strategic options if an agreement could not be
reached with SWCA, including delaying the sale of HHNM and
exploring efforts to seek other buyers of HHNM, either in a
single hospital sale or as part of a sale of a several hospitals
owned by the Company. However, none of those options were viewed
as favorable when compared to the proposed sale to LHS, and
accordingly NCA was directed by the Board of Directors to
continue negotiations with SWCA.
In November 2010, NCA informed LHS of the refusal of SWCA to
approve the sale. As a result, efforts to finalize definitive
agreements with LHS were not pursued further, and LHS did not
continue its diligence efforts during this time period.
At the November 19, 2010 Board of Directors meeting, the
Board of Directors reviewed with NCA and management the possible
options for the sale of the Companys interest in HHNM:
(i) authorize an increase in the amount of the HHNM Sale
Payment; or (ii) explore alternative strategic options
involving a sale of the Companys equity interest in HHNM,
though NCA expressed concern that a sale of the Companys
equity interest on favorable terms to an alternative buyer might
be difficult because, among other reasons, the approval of each
of NMHI and SWCA would still be required and certain HHNM
Physicians were currently in favor of the sale to LHS. Following
further discussion with NCA and management, in consultation with
the Companys legal advisors, the Board of Directors
authorized NCA to increase the aggregate amount of the HHNM Sale
Payment to $15,000,000. That amount was determined by the Board
of Directors following discussion and based upon guidance from
NCA as to an estimated amount that might be a sufficiently
material increase to obtain approval of all of the HHNM
Physicians for the sale to LHS.
Despite this increased offer, NCA and the Company were still
unable to secure SWCAs approval of the LHS transaction.
SWCA again communicated to NCA that the offered increase in
consideration was not sufficient to obtain their approval and
that they preferred to remain an owner of HHNM.
On December 2, 2010, the Company received a letter from
Ardent formally terminating negotiations between LHS and the
Company with respect to HHNM since the necessary approval of the
HHNM Physicians had not been obtained. The letter, however,
indicated LHSs willingness to reenter negotiations if the
Company obtained authority to act on behalf of all of
HHNMs members.
In December 2010, one of the SWCA physicians agreed to further
discuss with NCA the proposed sale of HHNMs assets to LHS.
The SWCA physician communicated to NCA that it would take a
substantial additional increase in the amount of the HHNM Sale
Payment for SWCA to approve the sale to LHS.
On December 12, 2010, the Board of Directors met, with NCA
and management present, to discuss the sale of the assets of
HHNM. At this meeting, NCA indicated that based on its
discussions with one of the SWCA physicians, further increases
in the amount of consideration payable to the SWCA physicians in
connection with the sale of the assets of HHNM to LHS would be
necessary to obtain SWCAs approval. NCA further indicated
that based on its discussions with the representative from SWCA,
the total amount of the HHNM Sale Payment which would likely be
required to obtain all of the HHNM Physicians approvals
for the LHS sale transaction would equal a total of $22,000,000
and would be shared among the HHNM Physicians themselves
disproportionately to the HHNM Physicians relative equity
interests in HHNM. The HHNM Physicians were aware that the
additional consideration would not be shared pro rata. The HHNM
Sale Payment, a portion of which would be paid to NMHI and a
portion of which would be paid to individual members of SWCA,
would be in addition to the pro rata portion of the net sales
proceeds due at closing to the HHNM Physicians.
38
At the December 12, 2010 Board of Directors meeting, the
Board of Directors also discussed the benefits of the sale to
LHS relative to other strategic options available to the Company
in respect of HHNM. NCA reported that only a single alternative
preliminary offer for HHNM had been obtained during recent
months, and that preliminary offer represented less value to the
Company and its stockholders than the LHS sale transaction, even
following an assumed HHNM Sale Payment of $22,000,000 to the
HHNM Physicians. NCA reviewed the significant efforts undertaken
by NCA, management and the Companys legal advisors over
the last several months to attempt to reach a compromise with
the HHNM Physicians, noting the extensive efforts which had been
made to obtain their required approvals. NCA also noted that LHS
had withdrawn its previous offer, and that the possibility
remained that LHS would not recommit to the $119,000,000
purchase price for HHNM previously offered by LHS.
Following further discussion at its December 12, 2010
meeting, the Board of Directors authorized NCA to offer an
increase in the aggregate amount of the HHNM Sale Payment to a
total of $22,000,000 in exchange for the approval of and consent
to the LHS sale transaction from all of the HHNM Physicians. The
Board of Directors also directed NCA to seek confirmation of its
offer from LHS. In the event LHS was not willing to pursue a
transaction for HHNM on the same terms as previously discussed,
the Board of Directors determined that it would direct NCA to
again explore other alternative strategic options for HHNM and
the HHNM Sale Payment would be reconsidered.
Following further discussion in December 2010, SWCA indicated
that it would approve the LHS transaction and execute an
approval and consent to HHNMs sale of substantially all of
its assets to LHS pursuant to the negotiated terms described
above, which approval and consent provided for the payment of a
portion of the increased HHNM Sale Payment. At that time, NMHI
had not executed such an approval and consent, but had indicated
informally to NCA and the Companys legal advisors that
they would do so. The HHNM Physicians consents provide that:
(i) NMHI and SWCA approve and consent to the sale of HHNM
to LHS; (ii) NMHI and SWCA shall each receive a portion of
net proceeds from the sale in accordance with their percentage
membership interest in HHNM, as well as each receiving a portion
of the Sale Payment; (iii) NMHI and SWCA acknowledge that
the amount of their respective portions of the Sale Payment
materially differs and is disproportionate to their percentage
membership interest in HHNM; (iv) following the sale, the
hospital entity will have the right to create and retain
sufficient reserves from amounts otherwise due to the Company
and to the HHNM Physicians to pay retained HHNM debts,
liabilities, and obligations; and (v) NMHI and SWCA agree
that no agreement in connection with the sale to LHS is payment
for or contingent upon any patient referrals between the parties
or their affiliates, or provision of any item or medical
service. Further, the approvals and consents from the HHNM
Physicians provide that the physician parties have no obligation
to refer to HHNM or any health care facility owned or affiliated
with LHS. All such referrals will be based upon the
physicians professional medical judgment, the medical
needs of the patient and patient choice.
At the January 4, 2011 Board of Directors meeting, NCA
confirmed that LHS had reengaged in the due diligence process,
and would confirm its offer to acquire substantially all of the
assets of HHNM for $119,000,000, subject to updating its due
diligence of HHNM.
During January, February and March 2011, LHS and its advisors
updated their due diligence of HHNM. Additionally, during that
period the Company and LHS finalized the terms of the New Mexico
Purchase Agreement and related schedules for the sale. The
primary material changes to the New Mexico Purchase Agreement
required by LHS, and which were approved by the Board of
Directors, were (i) reimbursement by the Company of up to
$750,000 of LHSs
out-of-pocket
expenses in the event the stockholders of the Company did not
approve the proposed sale to LHS, and (ii) the payment to
LHS of a termination fee of $3,213,000 in the event that due to
the Board of Directors exercise of their fiduciary duties
the New Mexico Purchase Agreement is cancelled and HHNM is sold
to another purchaser within the following twelve month period.
At its March 1, 2011 meeting the Board of Directors
discussed the HHNM transaction with NCA, management and its
legal advisors.
39
On May 5, 2011, NMHI executed an approval and consent to
the sale to LHS following which the Company had the authority to
agree to a sale of substantially all of HHNMs assets to
LHS.
The Company asked Houlihan Lokey to determine whether it could
provide a fairness opinion with respect to the New Mexico Sale.
Houlihan Lokey was asked by the Company whether it would opine
not only as to whether the consideration to be received by the
limited liability company which owns the assets of HHNM (the
HHNM Seller) was fair to the HHNM Seller from a
financial point of view (the First Opinion), but
also whether (i) the amounts to be received by the Company
as a result of the New Mexico Sale, which includes both
consideration with respect to its approximately 75% membership
interest in the HHNM Seller and repayment by HHNM Seller of such
indebtedness which it owes to the Company, after payment of the
HHNM Sale Payment, is within the range of fair market value with
respect to the Companys interest in HHNM, and
(ii) whether the amount of the Sale Payment is reasonable
to the Company from a financial point of view (the
Additional Opinions).
Representatives of Houlihan Lokey expressed concern to the
Company as to whether the fairness or reasonableness of the
amount of the HHNM Sale Payment, which Houlihan Lokey believed
was an implicit part of the Additional Opinions, was susceptible
to financial analysis. Accordingly, representatives of Houlihan
Lokey informed the Company that Houlihan Lokey may not be able
to render such an opinion or opinions. Representatives of
Houlihan Lokey stated to the Company that the issue related to
Houlihan Lokeys views as to the accessibility of
information necessary to reach any opinion in this context; not
that it affirmatively believed the HHNM Sale Payment to be
unfair. Accordingly, representatives of Houlihan Lokey stated to
the Company that they understood how the Board of Directors, in
the exercise of its business judgment, could decide to proceed
with the New Mexico Sale, depending upon the specific facts at
hand. Representatives of Houlihan Lokey had previously stated to
the Company in June of 2010 that Houlihan Lokey would likely be
able to provide the First Opinion at that time. Houlihan Lokey,
however, did not complete the necessary bring down
analysis to form a view as to whether it would likely be able to
provide the First Opinion at any point during 2011. Because the
Board of Directors determined that it desired to have an
independent and qualified financial advisor address the issues
in the Additional Opinions as well as those in the First
Opinion, the Company and Houlihan Lokey agreed that Houlihan
Lokey would not be asked to provide any opinions with respect to
the New Mexico Sale.
The Board of Directors decided to discuss with SRR, a national
financial advisory firm, its qualifications to evaluate the
fairness of the New Mexico Sale. SRR had no prior relationship
with the Company. The Board of Directors determined that SRR was
an independent and qualified financial advisory firm with
extensive experience providing investment banking services and
fairness opinions. The Board of Directors noted that SRR
provides services to both public and private companies and had
experience providing financial advisory services to companies in
the healthcare industry. The Board of Directors discussed with
SRR its desire to have the issues contemplated by the Additional
Opinions evaluated in connection with its consideration of the
New Mexico Sale. SRR was willing to evaluate those issues and
the Board of Directors determined that they were qualified to do
so. Accordingly, SRR was retained with respect to the New Mexico
Sale as well as with respect to the sale of the Companys
interests in MedCath Partners and the Arkansas Sale.
On May 5, 2011, the Board of Directors received an opinion
from SRR on (i) whether the consideration to be received by
HHNM is fair from a financial point of view, (ii) whether
the consideration to be received by MedCath with respect to its
membership interest in HHNM combined with the repayment of the
intercompany debt due from HHNM as a result of the New Mexico
Sale is not less than fair market value, and (iii) whether
the HHNM Sale Payment to the HHNM Physicians pursuant to the
terms of the New Mexico sale is reasonable, from a financial
point of view. See Proposal No. 2
Sale of Substantially All of the Assets of Heart Hospital of New
Mexico Opinion of Stout Risius Ross, Inc. relating
to the New Mexico Sale below. Following discussion, the
Board of Directors approved the sale of substantially all of the
assets of HHNM to LHS pursuant to the terms of the
New Mexico Purchase Agreement.
The Company entered into the New Mexico Purchase Agreement with
LHS on May 6, 2011.
On May 24, 2011, the Board of Directors adopted resolutions
declaring the New Mexico Sale advisable and in the best interest
of our stockholders and recommending that the stockholders vote
in favor of the New Mexico Sale.
40
Reasons
for the New Mexico Sale
The Board of Directors approved and recommended to the
stockholders the New Mexico Sale as a result of its decision to
pursue strategic options in order to maximize stockholder value.
The Board of Directors determined that the New Mexico Sale
is in the best interests of our stockholders since, among other
things (i) the anticipated net proceeds to the Company from
the New Mexico Sale, even after giving effect to the HHNM Sale
Payment, are expected to exceed the net proceeds the Company
would have received from transactions contemplated by other
indications of interest which the Company had received in
respect of HHNM, and (ii) the Board of Directors believes
that the anticipated net proceeds to the Company from the New
Mexico Sale to LHS as herein described would exceed those that
would be obtained from LHS or any other potential buyer if a
sale of HHNM is delayed to a later date.
As part of the Board of Directors evaluation of the New
Mexico Sale, the Board of Directors considered the risks and
timing of each strategic option available to the Company, and
consulted with NCA, management and the Companys legal
advisors. In approving the New Mexico Sale, the Board of
Directors considered a number of factors, including but not
limited to the factors described elsewhere in this proxy
statement as well as the following factors:
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The viability of the Companys business model at present
and the significant costs that would be required to alter the
Companys current business structure;
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The determination by the Board of Directors, after conducting a
review of the Companys financial condition, evaluation of
the Companys strategic alternatives, prospects for the
sale of the Company as a whole or its remaining assets in
individual sales, the results of operations and the
Companys future business prospects, that continuing to
operate HHNM as a going concern is not reasonably likely to
create greater value for the stockholders than the value that
may be obtained for the stockholders pursuant to the New Mexico
Sale;
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The Companys inability to identify a potential buyer of
the entire Company in a merger or similar transaction despite
the Board of Directors publicly announced strategic review
process and NCAs efforts to locate such potential buyers,
including contacting 80 such potential buyers;
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That the New Mexico Sale will ultimately allow the Company to
distribute the maximum amount of cash to the Companys
stockholders from the sale of HHNM;
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The volatile state of the economy and the economic uncertainty
globally as well as within the healthcare industry, including
the impact of the Legislative Reforms on the Companys
business prospects;
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The net amounts which may be realizable by the Company from a
sale of HHNM; and
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The fact that the Board of Directors is seeking approval of the
New Mexico Sale by the affirmative vote of holders of a majority
of the voting power of the shares of the Companys common
stock entitled to vote thereon, which ensures that the Board of
Directors will not be taking action without the support of a
significant portion of the stockholders.
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The foregoing summarizes the material factors and risks
considered by the Board of Directors but it is in no way meant
to be exhaustive of the discussion and information considered by
the Board of Directors in connection with the New Mexico Sale.
In view of its many considerations, the Board of Directors did
not quantify or otherwise assign relative significance to any
factor considered. In addition, each member of the Board of
Directors may have given different significance to each factor.
Recommendation
of Board of Directors
The Board of Directors has unanimously determined that the terms
and conditions of the New Mexico Purchase Agreement and the
transactions contemplated thereby, including the New Mexico
Sale, are in the best interests of MedCath and its stockholders
and recommends a vote
FOR
the New Mexico Sale
pursuant to the terms of the New Mexico Purchase Agreement.
41
Opinion
of Stout Risius Ross, Inc. relating to the New Mexico
Sale
THE FOLLOWING IS A SUMMARY OF SRRS OPINIONS AND THE
METHODOLOGY THAT SRR USED TO RENDER ITS OPINIONS DATED MAY 5,
2011. THE FOLLOWING SUMMARY OF SRRS OPINIONS DOES NOT
PURPORT TO BE A COMPLETE DESCRIPTION OF THE ANALYSIS PERFORMED
BY SRR IN CONNECTION WITH SUCH OPINIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE WRITTEN OPINIONS
OF SRR ATTACHED TO THIS PROXY STATEMENT AS ANNEX C.
SRRS OPINIONS ARE DIRECTED TO THE BOARD OF DIRECTORS FOR
ITS BENEFIT AND USE IN EVALUATING: (I) WHETHER THE
CONSIDERATION TO BE RECEIVED BY HHNM PURSUANT TO THE NEW MEXICO
SALE IS FAIR TO HHNM FROM A FINANCIAL POINT OF VIEW;
(II) WHETHER THE CONSIDERATION TO BE RECEIVED BY MEDCATH
WITH RESPECT TO ITS MEMBERSHIP INTEREST IN HHNM COMBINED WITH
THE REPAYMENT OF THE INTERCOMPANY DEBT DUE FROM HHNM TO MEDCATH
AS A RESULT OF THE NEW MEXICO SALE IS NOT LESS THAN FAIR MARKET
VALUE; AND (III) WHETHER THE HHNM SALE PAYMENT TO BE PAID
TO THE HHNM PHYSICIANS PURSUANT TO THE TERMS OF THE NEW MEXICO
SALE IS REASONABLE, FROM A FINANCIAL POINT OF VIEW.
WE URGE YOU TO READ THE OPINIONS CAREFULLY AND IN THEIR ENTIRETY
FOR A DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS CONSIDERED,
QUALIFICATIONS, AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY SRR
IN RENDERING ITS OPINIONS.
SRRS OPINIONS RELATE ONLY TO: (I) THE FAIRNESS, FROM
A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE RECEIVED
BY HHNM PURSUANT TO THE NEW MEXICO SALE; (II) WHETHER THE
CONSIDERATION TO BE RECEIVED BY MEDCATH WITH RESPECT TO ITS
MEMBERSHIP INTEREST IN HHNM COMBINED WITH THE REPAYMENT OF THE
INTERCOMPANY DEBT DUE FROM HHNM TO MEDCATH AS A RESULT OF THE
NEW MEXICO SALE IS NOT LESS THAN FAIR MARKET VALUE; AND
(III) THE REASONABLENESS, FROM A FINANCIAL POINT OF VIEW,
OF THE HHNM SALE PAYMENT TO BE PAID TO THE HHNM PHYSICIANS
PURSUANT TO THE TERMS OF THE NEW MEXICO SALE. SRRS
OPINIONS DO NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
AS TO HOW THAT STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE
APPROVAL OF THE NEW MEXICO SALE. IN RENDERING ITS OPINIONS, SRR
DID NOT ADDRESS THE MERITS OF THE UNDERLYING DECISION BY THE
MEDCATH BOARD OF DIRECTORS TO ENGAGE IN THE NEW MEXICO SALE.
The Board of Directors and the Committee retained SRR by a
letter agreement dated March 2, 2011 to evaluate:
(i) whether the consideration to be received by HHNM
pursuant to the New Mexico sale is fair to HHNM, from a
financial point of view: (ii) whether the consideration to
be received by MedCath with respect to its membership interest
in HHNM combined with the repayment of the intercompany debt due
from HHNM to MedCath as a result of the New Mexico Sale is not
less than fair market value; and (iii) whether the HHNM
Sale Payment to be paid to the HHNM Physicians pursuant to the
New Mexico Sale is reasonable, from a financial point of view.
With respect to the evaluation requested in paragraph (iii), the
Board of Directors advised SRR that for purposes of SRRs
analyses, the HHNM Sale Payment may be considered by SRR to be
reasonable if (1) it does not cause the
proceeds that are received by MedCath to be less than the Fair
Market Value of the MedCaths interest in HHNM and
(2) it is within the range of empirical financial evidence.
At the meeting of the Board of Directors on May 5, 2011,
SRR rendered its oral opinions, subsequently confirmed in
writing as of May 5, 2011, that subject to and based upon
the various assumptions made, procedures followed, matters
considered, and limitations upon the review undertaken:
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1.
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the consideration to be received by the HHNM pursuant to the
terms of the New Mexico Sale is fair to HHNM from a financial
point of view;
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2.
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the consideration to be received by MedCath with respect to its
membership interest in HHNM combined with the repayment of the
intercompany debt due from HHNM to MedCath as a result of the
New Mexico Sale is not less than the fair market
value; and
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42
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3.
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the HHNM Sale Payment to be paid to the HHNM Physicians pursuant
to the terms of the New Mexico Sale is reasonable from a
financial point of view.
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The full text of SRRs opinions, dated May 5, 2011,
which sets forth, among other things, the various assumptions
made, procedures followed, matters considered, and limitations
upon the review undertaken by SRR, is attached as Annex C
to this proxy statement. You should read these opinions
carefully and in their entirety. This summary is qualified in
its entirety by reference to the full text of the opinions.
SRR was not requested to opine as to, and SRRs opinions do
not in any manner address: (i) MedCaths underlying
business decision to proceed with or effect the New Mexico Sale,
(ii) the terms of any agreements or documents related to,
or the form or any other portion or aspect of, the New Mexico
Sale, except as specifically set forth therein, (iii) the
fairness of any portion or aspect of the New Mexico Sale to the
holders of any class of securities, creditors or other
constituencies of MedCath, except as specifically set forth
therein, (iv) the fairness of the consideration received by
MedCath relative to the HHNM Sale Payment to be received by the
HHNM Physicians pursuant to the terms of the New Mexico Sale,
provided that this subsection is not intended to be a limitation
on the three opinions SRR provided in its fairness opinion
letter, or (v) the solvency, creditworthiness or fair value
of MedCath or any other participant in the New Mexico Sale under
any applicable laws relating to bankruptcy, insolvency or
similar matters. Further, SRR was not requested to consider, and
SRRs opinions do not address, the merits of the New Mexico
Sale relative to any alternative business strategies that may
have existed for MedCath or the effect of any other transactions
in which MedCath might have engaged, nor did SRR offer any
opinion as to the terms of the New Mexico Sale. Moreover, SRR
was not engaged to recommend, and SRR did not recommend, a New
Mexico Sale price, and SRR did not participate in the New Mexico
Sale negotiations. In arriving at its opinion, SRR was not
authorized to solicit, and did not solicit, interest from any
party with respect to the transaction, nor did SRR negotiate
with any party with respect to any such transaction.
Furthermore, no opinion, counsel or interpretation was provided
by SRR in matters that require legal, regulatory, accounting,
insurance, tax or other similar professional advice. SRR also
assumed, that the final executed form of the New Mexico Purchase
Agreement would not differ from the draft of the New Mexico
Purchase Agreement that SRR examined, that the conditions to the
New Mexico Sale as set forth in the New Mexico Purchase
Agreement will be satisfied, and that the New Mexico Sale will
be consummated on a timely basis in the manner contemplated by
the New Mexico Purchase Agreement.
In arriving at its opinions, SRR, among other things:
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Reviewed certain business and financial information relating to
HHNM that SRR deemed to be relevant;
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Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of HHNM furnished to SRR by MedCath;
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Concerning the two matters above, conducted discussions with
members of senior management and representatives of HHNM and
MedCath;
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Reviewed the consideration and valuation multiples for HHNM and
compared them with those of certain publicly traded companies
that SRR deemed to be relevant;
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Reviewed the results of operations of HHNM and compared them
with those of certain publicly traded companies that SRR deemed
to be relevant;
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Compared the proposed financial terms of the New Mexico Sale
with the financial terms of certain other transactions that SRR
deemed to be relevant;
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Participated in certain discussions among representatives of
MedCath, the Board and the Special Committee and their financial
and legal advisors;
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Reviewed drafts as of May 4, 2011 of the New Mexico
Purchase Agreement and certain related documents (the New
Mexico Transaction Documents); and
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Reviewed such other financial studies and analyses and took into
account such other matters as SRR deemed necessary, including
SRRs assessment of general economic, market and monetary
conditions.
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43
In rendering SRRs opinions, SRR assumed and relied upon
the accuracy and completeness of all financial and other
information that was publicly available, furnished by MedCath,
or otherwise reviewed by or discussed with SRR without
independent verification of such information and SRR assumed and
relied upon the representations and warranties of MedCath
contained in the draft New Mexico Purchase Agreement SRR
reviewed. SRR assumed, without independent verification, that
the financial forecasts and projections provided to them had
been reasonably prepared and reflect the best currently
available estimates and judgment of MedCaths management of
the future financial results of HHNM, and SRR relied upon such
projections in arriving at SRRs opinions. SRR was not
engaged to assess the reasonableness or achievability of such
forecasts and projections or the assumptions upon which they
were based, and SRR expressed no view as to the forecasts,
projections, or assumptions. SRR assumed that the New Mexico
Sale will be consummated on the terms described in the New
Mexico Purchase Agreement, without any waiver of any material
terms or conditions by MedCath or LHS. SRR also assumed that the
final forms of the New Mexico Transaction Documents will be
substantially similar to the last drafts reviewed by them.
While SRR participated in a site visit and facility tour of
HHNM, SRR did not conduct a physical inspection, independent
evaluation or appraisal of the HHNM facilities, assets or
liabilities, nor was it furnished with any such evaluation or
appraisal. SRRs opinion was necessarily based on business,
economic, market, and other conditions as they existed and could
be evaluated by SRR at the date of the opinion. SRR does not
have any obligation to update, revise, or reaffirm its opinion.
SRR assumed that all governmental, regulatory, or other consents
and approvals necessary for the consummation of the New Mexico
Sale would be obtained without any material adverse effect on
HHNM or the New Mexico Sale. SRRs opinions were
necessarily based upon economic, monetary, market, and other
conditions as they exist and could be evaluated by them as of
the time of its analysis.
The following summaries of SRRs financial analyses present
some information in tabular format. In order to fully understand
the financial analyses used by SRR, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Accordingly, the analyses listed in the tables and described
below must be considered as a whole. Considering any portion of
such analyses and the factors considered, without considering
all analyses and factors, could create a misleading or
incomplete view of the process underlying SRRs opinions.
SRR arrived at its opinions based upon the results of all
analyses undertaken by it and assessed as a whole and believes
the totality of the factors considered and performed by SRR in
connection with its opinions operated collectively to support
its determination as to the fairness of the New Mexico Sale from
a financial point of view. SRR did not draw, in isolation,
conclusions from or with regard to any one factor or method of
analysis.
SRR arrived at its opinions on the basis of the multiple
financial and comparative analyses described below. The
following summary is not a complete description of all of the
analyses performed and factors considered by SRR in connection
with its opinions, but rather is a summary of the material
financial analyses performed and factors considered by SRR. The
preparation of a fairness opinion and the other opinions offered
by SRR is a complex process involving subjective judgments and
is not necessarily susceptible to partial analysis. With respect
to the analysis of publicly traded companies and the analysis of
publicly disclosed mergers and acquisitions summarized below,
such analyses reflect selected companies, and not necessarily
all companies that may be considered relevant in evaluating HHNM
or the New Mexico Sale. In addition, no company used as a
comparison is either identical or directly comparable to HHNM or
the New Mexico Sale. These analyses involve complex
considerations and judgments concerning financial and operating
characteristics and other factors that could affect the public
trading or acquisition values of the companies concerned.
The estimates of HHNMs future performance provided by us,
as contained in or underlying SRRs analyses, are not
necessarily indicative of future results or values, which may be
significantly more or less favorable than those estimates. In
performing its analyses, SRR considered industry performance,
general business and economic conditions, and other matters,
many of which are beyond our control.
The New Mexico Sale consideration was determined through
negotiation between MedCaths Board of Directors, on the
one hand, and LHS on the other hand, and their respective
counsel and advisors, and the decision to recommend the New
Mexico Sale was solely that of the Board of Directors.
SRRs opinions and
44
financial analyses were only one of many factors considered by
the Board of Directors in its evaluation of the New Mexico Sale
and should not be viewed as determinative of the views of our
Board of Directors with respect to the New Mexico Sale or the
New Mexico Sale consideration.
Discounted Cash Flow Method.
SRR performed a
discounted cash flow analysis of HHNM as one input in comparing
the implied equity reference range for HHNM with the proposed
New Mexico Sale consideration. Typically, in such analyses,
discounted cash flow analyses are performed using a multi-year
financial forecast prepared by a companys management. In
performing its discounted cash flow analyses, SRR relied on
MedCath provided financial projections.
In preparing its discounted cash flow analysis, SRR estimated
the cash flows that HHNM could generate over the years 2011
through 2013 based upon managements forecast for fiscal
years 2011 through 2013. These cash flows were discounted to a
present value-equivalent using a range of discount rates of
12.50% to 13.50%, which was based upon HHNMs estimated
weighted average cost of capital, or WACC, and
residual year EBITDA exit multiples ranging from 5.5x to 6.5x.
The estimated WACC used in the analysis was based upon estimates
of HHNMs cost of equity capital, cost of debt capital, and
an assumed capital structure, all of which were based upon
information from various independent sources (including the
Board of Governors of the Federal Reserve, Morningstar, Inc.,
and Capital IQ, Inc.) concerning market risk-free interest
rates, market equity risk premiums, small stock risk premiums,
equity betas, and corporate bond rates. In addition, SRR also
incorporated a 2% company specific risk premium in its
calculation of HHNMs cost of equity capital. The company
specific risk premium reflects that HHNM primarily focuses on
cardiology and related procedures, making it less diversified
compared to typical hospitals and HHNM has a high concentration
of referrals as almost all patient admissions are connected to
fewer than 20 physicians. SRR calculated a range of residual
year EBITDA exit multiples, the selection of which was based
primarily on certain factors of HHNM as compared to the
guideline companies and guideline transactions.
Based on the assumptions above, the discounted cash flow method
indicated an implied enterprise value range for HHNM of
approximately $83.0 million to $97.5 million.
Guideline Company Method.
HHNMs primary
competitors include small, privately held hospitals as well as
hospitals managed by public companies that are located in the
Albuquerque, New Mexico metropolitan area and specialize mainly
in cardiology procedures. As a result, SRR was not able to find
any public companies directly comparable to HHNM in terms of
size, services offered, and markets served. However, SRR was
able to identify nine publicly traded companies operating in the
healthcare facilities industry for consideration in its
analysis. SRR compared selected available information of HHNM
with the corresponding data of those nine publicly traded
companies. These companies included MedCath Corporation,
Community Health Systems, Inc., Health Management Associates,
Inc., HealthSouth Corporation, Universal Health Services, Inc.,
Tenet Healthcare Corp., Kindred Healthcare, Inc., LifePoint
Hospitals, Inc., and HCA, Inc.
SRR reviewed multiples of enterprise value of the selected
companies, which were calculated as equity value, plus debt and
preferred stock, plus minority interests, less cash and
equivalents, divided by the selected companies earnings
before interest, taxes, and depreciation (commonly known as
EBITDA), for the latest twelve months (LTM), and next fiscal
year (NFY) estimates. Multiples for the selected companies were
based upon
20-day
average stock prices through May 2, 2011. Latest twelve
month financial data for the selected companies was obtained
from the companies most recent SEC filings. Estimates of
future performance were compiled from equity analyst estimates,
as provided by Reuters estimates. This analysis indicated the
following enterprise value (EV) multiples for the selected
companies.
45
Market
Multiples of the Guideline Companies
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EV (In millions of
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EV/NFY
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|
EV/LTM
|
|
Company
|
|
U.S. Dollars)
|
|
|
EBITDA
|
|
|
EBITDA
|
|
|
MedCath Corp.
|
|
$
|
197.3
|
|
|
|
7.3
|
x
|
|
|
6.1
|
x
|
Community Health Systems, Inc.
|
|
|
12,372.6
|
|
|
|
6.6
|
x
|
|
|
7.1
|
x
|
Health Management Associates Inc.
|
|
|
5,422.7
|
|
|
|
6.8
|
x
|
|
|
7.1
|
x
|
HEALTHSOUTH Corp.
|
|
|
4,170.4
|
|
|
|
9.3
|
x
|
|
|
9.2
|
x
|
Universal Health Services Inc.
|
|
|
8,893.2
|
|
|
|
7.3
|
x
|
|
|
9.7
|
x
|
Tenet Healthcare Corp.
|
|
|
7,581.1
|
|
|
|
6.4
|
x
|
|
|
6.7
|
x
|
Kindred Healthcare Inc.
|
|
|
1,262.3
|
|
|
|
3.5
|
x
|
|
|
5.5
|
x
|
Lifepoint Hospitals Inc.
|
|
|
3,401.1
|
|
|
|
6.4
|
x
|
|
|
6.4
|
x
|
HCA, Inc.
|
|
|
43,151.2
|
|
|
|
n/m
|
|
|
|
7.3
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
43,151.2
|
|
|
|
9.3
|
x
|
|
|
9.7
|
x
|
Low
|
|
|
197.3
|
|
|
|
3.5
|
x
|
|
|
5.5
|
x
|
Mean
|
|
|
9,605.8
|
|
|
|
6.7
|
x
|
|
|
7.2
|
x
|
Median
|
|
|
5,422.7
|
|
|
|
6.7
|
x
|
|
|
7.1x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In performing the guideline company method, SRR selected a range
of multiples below the median of the guideline companies for the
NFY and LTM periods. Specifically, SRR selected a range of NFY
EBITDA multiples of 5.5x to 6.5x and LTM EBITDA multiples of
5.5x to 6.5x. Key considerations in selecting these multiples
included:
|
|
|
|
|
All else held constant, investors are willing to pay a higher
price for shares in a larger company vis-à-vis a smaller
company. In this case, HHNM is smaller than the guideline
companies in terms of revenue and EBITDA.
|
|
|
|
HHNM primarily focuses on cardiology and related procedures,
making it less diversified compared to the guideline companies.
|
|
|
|
In addition, HHNM has a high concentration of referrals as
almost all patient admissions are connected to fewer than 20
physicians.
|
|
|
|
Everything else held constant, the higher the expected growth
rate for a company, the higher the applicable multiple.
HHNMs historical and projected growth rates in EBITDA are
below the median growth rates indicated by the range of
guideline companies.
|
SRR then applied the multiples derived from the selected
companies to the historical operating results of HHNM for the
latest twelve month period and next fiscal year estimates in
order to derive implied enterprise values for HHNM. This
analysis indicated an implied enterprise value range for HHNM of
approximately $82.5 million to $97.5 million.
Guideline Transaction Method.
While not all
transactions SRR researched were comparable to HHNM in terms of
size, services offered, and markets served, SRR was able to
identify 46 recent guideline transactions (with sufficient
disclosure of financial terms) involving the acquisition of a
hospital or similar healthcare facility for consideration in its
analysis. SRR compared selected information of HHNM with the
corresponding data of those 46 acquisitions.
Multiples for the selected transactions were based upon the
information available in the latest financial statements issued
prior to the transaction announcement date. Financial data for
the selected mergers and acquisitions was obtained from various
independent sources including Irving Levin Associates, Inc., and
Capital IQ, Inc. SRRs analysis of the enterprise value
multiples implied by the selected transactions is as follows.
46
Market
Multiples of the Selected Mergers and Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicated Multiples
|
Date
|
|
|
|
|
|
EV/LTM
|
|
EV/LTM
|
Announced
|
|
Target
|
|
Target Location
|
|
Revenue
|
|
EBITDA
|
|
1/30/08
|
|
Gottlieb Memorial Hospital
|
|
Melrose Park, IL
|
|
0.70x
|
|
n/a
|
2/1/08
|
|
Ouachita Community Hospital
|
|
West Monroe, LA
|
|
1.80x
|
|
5.0x
|
2/14/08
|
|
Summit Hospital
|
|
Phenix City, GA
|
|
n/a
|
|
n/a
|
3/2/08
|
|
Doctors Hospital
|
|
Columbus, GA
|
|
1.40x
|
|
n/m
|
3/5/08
|
|
The Specialty Hospital
|
|
Rome, GA
|
|
1.21x
|
|
6.4x
|
3/24/08
|
|
Dayton Heart Hospital
|
|
Dayton, OH
|
|
0.77x
|
|
5.5x
|
4/15/08
|
|
USC University Hospital
|
|
Los Angeles, CA
|
|
0.74x
|
|
8.2x
|
4/17/08
|
|
Hughston Orthopedic Hospital
|
|
Columbus, GA
|
|
0.81x
|
|
3.6x
|
5/13/08
|
|
Long Term Acute Care Hospital
|
|
Southeastern, MI
|
|
0.59x
|
|
n/a
|
5/14/08
|
|
Rush North Shore Medical Center
|
|
Skokie, IL
|
|
0.95x
|
|
n/m
|
5/20/08
|
|
Condell Medical Center
|
|
Libertyville, IL
|
|
0.58x
|
|
n/a
|
5/28/08
|
|
Humphreys County Memorial Hospital
|
|
Belzoni, MS
|
|
0.33x
|
|
n/m
|
6/20/08
|
|
Moreno Valley Community Hospital
|
|
Helmet, CA
|
|
0.47x
|
|
n/m
|
7/1/08
|
|
Two California hospitals
|
|
Garden Grove, CA
|
|
0.39x
|
|
n/a
|
7/1/08
|
|
Tarzana Campus
|
|
Tarzana, CA
|
|
1.64x
|
|
n/m
|
7/16/08
|
|
Chatham Hospital
|
|
Siler City, NC
|
|
2.42x
|
|
n/m
|
8/15/08
|
|
Portneuf Medical Center
|
|
Pocatello, ID
|
|
1.36x
|
|
n/a
|
8/17/08
|
|
Pascack Valley Hospital
|
|
Westwood, NJ
|
|
0.94x
|
|
n/m
|
8/20/08
|
|
Wyoming Valley Healthcare System
|
|
Wilkes-Barre, PA
|
|
0.79x
|
|
7.9x
|
8/28/08
|
|
Southwest Regional Medical Center
|
|
Little Rock, AR
|
|
0.61x
|
|
n/m
|
9/12/08
|
|
Massachusetts LTACs
|
|
Braintree, MA
|
|
0.62x
|
|
n/m
|
10/31/08
|
|
Three Rivers Hospital
|
|
Waverly, TN
|
|
0.43x
|
|
7.8x
|
11/4/08
|
|
Starke Memorial Hospital
|
|
Knox, IN
|
|
n/m
|
|
6.5x
|
11/6/08
|
|
Doctors Hospital of Opelousas
|
|
Opelousas, LA
|
|
0.42x
|
|
n/m
|
12/22/08
|
|
Samaritan Hospital
|
|
Lexington, KY
|
|
1.23x
|
|
n/m
|
1/7/09
|
|
Presbyterian Hospital of Denton
|
|
Denton, TX
|
|
0.71x
|
|
6.9x
|
1/14/09
|
|
Palmetto Health Baptist Easley
|
|
Easley, SC
|
|
1.18x
|
|
n/m
|
2/2/09
|
|
Siloam Springs Memorial Hospital
|
|
Siloam Springs, AR
|
|
1.17x
|
|
9.9x
|
2/2/09
|
|
Rockdale Medical Center
|
|
Conyers, GA
|
|
0.74x
|
|
n/m
|
3/27/09
|
|
Prince William Health System
|
|
Manassas, VA
|
|
1.09x
|
|
n/m
|
4/2/09
|
|
Medina General Hospital
|
|
Medina, OH
|
|
0.56x
|
|
13.9x
|
6/1/09
|
|
Amsterdam Memorial Hospital
|
|
Amsterdam, NY
|
|
0.79x
|
|
n/m
|
6/29/09
|
|
Shore Health Services
|
|
Nassawadox, VA
|
|
1.07x
|
|
n/m
|
7/8/09
|
|
Jewish Hospital
|
|
Cincinnati, OH
|
|
0.79x
|
|
3.9x
|
8/14/09
|
|
Sparks Health System
|
|
Fort Smith, AR
|
|
0.60x
|
|
n/m
|
11/3/09
|
|
Triumph Healthcare
|
|
Houston, TX
|
|
1.30x
|
|
6.3x
|
12/3/09
|
|
Long-Term Acute Care Hospital
|
|
Dallas, TX
|
|
n/a
|
|
n/a
|
1/28/10
|
|
Cabrini Medical Center
|
|
New York, NY
|
|
2.08x
|
|
n/a
|
4/9/10
|
|
Mountain View Hospital, LLC
|
|
Idaho Falls, ID
|
|
0.94x
|
|
5.6x
|
4/30/10
|
|
Sumner Regional Health Systems
|
|
Gallatin, TN
|
|
1.04x
|
|
n/a
|
5/16/10
|
|
Psychiatric Solutions, Inc.
|
|
Franklin, TN
|
|
1.70x
|
|
9.8x
|
6/18/10
|
|
Regency Hospital Company, LLC
|
|
Alpharetta, GA
|
|
0.56x
|
|
7.6x
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicated Multiples
|
Date
|
|
|
|
|
|
EV/LTM
|
|
EV/LTM
|
Announced
|
|
Target
|
|
Target Location
|
|
Revenue
|
|
EBITDA
|
|
8/23/10
|
|
Vista Healthcare
|
|
Sacramento, CA
|
|
1.19x
|
|
6.6x
|
10/5/10
|
|
Center for Wound Healing
|
|
Tarrytown, NY
|
|
1.15x
|
|
n/m
|
11/12/10
|
|
Tenet Healthcare Corporation
|
|
Dallas, TX
|
|
0.76x
|
|
7.1x
|
2/7/11
|
|
Kindred Healthcare
|
|
Louisville, KY
|
|
0.95x
|
|
7.7x
|
Low
|
|
|
|
0.33x
|
|
3.6x
|
|
|
|
|
|
|
|
High
|
|
|
|
|
|
2.42x
|
|
13.9x
|
Mean
|
|
|
|
|
|
0.97x
|
|
7.2x
|
Median
|
|
|
|
|
|
0.81x
|
|
6.9x
|
|
|
|
|
|
|
|
|
|
Similar to the results of the guideline company method, SRR
selected a range of LTM EBITDA multiples below the median of the
range of the guideline transactions. SRR selected a range of net
sales multiples above the median of the transactions due to
HHNMs above average profitability. Specifically, SRR
selected a range of LTM EBITDA multiples of 5.5x to 6.5x and LTM
net sales multiples of 1.05x to 1.25x.
SRR then applied the multiples derived from the selected
companies to the historical operating results of HHNM for the
latest twelve months in order to derive implied enterprise
values for HHNM. This analysis indicated an implied enterprise
value range for HHNM of approximately $83.0 million to
$98.5 million.
Reconciliation of Valuation Methodologies.
As
discussed previously, SRR performed a discounted cash flow
analysis, guideline company method, and guideline transaction
method as inputs in comparing the enterprise value reference
range for HHNM. These analyses indicated an enterprise value
range for HHNM of $83.0 to $98.0 million.
Fairness
of Consideration to HHNM
SRR advised the Board of Directors that in its opinion, the
consideration offered in the New Mexico Sale of
$119 million, plus working capital adjustments, is above
SRRs enterprise value reference range for HHNM. Based
thereon and on other factors, SRR offered its opinion that the
consideration to be received by HHNM pursuant to the New Mexico
Sale is fair, from a financial point of view.
Comparison
of Consideration to MedCath to Fair Market Value
SRR advised the Board of Directors that in its opinion, after
adjustments to enterprise value, the indicated fair market value
of equity and loans reference range for MedCaths equity
and loans in HHNM is $73.0 million to $84.0 million as
compared to the consideration of $80.8 million expected to
be received by MedCath with respect to its membership interest
in HHNM combined with the repayment of the intercompany debt due
from HHNM to MedCath as a result of the New Mexico Sale. As a
result, the consideration to be received by MedCath with respect
to its membership interest in HHNM combined with the repayment
of the intercompany debt due from HHNM to MedCath as a result of
the New Mexico Sale is not less than the fair market value. The
chart below highlights the low and high estimates of the fair
market value of MedCaths equity and loans in HHNM.
48
Valuation
Summary
|
|
|
|
|
|
|
|
|
|
|
Indicated Range of Value as of 5/02/11
|
|
|
|
In thousands of
|
|
|
|
U.S. dollars
|
|
|
Concluded Enterprise Value
|
|
$
|
83,000
|
|
|
$
|
98,000
|
|
Less: Interest-Bearing Debt
|
|
|
(30,477
|
)
|
|
|
(30,477
|
)
|
Add: Cash and Cash Equivalents
|
|
|
12,694
|
|
|
|
12,694
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments to Enterprise Value
|
|
|
(17,783
|
)
|
|
|
(17,783
|
)
|
|
|
|
|
|
|
|
|
|
Marketable, Controlling-Interest Value of Equity
|
|
$
|
65,000
|
|
|
$
|
80,000
|
|
Multiplied by: MedCaths Ownership in HHNM
|
|
|
74.8
|
%
|
|
|
74.8
|
%
|
|
|
|
|
|
|
|
|
|
Fair Market Value of MedCaths Equity Ownership in
HHNM
|
|
$
|
48,500
|
|
|
$
|
60,000
|
|
Add: Loans from MedCath
|
|
|
24,312
|
|
|
|
24,312
|
|
|
|
|
|
|
|
|
|
|
Fair Market Value of Equity Interest and Loans
|
|
$
|
73,000
|
|
|
$
|
84,000
|
|
|
|
|
|
|
|
|
|
|
Reasonableness
of HHNM Sale Payment to be Paid to HHNM Physicians
MedCath requested that SRR determine if the HHNM Sale Payment to
be paid to the HHNM Physicians pursuant to the New Mexico Sale
is reasonable from a financial point of view. MedCath advised
SRR that for purposes of SRRs analyses, the HHNM Sale
Payment may be considered by SRR to be reasonable if
(1) it does not cause the proceeds that are received by
MedCath to be less than the Fair Market Value of MedCaths
interest in HHNM and (2) it is within the range of
empirical financial evidence.
SRR advised the Board of Directors that in its opinion, based on
the terms of the New Mexico Sale, the HHNM Sale Payment
represents an 84% premium above the HHNM Physicians
expected pro rata proceeds from the New Mexico Sale.
SRR reviewed 92 transactions (with meaningful results) that
occurred over the last fifteen years involving a majority
stockholder increasing its ownership stake in its current
investment in a publicly-traded company. These transactions
offer market evidence of premiums that a controlling stockholder
was willing to pay to minority stockholders in public companies.
Since the HHNM Physicians have a high degree of control, in that
they can block a transaction (which is more control than those
of the minority stockholders in these transactions), SRR paid
specific attention to the transactions with premiums in the top
quintile of the range.
The premiums paid in the top quintile of the transactions (18
transactions) ranged from a low of 50.7% to a high of 183.3%,
with an average and median premium of 92% and 81.4%,
respectively.
SRR advised the Board of Directors that in its opinion, the 84%
premium for the HHNM Sale Payment to be paid to the HHNM
Physicians pursuant to the New Mexico Sale is within the range
of this data. SRR was also of the view that qualitative factors,
such as the fact MedCath went through a fully vetted sale
process, and that the HHNM Physicians consent was required
to move forward with the New Mexico Sale, also supported the
conclusion that the HHNM Sale Payment to be paid to the HHNM
Physicians pursuant to the New Mexico Sale was reasonable from a
financial point of view.
Miscellaneous.
Under the terms of its
engagement, we have agreed to pay SRR a fee for its financial
advisory services in connection with the transaction, of which a
portion was payable in advance and the balance was payable prior
to the delivery of SRRs conclusions. In the past, SRR has
provided financial services to the Company and its affiliates
and was compensated for those services. SRRs compensation
was neither based upon nor contingent on the results of its
engagement or the consummation of any transaction. We have also
agreed to reimburse SRR for expenses reasonably incurred by SRR
in performing its services, including fees and expenses of its
legal counsel, and to indemnify SRR and related persons against
liabilities, including liabilities under the federal securities
laws, arising out of its engagement.
49
The Board of Directors selected SRR as its financial advisor in
connection with the New Mexico Sale because SRR is a financial
advisory firm with experience in similar transactions. SRR is
engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, and
private placements.
The foregoing summary describes the material analyses performed
by SRR but does not purport to be a complete description of the
analyses performed by SRR. Copies of SRRs opinions have
been attached as exhibits to this proxy. The opinions will be
available for any interested stockholder of the Company (or any
representative of the stockholder who has been so designated in
writing) to inspect and copy at the Companys principal
executive offices during regular business hours. Alternatively,
you may inspect and copy the opinions at the office of, or
obtain them by mail from, the SEC.
Material
U.S. Federal Income Tax Consequences of the New Mexico
Sale
The Company expects that the amount of federal and state income
taxes that it will ultimately pay as a result of the New Mexico
Sale will be between $17,000,000 and $19,000,000. However, the
Company expects that losses it expects to incur after the New
Mexico Sale will result in either a significant offset against
the gain on this Sale and other sales recognized in fiscal 2011,
or a significant refund of federal and state income taxes
incurred as a result of this Sale and the other sales occurring
in the fiscal 2011. If, however, there should be an
ownership change, as that term is defined in
Section 382 of the Internal Revenue Code, after the New
Mexico Sale, such offset or refund of income taxes may be
substantially reduced. The Company believes that an ownership
change is unlikely to occur; in part because the Company has
adopted a stockholders rights plan that should discourage
certain of the activities that could cause an ownership change
to occur. See the Companys current report on
Form 8-K
filed on June 15, 2011 regarding the Section 382
Rights Plan.
Accounting
Treatment of the New Mexico Sale
The New Mexico Sale will be accounted for as a sale
by MedCath, as that term is used under generally accepted
accounting principles, for accounting and financial reporting
purposes.
Government
Approvals
Under the HSR Act and the rules promulgated under it by the FTC,
the New Mexico Sale cannot be completed until notifications have
been given and certain information has been furnished to the FTC
and the Antitrust Division and the specified waiting periods
have expired or been terminated. The Company and Ardent filed
notification and report forms under the HSR Act with the FTC and
the Antitrust Division on May 13, 2011.
At any time before or after completion of the New Mexico Sale,
the Antitrust Division or the FTC or any state could take such
action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin
the completion of the New Mexico Sale, to rescind the New Mexico
Sale or to seek divestiture of particular assets of the Company
or LHS or Ardent. Private parties may also seek to take legal
action under the antitrust laws under certain circumstances. A
challenge to the New Mexico Sale on antitrust grounds may be
made, and, if such a challenge is made, it is possible that the
Company and LHS will not prevail.
Under the New Mexico Purchase Agreement, each of the Company and
LHS has agreed to use commercially reasonable efforts to
cooperate with one another and to oppose any preliminary
injunction sought by any governmental entity preventing the
consummation of the New Mexico Sale.
The Company received notice of early termination of the
applicable waiting period from the FTC on May 27, 2011.
Although we do not expect regulatory authorities to raise any
significant objections in connection with their review of the
New Mexico Sale, we cannot assure you that we will obtain all
required regulatory approvals or that any such regulatory
approvals will not contain terms, conditions or restrictions
that would be detrimental to the Company or LHS.
50
No
Appraisal Rights
Under the DGCL, appraisal rights are not available to
stockholders in connection with this transaction.
Interests
of Certain Persons in the New Mexico Sale
The Board of Directors approval of the New Mexico Purchase
Agreement and the transactions contemplated thereby, including
the New Mexico Sale, included consideration of whether members
of the Board of Directors or our executive officers had
interests in the New Mexico Sale that are different from, or in
addition to, the interests of MedCaths stockholders
generally. For a description of these different or additional
interests, if any, see Interests of Certain Persons in
Matters to be Acted Upon.
The New
Mexico Purchase Agreement
The following discussion is qualified in its entirety by
reference to the New Mexico Purchase Agreement, a copy of which
is attached hereto as Annex A. You should read the New
Mexico Purchase Agreement carefully because it, and not this
description, governs the New Mexico Sale. Except for its status
as a contractual document that establishes and governs the legal
relations among the parties thereto with respect to the
New Mexico Sale, we do not intend for its text to be a
source of factual, business or operational information about us.
The New Mexico Purchase Agreement contains representations,
warranties and covenants that are qualified and limited,
including by information in the disclosure schedules referenced
in the New Mexico Purchase Agreement that the parties delivered
in connection with the execution of the New Mexico Purchase
Agreement. Representations and warranties may be used as a tool
to allocate risks between the respective parties to the New
Mexico Purchase Agreement, including where the parties do not
have complete knowledge of all facts, instead of establishing
such matters as facts. Furthermore, the representations and
warranties may be subject to different standards of materiality
applicable to the contracting parties, which may differ from
what may be viewed as material to our stockholders. These
representations may or may not have been accurate as of any
specific date and do not purport to be accurate as of the date
of this proxy statement. Moreover, information concerning the
subject matter of the representations and warranties may have
changed since the date of the New Mexico Purchase Agreement and
subsequent developments or new information qualifying a
representation or warranty may have been included in this proxy
statement. You should not rely on the representations,
warranties or covenants in the New Mexico Purchase Agreement as
characterizations of the actual state of facts or condition of
MedCath or any of the parties thereto, including MedCath, its
subsidiaries or any of MedCaths affiliates.
Description
of Assets to be Sold and Retained
Under the New Mexico Purchase Agreement, we will sell to LHS the
following assets (the Purchased Assets) held or used
in the business or operation of the hospital, free and clear of
all encumbrances except certain limited permitted encumbrances,
including the following items:
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All furniture and equipment;
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Good and marketable title and rights in fee simple absolute to
the real property owned by HHNM and all plants, buildings,
structures, improvements, construction in progress,
appurtenances, covenants, easements, servitudes and fixtures
situated thereon;
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Interest in contracts relating to leased real property;
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Certain contracts in respect of the Purchased Assets and
contracts representing capital lease obligations of HHNM;
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All permits and approvals issued or granted by governmental
entities to the extent assignable under applicable law;
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All computer hardware, certain software and data processing
equipment owned by HHNM or used primarily in the business or
operation of HHNM or the operation of the Purchased Assets, and,
to the
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extent transferable, all rights in all warranties of any
manufacturer or vendor with respect to the hardware, software
and data processing equipment;
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All inventory;
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Assumable prepaid expenses, claims for refunds and rights to
offset related to prepaid assets;
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To the extent assignable, all financial, patient and medical
staff records held or used by HHNM primarily or exclusively in
the business or operation of the hospital;
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All intellectual property, including HHNMs rights in the
name Heart Hospital of New Mexico;
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HHNMs goodwill in respect of the Purchased Assets and the
hospital; and
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All records related to the business, operation or ownership of
the hospital.
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We will retain the following assets (the Excluded
Assets):
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All restricted and unrestricted cash and cash equivalents,
including investments in marketable securities, certificates of
deposit, bank accounts and promissory notes, except to the
extent such assets are included in the determination of net
working capital;
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All group contracts entered into by MedCath for the benefit of
HHNM and one or more of HHNMs affiliates, contracts with
managed care organizations, health maintenance organizations,
insurers and similar third party payors, certain contracts that
are not de minimis contracts that relate to the operations of
the hospital and certain other scheduled contracts;
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The corporate record books, minute books and corporate seals and
all records of any kind that HHNM is required by law to retain;
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Any claims or rights against third parties related to the
Purchased Assets (including the contracts assumed by LHS),
accruing or arising prior to the closing, except as otherwise
included in the net working capital calculation or to the extent
such claim relates to periods after the closing;
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All rights to settlement and retroactive adjustments, if any,
for open cost reporting periods ending on or prior to the
closing date (whether open or closed) arising from or against
the U.S. Government under the terms of the Medicare program
or TRICARE and against any state under its Medicaid program and
against any third-party payor programs that settle on a cost
report basis;
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All rights of HHNM under the New Mexico Purchase Agreement and
related agreements;
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All claims for tax refunds and all other tax assets for periods
prior to the closing and the supporting tax returns and
tax-related books and records;
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All data processing equipment, proprietary computer software and
intellectual property utilized in connection with the provision
of services by affiliates of HHNM for the benefit of HHNM, and,
in the case of software, all software unless specifically
included as a Purchased Asset;
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All accounts receivable of HHNM and other rights of payment in
connection with the operation of the hospital on or prior to
closing;
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The names and symbols used in connection with HHNM and the
Purchased Assets, including the name MedCath or any
variants, or any other names proprietary to HHNM or its
affiliates, other than Heart Hospital of New Mexico;
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Any proprietary information contained in HHNMs employee or
operation manuals or any films or videos used by HHNM for
operational or training purposes;
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All intercompany accounts;
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All insurance proceeds arising in connection with the operation
of the hospital or the Purchased Assets prior to closing,
subject to certain limitations set forth in the New Mexico
Purchase Agreement;
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All assets used by HHNM and its affiliates in rendering
corporate services located outside of the hospital, except to
the extent such assets are reflected in the net working capital
calculation;
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Any assets used or operated by MedCath on a company-wide or
region-wide basis, unless such assets are reflected in the net
working capital calculation;
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All assets disposed of or exhausted prior to closing, including
inventory, prepaid expenses and furniture and equipment, except
to the extent such assets are reflected in the net working
capital calculation; and
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All provider numbers and related agreements related to any
government programs and TRICARE.
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Liabilities
to be Assumed and Retained
Under the New Mexico Purchase Agreement, LHS will assume the
future payment and performance of the following liabilities of
HHNM and its affiliates (the Assumed Liabilities):
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All obligations and liabilities that arise or accrue after
closing under the contracts assumed by LHS;
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Certain capital lease obligations of HHNM;
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Prorated valorem and personal property taxes payable for the
calendar year in which the closing occurs;
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Obligations and liabilities as of the closing date in respect of
(i) accrued paid time off of employees of HHNM hired by LHS
following the closing and accrued extended service recognition
leave (including employer FICA and any other estimated employer
taxes thereon) of employees of HHNM hired by LHS having six
(6) years of eligibility service with HHNM, but only to the
extent such accrued paid time off is included in the
determination of net working capital and (ii) COBRA
obligations to current and former employees of the hospital to
the extent required by applicable law; and
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Any state and local transfer, sales and recording fees and
similar taxes which may arise upon closing (excluding taxes
measured by income or gain).
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The Purchaser is not assuming any liabilities other than those
expressly set forth in the New Mexico Purchase Agreement (the
Excluded Liabilities). The liabilities to be
retained by HHNM include the following:
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Current liabilities, accounts payable, long-term liabilities and
all indebtedness and obligations or guarantees of HHNM, except
to the extent such liabilities are reflected in the purchase
price adjustment calculations in respect of either the capital
lease obligations or the net working capital calculation;
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Any obligation or liability accruing or arising during the
period prior to closing in connection with (i) any assumed
contract (other than that which may arise from the failure to
obtain the consent of the counter-party thereto), (ii) the
operation of the hospital, including all malpractice and general
liability claims, whether or not the same are pending,
threatened, known or unknown prior to closing, or (iii) any
governmental programs or other third-party payor programs,
including recoupment of previously paid or reimbursed amounts,
and any cost report settlement payables relating to all cost
report periods ending on or prior to the closing;
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Any obligation or liability accruing, arising out of or relating
to any contracts retained by HHNM;
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Tax obligations for periods ending on or prior to the closing
and tax obligations of HHNM and its affiliates resulting from
the consummation of the New Mexico Sale (other than ad valorem
and personal property taxes and state and local transfer, sales
and recording fees and taxes which may arise upon the
consummation of the New Mexico Sale) that are not reflected in
the net working capital calculation and federal, state and local
income taxes resulting from the New Mexico Sale;
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Any obligation or liability for claims by or on behalf of
employees of HHNM and its affiliates relating to periods prior
to closing, including liability for any pension, profit sharing,
deferred compensation, or any other employee health and welfare
benefit plans, liability for any EEOC claim, wage and hour
claim, unemployment compensation claim or workers
compensation claim, and liability for all
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employee wages and benefits, including accrued vacation and
holiday pay and taxes or other liability related thereto in
respect of employees of HHNM and its affiliates, except to the
extent that accruals for such obligations are included in the
net working capital calculation;
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Any obligation or liability accruing, arising out of or relating
to the New Mexico ICD Investigation;
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Any obligation or liability accruing, arising out of or relating
to any federal, state or local investigations of, or claims or
actions against, HHNM or any of its affiliates or any of their
employees, medical staff, agents, vendors or representatives
which existed or occurred prior to closing; and
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Any obligation or liability accruing, arising out of or relating
to any violation of, or non-compliance with, law pertaining to
the Purchased Assets, the hospital or the operation thereof,
which existed or occurred prior to closing.
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Purchase
Price
As consideration for the Purchased Assets, LHS will assume the
liabilities described above and will pay us $119,000,000 in cash
and we will retain our accounts receivable, subject to the
following two adjustments:
(a) The purchase price will be adjusted positively or
negatively by the net amount of certain assets as of closing.
For purposes of this calculation in the New Mexico Purchase
Agreement, those assets include, with respect to HHNM as of the
date of determination, the sum of (i) the sum of the
amounts reflected in the entries (or line items) on the
applicable balance sheet entitled
(A) Inventories (comprised in all material
respects of inventory used or useful in respect of the hospital,
with obsolete items written off) and (B) Prepaid
expenses (limited to prepaid expenses useable by LHS after
the closing in the operation of the hospital) minus
(ii) the amounts reflected in the entries (or line items)
on the applicable balance sheet entitled Accrued paid time
off for employees; and
(b) The purchase price will be reduced by the aggregate
amount of outstanding capital lease obligations of HHNM as of
the closing date.
The
Closing
The closing of the asset sale will take place as soon as
possible following the satisfaction or waiver by the appropriate
party of all the conditions precedent to closing specified in
Articles 8 and 9 in the New Mexico Purchase Agreement,
including approval of the New Mexico Sale by our stockholders.
The parties shall use commercially reasonable efforts to cause
the conditions set forth in the New Mexico Purchase Agreement to
be satisfied so that the closing will occur on or before
July 31, 2011.
Representations
and Warranties
In the New Mexico Purchase Agreement, LHS has made
representations and warranties to us, including with respect to
the matters set forth below:
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Organization, qualification and capacity;
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Absence of conflicts or violations under the certificate of
incorporation, governing documents, governmental authorization
and third party consents;
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Enforceability;
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Sufficiency of financial resources;
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Absence of litigation that has or could affect the New Mexico
Purchase Agreement or the transaction contemplated thereby;
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Voluntary and independent nature of determination to enter into
the New Mexico Sale;
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Absence of any untrue statement of a material fact or omission
to state any material fact necessary to make the statements made
in the New Mexico Purchase Agreement not misleading;
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No other express or implied representations or
warranties; and
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No agreement in connection with the HHNM Asset Sale is payment
for or contingent upon any patient referrals between the parties
or their affiliates or provision of any item or service, and no
physician (or immediate family member of a physician) receiving
any benefit from the HHNM Asset Sale has any obligation to refer
patients to the parties or their affiliates and all such
referrals are based upon the physicians professional
medical judgment, the medical needs of the patient, and patient
choice.
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In the New Mexico Purchase Agreement, HHNM has made
representations and warranties to LHS, including with respect to
the matters set below:
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Incorporation, qualification and capacity;
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Absence of conflicts or violations under the certificate of
limited partnership or limited partnership agreement,
governmental authorization and third party consents;
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Subsidiaries and other interests;
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Outstanding rights related to the Purchased Assets;
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Enforceability;
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Accuracy and completeness of certain of our financial statements
and the absence of undisclosed liabilities;
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Permits and approvals;
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Intellectual property;
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Medicare participation and accreditation, including with respect
to billing practices and Joint Commission accreditation;
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Regulatory compliance;
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Material contracts;
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Encumbrances on the Purchased Assets;
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Real property and encumbrances thereon;
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Title to Purchased Assets;
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Insurance;
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Employee benefit plans;
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Hospital employees and employee relations;
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Litigation;
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Tax matters;
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Environmental matters;
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Absence of changes in connection with the hospital and the
Purchased Assets since September 30, 2010;
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Medical staff matters;
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Sufficiency of Purchased Assets;
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Absence of experimental procedures at the hospital;
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Inventory;
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Third party payor cost reports;
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Compliance program;
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Absence of any untrue statement of a material fact or omission
to state any material fact necessary to make the statements made
in the New Mexico Purchase Agreement not misleading;
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No agreement in connection with the HHNM Asset Sale is payment
for or contingent upon any patient referrals between the parties
or their affiliates, or provision of any item or service, and no
physician (or immediate family member of a physician) receiving
any benefit from the HHNM Asset Sale has any obligation to refer
patients to the parties or their affiliates and all such
referrals are based upon the physicians professional
medical judgment, the medical needs of the patient, and patient
choice; and
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No other representations or warranties.
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Certain
Covenants
The New Mexico Purchase Agreement contains certain covenants and
agreements of HHNM relating to both the periods prior to and
after closing. These covenants include agreements to:
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Prior to the closing date, provide reasonable access to
information to LHS and additional financial and operational
information upon request, to the extent permitted by law and
subject to certain limitations set forth in the New Mexico
Purchase Agreement;
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Use commercially reasonable efforts to (a) carry on its
business related to the Purchased Assets in substantially the
same manner as presently conducted and not make any material
change in personnel, operations, finance, accounting policies or
real or personal property pertaining to the hospital;
(b) maintain the hospital and all parts thereof in
accordance with HHNMs past practices in all material
respects; (c) perform all of its material obligations under
agreements relating to or affecting the hospital or Purchased
Assets; (d) keep in full force and effect present insurance
policies or other comparable insurance on the Purchased Assets;
(e) maintain and preserve its business organizations
intact, retain its present employees at the hospital and
maintain its relationships with physicians, suppliers, customers
and others having business relations with the hospital;
(f) permit and allow reasonable access by LHS to make
offers of post-closing employment and to establish relationships
with physicians, medical staff and others having business
relations with HHNM,
provided
that LHS shall have
complied with the limitations on its access set forth in the New
Mexico Purchase Agreement; and (g) maintain all material
approvals and permits relating to the hospital, Purchased Assets
and Assumed Liabilities in good standing;
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Not materially amend or terminate any of the contracts which are
material to the operation of the hospital, enter into any
material contract or commitment, or incur or agree to incur any
material liability, except as provided herein or, in all
material respects, in the ordinary course of business;
provided
that LHSs consent shall not be required to
the extent that such contract or commitment is material to the
continued operation of the hospital in the manner in which the
hospital was operated as of the date of execution of the New
Mexico Purchase Agreement;
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Not enter into any contract or commitment with physicians or
other referral sources;
provided
that LHSs consent
shall not be required to the extent that such contract or
commitment is material to the continued operation of the
hospital in the manner in which the hospital was operated as of
the date of the New Mexico Purchase Agreement and such contract
terminates or is terminable without penalty upon no more than
90 days written notice;
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Not increase compensation payable or to become payable or make
any bonus payment to or otherwise enter into one or more bonus
agreements with any hospital employee, except in the ordinary
course of business in accordance with existing personnel
policies;
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Not acquire (whether by purchase or lease) or sell, assign,
lease or otherwise transfer or dispose of any material property,
plant or equipment except in the ordinary course of business
with, in the case of a transfer or disposition, comparable
replacement thereof if such replacement is required in order to
operate the hospital in the manner it was operated as of the
date of the New Mexico Purchase Agreement;
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Not purchase capital assets or incur costs in respect of
construction-in-progress
in excess of $50,000 in the aggregate;
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Not take any material action outside the ordinary course of
business of the hospital or its related ancillary services;
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Not enter into any agreement which could reasonably be expected
to have a material adverse effect;
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Provide prompt written notice to LHS of (a) any event that
has caused any representation or warranty contained in the New
Mexico Purchase Agreement to be untrue in any material respect
and (b) any failure by HHNM to comply with or satisfy, in
any material respect, any covenant, condition or agreement in
the New Mexico Purchase Agreement;
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Make timely premerger filings with the FTC and the Antitrust
Division as required under the HSR Act;
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Provide timely financial information to LHS on a monthly basis
within 15 days following the end of each calendar month;
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Cooperate with LHS in its effort to cause Land Services USA,
Inc. to issue and deliver to LHS a title commitment to issue an
ALTA owners policy of title insurance, Form B, with
extended coverage, for the real property owned by HHNM;
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On or prior to the closing date, notify the appropriate
governmental entities of HHNMs intent to terminate as of
the closing date HHNMs provider agreements related to
Medicare, Medicaid programs and TRICARE and to take all other
required steps to terminate its participation in Medicare,
Medicaid programs and TRICARE; and
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Prior to the closing date, HHNM will (a) cooperate with LHS
and take all reasonable steps to assist LHS to obtain all
governmental approvals and permits required to complete the
transactions contemplated by the New Mexico Purchase Agreement
and in connection with LHSs expansion of Lovelace Medical
Center (LMC) to encompass and include the Purchased
Assets and (b) provide such information and communication
as is reasonably requested by LHS in connection therewith;
provided
that HHNM shall not be required to make any
Form 855 of The Centers for Medicare and Medicaid Services
filings until 10 days after the closing.
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The New Mexico Purchase Agreement contains certain covenants and
agreements of LHS relating to the periods both prior to and
after closing. These covenants include agreements to:
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Provide prompt written notice to HHNM of (a) any event that
has caused any representation or warranty contained in the New
Mexico Purchase Agreement to be untrue in any material respect
and (b) any failure by LHS to comply with or satisfy, in
any material respect, any covenant, condition or agreement;
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Make timely premerger filings with the FTC and the Antitrust
Division as required under the HSR Act, take all commercially
reasonable actions necessary to insure that the waiting period
imposed under the HSR Act terminates or expires 30 days
after the date of making such premerger filings and pay all
application fees required in connection with any filings
required under the HSR Act;
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Prior to the closing date, take all reasonable steps to obtain
approvals and permits required to complete the transactions
contemplated by the New Mexico Purchase Agreement and provide
such information as may be reasonably requested in connection
therewith;
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Obtain a current as-built survey of the real property owned by
HHNM (to be paid for by LHS); and
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Obtain a Phase I environmental assessment prior to the closing
(to be paid for by LHS) and provide a copy of such assessment to
HHNM.
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No
Shop Clause
Until the earlier of closing or the termination of the New
Mexico Purchase Agreement, HHNM shall not (and will not permit
any affiliate or any other person acting for or on behalf of
HHNM or any of its affiliates), without the prior written
consent of LHS:
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Offer for lease or sale its assets (or any material portion
thereof) or any ownership interest in any entity owning any of
the Purchased Assets;
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Solicit offers to lease or buy all or any material portion of
its assets or any ownership interest in any entity owning any of
the Purchased Assets;
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Hold discussions with any party (other than LHS) looking toward
such an offer or solicitation or looking toward a merger or
consolidation of HHNM;
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Enter into any agreement with any party (other than LHS) with
respect to the lease, sale or other disposition of its assets
(or any material portion thereof) or any ownership interest HHNM
or with respect to any merger, consolidation or similar
transaction involving HHNM; or
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Furnish or cause to be furnished any information with respect to
HHNM or its assets to any person that HHNM or such affiliate or
any such person acting for or on their behalf knows or has
reason to believe is in the process of considering any such
acquisition, merger, consolidation, combination or
reorganization,
provided
the foregoing shall not prevent
the Company or persons acting for or on its behalf from
including any information it deems required by law in any of its
filings with the SEC.
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The restrictions described above (a) shall not, however,
apply to or otherwise restrict any actions, negotiations or
agreements in respect of any transaction involving a sale of
equity, merger, combination, a sale of all or substantially all
of its assets or similar transaction involving MedCath
Corporation or its affiliates and any other person and
(b) are subject in all respects to the exercise of the
fiduciary duties, or other comparable duties, of the Board of
Directors of the Company to its stockholders and certain other
obligations set forth in the New Mexico Purchase Agreement.
Conditions
to Closing
The obligations of HHNM to consummate the New Mexico Sale are
subject to the fulfillment (or waiver) of certain conditions
including:
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Compliance by LHS in all material respects with all of its
covenants in the New Mexico Purchase Agreement;
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HHNM shall have complied with all waiting periods under the HSR
Act;
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No court or other governmental entity has issued an order (or
threatened in writing to do so) restraining or prohibiting the
transactions contemplated by the New Mexico Purchase Agreement;
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The representations and warranties of LHS that are qualified by
materiality are true in all respects and the representations and
warranties of LHS that are not so qualified shall be true in all
material respects when made and as of the closing date (unless
made only as of a specific date in which case they shall be true
as of such date); and
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The Company shall have obtained any approvals of its
stockholders which it has determined in its reasonable
discretion are required under the DGCL to authorize HHNM to
consummate the transactions contemplated under the New Mexico
Purchase Agreement, as well as any other transactions the
approval of which the Company elects to seek simultaneously
therewith. The Company shall file this proxy statement with the
SEC and, upon clearance by the SEC, shall deliver the proxy
statement to its stockholders and call a meeting of the
Companys stockholders (as described herein). The Company
shall use its commercially reasonable efforts to cause the
meeting date specified in the proxy statement to occur on or
prior to July 31, 2011. In the event that such stockholder
meeting date is scheduled for a date which is after
July 31, 2011, HHNM shall not be entitled to exercise
certain termination rights
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which may only be exercised to the extent the closing has
occurred prior to July 31, 2011. All obligations of the
Board of Directors shall be subject to the exercise of its
fiduciary duties, or other comparable duties, to the
stockholders of the Company.
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The obligations of LHS to consummate the New Mexico Sale are
subject to the fulfillment (or waiver) of certain conditions
including:
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Compliance by HHNM in all material respects with all of its
covenants in the New Mexico Purchase Agreement;
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LHS shall have (a) obtained reasonable assurances that
following closing LHS will receive all required approvals
required to consummate the New Mexico Sale and to expand the
operations, hospital licensure and Medicare certification of LMC
to encompass and include the Purchased Assets under the hospital
licensure and Medicare certification of LMC and
(b) complied with all waiting periods under the HSR Act;
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No court or other governmental entity has issued an order (or
threatened in writing to do so) restraining or prohibiting the
New Mexico Sale;
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All representations and warranties of HHNM that are qualified by
any type of materiality standard shall be true in all respects,
and all other representations and warranties of HHNM that are
not so qualified shall be true in all material respects, when
made and as of the closing date, as though such representations
and warranties had been made as of the closing date (unless made
only as of a specific date in which case they shall be true as
of such date);
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LHS and an affiliate of HHNM shall have entered into the HHNM
Transition Services Agreement;
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LHS shall have received a pro forma of the title policy (or
marked title commitment containing no additional exceptions to
title to the real property owned by HHNM) from Land Services
USA, Inc.;
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HHNM shall have conducted the business of the hospital, in all
material respects, only in the ordinary course of business and
there shall have occurred no material adverse effect;
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All encumbrances currently encumbering the Purchased Assets
other than permitted encumbrances shall have been duly released
by the secured parties and other lien holders, and UCC-3
releases or termination statements and other lien discharging
documents shall have been properly recorded, the third party
shall have committed in writing to promptly release its lien
upon receipt of a specified payoff amount at the closing, or the
recording thereof shall have been duly arranged pursuant to the
relevant secured partys written authorization allowing LHS
and/or
HHNM
to file lien-discharging documents without the secured
partys signature;
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LHS shall have received, at its sole cost and expense, a Phase I
environmental assessment, prepared by a firm selected by LHS,
and the scope, findings and conclusions of such report shall
have been reasonably satisfactory to LHS; and
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HHNM shall have delivered the ancillary closing documents
required to be delivered by it pursuant to the terms of the New
Mexico Purchase Agreement.
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Termination
Prior to Closing
The New Mexico Purchase Agreement and the New Mexico Sale may
not be terminated except prior to closing as follows:
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By mutual written consent;
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By LHS or HHNM at any time after July 31, 2011 (the
HHNM Outside Date) if the closing has not occurred
by such date;
provided
that the right to terminate is not
available to any party whose failure to fulfill any obligation
under the New Mexico Purchase Agreement has been the cause of,
or resulted in, the failure of the closing to occur by such
date;
provided
,
further
, that if the closing has
not occurred due to or related to either (x) any formal or
informal governmental action, review, investigation or
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proceeding or (y) because the Company shall not have
obtained any approvals of the stockholders of the Company which
it has determined in its reasonable discretion are required
under the DGCL for the Company to authorize HHNM to consummate
the transactions contemplated under the New Mexico Purchase
Agreement, then in either of such events, LHS or HHNM may elect,
by providing written notice to the other party hereto, to extend
the HHNM Outside Date to September 30, 2011 (the right to
so extend the HHNM Outside Date is not available to any party
whose failure to fulfill any obligation under the New Mexico
Purchase Agreement has been the cause of, or resulted in, the
failure of the closing to occur by July 31, 2011);
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By either party if there is a breach by such other party in any
material respect of any of the representations, warranties,
covenants or other agreements of such other party which would
result in a failure of a condition to closing in the New Mexico
Purchase Agreement, which breach cannot be or has not been cured
within 15 days after the giving of written notice;
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By either party, if any court or any other governmental entity
issues an order restraining or prohibiting such party from
consummating the sale and purchase of the Purchased Assets and
such order becomes final and non-appealable; or
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By LHS if a material adverse effect shall have occurred since
the date of the New Mexico Purchase Agreement.
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Transition
Services Agreement
As of closing, affiliates of HHNM and of LHS will execute and
deliver a transition services agreement, pursuant to which an
affiliate of HHNM, or a qualified third-party designated by an
affiliate of HHNM, will provide certain specified transition
services for a limited time to and for the benefit of LHS and
its affiliates.
Covenant
Not to Compete
HHNM covenants and agrees that from the closing date until the
5th anniversary of the closing date, HHNM (including NM
Management, LLC, the Company and their affiliates) shall not,
directly or indirectly, except as a consultant or contractor to
or of LHS (or any affiliate of LHS), own, lease, manage, operate
or control any acute care hospital, specialty hospital or
ambulatory or other type of surgery center within a
25-mile
radius of the hospital, without LHSs prior written consent
(which LHS may withhold in its sole and absolute discretion).
HHNM recognizes that monetary damages shall be inadequate to
compensate LHS and LHS shall be entitled, without the posting of
a bond or similar security, to an injunction restraining such
breach, with the costs (including attorneys fees) of
successfully securing such injunction to be borne by HHNM. LHS
is not prohibited from pursuing any other remedy available to it
under the New Mexico Purchase Agreement for such breach or
threatened breach.
A person that enters into a change in control transaction with
the Company or its affiliates shall not be considered an
assignee or successor of HHNM or its affiliates for purposes of
the covenant not to compete.
No person (other than an affiliate of the Company) that
purchases one or more hospital facilities from the Company or
one of its affiliates (by the acquisition of either the assets
thereof or the equity securities of such affiliate) shall be
subject to the covenant not to compete set forth in the New
Mexico Purchase Agreement.
Expense
Reimbursement; Termination Fee
In the event the stockholders of the Company fail to give
approval of the New Mexico Sale by the HHNM Outside Date, then
as long as there has been no material default by LHS with
respect to its liabilities and obligations arising under the New
Mexico Purchase Agreement, the Company shall reimburse LHS for
all of its
out-of-pocket
costs and expenses (including, without limitation, costs and
expenses of accountants, attorneys, engineers, valuation experts
and other consultants) incurred or paid by LHS in connection
with LHSs due diligence, LHSs negotiation of the New
Mexico Purchase Agreement and, generally, in connection with the
transactions described herein, up to an aggregate maximum amount
of $750,000 (the HHNM Expense Reimbursement);
60
In the event that (i) as a result of the exercise of the
fiduciary duties, or other comparable duties, of the Board of
Directors to the Companys stockholders, HHNM does not
fulfill its obligations to consummate the transaction
contemplated by the New Mexico Purchase Agreement and as a
result thereof LHS terminates the New Mexico Purchase Agreement,
and (ii) there has been no material default by LHS with
respect to its liabilities and obligations arising under the New
Mexico Purchase Agreement, then either (x) if within
12 months following the termination of the New Mexico
Purchase Agreement, HHNM consummates the sale of either the
Purchased Assets or a majority of the membership interest of
HHNM to a third party, then as the sole and exclusive remedy of
LHS, within 10 days of the consummation of the such third
party sale, HHNM shall pay to LHS in cash a termination fee
equal to $3,213,000 (the HHNM Termination Fee), in
which event LHS shall not be entitled to any amount of the HHNM
Expense Reimbursement, or (y) if the conditions of
subsection (x) are not satisfied, then the HHNM Expense
Reimbursement shall be the sole and exclusive remedy of LHS;
Specific
Performance
In the event of a breach by either party of its obligation to
consummate the transactions contemplated by the New Mexico
Purchase Agreement or a breach by either party of a covenant
prior to or following the closing, the non-breaching party shall
be entitled to specific performance to force the breaching party
to consummate the transactions contemplated by the New Mexico
Purchase Agreement, or to enforce the covenant.
Limitation
on Damages
No party to the New Mexico Purchase Agreement (or any of its
affiliates) shall, in any event, be liable to the other party
(or any of its affiliates) for special, consequential, punitive
or exemplary damages.
Right
to Seek Damages
Either party to the New Mexico Purchase Agreement shall be
entitled to seek to recover damages and to recover damages from
the other party relating to or arising under the New Mexico
Purchase Agreement and the transactions contemplated thereby,
subject to any limitations thereon set forth in the New Mexico
Purchase Agreement, if, but only if, any of the following is
applicable:
(a) The claim is permitted under the termination provisions
of the New Mexico Purchase Agreement or as an HHNM Expense
Reimbursement or the HHNM Termination Fee. See Proposal
No. 2 Sale of Substantially All of the Assets
of Heart Hospital of New Mexico The New Mexico
Purchase Agreement Stockholder Approval; Expense
Reimbursement; Termination Fee;
(b) The other party fails to fulfill its obligations under
any covenant or other agreement set forth in the New Mexico
Purchase Agreement which by its terms is intended to be
performed after closing;
(c) In the case of LHS, HHNM fails to pay or satisfy
Excluded Liabilities, and in the case of HHNM, LHS fails to pay
or satisfy Assumed Liabilities, it being acknowledged that HHNM
shall retain liability for the Excluded Liabilities and
covenants and agrees that HHNM shall be solely responsible and
liable therefore and, further, that LHS shall not assume the
Excluded Liabilities or any obligation or responsibility
relating thereto; or
(d) In the case of LHS, HHNM fails to convey to LHS at
closing good and marketable title to the Purchased Assets
subject to no encumbrances other than permitted encumbrances,
provided
,
however
, with respect to any matter
relating to owned real property, LHS may seek to recover damages
and recover damages from HHNM under the New Mexico Purchase
Agreement only if LHS has first asserted (and used commercially
reasonable efforts to recoup) its rights and remedies against
Land Services USA, Inc. and the title insurance policy issued
thereby with respect to such owned real property.
61
Guarantee
of LHSs Obligations
Ardent Medical Services, Inc., as principal obligor and not
merely as a surety, unconditionally guarantees full, punctual
and complete performance by LHS of all of LHSs obligations
under the New Mexico Purchase Agreement and all related
documents and so undertakes to HHNM that, if and whenever LHS is
in default, Ardent Medical Services, Inc. will on demand duly
and promptly perform or procure the performance of LHSs
obligations.
New
Mexico Consent Agreement
Prior to the consummation of the New Mexico Sale, NM Hospital
Management, Inc. (NM MedCath), a subsidiary of
MedCath Corporation, has entered into that certain Approval and
Consent (the HHNM Approval and Consent) by and
between NM MedCath, NMHI and SWCA, pursuant to which
(a) NMHI and SWCA approve and consent to the HHNM Asset
Sale; (b) NMHI and SWCA each receive their agreed upon
share of the HHNM Sale Payment in accordance with their
percentage membership interest in HHNM, as well as each
receiving an additional payment; (c) NMHI and SWCA
acknowledge that the amount of their additional share of the
HHNM Sale Payment materially differs and is disproportionate to
the their percentage membership interest in HHNM;
(d) following HHNM Asset Sale, NMHM would have the right to
create and retain sufficient reserves to pay all HHNM debts,
liabilities, and obligations; and (e) NMHI and SWCA agree
that no agreement in connection with the HHNM Asset Sale is
payment for or contingent upon any patient referrals between the
parties or their affiliates, or provision of any item or medical
service. Further, the approval and consent would provide that
the physician parties have no obligation to refer to HHNM or any
health care facility owned or affiliated with LHS. All such
referrals would be based upon the physicians professional
medical judgment, the medical needs of the patient, and patient
choice. The agreement to make the Sale Payment was required in
order to obtain the consent of NMHI and SWCA to the New Mexico
Sale which is required under the terms of the HHNM operating
agreement. See Proposal No. 2 Sale
of Substantially All of the Assets of Heart Hospital of New
Mexico Events Leading to New Mexico Sale.
Unaudited
Pro Forma Financial Information
The unaudited pro forma condensed consolidated financial
information, which is based upon estimates by our management, is
presented for informational purposes only. It is not intended to
be indicative of the actual consolidated results of operations
or the actual consolidated financial position that would have
been achieved had the transactions or adjustments been
consummated as of the dates indicated below, and it does not
purport to indicate results that may be attained in the future.
The unaudited pro forma condensed consolidated balance sheet as
of March 31, 2011 is derived from historical financial
statements adjusted to illustrate the effects of the New Mexico
Sale as if the transactions contemplated by the New Mexico Sale
had been completed on March 31, 2011.
The unaudited pro forma condensed consolidated statements of
operations for the year ended September 30, 2010 and the
six months ended March 31, 2011 are derived from historical
financial statements adjusted to illustrate the effects of the
New Mexico Sale as if the transactions contemplated by the New
Mexico Sale had been completed on October 1, 2009 and
October 1, 2010, respectively.
See MedCath Corporation Unaudited Pro Forma Consolidated
Financial Statements on page F-53.
The approval of Proposal No. 2 is not contingent on
approval of Proposal No. 3.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR
PROPOSAL NO. 2.
62
PROPOSAL NO. 3
SALE OF ALL OF MEDCATHS EQUITY INTERESTS IN ARKANSAS HEART
HOSPITAL
The following discussion is qualified in its entirety by
reference to that certain Equity Purchase Agreement dated as of
May 6, 2011 (the Arkansas Purchase Agreement)
by and among AR-MED, LLC (AR-MED), Bruce
Murphy, M.D. (Dr. Murphy), MedCath of
Little Rock, L.L.C. (MLR), the owner and operator of
AHH, and MedCath of Arkansas, LLC (MOA), a copy of
which is attached hereto as Annex B. You should read the
Arkansas Purchase Agreement carefully because it, and not this
description, governs the terms of sale of all of our equity
interests and debt in AHH (the Arkansas Sale).
General
Description of the Arkansas Sale
If this proposal is approved and the Arkansas Sale is
consummated, our subsidiary, MOA, will sell and transfer to
AR-MED its 70.3% ownership interest and management rights in AHH
(the AHH Equity Interest). AR-MED is majority owned
by Dr. Bruce Murphy, a physician affiliated with Little
Rock Cardiology Clinic, P.A. (LRCC) and a current
investor in AHH. Purchase terms are based on AHHs
valuation of $73,000,000 plus a percentage of the
hospitals available cash, and AR-MEDs repayment of
the intercompany indebtedness due from AHH to MedCath Finance
Company, LLC (Finco and, such intercompany
indebtedness due from AHH to Finco, the AHH Debt),
which is anticipated to net approximately $60,000,000 to us
after closing costs and taxes. As of April 30, 2011, the
AHH Debt was approximately $28,200,000.
Parties
to the Arkansas Sale
MLR owns and operates AHH. AHH is located in Little Rock,
Arkansas and was the first heart hospital in Arkansas. AHH
offers a comprehensive range of cardiac and other hospital
services. The hospital is partially owned 70.3% by MedCath (by
and through MOA) and 29.67% by local physicians.
MOAs principal executive offices are located at:
c/o MedCath
Corporation, 10720 Sikes Place, Suite 200, Charlotte, North
Carolina 28277.
AR-MEDs principal executive offices are located at:
c/o Bruce
E. Murphy, M.D., personal & confidential, 7
Shackleford West Boulevard, Little Rock, Arkansas 72211.
Events
Leading to the Arkansas Sale
The Company began its evaluation of strategic options for AHH as
part of its broader strategic options review. See
Background of the Sale Proposals General
above. The Company owns the AHH Equity Interest. The remaining
interests in AHH are held by local physicians, the significant
portion of which are held by LRCC and its affiliated physicians
(collectively the AHH Physicians). The AHH
Physicians regularly practice at AHH. Dr. Murphy is the
leader of LRCC and serves as AHHs medical director and is
on the Board of Directors of AHH. Dr. Murphy, on behalf of
himself and certain other investors (none of which other
investors are physicians), formed AR-MED to pursue a purchase of
the Companys interest in AHH.
NCA began soliciting offers for AHH in connection with the
Companys exploration of strategic options in April 2010.
In connection with this process, NCA contacted over 30 potential
buyers interested in evaluating all of the hospital assets of
MedCath and seven potential buyers regarding their specific
interest in AHH, including LRCC. As a result, 20 parties
executed confidentiality agreements to receive a Confidential
Information Memorandum for all MedCath assets and seven
potential buyers executed confidentiality agreements to receive
a Confidential Information Memorandum relating only to AHH.
At the May 25, 2010 Board of Directors meeting, NCA
informed the Board of Directors that NCA had received five
proposals for transactions involving AHH, including a proposal
from a foreign potential buyer that was interested in buying
four of MedCaths hospitals as well as a joint proposal
from LRCC and a healthcare REIT to acquire AHH. NCA informed the
Board of Directors that the proposals constituted only
preliminary indications of interest, with terms in many of the
proposals in need of further clarification. The Board of
Directors discussed the preliminary proposals with NCA and
management.
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At the June 2, 2010 Board of Directors meeting, NCA
reviewed the AHH proposals in greater detail, noting that terms
of three of the five proposals had been revised to provide more
specificity with respect to valuation and proposed transaction
structures. NCA also noted that the proposals were subject to
significant due diligence and generally contingent on
understanding LRCCs post closing plans with respect to
their use of the AHH. NCA indicated that the next step was to
schedule
on-site
diligence meetings with each of the parties in order to further
verify their valuation assumptions as well as to enable them to
meet with certain of the AHH Physicians. Following discussion
with NCA and management regarding the proposals received, the
Board of Directors instructed NCA to continue negotiations with
each of these potential buyers and to encourage each of them to
conduct due diligence.
During June 2010, NCA scheduled site visits for two of the
potential buyers that had submitted proposals involving AHH. NCA
also received an additional proposal for a sale leaseback of AHH.
On June 17, 2010, NCA notified all of the interested
parties that they should submit a revised proposal along with a
mark-up
of
an equity purchase agreement by July 12, 2010. On
June 18, 2010, the potential buyer that had initially
expressed an interest in purchasing four of the Companys
hospital assets notified NCA it was withdrawing from the process.
At the June 30, 2010 Committee meeting, the Committee
discussed with NCA and management the pending proposals
involving AHH. Following this discussion, the Committee
instructed NCA to continue negotiations with each of the
potential buyers that had submitted a proposal and to encourage
each of them to conduct due diligence.
In response to the July 12, 2010 deadline for revised
proposals, the Company received two revised proposals, each of
which was accompanied by a
mark-up
of
the Arkansas Purchase Agreement. One of the proposals was a
joint proposal from LRCC and a healthcare REIT while the other
proposal was from a second healthcare REIT that also indicated
they would need to negotiate a mutually acceptable arrangement
with the AHH Physicians regarding the management of AHH.
At the July 20, 2010 Committee meeting, the Committee
discussed with NCA and management the status of all proposals
received to date. The Committee further discussed with NCA and
management (i) the potential buyers and the merits of the
transactions proposed by each of them, (ii) the potential
challenges relating to the importance of the AHH
Physicians role in each proposal and (iii) the likely
desire of any buyer of AHH to work with the AHH Physicians
following the consummation of any such purchase.
At the August 3, 2010 Board of Directors meeting, NCA
reviewed developments relating to the marketing of AHH and
reported that the two healthcare REITs and one additional
potential buyer continued to actively conduct due diligence in
respect of AHH.
In August 2010, the AHH Physicians informed NCA that the AHH
Physicians were no longer pursuing a transaction with the
healthcare REIT with which the AHH Physicians had made its
previous proposal and now was working with the second healthcare
REIT that had previously submitted a proposal to purchase AHH.
NCA continued to negotiate the terms of a transaction with this
second healthcare REIT and to facilitate discussions with the
AHH Physicians.
At the August 17, 2010 Committee meeting, NCA reported that
the Companys legal advisors and NCA were negotiating a
purchase agreement with the second healthcare REIT to acquire
the AHH Equity Interest, and that an additional potential buyer
was in the process of seeking financing for the proposed
acquisition of the AHH Equity Interest. Each of these potential
buyers disclosed to NCA that a material increase in the amount,
structure and cost of debt secured by AHHs assets would be
required for them to pursue an offer for the AHH Equity Interest
within the price ranges which they had initially indicated to
NCA.
In September 2010, the AHH Physicians informed NCA that they had
not succeeded in reaching an agreement with the second
healthcare REIT with respect to a proposed purchase of AHH
primarily as a result of the additional debt and the increased
interest rate which would apply to such debt which AHH would be
required to incur under the second healthcare REITs
proposed transaction structure when compared to the current
interest rate charged to AHH with respect to the AHH Debt. The
AHH Physicians also expressed to
64
NCA and the Company concern regarding any transaction involving
AHH, other than a transaction whereby the AHH Physicians became
the majority owners of AHH. Additionally, the operating
agreement of AHH provides that Dr. Murphys consent
(in his capacity as a manager of the limited liability company
that owns AHH), which consent is not to be unreasonably
withheld, along with the consent of the Company, is required to
increase the debt of AHH. Dr. Murphy expressed an
unwillingness to provide that consent, due in part to the belief
that the additional debt would reduce the value of the AHH
Physicians interest in AHH. Dr. Murphy explained to
NCA his belief that the AHH Physicians would receive no benefit
from a material increase in the amount of debt of AHH and that
such an increased level of debt would decrease prospects for
future profits and distributions from AHH for the AHH Physicians
as equity investors in AHH.
On October 1, 2010, NCA received a revised proposal from a
potential buyer that had submitted an initial proposal but did
not submit a proposal at the July 12, 2010 deadline. This
revised proposal was contingent upon understanding the AHH
Physicians long terms plans with respect to its existing
relationship with AHH. NCA scheduled several meetings between
this potential buyer and certain of the AHH Physicians in
October 2010 and November 2010 and continued to negotiate the
terms of a transaction with the AHH Physicians.
At the October 12, 2010 Committee meeting, NCA reported
that negotiations with each potential buyer had not
significantly progressed in recent weeks as each of the
potential buyers (including AR-MED) explored financing options
and acquisition terms with the Company and AHH. NCA noted that
certain potential buyers had expressed reluctance to acquire the
AHH Equity Interest with no or only limited indemnification
rights as proposed by the Company. The Committee discussed with
NCA and management certain alternatives in the context of the
AHH transaction and the risks presented by entering into
transactions which created post-closing indemnification
obligations for the Company in light of a possible eventual
dissolution and wind down process.
Discussions and negotiations with potential buyers of AHH
continued through October 2010 and November 2010, during which
time the Board of Directors met, with NCA and management
present, several times to receive updates on its strategic
options process which included a report of developments relating
to the sale of the AHH Equity Interest. Throughout the AHH
marketing process, NCA also communicated with Dr. Murphy
who confirmed an interest on behalf of AR-MED in purchasing the
AHH Equity Interest, subject to AR-MEDs ability to obtain
satisfactory financing.
On December 7, 2010, NCA received a proposal from AR-MED to
acquire the AHH Equity Interest and payoff the MedCath debt
related to AHH. The proposal from AR-MED valued AHH at
approximately $58,500,000. In addition, Dr. Murphy informed
NCA that (i) the AHH Physicians would not support a sale of
AHHs assets or the AHH Equity Interest to a third party
buyer and (ii) the AHH Physicians desired to maintain their
ownership in AHH rather than support a sale of AHH to a third
party.
During December 2010, NCA continued its discussions with
Dr. Murphy regarding the terms of
AR-MEDs
proposal. NCA communicated the Companys concerns about
AR-MEDs proposed valuation of AHH and other terms
contained in AR-MEDs proposal. In particular, NCA
indicated to AR-MED that based on its discussions with the
Committee AR-MEDs proposal was not likely to be acceptable
to the Company because of the difference between AR-MEDs
proposed purchase price and the purchase price range set forth
by other potential buyers that had expressed an interest in
purchasing the AHH Equity Interest from the Company. NCA urged
Dr. Murphy to continue discussions with the other potential
buyers of AHH that continued to express interest in a
transaction involving AHH.
On December 20, 2010, AR-MED and one of the other parties
that had submitted a proposal on October 1, 2010 met to
discuss the terms of a potential transaction. The potential
buyer proposed to acquire the AHH Equity Interest from the
Company and repay the debt of AHH to the Company based on a
valuation for AHH of $96,000,000. Following the potential
buyers presentation of its proposal the AHH Physicians
expressed a number of concerns to NCA. The AHH Physicians stated
that (i) the proposed transaction would be harmful to the
financial performance of AHH and the AHH Physicians
investment in AHH because of the material increase in the amount
of debt which would be incurred by AHH to complete the proposed
transaction, (ii) the potential buyer had strategic goals
that differed from the goals of the AHH Physicians, including a
desire to use AHH to pursue a new hospital management business
and (iii) the potential buyers lack of experience
operating hospitals.
65
At the December 21, 2010 Board of Directors meeting, NCA
described to the Board of Directors and management AR-MEDs
proposal to purchase AHH and NCAs discussions with the AHH
Physicians relative to the other potential buyers
proposals. Following discussion with NCA and management, the
Board of Directors directed NCA to work with AR-MED and the
other potential buyers to see if a mutually acceptable
transaction could be negotiated.
On January 5, 2011, NCA held a conversation with the
potential buyer that had submitted a bid on October 1,
2010. NCA encouraged the potential buyer to restructure its
proposal such that the proposed transaction would not materially
increase the debt of AHH. On January 18, 2011, this
potential buyer informed NCA that it was not willing to
restructure its proposal in the manner proposed by NCA.
At the February 8, 2011 Board of Directors meeting, the
Board of Directors discussed with NCA and management the status
of negotiations with potential buyers of AHH and the risks
presented by entering into transactions which created
post-closing indemnification obligations for the Company in
light of a possible eventual dissolution and wind down process.
NCA informed the Board of Directors that arrangements had been
made for NCA to meet directly with Dr. Murphy the following
week to discuss the prospects for a transaction involving the
purchase by AR-MED of the AHH Equity Interest from the Company.
Subsequent to the Board of Directors meeting, the Committee met
with NCA and provided parameters within which NCA could
negotiate with Dr. Murphy a sale of the AHH Equity Interest
to AR-MED.
On February 15, 2011, NCA met with Dr. Murphy to
discuss the potential terms of a transaction with
AR-MED.
As a
result of these negotiations with Dr. Murphy, AR-MED
proposed a transaction valuing AHH at approximately $73,000,000,
based upon the following material terms: (i) the Company
would receive the repayment of all of the AHH Debt, and the
aggregate amount of the AHH Debt would be deducted from the
purchase price, with additional adjustments for working capital
and assumed equipment leases, (ii) AHH would retain all
pre-closing and post-closing liabilities and obligations of any
type or nature, including those relating to the ICD
Investigation, obligations to any payor, cost reports and taxes,
(iii) AHH, AR-MED and LRCC would fully indemnify the
Company for all of the liabilities and obligations described
above and (iv) the Company would have indemnity obligations
to AR-MED, AHH or the AHH Physicians for only certain limited
fundamental representations and warranties relating to AHH. A
nonbinding term sheet consistent with these terms was approved
by the Company and AR-MED on February 15, 2011 (the
Term Sheet).
The Company delivered a draft of the Arkansas Purchase Agreement
to AR-MED on February 18, 2011, the principal terms of
which were prepared based upon the Term Sheet.
At the March 1, 2011 Board of Directors meeting, NCA
summarized the principal terms of the Arkansas Purchase
Agreement. The Board of Directors discussed with NCA and
management the Arkansas Purchase Agreement and approved the Term
Sheet. The Board of Directors also directed that a separate
subsequent approval would be required for the Company to enter
into the Arkansas Purchase Agreement with AR-MED or otherwise.
Modifications to the Arkansas Purchase Agreement were proposed
by AR-MED to the Company on March 2, 2011, and, following
consultation with NCA, management and the Companys legal
advisors, the Company delivered a revised version of the
Arkansas Purchase Agreement to AR-MED on March 23, 2011.
The Company and AR-MED negotiated the final terms of the
Arkansas Purchase Agreement through April 2011.
The Board of Directors engaged SRR for the purpose of evaluating
the fairness to the Company from a financial point of view of
the proposed sale of the AHH Equity Interest to AR-MED pursuant
to the Arkansas Purchase Agreement. The Board of Directors
determined that SRR was independent and qualified to complete
such evaluation. See Proposal No. 2
Sale of Substantially All of the Assets of Heart Hospital of New
Mexico Events Leading to the New Mexico Sale.
On May 5, 2011, the Board of Directors received a fairness
opinion from SRR on the fairness to the Company from a financial
point of view of the proposed sale of the AHH Equity Interest to
AR-MED pursuant to the Arkansas Purchase Agreement. See
Proposal No. 3 Sale of All of
MedCaths Equity Interest in Arkansas Heart
Hospital Opinion of Stout Risius Ross, Inc. relating
to the Arkansas Sale.
66
Following discussion, the Board of Directors voted to approve
the sale of the AHH Equity Interest to
AR-MED
pursuant to the terms of the Arkansas Purchase Agreement.
The Company entered into the Arkansas Purchase Agreement with
AR-MED and Dr. Murphy on May 6, 2011.
On May 24, 2011, the Board of Directors adopted resolutions
declaring the Arkansas Sale advisable and in the best interest
of our stockholders and recommending that the stockholders vote
in favor of the Arkansas Sale.
Reasons
for the Arkansas Sale
The Board of Directors approved and recommended to the
stockholders the Arkansas Sale as a result of its decision to
pursue strategic options in order to maximize stockholder value.
The Board of Directors determined that the Arkansas Sale is in
the best interests of our stockholders since, among other things
(i) the anticipated net proceeds to the Company from the
Arkansas Sale are expected to exceed the net proceeds the
Company would have received from transactions contemplated by
other indications of interest which the Company had received in
respect of AHH, and (ii) the Board of Directors believes
that the anticipated net proceeds to the Company from the
Arkansas Sale to AR-MED as herein described would exceed those
that would be obtained from AR-MED or any other potential buyer
if a sale of AHH is delayed to a later date.
As part of the Board of Directors evaluation of the
Arkansas Sale, the Board of Directors considered the risks and
timing of each strategic option available to the Company, and
consulted with NCA, management and the Companys legal
advisors. In approving the Arkansas Sale, the Board of Directors
considered a number of factors, including but not limited to the
factors described elsewhere in this proxy statement as well as
the following factors:
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The viability of the Companys business model at present
and the significant costs that would be required to alter the
Companys current business structure;
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The determination by the Board of Directors, after conducting a
review of the Companys financial condition, evaluation of
the Companys strategic alternatives, prospects for the
sale of the Company as a whole or its remaining assets in
individual sales, the results of operations and the
Companys future business prospects, that continuing to
operate AHH as a going concern is not reasonably likely to
create greater value for the stockholders than the value that
may be obtained for the stockholders pursuant to the Arkansas
Sale;
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The Companys inability to identify a potential buyer of
the entire Company in a merger or similar transaction despite
the Board of Directors publicly announced strategic review
process and NCAs efforts to locate such potential buyers,
including contacting 80 such potential buyers;
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That the Arkansas Sale will ultimately allow the Company to
distribute the maximum amount of cash to the Companys
stockholders from the sale of AHH;
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The volatile state of the economy and the economic uncertainty
globally as well as within the healthcare industry, including
the impact of the Legislative Reforms on the Companys
business prospects;
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The net amounts which may be realizable by the Company from a
sale of AHH; and
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The fact that the DGCL requires that the Arkansas Sale be
approved by the affirmative vote of holders of a majority of the
voting power of the shares of the Companys common stock
entitled to vote which ensures that the Board of Directors will
not be taking action without the support of a significant
portion of the stockholders.
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The foregoing summarizes the material factors and risks
considered by the Board of Directors but it is in no way meant
to be exhaustive of the discussion and information considered by
the Board of Directors in connection with the Arkansas Sale. In
view of its many considerations, the Board of Directors did not
quantify
67
or otherwise assign relative significance to any factor
considered. In addition, each member of the Board of Directors
may have given different significance to each factor.
Recommendation
of Board of Directors
The Board of Directors has unanimously determined that the terms
and conditions of the Arkansas Purchase Agreement and the
transactions contemplated thereby, including the Arkansas Sale,
are fair to and in the best interests of MedCath and its
stockholders and recommends a vote
FOR
the
Arkansas Sale pursuant to the terms of the Arkansas Purchase
Agreement.
Opinion
of Stout Risius Ross, Inc. relating to the Arkansas
Sale
THE FOLLOWING IS A SUMMARY OF SRRS OPINION AND THE
METHODOLOGY THAT SRR USED TO RENDER ITS OPINION DATED MAY 5,
2011. THE FOLLOWING SUMMARY OF SRRS OPINION DOES NOT
PURPORT TO BE A COMPLETE DESCRIPTION OF THE ANALYSIS PERFORMED
BY SRR IN CONNECTION WITH SUCH OPINION AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE WRITTEN OPINION OF
SRR ATTACHED TO THIS PROXY STATEMENT AS ANNEX D. SRRS
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS FOR ITS BENEFIT
AND USE IN EVALUATING THE FAIRNESS OF THE CONSIDERATION TO BE
RECEIVED BY MEDCATH PURSUANT TO THE ARKANSAS SALE. WE URGE YOU
TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY FOR A
DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS CONSIDERED,
QUALIFICATIONS, AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY SRR
IN RENDERING ITS OPINION.
SRRS OPINION RELATES ONLY TO THE FAIRNESS, FROM A
FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO BE RECEIVED BY
MEDCATH PURSUANT TO THE ARKANSAS SALE, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW THAT STOCKHOLDER
SHOULD VOTE WITH RESPECT TO THE APPROVAL OF THE ARKANSAS SALE.
IN RENDERING ITS OPINION, SRR DID NOT ADDRESS THE MERITS OF THE
UNDERLYING DECISION BY THE MEDCATH BOARD OF DIRECTORS TO ENGAGE
IN THE ARKANSAS SALE.
The Board of Directors and the Committee retained SRR by a
letter agreement dated March 17, 2011 to render an opinion
as to the fairness, from a financial point of view, of the
consideration to be received by MedCath pursuant to the Arkansas
Sale. At the meeting of the Board of Directors on May 5,
2011, SRR rendered its oral opinion, subsequently confirmed in
writing as of May 5, 2011, that subject to and based upon
the various assumptions made, procedures followed, matters
considered, and limitations upon the review undertaken, the
consideration to be received by MedCath pursuant to the terms of
the Arkansas Sale is fair to MedCath from a financial point of
view.
The full text of SRRs opinion, dated May 5, 2011,
which sets forth, among other things, the various assumptions
made, procedures followed, matters considered, and limitations
upon the review undertaken by SRR, is attached as Annex D
to this proxy statement. You should read this opinion carefully
and in its entirety. This summary is qualified in its entirety
by reference to the full text of the opinion.
SRR was not requested to opine as to, and SRRs opinion
does not in any manner address: (i) MedCaths
underlying business decision to proceed with or effect the
Arkansas Sale, (ii) the terms of any agreements or
documents related to, or the form or any other portion or aspect
of, the Arkansas Sale, except as specifically set forth herein,
(iii) the fairness of any portion or aspect of the Arkansas
Sale to the holders of any class of securities, creditors or
other constituencies of MedCath, except as specifically set
forth herein, (iv) the solvency, creditworthiness or fair
value of MedCath or any other participant in the Arkansas Sale
under any applicable laws relating to bankruptcy, insolvency or
similar matters. Further, SRR was not requested to consider, and
SRRs opinion does not address, the merits of the Arkansas
Sale relative to any alternative business strategies that may
have existed for MedCath or the effect of any other transactions
in which MedCath might have engaged, nor does SRR offer any
opinion as to the terms of the Arkansas Purchase Agreement.
Moreover, SRR was not engaged to recommend, and SRR did not
recommend, a transaction price, and SRR did not participate in
the Arkansas Sale negotiations. In arriving at its opinion, SRR
was not
68
authorized to solicit, and did not solicit, interest from any
party with respect to the transaction, nor did SRR negotiate
with any party with respect to any such transaction.
Furthermore, no opinion, counsel or interpretation is intended
in matters that require legal, regulatory, accounting,
insurance, tax or other similar professional advice. SRR also
assumed that the final executed form of the Arkansas Purchase
Agreement will not differ from the draft of the Arkansas
Purchase Agreement that SRR examined, that the conditions to the
Arkansas Sale as set forth in the Arkansas Purchase Agreement
will be satisfied, and that the Arkansas Sale will be
consummated on a timely basis in the manner contemplated by the
Arkansas Purchase Agreement.
In arriving at its opinion, SRR, among other things:
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Reviewed certain business and financial information relating to
AHH that SRR deemed to be relevant;
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Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of AHH furnished to SRR by MedCath;
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Concerning the two matters above, conducted discussions with
members of senior management and representatives of MedCath;
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Reviewed the consideration and valuation multiples for AHH and
compared them with those of certain publicly traded companies
that SRR deemed to be relevant;
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Reviewed the results of operations of AHH and compared them with
those of certain publicly traded companies that SRR deemed to be
relevant;
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Compared the proposed financial terms of the Arkansas Sale with
the financial terms of certain other transactions that SRR
deemed to be relevant;
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Participated in certain discussions among representatives of
MedCath, the Board and the Committee and their financial and
legal advisors;
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Reviewed drafts as of May 4, 2011 of the Arkansas Purchase
Agreement and certain related documents (the Arkansas
Transaction Documents); and
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Reviewed such other financial studies and analyses and took into
account such other matters as SRR deemed necessary, including
SRRs assessment of general economic, market and monetary
conditions.
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In rendering SRRs opinion, SRR assumed and relied upon the
accuracy and completeness of all financial and other information
that was publicly available, furnished by MedCath, or otherwise
reviewed by or discussed with SRR without independent
verification of such information and SRR assumed and relied upon
the representations and warranties of MedCath contained in the
draft Arkansas Purchase Agreement SRR reviewed. SRR assumed,
without independent verification, that the financial forecasts
and projections provided to them had been reasonably prepared
and reflect the best currently available estimates and judgment
of MedCaths management of the future financial results of
AHH, and SRR relied upon such projections in arriving at
SRRs opinion. SRR was not engaged to assess the
reasonableness or achievability of such forecasts and
projections or the assumptions upon which they were based, and
SRR expressed no view as to the forecasts, projections, or
assumptions. SRR assumed that the Arkansas Sale will be
consummated on the terms described in the Arkansas Purchase
Agreement, without any waiver of any material terms or
conditions by MedCath or AR-MED. SRR also assumed that the final
forms of the Arkansas Transaction Documents will be
substantially similar to the last drafts reviewed by them.
While SRR participated in a site visit and facility tour of AHH,
SRR did not conduct a physical inspection, independent
evaluation or appraisal of the AHH facilities, assets or
liabilities, nor was it furnished with any such evaluation or
appraisal. SRRs opinion was necessarily based on business,
economic, market, and other conditions as they existed and could
be evaluated by SRR at the date of the opinion. SRR does not
have any obligation to update, revise, or reaffirm its opinion.
SRR assumed that all governmental, regulatory, or other consents
and approvals necessary for the consummation of the Arkansas
Sale would be obtained without any material adverse effect on
AHH or the Arkansas Sale. SRRs opinion was necessarily
based upon economic, monetary, market, and other conditions as
they exist and could be evaluated by them as of the time of its
analysis.
69
The following summaries of SRRs financial analyses present
some information in tabular format. In order to fully understand
the financial analyses used by SRR, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the financial analyses.
Accordingly, the analyses listed in the tables and described
below must be considered as a whole. Considering any portion of
such analyses and the factors considered, without considering
all analyses and factors, could create a misleading or
incomplete view of the process underlying SRRs opinion.
SRR arrived at its opinion based upon the results of all
analyses undertaken by it and assessed as a whole and believes
the totality of the factors considered and performed by SRR in
connection with its opinion operated collectively to support its
determination as to the fairness of the merger consideration
from a financial point of view. SRR did not draw, in isolation,
conclusions from or with regard to any one factor or method of
analysis.
In arriving at its opinion, SRR made its determination as to the
fairness, from a financial point of view, as of the date of the
opinion, of the consideration to be received by MedCath pursuant
to the Arkansas Sale agreement, on the basis of the multiple
financial and comparative analyses described below. The
following summary is not a complete description of all of the
analyses performed and factors considered by SRR in connection
with its opinion, but rather is a summary of the material
financial analyses performed and factors considered by SRR. The
preparation of a fairness opinion is a complex process involving
subjective judgments and is not necessarily susceptible to
partial analysis. With respect to the analysis of publicly
traded companies and the analysis of publicly disclosed mergers
and acquisitions summarized below, such analyses reflect
selected companies, and not necessarily all companies that may
be considered relevant in evaluating AHH or the Arkansas Sale.
In addition, no company used as a comparison is either identical
or directly comparable to AHH or the Arkansas Sale. These
analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that
could affect the public trading or acquisition values of the
companies concerned.
The estimates of AHHs future performance provided by us,
as contained in or underlying SRRs analyses, are not
necessarily indicative of future results or values, which may be
significantly more or less favorable than those estimates. In
performing its analyses, SRR considered industry performance,
general business and economic conditions, and other matters,
many of which are beyond our control.
The Arkansas Sale consideration was determined through
negotiation between MedCaths Board of Directors, on the
one hand, and AR-Med, LLC, on the other hand, and their
respective counsel and advisors, and the decision to recommend
the Arkansas Sale was solely that of the Board of Directors.
SRRs opinion and financial analyses were only one of many
factors considered by the Board of Directors in its evaluation
of the merger and should not be viewed as determinative of the
views of our Board of Directors with respect to the Arkansas
Sale or the Arkansas Sale consideration.
Discounted Cash Flow Method.
SRR performed a
discounted cash flow analysis of AHH as one input in comparing
the implied equity reference range for AHH with the proposed
Arkansas Sale consideration. Typically, in such analyses,
discounted cash flow analyses are performed using a multi-year
financial forecast prepared by a companys management. In
performing its discounted cash flow analyses, SRR relied on
Company provided financial projections.
In preparing its discounted cash flow analysis, SRR estimated
the cash flows that AHH could generate over the years 2011
through 2013 based upon managements forecast for fiscal
years 2011 through 2013. These cash flows were discounted to a
present value-equivalent using a range of discount rates of
16.00% to 18.00%, which was based upon AHHs estimated
weighted average cost of capital, or WACC, and
residual year EBITDA exit multiples ranging from 3.5x to 4.5x.
The estimated WACC used in the analysis was based upon estimates
of AHHs cost of equity capital, cost of debt capital, and
an assumed capital structure, all of which were based upon
information from various independent sources (including the
Board of Governors of the Federal Reserve, Morningstar, Inc.,
and Capital IQ, Inc.) concerning market risk-free interest
rates, market equity risk premiums, small stock risk premiums,
equity betas, and corporate bond rates. In addition, SRR also
incorporated a 5% company specific risk premium in its
calculation of AHHs cost of of equity capital. The company
specific risk premium reflects that: (1) AHH has a high
degree of concentration risk, as a majority of patient
admissions are indirectly related to a small group of
physicians; (2) as experienced at other MedCath
70
locations, AHH is susceptible to a competing hospital hiring its
key physicians directly at higher compensation levels due to
reimbursement allowances under the hospital provider number
structure; (3) AHH faces significant risk that AR-MED or
its affiliates could open a competing hospital; (4) AHH
primarily focuses on cardiology and related procedures, making
it less diversified compared to the reviewed guideline companies
(5) the potential liability related to the contingent
liabilities increases the risk of an equity position in AHH; and
(6) AHH expects to incur significant costs in the next
several years associated with upgrading to electronic medical
records. SRR calculated a range of residual year EBITDA exit
multiples, the selection of which was based primarily on certain
factors of AHH as compared to the guideline companies and
guideline transactions.
Based on the assumptions above, the discounted cash flow method
indicated an implied enterprise value range for AHH of
approximately $68.0 million to $85.0 million.
Guideline Company Method.
AHHs primary
competitors include small, privately held hospitals as well as
hospitals managed by public companies located in the Little
Rock, Arkansas metropolitan area and specialize in cardiology
procedures. As a result, SRR was not able to find any public
companies directly comparable to AHH in terms of size, services
offered, and markets served. However, SRR was able to identify
nine publicly traded companies operating in the healthcare
facilities industry for consideration in its analysis. SRR
compared selected available information of AHH with the
corresponding data of those nine publicly traded companies.
These companies included MedCath Corporation, Community Health
Systems, Inc., Health Management Associates, Inc., HealthSouth
Corporation, Universal Health Services, Inc., Tenet Healthcare
Corp., Kindred Healthcare, Inc., LifePoint Hospitals, Inc., and
HCA, Inc.
SRR reviewed multiples of enterprise value of the selected
companies, which were calculated as equity value, plus debt and
preferred stock, plus minority interests, less cash and
equivalents, divided by the selected companies earnings
before interest, taxes, and depreciation (commonly known as
EBITDA), for the latest twelve months (LTM), and next fiscal
year (NFY) estimates. Multiples for the selected companies were
based upon
20-day
average stock prices through May 2, 2011. Latest twelve
month financial data for the selected companies was obtained
from the companies most recent SEC filings. Estimates of
future performance were compiled from equity analyst estimates,
as provided by Reuters estimates. This analysis indicated the
following enterprise value multiples for the selected companies.
Market
Multiples of the Guideline Companies
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EV (In millions of
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EV/NFY
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EV/LTM
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Company
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U.S. Dollars)
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EBITDA
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EBITDA
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MedCath Corp.
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$
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197.3
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7.3
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x
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6.1
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x
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Community Health Systems, Inc.
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12,372.6
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6.6
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x
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7.1
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x
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Health Management Associates Inc.
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5,422.7
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6.8
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x
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7.1
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x
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HEALTHSOUTH Corp.
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4,170.4
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9.3
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x
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9.2
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x
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Universal Health Services Inc.
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8,893.2
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7.3
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x
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9.7
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x
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Tenet Healthcare Corp.
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7,581.1
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6.4
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x
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6.7
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x
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Kindred Healthcare Inc.
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1,262.3
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3.5
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x
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5.5
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x
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Lifepoint Hospitals Inc.
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3,401.1
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6.4
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x
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6.4
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x
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HCA, Inc.
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43,151.2
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n/m
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7.3
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x
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High
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43,151.2
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9.3
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x
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9.7
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x
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Low
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197.3
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3.5
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x
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5.5
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x
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Mean
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9,605.8
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6.7
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x
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7.2
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x
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Median
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5,422.7
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6.7
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x
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7.1
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x
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In performing the guideline company method, SRR selected a range
of multiples below the low end of the range of the guideline
companies for the NFY and LTM periods. Specifically, SRR
selected a range of
71
NFY EBITDA multiples of 3.5x to 4.5x and LTM EBITDA multiples of
4.0x to 5.0x. Key considerations in selecting these multiples
included:
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All else held constant, investors are willing to pay a higher
price for shares in a larger company vis-à-vis a smaller
company. In this case, AHH is smaller than the guideline
companies in terms of revenue and EBITDA.
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AHH has a high degree of concentration risk, as a majority of
patient admissions are indirectly related to a small group of
physicians.
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As experienced at other MedCath locations, AHH is susceptible to
a competing hospital hiring its key physicians directly at
higher compensation levels due to reimbursement allowances under
the hospital provider number structure.
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AHH faces significant risk that AR-MED or its affiliates could
open a competing hospital.
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AHH primarily focuses on cardiology and related procedures,
making it less diversified compared to the reviewed guideline
companies.
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The potential liability related to contingent liabilities
increases the risk of an equity position in AHH.
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AHH expects to incur significant costs in the next several years
associated with upgrading to electronic medical records.
Management has not incorporated these capital outlays or
expenses into their projections.
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Physician investors influence over the capital and legal
structure of AHH reduces the universe of potential buyers for
AHH.
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Everything else held constant, the higher the expected growth
rate for a company, the higher the applicable multiple.
AHHs historical growth rate in EBITDA is below the median
growth rate indicated by the guideline companies. Furthermore,
given uncertainties concerning future physician relationships
and heightened competition AHHs projected growth rate in
EBITDA is below the median growth rate indicated by the
guideline companies.
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SRR then applied the multiples derived from the selected
companies to the historical operating results of AHH for the
latest twelve month period and next fiscal year estimates in
order to derive implied enterprise values for AHH. This analysis
indicated an implied enterprise value range for AHH of
approximately $71.0 million to $90.0 million.
Guideline Transaction Method.
While not all
transactions SRR researched were comparable to AHH in terms of
size, services offered, and markets served, SRR was able to
identify 46 recent guideline transactions (with sufficient
disclosure of financial terms) involving the acquisition of a
hospital or similar healthcare facility for consideration in its
analysis. SRR compared selected information of AHH with the
corresponding data of those 46 acquisitions.
Multiples for the selected transactions were based upon the
information available in the latest financial statements issued
prior to the transaction announcement date. Financial data for
the selected mergers and acquisitions was obtained from various
independent sources, including Irving Levin Associates, Inc.,
and Capital IQ, Inc. SRRs analysis of the enterprise value
multiples implied by the selected transactions is as follows.
Market
Multiples of the Selected Mergers and Acquisitions
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Indicated Multiples
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Date
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EV/LTM
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EV/LTM
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Announced
|
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Target
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Target Location
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Revenue
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EBITDA
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1/30/08
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Gottlieb Memorial Hospital
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Melrose Park, IL
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0.70
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x
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n/a
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2/1/08
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Ouachita Community Hospital
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West Monroe, LA
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1.80
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x
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5.0
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x
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2/14/08
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Summit Hospital
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Phenix City, GA
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n/a
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n/a
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72
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Indicated Multiples
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Date
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EV/LTM
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EV/LTM
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Announced
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Target
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Target Location
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Revenue
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EBITDA
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3/2/08
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Doctors Hospital
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Columbus, GA
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1.40
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x
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n/m
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3/5/08
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The Specialty Hospital
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Rome, GA
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1.21
|
x
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6.4
|
x
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3/24/08
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Dayton Heart Hospital
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Dayton, OH
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0.77
|
x
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5.5
|
x
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4/15/08
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USC University Hospital
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Los Angeles, CA
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0.74
|
x
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8.2
|
x
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4/17/08
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Hughston Orthopedic Hospital
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Columbus, GA
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0.81
|
x
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3.6
|
x
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5/13/08
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Long Term Acute Care Hospital
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Southeastern, MI
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0.59
|
x
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n/a
|
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5/14/08
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Rush North Shore Medical Center
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Skokie, IL
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0.95
|
x
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n/m
|
|
5/20/08
|
|
Condell Medical Center
|
|
Libertyville, IL
|
|
|
0.58
|
x
|
|
|
n/a
|
|
5/28/08
|
|
Humphreys County Memorial Hospital
|
|
Belzoni, MS
|
|
|
0.33
|
x
|
|
|
n/m
|
|
6/20/08
|
|
Moreno Valley Community Hospital
|
|
Helmet, CA
|
|
|
0.47
|
x
|
|
|
n/m
|
|
7/1/08
|
|
Two California hospitals
|
|
Garden Grove, CA
|
|
|
0.39
|
x
|
|
|
n/a
|
|
7/1/08
|
|
Tarzana Campus
|
|
Tarzana, CA
|
|
|
1.64
|
x
|
|
|
n/m
|
|
7/16/08
|
|
Chatham Hospital
|
|
Siler City, NC
|
|
|
2.42
|
x
|
|
|
n/m
|
|
8/15/08
|
|
Portneuf Medical Center
|
|
Pocatello, ID
|
|
|
1.36
|
x
|
|
|
n/a
|
|
8/17/08
|
|
Pascack Valley Hospital
|
|
Westwood, NJ
|
|
|
0.94
|
x
|
|
|
n/m
|
|
8/20/08
|
|
Wyoming Valley Healthcare System
|
|
Wilkes-Barre, PA
|
|
|
0.79
|
x
|
|
|
7.9
|
x
|
8/28/08
|
|
Southwest Regional Medical Center
|
|
Little Rock, AR
|
|
|
0.61
|
x
|
|
|
n/m
|
|
9/12/08
|
|
Massachusetts LTACs
|
|
Braintree, MA
|
|
|
0.62
|
x
|
|
|
n/m
|
|
10/31/08
|
|
Three Rivers Hospital
|
|
Waverly, TN
|
|
|
0.43
|
x
|
|
|
7.8
|
x
|
11/4/08
|
|
Starke Memorial Hospital
|
|
Knox, IN
|
|
|
n/m
|
|
|
|
6.5
|
x
|
11/6/08
|
|
Doctors Hospital of Opelousas
|
|
Opelousas, LA
|
|
|
0.42
|
x
|
|
|
n/m
|
|
12/22/08
|
|
Samaritan Hospital
|
|
Lexington, KY
|
|
|
1.23
|
x
|
|
|
n/m
|
|
1/7/09
|
|
Presbyterian Hospital of Denton
|
|
Denton, TX
|
|
|
0.71
|
x
|
|
|
6.9
|
x
|
1/14/09
|
|
Palmetto Health Baptist Easley
|
|
Easley, SC
|
|
|
1.18
|
x
|
|
|
n/m
|
|
2/2/09
|
|
Siloam Springs Memorial Hospital
|
|
Siloam Springs, AR
|
|
|
1.17
|
x
|
|
|
9.9
|
x
|
2/2/09
|
|
Rockdale Medical Center
|
|
Conyers, GA
|
|
|
0.74
|
x
|
|
|
n/m
|
|
3/27/09
|
|
Prince William Health System
|
|
Manassas, VA
|
|
|
1.09
|
x
|
|
|
n/m
|
|
4/2/09
|
|
Medina General Hospital
|
|
Medina, OH
|
|
|
0.56
|
x
|
|
|
13.9
|
x
|
6/1/09
|
|
Amsterdam Memorial Hospital
|
|
Amsterdam, NY
|
|
|
0.79
|
x
|
|
|
n/m
|
|
6/29/09
|
|
Shore Health Services
|
|
Nassawadox, VA
|
|
|
1.07
|
x
|
|
|
n/m
|
|
7/8/09
|
|
Jewish Hospital
|
|
Cincinnati, OH
|
|
|
0.79
|
x
|
|
|
3.9
|
x
|
8/14/09
|
|
Sparks Health System
|
|
Fort Smith, AR
|
|
|
0.60
|
x
|
|
|
n/m
|
|
11/3/09
|
|
Triumph Healthcare
|
|
Houston, TX
|
|
|
1.30
|
x
|
|
|
6.3
|
x
|
12/3/09
|
|
Long-Term Acute Care Hospital
|
|
Dallas, TX
|
|
|
n/a
|
|
|
|
n/a
|
|
1/28/10
|
|
Cabrini Medical Center
|
|
New York, NY
|
|
|
2.08
|
x
|
|
|
n/a
|
|
4/9/10
|
|
Mountain View Hospital, LLC
|
|
Idaho Falls, ID
|
|
|
0.94
|
x
|
|
|
5.6
|
x
|
4/30/10
|
|
Sumner Regional Health Systems
|
|
Gallatin, TN
|
|
|
1.04
|
x
|
|
|
n/a
|
|
5/16/10
|
|
Psychiatric Solutions, Inc.
|
|
Franklin, TN
|
|
|
1.70
|
x
|
|
|
9.8
|
x
|
6/18/10
|
|
Regency Hospital Company, LLC
|
|
Alpharetta, GA
|
|
|
0.56
|
x
|
|
|
7.6
|
x
|
8/23/10
|
|
Vista Healthcare
|
|
Sacramento, CA
|
|
|
1.19
|
x
|
|
|
6.6
|
x
|
10/5//2010
|
|
Center for Wound Healing
|
|
Tarrytown, NY
|
|
|
1.15
|
x
|
|
|
n/m
|
|
11/12/2010
|
|
Tenet Healthcare Corporation
|
|
Dallas, TX
|
|
|
0.76
|
x
|
|
|
7.1
|
x
|
2/7/2011
|
|
Kindred Healthcare
|
|
Louisville, KY
|
|
|
0.95
|
x
|
|
|
7.7
|
x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indicated Multiples
|
|
Date
|
|
|
|
|
|
EV/LTM
|
|
|
EV/LTM
|
|
Announced
|
|
Target
|
|
Target Location
|
|
Revenue
|
|
|
EBITDA
|
|
|
Low
|
|
|
|
|
|
|
0.33
|
x
|
|
|
3.6
|
x
|
High
|
|
|
|
|
|
|
2.42
|
x
|
|
|
13.9
|
x
|
Mean
|
|
|
|
|
|
|
0.97
|
x
|
|
|
7.2
|
x
|
Median
|
|
|
|
|
|
|
0.81
|
x
|
|
|
6.9x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Similar to the results of the guideline company method, SRR
selected a range of multiples near the low end of the range of
the guideline companies. Specifically, SRR selected a range of
LTM EBITDA multiples of 3.5x to 4.5x and LTM net sales multiples
of 0.55x to 0.75x. Key considerations in selecting these
multiples include:
|
|
|
|
|
AHH has a high degree of concentration risk, as a majority of
patient admissions are indirectly related to a small group of
physicians.
|
|
|
|
As experienced at other MedCath locations, AHH is susceptible to
a competing hospital hiring its key physicians directly at
higher compensation levels due to reimbursement allowances under
the hospital provider number structure.
|
|
|
|
AHH faces significant risk that AR-MED or its affiliates could
open a competing hospital.
|
|
|
|
AHH primarily focuses on cardiology and related procedures,
making it less diversified compared to the reviewed target
companies.
|
|
|
|
The potential liability related to the contingent liabilities
increases the risk of an equity position in AHH.
|
|
|
|
AHH expects to incur significant costs in the next several years
associated with upgrading to electronic medical records.
Management has not incorporated these capital outlays or
expenses into their projections.
|
|
|
|
Physician investors influence over the capital and legal
structure of AHH reduces the universe of potential buyers for
AHH.
|
SRR then applied the multiples derived from the selected
companies to the historical operating results of AHH for the
latest twelve months in order to derive implied enterprise
values for AHH. This analysis indicated an implied enterprise
value range for AHH of approximately $67.0 million to
$89.0 million.
Reconciliation of Valuation Methodologies.
As
discussed previously, SRR performed a discounted cash flow
analysis, guideline company method, and guideline transaction
method as inputs in comparing the implied value of equity
reference range for AHH. After adjustments to enterprise value,
these analyses indicated an implied equity reference range for
MedCaths equity ownership in AHH of $33.6 million to
$47.0 million compared to the Arkansas Sale consideration
of $36.4 million. The chart below highlights the low and
high estimates of MedCaths equity ownership in AHH.
74
Valuation
Summary
|
|
|
|
|
|
|
|
|
|
|
Indicated Range of Value
|
|
|
|
as of 5/02/11
|
|
|
|
Low
|
|
|
High
|
|
|
|
In thousands of U.S. dollars
|
|
|
Guideline Company Method
|
|
$
|
71,000
|
|
|
$
|
90,000
|
|
Transaction Method
|
|
|
67,000
|
|
|
|
89,000
|
|
Discounted Cash Flow Method
|
|
|
68,000
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
Enterprise Value Range
|
|
$
|
69,000
|
|
|
$
|
88,000
|
|
Less: Interest-Bearing Debt
|
|
|
(28,573
|
)
|
|
|
(28,573
|
)
|
Add: Cash and Cash Equivalents
|
|
|
174
|
|
|
|
174
|
|
Add: Excess Working Capital
|
|
|
890
|
|
|
|
890
|
|
Add: Cash Held at MedCath on Behalf of AHH
|
|
|
6,328
|
|
|
|
6,328
|
|
|
|
|
|
|
|
|
|
|
Total Adjustments to Enterprise Value
|
|
|
(21,180
|
)
|
|
|
(21,180
|
)
|
|
|
|
|
|
|
|
|
|
Market Value of Equity Range (Rounded)
|
|
$
|
47,800
|
|
|
$
|
66,800
|
|
Multiplied by: MedCaths Ownership in AHH
|
|
|
70.3
|
%
|
|
|
70.3
|
%
|
|
|
|
|
|
|
|
|
|
Market Value of MedCaths Equity Ownership in AHH
(Rounded)
|
|
$
|
33,600
|
|
|
$
|
47,000
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous.
Under the terms of its
engagement, we have agreed to pay SRR a fee for its financial
advisory services in connection with the transaction, of which a
portion was payable in advance and the balance was payable prior
to the delivery of SRRs conclusions. In the past, SRR has
provided financial services to the Company and its affiliates
and was compensated for those services. SRRs compensation
was neither based upon nor contingent on the results of its
engagement or the consummation of any transaction. We have also
agreed to reimburse SRR for expenses reasonably incurred by SRR
in performing its services, including fees and expenses of its
legal counsel, and to indemnify SRR and related persons against
liabilities, including liabilities under the federal securities
laws, arising out of its engagement. The Board of Directors
selected SRR as its financial advisor in connection with the
merger because SRR is a financial advisory firm with experience
in similar transactions. SRR is engaged in the valuation of
businesses and their securities in connection with mergers and
acquisitions, leveraged buyouts, and private placements.
The foregoing summary describes the material analyses performed
by SRR but does not purport to be a complete description of the
analyses performed by SRR. Copies of SRRs opinions have
been attached as exhibits to this proxy. The opinions will be
available for any interested stockholder of the Company (or any
representative of the stockholder who has been so designated in
writing) to inspect and copy at the Companys principal
executive offices during regular business hours. Alternatively,
you may inspect and copy the opinions at the office of, or
obtain them by mail from, the SEC.
Material
U.S. Federal Income Tax Consequences of the Arkansas
Sale
The Company expects that the amount of federal and state income
taxes that it will ultimately pay as a result of the Arkansas
Sale will be between $3,500,000 and $4,500,000. However, the
Company expects that losses it expects to incur after the
Arkansas Sale will result in either a significant offset against
the gain on this Sale and other sales recognized in fiscal 2011,
or a significant refund of federal and state income taxes
incurred as a result of this Sale and the other sales occurring
in the fiscal 2011. If, however, there should be an
ownership change, as that term is defined in
Section 382 of the Internal Revenue Code, after the
Arkansas Sale, such offset or refund of income taxes may be
substantially reduced. The Company believes that an ownership
change is unlikely to occur; in part because the Company has
adopted a stockholders rights plan that should discourage
certain of the activities that could cause an ownership change
to occur. See the Companys current report on
Form 8-K
filed on June 15, 2011 regarding the Section 382 Rights
Plan.
75
Accounting
Treatment of the Arkansas Sale
The Arkansas Sale will be accounted for as a sale by
MedCath, as that term is used under generally accepted
accounting principles, for accounting and financial reporting
purposes.
Government
Approvals
No filings are required under the HSR Act or any related
applicable rules in connection with the Arkansas Sale. However,
at any time before or after completion of the Arkansas Sale, the
Antitrust Division or the FTC or any state could take such
action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin
the completion of the Arkansas Sale, to rescind the Arkansas
Sale or to seek divestiture of particular assets of the Company
or AR-MED. Private parties may also seek to take legal action
under the antitrust laws under certain circumstances. A
challenge to the Arkansas Sale on antitrust grounds may be made,
and, if such a challenge is made, it is possible that the
Company and AR-MED will not prevail.
No
Appraisal Rights
Under the DGCL, appraisal rights are not available to
stockholders in connection with this transaction.
Interests
of Certain Persons in the Arkansas Sale
The Board of Directors approval of the Arkansas Purchase
Agreement and the transactions contemplated thereby, including
the Arkansas Sale, included consideration of whether members of
the Board of Directors or our executive officers had interests
in the Arkansas Sale that are different from, or in addition to,
the interests of MedCaths stockholders generally. For a
description of these different or additional interests, if any,
see Interests of Certain Persons in Matters to be Acted
Upon.
The
Arkansas Purchase Agreement
The following discussion is qualified in its entirety by
reference to the Arkansas Purchase Agreement, a copy of which is
attached hereto as Annex B. You should read the Arkansas
Purchase Agreement carefully because it, and not this
description, governs the terms of Arkansas Sale. Except for its
status as a contractual document that establishes and governs
the legal relations among the parties thereto with respect to
the Arkansas Sale, we do not intend for its text to be a source
of factual, business or operational information about us. The
Arkansas Purchase Agreement contains representations, warranties
and covenants that are qualified and limited, including by
information in the disclosure schedules referenced in the
Arkansas Purchase Agreement that the parties delivered in
connection with the execution of the Arkansas Purchase
Agreement. Representations and warranties may be used as a tool
to allocate risks between the respective parties to the Arkansas
Purchase Agreement, including where the parties do not have
complete knowledge of all facts, instead of establishing such
matters as facts. Furthermore, the representations and
warranties may be subject to different standards of materiality
applicable to the contracting parties, which may differ from
what may be viewed as material to our stockholders. These
representations may or may not have been accurate as of any
specific date and do not purport to be accurate as of the date
of this proxy statement. Moreover, information concerning the
subject matter of the representations and warranties may have
changed since the date of the Arkansas Purchase Agreement and
subsequent developments or new information qualifying a
representation or warranty may have been included in this proxy
statement. You should not rely on the representations,
warranties or covenants contained in the Arkansas Purchase
Agreement as characterizations of the actual state of facts or
condition of the parties thereto, including MedCath, its
subsidiaries or any of MedCaths affiliates.
Equity
to be Sold
Under the Arkansas Purchase Agreement, our subsidiary, MOA, will
sell and transfer to AR-MED the AHH Equity Interest, free and
clear of all encumbrances, charges, claims or restrictions
except certain limited exceptions set forth in the Arkansas
Purchase Agreement.
76
Debt
to be Repaid
Under the Arkansas Purchase Agreement, AR-MED will repay in full
at closing the intercompany indebtedness due (the AHH
Debt) to MedCath Finance Company, LLC (Finco).
Purchase
Price
As consideration for the AHH Equity Interest, AR-MED will pay us
$73,000,000, subject to the following four adjustments:
(a) The purchase price will be adjusted positively or
negatively by the amount by which AHHs Net Working
Capital (as described below) exceeds or is less than the
agreed upon target net working capital amount of $7,000,000. For
purposes of this calculation in the Arkansas Purchase Agreement,
Net Working Capital means, with respect to AHH as of
the date of determination, the sum of (i) the sum of the
amounts reflected in the entries (or line items) on the
applicable balance sheet entitled (A) Total Accounts
Receivable, (B) Medical Supplies
Inventory and (C) Prepaid Expenses and Other
Assets minus (ii) the amounts reflected in the
entries (or line items) on the applicable balance sheet entitled
(A) Accounts Payable (but excluding any amounts
included within the AHH Debt), (B) Accrued Salaries
and Bonuses and (C) Other Accrued
Liabilities;
(b) The purchase price will be reduced by the aggregate
amount of the AHH Debt as of the closing date;
(c) The purchase price will be reduced by the aggregate
amount of outstanding capital lease obligations of AHH as of the
closing date
(d) The purchase price will be reduced by the aggregate
amount of outstanding long term indebtedness of AHH (other than
the AHH Debt) as of the closing date.
As consideration for the AHH Debt, AR-MED will pay to Finco an
amount equal to the outstanding principal and accrued but unpaid
interest due to Finco in respect of the AHH Debt as of the
closing date.
The
Closing
The closing of the sale will take place as soon as possible
following the satisfaction or waiver by the appropriate party of
all the conditions precedent to closing specified in
Articles 9 and 10 in the Arkansas Purchase Agreement,
including approval of the AHH Equity Sale by our stockholders.
The parties shall use commercially reasonable efforts to cause
the conditions set forth in the Arkansas Purchase Agreement to
be satisfied so that the Closing will occur on July 31,
2011 (which date may be extended to August 31, 2011, as
described below).
Representations
and Warranties
In the Arkansas Purchase Agreement, AR-MED has made
representations and warranties to us, including with respect to
the matters set forth below:
|
|
|
|
|
Organization, qualification and capacity;
|
|
|
|
Absence of conflicts or violations under the certificate of
incorporation, governing documents, governmental authorization
and third party consents;
|
|
|
|
Enforceability;
|
|
|
|
Absence of litigation that has or could affect the Arkansas
Purchase Agreement or the transaction contemplated thereby;
|
|
|
|
Knowledge and experience in financial and business matters;
|
|
|
|
Voluntary and independent nature of determination to enter into
the AHH transaction; and
|
|
|
|
No other express or implied representations or warranties.
|
77
In the Arkansas Purchase Agreement, Dr. Murphy has made
representations and warranties to us, including with respect to
the matters set forth below:
|
|
|
|
|
Accuracy and completeness of certain financial statements and
information of Dr. Murphy and the absence of undisclosed
liabilities of Dr. Murphy; and
|
|
|
|
No other express or implied representations or warranties.
|
In the Arkansas Purchase Agreement, MOA has made representations
and warranties to AR-MED, including with respect to the matters
set forth below:
|
|
|
|
|
Organization, qualification and capacity;
|
|
|
|
Ownership of the AHH Equity Interest;
|
|
|
|
Absence of conflicts or violations under the operating
agreement, governmental authorization and third party consents;
|
|
|
|
Enforceability;
|
|
|
|
Access to records related to certain liabilities and
contracts; and
|
|
|
|
No other representations or warranties.
|
Certain
Covenants
The Arkansas Purchase Agreement contains certain covenants and
agreements of MOA relating to the periods both prior to and
after closing. These covenants include agreements to:
|
|
|
|
|
Prior to the closing date, provide reasonable access to
information to AR-MED and additional financial and operational
information upon request, to the extent permitted by law and
subject to certain limitations described in Article 8 of
the Arkansas Purchase Agreement;
|
|
|
|
Provide prompt written notice to AR-MED of (a) any event
that has caused any representation or warranty contained in the
Arkansas Purchase Agreement to be untrue in any material respect
and (b) any failure by AR-MED to comply with or satisfy, in
any material respect, any covenant, condition or agreement in
the Arkansas Purchase Agreement; and
|
|
|
|
MOA, at no
out-of-pocket
cost or expense, agrees to reasonably cooperate with AR-MED as
necessary for AR-MED to arrange for financing in connection with
the consummation of the transactions contemplated by the
Arkansas Purchase Agreement,
provided
that obtaining such
financing is not a condition to AR-MEDs obligation to
consummate the transactions contemplated by the Arkansas
Purchase Agreement.
|
The Arkansas Purchase Agreement contains certain covenants and
agreements of AR-MED relating to the periods both prior to and
after closing. These covenants include agreements to:
|
|
|
|
|
Provide prompt written notice to MOA and Finco of (a) any
event that has caused any representation or warranty contained
in the Arkansas Purchase Agreement to be untrue in any material
respect, (b) any material and adverse change to any of the
Purchased Assets and (c) any failure by AR-MED to comply
with or satisfy, in any material respect, any covenant,
condition or agreement in the Arkansas Purchase
Agreement; and
|
|
|
|
Prior to the closing date, (a) take all reasonable steps to
obtain (i) approvals and permits required to complete the
transactions contemplated by the Arkansas Purchase Agreement and
(ii) all necessary consents of any counterparties to
contracts with AHH required under the terms of such contracts,
provided that obtaining any such consents shall not be a
condition to closing and (b) provide such information as
may be reasonably requested in connection therewith.
|
78
No
Shop Clause
Until the earlier of closing or the termination of the Arkansas
Purchase Agreement, MOA shall not (and will not permit any
affiliate or any other person acting for or on behalf of MOA or
any of its affiliates), without the prior written consent of
AR-MED:
|
|
|
|
|
Offer for lease or sale AHHs material assets (or any
material portion thereof) or any ownership interest in any
entity owning any of AHHs material assets or any interest
in the AHH Debt;
|
|
|
|
Solicit offers to lease or buy all or any material portion of
AHHs assets or any ownership interest in any entity owning
any of AHHs material assets or any interest in the AHH
Debt;
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Hold discussions with any party (other than AR-MED) looking
toward such an offer or solicitation or looking toward a merger
or consolidation of AHH or sale or assignment of the AHH Debt;
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Enter into any agreement with any party (other than AR-MED) with
respect to the lease, sale or other disposition of AHHs
material assets (or any material portion thereof) or any
ownership interest in AHH or with respect to any merger,
consolidation or similar transaction involving AHH or any
interest in the AHH Debt; or
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Furnish or cause to be furnished any information with respect to
AHH or its assets to any person that MOA or such affiliate or
any such person acting for or on their behalf knows or has
reason to believe is in the process of considering any such
acquisition, merger, consolidation, combination or
reorganization,
provided
the foregoing shall not prevent
the Company or persons acting for or on its behalf from
including any information it deems required by law in any of its
filings with the SEC.
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The restrictions described above shall not, however, apply to or
otherwise restrict any actions, negotiations or agreements in
respect of any transaction involving a sale of equity, merger,
combination, a sale of all or substantially all of its assets or
similar transaction involving the Company or its affiliates and
any other person.
Conditions
to Closing
The obligations of MOA to consummate the transactions
contemplated by the Arkansas Purchase Agreement are subject to
the fulfillment (or waiver) of certain conditions including:
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Compliance by AR-MED in all material respects with all covenants
and conditions required to be performed or complied with by it
in the Arkansas Purchase Agreement at or prior to the closing
date;
provided
that this condition will be deemed to be
satisfied unless both (a) AR-MED was given written notice
of such failure to perform or comply and did not or could not
cure such failure to perform or comply within 15 days after
receipt of such notice and (b) the respects in which such
covenants and obligations have not been performed have had a
material adverse effect on the ability of AR-MED to timely
consummate the transactions contemplated by the Arkansas
Purchase Agreement;
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No court or other governmental entity has issued an order (or
threatened in writing to do so) restraining or prohibiting the
transactions contemplated by the Arkansas Purchase Agreement,
and no governmental entity with jurisdiction over AHH or the
hospital shall have commenced or threatened in writing to
commence any action or suit before any court of competent
jurisdiction or other governmental entity that seeks to restrain
or prohibit the consummation of the transactions contemplated by
the Arkansas Purchase Agreement;
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The representations and warranties of AR-MED and Dr. Murphy
that are qualified by materiality are true in all respects and
the representations and warranties of AR-MED and Dr. Murphy
that are not so qualified shall be true in all material respects
when made and as of the closing date,
provided
that this
condition will be deemed to be satisfied unless any breaches of
representations and warranties by
AR-MED
and
Dr. Murphy have had a material adverse effect on the
ability of AR-MED to timely consummate the transactions
contemplated by the Arkansas Purchase Agreement;
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The Company shall have obtained any approvals of its
stockholders which it has determined in its sole discretion are
required under the DGCL to authorize MOA to consummate the
transactions contemplated by the Arkansas Purchase Agreement,
which approval may be subject to the stockholders of the Company
approving one or more additional transactions together with the
transactions contemplated by the Arkansas Purchase Agreement;
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MOA shall have obtained any consents or approvals from the board
of directors of AHH or AHHs members other than MOA, which
consents or approvals MOA is required to obtain in order to
consummate the transactions contemplated under this
Agreement; and
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AHH shall have paid to MOA or the Company, as appropriate, an
amount equal to (a) all amounts of management fees and
related expenses due from AHH to MOA or the Company,
(b) all amounts of unreimbursed costs and expenses of any
type or nature advanced or paid by MOA or the Company on behalf
or for the benefit of AHH, in both cases with respect to the
period through and including the closing date and (c) any
unpaid guarantee fee incurred by members of AHH under the terms
of Section 5.16 of AHHs operating agreement.
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The obligations of AR-MED to consummate the transactions
contemplated by the Arkansas Purchase Agreement are subject to
the fulfillment (or waiver) of certain conditions including:
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Compliance by MOA in all material respects with all covenants
and conditions required to be performed or complied with by it
in the Arkansas Purchase Agreement at or prior to the closing
date;
provided
that this condition will be deemed to be
satisfied unless both (a) MOA was given written notice of
such failure to perform or comply and did not or could not cure
such failure to perform or comply within 15 days after
receipt of such notice and (b) the respects in which such
covenants and obligations have not been performed have had a
material adverse effect on the ability of MOA to timely
consummate the transactions contemplated by the Arkansas
Purchase Agreement;
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No court or other governmental entity has issued an order (or
threatened in writing to do so) restraining or prohibiting the
transactions contemplated by the Arkansas Purchase Agreement,
and no governmental entity with jurisdiction over AHH or the
hospital shall have commenced or threatened in writing to
commence any action or suit before any court of competent
jurisdiction or other governmental entity that seeks to restrain
or prohibit the consummation of the transactions contemplated by
the Arkansas Purchase Agreement; and
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The representations and warranties of MOA that are qualified by
materiality are true in all respects and the representations and
warranties of MOA that are not so qualified shall be true in all
material respects when made and as of the closing date,
provided
that this condition will be deemed to be
satisfied unless any breaches of such representations and
warranties individually or in the aggregate have had or are
reasonably likely to have a material adverse effect. In the
event that there are breaches of representations and warranties
made by MOA hereunder that have not had or are not reasonably
likely to have a material adverse effect (a) AR-MED shall
not be excused from performance hereunder as a result of such
breaches and shall be obligated to complete the transaction
described in the Arkansas Purchase Agreement, and
(b) AR-MED shall not assert the breach of such
representations and warranties as a basis for not consummating
the transaction contemplated by the Arkansas Purchase Agreement.
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Termination
Prior to Closing
The Arkansas Purchase Agreement and the transactions
contemplated by the Arkansas Purchase Agreement may not be
terminated except prior to closing as follows:
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By mutual written consent;
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By AR-MED or MOA and Finco at any time after July 31, 2011
if the closing has not occurred by such date;
provided
that the right to terminate is not available to any party whose
failure to fulfill any obligation under the Arkansas Purchase
Agreement has been the cause of, or resulted in, the failure of
the closing to occur by such date;
provided
,
further
, that if the closing has not occurred due to or
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related to either (x) a governmental action, review,
investigation or proceeding or (y) because the Company
shall not have obtained any approvals of the stockholders of the
Company which it has determined in its reasonable discretion are
required under the DGCL for the Company to authorize MOA to
consummate the transactions contemplated under the Arkansas
Purchase Agreement, then in either of such events, AR-MED or MOA
may elect, by providing written notice to the other party
hereto, to extend the date by which the closing must occur to
August 31, 2011 (the right to so extend the date by which
the closing must occur is not available to any party whose
failure to fulfill any obligation under the Arkansas Purchase
Agreement has been the cause of, or resulted in, the failure of
the closing to occur by July 31, 2011);
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By either party if there is a breach by such other party in any
material respect of any of the representations, warranties,
covenants or other agreements of such other party which would
result in a failure of a condition to closing in the Arkansas
Purchase Agreement, which breach cannot be or has not been cured
within 15 days after the giving of written notice; or
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By either party, if any court or any other governmental entity
issues an order restraining or prohibiting such party from
consummating the sale and purchase of the Purchased Assets or
the full payment of the AHH Debt and such order becomes final
and non-appealable.
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Indemnification;
Survival
From and after the closing, AR-MED, Dr. Murphy and AHH
(collectively, the Indemnifying Parties) shall
jointly and severally indemnify and hold harmless the Company,
MedCath Incorporated, MOA and its affiliates, and their
respective officers directors, principals, attorneys, agents,
employees or other representatives (each, an Indemnified
Party) from and against any losses relating to or arising
out of (i) any breach of any representation or warranty of
AR-MED or Dr. Murphy, (ii) the failure by AR-MED to
perform any covenant or agreement in the Arkansas Purchase
Agreement, or (iii) any liability or obligation, whether
known, contingent or unknown, of any type or nature, whether now
existing or arising after closing, relating to AHH or the
hospital or relating to or arising out of the ownership,
management or operations of AHH prior to, on or after the
closing date, including without limitation any liability or
obligation, relating to or arising out of (A) current
liabilities, accounts payable and long-term liabilities of AHH
or the hospital, (B) any contract to which AHH or the
hospital was, is or will be a party, (C) any act or
omission of AHH or the hospital, including without limitation
any malpractice or general liability claim, (D) the
intellectual property rights of AHH or any intellectual property
rights of any third party to the extent licensed by or through
AHH or the hospital, (E) reimbursement by the federal
Medicare program, all applicable state Medicaid programs,
TRICARE and their respective successor programs
(Government Programs) or other third party payors
for goods and services provided by AHH or the hospital or any
other matters relating to Government Programs or other third
party payors, (F) federal, state or local investigations
of, or claims or actions against, AHH or the hospital, including
without limitation any investigations, claims or actions in
connection with the ongoing ICD Investigation, (G) cost
reports filed by AHH or the hospital with Medicare either before
or after closing, (H) any actual or alleged violation of,
or non-compliance with, any law by AHH or the hospital or by MOA
or its affiliates relating to or arising from the ownership,
management or operations of AHH or the hospital, including
without limitation any environmental laws, whether existing or
occurring, or alleged to exist or occur, prior to or after
closing, (I) any civil or criminal obligation, liability or
litigation accruing, arising out of, or relating to any acts or
omissions of AHH, the hospital, MOA, MOAs affiliates or
their respective officers, directors, employees or agents
relating to or arising from the ownership, management or
operation of AHH or the hospital, (J) former, current or
future employees of AHH or the hospital, including without
limitation claims related to severance, workers
compensation, unemployment compensation, employee health and
welfare benefit plans, wages and benefits, ERISA or violations
of laws adopted by the United States Equal Employment
Opportunity Commission, or (K) any obligation or liability
of AHH or the hospital with respect to taxes or tax returns due
either before or after closing, including without limitation
taxes which may arise upon consummation of the transactions
contemplated under the Arkansas Purchase Agreement other than
taxes due from MOA with respect to its income arising from the
sale of the AHH Equity Interest to AR-MED.
81
The obligations of AR-MED and its affiliates to indemnify MOA
and its affiliates under the Arkansas Purchase Agreement shall
survive the closing with respect to the (x) representations
and warranties contained in the Arkansas Purchase Agreement,
until 60 days after the expiration of the applicable
statute of limitations, and (y) covenants and agreements in
the Arkansas Purchase Agreement which by their terms contemplate
performance after the closing date in accordance with their
terms.
Specific
Performance
In the event of a breach by MOA of its obligation to consummate
the transactions contemplated by the Arkansas Purchase Agreement
or a breach by MOA of a covenant prior to or following the
closing, AR-MED shall be entitled to specific performance to
force MOA to consummate the transactions contemplated by the
Arkansas Purchase Agreement, or to enforce the covenant, such
relief to be without the necessity of posting a bond, cash or
otherwise (unless required by law).
Termination
Fee
MOAs sole and exclusive additional remedy for
AR-MEDs uncured breach of the Arkansas Purchase Agreement
which results in a termination of the Arkansas Purchase
Agreement is a fee of $3,000,000 (the Buyer Termination
Fee), for which AR-MED and Dr. Murphy shall be
jointly and severally obligated to pay to MOA as liquidated
damages. The Buyer Termination Fee shall be payable to MOA in
immediately available funds by wire transfer no later than
6 months after such termination;
provided
,
however
, such Buyer Termination Fee shall not be due from
AR-MED, if and only if, within 6 months of any such
termination of the Arkansas Purchase Agreement by MOA either
(i) MOA consummates the sale of the AHH Equity Interest on
terms that include a purchase price paid in cash equal to or
greater than the purchase price to be paid by AR-MED, repayment
in full of the AHH Debt and other terms and conditions
comparable to or more favorable than those set forth in the
Arkansas Purchase Agreement, or (ii) the Company
consummates the sale of its assets on terms that results in a
cash distribution to MOA equal to or greater than the purchase
price to be paid by AR-MED, repayment in full of the AHH Debt
and other terms and conditions comparable to or more favorable
than those set forth in the Arkansas Purchase Agreement.
Guarantee
of AR-MEDs Obligations
Dr. Murphy and AHH, each as a principal obligor and not
merely as a surety, jointly and severally unconditionally
guarantees full, punctual and complete performance by AR-MED of
all of AR-MEDs obligations under the Arkansas Purchase
Agreement and all related documents and so undertakes to MOA and
Finco that, if and whenever AR-MED is in default,
Dr. Murphy and AHH will on demand duly and promptly perform
or procure the performance of AR-MEDs obligations. MOA
shall not be required to exhaust any rights or remedies against
AR-MED prior to obtaining performance from Dr. Murphy
and/or
AHH.
Unaudited
Pro Forma Financial Information
The unaudited pro forma condensed consolidated financial
information, which is based upon estimates by our management, is
presented for informational purposes only. It is not intended to
be indicative of the actual consolidated results of operations
or the actual consolidated financial position that would have
been achieved had the transactions or adjustments been
consummated as of the dates indicated below, and it does not
purport to indicate results that may be attained in the future.
The unaudited pro forma condensed consolidated balance sheet as
of March 31, 2011 is derived from historical financial
statements adjusted to illustrate the effects of the Arkansas
Sale as if the transactions contemplated by the Arkansas Sale
had been completed on March 31, 2011.
The unaudited pro forma condensed consolidated statements of
operations for the year ended September 30, 2010 and the
six months ended March 31, 2011 are derived from historical
financial statements adjusted to illustrate the effects of the
Arkansas Sale as if the transactions contemplated by the
Arkansas Sale had been completed on October 1, 2009 and
October 1, 2010, respectively.
82
See MedCath Corporation Unaudited Pro Forma Consolidated
Financial Statements on page F-53.
The
approval of Proposal No. 3 is not contingent on
approval of Proposal No. 2 .
THE BOARD
OF DIRECTORS RECOMMENDS A VOTE FOR
PROPOSAL NO. 3.
PROPOSAL NO. 4
NON-BINDING
ADVISORY VOTE ON EXECUTIVE COMPENSATION
We are requesting your advisory vote on the compensation of our
named executive officers as disclosed in the Compensation
Discussion and Analysis, the compensation tables, and the
narrative discussion set forth on pages 90 to 107 of this
proxy statement.
Our compensation policies and procedures are competitive, are
focused on pay for performance principles and have been strongly
aligned with the long-term interests of our stockholders. We
also believe that both the Company and stockholders benefit from
responsive corporate governance policies and constructive and
consistent dialogue. MedCaths stockholders have an
opportunity to cast a non-binding advisory vote on our
compensation program at the Annual Meeting. This proposal,
commonly known as a
say-on-pay
proposal, gives you, as a MedCath stockholder, an opportunity to
endorse or not endorse the compensation we pay to our named
executive officers.
We encourage you to carefully review the Compensation
Discussion and Analysis in this proxy statement for
additional details on MedCaths executive compensation,
including MedCaths compensation philosophy and objectives,
as well as the processes our Compensation Committee used to
determine the structure and amounts of the compensation of our
named executive officers in fiscal 2010.
We ask you to indicate your support for the compensation of our
named executive officers as described in this proxy statement.
This vote is not intended to address any specific item of
compensation, but rather the overall compensation of our named
executive officers and the philosophy, policies and practices
used to structure compensation, which are described in this
proxy statement. Accordingly, we are asking you to vote, on a
non-binding advisory basis,
FOR
the following
resolution at the Annual Meeting:
RESOLVED, that the compensation paid to MedCath
Corporations named executive officers, as disclosed
pursuant to the Securities and Exchange Commissions
compensation disclosure rules, including the Compensation
Discussion and Analysis, compensation tables and narrative
discussion set forth on pages 90 to 107 of this proxy
statement, is hereby approved.
Your vote is advisory and will not be binding upon our Board of
Directors. However, the Compensation Committee will consider the
outcome of the vote in deciding whether to take any action as a
result of the vote and when making future compensation decisions
for named executive officers.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE COMPENSATION
OF OUR NAMED EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY
STATEMENT.
PROPOSAL NO. 5
NON-BINDING
ADVISORY VOTE ON FREQUENCY OF NON-BINDING ADVISORY VOTE ON
EXECUTIVE COMPENSATION
MedCaths stockholders have the opportunity to cast a
non-binding advisory vote on how frequently we should seek their
input in a non-binding advisory vote on the compensation of our
named executive officers, commonly referred to as a
say-on-pay
vote, as provided in Proposal 4. This non-binding advisory
vote is referred to here as the frequency of
say-on-pay
vote. Under this Proposal 5, you may vote on whether you
would prefer to have a
say-on-pay
vote every year, every 2 years or every 3 years or you
may abstain from voting.
The
say-on-pay
and frequency of
say-on-pay
voting provisions are new and, based upon current information,
our Board of Directors believes that the
say-on-pay
advisory vote should be conducted every
83
year. An annual non-binding advisory vote on executive
compensation will allow our stockholders to provide input on our
compensation philosophy, policies and practices as disclosed in
the proxy statement every year.
You may cast your vote on your preferred voting frequency by
choosing the option of 1 year, 2 years or 3 years
or abstain from voting when you vote in response to the
resolution set forth below.
RESOLVED, that the option of once every year, two years,
or three years that receives the highest number of votes cast
for this resolution will be determined to be the preferred
frequency with which MedCath Corporation is to hold a
non-binding advisory vote to approve the compensation of the
named executive officers, as disclosed pursuant to the
Securities and Exchange Commissions compensation
disclosure rules (including the Compensation Discussion and
Analysis, compensation tables and narrative discussion).
While this advisory vote on the frequency of the
say-on-pay
vote is non-binding, our Board of Directors and Compensation
Committee will give careful consideration to the choice that
receives the most votes when considering the frequency of future
say-on-pay
votes.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR A 1
YEAR
FREQUENCY FOR FUTURE ADVISORY VOTES ON EXECUTIVE
COMPENSATION.
PROPOSAL NO. 6
NON-BINDING
ADVISORY VOTE ON CERTAIN COMPENSATION AND OTHER
PAYMENTS
TO EXECUTIVES
In the event that there is a change in control and our named
executive officers are employed at the time of the change in
control, all of the named executive officers unvested
restricted stock will become fully vested on the date of such
change in control. Generally, if within 12 months of the
change in control the Company terminates the employment of any
of the Companys named executive officers without cause, or
the named executive officers terminate their employment with
good reason, the Company will be obligated to pay the named
executive officers an amount equal to the sum of one or two
times his or her annual base salary (depending on his or her
position) and his or her target annual incentive compensation,
payable in installments over a 12-month period. The named
executive officers will each continue to receive benefits and
perquisites for a period of 24 months. A change in control for
purposes of the foregoing will occur upon: (i) the
consummation of a tender offer for the ownership of more than
80% of the Companys outstanding voting securities;
(ii) the sale of all or substantially all of the
Companys assets; or (iii) the acquisition of more
than 50% of the Companys outstanding voting securities by
a person. The closing of either or both of the Sales will not
cause any of these conditions to have been satisfied and will
not trigger the vesting of restricted stock or any payment to
the named executive officers under the change in control
provisions.
Although the Sales will not trigger a change in control for
purposes of the compensation arrangements described above, under
the DGCL the Sales are considered a sale of all or substantially
all of the Companys assets. The SECs proxy
disclosure rules require the disclosure of certain compensation
arrangements with our named executive officers in the event of a
proxy solicitation seeking approval of the sale of all or
substantially all of the issuers assets, as defined under
the DGCL. The SEC rules require MedCath to disclose and conduct
an advisory vote on the compensation that would be payable to
our named executive officers assuming the Sales triggered a
change in control (as described above) and the executives were
terminated without cause or resigned with good reason. That
compensation is shown in the table below. This proposal gives
our stockholders the opportunity to endorse or not endorse the
compensation the named executive officers would receive upon a
change in control. We encourage you to review this information,
together with the Executive Compensation and Other
Information Compensation Discussion and
Analysis in this proxy statement for additional details on
MedCaths executive compensation, including MedCaths
philosophy and objectives, as well as the processes our
Compensation Committee used to determine the structure and
amounts of the compensation of our named executive officers,
including the payments described below.
84
Golden
Parachute Compensation*
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Pension/
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Non-Qualified
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Deferred
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Prequisites/
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Tax
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Name
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Cash
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Equity(3)
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Compensation
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Benefits(8)
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Reimbursement
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Other
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Total
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O. Edwin French
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$
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1,770,313
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(1)
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$
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2,429,285
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(4)(7)
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$
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$
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15,797
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$
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$
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$
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4,215,393
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President, Chief Executive Officer
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James A. Parker
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901,250
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(1)
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$
|
666,767
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(5)(7)
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21,966
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$
|
1,589,982
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Executive Vice President, Chief Financial Officer
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David Bussone(9)
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$
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500,649
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(6)(7)
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$
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500,649
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Executive Vice President and President Operations Division
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Joan McCanless
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633,888
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(1)
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$
|
283,616
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8,467
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$
|
925,970
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Senior Vice President and Chief Clinical and Compliance Officer
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Dan Perritt
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375,435
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(2)
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$
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110,813
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3,949
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$
|
490,195
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Senior Vice President, Finance Operations
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(1)
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Two times salary plus one times target annual incentive
compensation
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(2)
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One times salary plus one times target annual incentive
compensation
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(3)
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Based on the average stock close price the five days subsequent
May 9, 2011, which was the date of the public announcement
of the Companys plan to seek stockholder approval of
liquidation and dissolution
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(4)
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Includes 100,636 shares that have vested, but that contain
sales restrictions that will be lifted upon a technical change
in control
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(5)
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Includes 26,347 shares that have vested, but that contain
sales restrictions that will be lifted upon a technical change
in control
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(6)
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Includes 34,671 shares that have vested, but that contain
sales restrictions that will be lifted upon a technical change
in control
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(7)
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Any liquidation distributions made with respect to these shares
will be paid to the holder of the shares and will not be subject
to any vesting requirements or other restrictions.
|
|
(8)
|
|
Includes extended healthcare benefits after termination as the
result of a change in control
|
|
(9)
|
|
Mr. Bussones employment with the Company was
terminated in December 2010
|
|
*
|
|
With respect to the Companys named executive officers, all
payments set forth above, other than equity awards, are
considered double trigger benefits meaning that in
order for these named executive officers to receive such payment
there would need to be a change in control and such named
executive officers would have to be terminated other than for
cause or would have to resign for good reason. The equity awards
for the named executive officers are single trigger
meaning the unvested portion of the awards will be fully vested
and immediately exercisable upon the occurrence of a change in
control.
|
As a condition of receiving the benefits outlined, each of the
Companys named executive officers agreed to a prohibition
on the disclosure of the Companys confidential information
at all times following the officers termination, with
certain limited exceptions, and not to compete with the Company
for a period of either one year or 18 months, depending on
the officers position. Additionally, Mr. French
agreed not to disparage the Company following his termination.
The Company believed that it was in the best interest of the
stockholders for key management individuals to remain with the
Company during the pendency of a change in control and that the
payments described above were designed to encourage retention of
the named executive officers.
85
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE CERTAIN
COMPENSATION AND OTHER PAYMENTS TO EXECUTIVES AS DISCLOSED IN
THIS PROXY
STATEMENT.
PROPOSAL NO. 7
RATIFICATION
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The audit committee of the Board of Directors has selected
Deloitte & Touche LLP to serve as the Companys
independent registered public accounting firm for the fiscal
year ending September 30, 2011. Deloitte & Touche
LLP has served as the Companys independent registered
public accounting firm since 2001. Representatives of
Deloitte & Touche LLP are expected to be present at
the Annual Meeting, will have the opportunity to make a
statement if they desire to do so, and are expected to be
available to respond to appropriate questions.
Ratification by the stockholders of the selection of independent
registered public accounting firm is not required, but the audit
committee believes that it is desirable to submit this matter to
the stockholders. If holders of a majority of the common stock
present and entitled to vote on the matter do not ratify the
selection of Deloitte & Touche LLP at the meeting, the
audit committee will investigate the reason for the rejection
and reconsider the appointment. In addition, even if the
stockholders ratify the appointment of Deloitte &
Touche LLP, the audit committee may in its discretion appoint a
different independent registered public accounting firm at any
time if the audit committee determines that a change is in the
best interest of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
RATIFICATION OF
DELOITTE & TOUCHE LLP FOR THE FISCAL YEAR ENDING
SEPTEMBER 30, 2011.
ACCOUNTING
AND AUDIT MATTERS
Fees and
Services
For the fiscal years ended September 30, 2010 and 2009,
fees for services provided by Deloitte & Touche LLP
were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Audit Fees
|
|
|
|
|
|
|
|
|
Recurring audit and quarterly reviews(1)
|
|
$
|
1,270,993
|
|
|
$
|
1,383,029
|
|
Audit Related Fees(2)
|
|
|
39,302
|
|
|
|
302,389
|
|
Tax Fees(3)
|
|
|
84,103
|
|
|
|
74,405
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,394,398
|
|
|
$
|
1,759,823
|
|
|
|
|
(1)
|
|
Audit fees also include the audit of the Companys internal
control over financial reporting as required by Section 404
of the Sarbanes-Oxley Act of 2002.
|
|
(2)
|
|
Fiscal 2010 includes fees for work related to the Companys
Strategic Options Process. Fiscal 2009 includes fees for the
Companys third quarter internal controls assessment and
the review of private placement memoranda related to the
Companys solicitation of investor members in certain
subsidiaries.
|
|
(3)
|
|
Tax Fees are fees for tax return assistance and preparation, tax
examination assistance, and professional services related to tax
planning and tax strategy.
|
The audit committee of the Board of Directors is responsible for
pre-approving all services provided by the Companys
independent registered public accountants and approved all of
the services provided by Deloitte & Touche LLP in
fiscal 2010 and 2009. The chairman of the audit committee may
approve non-audit engagements that arise between committee
meetings, provided that any such decision is presented to the
full committee for ratification at its next scheduled meeting.
86
Audit
Committee Financial Expert
The Board of Directors has determined Robert S. McCoy, Jr.,
the chairman of the audit committee, to be
independent under the applicable NASDAQ listing
standards and the rules and regulations promulgated by the SEC
and an audit committee financial expert as defined
by rules and regulations promulgated by the SEC.
REPORT OF
THE AUDIT COMMITTEE
The following is the report of the audit committee of the Board
of Directors with respect to the Companys audited
financial statements for the fiscal year ended
September 30, 2010.
The audit committee is governed by the Amended and Restated
Audit Committee Charter adopted by the Board of Directors, a
copy of which was attached as Appendix A to the
Companys proxy statement filed on January 29, 2010.
Each member of the audit committee qualifies as an
independent director under the applicable listing
standards of the NASDAQ and regulations promulgated by the SEC.
The audit committee has reviewed and discussed the
Companys audited financial statements with management. As
a part of this oversight, the audit committee reviewed and
discussed with management its assessment and report on the
effectiveness of the Companys internal control over
financial reporting as of September 30, 2010, which was
made using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control Integrated Framework. The audit committee
also reviewed and discussed with Deloitte & Touche LLP
its attestation report on the Companys internal control
over financial reporting. These reports are included in the
Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010.
The audit committee has also discussed with Deloitte &
Touche LLP the matters required to be discussed by the Statement
of Auditing Standards No. 61, Communication with Audit
Committees, as amended and as adopted by the Public Company
Accounting Oversight Board (PCAOB) in
Rule 3200T. The audit committee has also received written
disclosures and the letter from Deloitte & Touche LLP
required by applicable requirements of the PCAOB regarding
Deloitte & Touche LLPs communications with the
audit committee concerning independence and has discussed
Deloitte & Touche LLPs independence with
representatives of Deloitte & Touche LLP.
Based upon the review and discussions referred to above, the
audit committee recommended to the Board of Directors that the
Companys audited financial statements be included in the
Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010 for filing
with the SEC.
Respectfully submitted,
Robert S. McCoy, Chairman
Woodrin Grossman
James A. Deal
PROPOSAL NO. 8
ADJOURNMENT
At the Annual Meeting, we may ask our stockholders to vote on a
proposal to adjourn the Annual Meeting if necessary or
appropriate in the sole discretion of our Board of Directors,
including to solicit additional proxies for one or more
proposals in the event that there are not sufficient votes at
the time of the Annual Meeting or any adjournment thereof to
approve one or more of the proposals.
If at the Annual Meeting the number of shares of our common
stock present or represented by proxy and voting in favor of the
Sale Proposals is insufficient to approve those proposals, then
our Board of Directors currently intends to move to adjourn the
Annual Meeting in order to solicit additional proxies in favor
of the proposals. If at the Annual Meeting the number of shares
of our common stock present or represented by proxy and voting
in favor of either of the Sale Proposals is insufficient to
approve such proposal (but where
87
sufficient votes are received to approve the other
proposal(s)), then our Board of Directors may take a vote and
close the polls on the proposal which has received the requisite
stockholder approval, but adjourn the meeting in order to
solicit additional votes solely with respect to the proposal as
to which there are insufficient votes to approve the proposal.
For example, if MedCath has received proxies sufficient to
approve one of the Sale Proposals but not both, then our Board
of Directors may elect to take a vote and close the polls on the
Sale Proposal receiving proxies sufficient for approval while
adjourning the Annual Meeting to solicit additional votes with
respect to the other Sale Proposal. This would enable MedCath to
proceed with its efforts to complete one of the Sale Proposals
even if we elected to adjourn the Annual Meeting to seek
additional votes to approve the other Sale Proposal. Voting in
favor of the adjournment proposal will allow MedCath to take
such actions.
Alternatively, even if there are sufficient shares of our common
stock present or represented by proxy voting in favor of the
Sale Proposals, our Board of Directors may hold a vote on the
adjournment proposal if, in its sole discretion, it determines
that it is necessary or appropriate for any reason to adjourn
the Annual Meeting to a later date and time. In that event,
MedCath will ask its stockholders to vote only upon the
adjournment proposal and not the Sale Proposals.
Any adjourned meeting may be convened without additional notice
(if the adjournment is not for more than thirty days and a new
record date is not fixed for the adjourned meeting), other than
by an announcement made at the Annual Meeting of the time, date
and place of the adjourned meeting.
Any adjournment of the Annual Meeting will allow our
stockholders who have already sent in their proxies to revoke
them at any time prior to their use at the Annual Meeting as
adjourned. Where a vote has been taken (and the polls have been
closed) with respect to one proposal at the Annual Meeting, but
where the Annual Meeting has been adjourned solely with respect
to the other proposal, then a stockholder may revoke a proxy
only with respect to the proposal as to which the Annual Meeting
was adjourned.
If we adjourn the Annual Meeting to a later date, we will
transact the same business and, unless we must fix a new record
date, only the stockholders who were eligible to vote at the
original meeting will be permitted to vote at the adjourned
meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
ADJOURNMENT PROPOSAL.
88
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information concerning the
beneficial ownership of the shares of MedCath common stock
outstanding as of June 24, 2011 for:
|
|
|
|
|
each person who is known by the Company to be the beneficial
owner of more than five percent of the outstanding shares of
MedCaths common stock,
|
|
|
|
each named executive officer of the Company listed on the
summary compensation table that appears elsewhere in this proxy
statement,
|
|
|
|
each director and nominee for director of the Company, and
|
|
|
|
MedCaths executive officers and directors as a group.
|
Beneficial ownership is determined under the rules of the SEC
and generally includes voting or investment power over
securities. Except as indicated in the footnotes to this table,
MedCath believes each stockholder identified in the table
possesses sole voting and investment power over all shares of
common stock shown as beneficially owned by the stockholder.
Shares of common stock subject to options that are exercisable
within 60 days of June 24, 2011 are considered
outstanding and beneficially owned by the person holding the
options for the purpose of computing the percentage ownership of
that person but are not treated as outstanding for the purpose
of computing the percentage ownership of another person.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Common
|
|
|
|
Number of Shares
|
|
|
Stock
|
|
Name of Beneficial Owner
|
|
Beneficially Owned(1)
|
|
|
Outstanding
|
|
|
Nierenberg Investment Management Company, Inc.(2)
|
|
|
2,924,777
|
|
|
|
14
|
%
|
Dimensional Fund Advisors LP(3)
|
|
|
1,691,949
|
|
|
|
8
|
%
|
PAR Capital Management, Inc.(4)
|
|
|
1,650,100
|
|
|
|
8
|
%
|
WS Capital Management LP(5)
|
|
|
1,500,000
|
|
|
|
7
|
%
|
BlackRock Fund Advisors(6)
|
|
|
1,461,183
|
|
|
|
7
|
%
|
O. Edwin French
|
|
|
798,353
|
|
|
|
4
|
%
|
James A. Parker
|
|
|
125,161
|
|
|
|
1
|
%
|
Joan McCanless
|
|
|
56,416
|
|
|
|
*
|
|
David Bussone
|
|
|
34,671
|
|
|
|
*
|
|
Paul Daniel Perritt
|
|
|
8,710
|
|
|
|
*
|
|
Jacque J. Sokolov, MD
|
|
|
49,200
|
|
|
|
*
|
|
John T. Casey
|
|
|
48,200
|
|
|
|
*
|
|
Robert S. McCoy, Jr.
|
|
|
44,200
|
|
|
|
*
|
|
Pamela G. Bailey
|
|
|
33,700
|
|
|
|
*
|
|
Woodrin Grossman
|
|
|
33,700
|
|
|
|
*
|
|
James A. Deal
|
|
|
25,600
|
|
|
|
*
|
|
Directors and executive officers, as a group (11 persons)
|
|
|
1,257,911
|
|
|
|
6
|
%
|
|
|
|
(1)
|
|
The following shares of common stock subject to options that are
currently exercisable or exercisable within 60 days of
June 24, 2011: O. Edwin French, 570,000; James A. Parker,
57,500; Joan McCanless, 16,000; Jacque J. Sokolov, 10,500; and
Robert S. McCoy, Jr., 10,500.
|
|
|
|
(2)
|
|
The address of this stockholder is 19605 N.E. 8th Street, Camas,
Washington 98607. The Schedule 13F filed by this
stockholder on March 31, 2011 indicates that this
stockholder, in its capacity as investment advisor, may be
deemed to have defined voting and dispositive power over
2,940,711 shares. On June 2, 2011, this stockholder
filed a Form 4 to report the disposition of 15,934 shares.
|
|
|
|
(3)
|
|
The address of this stockholder is 6300 Bee Cave Road, Building
One, Austin, Texas 78746. The Schedule 13F filed by this
stockholder on March 31, 2011 indicates that this
stockholder, in its capacity as investment advisor, may be
deemed to have defined voting and dispositive power over
1,691,949 shares.
|
|
(4)
|
|
The address of this stockholder is PAR Capital Management, Inc.,
One International Place, Suite 2401, Boston, MA 02110. The
schedule 13F filed by this stockholder on March 31,
2011 indicates that this
|
89
|
|
|
|
|
stockholder, in its capacity as investment advisor, may be
deemed to have sole voting and dispositive power over
1,650,100 shares.
|
|
(5)
|
|
The address of this stockholder is 300 Crescent Court,
Suite 1111, Dallas, Texas 75201. The Schedule 13F
filed by this stockholder on March 31, 2011 indicates that
this stockholder, in its capacity as investment advisor, may be
deemed to have sole voting and dispositive power over
1,500,000 shares.
|
|
(6)
|
|
The address of this stockholder is 400 Howard Street,
San Francisco, California 94105. The Schedule 13F
filed by this stockholder on March 31, 2011 indicates that
this stockholder, in its capacity as investment advisor, may be
deemed to have sole voting and dispositive power over
1,461,183 shares.
|
INTERESTS
OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON
Upon the completion of the sale of all or substantially all of
the assets of the Company, the equity awards held by our
executive officers will become fully vested and exercisable. In
addition, if within 12 months of such sale, the Company
terminates the employment of any named executive officer of the
Company without cause or any such named executive officer
resigns with good reason, the named executive officer will be
entitled to receive severance payments and continued benefits
and perequisites. The equity award vesting and severance
benefits are described in more detail in
Proposal No. 6 Non-Binding Advisory
Vote on Certain Compensation and Other Payments To
Executives.
EXECUTIVE
COMPENSATION AND OTHER INFORMATION
Compensation
Discussion and Analysis
Compensation
Philosophy and Objectives
The Companys executive compensation program is
administered by the compensation committee of the Board of
Directors. The compensation committee structured the
Companys compensation program with a view toward ensuring
the financial strength of the Company and maximizing long-term
stockholder value. The compensation program is designed to
provide meaningful incentives for the attainment of specific
objectives and reward executive officers who make substantial
contributions to the attainment of those objectives, and to link
executive officer compensation with performance. The goal of the
compensation committee is to establish compensation levels that
will enable the Company to attract, motivate, reward, and retain
qualified executives and provide compensation to executives that
is externally competitive, internally equitable and performance
based. Because total compensation under the program is
reflective of Company and individual performance, compensation
earned by some or all of our executive officers in a fiscal year
may be above market for exceptional business performance. The
program is designed to focus and direct the energies and efforts
of key executives toward achieving specific Company, divisional,
and strategic objectives. The program has three principal
components: base salary, annual cash incentive compensation, and
long-term equity incentive compensation. In addition, executive
officers may elect to participate in the Companys
tax-deferred savings plan and other benefit plans generally
available to all employees. The compensation committee typically
reviews and adjusts executive officer compensation in the first
fiscal quarter of each fiscal year.
Risks
Related to Compensation Policies and Practices
In November 2010, the compensation committee conducted a risk
assessment of our compensation policies and practices for our
employees, including those relating to our executive
compensation programs. Our risk assessment included a detailed
qualitative and quantitative analysis of our compensation and
benefit programs in which employees at all levels of the
organization may participate, including our executive officers.
We also considered how our compensation programs compare, from a
design perspective, to compensation programs maintained by other
companies. Based on our assessment, we believe that our
compensation and benefit programs have been designed to attract
and retain talent and discourage inappropriate risk taking.
Although our programs are generally designed to
pay-for-performance
and provide incentive-based compensation, the programs contain
various mitigating factors to ensure our employees, including
our named executive officers, are not encouraged to take
unnecessary risks in managing our business and the programs are
90
continuously monitored by our executive officers (in regards to
employees compensation programs) and the compensation committee
of the Board of Directors (in regards to employee and executive
compensation programs).
As a result of our strategic options process, we have offered,
and may continue to offer, retention bonuses to the majority of
our employees that are integral to the on-going support of our
hospitals and to the success of the ultimate outcome of our
strategic options process for our stockholders. We believe these
retention bonuses mitigate the risk that we lose critical
employees and ensure some level of continuity during our
strategic options process. We do not believe the retention bonus
plans or any of our compensation policies and practices
encourage excessive or unnecessary risk taking and are not
reasonably likely to have a material adverse effect on the
Company.
Compensation
Process, Peer Group Selection and Benchmarking
Compensation
Process
General
Our Board of Directors has delegated to our compensation
committee primary authority to determine executive compensation.
The compensation committee seeks input on executive compensation
from our Chief Executive Officer (except with respect to his own
compensation) and from Mercer HR Consulting, an independent
management and compensation consulting firm. As noted under
Director Compensation below, the Company compiled a
Compensation Report using Equilars research database, an
independent resource for benchmarking executive pay trends,
during fiscal 2009. The Company used peer group compensation
information of publicly-traded companies to compile the
Compensation Report so the compensation committee could
benchmark total executive cash and equity compensation levels.
The Compensation Committee continues to believe that these
companies represent an appropriate peer group and from time to
time will examine publicly disclosed pay practices of these
companies when evaluating proposed changes in the compensation
of our executives. See Executive Compensation and Other
Information Compensation Process, Peer Group
Selection and Benchmarking Peer Group Selection and
Benchmarking below.
The Company used the annual compensation comparative information
compiled in the Compensation Report to develop recommendations
regarding base salaries, annual cash incentive compensation and
long-term equity incentive compensation (Total
Compensation) for the Companys executive officers
(other than the Chief Executive Officer). These recommendations
were discussed with and reviewed in detail by the chairman of
the compensation committee before being presented to the entire
compensation committee. Total Compensation for each of the
executive officers (other than the Chief Executive Officer), for
fiscal 2010 were subsequently considered and discussed in detail
by the entire Board of Directors. Following this review with the
entire Board of Directors, the compensation committee approved
performance targets for incentive based compensation and other
compensation for executive officers for fiscal 2010.
Chief
Executive Officer
Simultaneously with its discussion and review of other executive
officer compensation, the compensation committee considered the
analysis in the Compensation Report regarding the compensation
paid to the chief executive officers of Benchmark Companies (as
defined below) and discussed the base salary, annual cash
incentive compensation and long-term equity incentive
compensation of our Chief Executive Officer, O. Edwin French.
The compensation committee reviewed and discussed in detail its
analysis and determinations with the full Board of Directors
and, following that review, the compensation committee approved
performance targets for incentive compensation and other
compensation for Mr. French for the 2010 fiscal year.
Peer
Group Selection and Benchmarking
To assist the compensation committee in assessing appropriate
levels of compensation for all our executive officers, the
Compensation Report contained compensation information that
identified and analyzed
91
compensation awarded to executive officers at a group of
selected Benchmark Companies. The Benchmark Companies were the
following:
|
|
|
|
|
AMN Health Care Services, Inc.
|
|
|
|
Concentra Operating Corporation
|
|
|
|
IASIS Health Care LLC
|
|
|
|
Lifepoint Hospitals, Inc.
|
|
|
|
Pediatrix Medical Group, Inc.
|
|
|
|
Psychiatric Solutions, Inc.
|
|
|
|
United Surgical Partners International
|
|
|
|
US Oncology, Inc.
|
|
|
|
Vanguard Health Systems, Inc.
|
Elements
of Compensation and How Each Element is Chosen
Each of the components of compensation is discussed in more
detail below. While considering each component of compensation,
the compensation committee is more focused on each executive
officers Total Compensation than on the individual
components that make up an individual officers Total
Compensation.
Base
Salaries
The initial base salaries for executive officers, including the
Chief Executive Officer, were fixed pursuant to written
employment agreements and were set in accordance with Company
compensation policies and practices. Annual adjustments in the
base salaries of all executive officers are determined by the
compensation committee on an individual basis through a
subjective review of the officers performance based on the
compensation process outlined above under the section entitled
Executive Compensation and Other Information
Compensation Process, Peer Group Selection and
Benchmarking Compensation Process.
Changes in base salary impact target and actual annual incentive
cash payouts as those are based on a percentage of base salary.
Base salaries are generally set at the median of Benchmark
Companies but may be impacted by exceptional performance.
The Chief Executive Officer and the compensation committee did
not approve executive officer base salary increases for fiscal
2010 as a result of the fiscal 2009 operating performance.
Annual
Incentive Compensation
To reward superior performance and contributions made by
executive officers, the Company established the Executive Bonus
Plan (the Bonus Plan), an annual cash incentive plan
that awards annual cash bonuses if specific performance-based
financial and operational goals are achieved. The specific
performance-based financial and operational goals and the
maximum amount of annual cash bonus for each executive officer
are determined at the beginning of each fiscal year by the
compensation committee. Subsequent to the end of the fiscal
year, individual cash bonus awards are approved by the
compensation committee based upon achievement of the
performance-based financial and operational goals.
During November 2009, the compensation committee of the Board of
Directors approved the terms of the Companys fiscal 2010
Bonus Plan based on the Companys full fiscal 2010 budget.
The annual targeted bonus was established in each executive
employment agreement at 75% of base salary for Mr. French
and 50% of base salary for Messrs. Parker and Bussone and
Ms. McCanless and 35% of base salary for Mr. Perritt.
As a result of the Companys March 2010 announcement that
it had formed a strategic options committee to consider the sale
either of the entire company or its assets, the compensation
committee of the Board of Directors approved an incentive bonus
plan for executive officers based on the Companys fiscal
2010 budget
92
for the period from April 2010 to September 2010 (the stub
period). The stub period incentive bonus plan was approved
to reflect the budget for the stub period and the reduction in
operations, the anticipated sale of some of the Companys
assets and increased costs associated with the strategic options
review. The annual targeted bonus potential for the executive
officers was reduced by 50% because the stub period accounted
for 50% of the original annual full 2010 budget. The Chief
Executive Officer and the compensation committee had the
discretion to increase or decrease each executive officers
targeted bonus based on a subjective assessment of each
executive officers individual contribution to the Company.
The primary performance-based financial and operational goal for
which the executive officers are measured against is Adjusted
EBITDAP. Adjusted EBITDAP is defined as the Companys
earnings before income tax, depreciation, interest, amortization
and pre-opening expenses less net cash interest expense
(EBITDAP), as further adjusted by the compensation
committee for items, positive or negative, related to certain
events that occurred during the fiscal year but in the
compensation committees judgment were not directly
attributable to the on-going management of the Company.
Adjusted EBITDAP thresholds are tiered as follows:
|
|
|
|
|
|
|
% Payout of
|
% of Adjusted EBITDAP Target Achieved
|
|
Targeted Bonus
|
|
<90
|
|
|
0
|
|
90
|
|
|
50
|
|
95
|
|
|
75
|
|
100
|
|
|
100
|
|
Stretch bonuses are applicable to the Chief Executive Officer
and Chief Financial Officer based on the following tiered
thresholds:
|
|
|
|
|
|
|
% Payout of
|
|
% Adjusted EBITDAP Target Achieved
|
|
Targeted Bonus
|
|
|
104
|
|
|
130
|
|
106
|
|
|
160
|
|
108
|
|
|
200
|
|
The stub period targeted Adjusted EBITDAP was determined by the
compensation committee to be $21.5 million for fiscal 2010.
Actual Adjusted EBITDAP for the fiscal 2010 stub period was
$22.1 million, resulting in the achievement of 102.8% of
the Adjusted EBITDAP target. Based on this level of achievement,
100% of the targeted bonuses were available to the executive
officers.
Actual Adjusted EBITDAP from April to September of fiscal 2010
(the stub period) was calculated as follows (in millions):
|
|
|
|
|
|
|
|
|
Actual EBITDAP(1)
|
|
|
|
|
|
$
|
21.4
|
|
Adjustments to EBITDAP
|
|
|
|
|
|
|
|
|
Plus:
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
$
|
4.5
|
|
|
|
|
|
Strategic alternatives costs
|
|
|
4.2
|
|
|
|
|
|
Other non-recurring
|
|
|
0.6
|
|
|
|
|
|
Compensation expense from stock awards
|
|
|
0.6
|
|
|
|
|
|
Minus:
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
(5.9
|
)
|
|
|
|
|
Interest expense
|
|
|
(3.3
|
)
|
|
|
|
|
Total Adjustments to EBITDAP
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDAP
|
|
|
|
|
|
$
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes operations still owned that are reported in
discontinued operations at September 30, 2010.
|
93
The Chief Executive Officer and the compensation committee took
the above into consideration in determining the total incentive
compensation award to the executive officers. Mr. French
and Mr. Perritt were awarded their targeted bonus. The
compensation committee approved an additional 50% of the total
targeted bonus for Mr. Parker and Ms. McCanless due to
their respective contributions to the strategic options process
including comprehensive due diligence support and the myriad of
tasks and responsibilities associated with contributing to the
closing of multiple transactions which the committee believed
was beyond the normal expectations of their jobs.
Mr. Bussones target bonus was reduced by 20% to
account for the lower than anticipated operating results at
certain of the Companys hospitals and to acknowledge that
the attainment of the targeted Adjusted EBITDAP was largely due
to cost reductions in divisions not managed by Mr. Bussone.
Award
Granting Procedures
The Company established an equity based incentive plan known as
the MedCath Corporation 2006 Stock Option and Award Plan (the
Plan) to attract and retain employees of outstanding
competence and to encourage and enable such employees to obtain
a financial interest in the Company. The Company has adopted the
following policy as it relates to the awarding of equity awards
under the Plan.
The Plan is administered by the compensation committee which has
all of the powers necessary to enable it to properly carry out
its duties under the Plan. The compensation committee has the
power to construe and interpret the Plan. The compensation
committee may appoint such agents, who need not be members of
the compensation committee, as it may deem necessary for the
effective performance of its duties, and may delegate to such
agents such powers and duties as the compensation committee may
deem expedient or appropriate that are not inconsistent with the
intent of the Plan to the fullest extent permitted under the
law. The decision of the compensation committee or any agent of
the compensation committee upon all matters within the scope of
its authority shall be final and conclusive on all persons.
Equity awards may be granted to any employee (designated as a
participant under the terms and conditions of the Plan) by the
compensation committee, in its sole discretion. The compensation
committee determines which employees will be participants, the
type of award to be made to each participant, and the terms,
conditions, and limitations applicable to each award not
inconsistent with the Plan. The compensation committee may grant
awards singly, in tandem, or in combination with other awards,
as the compensation committee may, in its sole discretion,
determine.
The maximum number of shares of stock with respect to which
awards may be granted to any employee during a fiscal year of
the Company is 500,000 shares. Awards of stock options may
include incentive stock options, non-qualified stock options,
restricted stock or any combination thereof.
Grants of equity awards, of any type, to the Companys
Chief Executive Officer must be ratified by the independent
members of the Board of Directors.
2010
Restricted Stock Awards
We believe that employee equity ownership provides executive
officers with significant additional motivation to maximize
value for our stockholders. Generally, the size of equity awards
made pursuant to the Plan are determined in light of the
relative responsibilities of the executive officer, his or her
historical
and/or
expected contributions to the Company, as well as recruitment
and retention considerations. Awards are taken into
consideration when the compensation committee evaluates the
total compensation for each executive officer and grants awards
at its discretion. As a means to assist the compensation
committee in their decisions regarding the number of, value of,
and form of equity awards to be granted, the Company engaged
Mercer, an independent management and compensation consultant,
to perform a long-term incentive strategy review for fiscal 2009
and used this report as a guide for fiscal 2010 grants.
Restricted stock was granted to our executives during fiscal
2010 in the form of two grants. The first grant was comprised of
restricted stock awards (RSA) that vest annually on
December 31, over a three year period. The second grant is
comprised of performance based restricted stock awards
(PSA) that vest annually on December 31, over a
three year period if certain performance conditions are met.
Each PSA has an Annual
94
Performance Goal or performance condition, which is
satisfied annually if the Company achieves a 10% increase in its
publicly reported diluted earnings per share, subject to
adjustment by the compensation committee. Additionally, if the
Annual Performance Goal is not met for a given year, the PSA may
still vest based on a cumulative performance goal. The
Cumulative Performance Goal shall be satisfied as of
a fiscal year end if the Company achieves a 10% compounded
annual increase in its publicly-reported diluted earnings per
share, subject to adjustments by the compensation committee.
In determining whether the Company has achieved the Annual or
Cumulative Performance Goals, the compensation committee shall
have the discretion to exclude from the calculation of the
Companys diluted earnings per share the effect of
(i) items presented as extraordinary items (or
other comparable terms) in the Companys audited financial
statements, (ii) extraordinary, unusual or nonrecurring
items of gain or loss, (iii) changes in tax or accounting
laws or rules, and (iv) mergers, acquisitions, investments,
divestitures, spin offs or significant transactions, each of
which are identified in the audited financial statements and
notes thereto or in the Executive Compensation and Other
Information Compensation Discussion and
Analysis within this proxy statement.
We believe the equity compensation awards discussed above are a
critical component to our compensation program as they serve to
align the interests of executive officers closely with other
stockholders because of the direct benefit executive officers
receive through improved stock performance and Company
performance, in the case of PSAs.
Change in
Control and Severance Agreements
Our executive officers are employed pursuant to the terms of
written employment agreements. Nevertheless, from time to time,
we implement plans or enter into agreements that would provide
certain benefits payable to certain employees, including in some
cases certain executive officers, in connection with the
termination of employment, a change in control of the Company or
other situations. The compensation committee considers such
plans, agreements and benefits in order to be competitive in the
hiring and retention of employees, including executive officers,
in comparison with comparable companies with which we compete
for talent. In addition, these benefits are intended to retain
our officers during the pendency of a proposed change in control
transaction and align the interests of our officers with our
stockholders in the event of a change in control. We believe
that proposed or actual change in control transactions can
adversely impact the morale of officers and create uncertainty
regarding their continued employment. Without these benefits,
officers may be tempted to leave MedCath prior to the closing of
the change in control, especially if they do not wish to remain
with the entity after the transaction closes, and any such
departures could jeopardize the consummation of the transaction
or our interests if the transaction does not close and we remain
independent. The compensation committee believes that these
benefits therefore serve to enhance stockholder value in the
transaction, and align the officers interest with those of
our stockholders in change in control transactions.
The potential payments that each of the named executive officers
would have received if a change in control or termination of
employment would have occurred on September 30, 2010 are
set forth under the section titled Executive Compensation
and Other Information Executive Employment
Agreements and Compensation of Individual Named Executive
Officers and Executive Compensation and Other
Information Potential Payments upon Termination or
Change-in-Control
Table elsewhere in this proxy statement.
Other
Benefits
We provide other customary benefits that are comprehensive and
apply uniformly to all of our employees, including our executive
officers. The purpose of this element of compensation is to
provide assurance of financial support in the event of illness
or injury and encourage retirement savings.
Our employee benefits program includes medical, dental,
prescription drug, Medical Flexible Spending contribution,
vision care, disability insurance, life insurance benefits,
business travel insurance, 401(k) savings plan with employer
match, educational assistance, gymnasium dues, employee
assistance program and holidays, and a vacation allowance. We
believe that these benefits are standard for executive officers
at comparable companies with whom we compete for personnel.
95
Deferred
Compensation Programs
We do not maintain any non-qualified deferred compensation
programs for our executive officers or any supplemental
executive retirement plans. We believe that the equity award
component of each executive officers Total Compensation
should serve as a major source of wealth creation, including the
accumulation of substantial resources to fund the executive
officers retirement years.
Tax
Considerations
Under federal income tax law, a public company may not deduct
non-performance based compensation in excess of
$1.0 million paid to its chief executive officer or any of
its three highest paid other executive officers (other than the
Chief Financial Officer). No executive officer of the Company
received in fiscal 2010 non- performance based compensation in
excess of this limit. The compensation committee currently
intends to continue to manage the Companys executive
compensation program in a manner that will maximize federal
income tax deductions. However, the compensation committee may
from time to time exercise its discretion to award compensation
that may not be deductible under Section 162(m) of the Code
when in its judgment such award would be in the interests of the
Company.
Executive
Employment Agreements and Compensation of Individual Named
Executive Officers
O. Edwin French.
MedCath entered into an
employment agreement with Mr. French, our President and
Chief Executive Officer, on February 21, 2006. The
agreement provides for an initial three-year term that is
automatically renewed for successive one year terms unless
either party provides notice of non-renewal at least
90 days prior to the end of the initial or any renewal
term. Mr. Frenchs base salary is adjusted annually at
the discretion of the Board of Directors, but in no event may
his base salary be reduced nor be less than the median base
salary for a comparable position at corporations of similar size
and character as the Company.
The agreement provides that Mr. French will participate in
an annual bonus plan that will establish a target annual bonus
opportunity equal to 75% of his base salary for the year. The
terms and provisions of the bonus plan, including the
performance goals and the threshold performance levels that must
be met for payment of a bonus may established each year by the
compensation committee. See Executive Compensation and
Other Information Compensation Process, Peer Group
Selection and Benchmarking Compensation
Process. The agreement further provides for him to
participate in any other compensation plan or program maintained
by the Company for senior executives as well as all employee
fringe benefit, pension and welfare benefit programs which the
Company makes available to senior executives.
Upon the termination of employment of Mr. French by the
Company without cause (other than as a result of death or
disability which are addressed below), or upon a voluntary
termination by the executive for good reason by giving six
months advance notice, the agreement provides for the following
payments and benefits:
|
|
|
|
|
an amount equal to the sum of two times his annual base salary
and one times his target annual bonus;
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment);
|
|
|
|
unreimbursed business expenses; and
|
|
|
|
continued coverage under the Companys group medical
insurance plan for a period ending on the earlier of
(A) the date Mr. French becomes covered under
comparable plans of a new employer or (B) eligibility for
Medicare benefits.
|
Upon termination by the Company with cause, or by
Mr. French without good reason, the agreement provides for
the following payments:
|
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment); and
|
|
|
|
unreimbursed business expenses.
|
Upon termination of employment because of a total and permanent
disability, Mr. French will receive any amounts due under
the terms of any disability insurance policy which the Company
maintains for him, a pro
96
rata portion of the target bonus (if any) for the fiscal year in
which the disability occurs, any earned but unpaid salary
(including any awarded but deferred bonus payment), and any
unreimbursed business expenses.
Upon termination of employment because of death,
Mr. Frenchs estate or designated beneficiaries will
receive any death benefits provided under any plans the Company
maintains for him, a pro rata portion of the target bonus (if
any) for the fiscal year in which the death occurs, any earned
but unpaid salary (including any awarded but deferred bonus
payment), and any unreimbursed business expenses.
The agreement contains non-competition and nondisclosure
provisions. The nondisclosure provisions provide that
Mr. French will not disclose confidential information
regarding the Company and its subsidiaries and affiliates at any
time following his termination of employment. The
non-competition provisions provide that he will not, for a
period of 18 months following the date of termination,
compete with the Company by directly or indirectly becoming
involved with a competitor of the Company. Furthermore,
Mr. French agrees not to solicit employees of the Company
for one year following the date of his termination of employment.
James A. Parker.
MedCath entered into an
employment agreement dated February 18, 2001 with
Mr. Parker, Executive Vice President and Chief Financial
Officer, which was amended and restated effective
August 14, 2009. The agreement provides for an initial
three-year term that is automatically renewed for successive one
year terms unless either party provides notice of non-renewal at
least 90 days prior to the end of the initial or any
renewal term. Mr. Parkers base salary will be
adjusted annually at the discretion of the Board of Directors,
but in no event will his base salary be reduced nor be less than
the median base salary for a comparable position at corporations
of similar size and character as the Company.
The agreement provides that Mr. Parker will participate in
an annual bonus plan that will establish a target annual bonus
opportunity equal to 50% of his base salary for the year. The
terms and provisions of the bonus plan, including the
performance goals and the threshold performance levels that must
be met for payment of a bonus will be established each year by
the compensation committee. The agreement further provides for
him to participate in any other compensation plan or program
maintained by the Company for senior executives as well as all
employee fringe benefit, pension and welfare benefit programs
which the Company makes available to senior executives.
Upon the termination of employment of Mr. Parker by the
Company without cause (other than as a result of death or
disability which is addressed below), or upon a voluntary
termination by the executive for good reason, the agreement
provides for the following payments and benefits:
|
|
|
|
|
an amount equal to (A) one times his annual base salary if
termination occurs prior to a change in control or more than
12 months after a change in control or (B) if such
termination occurs upon a change in control or at any time
within 12 months after a change in control, the sum of two
times his annual base salary and one times his target annual
bonus;
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment);
|
|
|
|
unreimbursed business expenses; and
|
|
|
|
continued coverage under the Companys medical, disability
and life insurance plans for a period ending the earlier of
(A) the second anniversary of the date of termination or
(B) the date the executive becomes covered under comparable
plans of a new employer.
|
Upon termination by the Company with cause, or by
Mr. Parker without good reason, the agreement provides for
the following payments:
|
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment); and
|
|
|
|
unreimbursed business expenses.
|
Upon termination of employment because of a total and permanent
disability, Mr. Parker will receive any amounts due under
the terms of any disability insurance policy which the Company
maintains for him, pro rata portion of the bonus (if any) for
the fiscal year in which the disability occurs, any earned but
unpaid salary (including any awarded but deferred bonus
payment), and any unreimbursed business expenses.
97
Upon termination of employment because of death,
Mr. Parkers estate or designated beneficiaries will
receive any death benefits provided under any plans the Company
maintains for him, a pro rata portion of the bonus (if any) for
the fiscal year in which the death occurs, any earned but unpaid
salary (including any awarded but deferred bonus payment), and
any unreimbursed business expenses.
The agreement contains non-competition and nondisclosure
provisions. The nondisclosure provisions provide that
Mr. Parker will not disclose confidential information
regarding the Company and its subsidiaries and affiliates at any
time following his termination of employment. The
non-competition provisions provide that he will not, for a
period of 18 months following the date of termination,
compete with the Company by directly or indirectly becoming
involved with a competitor of the Company. Furthermore,
Mr. Parker agrees not to solicit employees of the Company
for one year following the date of his termination of employment.
David Bussone.
MedCath entered into an
employment agreement with Mr. Bussone Executive Vice
President and President, Operations Division, on
September 1, 2009. The agreement provided for an initial
three-year term that is automatically renewed for successive one
year terms unless either party provided notice of non-renewal at
least 90 days prior to the end of the initial or any
renewal term. Mr. Bussones base salary was adjusted
annually at the discretion of the Board of Directors, but in no
event will his base salary be reduced nor be less than the
median base salary for a comparable position at corporations of
similar size and character as the Company.
The agreement provided that Mr. Bussone will participate in
an annual bonus plan that will establish a target annual bonus
opportunity equal to 50% of his base salary for the year. The
terms and provisions of the bonus plan, including the
performance goals and the threshold performance levels that must
be met for payment of a bonus will be established each year by
the compensation committee. The agreement further provides for
him to participate in any other compensation plan or program
maintained by the Company for senior executives as well as all
employee fringe benefit, pension and welfare benefit programs
which the Company makes available to senior executives.
Upon the termination of employment of Mr. Bussone by the
Company without cause (other than as a result of death or
disability which are addressed below), or upon a voluntary
termination by the executive for good reason, the agreement
provides for the following payments and benefits:
|
|
|
|
|
an amount equal to (A) one times his annual base salary if
termination occurs prior to a change in control or more than
12 months after a change in control or (B) if such
termination occurs upon a change in control or at any time
within 12 months after a change in control, the sum of two
times his annual base salary and one times his target annual
bonus;
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment);
|
|
|
|
unreimbursed business expenses; and
|
|
|
|
continued coverage under the Companys medical, disability
and life insurance plans for a period ending the earlier of
(A) the second anniversary of the date of termination or
(B) the date the executive becomes covered under comparable
plans of a new employer.
|
Upon termination by the Company with cause, or by
Mr. Bussone without good reason, the agreement provides for
the following payments:
|
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment); and
|
|
|
|
unreimbursed business expenses.
|
Upon termination of employment because of a total and permanent
disability, Mr. Bussone will receive any amounts due under
the terms of any disability insurance policy which the Company
maintains for him, a pro rata portion of the bonus (if any) for
the fiscal year in which the disability occurs, any earned but
unpaid salary (including any awarded but deferred bonus
payment), and any unreimbursed business expenses.
Upon termination of employment because of death,
Mr. Bussones estate or designated beneficiaries will
receive any death benefits provided under any plans the Company
maintains for him, pro rata portion of the
98
bonus (if any) for the fiscal year in which the death occurs,
any earned but unpaid salary (including any awarded but deferred
bonus payment), and any unreimbursed business expenses.
The agreement contains non-competition and nondisclosure
provisions. The nondisclosure provisions provide that
Mr. Bussone will not disclose confidential information
regarding the Company and its subsidiaries and affiliates at any
time following his termination of employment. The
non-competition provisions provide that he will not, for a
period of one year following the date of termination, compete
with the Company by directly or indirectly becoming involved
with a competitor of the Company. Furthermore, Mr. Bussone
agrees not to solicit employees of the Company for one year
following the date of his termination of employment.
Joan McCanless.
MedCath entered into an
amended and restated employment agreement with
Ms. McCanless, Senior Vice President and Chief Clinical and
Compliance Officer, on September 30, 2005. The agreement
provides for an initial three-year term that is automatically
renewed for successive one year terms unless either party
provides notice of non-renewal at least 90 days prior to
the end of the initial or any renewal term.
Ms. McCanless base salary is adjusted annually at the
discretion of the Board of Directors, but in no event will her
base salary be reduced nor be less than the median base salary
for a comparable position at corporations of similar size and
character as the Company.
The agreement provides that Ms. McCanless will participate
in an annual bonus plan that will establish a target annual
bonus opportunity equal to 50% of her base salary for the year.
The terms and provisions of the bonus plan, including the
performance goals and the threshold performance levels that must
be met for payment of a bonus will be established each year by
the compensation committee. The agreement further provides for
her to participate in any other compensation plan or program
maintained by the Company for senior executives as well as all
employee fringe benefit, pension and welfare benefit programs
which the Company makes available to senior executives.
Upon the termination of employment of Ms. McCanless by the
Company without cause (other than as a result of death or
disability which are addressed below), or upon a voluntary
termination by the executive for good reason, the agreement
provides for the following payments and benefits:
|
|
|
|
|
an amount equal to (A) one times her annual base salary if
termination occurs prior to a change in control or more than
12 months after a change in control or (B) if such
termination occurs upon a change in control or at any time
within 12 months after a change in control, the sum of two
times her annual base salary and one times her target annual
bonus;
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment);
|
|
|
|
unreimbursed business expenses; and
|
|
|
|
continued coverage under the Companys medical, disability
and life insurance plans for a period ending the earlier of
(A) the second anniversary of the date of termination or
(B) the date the executive becomes covered under comparable
plans of a new employer.
|
Upon termination by the Company with cause, or by
Ms. McCanless without good reason, the agreement provides
for the following payments:
|
|
|
|
|
earned but unpaid salary (including any awarded but deferred
bonus payment); and
|
|
|
|
unreimbursed business expenses.
|
Upon termination of employment because of a total and permanent
disability, Ms. McCanless will receive any amounts due
under the terms of any disability insurance policy which the
Company maintains for her, a pro rata portion of the bonus (if
any) for the fiscal year in which the disability occurs, any
earned but unpaid salary (including any awarded but deferred
bonus payment), and any unreimbursed business expenses.
Upon termination of employment because of death,
Ms. McCanless estate or designated beneficiaries will
receive any death benefits provided under any plans the Company
maintains for her, a pro rata portion of the bonus (if any) for
the fiscal year in which the death occurs, any earned but unpaid
salary (including any awarded but deferred bonus payment), and
any unreimbursed business expenses.
99
The agreement contains non-competition and nondisclosure
provisions. The nondisclosure provisions provide that
Ms. McCanless will not disclose confidential information
regarding the Company and its subsidiaries and affiliates at any
time following her termination of employment. The
non-competition provisions provide that she will not, for a
period of one year following the date of termination, compete
with the Company by directly or indirectly becoming involved
with a competitor of the Company. Furthermore,
Ms. McCanless agrees not to solicit employees of the
Company for one year following the date of her termination of
employment.
Paul Daniel Perritt.
MedCath entered into an
employment agreement with Mr. Perritt, Vice President,
Finance Operations, on October 29, 2009 (employment started
in December 2009). Mr. Perritts base salary is
adjusted annually at the discretion of Mr. French.
The agreement provides that Mr. Perritt will participate in
an annual bonus plan that will establish a target annual bonus
opportunity equal to 35% of his base salary for the year. The
terms and provisions of the bonus plan, including the threshold
performance levels that must be met for payment of a bonus will
be established each year by Mr. French. The agreement
further provides for him to participate in any other fringe
benefit, pension and welfare benefit programs which the Company
makes available to employees.
Upon the termination of employment of Mr. Perritt by the
Company without cause, or upon a voluntary termination by the
executive for good reason, the agreement provides for the
following payments and benefits:
|
|
|
|
|
an amount equal to (A) one half times his annual base
salary if termination occurs prior to a change in control or
(B) if such termination occurs upon a change in control or
at any time within 12 months after a change in control, the
sum of one times his annual base salary and one times his target
annual bonus;
|
|
|
|
earned but unpaid salary; and
|
|
|
|
unreimbursed business expenses.
|
Upon termination by the Company with cause, or by
Mr. Perritt without good reason, the agreement provides for
the following payments:
|
|
|
|
|
earned but unpaid salary; and
|
|
|
|
unreimbursed business expenses.
|
The agreement contains non-competition and nondisclosure
provisions. The nondisclosure provisions provide that
Mr. Perritt will not disclose confidential information
regarding the Company and its subsidiaries and affiliates at any
time following his termination of employment. The
non-competition provisions provide that he will not, for a
period of one year following the date of termination, compete
with the Company by directly or indirectly becoming involved
with a competitor of the Company. Furthermore, Mr. Perritt
agrees not to solicit employees of the Company for one year
following the date of his termination of employment.
100
Summary
Compensation Table
The following table sets forth the annual and long-term
compensation for the Named Executive Officers during the fiscal
years ended September 30, 2010, 2009, and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
All Other
|
|
|
Name and Principal
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Total
|
Position(s)
|
|
Year
|
|
($)
|
|
($)(2)
|
|
($)(1)
|
|
($)(1)
|
|
($)
|
|
($)
|
|
O. Edwin French
|
|
|
2010
|
|
|
$
|
625,000
|
|
|
$
|
234,375
|
|
|
$
|
854,885
|
|
|
$
|
|
|
|
$
|
15,275
|
(4)
|
|
$
|
1,729,535
|
|
President, Chief Executive Officer
|
|
|
2009
|
|
|
$
|
618,269
|
|
|
$
|
|
|
|
$
|
1,499,996
|
|
|
$
|
|
|
|
$
|
14,938
|
(3)
|
|
$
|
2,133,203
|
|
(principal executive officer)
|
|
|
2008
|
|
|
$
|
600,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
805,000
|
|
|
$
|
15,231
|
(3)
|
|
$
|
1,420,231
|
|
James A. Parker
|
|
|
2010
|
|
|
$
|
350,000
|
|
|
$
|
131,250
|
|
|
$
|
284,651
|
|
|
$
|
|
|
|
$
|
19,502
|
(3)
|
|
$
|
785,403
|
|
Executive Vice President,
|
|
|
2009
|
|
|
$
|
300,385
|
|
|
$
|
|
|
|
$
|
349,996
|
|
|
$
|
|
|
|
$
|
17,677
|
(3)
|
|
$
|
668,058
|
|
Chief Financial Officer
|
|
|
2008
|
|
|
$
|
300,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,107
|
(3)
|
|
$
|
319,107
|
|
(principal financial officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Bussone(7)
|
|
|
2010
|
|
|
$
|
425,000
|
|
|
$
|
85,000
|
|
|
$
|
32,734
|
|
|
$
|
|
|
|
$
|
133,178
|
(5)
|
|
$
|
675,912
|
|
Executive Vice President and
|
|
|
2009
|
|
|
$
|
22,885
|
|
|
$
|
|
|
|
$
|
499,999
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
522,884
|
|
President Operations Division
(beginning September 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joan McCanless
|
|
|
2010
|
|
|
$
|
246,170
|
|
|
$
|
92,314
|
|
|
$
|
91,004
|
|
|
$
|
|
|
|
$
|
10,550
|
(4)
|
|
$
|
440,038
|
|
Senior Vice President and
|
|
|
2009
|
|
|
$
|
245,502
|
|
|
$
|
|
|
|
$
|
123,084
|
|
|
$
|
|
|
|
$
|
10,603
|
(3)
|
|
$
|
379,189
|
|
Chief Clinical and Compliance Officer
|
|
|
2008
|
|
|
$
|
239,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,459
|
(3)
|
|
$
|
248,459
|
|
Paul Daniel Perritt
|
|
|
2010
|
|
|
$
|
217,039
|
|
|
$
|
47,250
|
|
|
$
|
67,502
|
|
|
$
|
|
|
|
$
|
110,629
|
(6)
|
|
$
|
442,420
|
|
Senior Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Operations
(beginning December 2009)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Both Stock and Option Awards are valued based on the fair value
of the award at the date of grant. The Stock Awards vest in
various increments as discussed in the
Equity Compensation
Awards
section of the
Compensation Discussion and
Analysis
section elsewhere in this proxy statement. The
Option Awards vest immediately but are subject to sales
restrictions for five years. As a result, this fair value may
not be indicative of the ultimate value the executive may
receive under a given grant. See Note 16 to MedCaths
Consolidated Financial Statements included in its Annual Report
on
Form 10-K
for the year ending September 30, 2010 for the valuation
assumptions used in determining the fair value of the awards.
|
|
|
|
|
|
(2)
|
|
Includes bonuses earned for performance in the fiscal year noted
even though such amounts are payable in subsequent years.
Excludes bonuses paid in the fiscal year noted but earned in
prior years. See Executive Compensation and Other
Information Compensation Discussion and
Analysis for further discussion on how bonuses were
determined.
|
|
|
|
|
|
(3)
|
|
The perquisites include 401(k) matching contributions, gymnasium
dues, and medical insurance.
|
|
|
|
|
|
(4)
|
|
The perquisites include 401(k) matching contributions and
medical insurance.
|
|
|
|
|
|
(5)
|
|
The perquisites include 401(k) matching contributions, gymnasium
dues, medical insurance and relocation expenses of $119,298.
|
|
|
|
|
|
(6)
|
|
The perquisites include 401(k) matching contributions, gymnasium
dues, medical insurance and relocation expenses of $103,060.
|
|
|
|
|
|
(7)
|
|
Mr. Bussones employment with the Company was
terminated in December 2010.
|
101
Grants of
Plan Based Awards During 2010
The following table sets forth information regarding all grants
of awards made to our Named Executive Officers during fiscal
year 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts
|
|
Estimated Possible Payouts
|
|
|
|
|
|
|
|
|
Under Non-Equity Incentive
|
|
Under Equity Incentive
|
|
|
|
|
|
|
|
|
Plan Awards
|
|
Plan Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
Stock/
|
|
|
Grant
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Stock or
|
|
Option
|
Name
|
|
Date(1)
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
Units (#)
|
|
Awards(1)
|
|
O. Edwin French
|
|
|
12/10/09
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,503
|
|
|
$
|
427,446
|
|
President, Chief Executive Officer
|
|
|
12/10/09
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,502
|
|
|
$
|
427,439
|
|
(principal executive officer)
|
|
|
|
|
|
|
117,188
|
|
|
|
234,375
|
|
|
|
468,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Parker
|
|
|
12/10/09
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,479
|
|
|
$
|
142,329
|
|
Executive Vice President and
|
|
|
12/10/09
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,478
|
|
|
$
|
142,322
|
|
Chief Financial Officer
|
|
|
|
|
|
|
43,750
|
|
|
|
87,500
|
|
|
|
175,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(principal financial officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Bussone
|
|
|
12/10/09
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,355
|
|
|
$
|
16,367
|
|
Former Executive Vice President and
|
|
|
12/10/09
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,355
|
|
|
$
|
16,367
|
|
President Operations Division
|
|
|
|
|
|
|
53,125
|
|
|
|
106,250
|
|
|
|
212,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(September 2009 through December 2010)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joan McCanless
|
|
|
12/10/09
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
|
$
|
45,502
|
|
Senior Vice President and Chief
|
|
|
12/10/09
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
|
$
|
45,502
|
|
Clinical and Compliance Officer
|
|
|
|
|
|
|
30,771
|
|
|
|
61,543
|
|
|
|
61,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Daniel Perritt
|
|
|
12/1/09
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,605
|
|
|
$
|
33,755
|
|
Senior Vice President,
|
|
|
12/1/09
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,604
|
|
|
$
|
33,747
|
|
Finance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,875
|
|
|
|
33,750
|
|
|
|
33,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Restricted stock awards are valued based on the closing price of
the Companys stock on the date of grant.
|
|
|
|
|
|
(2)
|
|
Grants were issued pursuant to the MedCath Corporation 2006
Stock Option and Award Plan.
|
|
|
|
|
|
(3)
|
|
Restricted stock awards vest over a three year period.
|
|
|
|
|
|
(4)
|
|
Performance based restricted stock awards vest over a three year
period based on the Company meeting specific performance
conditions in each given year. See Executive Compensation
and Other Information Compensation Discussion and
Analysis.
|
102
Outstanding
Equity Awards at Fiscal Year End Table
All of the stock options granted vest on the date of grant but
contain sales restrictions. The following table sets forth
information with respect to options to purchase the
Companys common stock and restricted stock awards held by
the named executive officers as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Equity Awards at Fiscal Year End
|
|
|
Options Awards(1)
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Awards:
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Market or
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
Unearned
|
|
Payout Value of
|
|
|
|
|
Number of
|
|
|
|
|
|
Shares or
|
|
Market Value
|
|
Shares, Units
|
|
Unearned
|
|
|
|
|
Securities
|
|
|
|
|
|
Units of
|
|
of Shares or
|
|
or Other
|
|
Shares, Units or
|
|
|
|
|
Underlying
|
|
Option
|
|
|
|
Stock That
|
|
Units of Stock
|
|
Rights That
|
|
Other Rights
|
|
|
|
|
Unexercised
|
|
Exercise
|
|
|
|
Have Not
|
|
That Have Not
|
|
Have Not
|
|
That Have Not
|
|
|
Award
|
|
Options (#)
|
|
Price
|
|
Option
|
|
Vested
|
|
Vested
|
|
Vested
|
|
Vested
|
Name
|
|
Grant Date
|
|
Exercisable
|
|
($)
|
|
Expiration Date
|
|
(#)
|
|
($)(2)
|
|
(#)
|
|
($)
|
|
O. Edwin French
|
|
|
2/21/2006
|
|
|
|
500,000
|
|
|
$
|
21.49
|
|
|
|
2/21/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President, Chief
|
|
|
3/9/2006
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
39,063
|
|
|
$
|
393,364
|
|
Executive Officer
|
|
|
11/13/2007
|
|
|
|
70,000
|
|
|
$
|
26.50
|
|
|
|
11/13/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/13/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,191
|
|
|
$
|
535,633
|
|
|
|
|
|
|
$
|
|
|
|
|
|
2/13/2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
79,787
|
|
|
$
|
803,455
|
|
|
|
|
12/10/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,503
|
|
|
$
|
619,335
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,502
|
|
|
$
|
619,325
|
|
James A. Parker
|
|
|
2/26/2001
|
|
|
|
20,000
|
|
|
$
|
19.00
|
|
|
|
2/26/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Vice
|
|
|
8/11/2004
|
|
|
|
16,500
|
|
|
$
|
15.13
|
|
|
|
8/11/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President,
|
|
|
2/16/2005
|
|
|
|
10,000
|
|
|
$
|
26.46
|
|
|
|
2/16/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
6/12/2006
|
|
|
|
31,000
|
|
|
$
|
14.89
|
|
|
|
6/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/13/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,319
|
|
|
$
|
53,562
|
|
|
|
|
|
|
$
|
|
|
|
|
|
2/13/2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
7,978
|
|
|
$
|
80,338
|
|
|
|
|
9/17/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,033
|
|
|
$
|
70,822
|
|
|
|
|
|
|
$
|
|
|
|
|
|
9/17/2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
10,548
|
|
|
$
|
106,218
|
|
|
|
|
12/10/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,479
|
|
|
$
|
206,224
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2009
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,478
|
|
|
$
|
206,213
|
|
David Bussone
|
|
|
9/1/2009
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,107
|
|
|
$
|
222,617
|
|
|
|
|
|
|
$
|
|
|
Former Executive Vice
|
|
|
9/1/2009
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
24,510
|
|
|
$
|
246,816
|
|
President, President
|
|
|
12/10/2009
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,355
|
|
|
$
|
23,715
|
|
|
|
|
|
|
|
|
|
Operations Division
|
|
|
12/10/2009
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,355
|
|
|
$
|
23,715
|
|
Joan McCanless
|
|
|
12/12/2003
|
|
|
|
11,600
|
|
|
$
|
9.95
|
|
|
|
12/12/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President
|
|
|
1/7/2004
|
|
|
|
4,400
|
|
|
$
|
10.58
|
|
|
|
1/7/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Chief Clinical and
|
|
|
2/13/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,365
|
|
|
$
|
43,956
|
|
|
|
|
|
|
$
|
|
|
Compliance Officer
|
|
|
2/13/2009
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
6,547
|
|
|
$
|
65,928
|
|
|
|
|
12/10/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
|
$
|
65,928
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2009
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,547
|
|
|
$
|
65,928
|
|
Paul Daniel Perritt
|
|
|
12/1/2009
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,605
|
|
|
$
|
46,372
|
|
|
|
|
|
|
|
|
|
Senior Vice President,
|
|
|
12/1/2009
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,604
|
|
|
$
|
46,362
|
|
Finance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Options vest immediately upon grant but remain subject to sales
restrictions for five years.
|
|
|
|
|
|
(2)
|
|
Market value based on September 30, 2010 closing market
price of our common stock of $10.07 per share.
|
|
(3)
|
|
The Compensation Committee waived the performance vesting
criteria for these shares and the shares became fully vested in
December 2010.
|
|
(4)
|
|
Restricted stock awards vest over a three year period.
|
|
(5)
|
|
These shares became fully vested upon the termination of
Mr. Bussones employment in December 2010.
|
|
(6)
|
|
Performance based restricted stock awards vest over a three year
period based on the Company meeting specific performance
conditions in each given year as discussed in the Equity
Compensation Awards section of the Compensation Discussion and
Analysis section elsewhere in this proxy statement.
|
103
Option
Exercises and Stock Vested Table
The following table sets forth information concerning each
exercise of stock options and each vesting of restricted stock
and restricted stock units during 2010 for each of the Named
Executive Officers on an aggregated basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
Number of
|
|
|
|
Number of
|
|
|
|
|
Shares
|
|
Value
|
|
Shares
|
|
Value
|
|
|
Acquired on
|
|
Realized on
|
|
Acquired on
|
|
Realized on
|
|
|
Exercise
|
|
Exercise
|
|
Vesting
|
|
Vesting
|
Name
|
|
(#)
|
|
($)
|
|
(#)
|
|
($)(1)
|
|
O. Edwin French
|
|
|
|
|
|
|
|
|
|
|
26,596
|
|
|
$
|
210,374
|
|
President, Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Parker
|
|
|
|
|
|
|
|
|
|
|
6,176
|
|
|
$
|
48,852
|
|
Executive Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Bussone
|
|
|
|
|
|
|
|
|
|
|
11,053
|
|
|
$
|
87,429
|
|
Former Executive Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President Operations Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joan McCanless
|
|
|
|
|
|
|
|
|
|
|
2,182
|
|
|
$
|
17,260
|
|
Senior Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Clinical and Compliance Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul Daniel Perritt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents pretax gain upon vesting.
|
Potential
Payments upon Termination or
Change-in-Control
Table
The Company has entered into certain agreements and maintains
certain plans that will require the Company to provide
compensation to executive officers in the event of a termination
of employment without cause or a change in control of the
Company. The amount of compensation payable to each executive
officer if each situation occurred on September 30, 2010 is
listed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
Termination
|
|
|
Value
|
|
|
Value
|
|
|
|
Termination
|
|
|
Related to
|
|
|
of
|
|
|
of
|
|
Name
|
|
Without Cause
|
|
|
Change in Control
|
|
|
Stock Options
|
|
|
Stock Awards
|
|
|
O. Edwin French
|
|
$
|
1,718,750
|
(1)
|
|
$
|
1,734,547
|
(2)
|
|
$
|
|
|
|
$
|
2,971,113
|
(6)
|
President, Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Parker
|
|
|
350,000
|
(3)
|
|
|
896,966
|
(2)
|
|
|
|
|
|
|
723,378
|
(6)
|
Executive Vice President,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Bussone
|
|
|
425,000
|
(3)
|
|
|
1,071,872
|
(2)
|
|
|
|
|
|
|
516,863
|
(6)
|
Former Executive Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
President Operations Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joan McCanless
|
|
|
246,170
|
(3)
|
|
|
623,892
|
(2)
|
|
|
1,392
|
|
|
|
241,740
|
(6)
|
Senior Vice President and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Clinical and Compliance Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Perritt
|
|
|
135,000
|
(4)
|
|
|
364,500
|
(5)
|
|
|
|
|
|
|
92,735
|
(6)
|
Senior Vice President, Finance Operations (beginning December
2010)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Two times salary plus one times target annual incentive
compensation
|
|
|
|
|
|
(2)
|
|
Two times salary plus one times target annual incentive
compensation and estimated healthcare subsidy
|
|
|
|
|
|
(3)
|
|
One times salary
|
|
|
|
|
|
(4)
|
|
One half times salary
|
104
|
|
|
(5)
|
|
One times salary plus one times target annual incentive
compensation
|
|
|
|
|
|
(6)
|
|
Market value based on September 30, 2010 closing market
price of our common stock of $10.07 per share. Includes all
unvested time and performance based restricted shares outstanding
|
Compensation
Committee Report
We, the compensation committee of the Board of Directors of
MedCath Corporation, have reviewed and discussed the
Compensation Discussion and Analysis required by
Item 402(b) of
Regulation S-K
with management. Based on such review and discussion, we
recommended to the Board of Directors that the Compensation
Discussion and Analysis be included in the Annual Report on
Form 10-K
and
Form 10-K/A
for the fiscal year ended September 30, 2010 and this proxy
statement on Schedule 14A.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Pamela Bailey, Chairman
Robert S. McCoy, Jr.
John T. Casey
EQUITY
COMPENSATION PLAN INFORMATION
Pursuant to the Plan, the Company may award its executive
officers and employees incentive stock options, nonqualified
stock options, restricted stock units, and restricted stock.
Under the Plan the compensation committee may grant equity
awards and determine the exercise period, exercise price, number
of awards and such other conditions and restrictions as it deems
appropriate for each grant.
The following table summarizes the Companys equity
compensation plans as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Available for Future
|
|
|
|
|
Weighted Average
|
|
Issuance
|
|
|
Number of Securities to be
|
|
Exercise Price of
|
|
Under Equity
|
|
|
Issued Upon Exercise of
|
|
Outstanding
|
|
Compensation
|
Plan Category
|
|
Outstanding Options
|
|
Options
|
|
Plans
|
|
Equity Compensation Plans Approved by Stockholders
|
|
|
1,681,714
|
|
|
$
|
22.25
|
|
|
|
976,319
|
|
Equity Compensation Plans Not Approved by Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
DIRECTOR
COMPENSATION
Compensation
of Directors
Directors are reimbursed for
out-of-pocket
expenses incurred to attend meetings of the Board of Directors
and for meetings of any committees of the Board of Directors on
which they serve. Non-employee directors receive an annual
retainer to serve on the Board of Directors and a fee for each
Board of Directors and committee meeting attended. The chairman
of the Board of Directors and each committee chairman receive an
additional annual retainer.
The Board of Directors of director and committee fees for fiscal
2010 are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic
|
|
|
|
|
Board of
|
|
Audit
|
|
Compensation
|
|
Compliance
|
|
Options
|
|
Governance
|
|
|
Directors
|
|
Committee
|
|
Committee
|
|
Committee
|
|
Committee
|
|
Committee
|
|
Annual Retainer Member
|
|
$
|
30,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
Annual Retainer Chairman
|
|
$
|
50,000
|
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
|
$
|
25,000
|
|
|
$
|
180,000
|
|
|
$
|
|
|
Meeting
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
105
The compensation committee reviews and makes recommendations to
the Board regarding director compensation. The compensation
committee may from time to time seek the input of an independent
compensation consultant (although no consultant was used during
fiscal year 2010) to determine director and executive
compensation. During fiscal 2009 the Company compiled benchmark
director compensation data using Equilars research
database, an independent resource for benchmarking director
compensation and analyzing CEO and executive pay trends. The
Company also engaged Mercer Consulting to conduct independent
market assessments and to make recommendations for compensation.
The Company used peer group compensation information of
publicly-traded companies to compile a report (the
Compensation Report) so the compensation committee
could benchmark total director cash and equity compensation
levels (Total Director Compensation). See the
section below entitled
Peer Group Selection and Benchmarking
for a detailed list of peer group companies recommended by
Mercer. The Committee continues to believe that these companies
represent an appropriate peer group and from time to time will
examine publicly disclosed pay practices of these companies when
evaluating proposed changes in the compensation.
The results of the Companys Compensation Report indicated
that the Total Director Compensation paid to the directors of
the Company for fiscal 2010 was comparable to the Total Director
Compensation paid to directors of the Benchmark Companies.
During fiscal 2010 the Company engaged Pearl Meyer, a leading
executive compensation consulting firm, to review the
appropriate compensation for the chairman of the newly formed
strategic options committee. The compensation committee reviewed
Pearl Meyers report to determine and approve the fiscal
2010 compensation for the chairman of the strategic options
committee.
The Company grants restricted stock units (RSU)
under the MedCath Corporation Amended and Restated Outside
Directors Stock Option Plan to each non-employee director
upon becoming a director and as of the Companys annual
stockholder meeting for each director who served as a director
as of the first day of each fiscal year. The RSUs are granted at
a fair value equal to the fair market value of the
Companys common stock at the date of grant, are fully
vested at the date of grant, and are paid in shares of the
Companys common stock upon each directors
termination of service on the Board of Directors. The table
below reflects the amounts of fees earned or paid in cash and
RSUs awarded to each non-employee director during the fiscal
year ended September 30, 2010.
Director
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned or
|
|
Equity
|
|
|
|
|
Paid in Cash
|
|
Awards
|
|
Total
|
Name
|
|
($)(1)
|
|
($)(2)
|
|
($)
|
|
Current Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. McCoy, Jr.
|
|
$
|
143,000
|
|
|
$
|
100,736
|
(3)
|
|
$
|
243,736
|
|
James A. Deal
|
|
|
79,500
|
|
|
|
100,736
|
(3)
|
|
|
180,236
|
|
Woodrin Grossman
|
|
|
208,500
|
|
|
|
100,736
|
(3)
|
|
|
309,236
|
|
John T. Casey
|
|
|
129,500
|
|
|
|
100,736
|
(3)
|
|
|
230,236
|
|
Pamela G. Bailey
|
|
|
77,417
|
|
|
|
100,736
|
(3)
|
|
|
178,153
|
|
Jacque J. Sokolov, MD
|
|
|
82,417
|
|
|
|
100,736
|
(3)
|
|
|
183,153
|
|
Former Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Galen D. Powers(4)
|
|
|
59,250
|
|
|
|
100,736
|
(3)
|
|
|
159,986
|
|
Edward R. Casas(5)
|
|
|
57,500
|
|
|
|
|
|
|
|
57,500
|
|
|
|
|
(1)
|
|
The amounts shown in this column represent the aggregate amount
of all fees earned or paid in cash for services as a director in
fiscal year 2010.
|
|
(2)
|
|
Represents the dollar amount recognized for financial statement
purposes with respect to the RSUs granted during fiscal 2010.
See Note 16 to MedCaths Consolidated Financial Statements
included in its Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010 for additional
details.
|
106
|
|
|
(3)
|
|
The grant date fair value of these awards was based on a grant
of 12,800 RSUs and a closing price of $7.87 as of March 3,
2010 (the grant date) for the Companys common stock.
|
|
(4)
|
|
Termination effective June 2010.
|
|
(5)
|
|
Termination effective February 2010.
|
Director
Equity Awards
Nonemployee directors had the following equity awards
outstanding as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Restricted
|
|
|
Option
|
|
Stock
|
|
|
Awards
|
|
Units(1)
|
|
Robert S. McCoy, Jr.
|
|
|
10,500
|
|
|
|
26,500
|
|
James A. Deal
|
|
|
|
|
|
|
18,400
|
|
Woodrin Grossman
|
|
|
|
|
|
|
26,500
|
|
John T. Casey
|
|
|
|
|
|
|
26,500
|
|
Pamela G. Bailey
|
|
|
|
|
|
|
26,500
|
|
Jacque J. Sokolov, MD
|
|
|
10,500
|
|
|
|
26,500
|
|
|
|
|
(1)
|
|
Restricted stock units are fully vested at the date of grant and
are paid in shares of common stock upon each applicable
directors termination of service on the Board of Directors.
|
CERTAIN
TRANSACTIONS
The Company and its Board of Directors continually scrutinize
proposed business arrangements to identify and evaluate
potential related party transactions. Related party transactions
are evaluated by either the full Board of Directors or a
committee of the Board of Directors depending on the subject
matter of the arrangement and the facts giving rise to any
possible conflicts of interest. The Board of Directors has a
policy which requires (i) Board of Directors members to
disclose conflicts if they arise and (ii) the evaluation by
the Board of Directors, or the applicable committee, of any such
conflict. No such transactions were entered into during the
fiscal year ended September 30, 2010 and none are
anticipated during the fiscal year ending September 30,
2011.
OTHER
MATTERS
Stockholder
Proposals
Proposals of stockholders intended to be presented at the
Companys 2012 annual meeting and included in the
Companys proxy materials relating to that meeting must be
received by the Company at its principal executive offices
addressed to the Secretary of the Company no later than the
close of business on February 28, 2012. Proposals of
stockholders intended to be presented at the 2012 annual meeting
that the Company may not be required to include in its proxy
materials relating to the meeting or nominations of persons for
election to the Board by a stockholder, must be delivered to or
mailed and received at the Companys principal executive
offices addressed to the Secretary of the Company no earlier
than May 12, 2012 and no later than June 11, 2012.
Expenses
and Solicitation
The Company will bear the entire cost of this proxy
solicitation, including the preparation, printing, and mailing
of the proxy statement, the proxy and any additional soliciting
materials sent by the Company to stockholders. The Company may
reimburse brokerage firms and other persons representing
beneficial owners of shares for reasonable expenses incurred by
them in forwarding proxy soliciting materials to such beneficial
owners. In addition to solicitations by mail, certain of the
Companys directors, officers, and regular employees,
without additional remuneration, may solicit proxies by
telephone, facsimile, and personal
107
interviews. Solicitation by officers and employees of the
Company may also be made of some stockholders in person or by
mail, telephone, or facsimile following the original
solicitation.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors
and certain officers and any persons who beneficially own more
than 10% of our capital stock to file with the Commission,
various reports as to ownership and change in ownership of such
capital stock. Such persons are required by Commission
regulations to furnish us with copies of all Section 16(a)
forms they file. Based solely upon reports and representations
submitted by the directors, certain officers and holders of more
than 10% of our capital stock, all Forms 3, 4 and 5 showing
ownership of and changes in ownership of our capital stock
during 2010 were timely filed with the Commission.
Delivery
of Proxy Statements
As permitted by the Securities Exchange Act of 1934, as amended,
only one copy of this proxy statement and the annual report is
being delivered to stockholders residing at the same address,
unless such stockholders have notified us of their desire to
receive multiple copies of the proxy statement or annual report.
We will promptly deliver, upon oral or written request, a
separate copy of this proxy statement or annual report to any
stockholder residing at a shared address to which only one copy
was mailed. Requests for additional copies of this proxy
statement or annual report, requests to receive multiple copies
of future proxy statements or annual reports and requests to
receive only one copy of future proxy statements or annual
reports should be directed to James A. Parker, Secretary, at
MedCaths principal executive offices, 10720 Sikes Place,
Suite 200, Charlotte, North Carolina 28277,
(704) 815-7700.
Important Notice Regarding the Availability of Proxy
Materials for the Stockholder Meeting to Be Held on
July 26, 2011:
The Companys Notice of Meeting for the Annual Meeting,
Proxy Statement for the Annual Meeting, form of proxy card,
Annual Report to Stockholders and Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010 are available
at:
http://phx.corporate-ir.net/phoenix.zhtml?c=129804&p=irol-sec&control_selectgroup=Proxy%20Filings
CAUTIONARY
STATEMENT
CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement includes forward-looking statements,
including statements regarding the proposed sale of all or
substantially all of our assets. These statements are not
statements of historical facts and do not reflect historical
information. This proxy statement contains certain
forward-looking statements with respect to the financial
condition, results of operations, plans, objectives, future
performance and business of the Company and its subsidiaries and
the effect of the proposed sale of all or substantially all of
our assets. Words or phrases such as will likely
result, are expected to, will
continue, is anticipated,
estimate, project, believe
or similar expressions identify forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as amended. Forward-looking
statements are subject to numerous risks and uncertainties and
actual results may differ materially from those statements.
Stockholders are cautioned not to place undue reliance on such
statements, which speak only as of the date hereof. Neither the
Company nor any of its subsidiaries undertakes any obligation to
update such forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence
of unanticipated events.
108
INCORPORATION
BY REFERENCE
The following documents, which have been filed by the Company
with the SEC, copies of which can be found on the SECs
website at
http://www.sec.gov,
are incorporated into this proxy statement by reference thereto:
|
|
|
|
|
The Companys Annual Report on
Form 10-K
for the fiscal year ended September 30, 2010 filed with the
SEC on December 14, 2010 (other than the information
included in Items 6 and 8 to such report, which has been
superseded by the Current Report on Form 8-K filed by the
Company on May 27, 2011) and amended by our Annual Report
on Form
10-K/A
filed
with the SEC on January 28, 2011.
|
|
|
|
The Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended December 31, 2010 filed with
the SEC on February 9, 2011.
|
|
|
|
The Companys Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2011 filed with the
SEC on May 10, 2011.
|
|
|
|
The Companys Current Reports on
Form 8-K
filed with the SEC on October 5, 2010, November 5,
2010, November 9, 2010, November 15, 2010,
November 26, 2010, December 22, 2010, January 6,
2011, May 12, 2011, May 27, 2011, June 15, 2011
and June 15, 2011.
|
Other than the current report on
Form 8-K
listed above that is hereby expressly incorporated by reference,
we are not incorporating by reference any current reports that
are not deemed to be filed for purposes of
Section 18 of the Exchange Act, and will not incorporate by
reference future filings of current reports on
Form 8-K
into a filing under the Securities Act of 1933, as amended, or
the Exchange Act or into this proxy statement that are not
deemed to be filed for purposes of Section 18
of the Exchange Act.
All documents filed by the Company under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act, after the
date hereof and before the date of the Annual Meeting are deemed
to be incorporated by reference into and to be a part of this
proxy statement from the date of filing of those documents.
Any statement contained in a document incorporated or deemed to
be incorporated in this proxy statement by reference will be
deemed to be modified or superseded for purposes of this proxy
statement to the extent that a statement contained in this proxy
statement or any other subsequently filed document that is
deemed to be incorporated in this proxy statement by reference
modifies or supersedes the statement. Any statement so modified
or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement.
The Company files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and
copy any reports, proxy statements or other information that we
file with the SEC at the following location of the SEC, Public
Reference Room, 100 F Street, N.E.,
Washington, D.C. 20549.
Please call the SEC at
1-800-SEC-0330
for further information on the public reference rooms. You may
also obtain copies of this information by mail from the Public
Reference Section of the SEC, 100 F Street, N.E.,
Washington, D.C. 20549, at prescribed rates. The
Companys public filings are also available to the public
from document retrieval services and the Internet website
maintained by the SEC at www.sec.gov.
Any person, including any beneficial owner, to whom this proxy
statement is delivered may request copies of reports, proxy
statements or other information concerning us, including any
information incorporated into this proxy statement by reference,
without charge, by written or telephonic request directed to us
at MedCath Corporation, 10720 Sikes Place, Suite 200,
Charlotte, North Carolina 28277,
Telephone: (704) 815-7700,
Attention: James A. Parker, Secretary.
No persons have been authorized to give any information or to
make any representations other than those contained in this
proxy statement and, if given or made, such information or
representations must not be relied upon as having been
authorized by us or any other person. You should not assume that
the information contained in this proxy statement is accurate as
of any date other than the date on which this proxy statement is
first mailed to stockholders, and the mailing of this proxy
statement to our stockholders shall not create any implication
to the contrary.
109
New Mexico,
LLC
Unaudited Financial Statements as of and for the
Years Ended September 30, 2010 and 2009
F-1
HEART
HOSPITAL OF NEW MEXICO, LLC
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7-F-14
|
|
F-2
HEART
HOSPITAL OF NEW MEXICO, LLC
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
9,258
|
|
|
$
|
12,542
|
|
Accounts receivable, net
|
|
|
9,198
|
|
|
|
7,912
|
|
Medical supplies
|
|
|
1,932
|
|
|
|
1,839
|
|
Prepaid expenses and other current assets
|
|
|
2,921
|
|
|
|
2,527
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
23,309
|
|
|
|
24,820
|
|
Property and equipment, net
|
|
|
28,246
|
|
|
|
25,019
|
|
Intangible assets, net
|
|
|
253
|
|
|
|
285
|
|
Other assets
|
|
|
1,766
|
|
|
|
1,269
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,574
|
|
|
$
|
51,393
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,605
|
|
|
$
|
4,115
|
|
Accrued compensation and benefits
|
|
|
1,863
|
|
|
|
1,230
|
|
Other accrued liabilities
|
|
|
3,667
|
|
|
|
4,082
|
|
Due to affiliate
|
|
|
192
|
|
|
|
149
|
|
Short-term borrowings and current portion of loans payable to
affiliate
|
|
|
1,012
|
|
|
|
387
|
|
Current portion of obligations under capital leases
|
|
|
2,072
|
|
|
|
1,251
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
11,411
|
|
|
|
11,214
|
|
Loans payable to affiliate
|
|
|
23,118
|
|
|
|
23,855
|
|
Obligations under capital leases
|
|
|
4,870
|
|
|
|
3,466
|
|
Other long-term obligations
|
|
|
1,749
|
|
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
41,148
|
|
|
|
39,787
|
|
Members capital
|
|
|
12,426
|
|
|
|
11,606
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
53,574
|
|
|
$
|
51,393
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-3
HEART
HOSPITAL OF NEW MEXICO, LLC
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
81,232
|
|
|
$
|
75,425
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
22,032
|
|
|
|
21,295
|
|
Medical supplies expense
|
|
|
21,213
|
|
|
|
19,576
|
|
Bad debt expense
|
|
|
5,438
|
|
|
|
5,303
|
|
Other operating expenses
|
|
|
17,167
|
|
|
|
17,365
|
|
Depreciation
|
|
|
2,934
|
|
|
|
2,824
|
|
Amortization
|
|
|
32
|
|
|
|
32
|
|
Loss on disposal of property, equipment and other assets
|
|
|
43
|
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
68,859
|
|
|
|
66,486
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,373
|
|
|
|
8,939
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,319
|
)
|
|
|
(2,184
|
)
|
Interest and other income
|
|
|
66
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(2,253
|
)
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,120
|
|
|
$
|
6,776
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-4
HEART
HOSPITAL OF NEW MEXICO, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Mexico
|
|
|
New Mexico
|
|
|
Southwest
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
Heart
|
|
|
Cardiology
|
|
|
|
|
|
|
|
|
|
Management,
|
|
|
Institute,
|
|
|
Associates,
|
|
|
Physician
|
|
|
|
|
|
|
Inc.
|
|
|
LLC
|
|
|
LLC
|
|
|
Members
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance, September 30, 2008
|
|
$
|
12,188
|
|
|
$
|
2,430
|
|
|
$
|
1,633
|
|
|
$
|
|
|
|
$
|
16,251
|
|
Distributions to members
|
|
|
(8,566
|
)
|
|
|
(1,713
|
)
|
|
|
(1,142
|
)
|
|
|
|
|
|
|
(11,421
|
)
|
Net income
|
|
|
5,082
|
|
|
|
1,016
|
|
|
|
678
|
|
|
|
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
8,704
|
|
|
|
1,733
|
|
|
|
1,169
|
|
|
|
|
|
|
|
11,606
|
|
Transfer of membership interest (Note 1)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
Distributions to members
|
|
|
(6,956
|
)
|
|
|
(1,395
|
)
|
|
|
(949
|
)
|
|
|
|
|
|
|
(9,300
|
)
|
Net income
|
|
|
7,575
|
|
|
|
1,518
|
|
|
|
1,012
|
|
|
|
15
|
|
|
|
10,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
9,296
|
|
|
$
|
1,856
|
|
|
$
|
1,232
|
|
|
$
|
42
|
|
|
$
|
12,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-5
HEART
HOSPITAL OF NEW MEXICO, LLC
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
10,120
|
|
|
$
|
6,776
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
5,438
|
|
|
|
5,303
|
|
Depreciation
|
|
|
2,934
|
|
|
|
2,824
|
|
Amortization
|
|
|
32
|
|
|
|
32
|
|
Loss on disposal of property, equipment and other assets
|
|
|
43
|
|
|
|
91
|
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(6,724
|
)
|
|
|
(2,114
|
)
|
Medical supplies
|
|
|
(93
|
)
|
|
|
(272
|
)
|
Prepaid expenses and other assets
|
|
|
71
|
|
|
|
(6,216
|
)
|
Accounts payable and accrued liabilities
|
|
|
(1,403
|
)
|
|
|
9,372
|
|
Due to affiliate
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,540
|
|
|
|
15,796
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,805
|
)
|
|
|
(1,752
|
)
|
Proceeds from sale of property and equipment
|
|
|
3
|
|
|
|
2
|
|
Changes in restricted cash
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,803
|
)
|
|
|
(1,750
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of obligations under capital leases
|
|
|
(1,530
|
)
|
|
|
(791
|
)
|
Proceeds from loans payable to affiliate
|
|
|
|
|
|
|
6,515
|
|
Repayments of loans payable to affiliate
|
|
|
(191
|
)
|
|
|
(6,495
|
)
|
Distributions to members
|
|
|
(9,300
|
)
|
|
|
(11,421
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11,021
|
)
|
|
|
(12,192
|
)
|
Net (decrease) increase in cash
|
|
|
(3,284
|
)
|
|
|
1,854
|
|
Cash:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
12,542
|
|
|
|
10,688
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
9,258
|
|
|
$
|
12,542
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,277
|
|
|
$
|
2,184
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Equipment financed under capital leases
|
|
$
|
3,755
|
|
|
$
|
3,610
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-6
HEART
HOSPITAL OF NEW MEXICO, LLC
(All
tables in thousands)
Heart Hospital of New Mexico, LLC (the Company) is a
New Mexico limited liability company that was formed on
February 18, 1998, to develop, own and operate an
acute-care hospital located in Albuquerque, New Mexico,
specializing in all aspects of cardiology and cardiovascular
surgery. The hospital commenced operations on October 18,
1999.
New Mexico Hospital Management, Inc., an indirect wholly owned
subsidiary of MedCath Corporation (MedCath), held a
75.0% interest in the Company. New Mexico Heart Institute, LLC
and Southwest Cardiology Associates, LLC (collectively the
Group Members) held a 15.0% and 10.0% interest,
respectively.
Effective December 31, 2009, MedCath sold a 0.2% of its
interest in the Company to certain physicians (the
Physician Members) for $140,000, which reduced
MedCaths ownership interest in the Company to 74.8%. The
Group Members continued to hold 25.0% and the physician
Members ownership interest in the Company is 0.2%.
New Mexico Hospital Management, Inc. acts as the managing member
in accordance with the Companys operating agreement. The
Company will cease to exist on December 31, 2097, unless
the members elect earlier dissolution.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities in the
financial statements and accompanying notes. There is a
reasonable possibility that actual results may vary
significantly from those estimates.
Fair Value of Financial Instruments
The
Company considers the carrying amounts of significant classes of
financial instruments on the balance sheets to be reasonable
estimates of fair value due either to their length to maturity
or the existence of variable interest rates underlying such
financial instruments that approximate prevailing market rates
at September 30, 2010 and 2009. The Companys
significant classes of financial instruments on the balance
sheets, for which the carrying amounts and estimated fair values
differ at September 30, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
Fixed rate loan payable to affiliate
|
|
$
|
23,722
|
|
|
$
|
26,069
|
|
|
$
|
23,855
|
|
|
$
|
27,427
|
|
The fair value of the Companys fixed rate loan payable to
affiliate was estimated using discounted cash flow analyses,
based on the Companys incremental borrowing rates at the
respective reporting dates for similar types of arrangements.
Cash
Cash consists of currency on hand and
demand deposits with financial institutions. At both
September 30, 2010 and 2009, the Company has included in
prepaid expenses and other current assets on the accompanying
balance sheets cash balances of $0.3 million, which are
restricted to meet the current amount of affiliate debt and
interest payments.
Concentrations of Credit Risk
The Company
grants credit without collateral to its patients, most of whom
are insured under payment arrangements with third-party payors,
including Medicare, Medicaid, and
F-7
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
commercial insurance carriers. The following table summarizes
the percentage of net accounts receivable from all payors at
September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Medicare and Medicaid
|
|
|
33
|
%
|
|
|
36
|
%
|
Commercial and Other
|
|
|
58
|
%
|
|
|
54
|
%
|
Self-pay
|
|
|
9
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Allowance for Doubtful Accounts
Accounts
receivable primarily consist of amounts due from third-party
payors and patients. To provide for accounts receivable that
could become uncollectible in the future, the Company
establishes an allowance for doubtful accounts to reduce the
carrying value of such receivables to their estimated net
realizable value. The Company estimates this allowance based on
such factors as payor mix, aging and its historical collection
experience and write-offs.
Medical Supplies
Medical supplies consist
primarily of supplies necessary for diagnostics, catheterization
and surgical procedures and general patient care and are stated
at the lower of
first-in,
first-out cost or market.
Property and Equipment
Property and equipment
are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which generally
range from 25 to 40 years for buildings and improvements,
25 years for land improvements, and from 3 to 10 years
for equipment, furniture and software. Repairs and maintenance
costs are charged to operating expense while betterments are
capitalized as additions to the related assets. Retirements,
sales and disposals of assets are recorded by removing the
related cost and accumulated depreciation with any resulting
gain or loss reflected in income from operations. Amortization
of property and equipment recorded under capital leases is
included in depreciation expense. Interest expense incurred in
connection with the expansion of the hospital is capitalized as
part of the cost of the building until the expansion is
operational, at which time depreciation begins using the
straight-line method over the estimated useful life of the
building.
Intangible Assets
Intangible assets consist
of parking rights (Parking Rights), which are
representative of the Companys right to use a parking
structure placed in service on September 30, 2003. The
Parking Rights are recorded at a gross value of
$0.5 million and are being amortized over 15 years.
The cumulative amount of Parking Rights amortization at
September 30, 2010 and 2009 was $0.2 million.
Amortization expense recognized for Parking Rights totaled
$32,000 for both years ended September 30, 2010 and 2009.
The estimated aggregate amortization expense for each of the
five fiscal years succeeding the year ended September 30,
2010 is $32,000 per year.
Long-Lived Assets
Long-lived assets are
evaluated for impairment when events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows
expected to result from the use of these assets and their
eventual disposition are less than their carrying amount. The
determination of whether or not long-lived assets have become
impaired involves a significant level of judgment in the
assumptions underlying the approach used to determine the
estimated future cash flows expected to result from the use of
those assets. Changes in the Companys strategy,
assumptions
and/or
market conditions could significantly impact these judgments and
require adjustments to recorded amounts of long-lived assets. No
impairment charges of long-lived assets were necessary for the
years ended September 30, 2010 and 2009.
Revenue Recognition
Amounts the Company
receives for treatment of patients covered by governmental
programs such as Medicare and Medicaid and other third-party
payors such as commercial insurers, health
F-8
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
maintenance organizations and preferred provider organizations
are generally less than established billing rates. Payment
arrangements with third-party payors may include prospectively
determined rates per discharge or per visit, a discount from
established charges, per diem payments, reimbursed costs
(subject to limits)
and/or
other
similar contractual arrangements. As a result, net revenue for
services rendered to patients is reported at the estimated net
realizable amounts as services are rendered. The Company
accounts for the differences between the estimated realizable
rates under the reimbursement program and the standard billing
rates as contractual adjustments.
The majority of the Companys contractual adjustments are
system-generated at the time of billing based on either
government fee schedules or fee schedules contained in managed
care agreements with various insurance plans. Portions of the
Companys contractual adjustments are performed manually
and these adjustments primarily relate to patients that have
insurance plans with whom the Company does not have contracts
containing discounted fee schedules, also referred to as
non-contracted payors, patients that have secondary insurance
plans following adjudication by the primary payor, uninsured
self-pay patients and charity care patients. Estimates of
contractual adjustments are made on a payor-specific basis and
based on the best information available regarding the
Companys interpretation of the applicable laws,
regulations and contract terms. While subsequent adjustments to
the systematic contractual allowances can arise due to denials,
short payments deemed immaterial for continued collection effort
and a variety of other reasons, such amounts have not
historically been significant.
The Company continually reviews the contractual estimation
process to consider and incorporate updates to the laws and
regulations and any changes in the contractual terms of its
programs. Final settlements under some of these programs are
subject to adjustment based on audit by third parties, which can
take several years to determine. From a procedural standpoint,
the Company subsequently adjusts those settlements as new
information is obtained from audits or review by the fiscal
intermediary, and, if the result of the fiscal intermediary
audit or review impacts other unsettled and open cost reports,
then the Company recognizes the impact of those adjustments. As
such, the Company recognized net adjustments that decreased net
revenue by $0.3 million and $1.3 million in the year
ended September 30, 2010 and 2009, respectively.
A significant portion of the Companys net revenue is
derived from federal and state governmental healthcare programs,
including Medicare and Medicaid, which, combined, accounted for
45% and 48% of the Companys net revenue during the years
ended September 30, 2010 and 2009, respectively. Medicare
payments for inpatient acute services and certain outpatient
services are generally made pursuant to a prospective payment
system. Under this system, a hospital is paid a
prospectively-determined fixed amount for each hospital
discharge based on the patients diagnosis. Specifically,
each discharge is assigned to a Medicare severity
diagnosis-related group (MS-DRG). Based upon the
patients condition and treatment during the relevant
inpatient stay, each MS-DRG is assigned a fixed payment rate
that is prospectively set using national average costs per case
for treating a patient for a particular diagnosis. The MS-DRG
rates are adjusted by an update factor each federal fiscal year,
which begins on October 1. The update factor is determined,
in part, by the projected increase in the cost of goods and
services that are purchased by hospitals, referred to as the
market basket index. MS-DRG payments do not consider the actual
costs incurred by a hospital in providing a particular inpatient
service; however, MS-DRG payments are adjusted by a
predetermined adjustment factor assigned to the geographic area
in which the hospital is located. While hospitals generally do
not receive direct payment in addition to a MS-DRG payment,
hospitals may qualify for additional capital-related costs
reimbursement and outlier payments from Medicare under specific
circumstances. Medicare payments for non-acute services, certain
outpatient services, medical equipment, and education costs are
made based on a cost reimbursement methodology and are under
transition to various methodologies involving prospectively
determined rates. The Company is reimbursed for
cost-reimbursable items at a tentative rate with final
settlement determined after submission of annual cost reports by
the Company and audits thereof by the
F-9
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Medicare fiscal intermediary. Medicaid payments for inpatient
and outpatient services are made at prospectively determined
amounts and cost based reimbursement, respectively.
The Company provides care to patients who meet certain criteria
under its charity care policy without charge or at amounts less
than its established rates. Any discounts provided to these
patients are recorded as a reduction to gross patient revenue.
During the years ended September 30, 2010 and 2009, the
Company provided charity care of $0.2 million and
$0.5 million, respectively.
Advertising
Advertising costs are expensed as
incurred. During the years ended September 30, 2010 and
2009, the Company incurred $0.5 million and
$0.7 million, respectively, of advertising expenses.
Income Taxes
The Company has elected to be
treated as a limited liability company for federal and state
income tax purposes. As such, all taxable income or loss of the
Company is included in the income tax returns of the respective
members. Accordingly, no provision has been made for federal or
state income taxes in the accompanying financial statements.
Members Share of Net Income and Loss
In
accordance with the operating agreement, net income and loss are
first allocated to the members based on their respective
ownership percentages. If the cumulative losses of the Company
exceed its initial capitalization and committed capital
obligations of the members, New Mexico Hospital Management,
Inc., the Companys managing member will recognize a
disproportionate share of the Companys losses that
otherwise would be allocated to all of its members on a pro rata
basis. In such cases, New Mexico Hospital Management, Inc. will
recognize a disproportionate share of the Companys future
profits to the extent it has previously recognized a
disproportionate share of the Companys losses.
New Accounting Pronouncements
In August 2010,
the FASB issued Accounting Standard Updates (ASU)
2010-24,
Health Care Entities (Topic 954): Presentation of
Insurance Claims and Related Insurance Recoveries, which
clarifies that a health care entity should not net insurance
recoveries against a related claim liability. The guidance
provided in this ASU is effective as of the beginning of the
first fiscal year beginning after December 15, 2010, fiscal
2012 for the Company. The Company is evaluating the potential
impacts the adoption of this ASU will have on its financial
statements.
In August 2010, the FASB issued ASU
2010-23,
Health Care Entities (Topic 954): Measuring Charity Care
for Disclosure, which requires a company in the healthcare
industry to use its direct and indirect costs of providing
charity care as the measurement basis for charity care
disclosures. This ASU also requires additional disclosures of
the method used to identify such costs. The guidance provided in
this ASU is effective for fiscal years beginning after
December 15, 2010, fiscal 2012 for the Company. The
adoption of this ASU is not expected to have any impact on its
financial position or results of operations.
Accounts receivable, net, at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
18,176
|
|
|
$
|
17,469
|
|
Other receivables
|
|
|
130
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,306
|
|
|
|
17,662
|
|
Allowance for doubtful accounts
|
|
|
(9,108
|
)
|
|
|
(9,750
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
9,198
|
|
|
$
|
7,912
|
|
|
|
|
|
|
|
|
|
|
F-10
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Activity for the allowance for doubtful accounts for the years
ended September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of year
|
|
$
|
9,750
|
|
|
$
|
6,294
|
|
Bad debt expense
|
|
|
5,438
|
|
|
|
5,303
|
|
Write-offs, net of recoveries
|
|
|
(6,080
|
)
|
|
|
(1,847
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
9,108
|
|
|
$
|
9,750
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
Property and equipment, net, at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and improvements
|
|
$
|
2,363
|
|
|
$
|
2,347
|
|
Buildings and improvements
|
|
|
21,930
|
|
|
|
20,548
|
|
Equipment and software
|
|
|
26,450
|
|
|
|
20,080
|
|
Construction in progress
|
|
|
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,743
|
|
|
|
45,310
|
|
Less accumulated depreciation
|
|
|
(22,497
|
)
|
|
|
(20,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,246
|
|
|
$
|
25,019
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Obligations
under Capital Leases
|
The Company has entered into various capital leases for certain
equipment to be used by the Company. Amortization of the
capitalized amounts is included in depreciation expense. These
obligations bear interest at rates ranging from 5.05% to 7.86%,
and payments of principal and interest are due monthly through
June 2015. Total assets under these capital leases (net of
accumulated depreciation of $2.6 million and
$1.2 million, respectively) at September 30, 2010 and
2009, are $7.0 million and $1.4 million, respectively,
and are included in property and equipment, net, in the
accompanying financial statements. Lease payments during the
years ended September 30, 2010 and 2009, were
$1.8 million and $1.0 million, respectively, and
included interest of $0.3 million and $0.2 million,
respectively.
The future minimum lease payments as of September 30, 2010,
are due as follows:
|
|
|
|
|
Fiscal Year:
|
|
|
|
|
2011
|
|
$
|
2,428
|
|
2012
|
|
|
1,929
|
|
2013
|
|
|
1,474
|
|
2014
|
|
|
1,327
|
|
2015
|
|
|
652
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
7,810
|
|
Less amounts representing interest
|
|
|
(868
|
)
|
|
|
|
|
|
Present value of capital lease obligation
|
|
|
6,942
|
|
Less: current portion
|
|
|
(2,072
|
)
|
|
|
|
|
|
|
|
$
|
4,870
|
|
|
|
|
|
|
F-11
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
|
|
6.
|
Commitments
and Contingencies
|
Operating Leases
The Company leases equipment
under noncancelable operating leases. The total rent expense
under these operating leases was $0.2 million during the
years ended September 30, 2010 and 2009, and is included in
other operating expenses on the statements of income. The future
minimum payments on noncancelable operating leases are
$0.1 million during fiscal 2011.
Commitments
The Company provides guarantees
to certain non-investor physician groups for funds required to
operate and maintain services for the benefit of the
hospitals patients including emergency care services and
anesthesiology services, among others. These guarantees extend
for the duration of the underlying service agreements. At
September 30, 2010, the maximum potential future payment
that the Company could be required to make under these
guarantees was $5.9 million through June 2013. The Company
would be required to pay this maximum amount only if none of the
physician groups collected fees for services performed during
the guarantee period. At September 30, 2010 the Company has
recorded a liability of $4.0 million for the fair value of
these guarantees, of which $2.3 million is in other accrued
liabilities and $1.7 million is in other long-term
obligations on the balance sheets. Additionally, the Company has
recorded an asset of $4.0 million representing the future
services to be provided by the physicians, of which
$2.3 million is in prepaid expenses and other current
assets and $1.7 million is in other assets on the balance
sheets.
Contingencies
Laws and regulations governing
the Medicare and Medicaid programs are complex, subject to
interpretation and may be modified. The Company believes that it
is in compliance with such laws and regulations and it is not
aware of any investigations involving allegations of potential
wrongdoing. However, compliance with such laws and regulations
can be subject to future government review and interpretation as
well as significant regulatory action, including substantial
fines and criminal penalties, as well as repayment of previously
billed and collected revenue from patient services and exclusion
from the Medicare and Medicaid programs. Medicare and Medicaid
cost reports have been audited by the fiscal intermediary
through September 30, 2006 and September 30, 2008,
respectively.
In March 2010, the U.S. Department of Justice
(DOJ) issued a civil investigative demand
(CID) pursuant to the federal False Claims Act to
the Company. The CID requested information regarding Medicare
claims submitted by the Company in connection with the
implantation of implantable cardioverter defibrillators
(ICDs) during the period 2002 to the present. The
Company has complied with all information requested by the DOJ.
The Company is unable to evaluate the outcome of this
investigation at this time; however, ICD revenue is a material
component of total net revenue and this investigation could have
a material adverse effect on the Companys financial
condition and results of operations.
|
|
7.
|
Related-Party
Transactions
|
During 2006, the Company entered into a real estate mortgage
loan with MedCath for the amount of $23.9 million. The real
estate mortgage loan had a ten-year term, requiring interest
only payments fixed at 8.5% until maturity in November 2016,
when the principal was due. On June 24, 2010, the real
estate mortgage loan was amended to reduce the interest rate to
6.69% and provide for monthly principal and interest payments of
$183,000 through May 2017, when the remaining principal is due.
The real estate mortgage loan is collateralized by a pledge of
land, buildings and fixtures, and certain other assets of the
Company. The outstanding balance of this loan at
September 30, 2010 and 2009 was $23.7 million and
$23.9 million, respectively.
MedCath also provides working capital to the Company in the form
of advances under a working capital loan with a maximum
borrowing limit of $10.0 million. The working capital loan
has no specified due date and is callable on demand by MedCath.
At the request of the Company and upon the election of MedCath,
an additional $9.0 million can be advanced, for an
aggregate amount of $19.0 million. This loan is
collateralized
F-12
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
by the Companys accounts receivable from patient services.
The total outstanding for these advances were $0.4 million
as of September 30, 2010 and 2009, which bore interest at
the Prime rate plus 1% (4.25% at September 30, 2010 and
2009).
Future maturities of the above loans payable to affiliates as of
September 30, 2010, are as follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2011
|
|
$
|
1,012
|
|
2012
|
|
|
642
|
|
2013
|
|
|
691
|
|
2014
|
|
|
740
|
|
2015
|
|
|
791
|
|
Thereafter
|
|
|
20,254
|
|
|
|
|
|
|
|
|
$
|
24,130
|
|
|
|
|
|
|
In addition to the loans payable above, at September 30,
2010 and 2009, $133,000 and $90,000, respectively is recorded as
due to affiliate in the balance sheets for the amount of accrued
interest related to the above loans due to MedCath by the
Company.
MedCath allocated corporate expenses to the Company for costs in
the following categories, which are included in operating
expenses in the statements of operations, during the years ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Hospital management, salaries, and benefits
|
|
$
|
289
|
|
|
$
|
282
|
|
Interest expense on borrowings
|
|
|
1,949
|
|
|
|
2,067
|
|
Management fees
|
|
|
1,333
|
|
|
|
1,350
|
|
Hospital employee group insurance
|
|
|
2,794
|
|
|
|
2,668
|
|
Other
|
|
|
2,234
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,599
|
|
|
$
|
8,578
|
|
|
|
|
|
|
|
|
|
|
The other category above consists primarily of support services
provided by MedCath and consolidated purchased services paid for
by MedCath for which it receives reimbursement at cost in lieu
of the Company incurring these services directly. Support
services include, but are not limited to training, treasury and
development. Consolidated purchased services include, but are
not limited to insurance coverage, professional services,
software maintenance and licenses purchased by MedCath under its
consolidated purchasing programs and agreements with third-party
vendors for the direct benefit of the Company. At both
September 30, 2010 and 2009, $59,000 is outstanding for
these corporate allocated expenses.
Various physicians who are owners within the Physician
Members group are contractually paid on-call and medical
director fees which totaled $1.7 million and
$1.2 million for the years ended September 30, 2010
and 2009, respectively, which are included within operating
expenses. At September 30, 2010 and 2009, $151,000 and
$141,000, respectively, are outstanding related to these fees.
The Company participates in MedCaths defined contribution
retirement savings plan (the 401(k) Plan), which
covers all employees. The 401(k) Plan allows employees to
contribute from 1% to 50% of their annual compensation on a
pretax basis. The Company, at its discretion, may make an annual
contribution of up to 40% of an employees pretax
contribution, up to a maximum of 6% of compensation. The
Companys
F-13
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
contributions to the 401(k) Plan were $0.3 million and
$0.2 million during the years ended September 30, 2010
and 2009, respectively.
|
|
9.
|
Litigation
and Related Professional Liability Insurance Coverage
|
The Company is involved in various claims and legal actions in
the ordinary course of business, including malpractice claims
arising from services provided to patients that have been
asserted by various claimants and additional claims that may be
asserted for known incidents through September 30, 2010.
These claims and legal actions are in various stages, and some
may ultimately be brought to trial. Moreover, additional claims
arising from services provided to patients in the past and other
legal actions may be asserted in the future. The Company is
protecting its interest in all such claims and actions.
Management does not believe, based on the Companys
experience with past litigation and taking into account the
applicable liability insurance coverage and the expectations of
counsel with respect to the amount of potential liability, the
outcome of any such claims and litigation, individually or in
the aggregate, will have a materially adverse effect on the
Companys financial position or results of operations.
During June 2010 and 2009, MedCath entered into a one-year
claims-made policy providing coverage for medical malpractice
claim amounts in excess of $2.0 million of retained
liability per claim in the aggregate inclusive of the Company.
Because of the Companys self-insured retention levels, the
Company is required to recognize an estimated expense/liability
for the amount of our retained liability applicable to each
malpractice claim. As of September 30, 2010 and 2009, the
total estimated liability for the Companys self-insured
retention on medical malpractice claims, including an estimated
amount for incurred but not reported claims, is
$0.6 million and $1.3 million, respectively, which is
included in other accrued liabilities in the Companys
balance sheets. The Company maintains this reserve based on
actuarial estimates using the Companys historical
experience with claims and assumptions about future events.
On May 9, 2011, MedCath announced that it had entered into
a definitive agreement, along with it physician partners, to
sell certain assets and liabilities of the Company (the
Transaction). The closing of the Transaction is
conditioned upon, among other customary conditions, approval of
the holders of a majority of the shares of MedCaths common
stock. MedCath anticipates that it will receive approximately
$62.0 million from the sale of the Company after
liquidation of retained net working capital and the payment of
taxes and closing costs.
******
F-14
Unaudited Financial Statements as of and for the
Three and Six Month Periods Ended March 31, 2011 and
2010
F-15
HEART
HOSPITAL OF NEW MEXICO, LLC
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
F-21-F-24
|
|
F-16
HEART
HOSPITAL OF NEW MEXICO, LLC
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,379
|
|
|
$
|
9,258
|
|
Accounts receivable, net
|
|
|
10,688
|
|
|
|
9,198
|
|
Medical supplies
|
|
|
1,842
|
|
|
|
1,932
|
|
Prepaid expenses and other current assets
|
|
|
2,196
|
|
|
|
2,921
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,105
|
|
|
|
23,309
|
|
Property and equipment, net
|
|
|
26,892
|
|
|
|
28,246
|
|
Intangible assets, net
|
|
|
237
|
|
|
|
253
|
|
Other assets
|
|
|
1,234
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,468
|
|
|
$
|
53,574
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,131
|
|
|
$
|
2,605
|
|
Accrued compensation and benefits
|
|
|
1,679
|
|
|
|
1,863
|
|
Other accrued liabilities
|
|
|
2,497
|
|
|
|
3,667
|
|
Due to affiliate
|
|
|
59
|
|
|
|
192
|
|
Short-term borrowings and current portion of loans payable to
affiliate
|
|
|
1,300
|
|
|
|
1,012
|
|
Current portion of obligations under capital leases
|
|
|
2,070
|
|
|
|
2,072
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
10,736
|
|
|
|
11,411
|
|
Loans payable to affiliate
|
|
|
22,798
|
|
|
|
23,118
|
|
Obligations under capital leases
|
|
|
3,850
|
|
|
|
4,870
|
|
Other long-term obligations
|
|
|
1,218
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
38,602
|
|
|
|
41,148
|
|
Members capital
|
|
|
14,866
|
|
|
|
12,426
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
53,468
|
|
|
$
|
53,574
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-17
HEART
HOSPITAL OF NEW MEXICO, LLC
STATEMENTS
OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
|
|
Six Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
18,991
|
|
|
$
|
21,031
|
|
|
$
|
38,604
|
|
|
$
|
41,145
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
5,510
|
|
|
|
5,455
|
|
|
|
10,763
|
|
|
|
11,062
|
|
Medical supplies expense
|
|
|
4,986
|
|
|
|
5,688
|
|
|
|
9,386
|
|
|
|
10,921
|
|
Bad debt expense
|
|
|
1,071
|
|
|
|
1,213
|
|
|
|
2,817
|
|
|
|
2,764
|
|
Other operating expenses
|
|
|
4,260
|
|
|
|
4,446
|
|
|
|
8,495
|
|
|
|
8,701
|
|
Depreciation
|
|
|
794
|
|
|
|
604
|
|
|
|
1,615
|
|
|
|
1,211
|
|
Amortization
|
|
|
8
|
|
|
|
8
|
|
|
|
16
|
|
|
|
16
|
|
Loss on disposal of property, equipment and other assets
|
|
|
6
|
|
|
|
|
|
|
|
7
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,635
|
|
|
|
17,414
|
|
|
|
33,099
|
|
|
|
34,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
2,356
|
|
|
|
3,617
|
|
|
|
5,505
|
|
|
|
6,462
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(486
|
)
|
|
|
(550
|
)
|
|
|
(991
|
)
|
|
|
(1,130
|
)
|
Interest and other income
|
|
|
8
|
|
|
|
8
|
|
|
|
18
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(478
|
)
|
|
|
(542
|
)
|
|
|
(973
|
)
|
|
|
(1,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,878
|
|
|
$
|
3,075
|
|
|
$
|
4,532
|
|
|
$
|
5,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-18
HEART
HOSPITAL OF NEW MEXICO, LLC
STATEMENTS
OF MEMBERS CAPITAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Mexico
|
|
|
New Mexico
|
|
|
Southwest
|
|
|
|
|
|
|
|
|
|
Hospital
|
|
|
Heart
|
|
|
Cardiology
|
|
|
|
|
|
|
|
|
|
Management,
|
|
|
Institute,
|
|
|
Associates,
|
|
|
Physician
|
|
|
|
|
|
|
Inc.
|
|
|
LLC
|
|
|
LLC
|
|
|
Members
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance, September 30, 2010
|
|
$
|
9,296
|
|
|
$
|
1,856
|
|
|
$
|
1,232
|
|
|
$
|
42
|
|
|
$
|
12,426
|
|
Distributions to members
|
|
|
(1,565
|
)
|
|
|
(314
|
)
|
|
|
(209
|
)
|
|
|
(4
|
)
|
|
|
(2,092
|
)
|
Net income
|
|
|
3,390
|
|
|
|
680
|
|
|
|
453
|
|
|
|
9
|
|
|
|
4,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2011
|
|
$
|
11,121
|
|
|
$
|
2,222
|
|
|
$
|
1,476
|
|
|
$
|
47
|
|
|
$
|
14,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-19
HEART
HOSPITAL OF NEW MEXICO, LLC
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
4,532
|
|
|
$
|
5,349
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
2,817
|
|
|
|
2,764
|
|
Depreciation
|
|
|
1,615
|
|
|
|
1,211
|
|
Amortization
|
|
|
16
|
|
|
|
16
|
|
Loss on disposal of property, equipment and other assets
|
|
|
7
|
|
|
|
8
|
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,307
|
)
|
|
|
(4,897
|
)
|
Medical supplies
|
|
|
90
|
|
|
|
(5
|
)
|
Prepaid expenses and other assets
|
|
|
(144
|
)
|
|
|
(201
|
)
|
Accounts payable and accrued liabilities
|
|
|
31
|
|
|
|
(16
|
)
|
Due to affiliate
|
|
|
139
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
4,796
|
|
|
|
4,356
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(259
|
)
|
|
|
(2,301
|
)
|
Proceeds from sale of property and equipment
|
|
|
1
|
|
|
|
|
|
Changes in restricted cash
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(257
|
)
|
|
|
(2,301
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of obligations under capital leases
|
|
|
(1,022
|
)
|
|
|
(658
|
)
|
Repayments of loans payable to affiliate
|
|
|
(304
|
)
|
|
|
|
|
Distributions to members
|
|
|
(2,092
|
)
|
|
|
(9,300
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(3,418
|
)
|
|
|
(9,958
|
)
|
Net increase (decrease) in cash
|
|
|
1,121
|
|
|
|
(7,903
|
)
|
Cash:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
9,258
|
|
|
|
12,542
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
10,379
|
|
|
$
|
4,639
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Equipment financed under capital leases
|
|
$
|
|
|
|
$
|
3,755
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-20
HEART
HOSPITAL OF NEW MEXICO, LLC
(All
tables in thousands)
|
|
1.
|
Business
and Basis of Presentation
|
Heart Hospital of New Mexico, LLC (the Company) is a
New Mexico limited liability company that was formed on
February 18, 1998, to develop, own and operate an
acute-care hospital located in Albuquerque, New Mexico,
specializing in all aspects of cardiology and cardiovascular
surgery. The hospital commenced operations on October 18,
1999.
New Mexico Hospital Management, Inc., an indirect wholly owned
subsidiary of MedCath Corporation (MedCath), held a
75.0% interest in the Company. New Mexico Heart Institute, LLC
and Southwest Cardiology Associates, LLC (collectively the
Group Members) held a 15.0% and 10.0% interest,
respectively.
Effective December 31, 2009, MedCath sold 0.2% of its
interest in the Company to certain physicians (the
Physician Members) for $140,000, which reduced
MedCaths ownership interest in the Company to 74.8%. The
Group Members continued to hold 25.0% and the physician
Members ownership interest in the Company is 0.2%.
New Mexico Hospital Management, Inc. acts as the managing member
in accordance with the Companys operating agreement. The
Company will cease to exist on December 31, 2097, unless
the members elect earlier dissolution.
Basis of Presentation
The Companys
unaudited interim financial statements as of March 31, 2011
and for the three and six months ended March 31, 2011 and
2010 have been prepared in accordance with accounting principles
generally accepted in the United States of America
(GAAP) and pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC).
These unaudited interim financial statements reflect, in the
opinion of management, all material adjustments necessary to
fairly state the results of operations and financial position
for the periods presented.
Certain information and disclosures normally included in the
notes to financial statements have been condensed or omitted as
permitted by the rules and regulations of the SEC, although the
Company believes the disclosures are adequate to make the
information presented not misleading. The unaudited interim
financial statements and notes thereto should be read in
conjunction with the Companys unaudited financial
statements and notes thereto for the fiscal year ended
September 30, 2010 included elsewhere in this proxy.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Fair Value of Financial Instruments
The
Company considers the carrying amounts of significant classes of
financial instruments on the balance sheets to be reasonable
estimates of fair value due either to their length to maturity
or the existence of variable interest rates underlying such
financial instruments that approximate prevailing market rates
at March 31, 2011 and September 30, 2010.
The Companys significant classes of financial instruments
on the balance sheets, for which the carrying amounts and
estimated fair values differ are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
September 30, 2010
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
Fixed rate loan payable to affiliate
|
|
$
|
23,419
|
|
|
$
|
24,488
|
|
|
$
|
23,722
|
|
|
$
|
26,069
|
|
The fair value of the Companys fixed rate loan payable to
affiliate was estimated using discounted cash flow analyses,
based on the Companys incremental borrowing rates at the
respective reporting dates for similar types of arrangements.
F-21
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Cash
At both March 31, 2011 and
September 30, 2010, the Company has included in prepaid
expenses and other current assets on the accompanying balance
sheets cash balances of $0.3 million, which are restricted
to meet the current amount of affiliate debt and interest
payments.
Intangible Assets
Intangible assets consist
of parking rights (Parking Rights), which are
representative of the Companys right to use a parking
structure placed in service on September 30, 2003. The
Parking Rights are recorded at a gross value of
$0.5 million and are being amortized over 15 years.
The cumulative amount of Parking Rights amortization at
March 31, 2011 and September 30, 2010 was
$0.2 million. Amortization expense recognized for Parking
Rights totaled $16,000 for both the six months ended
March 31, 2011 and 2010.
New Accounting Pronouncements
In August 2010,
the FASB issued Accounting Standard Updates (ASU)
2010-24,
Health Care Entities (Topic 954): Presentation of
Insurance Claims and Related Insurance Recoveries, which
clarifies that a health care entity should not net insurance
recoveries against a related claim liability. The guidance
provided in this ASU is effective as of the beginning of the
first fiscal year beginning after December 15, 2010, fiscal
2012 for the Company. The Company is evaluating the potential
impacts the adoption of this ASU will have on its financial
statements.
In August 2010, the FASB issued ASU
2010-23,
Health Care Entities (Topic 954): Measuring Charity Care
for Disclosure, which requires a company in the healthcare
industry to use its direct and indirect costs of providing
charity care as the measurement basis for charity care
disclosures. This ASU also requires additional disclosures of
the method used to identify such costs. The guidance provided in
this ASU is effective for fiscal years beginning after
December 15, 2010, fiscal 2012 for the Company. The
adoption of this ASU is not expected to have any impact on its
financial position or results of operations.
Accounts receivable, net is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
21,770
|
|
|
$
|
18,176
|
|
Other receivables
|
|
|
82
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,852
|
|
|
|
18,306
|
|
Allowance for doubtful accounts
|
|
|
(11,164
|
)
|
|
|
(9,108
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
10,688
|
|
|
$
|
9,198
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Commitments
and Contingencies
|
Commitments
The Company provides guarantees
to certain non-investor physician groups for funds required to
operate and maintain services for the benefit of the
hospitals patients including emergency care services and
anesthesiology services, among others. These guarantees extend
for the duration of the underlying service agreements. At
March 31, 2011, the maximum potential future payment that
the Company could be required to make under these guarantees was
$5.9 million through June 2013. The Company would be
required to pay this maximum amount only if none of the
physician groups collected fees for services performed during
the guarantee period. At March 31, 2011 the Company has
recorded a liability of $2.6 million for the fair value of
these guarantees, of which $1.4 million is in other accrued
liabilities and $1.2 million is in other long-term
obligations on the balance sheets. Additionally, at
March 31, 2011, the Company has recorded an asset of
$2.6 million representing the future services to be
provided by the physicians, of which $1.4 million is in
prepaid expenses and other current assets and $1.2 million
is in other assets on the balance sheet.
F-22
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Contingencies
Laws and regulations governing
the Medicare and Medicaid programs are complex, subject to
interpretation and may be modified. The Company believes that it
is in compliance with such laws and regulations and it is not
aware of any investigations involving allegations of potential
wrongdoing. However, compliance with such laws and regulations
can be subject to future government review and interpretation as
well as significant regulatory action, including substantial
fines and criminal penalties, as well as repayment of previously
billed and collected revenue from patient services and exclusion
from the Medicare and Medicaid programs. Medicare and Medicaid
cost reports have been audited by the fiscal intermediary
through September 30, 2006 and September 30, 2008,
respectively.
In March 2010, the U.S. Department of Justice
(DOJ) issued a civil investigative demand
(CID) pursuant to the federal False Claims Act to
the Company. The CID requested information regarding Medicare
claims submitted by the Company in connection with the
implantation of implantable cardioverter defibrillators
(ICDs) during the period 2002 to the present. The
Company has complied with all information requested by the DOJ.
The Company is unable to evaluate the outcome of this
investigation at this time; however, ICD revenue is a material
component of total net revenue and the results of this
investigation could have a material adverse effect on the
Companys financial condition, results of operations and
cash flows.
|
|
5.
|
Related-Party
Transactions
|
During 2006, the Company entered into a real estate mortgage
loan with MedCath for the amount of $23.9 million. The real
estate mortgage loan had a ten-year term, requiring interest
only payments fixed at 8.5% until maturity in November 2016,
when the principal was due. On June 24, 2010, the real
estate mortgage loan was amended to reduce the interest rate to
6.69% and provide for monthly principal and interest payments of
$183,000 through May 2017, when the remaining principal is due.
The real estate mortgage loan is collateralized by a pledge of
land, buildings and fixtures, and certain other assets of the
Company. The outstanding balance of this loan at March 31,
2011 and September 30, 2010 was $23.4 million and
$23.7 million, respectively.
MedCath also provides working capital to the Company in the form
of advances under a working capital loan with a maximum
borrowing limit of $10.0 million. The working capital loan
has no specified due date and is callable on demand by MedCath.
At the request of the Company and upon the election of MedCath,
an additional $9.0 million can be advanced, for an
aggregate amount of $19.0 million. This loan is
collateralized by the Companys accounts receivable from
patient services. The total outstanding for these advances were
$0.5 million and $0.4 million as of March 31,
2011 and September 30, 2010, respectively, which bore
interest at the Prime rate plus 1% (4.25% at March 31, 2011
and September 30, 2010).
In addition to the loans payable above, at March 31, 2011
and September 30, 2010, $135,000 and $133,000, respectively
is recorded as due to affiliate in the balance sheets for the
amount of accrued interest related to the above loans due to
MedCath by the Company.
MedCath allocated corporate expenses to the Company for costs
relative to hospital management salaries, interest expense on
borrowings, management fees and employee group insurance, which
are included in operating expenses in the statements of
operations. Such allocated costs amounted to $4.3 million
and $4.4 million during the six months ended March 31,
2011 and 2010, respectively.
At March 31, 2011 and September 30, 2010, $59,000 is
outstanding for these corporate allocated expenses.
|
|
6.
|
Litigation
and Related Professional Liability Insurance Coverage
|
The Company is involved in various claims and legal actions in
the ordinary course of business, including malpractice claims
arising from services provided to patients that have been
asserted by various claimants and
F-23
HEART
HOSPITAL OF NEW MEXICO, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
additional claims that may be asserted for known incidents
through March 31, 2011. These claims and legal actions are
in various stages, and some may ultimately be brought to trial.
Moreover, additional claims arising from services provided to
patients in the past and other legal actions may be asserted in
the future. The Company is protecting its interest in all such
claims and actions.
Management does not believe, based on the Companys
experience with past litigation and taking into account the
applicable liability insurance coverage and the expectations of
counsel with respect to the amount of potential liability, the
outcome of any such claims and litigation, individually or in
the aggregate, will have a materially adverse effect on the
Companys financial position or results of operations.
During June 2010 and 2009, MedCath entered into a one-year
claims-made policy providing coverage for medical malpractice
claim amounts in excess of $2.0 million of retained
liability per claim in the aggregate inclusive of the Company.
Because of the Companys self-insured retention levels, the
Company is required to recognize an estimated expense/liability
for the amount of our retained liability applicable to each
malpractice claim. As of March 31, 2011 and
September 30, 2010, the total estimated liability for the
Companys self-insured retention on medical malpractice
claims, including an estimated amount for incurred but not
reported claims, is $0.4 million and $0.6 million,
respectively, which is included in other accrued liabilities in
the Companys balance sheets. The Company maintains this
reserve based on actuarial estimates using the Companys
historical experience with claims and assumptions about future
events.
On May 9, 2011, MedCath announced that it had entered into
a definitive agreement, along with it physician partners, to
sell certain assets and liabilities of the Company (the
Transaction). The closing of the Transaction is
conditioned upon, among other customary conditions, approval of
the holders of a majority of the shares of MedCaths common
stock. MedCath anticipates that it will receive approximately
$62.0 million from the sale of the Company after
liquidation of retained net working capital and the payment of
taxes and closing costs.
******
F-24
Unaudited Financial Statements as of and for
the Years Ended September 30, 2010 and 2009
F-25
MEDCATH
OF LITTLE ROCK, LLC
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-27
|
|
|
|
|
F-28
|
|
|
|
|
F-29
|
|
|
|
|
F-30
|
|
|
|
|
F-31-F-39
|
|
F-26
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2
|
|
|
$
|
2
|
|
Accounts receivable, net
|
|
|
11,958
|
|
|
|
12,137
|
|
Medical supplies
|
|
|
3,365
|
|
|
|
2,897
|
|
Due from affiliate
|
|
|
10,366
|
|
|
|
8,124
|
|
Prepaid expenses and other current assets
|
|
|
2,104
|
|
|
|
2,095
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
27,795
|
|
|
|
25,255
|
|
Property and equipment, net
|
|
|
41,144
|
|
|
|
45,382
|
|
Other assets
|
|
|
72
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
69,011
|
|
|
$
|
70,740
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,408
|
|
|
$
|
5,718
|
|
Accrued compensation and benefits
|
|
|
3,424
|
|
|
|
2,614
|
|
Other accrued liabilities
|
|
|
3,783
|
|
|
|
4,018
|
|
Due to affiliate
|
|
|
356
|
|
|
|
621
|
|
Current portion of loans payable to affiliate
|
|
|
26,757
|
|
|
|
2,215
|
|
Current portion of obligation under capital lease
|
|
|
53
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
38,781
|
|
|
|
15,237
|
|
Loans payable to affiliate
|
|
|
2,848
|
|
|
|
27,056
|
|
Obligation under capital lease
|
|
|
174
|
|
|
|
228
|
|
Other long-term obligations
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
41,852
|
|
|
|
42,521
|
|
Commitments and contingencies (See Note 6)
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
27,159
|
|
|
|
28,219
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
69,011
|
|
|
$
|
70,740
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-27
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
117,843
|
|
|
$
|
117,650
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
36,291
|
|
|
|
36,346
|
|
Medical supplies expense
|
|
|
36,847
|
|
|
|
34,860
|
|
Bad debt expense
|
|
|
11,355
|
|
|
|
13,058
|
|
Other operating expenses
|
|
|
16,059
|
|
|
|
15,469
|
|
Depreciation
|
|
|
5,334
|
|
|
|
5,150
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
24
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
105,910
|
|
|
|
104,879
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11,933
|
|
|
|
12,771
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,039
|
)
|
|
|
(1,334
|
)
|
Interest and other income
|
|
|
42
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(997
|
)
|
|
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,936
|
|
|
$
|
11,462
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-28
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
|
MedCath of
|
|
|
|
|
|
from
|
|
|
|
|
|
|
Arkansas,
|
|
|
Physician
|
|
|
Physician
|
|
|
|
|
|
|
Inc.
|
|
|
Members
|
|
|
Members
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance, September 30, 2008
|
|
$
|
23,437
|
|
|
$
|
9,885
|
|
|
$
|
(63
|
)
|
|
$
|
33,259
|
|
Distributions to members
|
|
|
(11,605
|
)
|
|
|
(4,895
|
)
|
|
|
(2
|
)
|
|
|
(16,502
|
)
|
Net income
|
|
|
8,061
|
|
|
|
3,401
|
|
|
|
|
|
|
|
11,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2009
|
|
|
19,893
|
|
|
|
8,391
|
|
|
|
(65
|
)
|
|
|
28,219
|
|
Distributions to members
|
|
|
(8,440
|
)
|
|
|
(3,560
|
)
|
|
|
4
|
|
|
|
(11,996
|
)
|
Net income
|
|
|
7,691
|
|
|
|
3,245
|
|
|
|
|
|
|
|
10,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
$
|
19,144
|
|
|
$
|
8,076
|
|
|
$
|
(61
|
)
|
|
$
|
27,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-29
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
10,936
|
|
|
$
|
11,462
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
11,355
|
|
|
|
13,058
|
|
Depreciation
|
|
|
5,334
|
|
|
|
5,150
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
24
|
|
|
|
(4
|
)
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,176
|
)
|
|
|
(13,831
|
)
|
Medical supplies
|
|
|
(468
|
)
|
|
|
(925
|
)
|
Prepaid expenses and other assets
|
|
|
6
|
|
|
|
4,380
|
|
Accounts payable and accrued liabilities
|
|
|
(519
|
)
|
|
|
(4,088
|
)
|
Due to affiliate
|
|
|
(265
|
)
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
15,227
|
|
|
|
15,179
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(1,288
|
)
|
|
|
(5,050
|
)
|
Proceeds from sale of property and equipment
|
|
|
9
|
|
|
|
52
|
|
Due from affiliate
|
|
|
(2,242
|
)
|
|
|
8,521
|
|
Restricted cash
|
|
|
8
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(3,513
|
)
|
|
|
3,526
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of obligation under capital lease
|
|
|
(52
|
)
|
|
|
(3
|
)
|
Proceeds from loans payable to affiliate
|
|
|
3,000
|
|
|
|
|
|
Repayments of loans payable to affiliates
|
|
|
(2,666
|
)
|
|
|
(2,200
|
)
|
Distributions to members
|
|
|
(11,996
|
)
|
|
|
(16,502
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(11,714
|
)
|
|
|
(18,705
|
)
|
Net change in cash
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,036
|
|
|
$
|
1,356
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures financed by capital leases
|
|
$
|
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-30
MEDCATH
OF LITTLE ROCK, LLC
(All
tables in thousands)
MedCath of Little Rock, LLC (the Company) is a North
Carolina limited liability company that was formed on
July 12, 1995, to develop, own, and operate an acute-care
hospital located in Little Rock, Arkansas, specializing in all
aspects of cardiology and cardiovascular surgery. The hospital
commenced operations on March 3, 1997. At
September 30, 2010 and 2009, MedCath of Arkansas, Inc., an
indirectly wholly owned subsidiary of MedCath Corporation
(MedCath), held a 70.33% interest in the Company,
and physician members held the remaining 29.67% interest.
MedCath of Arkansas, Inc. acts as the managing member in
accordance with the Companys operating agreement. The
Company will cease to exist on December 31, 2035, unless
the members elect earlier dissolution. The termination date may
be extended for up to an additional 40 years in five-year
increments at the election of MedCath of Arkansas, Inc.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities in the
financial statements and accompanying notes. There is a
reasonable possibility that actual results may vary
significantly from those estimates.
Fair Value of Financial Instruments
The
Company considers the carrying amounts of significant classes of
financial instruments on the balance sheets to be reasonable
estimates of fair value due either to their length to maturity
or the existence of variable interest rates underlying such
financial instruments that approximate prevailing market rates
at September 30, 2010 and 2009. The Companys other
significant classes of financial instruments on the balance
sheets for which the carrying amounts and estimated fair values
differ at September 30, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
Fixed rate loan payable to affiliate, including current portion
|
|
$
|
3,908
|
|
|
$
|
4,049
|
|
|
$
|
1,844
|
|
|
$
|
1,915
|
|
Cash
Cash consists of currency on hand and
demand deposits with financial institutions. The Company has
included in accounts payable on the accompanying balance sheets
negative cash balances totaling approximately $1.1 million
and $0.9 million at September 30, 2010 and 2009,
respectively. At September 30, 2010 and 2009, the Company
has included in prepaid expenses and other current assets on the
accompanying balance sheets cash balances of $0.2 million,
which are restricted to meet the current affiliate debt and
interest payments.
Concentrations of Credit Risk
The Company
grants credit without collateral to its patients, most of whom
are insured under payment arrangements with third-party payors,
including Medicare, Medicaid, and commercial insurance carriers.
The following table summarizes the percentage of net realizable
accounts receivable from all payors at September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Medicare and Medicaid
|
|
|
47
|
%
|
|
|
47
|
%
|
Commercial and Other
|
|
|
34
|
%
|
|
|
35
|
%
|
Self-pay
|
|
|
19
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
F-31
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Allowance for Doubtful Accounts
Accounts
receivable primarily consist of amounts due from third-party
payors and patients. To provide for accounts receivable that
could become uncollectible in the future, the Company
establishes an allowance for doubtful accounts to reduce the
carrying value of such receivables to their estimated net
realizable value. The Company estimates this allowance based on
such factors as payor mix, aging and its historical collection
experience and write-offs.
Medical Supplies
Medical supplies consist
primarily of supplies necessary for diagnostics, catheterization
and surgical procedures and general patient care and are stated
at the lower of
first-in,
first-out cost or market.
Property and Equipment
Property and equipment
are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which generally
range from 25 to 40 years for buildings and improvements,
25 years for land improvements, and from 3 to 10 years
for equipment, furniture and software. Repairs and maintenance
costs are charged to operating expense while betterments are
capitalized as additions to the related assets. Retirements,
sales, and disposals of assets are recorded by removing the
related cost and accumulated depreciation with any resulting
gain or loss reflected in income from operations. Amortization
of property and equipment recorded under capital leases is
included in depreciation expense. Interest expense incurred in
connection with the expansion of the hospital is capitalized as
part of the cost of the building until the expansion is
operational, at which time depreciation begins using the
straight-line method over the estimated useful life of the
building. No interest was capitalized during the years ended
September 30, 2010 and 2009.
Long-Lived Assets
Long-lived assets are
evaluated for impairment when events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows
expected to result from the use of these assets and their
eventual disposition are less than their carrying amount. The
determination of whether or not long-lived assets have become
impaired involves a significant level of judgment in the
assumptions underlying the approach used to determine the
estimated future cash flows expected to result from the use of
those assets. Changes in the Companys strategy,
assumptions
and/or
market conditions could significantly impact these judgments and
require adjustments to recorded amounts of long-lived assets. No
impairment charges of long-lived assets were necessary for the
years ended September 30, 2010 and 2009.
Revenue Recognition
Amounts the Company
receives for treatment of patients covered by governmental
programs such as Medicare and Medicaid and other third-party
payors such as commercial insurers, health maintenance
organizations and preferred provider organizations are generally
less than established billing rates. Payment arrangements with
third-party payors may include prospectively determined rates
per discharge or per visit, a discount from established charges,
per diem payments, reimbursed costs (subject to limits)
and/or
other
similar contractual arrangements. As a result, net revenue for
services rendered to patients is reported at the estimated net
realizable amounts as services are rendered. The Company
accounts for the differences between the estimated realizable
rates under the reimbursement program and the standard billing
rates as contractual adjustments.
The majority of the Companys contractual adjustments are
system-generated at the time of billing based on either
government fee schedules or fee schedules contained in managed
care agreements with various insurance plans. Portions of the
Companys contractual adjustments are performed manually
and these adjustments primarily relate to patients that have
insurance plans with whom the Company does not have contracts
containing discounted fee schedules, also referred to as
non-contracted payors, patients that have secondary insurance
plans following adjudication by the primary payor, uninsured
self-pay patients and charity care patients. Estimates of
contractual adjustments are made on a payor-specific basis and
based on the best information available regarding the
Companys interpretation of the applicable laws,
regulations and contract terms. While subsequent adjustments to
the systematic contractual allowances can arise due to denials,
short
F-32
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
payments deemed immaterial for continued collection effort and a
variety of other reasons, such amounts have not historically
been significant.
The Company continually reviews the contractual estimation
process to consider and incorporate updates to the laws and
regulations and any changes in the contractual terms of its
programs. Final settlements under some of these programs are
subject to adjustment based on audit by third parties, which can
take several years to determine. From a procedural standpoint,
the Company subsequently adjusts those settlements as new
information is obtained from audits or review by the fiscal
intermediary, and, if the result of the fiscal intermediary
audit or review impacts other unsettled and open cost reports,
then the Company recognizes the impact of those adjustments. As
such, the Company recognized net adjustments that increased net
revenue by $41,000 and $77,000, respectively, in the years ended
September 30, 2010 and 2009.
A significant portion of the Companys net revenue is
derived from federal and state governmental healthcare programs,
including Medicare and Medicaid, which, combined, accounted for
66% and 61% of the Companys net revenue during the years
ended September 30, 2010 and 2009, respectively. Medicare
payments for inpatient acute services and certain outpatient
services are generally made pursuant to a prospective payment
system. Under this system, a hospital is paid a
prospectively-determined fixed amount for each hospital
discharge based on the patients diagnosis. Specifically,
each discharge is assigned to a Medicare severity
diagnosis-related group (MS-DRG). Based upon the
patients condition and treatment during the relevant
inpatient stay, each MS-DRG is assigned a fixed payment rate
that is prospectively set using national average costs per case
for treating a patient for a particular diagnosis. The MS-DRG
rates are adjusted by an update factor each federal fiscal year,
which begins on October 1. The update factor is determined,
in part, by the projected increase in the cost of goods and
services that are purchased by hospitals, referred to as the
market basket index. MS-DRG payments do not consider the actual
costs incurred by a hospital in providing a particular inpatient
service; however, MS-DRG payments are adjusted by a
predetermined adjustment factor assigned to the geographic area
in which the hospital is located.
While hospitals generally do not receive direct payment in
addition to a MS-DRG payment, hospitals may qualify for
additional capital-related cost reimbursement and outlier
payments from Medicare under specific circumstances. Medicare
payments for non-acute services, certain outpatient services,
medical equipment, and education costs are made based on a cost
reimbursement methodology and are under transition to various
methodologies involving prospectively determined rates. The
Company is reimbursed for cost-reimbursable items at a tentative
rate with final settlement determined after submission of annual
cost reports by the Company and audits thereof by the Medicare
fiscal intermediary. Medicaid payments for inpatient and
outpatient services are made at prospectively determined amounts
and cost based reimbursement, respectively.
The Company provides care to patients who meet certain criteria
under its charity care policy without charge or at amounts less
than its established rates. Because the Company does not pursue
collection of amounts determined to qualify as charity care,
they are not reported as net revenue. During the years ended
September 30, 2010 and 2009, the Company provided charity
care of $3.4 million and $1.4 million, respectively.
Advertising
Advertising costs are expensed as
incurred. During each of the years ended September 30, 2010
and 2009, the Company incurred approximately $0.8 million
of advertising expenses.
Income Taxes
The Company has elected to be
treated as a limited liability company for federal and state
income tax purposes. As such, all taxable income or loss of the
Company is included in the income tax returns of the respective
members. Accordingly, no provision has been made for federal or
state income taxes in the accompanying financial statements.
Members Share of Net Income and Loss
In
accordance with the operating agreement, net income and loss are
first allocated to the members based on their respective
ownership percentages. If the cumulative
F-33
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
losses of the Company exceed its initial capitalization and
committed capital obligations of the members, MedCath of
Arkansas, Inc., the Companys managing member will
recognize a disproportionate share of the Companys losses
that otherwise would be allocated to all of its members on a pro
rata basis. In such cases, MedCath of Arkansas, Inc. will
recognize a disproportionate share of the Companys future
profits to the extent it has previously recognized a
disproportionate share of the Companys losses.
New Accounting Pronouncements
In August 2010,
the FASB issued Accounting Standard Updates (ASU)
2010-24,
Health Care Entities (Topic 954): Presentation of
Insurance Claims and Related Insurance Recoveries, which
clarifies that a health care entity should not net insurance
recoveries against a related claim liability. The guidance
provided in this ASU is effective as of the beginning of the
first fiscal year beginning after December 15, 2010, fiscal
2012 for the Company. The Company is evaluating the potential
impacts the adoption of this ASU will have on our financial
statements.
In August 2010, the FASB issued ASU
2010-23,
Health Care Entities (Topic 954): Measuring Charity Care
for Disclosure, which requires a company in the healthcare
industry to use its direct and indirect costs of providing
charity care as the measurement basis for charity care
disclosures. This ASU also requires additional disclosures of
the method used to identify such costs. The guidance provided in
this ASU is effective for fiscal years beginning after
December 15, 2010, fiscal 2012 for the Company. The
adoption of this ASU is not expected to have any impact on our
financial position or results of operations.
Accounts receivable, net, at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
32,412
|
|
|
$
|
31,506
|
|
Other receivables
|
|
|
338
|
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,750
|
|
|
|
32,078
|
|
Allowance for doubtful accounts
|
|
|
(20,792
|
)
|
|
|
(19,941
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
11,958
|
|
|
$
|
12,137
|
|
|
|
|
|
|
|
|
|
|
Activity for the allowance for doubtful accounts for the years
ended September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance, beginning of year
|
|
$
|
19,941
|
|
|
$
|
11,441
|
|
Bad debt expense
|
|
|
11,355
|
|
|
|
13,058
|
|
Write-offs, net of recoveries
|
|
|
(10,504
|
)
|
|
|
(4,558
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
20,792
|
|
|
$
|
19,941
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property
and Equipment
|
Property and equipment, net, at September 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and improvements
|
|
$
|
3,212
|
|
|
$
|
3,212
|
|
Buildings and improvements
|
|
|
38,315
|
|
|
|
38,315
|
|
Equipment and software
|
|
|
36,265
|
|
|
|
36,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,792
|
|
|
|
78,222
|
|
Less accumulated depreciation
|
|
|
(36,648
|
)
|
|
|
(32,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
41,144
|
|
|
$
|
45,382
|
|
|
|
|
|
|
|
|
|
|
F-34
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
|
|
5.
|
Obligation
Under Capital Lease
|
The Company entered into a capital lease during September 2009
for office equipment. Amortization of the capitalized amount is
included in depreciation expense. This obligation bears interest
at 5.33% and payments of principal and interest are due monthly
through September 2014. Total assets under this capital lease
net of accumulated depreciation of $61,000 and $5,000 at
September 30, 2010 and 2009, respectively, are
$0.2 million and $0.3 million, respectively, and are
included in property and equipment, net, in the accompanying
financial statements. Lease payments during the years ended
September 30, 2010 and 2009, were $64,000 and $4,000,
respectively, and included interest of $12,000 and $1,000,
respectively.
The future minimum lease payments as of September 30, 2010,
are due as follows:
|
|
|
|
|
Fiscal Year:
|
|
|
|
|
2011
|
|
$
|
64
|
|
2012
|
|
|
64
|
|
2013
|
|
|
64
|
|
2014
|
|
|
60
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
252
|
|
Less amounts representing interest
|
|
|
(25
|
)
|
|
|
|
|
|
Present value of capital lease obligation
|
|
|
227
|
|
Less: current portion
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
6.
|
Commitments
and Contingencies
|
Operating Leases
The Company leases certain
equipment under noncancelable operating leases. The total rent
expense under these operating leases was $23,000 and $302,000
during the years ended September 30, 2010 and 2009,
respectively, and is included in other operating expenses.
The approximate future minimum payments for noncancelable
operating leases as of September 30, 2010 as follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2011
|
|
$
|
5
|
|
2012
|
|
|
1
|
|
|
|
|
|
|
Total
|
|
$
|
6
|
|
|
|
|
|
|
Commitments
The Company provides guarantees
to certain non-investor physician groups for funds required to
operate and maintain services for the benefit of the
hospitals patients including emergency care services and
anesthesiology services, among others. These guarantees extend
for the duration of the underlying service agreements. At
September 30, 2010, the maximum potential future payments
that the Company could be required to make under these
guarantees was approximately $2.2 million through September
2011. At September 30, 2010 the Company had recorded a
liability of $1.6 million for the fair value of these
guarantees, which is in other accrued liabilities. Additionally,
the Company had recorded an asset of $1.6 million
representing the future services to be provided by the
physicians, which is in prepaid expenses and other current assets
Contingencies
Laws and regulations governing
the Medicare and Medicaid programs are complex, subject to
interpretation and may be modified. The Company believes that it
is in compliance with such laws
F-35
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
and regulations and it is not aware of any investigations
involving allegations of potential wrongdoing. However,
compliance with such laws and regulations can be subject to
future government review and interpretation as well as
significant regulatory action, including substantial fines and
criminal penalties, as well as repayment of previously billed
and collected revenue from patient services and exclusion from
the Medicare and Medicaid programs. Medicare and Medicaid cost
reports have been audited by the fiscal intermediary through
September 30, 2006 and September 30, 2005,
respectively.
|
|
7.
|
Related-Party
Transactions
|
On July 7, 2004, the Company entered into a real estate
mortgage loan with MedCath in the amount of $25.5 million
for the purpose of repaying the outstanding balance of its bank
mortgage loan. The real estate mortgage loan was amended on
November 2007 to increase the maximum borrowing capacity to
$30.5 million. The real estate mortgage loan has a
seven-year term, with principal and interest payable monthly
using an extended amortization schedule and a balloon payment
due on June 30, 2011. The interest is based on the
three-month LIBOR rate plus 2.5%. At September 30, 2010 and
2009, the interest rate on the real estate mortgage loan is
2.80% and 2.83%, respectively. The real estate mortgage loan is
collateralized by a pledge of the land, buildings and fixtures,
and certain other assets of the Company. The outstanding balance
of this loan at September 30, 2010 and 2009 is
approximately $25.7 million and $27.4 million,
respectively.
During December 2006, the Company entered into an equipment loan
with MedCath in the amount of $1.8 million. The equipment
loan has a six-year term, with principal and interest payable
monthly and matures on January 31, 2013. Interest is fixed
at 8.43%. The equipment loan is collateralized by a pledge of
the equipment and certain other assets of the Company. The
amount of the equipment loan outstanding at September 30,
2010 and 2009 is approximately $0.7 million and
$1.0 million, respectively.
During November 2007, the Company entered into a new equipment
loan with MedCath in the amount of $1.1 million. The
equipment loan has a six-year term, with principal and interest
payable monthly and matures on October 31, 2013. Interest
is fixed at 7.95%. The equipment loan is collateralized by a
pledge of the equipment and certain other assets of the Company.
The amount of the equipment loan outstanding at
September 30, 2010 and 2009 is approximately
$0.6 million and $0.8 million, respectively.
During December 2009, the Company entered into a new equipment
loan with MedCath in the amount of $3.0 million. The
equipment loan has a five-year term with a fixed interest rate
of 5.8%. Principal and interest are payable monthly and the loan
matures November 2014. The equipment loan is collateralized by a
pledge of the purchased equipment of the Company. The amount of
the equipment loan outstanding at September 30, 2010 is
approximately $2.6 million.
MedCath also provides working capital to the Company in the form
of advances under a working capital loan with a maximum
borrowing limit of $12.5 million. Upon election, MedCath
may advance up to an additional $2.5 million, for an
aggregate amount of $15.0 million. This loan is
collateralized in part by the Companys accounts receivable
from patient services. Amounts outstanding under this working
capital loan bear interest at the Prime rate plus 1% (4.25% at
September 30, 2010 and 2009) with no specified due
date. No amounts are outstanding at September 30, 2010 and
2009.
At September 30, 2010 and 2009, approximately $44,000 and
$41,000, respectively, are recorded as due to affiliate in the
balance sheets for the amount of accrued interest related to the
above loan due to MedCath by the Company.
F-36
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Future maturities of the loans payable to affiliate as of
September 30, 2010, are as follows:
|
|
|
|
|
Fiscal year:
|
|
|
|
|
2011
|
|
$
|
26,757
|
|
2012
|
|
|
1,109
|
|
2013
|
|
|
983
|
|
2014
|
|
|
654
|
|
2015
|
|
|
102
|
|
|
|
|
|
|
|
|
$
|
29,605
|
|
|
|
|
|
|
The Companys continuing operations may be dependent on
MedCaths forbearance of collection of the outstanding real
estate mortgage loan, which is due on June 30, 2011 and may
also be dependent on further advances from MedCath if the cash
flows of the Company are insufficient. The Company and MedCath
have not yet reached an agreement as to amended terms on the
real estate mortgage loan.
The Company also advances funds to MedCath as cash is available.
The Company receives interest from MedCath on the advance
balance at a rate commensurate with the rate of return MedCath
earns on the investment of such funds. As of September 30,
2010 and 2009, the advances bore interest at 0.15%. As of
September 30, 2010 and 2009, the amount receivable from
MedCath for these advances totaled approximately
$10.4 million and $8.1 million, respectively. For the
years ended September 30, 2010 and 2009, $7,000 and
$14,000, respectively, are recorded as interest and other income
in the statements of income for the interest earned on the above
advanced funds. Under the terms of the advance between the
Company and MedCath, all outstanding amounts are due on demand
by the Company and, therefore, are classified as a current asset
(due from affiliate) in the Companys balance sheets.
The Company expensed certain costs allocated by MedCath in the
following categories, which are included in operating expenses
in the statements of income, during the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Hospital management, salaries, and benefits
|
|
$
|
854
|
|
|
$
|
671
|
|
Interest expense on borrowings, net of interest income of $7 and
$14 in 2010 and 2009 on advances
|
|
|
1,025
|
|
|
|
1,319
|
|
Management fees
|
|
|
136
|
|
|
|
133
|
|
Hospital employee group insurance and benefits
|
|
|
3,865
|
|
|
|
3,893
|
|
Other
|
|
|
2,012
|
|
|
|
2,383
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,892
|
|
|
$
|
8,399
|
|
|
|
|
|
|
|
|
|
|
The other category above consists primarily of support services
provided by MedCath and consolidated purchased services paid for
by MedCath for which it receives reimbursement at cost in lieu
of the Companys incurring these services directly. Support
services include, but are not limited to training, treasury and
development. Consolidated purchased services include, but are
not limited to insurance coverage, professional services,
software maintenance and licenses purchased by MedCath under its
consolidated purchasing programs and agreements with third-party
vendors for the direct benefit of the Company. At
September 30, 2010 and 2009, $0.4 million and
$0.6 million, respectively, was outstanding for these
corporate allocated expenses and was recorded on the balance
sheet as due to affiliates.
In addition to the allocated corporate expenses, MedCath charges
the physician members a fee for providing guarantees of
indebtedness in excess of MedCaths ownership interest in
the Company (the Guarantee Fee). The Guarantee Fee
is charged directly to the Company, and paid periodically by the
F-37
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Company to MedCath on behalf of the physician members. The
Company then charges the Guarantee Fee to the physician members
by recognizing a receivable due from the physician members to
the Company that is offset against the physician members
capital accounts. Such amounts are repaid by the physician
members to the Company, upon future cash distributions of
earnings. At September 30, 2010 and 2009, $14,000 and
$15,000, respectively, was recorded as due to affiliate in the
balance sheets for the amount of guarantee fees due to MedCath
by the Company. At September 30, 2010 and 2009,
approximately $61,000 and $65,000, respectively, are recorded as
receivable from physician members, as a component of
members capital in the balance sheets, for the amount due
to the Company by the physician members.
Various physician members are contractually paid for services
and medical director fees which totaled $0.4 million for
the years ended September 30, 2010 and 2009, which are
included within operating expenses in the statements of income.
At September 30, 2010 and 2009, $36,000 and $35,000,
respectively, was outstanding related to these expenses as
recorded on the balance sheets in other accrued liabilities.
The Company participates in MedCaths defined contribution
retirement savings plan (the 401(k) Plan), which covers all
employees. The 401(k) Plan allows employees to contribute from
1% to 50% of their annual compensation on a pretax basis. The
Company, at its discretion, may make an annual contribution of
up to 40% of an employees pretax contribution, up to a
maximum of 6% of compensation. The Companys contributions
to the 401(k) Plan were $0.4 million during the years ended
September 30, 2010 and 2009.
|
|
9.
|
Litigation
and Related Professional Liability Insurance Coverage
|
The Company is involved in various claims and legal actions in
the ordinary course of business, including malpractice claims
arising from services provided to patients that have been
asserted by various claimants and additional claims that may be
asserted for known incidents through September 30, 2010.
These claims and legal actions are in various stages, and some
may ultimately be brought to trial. Moreover, additional claims
arising from services provided to patients in the past and other
legal actions may be asserted in the future. The Company is
protecting its interest in all such claims and actions.
Management does not believe, based on the Companys
experience with past litigation and taking into account the
applicable liability insurance coverage and the expectations of
counsel with respect to the amount of potential liability, the
outcome of any such claims and litigation, individually or in
the aggregate, will have a materially adverse effect on the
Companys financial position or results of operations.
On September 17, 2010, MedCath received a letter from the
United States Department of Justice (DOJ) advising
that an investigation is being conducted to determine whether
certain of its hospitals have submitted claims excluded from
coverage. The period of time covered by the investigation is
2003 to the present. The letter states that the DOJs data
indicates that many of MedCaths hospitals have claims for
the implantation of implantable cardioverter defibrillators
(ICDs) which were not medically indicated
and/or
otherwise violated Medicare payment policy. MedCath understands
that the DOJ has submitted similar requests to many other
hospitals and hospital systems across the country as well as to
the ICD manufacturers themselves. MedCath is fully cooperating
with the government in this investigation; to date, the DOJ has
not asserted any claim against the Company specifically. Because
MedCath is in the early stages of this investigation, the
Company is unable to evaluate the outcome of this investigation.
During June 2010 and 2009, MedCath entered into a one-year
claims-made policy providing coverage for medical malpractice
claim amounts in excess of $2.0 million of retained
liability per claim in the aggregate inclusive of the Company.
F-38
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
Because of the Companys self-insured retention levels, the
Company is required to recognize an estimated expense/liability
for the amount of retained liability applicable to each
malpractice claim. As of September 30, 2010 and 2009, the
total estimated liability for the Companys self-insured
retention on medical malpractice claims, including an estimated
amount for incurred but not reported claims, is approximately
$0.9 million, and is included in other accrued liabilities
in the Companys balance sheets. The Company maintains this
reserve based on actuarial estimates using the Companys
historical experience with claims and assumptions about future
events.
On May 9, 2011, MedCath announced that it had entered into
a definitive agreement to sell its equity in the Company
(the Transaction). The closing of the Transaction is
conditioned upon, among other customary conditions, approval of
the holders of a majority of the shares of the Companys
common stock. The Company anticipates that it will receive
approximately $60.0 million from the sale of its
equity in the Company after the payment of taxes and closing
costs.
******
F-39
Rock, LLC
Unaudited Financial Statements as of and for the Three and
Six
Month Periods Ended March 31, 2011 and 2010
F-40
MEDCATH
OF LITTLE ROCK, LLC
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
UNAUDITED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-42
|
|
|
|
|
F-43
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
|
|
|
F-46-F-51
|
|
F-41
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2
|
|
|
$
|
2
|
|
Accounts receivable, net
|
|
|
14,079
|
|
|
|
11,958
|
|
Medical supplies
|
|
|
3,454
|
|
|
|
3,365
|
|
Due from affiliate
|
|
|
6,328
|
|
|
|
10,366
|
|
Prepaid expenses and other current assets
|
|
|
2,696
|
|
|
|
2,104
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
26,559
|
|
|
|
27,795
|
|
Property and equipment, net
|
|
|
39,022
|
|
|
|
41,144
|
|
Other assets
|
|
|
59
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
65,640
|
|
|
$
|
69,011
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,267
|
|
|
$
|
4,408
|
|
Accrued compensation and benefits
|
|
|
3,450
|
|
|
|
3,424
|
|
Other accrued liabilities
|
|
|
3,449
|
|
|
|
3,783
|
|
Due to affiliate
|
|
|
155
|
|
|
|
356
|
|
Current portion of loans payable to affiliate
|
|
|
25,916
|
|
|
|
26,757
|
|
Current portion of obligation under capital lease
|
|
|
55
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
38,292
|
|
|
|
38,781
|
|
Loans payable to affiliate
|
|
|
2,300
|
|
|
|
2,848
|
|
Obligation under capital lease
|
|
|
147
|
|
|
|
174
|
|
Other long-term obligations
|
|
|
53
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
40,792
|
|
|
|
41,852
|
|
Members capital
|
|
|
24,848
|
|
|
|
27,159
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members capital
|
|
$
|
65,640
|
|
|
$
|
69,011
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-42
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March
|
|
|
Six Months Ended March
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
32,216
|
|
|
$
|
29,139
|
|
|
$
|
60,435
|
|
|
$
|
54,673
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
9,397
|
|
|
|
9,067
|
|
|
|
18,158
|
|
|
|
17,912
|
|
Medical supplies expense
|
|
|
9,523
|
|
|
|
8,943
|
|
|
|
16,238
|
|
|
|
17,996
|
|
Bad debt expense
|
|
|
2,961
|
|
|
|
2,690
|
|
|
|
5,299
|
|
|
|
3,436
|
|
Other operating expenses
|
|
|
3,729
|
|
|
|
3,775
|
|
|
|
8,664
|
|
|
|
7,753
|
|
Depreciation
|
|
|
1,120
|
|
|
|
1,355
|
|
|
|
2,323
|
|
|
|
2,719
|
|
Loss on disposal of property, equipment and other assets
|
|
|
|
|
|
|
7
|
|
|
|
23
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
26,730
|
|
|
|
25,837
|
|
|
|
50,705
|
|
|
|
49,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5,486
|
|
|
|
3,302
|
|
|
|
9,730
|
|
|
|
4,833
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(235
|
)
|
|
|
(265
|
)
|
|
|
(480
|
)
|
|
|
(510
|
)
|
Interest and other income (expense), net
|
|
|
|
|
|
|
(5
|
)
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses, net
|
|
|
(235
|
)
|
|
|
(270
|
)
|
|
|
(70
|
)
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,251
|
|
|
$
|
3,032
|
|
|
$
|
9,660
|
|
|
$
|
4,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-43
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable
|
|
|
|
|
|
|
MedCath of
|
|
|
|
|
|
from
|
|
|
|
|
|
|
Arkansas,
|
|
|
Physician
|
|
|
Physician
|
|
|
|
|
|
|
Inc.
|
|
|
Members
|
|
|
Members
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance, September 30, 2010
|
|
$
|
19,144
|
|
|
$
|
8,076
|
|
|
$
|
(61
|
)
|
|
$
|
27,159
|
|
Distributions to members
|
|
|
(8,442
|
)
|
|
|
(3,562
|
)
|
|
|
33
|
|
|
|
(11,971
|
)
|
Net income
|
|
|
6,794
|
|
|
|
2,866
|
|
|
|
|
|
|
|
9,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2011
|
|
$
|
17,496
|
|
|
$
|
7,380
|
|
|
$
|
(28
|
)
|
|
$
|
24,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-44
MEDCATH
OF LITTLE ROCK, LLC
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
9,660
|
|
|
$
|
4,323
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
5,299
|
|
|
|
3,436
|
|
Depreciation
|
|
|
2,323
|
|
|
|
2,719
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
23
|
|
|
|
24
|
|
Change in assets and liabilities that relate to operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,420
|
)
|
|
|
(3,463
|
)
|
Medical supplies
|
|
|
(89
|
)
|
|
|
(699
|
)
|
Prepaid expenses and other assets
|
|
|
(181
|
)
|
|
|
(227
|
)
|
Accounts payable and accrued liabilities
|
|
|
134
|
|
|
|
(377
|
)
|
Due to affiliate
|
|
|
(201
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
9,548
|
|
|
|
5,737
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(195
|
)
|
|
|
(869
|
)
|
Proceeds from sale of property and equipment
|
|
|
|
|
|
|
9
|
|
Due from affiliate
|
|
|
4,038
|
|
|
|
5,403
|
|
Restricted cash
|
|
|
(6
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
3,837
|
|
|
|
4,547
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Repayments of obligation under capital lease
|
|
|
(25
|
)
|
|
|
(26
|
)
|
Proceeds from loans payable to affiliate
|
|
|
|
|
|
|
3,000
|
|
Repayments of loans payable to affiliates
|
|
|
(1,389
|
)
|
|
|
(1,290
|
)
|
Distributions to members
|
|
|
(11,971
|
)
|
|
|
(11,968
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(13,385
|
)
|
|
|
(10,284
|
)
|
Net change in cash
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited financial statements.
F-45
MEDCATH
OF LITTLE ROCK, LLC
(All tables in thousands)
MedCath of Little Rock, LLC (the Company) is a North
Carolina limited liability company that was formed on
July 12, 1995, to develop, own, and operate an acute-care
hospital located in Little Rock, Arkansas, specializing in all
aspects of cardiology and cardiovascular surgery. The hospital
commenced operations on March 3, 1997. MedCath of Arkansas,
Inc., an indirectly wholly owned subsidiary of MedCath
Corporation (MedCath), holds a 70.33% interest in
the Company, and physician members hold the remaining 29.67%
interest.
MedCath of Arkansas, Inc. acts as the managing member in
accordance with the Companys operating agreement. The
Company will cease to exist on December 31, 2035, unless
the members elect earlier dissolution. The termination date may
be extended for up to an additional 40 years in five-year
increments at the election of MedCath of Arkansas, Inc.
Basis of Presentation
The Companys
unaudited interim financial statements as of March 31, 2011
and for the three and six months ended March 31, 2011 and
2010 have been prepared in accordance with accounting principles
generally accepted in the United States of America
(GAAP) and pursuant to the rules and regulations of
the Securities and Exchange Commission (the SEC).
These unaudited interim financial statements reflect, in the
opinion of management, all material adjustments necessary to
fairly state the results of operations and financial position
for the periods presented.
Certain information and disclosures normally included in the
notes to financial statements have been condensed or omitted as
permitted by the rules and regulations of the SEC, although the
Company believes the disclosures are adequate to make the
information presented not misleading. The unaudited interim
financial statements and notes thereto should be read in
conjunction with the Companys unaudited financial
statements and notes thereto for the fiscal year ended
September 30, 2010 included elsewhere in this proxy.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Fair Value of Financial Instruments
The
Company considers the carrying amounts of significant classes of
financial instruments on the balance sheets to be reasonable
estimates of fair value due either to their length to maturity
or the existence of variable interest rates underlying such
financial instruments that approximate prevailing market rates
at March 31, 2011 and September 30, 2010.
The Companys other significant classes of financial
instruments on the balance sheets for which the carrying amounts
and estimated fair values differ are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
September 30, 2010
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
Fixed rate loan payable to affiliate, including current portion
|
|
$
|
3,383
|
|
|
$
|
3,465
|
|
|
$
|
3,908
|
|
|
$
|
4,049
|
|
Cash
The Company has included in accounts
payable on the accompanying balance sheets negative cash
balances totaling approximately $0.7 million and
$1.1 million at March 31, 2011 and September 30,
2010, respectively. At March 31, 2011 and
September 30, 2010, the Company has included in prepaid
expenses and other current assets on the accompanying balance
sheets cash balances of $0.2 million, which are restricted
to meet the current affiliate debt and interest payments.
New Accounting Pronouncements
In August 2010,
the FASB issued Accounting Standard Updates (ASU)
2010-24,
Health Care Entities (Topic 954): Presentation of
Insurance Claims and Related Insurance Recoveries, which
clarifies that a health care entity should not net insurance
recoveries against a related claim liability. The guidance
provided in this ASU is effective as of the beginning of the
first fiscal year beginning
F-46
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
after December 15, 2010, fiscal 2012 for the Company. The
Company is evaluating the potential impacts the adoption of this
ASU will have on our financial statements.
In August 2010, the FASB issued ASU
2010-23,
Health Care Entities (Topic 954): Measuring Charity Care
for Disclosure, which requires a company in the healthcare
industry to use its direct and indirect costs of providing
charity care as the measurement basis for charity care
disclosures. This ASU also requires additional disclosures of
the method used to identify such costs. The guidance provided in
this ASU is effective for fiscal years beginning after
December 15, 2010, fiscal 2012 for the Company. The
adoption of this ASU is not expected to have any impact on our
financial position or results of operations.
Accounts receivable, net, is as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
Receivables, principally from patients and third-party payors
|
|
$
|
36,110
|
|
|
$
|
32,412
|
|
Other receivables
|
|
|
1,278
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,388
|
|
|
|
32,750
|
|
Allowance for doubtful accounts
|
|
|
(23,309
|
)
|
|
|
(20,792
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
14,079
|
|
|
$
|
11,958
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Commitments
and Contingencies
|
Commitments
The Company provides guarantees
to certain non-investor physician groups for funds required to
operate and maintain services for the benefit of the
hospitals patients including emergency care services and
anesthesiology services, among others. These guarantees extend
for the duration of the underlying service agreements. At
March 31, 2011, the maximum potential future payments that
the Company could be required to make under these guarantees was
approximately $2.5 million through February 2012. At
March 31, 2011 the Company had recorded a liability of
$2.0 million for the fair value of these guarantees, which
is in other accrued liabilities. Additionally, the Company had
recorded an asset of $2.0 million representing the future
services to be provided by the physicians, which is in prepaid
expenses and other current assets
Contingencies
Laws and regulations governing
the Medicare and Medicaid programs are complex, subject to
interpretation and may be modified. The Company believes that it
is in compliance with such laws and regulations and it is not
aware of any investigations involving allegations of potential
wrongdoing. However, compliance with such laws and regulations
can be subject to future government review and interpretation as
well as significant regulatory action, including substantial
fines and criminal penalties, as well as repayment of previously
billed and collected revenue from patient services and exclusion
from the Medicare and Medicaid programs. Medicare and Medicaid
cost reports have been audited by the fiscal intermediary
through September 30, 2006 and September 30, 2005,
respectively.
|
|
5.
|
Related-Party
Transactions
|
On July 7, 2004, the Company entered into a real estate
mortgage loan with MedCath in the amount of $25.5 million
for the purpose of repaying the outstanding balance of its bank
mortgage loan. The real estate mortgage loan was amended on
November 2007 to increase the maximum borrowing capacity to
$30.5 million. The real estate mortgage loan has a
seven-year term, with principal and interest payable monthly
using an extended amortization schedule and a balloon payment
due on June 30, 2011. The interest is based on the
three-month LIBOR rate plus 2.5%. At March 31, 2011 and
September 30, 2010, the interest rate on the real
F-47
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
estate mortgage loan is 2.81% and 2.80%, respectively. The real
estate mortgage loan is collateralized by a pledge of the land,
buildings and fixtures, and certain other assets of the Company.
The outstanding balance of this loan at March 31, 2011 and
September 30, 2010 is $24.8 million and
$25.7 million, respectively.
During December 2006, the Company entered into an equipment loan
with MedCath in the amount of $1.8 million. The equipment
loan has a six-year term, with principal and interest payable
monthly and matures on January 31, 2013. Interest is fixed
at 8.43%. The equipment loan is collateralized by a pledge of
the equipment and certain other assets of the Company. The
amount of the equipment loan outstanding at March 31, 2011
and September 30, 2010 is $0.6 million and
$0.7 million, respectively.
During November 2007, the Company entered into a new equipment
loan with MedCath in the amount of $1.1 million. The
equipment loan has a six-year term, with principal and interest
payable monthly and matures on October 31, 2013. Interest
is fixed at 7.95%. The equipment loan is collateralized by a
pledge of the equipment and certain other assets of the Company.
The amount of the equipment loan outstanding at March 31,
2011 and September 30, 2010 is $0.5 million and
$0.6 million, respectively.
During December 2009, the Company entered into a new equipment
loan with MedCath in the amount of $3.0 million. The
equipment loan has a five-year term with a fixed interest rate
of 5.8%. Principal and interest are payable monthly and the loan
matures November 2014. The equipment loan is collateralized by a
pledge of the purchased equipment of the Company. The amount of
the equipment loan outstanding at March 31, 2011 and
September 30, 2010 is $2.3 million and
$2.6 million, respectively.
MedCath also provides working capital to the Company in the form
of advances under a working capital loan with a maximum
borrowing limit of $12.5 million. Upon election, MedCath
may advance up to an additional $2.5 million, for an
aggregate amount of $15.0 million. This loan is
collateralized in part by the Companys accounts receivable
from patient services. Amounts outstanding under this working
capital loan bear interest at the Prime rate plus 1% with no
specified due date. No amounts are outstanding at March 31,
2011 and September 30, 2010.
At March 31, 2011 and September 30, 2010, $43,000 and
$44,000, respectively, are recorded as due to affiliate in the
balance sheets for the amount of accrued interest related to the
above loans due to MedCath by the Company.
The Companys continuing operations may be dependent on
MedCaths forbearance of collection of the outstanding real
estate mortgage loan, which is due on June 30, 2011 and may
also be dependent on further advances from MedCath if the cash
flows of the Company are insufficient. The Company and MedCath
have not yet reached an agreement as to amended terms on the
real estate mortgage loan. However, the Company expects to repay
the balance pursuant to a pending sale transaction (see
Note 7). Should the sale not occur, the Company and MedCath
would negotiate an amendment of the real estate mortgage on
commercially reasonable terms.
The Company also advances funds to MedCath as cash is available.
The Company receives interest from MedCath on the advance
balance at a rate commensurate with the rate of return MedCath
earns on the investment of such funds. As of March 31, 2011
and September 30, 2010, the advances bore interest at
0.15%. As of March 31, 2011 and September 30, 2010,
the amount receivable from MedCath for these advances totaled
approximately $6.3 million and $10.4 million,
respectively. Under the terms of the advance between the Company
and MedCath, all outstanding amounts are due on demand by the
Company and, therefore, are classified as a current asset (due
from affiliate) in the Companys balance sheets.
MedCath allocated corporate expenses to the Company for costs
relative to hospital management salaries, interest expense on
borrowings, management fees and employee group insurance, which
are included in operating expenses in the statements of
operations. Such allocated costs amounted to $4.9 million
and $5.2 million during the six months ended March 31,
2011 and 2010, respectively.
F-48
MEDCATH
OF LITTLE ROCK, LLC
NOTES TO
UNAUDITED FINANCIAL STATEMENTS (Continued)
(All
tables in thousands)
At March 31, 2011 and September 30, 2010,
$0.2 million and $0.4 million, respectively, was
outstanding for these corporate allocated expenses and was
recorded on the balance sheet as due to affiliates.
|
|
6.
|
Litigation
and Related Professional Liability Insurance Coverage
|
The Company is involved in various claims and legal actions in
the ordinary course of business, including malpractice claims
arising from services provided to patients that have been
asserted by various claimants and additional claims that may be
asserted for known incidents through March 31, 2011. These
claims and legal actions are in various stages, and some may
ultimately be brought to trial. Moreover, additional claims
arising from services provided to patients in the past and other
legal actions may be asserted in the future. The Company is
protecting its interest in all such claims and actions.
Management does not believe, based on the Companys
experience with past litigation and taking into account the
applicable liability insurance coverage and the expectations of
counsel with respect to the amount of potential liability, the
outcome of any such claims and litigation, individually or in
the aggregate, will have a materially adverse effect on the
Companys financial position or results of operations.
On September 17, 2010, MedCath received a letter from the
United States Department of Justice (DOJ) advising
that an investigation is being conducted to determine whether
certain of its hospitals have submitted claims excluded from
coverage. The period of time covered by the investigation is
2003 to the present. The letter states that the DOJs data
indicates that many of MedCaths hospitals have claims for
the implantation of implantable cardioverter defibrillators
(ICDs) which were not medically indicated
and/or
otherwise violated Medicare payment policy. MedCath understands
that the DOJ has submitted similar requests to many other
hospitals and hospital systems across the country as well as to
the ICD manufacturers themselves. MedCath is fully cooperating
with the DOJ, is actively engaged discussions with the DOJ
regarding the issues involved in the investigation and has
entered into a tolling agreement with the government in this
investigation. MedCath has met with the DOJ on one occasion to
provide examples of its documentation for such ICD cases related
to one of its hospitals. To date, the DOJ has not asserted any
claim against the Company specifically. Because MedCath is in
the early stages of this investigation, the Company is unable to
evaluate the outcome of this investigation.
During June 2010 and 2009, MedCath entered into a one-year
claims-made policy providing coverage for medical malpractice
claim amounts in excess of $2.0 million of retained
liability per claim in the aggregate inclusive of the Company.
Because of the Companys self-insured retention levels, the
Company is required to recognize an estimated expense/liability
for the amount of retained liability applicable to each
malpractice claim. As of March 31, 2011 and
September 30, 2010, the total estimated liability for the
Companys self-insured retention on medical malpractice
claims, including an estimated amount for incurred but not
reported claims, is$0.5 million and $0.9 million,
respectively, and is included in other accrued liabilities in
the Companys balance sheets. The Company maintains this
reserve based on actuarial estimates using the Companys
historical experience with claims and assumptions about future
events.
On May 9, 2011, MedCath announced that it had entered into
a definitive agreement to sell its equity in the Company
(the Transaction). The closing of the Transaction is
conditioned upon, among other customary conditions, approval of
the holders of a majority of the shares of the Companys
common stock. The Company anticipates that it will receive
approximately $60.0 million from the sale of its
equity in the Company after the payment of taxes and closing
costs.
******
F-49
The following table sets forth our selected consolidated
financial data as of and for the years ended September 30,
2010, 2009, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
376,926
|
|
|
$
|
343,849
|
|
|
$
|
337,769
|
|
|
$
|
399,492
|
|
|
$
|
378,471
|
|
Impairment of long-lived assets and goodwill
|
|
$
|
66,822
|
|
|
$
|
42,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
458
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(65,718
|
)
|
|
$
|
(32,048
|
)
|
|
$
|
27,817
|
|
|
$
|
29,402
|
|
|
$
|
(937
|
)
|
(Loss) income from continuing operations, net of taxes
|
|
$
|
(50,485
|
)
|
|
$
|
(41,252
|
)
|
|
$
|
7,982
|
|
|
$
|
8,433
|
|
|
$
|
(8,139
|
)
|
Income from discontinued operations, net of taxes
|
|
$
|
2,114
|
|
|
$
|
(9,030
|
)
|
|
$
|
13,008
|
|
|
$
|
3,094
|
|
|
$
|
19,595
|
|
Net (loss) income
|
|
$
|
(48,371
|
)
|
|
$
|
(50,282
|
)
|
|
$
|
20,990
|
|
|
$
|
11,527
|
|
|
$
|
12,576
|
|
(Loss) earnings from continuing operations attributable to
MedCath Corporation common stockholders per share, basic
|
|
$
|
(2.55
|
)
|
|
$
|
(2.09
|
)
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
(0.44
|
)
|
(Loss) earnings from continuing operations attributable to
MedCath Corporation common stockholders per share, diluted
|
|
$
|
(2.55
|
)
|
|
$
|
(2.09
|
)
|
|
$
|
0.40
|
|
|
$
|
0.39
|
|
|
$
|
(0.42
|
)
|
(Loss) earnings per share, basic
|
|
$
|
(2.44
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
1.05
|
|
|
$
|
0.56
|
|
|
$
|
0.67
|
|
(Loss) earnings per share, diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
1.04
|
|
|
$
|
0.54
|
|
|
$
|
0.64
|
|
Weighted average number of shares, basic
|
|
|
19,842
|
|
|
|
19,684
|
|
|
|
19,996
|
|
|
|
20,872
|
|
|
|
18,656
|
|
Weighted average number of shares, diluted
|
|
|
19,842
|
|
|
|
19,684
|
|
|
|
20,069
|
|
|
|
21,511
|
|
|
|
19,555
|
|
Balance Sheet and Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
494,538
|
|
|
$
|
590,448
|
|
|
$
|
653,456
|
|
|
$
|
678,567
|
|
|
$
|
785,849
|
|
Total long-term obligations
|
|
$
|
99,841
|
|
|
$
|
115,063
|
|
|
$
|
121,875
|
|
|
$
|
148,484
|
|
|
$
|
274,962
|
|
Net cash provided by operating activities
|
|
$
|
43,294
|
|
|
$
|
63,633
|
|
|
$
|
52,008
|
|
|
$
|
58,225
|
|
|
$
|
65,634
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(16,956
|
)
|
|
$
|
(63,790
|
)
|
|
$
|
(5,805
|
)
|
|
$
|
(28,591
|
)
|
|
$
|
10,064
|
|
Net cash used in financing activities
|
|
$
|
(41,009
|
)
|
|
$
|
(50,210
|
)
|
|
$
|
(78,028
|
)
|
|
$
|
(80,116
|
)
|
|
$
|
(22,165
|
)
|
Selected Operating Data (consolidated)(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of hospitals
|
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
|
|
5
|
|
Licensed beds(b)
|
|
|
466
|
|
|
|
396
|
|
|
|
332
|
|
|
|
244
|
|
|
|
356
|
|
Staffed and available beds(c)
|
|
|
380
|
|
|
|
310
|
|
|
|
272
|
|
|
|
242
|
|
|
|
354
|
|
Admissions(d)
|
|
|
18,762
|
|
|
|
15,836
|
|
|
|
17,010
|
|
|
|
22,494
|
|
|
|
23,789
|
|
Adjusted admissions(e)
|
|
|
28,163
|
|
|
|
23,301
|
|
|
|
23,274
|
|
|
|
31,510
|
|
|
|
32,806
|
|
Patient days(f)
|
|
|
69,956
|
|
|
|
60,763
|
|
|
|
61,259
|
|
|
|
75,751
|
|
|
|
79,651
|
|
Adjusted patient days(g)
|
|
|
105,467
|
|
|
|
89,281
|
|
|
|
83,541
|
|
|
|
105,680
|
|
|
|
109,670
|
|
Average length of stay(h)
|
|
|
3.73
|
|
|
|
3.84
|
|
|
|
3.60
|
|
|
|
3.37
|
|
|
|
3.35
|
|
Occupancy(i)
|
|
|
50.4
|
%
|
|
|
53.7
|
%
|
|
|
61.7
|
%
|
|
|
85.8
|
%
|
|
|
61.6
|
%
|
Inpatient catheterization procedures(j)
|
|
|
7,986
|
|
|
|
7,348
|
|
|
|
9,048
|
|
|
|
10,481
|
|
|
|
10,372
|
|
Inpatient surgical procedures(k)
|
|
|
4,555
|
|
|
|
4,200
|
|
|
|
3,975
|
|
|
|
5,154
|
|
|
|
5,321
|
|
Hospital net revenue
|
|
$
|
362,552
|
|
|
$
|
324,286
|
|
|
$
|
316,389
|
|
|
$
|
375,037
|
|
|
$
|
351,669
|
|
F-50
|
|
|
(a)
|
|
Selected operating data includes consolidated hospitals in
operation as of the end of the period reported in continuing
operations but does not include hospitals which were accounted
for using the equity method or as discontinued operations in our
consolidated financial statements. During the fourth quarter of
fiscal 2007, Harlingen Medical Center ceased to be a
consolidated subsidiary due to the sale of a portion of the
hospital.
|
|
(b)
|
|
Licensed beds represent the number of beds for which the
appropriate state agency licenses a facility regardless of
whether the beds are actually available for patient use.
|
|
(c)
|
|
Staffed and available beds represent the number of beds that are
readily available for patient use at the end of the period.
|
|
(d)
|
|
Admissions represent the number of patients admitted for
inpatient treatment.
|
|
(e)
|
|
Adjusted admissions is a general measure of combined inpatient
and outpatient volume. We computed adjusted admissions by
dividing gross patient revenue by gross inpatient revenue and
then multiplying the quotient by admissions.
|
|
(f)
|
|
Patient days represent the total number of days of care provided
to inpatients.
|
|
(g)
|
|
Adjusted patient days is a general measure of combined inpatient
and outpatient volume. We computed adjusted patient days by
dividing gross patient revenue by gross inpatient revenue and
then multiplying the quotient by patient days.
|
|
(h)
|
|
Average length of stay (days) represents the average number of
days inpatients stay in our hospitals.
|
|
(i)
|
|
We computed occupancy by dividing patient days by the number of
days in the period and then dividing the quotient by the number
of staffed and available beds.
|
|
(j)
|
|
Inpatients with a catheterization procedure represent the number
of inpatients with a procedure performed in one of the
hospitals catheterization labs during the period.
|
|
(k)
|
|
Inpatient surgical procedures represent the number of surgical
procedures performed on inpatients during the period.
|
F-51
MedCath
Corporation
Unaudited
Pro Forma Consolidated Financial Statements
Pro Forma
Financial Statements
The following presents our unaudited pro forma statements of
operations for the fiscal years ended September 30, 2010,
2009 and 2008 and as of and for the three and six months ended
March 31, 2011 and 2010 and our unaudited pro forma balance
sheet as of March 31, 2011. The pro forma statements of
operations give effect to the sale of Heart Hospital of New
Mexico and Arkansas Heart Hospital (the Sale
Proposals) as if each had occurred at October 1,
2009. The net proceeds are to be used as described in Use
of Proceeds. The unaudited pro forma balance sheet as of
March 31, 2011 has been prepared as if the Sale Proposals
and the net proceeds had occurred on that date.
The unaudited pro forma financial information is for
informational purposes only and does not purport to present what
our results would actually have been had these transactions
actually occurred on the dates presented or to project our
results of operations or financial position for any future
period. You should read the information set forth below together
with (i) MedCath Corporations consolidated financial
statements as of September 30, 2010 and 2009 and for each
of the years in the three-year period ended September 30,
2010, including the notes thereto, included in MedCath
Corporations Annual Report on
Form 8-K
for the fiscal year ended September 30, 2010, and
(ii) MedCath Corporations unaudited consolidated
financial statements as of March 31, 2011 and for each of
the three and six-month periods ended March 31, 2011 and
2010, including the notes thereto, included in MedCath
Corporations
Form 10-Q.
F-52
MedCath
Corporation Financial Information
Index
|
|
|
|
|
Unaudited Pro Forma Financial Statements:
|
|
Page
|
|
Unaudited Pro Forma Consolidated Balance Sheets as of
March 31, 2011:
|
|
|
|
|
|
|
|
F-54
|
|
|
|
|
F-55
|
|
|
|
|
F-56
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Year Ended September 30, 2010:
|
|
|
|
|
|
|
|
F-57
|
|
|
|
|
F-58
|
|
|
|
|
F-59
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Year Ended September 30, 2009:
|
|
|
|
|
|
|
|
F-60
|
|
|
|
|
F-61
|
|
|
|
|
F-62
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Year Ended September 30, 2008:
|
|
|
|
|
|
|
|
F-63
|
|
|
|
|
F-64
|
|
|
|
|
F-65
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Three Months Ended March 31, 2011:
|
|
|
|
|
|
|
|
F-66
|
|
|
|
|
F-67
|
|
|
|
|
F-68
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Three Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
F-69
|
|
|
|
|
F-70
|
|
|
|
|
F-71
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Six Months Ended March 31, 2011:
|
|
|
|
|
|
|
|
F-72
|
|
|
|
|
F-73
|
|
|
|
|
F-74
|
|
Unaudited Pro Forma Consolidated Statements of Operations for
the Six Months Ended March 31, 2010:
|
|
|
|
|
|
|
|
F-75
|
|
|
|
|
F-76
|
|
|
|
|
F-77
|
|
F-53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
|
|
HHNM Sale
|
|
|
|
|
|
|
|
|
|
Sale of
|
|
|
Coastal
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Company
|
|
|
MedCath
|
|
|
Carolina
|
|
|
Repayment
|
|
|
Company
|
|
|
Adjustments
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Partners(2)
|
|
|
Heart(3)
|
|
|
of Debt(4)
|
|
|
Recast
|
|
|
(5)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except share data)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,735
|
|
|
$
|
15,801
|
|
|
$
|
3,064
|
|
|
$
|
(30,166
|
)
|
|
$
|
108,434
|
|
|
$
|
51,798
|
|
|
$
|
160,232
|
|
Accounts receivable, net
|
|
|
49,748
|
|
|
|
(1,403
|
)
|
|
|
509
|
|
|
|
|
|
|
|
48,345
|
|
|
|
(10,688
|
)
|
|
|
38,166
|
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical supplies
|
|
|
10,373
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
10,364
|
|
|
|
(1,842
|
)
|
|
|
8,522
|
|
Deferred income tax assets
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
8,500
|
|
Prepaid expenses and other current assets
|
|
|
12,949
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
12,888
|
|
|
|
(1,939
|
)
|
|
|
10,949
|
|
Current assets of discontinued operations
|
|
|
46,619
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
48,022
|
|
|
|
10,688
|
|
|
|
58,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
247,924
|
|
|
|
15,731
|
|
|
|
3,573
|
|
|
|
(30,166
|
)
|
|
|
236,553
|
|
|
|
48,017
|
|
|
|
285,079
|
|
Property and equipment, net
|
|
|
153,469
|
|
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
|
147,262
|
|
|
|
(26,892
|
)
|
|
|
120,370
|
|
Other assets
|
|
|
18,484
|
|
|
|
(545
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
17,334
|
|
|
|
(1,471
|
)
|
|
|
15,863
|
|
Non-current assets of discontinued operations
|
|
|
1,152
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
3,698
|
|
|
|
253
|
|
|
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
421,029
|
|
|
$
|
11,525
|
|
|
$
|
2,968
|
|
|
$
|
(30,166
|
)
|
|
$
|
404,847
|
|
|
$
|
19,907
|
|
|
$
|
425,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,633
|
|
|
$
|
(83
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,550
|
|
|
$
|
(3,131
|
)
|
|
$
|
13,419
|
|
Income tax payable
|
|
|
3,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
|
|
|
|
3,205
|
|
Accrued compensation and benefits
|
|
|
14,775
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
14,461
|
|
|
|
(1,679
|
)
|
|
|
12,782
|
|
Other accrued liabilities
|
|
|
15,503
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
15,353
|
|
|
|
(2,496
|
)
|
|
|
12,857
|
|
Current portion of long-term debt and obligations under capital
leases
|
|
|
32,793
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
2,515
|
|
|
|
(2,070
|
)
|
|
|
445
|
|
Current liabilities of discontinued operations
|
|
|
14,174
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
14,507
|
|
|
|
5,278
|
|
|
|
19,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
97,083
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
66,591
|
|
|
|
(4,098
|
)
|
|
|
62,493
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases
|
|
|
5,191
|
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
4,748
|
|
|
|
(3,850
|
)
|
|
|
898
|
|
Other long-term obligations
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,804
|
|
|
|
(1,218
|
)
|
|
|
1,586
|
|
Long-term liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
105,078
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
74,143
|
|
|
|
(9,166
|
)
|
|
|
64,977
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
7,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,356
|
|
|
|
|
|
|
|
7,356
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 50,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,281,828 issued and 20,327,467 outstanding at March 31,
2011
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
216
|
|
Paid-in capital
|
|
|
458,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458,573
|
|
|
|
|
|
|
|
458,573
|
|
Accumulated deficit
|
|
|
(116,247
|
)
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
(101,494
|
)
|
|
|
32,818
|
|
|
|
(68,167
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954,361 shares at March 31, 2011
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MedCath Corporation stockholders equity
|
|
|
297,745
|
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
312,498
|
|
|
|
32,818
|
|
|
|
345,825
|
|
Noncontrolling interest
|
|
|
10,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,850
|
|
|
|
(3,745
|
)
|
|
|
7,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
308,595
|
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
323,348
|
|
|
|
29,073
|
|
|
|
352,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
421,029
|
|
|
$
|
11,525
|
|
|
$
|
2,968
|
|
|
$
|
(30,166
|
)
|
|
$
|
404,847
|
|
|
$
|
19,907
|
|
|
$
|
425,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys Current Report on
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Reflects the sale of MedCath Partners, which was effective on
May 1, 2011, including the reclassification of retained
assets and liabilities as discontinued operations and the net
proceeds from the sale.
|
|
(3)
|
|
Reflects the net proceeds from the sale of Coastal Carolina
Heart, which was effective on May 6, 2011.
|
|
(4)
|
|
Reflects the impact of the repayment of debt under the credit
facility, which was repaid and terminated on May 9, 2011.
|
|
(5)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico. The
retained assets and liabilities are reflected as discontinued
operations.
|
F-54
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of
|
|
|
Coastal
|
|
|
|
|
|
|
|
|
AHH Sale
|
|
|
|
|
|
|
Company
|
|
|
MedCath
|
|
|
Carolina
|
|
|
Repayment
|
|
|
Company
|
|
|
Pro Forma
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Partners(2)
|
|
|
Heart(3)
|
|
|
of Debt(4)
|
|
|
Recast
|
|
|
Adjustments(5)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except share data)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,735
|
|
|
$
|
15,801
|
|
|
$
|
3,064
|
|
|
$
|
(30,166
|
)
|
|
$
|
108,434
|
|
|
$
|
59,995
|
|
|
$
|
168,429
|
|
Accounts receivable, net
|
|
|
49,748
|
|
|
|
(1,403
|
)
|
|
|
509
|
|
|
|
|
|
|
|
48,345
|
|
|
|
(14,079
|
)
|
|
|
34,775
|
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical supplies
|
|
|
10,373
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
10,364
|
|
|
|
(3,454
|
)
|
|
|
6,910
|
|
Deferred income tax assets
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
8,500
|
|
Prepaid expenses and other current assets
|
|
|
12,949
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
12,888
|
|
|
|
(2,524
|
)
|
|
|
10,364
|
|
Current assets of discontinued operations
|
|
|
46,619
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
48,022
|
|
|
|
|
|
|
|
48,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
247,924
|
|
|
|
15,731
|
|
|
|
3,573
|
|
|
|
(30,166
|
)
|
|
|
236,553
|
|
|
|
39,938
|
|
|
|
277,000
|
|
Property and equipment, net
|
|
|
153,469
|
|
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
|
147,262
|
|
|
|
(39,022
|
)
|
|
|
108,240
|
|
Other assets
|
|
|
18,484
|
|
|
|
(545
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
17,334
|
|
|
|
(59
|
)
|
|
|
17,275
|
|
Non-current assets of discontinued operations
|
|
|
1,152
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
3,698
|
|
|
|
|
|
|
|
3,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
421,029
|
|
|
$
|
11,525
|
|
|
$
|
2,968
|
|
|
$
|
(30,166
|
)
|
|
$
|
404,847
|
|
|
$
|
857
|
|
|
$
|
406,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,633
|
|
|
$
|
(83
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,550
|
|
|
$
|
(5,267
|
)
|
|
$
|
11,283
|
|
Income tax payable
|
|
|
3,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
|
|
|
|
3,205
|
|
Accrued compensation and benefits
|
|
|
14,775
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
14,461
|
|
|
|
(3,450
|
)
|
|
|
11,011
|
|
Other accrued liabilities
|
|
|
15,503
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
15,353
|
|
|
|
(3,449
|
)
|
|
|
11,904
|
|
Current portion of long-term debt and obligations under capital
leases
|
|
|
32,793
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
2,515
|
|
|
|
(55
|
)
|
|
|
2,460
|
|
Current liabilities of discontinued operations
|
|
|
14,174
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
14,507
|
|
|
|
|
|
|
|
14,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
97,083
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
66,591
|
|
|
|
(12,221
|
)
|
|
|
54,370
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases
|
|
|
5,191
|
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
4,748
|
|
|
|
(147
|
)
|
|
|
4,601
|
|
Other long-term obligations
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,804
|
|
|
|
(53
|
)
|
|
|
2,751
|
|
Long-term liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
105,078
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
74,143
|
|
|
|
(12,421
|
)
|
|
|
61,722
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
7,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,356
|
|
|
|
(7,356
|
)
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 50,000,000 shares
authorized; 22,281,828 issued and 20,327,467 outstanding at
March 31, 2011
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
216
|
|
Paid-in capital
|
|
|
458,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458,573
|
|
|
|
|
|
|
|
458,573
|
|
Accumulated deficit
|
|
|
(116,247
|
)
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
(101,494
|
)
|
|
|
20,634
|
|
|
|
(80,351
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost; 1,954,361 shares at March 31,
2011
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MedCath Corporation stockholders equity
|
|
|
297,745
|
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
312,498
|
|
|
|
20,634
|
|
|
|
333,641
|
|
Noncontrolling interest
|
|
|
10,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,850
|
|
|
|
|
|
|
|
10,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
308,595
|
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
323,348
|
|
|
|
20,634
|
|
|
|
344,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
421,029
|
|
|
$
|
11,525
|
|
|
$
|
2,968
|
|
|
$
|
(30,166
|
)
|
|
$
|
404,847
|
|
|
$
|
857
|
|
|
$
|
406,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys Current Report on
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Reflects the sale of MedCath Partners, which was effective on
May 1, 2011, including the reclassification of retained
assets and liabilities as discontinued operations and the net
proceeds from the sale.
|
|
(3)
|
|
Reflects the net proceeds from the sale of Coastal Carolina
Heart, which was effective on May 6, 2011.
|
|
(4)
|
|
Reflects the impact of the repayment of debt under the credit
facility, which was repaid and terminated on May 9, 2011.
|
|
(5)
|
|
Impact of the assumed sale of Arkansas Heart Hospital. The AHH
transaction is an equity sale with no retained assets or
liabilities.
|
F-55
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
|
|
HHNM and
|
|
|
|
|
|
|
|
|
|
Sale of
|
|
|
Coastal
|
|
|
|
|
|
|
|
|
AHH Sale
|
|
|
|
|
|
|
Company
|
|
|
MedCath
|
|
|
Carolina
|
|
|
Repayment
|
|
|
Company
|
|
|
Pro Forma
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Partners(2)
|
|
|
Heart(3)
|
|
|
of Debt(4)
|
|
|
Recast
|
|
|
Adjustments(5)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except share data)
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
119,735
|
|
|
$
|
15,801
|
|
|
$
|
3,064
|
|
|
$
|
(30,166
|
)
|
|
$
|
108,434
|
|
|
$
|
111,793
|
|
|
$
|
220,227
|
|
Accounts receivable, net
|
|
|
49,748
|
|
|
|
(1,403
|
)
|
|
|
509
|
|
|
|
|
|
|
|
48,345
|
|
|
|
(24,767
|
)
|
|
|
24,087
|
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical supplies
|
|
|
10,373
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
10,364
|
|
|
|
(5,296
|
)
|
|
|
5,068
|
|
Deferred income tax assets
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
8,500
|
|
Prepaid expenses and other current assets
|
|
|
12,949
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
12,888
|
|
|
|
(4,463
|
)
|
|
|
8,425
|
|
Current assets of discontinued operations
|
|
|
46,619
|
|
|
|
1,403
|
|
|
|
|
|
|
|
|
|
|
|
48,022
|
|
|
|
10,688
|
|
|
|
58,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
247,924
|
|
|
|
15,731
|
|
|
|
3,573
|
|
|
|
(30,166
|
)
|
|
|
236,553
|
|
|
|
87,955
|
|
|
|
325,017
|
|
Property and equipment, net
|
|
|
153,469
|
|
|
|
(6,207
|
)
|
|
|
|
|
|
|
|
|
|
|
147,262
|
|
|
|
(65,914
|
)
|
|
|
81,348
|
|
Other assets
|
|
|
18,484
|
|
|
|
(545
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
17,334
|
|
|
|
(1,530
|
)
|
|
|
15,804
|
|
Non-current assets of discontinued operations
|
|
|
1,152
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
3,698
|
|
|
|
253
|
|
|
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
421,029
|
|
|
$
|
11,525
|
|
|
$
|
2,968
|
|
|
$
|
(30,166
|
)
|
|
$
|
404,847
|
|
|
$
|
20,764
|
|
|
$
|
426,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
16,633
|
|
|
$
|
(83
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
16,550
|
|
|
$
|
(8,398
|
)
|
|
$
|
8,152
|
|
Income tax payable
|
|
|
3,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,205
|
|
|
|
|
|
|
|
3,205
|
|
Accrued compensation and benefits
|
|
|
14,775
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
14,461
|
|
|
|
(5,129
|
)
|
|
|
9,332
|
|
Other accrued liabilities
|
|
|
15,503
|
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
15,353
|
|
|
|
(5,945
|
)
|
|
|
9,408
|
|
Current portion of long-term debt and obligations under capital
leases
|
|
|
32,793
|
|
|
|
(112
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
2,515
|
|
|
|
(2,125
|
)
|
|
|
390
|
|
Current liabilities of discontinued operations
|
|
|
14,174
|
|
|
|
333
|
|
|
|
|
|
|
|
|
|
|
|
14,507
|
|
|
|
5,278
|
|
|
|
19,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
97,083
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
66,591
|
|
|
|
(16,319
|
)
|
|
|
50,272
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations under capital leases
|
|
|
5,191
|
|
|
|
(443
|
)
|
|
|
|
|
|
|
|
|
|
|
4,748
|
|
|
|
(3,997
|
)
|
|
|
751
|
|
Other long-term obligations
|
|
|
2,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,804
|
|
|
|
(1,271
|
)
|
|
|
1,533
|
|
Long-term liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
105,078
|
|
|
|
(769
|
)
|
|
|
|
|
|
|
(30,166
|
)
|
|
|
74,143
|
|
|
|
(21,587
|
)
|
|
|
52,556
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interest
|
|
|
7,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,356
|
|
|
|
(7,356
|
)
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000,000 shares
authorized; none issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 50,000,000 shares
authorized; 22,281,828 issued and 20,327,467 outstanding at
March 31, 2011
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
216
|
|
Paid-in capital
|
|
|
458,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
458,573
|
|
|
|
|
|
|
|
458,573
|
|
Accumulated deficit
|
|
|
(116,247
|
)
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
(101,494
|
)
|
|
|
53,452
|
|
|
|
(47,533
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost; 1,954,361 shares at March 31,
2011
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
(44,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total MedCath Corporation stockholders equity
|
|
|
297,745
|
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
312,498
|
|
|
|
53,452
|
|
|
|
366,459
|
|
Noncontrolling interest
|
|
|
10,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,850
|
|
|
|
(3,745
|
)
|
|
|
7,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
308,595
|
|
|
|
12,294
|
|
|
|
2,968
|
|
|
|
|
|
|
|
323,348
|
|
|
|
49,707
|
|
|
|
373,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
421,029
|
|
|
$
|
11,525
|
|
|
$
|
2,968
|
|
|
$
|
(30,166
|
)
|
|
$
|
404,847
|
|
|
$
|
20,764
|
|
|
$
|
426,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys Current Report on
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Reflects the sale of MedCath Partners, which was effective on
May 1, 2011, including the reclassification of retained
assets and liabilities as discontinued operations and the net
proceeds from the sale.
|
|
(3)
|
|
Reflects the net proceeds from the sale of Coastal Carolina
Heart, which was effective on May 6, 2011.
|
|
(4)
|
|
Reflects the impact of the repayment of debt under the credit
facility, which was repaid and terminated on May 9, 2011.
|
|
(5)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico with
the retained assets and liabilities reflected as discontinued
operations as well as the impact of the assumed sale of Arkansas
Heart Hospital. The AHH transaction is an equity sale with no
retained assets or liabilities.
|
F-56
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
376,926
|
|
|
$
|
(11,440
|
)
|
|
$
|
365,486
|
|
|
$
|
(81,232
|
)
|
|
$
|
284,254
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
128,663
|
|
|
|
(3,606
|
)
|
|
|
125,057
|
|
|
|
(22,032
|
)
|
|
|
103,025
|
|
Medical supplies expense
|
|
|
91,931
|
|
|
|
(461
|
)
|
|
|
91,470
|
|
|
|
(21,213
|
)
|
|
|
70,257
|
|
Bad debt expense
|
|
|
40,620
|
|
|
|
(22
|
)
|
|
|
40,598
|
|
|
|
(5,438
|
)
|
|
|
35,160
|
|
Other operating expenses
|
|
|
91,635
|
|
|
|
(4,950
|
)
|
|
|
86,685
|
|
|
|
(17,166
|
)
|
|
|
69,519
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
Depreciation
|
|
|
23,675
|
|
|
|
(3,186
|
)
|
|
|
20,489
|
|
|
|
(2,934
|
)
|
|
|
17,555
|
|
Amortization
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Impairment of long-lived assets and goodwill
|
|
|
66,822
|
|
|
|
(800
|
)
|
|
|
66,022
|
|
|
|
|
|
|
|
66,022
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
(36
|
)
|
|
|
49
|
|
|
|
13
|
|
|
|
(43
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
444,208
|
|
|
|
(12,976
|
)
|
|
|
431,232
|
|
|
|
(68,858
|
)
|
|
|
362,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(67,282
|
)
|
|
|
1,536
|
|
|
|
(65,746
|
)
|
|
|
(12,374
|
)
|
|
|
(78,120
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,278
|
)
|
|
|
18
|
|
|
|
(4,260
|
)
|
|
|
311
|
|
|
|
(3,949
|
)
|
Interest and other income, net
|
|
|
82
|
|
|
|
112
|
|
|
|
194
|
|
|
|
(66
|
)
|
|
|
128
|
|
Loss on note receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,267
|
|
|
|
(1,908
|
)
|
|
|
5,359
|
|
|
|
|
|
|
|
5,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,564
|
|
|
|
(1,778
|
)
|
|
|
(214
|
)
|
|
|
245
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(65,718
|
)
|
|
|
(242
|
)
|
|
|
(65,960
|
)
|
|
|
(12,129
|
)
|
|
|
(78,089
|
)
|
Income tax (expense) benefit
|
|
|
(26,179
|
)
|
|
|
(93
|
)
|
|
|
(26,271
|
)
|
|
|
(3,687
|
)
|
|
|
(29,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(39,540
|
)
|
|
|
(149
|
)
|
|
|
(39,689
|
)
|
|
|
(8,442
|
)
|
|
|
(48,131
|
)
|
Less: income (loss) attributable to noncontrolling interest
|
|
|
(12,389
|
)
|
|
|
|
|
|
|
(12,389
|
)
|
|
|
2,530
|
|
|
|
(9,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(51,929
|
)
|
|
$
|
(149
|
)
|
|
$
|
(52,078
|
)
|
|
$
|
(5,912
|
)
|
|
$
|
(57,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(50,485
|
)
|
|
$
|
(149
|
)
|
|
$
|
(50,634
|
)
|
|
$
|
(5,912
|
)
|
|
$
|
(56,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(2.55
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(2.85
|
)
|
Loss per share, diluted
|
|
$
|
(2.55
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(2.85
|
)
|
Weighted average number of shares, basic
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-57
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
376,926
|
|
|
$
|
(11,440
|
)
|
|
$
|
365,486
|
|
|
$
|
(117,843
|
)
|
|
$
|
247,643
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
128,663
|
|
|
|
(3,606
|
)
|
|
|
125,057
|
|
|
|
(36,291
|
)
|
|
|
88,766
|
|
Medical supplies expense
|
|
|
91,931
|
|
|
|
(461
|
)
|
|
|
91,470
|
|
|
|
(36,847
|
)
|
|
|
54,623
|
|
Bad debt expense
|
|
|
40,620
|
|
|
|
(22
|
)
|
|
|
40,598
|
|
|
|
(11,355
|
)
|
|
|
29,243
|
|
Other operating expenses
|
|
|
91,635
|
|
|
|
(4,950
|
)
|
|
|
86,685
|
|
|
|
(16,060
|
)
|
|
|
70,625
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
Depreciation
|
|
|
23,675
|
|
|
|
(3,186
|
)
|
|
|
20,489
|
|
|
|
(5,334
|
)
|
|
|
15,155
|
|
Amortization
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
Impairment of long-lived assets and goodwill
|
|
|
66,822
|
|
|
|
(800
|
)
|
|
|
66,022
|
|
|
|
|
|
|
|
66,022
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
(36
|
)
|
|
|
49
|
|
|
|
13
|
|
|
|
(24
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
444,208
|
|
|
|
(12,976
|
)
|
|
|
431,232
|
|
|
|
(105,911
|
)
|
|
|
325,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(67,282
|
)
|
|
|
1,536
|
|
|
|
(65,746
|
)
|
|
|
(11,932
|
)
|
|
|
(77,678
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,278
|
)
|
|
|
18
|
|
|
|
(4,260
|
)
|
|
|
14
|
|
|
|
(4,246
|
)
|
Interest and other income, net
|
|
|
82
|
|
|
|
112
|
|
|
|
194
|
|
|
|
(41
|
)
|
|
|
153
|
|
Loss on note receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,267
|
|
|
|
(1,908
|
)
|
|
|
5,359
|
|
|
|
|
|
|
|
5,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,564
|
|
|
|
(1,778
|
)
|
|
|
(214
|
)
|
|
|
(27
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(65,718
|
)
|
|
|
(242
|
)
|
|
|
(65,960
|
)
|
|
|
(11,959
|
)
|
|
|
(77,919
|
)
|
Income tax (expense) benefit
|
|
|
(26,178
|
)
|
|
|
(93
|
)
|
|
|
(26,271
|
)
|
|
|
(3,347
|
)
|
|
|
(29,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(39,540
|
)
|
|
|
(149
|
)
|
|
|
(39,689
|
)
|
|
|
(8,612
|
)
|
|
|
(48,301
|
)
|
Less: income (loss) attributable to noncontrolling interest
|
|
|
(12,389
|
)
|
|
|
|
|
|
|
(12,389
|
)
|
|
|
3,245
|
|
|
|
(9,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(51,929
|
)
|
|
$
|
(149
|
)
|
|
$
|
(52,078
|
)
|
|
$
|
(5,367
|
)
|
|
$
|
(57,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(50,485
|
)
|
|
$
|
(149
|
)
|
|
$
|
(50,634
|
)
|
|
$
|
(5,367
|
)
|
|
$
|
(56,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(2.55
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(2.82
|
)
|
Loss per share, diluted
|
|
$
|
(2.55
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(2.82
|
)
|
Weighted average number of shares, basic
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2010
|
|
|
|
|
|
|
Reclassification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MedCath Partners as
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
a Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
376,926
|
|
|
$
|
(11,440
|
)
|
|
$
|
365,486
|
|
|
$
|
(199,075
|
)
|
|
$
|
166,411
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
128,663
|
|
|
|
(3,606
|
)
|
|
|
125,057
|
|
|
|
(58,323
|
)
|
|
|
66,734
|
|
Medical supplies expense
|
|
|
91,931
|
|
|
|
(461
|
)
|
|
|
91,470
|
|
|
|
(58,060
|
)
|
|
|
33,410
|
|
Bad debt expense
|
|
|
40,620
|
|
|
|
(22
|
)
|
|
|
40,598
|
|
|
|
(16,793
|
)
|
|
|
23,805
|
|
Other operating expenses
|
|
|
91,635
|
|
|
|
(4,950
|
)
|
|
|
86,685
|
|
|
|
(33,226
|
)
|
|
|
53,459
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
Depreciation
|
|
|
23,675
|
|
|
|
(3,186
|
)
|
|
|
20,489
|
|
|
|
(8,268
|
)
|
|
|
12,221
|
|
Amortization
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Impairment of long-lived assets and goodwill
|
|
|
66,822
|
|
|
|
(800
|
)
|
|
|
66,022
|
|
|
|
|
|
|
|
66,022
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
(36
|
)
|
|
|
49
|
|
|
|
13
|
|
|
|
(67
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
444,208
|
|
|
|
(12,976
|
)
|
|
|
431,232
|
|
|
|
(174,769
|
)
|
|
|
256,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(67,282
|
)
|
|
|
1,536
|
|
|
|
(65,746
|
)
|
|
|
(24,306
|
)
|
|
|
(90,052
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,278
|
)
|
|
|
18
|
|
|
|
(4,260
|
)
|
|
|
325
|
|
|
|
(3,935
|
)
|
Interest and other income, net
|
|
|
82
|
|
|
|
112
|
|
|
|
194
|
|
|
|
(107
|
)
|
|
|
87
|
|
Loss on note receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,267
|
|
|
|
(1,908
|
)
|
|
|
5,359
|
|
|
|
|
|
|
|
5,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,564
|
|
|
|
(1,778
|
)
|
|
|
(214
|
)
|
|
|
218
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(65,718
|
)
|
|
|
(242
|
)
|
|
|
(65,960
|
)
|
|
|
(24,088
|
)
|
|
|
(90,048
|
)
|
Income tax (expense) benefit
|
|
|
(26,178
|
)
|
|
|
(93
|
)
|
|
|
(26,271
|
)
|
|
|
(7,034
|
)
|
|
|
(33,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(39,540
|
)
|
|
|
(149
|
)
|
|
|
(39,689
|
)
|
|
|
(17,054
|
)
|
|
|
(56,743
|
)
|
Less: income (loss) attributable to noncontrolling interest
|
|
|
(12,389
|
)
|
|
|
|
|
|
|
(12,389
|
)
|
|
|
5,775
|
|
|
|
(6,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(51,929
|
)
|
|
$
|
(149
|
)
|
|
$
|
(52,078
|
)
|
|
$
|
(11,279
|
)
|
|
$
|
(63,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(50,485
|
)
|
|
$
|
(149
|
)
|
|
$
|
(50,634
|
)
|
|
$
|
(11,279
|
)
|
|
$
|
(61,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(2.55
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(3.12
|
)
|
Loss per share, diluted
|
|
$
|
(2.55
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(2.55
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(3.12
|
)
|
Weighted average number of shares, basic
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
19,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2009
|
|
|
|
|
|
|
Reclassification of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MedCath Partners as
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
a Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
343,849
|
|
|
$
|
(16,645
|
)
|
|
$
|
327,204
|
|
|
$
|
(75,425
|
)
|
|
$
|
251,779
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
114,893
|
|
|
|
(6,187
|
)
|
|
|
108,706
|
|
|
|
(21,295
|
)
|
|
|
87,411
|
|
Medical supplies expense
|
|
|
84,366
|
|
|
|
(794
|
)
|
|
|
83,572
|
|
|
|
(19,576
|
)
|
|
|
63,996
|
|
Bad debt expense
|
|
|
33,177
|
|
|
|
(25
|
)
|
|
|
33,152
|
|
|
|
(5,303
|
)
|
|
|
27,849
|
|
Other operating expenses
|
|
|
77,000
|
|
|
|
(6,435
|
)
|
|
|
70,565
|
|
|
|
(17,366
|
)
|
|
|
53,199
|
|
Pre-opening expenses
|
|
|
3,563
|
|
|
|
|
|
|
|
3,563
|
|
|
|
|
|
|
|
3,563
|
|
Depreciation
|
|
|
19,299
|
|
|
|
(3,849
|
)
|
|
|
15,450
|
|
|
|
(2,824
|
)
|
|
|
12,626
|
|
Amortization
|
|
|
891
|
|
|
|
(859
|
)
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Impairment of long-lived assets and goodwill
|
|
|
42,000
|
|
|
|
|
|
|
|
42,000
|
|
|
|
(14,000
|
)
|
|
|
28,000
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
93
|
|
|
|
32
|
|
|
|
125
|
|
|
|
(91
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
375,282
|
|
|
|
(18,117
|
)
|
|
|
357,165
|
|
|
|
(80,487
|
)
|
|
|
276,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(31,433
|
)
|
|
|
1,472
|
|
|
|
(29,961
|
)
|
|
|
5,062
|
|
|
|
(24,899
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,184
|
)
|
|
|
13
|
|
|
|
(3,171
|
)
|
|
|
117
|
|
|
|
(3,054
|
)
|
Interest and other income, net
|
|
|
214
|
|
|
|
(5
|
)
|
|
|
209
|
|
|
|
(21
|
)
|
|
|
188
|
|
Loss on early extinguishment of debt
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
9,057
|
|
|
|
(3,785
|
)
|
|
|
5,272
|
|
|
|
|
|
|
|
5,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(615
|
)
|
|
|
(3,777
|
)
|
|
|
(4,392
|
)
|
|
|
96
|
|
|
|
(4,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from before income taxes
|
|
|
(32,048
|
)
|
|
|
(2,305
|
)
|
|
|
(34,353
|
)
|
|
|
5,158
|
|
|
|
(29,195
|
)
|
Income tax benefit
|
|
|
(169
|
)
|
|
|
(877
|
)
|
|
|
(1,046
|
)
|
|
|
(2,746
|
)
|
|
|
(3,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(31,879
|
)
|
|
|
(1,428
|
)
|
|
|
(33,307
|
)
|
|
|
7,904
|
|
|
|
(25,403
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(17,527
|
)
|
|
|
21
|
|
|
|
(17,506
|
)
|
|
|
1,694
|
|
|
|
(15,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss income attributable to MedCath Corporation
|
|
$
|
(49,406
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(50,813
|
)
|
|
$
|
9,598
|
|
|
$
|
(41,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(41,252
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(42,659
|
)
|
|
$
|
9,598
|
|
|
$
|
(33,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(2.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(2.17
|
)
|
|
$
|
0.49
|
|
|
$
|
(1.68
|
)
|
Loss per share, diluted
|
|
$
|
(2.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(2.17
|
)
|
|
$
|
0.49
|
|
|
$
|
(1.68
|
)
|
Weighted average number of shares, basic
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-60
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2009
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
343,849
|
|
|
$
|
(16,645
|
)
|
|
$
|
327,204
|
|
|
$
|
(117,650
|
)
|
|
$
|
209,554
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
114,893
|
|
|
|
(6,187
|
)
|
|
|
108,706
|
|
|
|
(36,346
|
)
|
|
|
72,360
|
|
Medical supplies expense
|
|
|
84,366
|
|
|
|
(794
|
)
|
|
|
83,572
|
|
|
|
(34,860
|
)
|
|
|
48,712
|
|
Bad debt expense
|
|
|
33,177
|
|
|
|
(25
|
)
|
|
|
33,152
|
|
|
|
(13,058
|
)
|
|
|
20,094
|
|
Other operating expenses
|
|
|
77,000
|
|
|
|
(6,435
|
)
|
|
|
70,565
|
|
|
|
(15,470
|
)
|
|
|
55,095
|
|
Pre-opening expenses
|
|
|
3,563
|
|
|
|
|
|
|
|
3,563
|
|
|
|
|
|
|
|
3,563
|
|
Depreciation
|
|
|
19,299
|
|
|
|
(3,849
|
)
|
|
|
15,450
|
|
|
|
(5,150
|
)
|
|
|
10,300
|
|
Amortization
|
|
|
891
|
|
|
|
(859
|
)
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
Impairment of long-lived assets and goodwill
|
|
|
42,000
|
|
|
|
|
|
|
|
42,000
|
|
|
|
(11,000
|
)
|
|
|
31,000
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
93
|
|
|
|
32
|
|
|
|
125
|
|
|
|
4
|
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
375,282
|
|
|
|
(18,117
|
)
|
|
|
357,165
|
|
|
|
(115,880
|
)
|
|
|
241,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(31,433
|
)
|
|
|
1,472
|
|
|
|
(29,961
|
)
|
|
|
(1,770
|
)
|
|
|
(31,731
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,184
|
)
|
|
|
13
|
|
|
|
(3,171
|
)
|
|
|
1
|
|
|
|
(3,170
|
)
|
Interest and other income, net
|
|
|
214
|
|
|
|
(5
|
)
|
|
|
209
|
|
|
|
(11
|
)
|
|
|
198
|
|
Loss on early extinguishment of debt
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
9,057
|
|
|
|
(3,785
|
)
|
|
|
5,272
|
|
|
|
|
|
|
|
5,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(615
|
)
|
|
|
(3,777
|
)
|
|
|
(4,392
|
)
|
|
|
(10
|
)
|
|
|
(4,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from before income taxes
|
|
|
(32,048
|
)
|
|
|
(2,305
|
)
|
|
|
(34,353
|
)
|
|
|
(1,780
|
)
|
|
|
(36,133
|
)
|
Income tax benefit
|
|
|
(169
|
)
|
|
|
(877
|
)
|
|
|
(1,046
|
)
|
|
|
(3,602
|
)
|
|
|
(4,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(31,879
|
)
|
|
|
(1,428
|
)
|
|
|
(33,307
|
)
|
|
|
1,822
|
|
|
|
(31,485
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(17,527
|
)
|
|
|
21
|
|
|
|
(17,506
|
)
|
|
|
3,401
|
|
|
|
(14,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss income attributable to MedCath Corporation
|
|
$
|
(49,406
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(50,813
|
)
|
|
$
|
5,223
|
|
|
$
|
(45,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(41,252
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(42,659
|
)
|
|
$
|
5,223
|
|
|
$
|
(37,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(2.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(2.17
|
)
|
|
$
|
0.27
|
|
|
$
|
(1.90
|
)
|
Loss per share, diluted
|
|
$
|
(2.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(2.17
|
)
|
|
$
|
0.27
|
|
|
$
|
(1.90
|
)
|
Weighted average number of shares, basic
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2009
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
343,849
|
|
|
$
|
(16,645
|
)
|
|
$
|
327,204
|
|
|
$
|
(193,075
|
)
|
|
$
|
134,129
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
114,893
|
|
|
|
(6,187
|
)
|
|
|
108,706
|
|
|
|
(57,641
|
)
|
|
|
51,065
|
|
Medical supplies expense
|
|
|
84,366
|
|
|
|
(794
|
)
|
|
|
83,572
|
|
|
|
(54,436
|
)
|
|
|
29,136
|
|
Bad debt expense
|
|
|
33,177
|
|
|
|
(25
|
)
|
|
|
33,152
|
|
|
|
(18,361
|
)
|
|
|
14,791
|
|
Other operating expenses
|
|
|
77,000
|
|
|
|
(6,435
|
)
|
|
|
70,565
|
|
|
|
(32,836
|
)
|
|
|
37,729
|
|
Pre-opening expenses
|
|
|
3,563
|
|
|
|
|
|
|
|
3,563
|
|
|
|
|
|
|
|
3,563
|
|
Depreciation
|
|
|
19,299
|
|
|
|
(3,849
|
)
|
|
|
15,450
|
|
|
|
(7,974
|
)
|
|
|
7,476
|
|
Amortization
|
|
|
891
|
|
|
|
(859
|
)
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Impairment of long-lived assets and goodwill
|
|
|
42,000
|
|
|
|
|
|
|
|
42,000
|
|
|
|
(25,000
|
)
|
|
|
17,000
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
93
|
|
|
|
32
|
|
|
|
125
|
|
|
|
(87
|
)
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
375,282
|
|
|
|
(18,117
|
)
|
|
|
357,165
|
|
|
|
(196,367
|
)
|
|
|
160,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(31,433
|
)
|
|
|
1,472
|
|
|
|
(29,961
|
)
|
|
|
3,292
|
|
|
|
(26,669
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,184
|
)
|
|
|
13
|
|
|
|
(3,171
|
)
|
|
|
118
|
|
|
|
(3,053
|
)
|
Interest and other income, net
|
|
|
214
|
|
|
|
(5
|
)
|
|
|
209
|
|
|
|
(32
|
)
|
|
|
177
|
|
Loss on early extinguishment of debt
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
|
|
|
|
|
|
(6,702
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
9,057
|
|
|
|
(3,785
|
)
|
|
|
5,272
|
|
|
|
|
|
|
|
5,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(615
|
)
|
|
|
(3,777
|
)
|
|
|
(4,392
|
)
|
|
|
86
|
|
|
|
(4,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from before income taxes
|
|
|
(32,048
|
)
|
|
|
(2,305
|
)
|
|
|
(34,353
|
)
|
|
|
3,378
|
|
|
|
(30,975
|
)
|
Income tax benefit
|
|
|
(169
|
)
|
|
|
(877
|
)
|
|
|
(1,046
|
)
|
|
|
(6,348
|
)
|
|
|
(7,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(31,879
|
)
|
|
|
(1,428
|
)
|
|
|
(33,307
|
)
|
|
|
9,726
|
|
|
|
(23,581
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(17,527
|
)
|
|
|
21
|
|
|
|
(17,506
|
)
|
|
|
5,095
|
|
|
|
(12,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss income attributable to MedCath Corporation
|
|
$
|
(49,406
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(50,813
|
)
|
|
$
|
14,821
|
|
|
$
|
(35,992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(41,252
|
)
|
|
$
|
(1,407
|
)
|
|
$
|
(42,659
|
)
|
|
$
|
14,821
|
|
|
$
|
(27,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(2.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(2.17
|
)
|
|
$
|
0.75
|
|
|
$
|
(1.41
|
)
|
Loss per share, diluted
|
|
$
|
(2.09
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(2.17
|
)
|
|
$
|
0.75
|
|
|
$
|
(1.41
|
)
|
Weighted average number of shares, basic
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
19,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-62
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2008
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
337,769
|
|
|
$
|
(18,070
|
)
|
|
$
|
319,699
|
|
|
$
|
(72,752
|
)
|
|
$
|
246,947
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
112,236
|
|
|
|
(5,712
|
)
|
|
|
106,524
|
|
|
|
(19,499
|
)
|
|
|
87,025
|
|
Medical supplies expense
|
|
|
81,632
|
|
|
|
(1,519
|
)
|
|
|
80,113
|
|
|
|
(18,390
|
)
|
|
|
61,723
|
|
Bad debt expense
|
|
|
24,515
|
|
|
|
(28
|
)
|
|
|
24,487
|
|
|
|
(4,707
|
)
|
|
|
19,780
|
|
Other operating expenses
|
|
|
72,104
|
|
|
|
(7,258
|
)
|
|
|
64,846
|
|
|
|
(14,831
|
)
|
|
|
50,015
|
|
Pre-opening expenses
|
|
|
786
|
|
|
|
|
|
|
|
786
|
|
|
|
|
|
|
|
786
|
|
Depreciation
|
|
|
17,896
|
|
|
|
(4,066
|
)
|
|
|
13,830
|
|
|
|
(2,598
|
)
|
|
|
11,232
|
|
Amortization
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
82
|
|
|
|
153
|
|
|
|
235
|
|
|
|
(84
|
)
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
309,283
|
|
|
|
(18,430
|
)
|
|
|
290,853
|
|
|
|
(60,141
|
)
|
|
|
230,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
28,486
|
|
|
|
360
|
|
|
|
28,846
|
|
|
|
(12,611
|
)
|
|
|
16,235
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,464
|
)
|
|
|
37
|
|
|
|
(10,427
|
)
|
|
|
158
|
|
|
|
(10,269
|
)
|
Interest and other income, net
|
|
|
1,904
|
|
|
|
(10
|
)
|
|
|
1,894
|
|
|
|
(110
|
)
|
|
|
1,784
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,891
|
|
|
|
(2,157
|
)
|
|
|
5,734
|
|
|
|
|
|
|
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(669
|
)
|
|
|
(2,130
|
)
|
|
|
(2,799
|
)
|
|
|
48
|
|
|
|
(2,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from before income taxes
|
|
|
27,817
|
|
|
|
(1,770
|
)
|
|
|
26,047
|
|
|
|
(12,563
|
)
|
|
|
13,484
|
|
Income tax (benefit) expense
|
|
|
6,636
|
|
|
|
(716
|
)
|
|
|
5,920
|
|
|
|
(3,716
|
)
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income from continuing operations
|
|
|
21,181
|
|
|
|
(1,054
|
)
|
|
|
20,127
|
|
|
|
(8,847
|
)
|
|
|
11,280
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
(21,858
|
)
|
|
|
(95
|
)
|
|
|
(21,953
|
)
|
|
|
2,889
|
|
|
|
(19,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(677
|
)
|
|
$
|
(1,149
|
)
|
|
$
|
(1,826
|
)
|
|
$
|
(5,958
|
)
|
|
$
|
(7,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
7,982
|
|
|
$
|
(1,149
|
)
|
|
$
|
6,833
|
|
|
$
|
(5,958
|
)
|
|
$
|
875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share, basic
|
|
$
|
0.40
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.30
|
)
|
|
$
|
0.04
|
|
Income (Loss) per share, diluted
|
|
$
|
0.40
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.30
|
)
|
|
$
|
0.04
|
|
Weighted average number of shares, basic
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
Dilutive effect of stock options and restricted stock
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-63
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2008
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
337,769
|
|
|
$
|
(18,070
|
)
|
|
$
|
319,699
|
|
|
$
|
(114,314
|
)
|
|
$
|
205,385
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
112,236
|
|
|
|
(5,712
|
)
|
|
|
106,524
|
|
|
|
(35,322
|
)
|
|
|
71,202
|
|
Medical supplies expense
|
|
|
81,632
|
|
|
|
(1,519
|
)
|
|
|
80,113
|
|
|
|
(32,452
|
)
|
|
|
47,661
|
|
Bad debt expense
|
|
|
24,515
|
|
|
|
(28
|
)
|
|
|
24,487
|
|
|
|
(9,003
|
)
|
|
|
15,484
|
|
Other operating expenses
|
|
|
72,104
|
|
|
|
(7,258
|
)
|
|
|
64,846
|
|
|
|
(15,713
|
)
|
|
|
49,133
|
|
Pre-opening expenses
|
|
|
786
|
|
|
|
|
|
|
|
786
|
|
|
|
|
|
|
|
786
|
|
Depreciation
|
|
|
17,896
|
|
|
|
(4,066
|
)
|
|
|
13,830
|
|
|
|
(4,612
|
)
|
|
|
9,218
|
|
Amortization
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
82
|
|
|
|
153
|
|
|
|
235
|
|
|
|
(145
|
)
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
309,283
|
|
|
|
(18,430
|
)
|
|
|
290,853
|
|
|
|
(97,247
|
)
|
|
|
193,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
28,486
|
|
|
|
360
|
|
|
|
28,846
|
|
|
|
(17,067
|
)
|
|
|
11,779
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,464
|
)
|
|
|
37
|
|
|
|
(10,427
|
)
|
|
|
|
|
|
|
(10,427
|
)
|
Interest and other income, net
|
|
|
1,904
|
|
|
|
(10
|
)
|
|
|
1,894
|
|
|
|
(20
|
)
|
|
|
1,874
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,891
|
|
|
|
(2,157
|
)
|
|
|
5,734
|
|
|
|
|
|
|
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(669
|
)
|
|
|
(2,130
|
)
|
|
|
(2,799
|
)
|
|
|
(20
|
)
|
|
|
(2,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from before income taxes
|
|
|
27,817
|
|
|
|
(1,770
|
)
|
|
|
26,047
|
|
|
|
(17,087
|
)
|
|
|
8,960
|
|
Income tax (benefit) expense
|
|
|
6,636
|
|
|
|
(716
|
)
|
|
|
5,920
|
|
|
|
(4,809
|
)
|
|
|
1,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income from continuing operations
|
|
|
21,181
|
|
|
|
(1,054
|
)
|
|
|
20,127
|
|
|
|
(12,278
|
)
|
|
|
7,849
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
(21,858
|
)
|
|
|
(95
|
)
|
|
|
(21,953
|
)
|
|
|
4,568
|
|
|
|
(17,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(677
|
)
|
|
$
|
(1,149
|
)
|
|
$
|
(1,826
|
)
|
|
$
|
(7,710
|
)
|
|
$
|
(9,536
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
7,982
|
|
|
$
|
(1,149
|
)
|
|
$
|
6,833
|
|
|
$
|
(7,710
|
)
|
|
$
|
(877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share, basic
|
|
$
|
0.40
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.39
|
)
|
|
$
|
(0.04
|
)
|
Income (Loss) per share, diluted
|
|
$
|
0.40
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.38
|
)
|
|
$
|
(0.04
|
)
|
Weighted average number of shares, basic
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
Dilutive effect of stock options and restricted stock
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30, 2008
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
337,769
|
|
|
$
|
(18,070
|
)
|
|
$
|
319,699
|
|
|
$
|
(187,066
|
)
|
|
$
|
132,633
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
112,236
|
|
|
|
(5,712
|
)
|
|
|
106,524
|
|
|
|
(54,821
|
)
|
|
|
51,703
|
|
Medical supplies expense
|
|
|
81,632
|
|
|
|
(1,519
|
)
|
|
|
80,113
|
|
|
|
(50,842
|
)
|
|
|
29,271
|
|
Bad debt expense
|
|
|
24,515
|
|
|
|
(28
|
)
|
|
|
24,487
|
|
|
|
(13,710
|
)
|
|
|
10,777
|
|
Other operating expenses
|
|
|
72,104
|
|
|
|
(7,258
|
)
|
|
|
64,846
|
|
|
|
(30,544
|
)
|
|
|
34,302
|
|
Pre-opening expenses
|
|
|
786
|
|
|
|
|
|
|
|
786
|
|
|
|
|
|
|
|
786
|
|
Depreciation
|
|
|
17,896
|
|
|
|
(4,066
|
)
|
|
|
13,830
|
|
|
|
(7,210
|
)
|
|
|
6,620
|
|
Amortization
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
(32
|
)
|
|
|
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
82
|
|
|
|
153
|
|
|
|
235
|
|
|
|
(229
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
309,283
|
|
|
|
(18,430
|
)
|
|
|
290,853
|
|
|
|
(157,388
|
)
|
|
|
133,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
28,486
|
|
|
|
360
|
|
|
|
28,846
|
|
|
|
(29,678
|
)
|
|
|
(832
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(10,464
|
)
|
|
|
37
|
|
|
|
(10,427
|
)
|
|
|
158
|
|
|
|
(10,269
|
)
|
Interest and other income, net
|
|
|
1,904
|
|
|
|
(10
|
)
|
|
|
1,894
|
|
|
|
(130
|
)
|
|
|
1,764
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
7,891
|
|
|
|
(2,157
|
)
|
|
|
5,734
|
|
|
|
|
|
|
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(669
|
)
|
|
|
(2,130
|
)
|
|
|
(2,799
|
)
|
|
|
28
|
|
|
|
(2,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from before income taxes
|
|
|
27,817
|
|
|
|
(1,770
|
)
|
|
|
26,047
|
|
|
|
(29,650
|
)
|
|
|
(3,603
|
)
|
Income tax (benefit) expense
|
|
|
6,636
|
|
|
|
(716
|
)
|
|
|
5,920
|
|
|
|
(8,525
|
)
|
|
|
(2,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income from continuing operations
|
|
|
21,181
|
|
|
|
(1,054
|
)
|
|
|
20,127
|
|
|
|
(21,125
|
)
|
|
|
(998
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(21,858
|
)
|
|
|
(95
|
)
|
|
|
(21,953
|
)
|
|
|
7,457
|
|
|
|
(14,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(677
|
)
|
|
$
|
(1,149
|
)
|
|
$
|
(1,826
|
)
|
|
$
|
(13,668
|
)
|
|
$
|
(15,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
7,982
|
|
|
$
|
(1,149
|
)
|
|
$
|
6,833
|
|
|
$
|
(13,668
|
)
|
|
$
|
(6,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share, basic
|
|
$
|
0.40
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.68
|
)
|
|
$
|
(0.34
|
)
|
Income (Loss) per share, diluted
|
|
$
|
0.40
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.68
|
)
|
|
$
|
(0.34
|
)
|
Weighted average number of shares, basic
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
|
|
19,996
|
|
Dilutive effect of stock options and restricted stock
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
20,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-65
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
97,163
|
|
|
$
|
(2,057
|
)
|
|
$
|
95,106
|
|
|
$
|
(18,991
|
)
|
|
$
|
76,115
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
33,859
|
|
|
|
(642
|
)
|
|
|
33,217
|
|
|
|
(5,510
|
)
|
|
|
27,707
|
|
Medical supplies expense
|
|
|
23,189
|
|
|
|
(33
|
)
|
|
|
23,156
|
|
|
|
(4,986
|
)
|
|
|
18,170
|
|
Bad debt expense
|
|
|
10,006
|
|
|
|
(1
|
)
|
|
|
10,005
|
|
|
|
(1,071
|
)
|
|
|
8,934
|
|
Other operating expenses
|
|
|
22,843
|
|
|
|
(569
|
)
|
|
|
22,274
|
|
|
|
(4,260
|
)
|
|
|
18,014
|
|
Depreciation
|
|
|
4,630
|
|
|
|
(562
|
)
|
|
|
4,068
|
|
|
|
(794
|
)
|
|
|
3,274
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Impairment of long-lived assets and goodwill
|
|
|
19,548
|
|
|
|
|
|
|
|
19,548
|
|
|
|
|
|
|
|
19,548
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
178
|
|
|
|
5
|
|
|
|
183
|
|
|
|
(6
|
)
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,253
|
|
|
|
(1,802
|
)
|
|
|
112,451
|
|
|
|
(16,635
|
)
|
|
|
95,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,090
|
)
|
|
|
(255
|
)
|
|
|
(17,345
|
)
|
|
|
(2,356
|
)
|
|
|
(19,701
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(997
|
)
|
|
|
15
|
|
|
|
(982
|
)
|
|
|
90
|
|
|
|
(892
|
)
|
Interest and other income, net
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
(8
|
)
|
|
|
42
|
|
Gain on sale of unconsolidated affiliates
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
1,258
|
|
|
|
(213
|
)
|
|
|
1,045
|
|
|
|
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
490
|
|
|
|
(198
|
)
|
|
|
292
|
|
|
|
82
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(16,600
|
)
|
|
|
(453
|
)
|
|
|
(17,053
|
)
|
|
|
(2,274
|
)
|
|
|
(19,327
|
)
|
Income tax benefit
|
|
|
(7,695
|
)
|
|
|
(185
|
)
|
|
|
(7,880
|
)
|
|
|
(692
|
)
|
|
|
(8,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(8,905
|
)
|
|
|
(268
|
)
|
|
|
(9,173
|
)
|
|
|
(1,582
|
)
|
|
|
(10,755
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(3,189
|
)
|
|
|
(29
|
)
|
|
|
(3,218
|
)
|
|
|
473
|
|
|
|
(2,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(12,094
|
)
|
|
$
|
(297
|
)
|
|
$
|
(12,391
|
)
|
|
$
|
(1,109
|
)
|
|
$
|
(13,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(12,341
|
)
|
|
$
|
(297
|
)
|
|
$
|
(12,638
|
)
|
|
$
|
(1,109
|
)
|
|
$
|
(13,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.61
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.68
|
)
|
Loss per share, diluted
|
|
$
|
(0.61
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.68
|
)
|
Weighted average number of shares, basic
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-66
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
97,163
|
|
|
$
|
(2,057
|
)
|
|
$
|
95,106
|
|
|
$
|
(32,216
|
)
|
|
$
|
62,890
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
33,859
|
|
|
|
(642
|
)
|
|
|
33,217
|
|
|
|
(9,397
|
)
|
|
|
23,820
|
|
Medical supplies expense
|
|
|
23,189
|
|
|
|
(33
|
)
|
|
|
23,156
|
|
|
|
(9,523
|
)
|
|
|
13,633
|
|
Bad debt expense
|
|
|
10,006
|
|
|
|
(1
|
)
|
|
|
10,005
|
|
|
|
(2,961
|
)
|
|
|
7,044
|
|
Other operating expenses
|
|
|
22,843
|
|
|
|
(569
|
)
|
|
|
22,274
|
|
|
|
(3,729
|
)
|
|
|
18,545
|
|
Depreciation
|
|
|
4,630
|
|
|
|
(562
|
)
|
|
|
4,068
|
|
|
|
(1,120
|
)
|
|
|
2,948
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets and goodwill
|
|
|
19,548
|
|
|
|
|
|
|
|
19,548
|
|
|
|
|
|
|
|
19,548
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
178
|
|
|
|
5
|
|
|
|
183
|
|
|
|
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,253
|
|
|
|
(1,802
|
)
|
|
|
112,451
|
|
|
|
(26,730
|
)
|
|
|
85,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,090
|
)
|
|
|
(255
|
)
|
|
|
(17,345
|
)
|
|
|
(5,486
|
)
|
|
|
(22,831
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(997
|
)
|
|
|
15
|
|
|
|
(982
|
)
|
|
|
3
|
|
|
|
(979
|
)
|
Interest and other income, net
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
Gain on sale of unconsolidated affiliates
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
1,258
|
|
|
|
(213
|
)
|
|
|
1,045
|
|
|
|
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
490
|
|
|
|
(198
|
)
|
|
|
292
|
|
|
|
3
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(16,600
|
)
|
|
|
(453
|
)
|
|
|
(17,053
|
)
|
|
|
(5,483
|
)
|
|
|
(22,536
|
)
|
Income tax benefit
|
|
|
(7,695
|
)
|
|
|
(185
|
)
|
|
|
(7,880
|
)
|
|
|
(1,508
|
)
|
|
|
(9,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(8,905
|
)
|
|
|
(268
|
)
|
|
|
(9,173
|
)
|
|
|
(3,975
|
)
|
|
|
(13,148
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(3,189
|
)
|
|
|
(29
|
)
|
|
|
(3,218
|
)
|
|
|
1,558
|
|
|
|
(1,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(12,094
|
)
|
|
$
|
(297
|
)
|
|
$
|
(12,391
|
)
|
|
$
|
(2,417
|
)
|
|
$
|
(14,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(12,341
|
)
|
|
$
|
(297
|
)
|
|
$
|
(12,638
|
)
|
|
$
|
(2,417
|
)
|
|
$
|
(15,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.61
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.75
|
)
|
Loss per share, diluted
|
|
$
|
(0.61
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.75
|
)
|
Weighted average number of shares, basic
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2011
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
97,163
|
|
|
$
|
(2,057
|
)
|
|
$
|
95,106
|
|
|
$
|
(51,207
|
)
|
|
$
|
43,899
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Personnel expense
|
|
|
33,859
|
|
|
|
(642
|
)
|
|
|
33,217
|
|
|
|
(14,907
|
)
|
|
|
18,310
|
|
Medical supplies expense
|
|
|
23,189
|
|
|
|
(33
|
)
|
|
|
23,156
|
|
|
|
(14,509
|
)
|
|
|
8,647
|
|
Bad debt expense
|
|
|
10,006
|
|
|
|
(1
|
)
|
|
|
10,005
|
|
|
|
(4,032
|
)
|
|
|
5,973
|
|
Other operating expenses
|
|
|
22,843
|
|
|
|
(569
|
)
|
|
|
22,274
|
|
|
|
(7,989
|
)
|
|
|
14,285
|
|
Depreciation
|
|
|
4,630
|
|
|
|
(562
|
)
|
|
|
4,068
|
|
|
|
(1,914
|
)
|
|
|
2,154
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Impairment of long-lived assets and goodwill
|
|
|
19,548
|
|
|
|
|
|
|
|
19,548
|
|
|
|
|
|
|
|
19,548
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
178
|
|
|
|
5
|
|
|
|
183
|
|
|
|
(6
|
)
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
114,253
|
|
|
|
(1,802
|
)
|
|
|
112,451
|
|
|
|
(43,365
|
)
|
|
|
69,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,090
|
)
|
|
|
(255
|
)
|
|
|
(17,345
|
)
|
|
|
(7,842
|
)
|
|
|
(25,187
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(997
|
)
|
|
|
15
|
|
|
|
(982
|
)
|
|
|
93
|
|
|
|
(889
|
)
|
Interest and other income, net
|
|
|
50
|
|
|
|
|
|
|
|
50
|
|
|
|
(8
|
)
|
|
|
42
|
|
Gain on sale of unconsolidated affiliates
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
179
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
1,258
|
|
|
|
(213
|
)
|
|
|
1,045
|
|
|
|
|
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
490
|
|
|
|
(198
|
)
|
|
|
292
|
|
|
|
85
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(16,600
|
)
|
|
|
(453
|
)
|
|
|
(17,053
|
)
|
|
|
(7,757
|
)
|
|
|
(24,810
|
)
|
Income tax benefit
|
|
|
(7,695
|
)
|
|
|
(185
|
)
|
|
|
(7,880
|
)
|
|
|
(2,200
|
)
|
|
|
(10,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(8,905
|
)
|
|
|
(268
|
)
|
|
|
(9,173
|
)
|
|
|
(5,557
|
)
|
|
|
(14,730
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(3,189
|
)
|
|
|
(29
|
)
|
|
|
(3,218
|
)
|
|
|
2,031
|
|
|
|
(1,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(12,094
|
)
|
|
$
|
(297
|
)
|
|
$
|
(12,391
|
)
|
|
$
|
(3,526
|
)
|
|
$
|
(15,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to
MedCath Corporation common stockholders, net of taxes
|
|
$
|
(12,341
|
)
|
|
$
|
(297
|
)
|
|
$
|
(12,638
|
)
|
|
$
|
(3,526
|
)
|
|
$
|
(16,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.61
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.80
|
)
|
Loss per share, diluted
|
|
$
|
(0.61
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.80
|
)
|
Weighted average number of shares, basic
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
20,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-68
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
96,777
|
|
|
$
|
(2,785
|
)
|
|
$
|
93,992
|
|
|
$
|
(21,031
|
)
|
|
$
|
72,961
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
33,150
|
|
|
|
(951
|
)
|
|
|
32,199
|
|
|
|
(5,455
|
)
|
|
|
26,744
|
|
Medical supplies expense
|
|
|
23,581
|
|
|
|
(150
|
)
|
|
|
23,431
|
|
|
|
(5,688
|
)
|
|
|
17,743
|
|
Bad debt expense
|
|
|
9,931
|
|
|
|
(13
|
)
|
|
|
9,918
|
|
|
|
(1,213
|
)
|
|
|
8,705
|
|
Other operating expenses
|
|
|
22,296
|
|
|
|
(1,151
|
)
|
|
|
21,145
|
|
|
|
(4,446
|
)
|
|
|
16,699
|
|
Pre-opening expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,124
|
|
|
|
(785
|
)
|
|
|
5,339
|
|
|
|
(604
|
)
|
|
|
4,735
|
|
Impairment of long-lived assets and goodwill
|
|
|
14,700
|
|
|
|
(114
|
)
|
|
|
14,586
|
|
|
|
|
|
|
|
14,586
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
(69
|
)
|
|
|
76
|
|
|
|
7
|
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
109,713
|
|
|
|
(3,088
|
)
|
|
|
106,625
|
|
|
|
(17,414
|
)
|
|
|
89,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(12,936
|
)
|
|
|
303
|
|
|
|
(12,633
|
)
|
|
|
(3,617
|
)
|
|
|
(16,250
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
(1,054
|
)
|
|
|
40
|
|
|
|
(1,014
|
)
|
Interest and other income, net
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
(8
|
)
|
|
|
7
|
|
Gain on sale of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on not receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
3,092
|
|
|
|
(1,488
|
)
|
|
|
1,604
|
|
|
|
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
546
|
|
|
|
(1,488
|
)
|
|
|
(942
|
)
|
|
|
32
|
|
|
|
(910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(12,390
|
)
|
|
|
(1,185
|
)
|
|
|
(13,575
|
)
|
|
|
(3,585
|
)
|
|
|
(17,160
|
)
|
Income tax benefit
|
|
|
(5,639
|
)
|
|
|
(455
|
)
|
|
|
(6,094
|
)
|
|
|
(1,082
|
)
|
|
|
(7,176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(6,751
|
)
|
|
|
(730
|
)
|
|
|
(7,481
|
)
|
|
|
(2,503
|
)
|
|
|
(9,984
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(2,524
|
)
|
|
|
(2,663
|
)
|
|
|
(5,187
|
)
|
|
|
769
|
|
|
|
(4,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to MedCath Corporation
|
|
$
|
(9,275
|
)
|
|
$
|
1,933
|
|
|
$
|
(12,668
|
)
|
|
$
|
(1,734
|
)
|
|
$
|
(14,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(8,970
|
)
|
|
$
|
1,933
|
|
|
$
|
(7,037
|
)
|
|
$
|
(1,734
|
)
|
|
$
|
(8,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income per share, basic
|
|
$
|
(0.45
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.44
|
)
|
(Loss) Income per share, diluted
|
|
$
|
(0.45
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.44
|
)
|
Weighted average number of shares, basic
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-69
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
96,777
|
|
|
$
|
(2,785
|
)
|
|
$
|
93,992
|
|
|
$
|
(29,139
|
)
|
|
$
|
64,853
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
33,150
|
|
|
|
(951
|
)
|
|
|
32,199
|
|
|
|
(9,067
|
)
|
|
|
23,132
|
|
Medical supplies expense
|
|
|
23,581
|
|
|
|
(150
|
)
|
|
|
23,431
|
|
|
|
(8,943
|
)
|
|
|
14,488
|
|
Bad debt expense
|
|
|
9,931
|
|
|
|
(13
|
)
|
|
|
9,918
|
|
|
|
(2,690
|
)
|
|
|
7,228
|
|
Other operating expenses
|
|
|
22,296
|
|
|
|
(1,151
|
)
|
|
|
21,145
|
|
|
|
(3,775
|
)
|
|
|
17,370
|
|
Pre-opening expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,124
|
|
|
|
(785
|
)
|
|
|
5,339
|
|
|
|
(1,355
|
)
|
|
|
3,984
|
|
Impairment of long-lived assets and goodwill
|
|
|
14,700
|
|
|
|
(114
|
)
|
|
|
14,586
|
|
|
|
|
|
|
|
14,586
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
(69
|
)
|
|
|
76
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
109,713
|
|
|
|
(3,088
|
)
|
|
|
106,625
|
|
|
|
(25,837
|
)
|
|
|
80,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(12,936
|
)
|
|
|
303
|
|
|
|
(12,633
|
)
|
|
|
(3,302
|
)
|
|
|
(15,935
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
(1,054
|
)
|
|
|
3
|
|
|
|
(1,051
|
)
|
Interest and other income, net
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
6
|
|
|
|
21
|
|
Gain on sale of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on note receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
3,092
|
|
|
|
(1,488
|
)
|
|
|
1,604
|
|
|
|
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,053
|
|
|
|
(1,488
|
)
|
|
|
565
|
|
|
|
9
|
|
|
|
(933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(14,414
|
)
|
|
|
(1,185
|
)
|
|
|
(16,064
|
)
|
|
|
(3,293
|
)
|
|
|
(16,868
|
)
|
Income tax benefit
|
|
|
(5,639
|
)
|
|
|
(455
|
)
|
|
|
(6,094
|
)
|
|
|
(919
|
)
|
|
|
(7,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,438
|
)
|
|
|
(730
|
)
|
|
|
(8,454
|
)
|
|
|
(2,374
|
)
|
|
|
(9,855
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(2,524
|
)
|
|
|
(2,663
|
)
|
|
|
(5,187
|
)
|
|
|
900
|
|
|
|
(4,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to MedCath Corporation
|
|
$
|
(9,275
|
)
|
|
$
|
1,933
|
|
|
$
|
(12,668
|
)
|
|
$
|
(1,474
|
)
|
|
$
|
(14,142
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(8,970
|
)
|
|
$
|
1,933
|
|
|
$
|
(7,037
|
)
|
|
$
|
(1,474
|
)
|
|
$
|
(8,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income per share, basic
|
|
$
|
(0.45
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.43
|
)
|
(Loss) Income per share, diluted
|
|
$
|
(0.45
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.43
|
)
|
Weighted average number of shares, basic
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
96,777
|
|
|
$
|
(2,785
|
)
|
|
$
|
93,992
|
|
|
$
|
(50,170
|
)
|
|
$
|
43,822
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
33,150
|
|
|
|
(951
|
)
|
|
|
32,199
|
|
|
|
(14,522
|
)
|
|
|
17,677
|
|
Medical supplies expense
|
|
|
23,581
|
|
|
|
(150
|
)
|
|
|
23,431
|
|
|
|
(14,631
|
)
|
|
|
8,800
|
|
Bad debt expense
|
|
|
9,931
|
|
|
|
(13
|
)
|
|
|
9,918
|
|
|
|
(3,903
|
)
|
|
|
6,015
|
|
Other operating expenses
|
|
|
22,296
|
|
|
|
(1,151
|
)
|
|
|
21,145
|
|
|
|
(8,221
|
)
|
|
|
12,924
|
|
Pre-opening expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,124
|
|
|
|
(785
|
)
|
|
|
5,339
|
|
|
|
(1,959
|
)
|
|
|
3,380
|
|
Impairment of long-lived assets and goodwill
|
|
|
14,700
|
|
|
|
(114
|
)
|
|
|
14,586
|
|
|
|
|
|
|
|
14,586
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
(69
|
)
|
|
|
76
|
|
|
|
7
|
|
|
|
(15
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
109,713
|
|
|
|
(3,088
|
)
|
|
|
106,625
|
|
|
|
(43,251
|
)
|
|
|
63,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(12,936
|
)
|
|
|
303
|
|
|
|
(12,633
|
)
|
|
|
(6,919
|
)
|
|
|
(19,552
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,054
|
)
|
|
|
|
|
|
|
(1,054
|
)
|
|
|
43
|
|
|
|
(1,011
|
)
|
Interest and other income, net
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
(2
|
)
|
|
|
13
|
|
Gain on sale of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on note receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
3,092
|
|
|
|
(1,488
|
)
|
|
|
1,604
|
|
|
|
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,053
|
|
|
|
(1,488
|
)
|
|
|
(942
|
)
|
|
|
41
|
|
|
|
(901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(14,414
|
)
|
|
|
(1,185
|
)
|
|
|
(13,575
|
)
|
|
|
(6,878
|
)
|
|
|
(20,453
|
)
|
Income tax benefit
|
|
|
(5,639
|
)
|
|
|
(455
|
)
|
|
|
(6,094
|
)
|
|
|
(2,001
|
)
|
|
|
(8,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,438
|
)
|
|
|
(730
|
)
|
|
|
(7,481
|
)
|
|
|
(4,877
|
)
|
|
|
(12,358
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(2,524
|
)
|
|
|
(2,663
|
)
|
|
|
(5,187
|
)
|
|
|
1,669
|
|
|
|
(3,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to MedCath Corporation
|
|
$
|
(9,275
|
)
|
|
$
|
1,933
|
|
|
$
|
(12,668
|
)
|
|
$
|
(3,208
|
)
|
|
$
|
(15,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(8,970
|
)
|
|
$
|
1,933
|
|
|
$
|
(7,037
|
)
|
|
$
|
(3,208
|
)
|
|
$
|
(10,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income per share, basic
|
|
$
|
(0.45
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.52
|
)
|
(Loss) Income per share, diluted
|
|
$
|
(0.45
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.35
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.52
|
)
|
Weighted average number of shares, basic
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
19,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-71
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2011
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
186,063
|
|
|
$
|
(4,285
|
)
|
|
$
|
181,778
|
|
|
$
|
(38,604
|
)
|
|
$
|
143,174
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
66,313
|
|
|
|
(1,337
|
)
|
|
|
64,976
|
|
|
|
(10,763
|
)
|
|
|
54,213
|
|
Medical supplies expense
|
|
|
42,411
|
|
|
|
(56
|
)
|
|
|
42,355
|
|
|
|
(9,386
|
)
|
|
|
32,969
|
|
Bad debt expense
|
|
|
19,715
|
|
|
|
|
|
|
|
19,715
|
|
|
|
(2,817
|
)
|
|
|
16,898
|
|
Other operating expenses
|
|
|
46,959
|
|
|
|
(1,402
|
)
|
|
|
45,557
|
|
|
|
(8,495
|
)
|
|
|
37,062
|
|
Depreciation
|
|
|
9,517
|
|
|
|
(1,170
|
)
|
|
|
8,347
|
|
|
|
(1,615
|
)
|
|
|
6,732
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Impairment of long-lived assets and goodwill
|
|
|
19,548
|
|
|
|
(209
|
)
|
|
|
19,339
|
|
|
|
|
|
|
|
19,339
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
271
|
|
|
|
(21
|
)
|
|
|
250
|
|
|
|
(7
|
)
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
204,734
|
|
|
|
(4,195
|
)
|
|
|
200,539
|
|
|
|
(33,099
|
)
|
|
|
167,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,671
|
)
|
|
|
(90
|
)
|
|
|
(18,761
|
)
|
|
|
(5,505
|
)
|
|
|
(24,266
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,079
|
)
|
|
|
|
|
|
|
(2,079
|
)
|
|
|
188
|
|
|
|
(1,891
|
)
|
Interest and other income, net
|
|
|
539
|
|
|
|
31
|
|
|
|
570
|
|
|
|
(18
|
)
|
|
|
552
|
|
Gain on sale of unconsolidated affiliates
|
|
|
15,570
|
|
|
|
|
|
|
|
15,570
|
|
|
|
|
|
|
|
15,570
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
1,860
|
|
|
|
(693
|
)
|
|
|
1,167
|
|
|
|
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
15,890
|
|
|
|
(662
|
)
|
|
|
15,228
|
|
|
|
170
|
|
|
|
15,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(2,781
|
)
|
|
|
(752
|
)
|
|
|
(3,533
|
)
|
|
|
(5,335
|
)
|
|
|
(8,868
|
)
|
Income tax benefit
|
|
|
(3,213
|
)
|
|
|
(300
|
)
|
|
|
(3,513
|
)
|
|
|
(1,611
|
)
|
|
|
(5,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
|
432
|
|
|
|
(452
|
)
|
|
|
(20
|
)
|
|
|
(3,724
|
)
|
|
|
(3,744
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(14,615
|
)
|
|
|
(29
|
)
|
|
|
(14,644
|
)
|
|
|
1,142
|
|
|
|
(13,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(14,183
|
)
|
|
$
|
(481
|
)
|
|
$
|
(14,664
|
)
|
|
$
|
(2,582
|
)
|
|
$
|
(17,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to
MedCath Corporation common stockholders, net of taxes
|
|
$
|
(5,179
|
)
|
|
$
|
(481
|
)
|
|
$
|
(5,660
|
)
|
|
$
|
(2,582
|
)
|
|
$
|
(8,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.41
|
)
|
Loss per share, diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.41
|
)
|
Weighted average number of shares, basic
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
Dilutive effect of stock options and restricted stock
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-72
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2011
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
a Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
186,063
|
|
|
$
|
(4,285
|
)
|
|
$
|
181,778
|
|
|
$
|
(60,435
|
)
|
|
$
|
121,343
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
66,313
|
|
|
|
(1,337
|
)
|
|
|
64,976
|
|
|
|
(18,158
|
)
|
|
|
46,818
|
|
Medical supplies expense
|
|
|
42,411
|
|
|
|
(56
|
)
|
|
|
42,355
|
|
|
|
(16,238
|
)
|
|
|
26,117
|
|
Bad debt expense
|
|
|
19,715
|
|
|
|
|
|
|
|
19,715
|
|
|
|
(5,299
|
)
|
|
|
14,416
|
|
Other operating expenses
|
|
|
46,959
|
|
|
|
(1,402
|
)
|
|
|
45,557
|
|
|
|
(8,664
|
)
|
|
|
36,893
|
|
Depreciation
|
|
|
9,517
|
|
|
|
(1,170
|
)
|
|
|
8,347
|
|
|
|
(2,323
|
)
|
|
|
6,024
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived assets and goodwill
|
|
|
19,548
|
|
|
|
(209
|
)
|
|
|
19,339
|
|
|
|
|
|
|
|
19,339
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
271
|
|
|
|
(21
|
)
|
|
|
250
|
|
|
|
(23
|
)
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
204,734
|
|
|
|
(4,195
|
)
|
|
|
200,539
|
|
|
|
(50,705
|
)
|
|
|
149,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,671
|
)
|
|
|
(90
|
)
|
|
|
(18,761
|
)
|
|
|
(9,730
|
)
|
|
|
(28,491
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,079
|
)
|
|
|
|
|
|
|
(2,079
|
)
|
|
|
6
|
|
|
|
(2,073
|
)
|
Interest and other income, net
|
|
|
539
|
|
|
|
31
|
|
|
|
570
|
|
|
|
(406
|
)
|
|
|
164
|
|
Gain on sale of unconsolidated affiliates
|
|
|
15,570
|
|
|
|
|
|
|
|
15,570
|
|
|
|
|
|
|
|
15,570
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
1,860
|
|
|
|
(693
|
)
|
|
|
1,167
|
|
|
|
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
15,890
|
|
|
|
(662
|
)
|
|
|
15,228
|
|
|
|
(400
|
)
|
|
|
14,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(2,781
|
)
|
|
|
(752
|
)
|
|
|
(3,533
|
)
|
|
|
(10,130
|
)
|
|
|
(13,663
|
)
|
Income tax benefit
|
|
|
(3,213
|
)
|
|
|
(300
|
)
|
|
|
(3,513
|
)
|
|
|
(2,790
|
)
|
|
|
(6,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
|
432
|
|
|
|
(452
|
)
|
|
|
(20
|
)
|
|
|
(7,340
|
)
|
|
|
(7,360
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(14,615
|
)
|
|
|
(29
|
)
|
|
|
(14,644
|
)
|
|
|
2,865
|
|
|
|
(11,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(14,183
|
)
|
|
$
|
(481
|
)
|
|
$
|
(14,664
|
)
|
|
$
|
(4,475
|
)
|
|
$
|
(19,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(5,179
|
)
|
|
$
|
(481
|
)
|
|
$
|
(5,660
|
)
|
|
$
|
(4,475
|
)
|
|
$
|
(10,135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.50
|
)
|
Loss per share, diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.50
|
)
|
Weighted average number of shares, basic
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
Dilutive effect of stock options and restricted stock
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2011
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
a Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
186,063
|
|
|
$
|
(4,285
|
)
|
|
$
|
181,778
|
|
|
$
|
(99,039
|
)
|
|
$
|
82,739
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
66,313
|
|
|
|
(1,337
|
)
|
|
|
64,976
|
|
|
|
(28,921
|
)
|
|
|
36,055
|
|
Medical supplies expense
|
|
|
42,411
|
|
|
|
(56
|
)
|
|
|
42,355
|
|
|
|
(25,624
|
)
|
|
|
16,731
|
|
Bad debt expense
|
|
|
19,715
|
|
|
|
|
|
|
|
19,715
|
|
|
|
(8,116
|
)
|
|
|
11,599
|
|
Other operating expenses
|
|
|
46,959
|
|
|
|
(1,402
|
)
|
|
|
45,557
|
|
|
|
(17,159
|
)
|
|
|
28,398
|
|
Depreciation
|
|
|
9,517
|
|
|
|
(1,170
|
)
|
|
|
8,347
|
|
|
|
(3,938
|
)
|
|
|
4,409
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(16
|
)
|
Impairment of long-lived assets and goodwill
|
|
|
19,548
|
|
|
|
(209
|
)
|
|
|
19,339
|
|
|
|
|
|
|
|
19,339
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
271
|
|
|
|
(21
|
)
|
|
|
250
|
|
|
|
(30
|
)
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
204,734
|
|
|
|
(4,195
|
)
|
|
|
200,539
|
|
|
|
(83,804
|
)
|
|
|
116,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(18,671
|
)
|
|
|
(90
|
)
|
|
|
(18,761
|
)
|
|
|
(15,235
|
)
|
|
|
(33,996
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(2,079
|
)
|
|
|
|
|
|
|
(2,079
|
)
|
|
|
194
|
|
|
|
(1,885
|
)
|
Interest and other income, net
|
|
|
539
|
|
|
|
31
|
|
|
|
570
|
|
|
|
(424
|
)
|
|
|
146
|
|
Gain on sale of unconsolidated affiliates
|
|
|
15,570
|
|
|
|
|
|
|
|
15,570
|
|
|
|
|
|
|
|
15,570
|
|
Equity in net earnings of unconsolidated affiliates
|
|
|
1,860
|
|
|
|
(693
|
)
|
|
|
1,167
|
|
|
|
|
|
|
|
1,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
15,890
|
|
|
|
(662
|
)
|
|
|
15,228
|
|
|
|
(230
|
)
|
|
|
14,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(2,781
|
)
|
|
|
(752
|
)
|
|
|
(3,533
|
)
|
|
|
(15,465
|
)
|
|
|
(18,998
|
)
|
Income tax benefit
|
|
|
(3,213
|
)
|
|
|
(300
|
)
|
|
|
(3,513
|
)
|
|
|
(4,401
|
)
|
|
|
(7,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from continuing operations
|
|
|
432
|
|
|
|
(452
|
)
|
|
|
(20
|
)
|
|
|
(11,064
|
)
|
|
|
(11,084
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(14,615
|
)
|
|
|
(29
|
)
|
|
|
(14,644
|
)
|
|
|
4,007
|
|
|
|
(10,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(14,183
|
)
|
|
$
|
(481
|
)
|
|
$
|
(14,664
|
)
|
|
$
|
(7,057
|
)
|
|
$
|
(21,721
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(5,179
|
)
|
|
$
|
(481
|
)
|
|
$
|
(5,660
|
)
|
|
$
|
(7,057
|
)
|
|
$
|
(12,717
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.63
|
)
|
Loss per share, diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.63
|
)
|
Weighted average number of shares, basic
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
|
|
20,075
|
|
Dilutive effect of stock options and restricted stock
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
20,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
a Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
HHNM(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
184,607
|
|
|
$
|
(6,121
|
)
|
|
$
|
178,486
|
|
|
$
|
(41,145
|
)
|
|
$
|
137,341
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
64,786
|
|
|
|
(1,926
|
)
|
|
|
62,860
|
|
|
|
(11,062
|
)
|
|
|
51,798
|
|
Medical supplies expense
|
|
|
45,688
|
|
|
|
(309
|
)
|
|
|
45,379
|
|
|
|
(10,921
|
)
|
|
|
34,458
|
|
Bad debt expense
|
|
|
17,437
|
|
|
|
(23
|
)
|
|
|
17,414
|
|
|
|
(2,764
|
)
|
|
|
14,650
|
|
Other operating expenses
|
|
|
44,640
|
|
|
|
(2,550
|
)
|
|
|
42,090
|
|
|
|
(8,701
|
)
|
|
|
33,389
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
Depreciation
|
|
|
12,064
|
|
|
|
(1,681
|
)
|
|
|
10,383
|
|
|
|
(1,227
|
)
|
|
|
9,156
|
|
Impairment of long-lived assets and goodwill
|
|
|
14,700
|
|
|
|
(114
|
)
|
|
|
14,586
|
|
|
|
|
|
|
|
14,586
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
27
|
|
|
|
4
|
|
|
|
31
|
|
|
|
(8
|
)
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
200,208
|
|
|
|
(6,599
|
)
|
|
|
193,609
|
|
|
|
(34,683
|
)
|
|
|
158,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(15,601
|
)
|
|
|
478
|
|
|
|
(15,123
|
)
|
|
|
(6,462
|
)
|
|
|
(21,585
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,999
|
)
|
|
|
1
|
|
|
|
(1,998
|
)
|
|
|
99
|
|
|
|
(1,899
|
)
|
Interest and other income, net
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
(17
|
)
|
|
|
68
|
|
Gain on sale of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on not receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
4,608
|
|
|
|
(2,129
|
)
|
|
|
2,479
|
|
|
|
|
|
|
|
2,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,187
|
|
|
|
(2,128
|
)
|
|
|
(941
|
)
|
|
|
82
|
|
|
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(14,414
|
)
|
|
|
(1,650
|
)
|
|
|
(16,064
|
)
|
|
|
(6,380
|
)
|
|
|
(22,444
|
)
|
Income tax benefit
|
|
|
(6,976
|
)
|
|
|
(634
|
)
|
|
|
(7,610
|
)
|
|
|
(1,937
|
)
|
|
|
(9,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,438
|
)
|
|
|
(1,016
|
)
|
|
|
(8,454
|
)
|
|
|
(4,443
|
)
|
|
|
(12,897
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(3,064
|
)
|
|
|
(2,663
|
)
|
|
|
(5,727
|
)
|
|
|
1,337
|
|
|
|
(4,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(10,502
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
(14,181
|
)
|
|
$
|
(3,106
|
)
|
|
$
|
(17,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to MedCath
Corporation common stockholders, net of taxes
|
|
$
|
(10,872
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
(14,551
|
)
|
|
$
|
(3,106
|
)
|
|
$
|
(17,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.55
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.89
|
)
|
Loss per share, diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.89
|
)
|
Weighted average number of shares, basic
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico as
though the sale occurred at the beginning of the reporting
period.
|
F-75
MEDCATH
CORPORATION
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
Sale of
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
184,607
|
|
|
$
|
(6,121
|
)
|
|
$
|
178,486
|
|
|
$
|
(54,673
|
)
|
|
$
|
123,813
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
64,786
|
|
|
|
(1,926
|
)
|
|
|
62,860
|
|
|
|
(17,912
|
)
|
|
|
44,948
|
|
Medical supplies expense
|
|
|
45,688
|
|
|
|
(309
|
)
|
|
|
45,379
|
|
|
|
(17,996
|
)
|
|
|
27,383
|
|
Bad debt expense
|
|
|
17,437
|
|
|
|
(23
|
)
|
|
|
17,414
|
|
|
|
(3,436
|
)
|
|
|
13,978
|
|
Other operating expenses
|
|
|
44,640
|
|
|
|
(2,550
|
)
|
|
|
42,090
|
|
|
|
(7,753
|
)
|
|
|
34,337
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
Depreciation
|
|
|
12,064
|
|
|
|
(1,681
|
)
|
|
|
10,383
|
|
|
|
(2,719
|
)
|
|
|
7,664
|
|
Impairment of long-lived assets and goodwill
|
|
|
14,700
|
|
|
|
(114
|
)
|
|
|
14,586
|
|
|
|
|
|
|
|
14,586
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
27
|
|
|
|
4
|
|
|
|
31
|
|
|
|
(24
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
200,208
|
|
|
|
(6,599
|
)
|
|
|
193,609
|
|
|
|
(49,840
|
)
|
|
|
143,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(15,601
|
)
|
|
|
478
|
|
|
|
(15,123
|
)
|
|
|
(4,833
|
)
|
|
|
(19,956
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,999
|
)
|
|
|
1
|
|
|
|
(1,998
|
)
|
|
|
7
|
|
|
|
(1,991
|
)
|
Interest and other income, net
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
Gain on sale of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on not receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
4,608
|
|
|
|
(2,129
|
)
|
|
|
2,479
|
|
|
|
|
|
|
|
2,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,694
|
|
|
|
(2,128
|
)
|
|
|
(941
|
)
|
|
|
7
|
|
|
|
(934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(14,414
|
)
|
|
|
(1,650
|
)
|
|
|
(16,064
|
)
|
|
|
(4,826
|
)
|
|
|
(20,890
|
)
|
Income tax benefit
|
|
|
(6,976
|
)
|
|
|
(634
|
)
|
|
|
(7,610
|
)
|
|
|
(1,361
|
)
|
|
|
(8,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,438
|
)
|
|
|
(1,016
|
)
|
|
|
(8,454
|
)
|
|
|
(3,465
|
)
|
|
|
(11,919
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(3,064
|
)
|
|
|
(2,663
|
)
|
|
|
(5,727
|
)
|
|
|
1,283
|
|
|
|
(4,444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(10,502
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
(14,181
|
)
|
|
$
|
(2,182
|
)
|
|
$
|
(16,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to
MedCath Corporation common stockholders, net of taxes
|
|
$
|
(10,872
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
(14,551
|
)
|
|
$
|
(2,182
|
)
|
|
$
|
(16,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.55
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.85
|
)
|
Loss per share, diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.85
|
)
|
Weighted average number of shares, basic
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Arkansas Heart Hospital as though
the sale occurred at the beginning of the reporting period.
|
F-76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2010
|
|
|
|
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of MedCath
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners as a
|
|
|
|
|
|
Sale of
|
|
|
|
|
|
|
Company
|
|
|
Discontinued
|
|
|
Company
|
|
|
HHNM and
|
|
|
Company
|
|
|
|
Historical(1)
|
|
|
Operation(2)
|
|
|
Recast(3)
|
|
|
AHH(4)
|
|
|
Pro Forma
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
184,607
|
|
|
$
|
(6,121
|
)
|
|
$
|
178,486
|
|
|
$
|
(95,818
|
)
|
|
$
|
82,668
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
64,786
|
|
|
|
(1,926
|
)
|
|
|
62,860
|
|
|
|
(28,974
|
)
|
|
|
33,886
|
|
Medical supplies expense
|
|
|
45,688
|
|
|
|
(309
|
)
|
|
|
45,379
|
|
|
|
(28,917
|
)
|
|
|
16,462
|
|
Bad debt expense
|
|
|
17,437
|
|
|
|
(23
|
)
|
|
|
17,414
|
|
|
|
(6,200
|
)
|
|
|
11,214
|
|
Other operating expenses
|
|
|
44,640
|
|
|
|
(2,550
|
)
|
|
|
42,090
|
|
|
|
(16,454
|
)
|
|
|
25,636
|
|
Pre-opening expenses
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
|
|
|
|
|
|
866
|
|
Depreciation
|
|
|
12,064
|
|
|
|
(1,681
|
)
|
|
|
10,383
|
|
|
|
(3,946
|
)
|
|
|
6,437
|
|
Impairment of long-lived assets and goodwill
|
|
|
14,700
|
|
|
|
(114
|
)
|
|
|
14,586
|
|
|
|
|
|
|
|
14,586
|
|
Loss (gain) on disposal of property, equipment and other assets
|
|
|
27
|
|
|
|
4
|
|
|
|
31
|
|
|
|
(32
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
200,208
|
|
|
|
(6,599
|
)
|
|
|
193,609
|
|
|
|
(84,523
|
)
|
|
|
109,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(15,601
|
)
|
|
|
478
|
|
|
|
(15,123
|
)
|
|
|
(11,295
|
)
|
|
|
(26,418
|
)
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,999
|
)
|
|
|
1
|
|
|
|
(1,998
|
)
|
|
|
106
|
|
|
|
(1,892
|
)
|
Interest and other income, net
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
(17
|
)
|
|
|
68
|
|
Gain on sale of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on not receivable
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
|
|
|
|
|
|
(1,507
|
)
|
Equity in net earnings of unconsolidated affiliates
|
|
|
4,608
|
|
|
|
(2,129
|
)
|
|
|
2,479
|
|
|
|
|
|
|
|
2,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,694
|
|
|
|
(2,128
|
)
|
|
|
(941
|
)
|
|
|
89
|
|
|
|
(852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(14,414
|
)
|
|
|
(1,650
|
)
|
|
|
(16,064
|
)
|
|
|
(11,206
|
)
|
|
|
(27,270
|
)
|
Income tax benefit
|
|
|
(6,976
|
)
|
|
|
(634
|
)
|
|
|
(7,610
|
)
|
|
|
(3,298
|
)
|
|
|
(10,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(7,438
|
)
|
|
|
(1,016
|
)
|
|
|
(8,454
|
)
|
|
|
(7,908
|
)
|
|
|
(16,362
|
)
|
Less: Net income attributable to noncontrolling interest
|
|
|
(3,064
|
)
|
|
|
(2,663
|
)
|
|
|
(5,727
|
)
|
|
|
2,620
|
|
|
|
(3,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss attributable to MedCath Corporation
|
|
$
|
(10,502
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
(14,181
|
)
|
|
$
|
(5,288
|
)
|
|
$
|
(19,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to
MedCath Corporation common stockholders, net of taxes
|
|
$
|
(10,872
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
(14,551
|
)
|
|
$
|
(5,288
|
)
|
|
$
|
(19,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic
|
|
$
|
(0.55
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(1.00
|
)
|
Loss per share, diluted
|
|
$
|
(0.55
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(1.00
|
)
|
Weighted average number of shares, basic
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
Dilutive effect of stock options and restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares, diluted
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
19,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As reported in the Companys
Form 8-K
on May 27, 2011.
|
|
(2)
|
|
Includes the historical results of MedCath Partners, which was
effective May 1, 2011. The reclassification does not
include the proforma effects of the net gain related to the sale
as it would be reported in discontinued operations.
|
|
(3)
|
|
Represents the Companys historical financial statements
recast to exclude the historical operations of MedCath Partners.
|
|
(4)
|
|
Impact of the assumed sale of Heart Hospital of New Mexico and
Arkansas Heart Hospital as though the sales occurred at the
beginning of the reporting period.
|
F-77
Execution
Copy
ASSET
PURCHASE AGREEMENT
BY
AND
BETWEEN
LOVELACE HEALTH SYSTEM, INC.
AND
HEART HOSPITAL OF NEW MEXICO, LLC
Dated as of May 6, 2011
TABLE OF
CONTENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
ARTICLE 1 DEFINITIONS
|
|
|
1
|
|
|
1.1
|
|
|
Definitions
|
|
|
1
|
|
|
1.2
|
|
|
Interpretation
|
|
|
6
|
|
|
1.3
|
|
|
Schedules
|
|
|
7
|
|
ARTICLE 2 SALE OF PURCHASED ASSETS AND CERTAIN RELATED MATTERS
|
|
|
8
|
|
|
2.1
|
|
|
Sale of Purchased Assets
|
|
|
8
|
|
|
2.2
|
|
|
Excluded Assets
|
|
|
9
|
|
|
2.3
|
|
|
Assumed Liabilities
|
|
|
10
|
|
|
2.4
|
|
|
Excluded Liabilities
|
|
|
10
|
|
|
2.5
|
|
|
Purchase Price
|
|
|
11
|
|
|
2.6
|
|
|
Interim Cash Purchase Price
|
|
|
11
|
|
|
2.7
|
|
|
Final Cash Purchase Price
|
|
|
11
|
|
|
2.8
|
|
|
Dispute of Adjustments/Reconciliation of Final Cash Purchase
Price
|
|
|
11
|
|
|
2.9
|
|
|
Proration
|
|
|
12
|
|
|
2.10
|
|
|
No Compensation for Referrals
|
|
|
12
|
|
ARTICLE 3 CLOSING
|
|
|
12
|
|
|
3.1
|
|
|
Closing
|
|
|
12
|
|
|
3.2
|
|
|
Actions of Buyer at Closing
|
|
|
12
|
|
|
3.3
|
|
|
Actions of Seller at Closing
|
|
|
13
|
|
|
3.4
|
|
|
Additional Acts
|
|
|
13
|
|
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER
|
|
|
14
|
|
|
4.1
|
|
|
Organization, Qualification and Capacity
|
|
|
14
|
|
|
4.2
|
|
|
Powers; Consents; Absence of Conflicts With Other Agreements,
Etc.
|
|
|
14
|
|
|
4.3
|
|
|
Binding Agreement
|
|
|
14
|
|
|
4.4
|
|
|
Sufficient Resources
|
|
|
14
|
|
|
4.5
|
|
|
Litigation
|
|
|
14
|
|
|
4.6
|
|
|
Buyer Acknowledgements
|
|
|
14
|
|
|
4.7
|
|
|
Statements True and Correct
|
|
|
15
|
|
|
4.8
|
|
|
No Other Representations and Warranties
|
|
|
15
|
|
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER
|
|
|
15
|
|
|
5.1
|
|
|
Incorporation, Qualification and Capacity
|
|
|
15
|
|
|
5.2
|
|
|
Powers; Consents; Absence of Conflicts With Other Agreements, Etc
|
|
|
15
|
|
|
5.3
|
|
|
Affiliates and Minority Interests
|
|
|
15
|
|
|
5.4
|
|
|
No Outstanding Rights
|
|
|
16
|
|
|
5.5
|
|
|
Binding Agreement
|
|
|
16
|
|
|
5.6
|
|
|
Seller Financial Information
|
|
|
16
|
|
|
5.7
|
|
|
Permits and Approvals
|
|
|
16
|
|
|
5.8
|
|
|
Intellectual Property
|
|
|
17
|
|
|
5.9
|
|
|
Medicare Participation/Accreditation
|
|
|
17
|
|
|
5.10
|
|
|
Regulatory Compliance
|
|
|
18
|
|
|
5.11
|
|
|
Scheduled Contracts
|
|
|
18
|
|
|
5.12
|
|
|
Encumbrances; Real Property
|
|
|
18
|
|
|
5.13
|
|
|
Personal Property
|
|
|
19
|
|
i
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
5.14
|
|
|
Insurance
|
|
|
19
|
|
|
5.15
|
|
|
Employee Benefit Plans
|
|
|
19
|
|
|
5.16
|
|
|
Hospital Employees and Employee Relations
|
|
|
20
|
|
|
5.17
|
|
|
Litigation or Proceedings
|
|
|
20
|
|
|
5.18
|
|
|
Tax Matters
|
|
|
21
|
|
|
5.19
|
|
|
Environmental Matters
|
|
|
21
|
|
|
5.20
|
|
|
Absence of Changes
|
|
|
22
|
|
|
5.21
|
|
|
Medical Staff Matters
|
|
|
22
|
|
|
5.22
|
|
|
Sufficiency of Purchased Assets
|
|
|
22
|
|
|
5.23
|
|
|
Experimental Procedures
|
|
|
23
|
|
|
5.24
|
|
|
Supplies
|
|
|
23
|
|
|
5.25
|
|
|
Third Party Payor Cost Reports
|
|
|
23
|
|
|
5.26
|
|
|
Compliance Program
|
|
|
23
|
|
|
5.27
|
|
|
Statements True and Correct
|
|
|
23
|
|
|
5.28
|
|
|
No Other Representations and Warranties
|
|
|
23
|
|
ARTICLE 6 COVENANTS OF BUYER
|
|
|
24
|
|
|
6.1
|
|
|
Notification of Certain Matters
|
|
|
24
|
|
|
6.2
|
|
|
HSR Act Filings
|
|
|
24
|
|
|
6.3
|
|
|
Approvals
|
|
|
24
|
|
|
6.4
|
|
|
Survey
|
|
|
25
|
|
|
6.5
|
|
|
Environmental Survey
|
|
|
25
|
|
ARTICLE 7 COVENANTS OF SELLER
|
|
|
25
|
|
|
7.1
|
|
|
Information
|
|
|
25
|
|
|
7.2
|
|
|
Operations
|
|
|
25
|
|
|
7.3
|
|
|
Negative Covenants
|
|
|
26
|
|
|
7.4
|
|
|
Notification of Certain Matters
|
|
|
26
|
|
|
7.5
|
|
|
HSR Act Filings
|
|
|
27
|
|
|
7.6
|
|
|
Additional Financial Information
|
|
|
27
|
|
|
7.7
|
|
|
No-Shop Clause
|
|
|
27
|
|
|
7.8
|
|
|
Title Policy
|
|
|
28
|
|
|
7.9
|
|
|
Provider Agreements
|
|
|
28
|
|
|
7.10
|
|
|
Approvals
|
|
|
28
|
|
ARTICLE 8 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
|
|
|
28
|
|
|
8.1
|
|
|
Compliance With Covenants
|
|
|
28
|
|
|
8.2
|
|
|
HSR Act Waiting Period
|
|
|
28
|
|
|
8.3
|
|
|
Action/Proceeding
|
|
|
28
|
|
|
8.4
|
|
|
Representations and Warranties
|
|
|
29
|
|
|
8.5
|
|
|
Approvals
|
|
|
29
|
|
ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
|
|
|
29
|
|
|
9.1
|
|
|
Compliance with Covenants
|
|
|
29
|
|
|
9.2
|
|
|
Pre-Closing Confirmations
|
|
|
29
|
|
|
9.3
|
|
|
Action/Proceeding
|
|
|
29
|
|
|
9.4
|
|
|
Representations and Warranties
|
|
|
30
|
|
|
9.5
|
|
|
Transition Services Agreement
|
|
|
30
|
|
ii
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
9.6
|
|
|
Title Policy
|
|
|
30
|
|
|
9.7
|
|
|
Absence of Certain Changes
|
|
|
30
|
|
|
9.8
|
|
|
Releases
|
|
|
30
|
|
|
9.9
|
|
|
Environmental Report
|
|
|
30
|
|
|
9.10
|
|
|
Sellers Deliverables
|
|
|
30
|
|
ARTICLE 10 TRANSITIONAL ARRANGEMENTS
|
|
|
30
|
|
|
10.1
|
|
|
Transition Patients
|
|
|
30
|
|
|
10.2
|
|
|
Sellers Cost Reports
|
|
|
31
|
|
|
10.3
|
|
|
Employees; Benefits
|
|
|
31
|
|
|
10.4
|
|
|
Misdirected Payments
|
|
|
33
|
|
ARTICLE 11 ADDITIONAL AGREEMENTS
|
|
|
33
|
|
|
11.1
|
|
|
Allocations
|
|
|
33
|
|
|
11.2
|
|
|
Termination Prior to Closing
|
|
|
33
|
|
|
11.3
|
|
|
Buyer Preservation and Seller Access to Records After the Closing
|
|
|
34
|
|
|
11.4
|
|
|
Reproduction of Documents
|
|
|
35
|
|
|
11.5
|
|
|
Tax Matters
|
|
|
35
|
|
|
11.6
|
|
|
Consented Assignment and Permits
|
|
|
35
|
|
|
11.7
|
|
|
Use of Controlled Substance Permits
|
|
|
35
|
|
|
11.8
|
|
|
Risk of Loss; Preclosing Casualty
|
|
|
36
|
|
|
11.9
|
|
|
Change of Name
|
|
|
36
|
|
|
11.10
|
|
|
Transition Services Agreement
|
|
|
36
|
|
|
11.11
|
|
|
CVSTAT Program
|
|
|
37
|
|
|
11.12
|
|
|
Quality Reporting
|
|
|
37
|
|
|
11.13
|
|
|
Supplemental Insurance
|
|
|
37
|
|
|
11.14
|
|
|
Sellers Covenant Not to Compete
|
|
|
37
|
|
|
11.15
|
|
|
Information from Virtual Data Room
|
|
|
38
|
|
|
11.16
|
|
|
MedCath Corporation Shareholder Approval
|
|
|
38
|
|
|
11.17
|
|
|
Post Closing Access to Information
|
|
|
39
|
|
ARTICLE 12 GENERAL
|
|
|
39
|
|
|
12.1
|
|
|
Consents, Approvals and Discretion
|
|
|
39
|
|
|
12.2
|
|
|
Legal Fees and Costs
|
|
|
39
|
|
|
12.3
|
|
|
Choice of Law; Waiver of Jury Trial; Limitation on Damages
|
|
|
39
|
|
|
12.4
|
|
|
Benefit; Assignment
|
|
|
39
|
|
|
12.5
|
|
|
Effective Time; Accounting Date
|
|
|
40
|
|
|
12.6
|
|
|
No Brokerage
|
|
|
40
|
|
|
12.7
|
|
|
Cost of Transaction
|
|
|
40
|
|
|
12.8
|
|
|
Confidentiality
|
|
|
40
|
|
|
12.9
|
|
|
Press Release
|
|
|
41
|
|
|
12.10
|
|
|
Waiver of Breach
|
|
|
41
|
|
|
12.11
|
|
|
Notice
|
|
|
41
|
|
|
12.12
|
|
|
Severability
|
|
|
41
|
|
|
12.13
|
|
|
No Inferences
|
|
|
42
|
|
|
12.14
|
|
|
Divisions and Headings of this Agreement
|
|
|
42
|
|
|
12.15
|
|
|
No Third-Party Beneficiaries
|
|
|
42
|
|
iii
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
12.16
|
|
|
Tax and Medicare Advice and Reliance
|
|
|
42
|
|
|
12.17
|
|
|
Entire Agreement; Amendment
|
|
|
42
|
|
|
12.18
|
|
|
Sellers Knowledge
|
|
|
42
|
|
|
12.19
|
|
|
Multiple Counterparts
|
|
|
42
|
|
|
12.20
|
|
|
Disclaimer of Warranties
|
|
|
42
|
|
|
12.21
|
|
|
No Survival Period
|
|
|
42
|
|
|
12.22
|
|
|
Right to Seek Damages
|
|
|
43
|
|
|
12.23
|
|
|
Right to Take Limited Liability Company and Corporate Action
|
|
|
43
|
|
|
12.24
|
|
|
Guarantee of Buyers Obligations
|
|
|
43
|
|
iv
LIST
OF SCHEDULES
|
|
|
Schedule 1.1A
|
|
Capital Lease Obligations
|
Schedule 1.1B
|
|
Net Working Capital
|
Schedule 1.1C
|
|
Leased Real Property
|
Schedule 1.1D
|
|
Owned Real Property
|
Schedule 2.1(f)
|
|
Software
|
Schedule 2.2(d)
|
|
Excluded Assets
|
Schedule 2.2(i)
|
|
Excluded Intellectual Property
|
Schedule 4.2
|
|
Required Approvals for Buyer
|
Schedule 5.1
|
|
Outstanding Corporate Approvals
|
Schedule 5.2
|
|
Required Approvals for Seller
|
Schedule 5.3
|
|
Affiliates and Minority Interests in Seller
|
Schedule 5.4
|
|
Rights Regarding Purchased Assets
|
Schedule 5.6
|
|
Historical Financial Information
|
Schedule 5.7
|
|
Permits
|
Schedule 5.8
|
|
Intellectual Property
|
Schedule 5.9
|
|
Medicare Participation/Accreditation
|
Schedule 5.10
|
|
Regulatory Compliance
|
Schedule 5.11
|
|
Scheduled Contracts
|
Schedule 5.14
|
|
Insurance
|
Schedule 5.15
|
|
Employee Benefit Plans
|
Schedule 5.16(a)
|
|
Labor Disputes
|
Schedule 5.16(b)
|
|
Hospital Employees
|
Schedule 5.17
|
|
Litigation or Proceedings against Seller
|
Schedule 5.18
|
|
Tax Matters
|
Schedule 5.19
|
|
Environmental Matters
|
Schedule 5.20
|
|
Certain Seller Changes
|
Schedule 5.25
|
|
Unaudited Cost Reports
|
Schedule 5.26
|
|
Audits and Investigations
|
Schedule 7.2
|
|
Operating Covenants
|
Schedule 7.3
|
|
Permitted Operations
|
Schedule 10.1(a)
|
|
ACE Demonstration Project Payments
|
Schedule 10.3
|
|
COBRA Beneficiaries
|
Schedule 11.1
|
|
Allocations
|
Schedule 11.13
|
|
Supplemental Insurance
|
Schedule 12.18
|
|
Persons with Knowledge
|
|
LIST OF EXHIBITS
|
|
|
|
Exhibit A
|
|
Limited Power of Attorney
|
Exhibit B
|
|
Transition Services Agreement
|
v
ASSET
PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT
(this
Agreement
) is made and entered into as of
May 6, 2011 by and between
LOVELACE HEALTH SYSTEM, INC.,
a New Mexico corporation (
Buyer
), and
HEART HOSPITAL OF NEW MEXICO, LLC,
a New Mexico limited
liability company (
Seller
).
WITNESSETH
:
WHEREAS,
Seller owns and operates the Heart Hospital of
New Mexico located in Albuquerque, New Mexico (the
Hospital
) and the Purchased Assets (as
defined herein); and
WHEREAS,
in reliance upon the representations, warranties
and covenants of Buyer set forth herein, Seller desires to sell
the Hospital and the Purchased Assets to Buyer, and to assign
the Assumed Liabilities to Buyer, all as more fully set forth
herein.
NOW, THEREFORE,
for and in consideration of the premises,
and the agreements, covenants, representations and warranties
hereinafter set forth, and other good and valuable
consideration, the receipt and adequacy of which are forever
acknowledged and confessed, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1
Definitions
. As used
herein the terms below shall have the following meanings:
Accrued PTO
has the meaning set forth in
Section 2.3(d).
ACE Demonstration Project
has the meaning set
forth in Section 10.1(a).
Additional Financial Statements
has the
meaning set forth in Section 7.6.
Affiliate
means, as to the Person in
question, any Person that directly or indirectly controls, is
controlled by, or is under common control with, the Person in
question and any successors or assigns of such Person; and the
term control means possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of a Person whether through ownership of
voting securities, by Contract or otherwise;
provided
that, with respect to Seller, Affiliate shall not
include direct or indirect equityholders, officers or directors
of MedCath Corporation or MedCath Incorporated and shall not
include any equityholder of Seller other than Manager and its
Affiliates.
Agency Receivables
has the meaning set forth
in Section 2.2(f).
Agreement
means this Agreement, as amended or
supplemented, together with all Exhibits and Schedules attached
or delivered with respect hereto or expressly incorporated
herein by reference.
Applicable Rate
means the prime
rate as quoted in the Money Rates section of
The Wall Street Journal
on the Closing Date.
Approval
means any approval, authorization,
consent, notice, qualification or registration, or any
extension, modification, amendment or waiver of any of the
foregoing, of or from, or any notice, statement, filing or other
communication to be filed with or delivered to, any Governmental
Entity or any other Person.
Assumed Contracts
has the meaning set forth
in Section 2.1(d).
Assumed Liabilities
has the meaning set forth
in Section 2.3.
Baseline Balance Sheet
means the audited
balance sheet of the Hospital dated September 30, 2010.
Baseline Balance Sheet Date
means
September 30, 2010.
Buyer
has the meaning set forth in the
Preamble hereto.
1
Capital Lease Obligations
means, as of the
date of determination, an amount equal to the aggregate amount
outstanding under capital lease obligations of the Seller under
capital leases identified on
Schedule 1.1A
, which
capital leases are included in the Assumed Liabilities,
determined in accordance with GAAP. The amount of Capital Lease
Obligations as of September 30, 2010 was $6,188,251 as set
forth on
Schedule 1.1A
.
CERCLA
has the meaning set forth in the
definition of Environmental Laws.
Change in Control Transaction
means
(i) a transaction in which a Person is or becomes the
beneficial owner, directly or indirectly, of securities of
MedCath Corporation representing fifty percent (50%) or more of
the total voting power represented by MedCath Corporations
then outstanding voting securities; (ii) a merger or
consolidation in which MedCath Corporation is a party and in
which the equityholders of MedCath Corporation before such
merger or consolidation do not retain, directly or indirectly,
at least a majority of the beneficial interest in the voting
equity interests of the Person that survives or results from
such merger or consolidation; or (iii) a sale or
disposition by MedCath Corporation or its Affiliates of all or
substantially all of MedCath Corporations assets or those
of its Affiliates existing as of the date hereof (excluding the
Hospital) either to a single or multiple buyers thereof.
Notwithstanding the foregoing, in no event shall the acquisition
of voting securities by one or more Persons (even if such
offering represents 50% or more of the total voting power
represented by MedCath Corporations then outstanding
voting securities) in a public offering constitute a Change in
Control Transaction.
Closing
has the meaning set forth in
Section 3.1.
Closing Balance Sheet
means the balance sheet
of Seller in respect of the Hospital as of the Closing Date. The
Closing Balance Sheet shall be prepared in accordance with GAAP
(except as provided in
Schedule 5.6
), applied on a
basis consistent with the Baseline Balance Sheet.
Closing Date
has the meaning set forth in
Section 3.1.
CMS has the meaning set forth in Section 5.9(e).
COBRA
has the meaning set forth in
Section 10.3(d).
Code
means the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
Competing Business
has the meaning set forth
in Section 11.14(a).
Confidentiality Agreement
has the meaning set
forth in Section 12.8.
Contract
means any binding written or oral
contract, commitment, instrument, lease, or other arrangement or
agreement.
Cost Reports
has the meaning set forth in
Section 10.2.
CVSTAT License Agreement
has the meaning set
forth in Section 11.11.
De Minimis Contract
means any Contract that
either (i) requires total expenditures subsequent to
Closing of not more than $25,000 or (ii) can be terminated
without cause or penalty within ninety (90) days after
Closing without the expenditure of more than $25,000 within such
ninety (90) day period, other than Contracts that
(x) are with physicians or other referral sources,
(y) involve leases of the Real Property, or (z) would
limit in any material respect the ability of Buyer to engage in
any line of business in any geographic area or to compete with
any Person, which must be scheduled.
DRG Transition Patient
has the meaning set
forth in Section 10.1(a).
EEOC
means the Equal Employment Opportunity
Commission.
Effective Time
has the meaning set forth in
Section 12.5.
2
Encumbrance
means any claim, charge,
easement, encumbrance, conditional sales agreement, right of
first refusal, option, encroachment, security interest,
mortgage, lien, pledge or restriction, whether imposed by
Contract, Law, equity or otherwise.
Environmental Condition
as to either party,
means any event, circumstance or conditions related in any
manner whatsoever to: (i) the current or past presence or
spill, emission, discharge, disposal, release or threatened
release of any hazardous, infectious or toxic substance or waste
(as defined by any applicable Environmental Laws) or any
chemicals, pollutants, petroleum, petroleum products or oil
(
Hazardous Materials
), into the environment;
or (ii) the
on-site
or
off-site treatment, storage, disposal or other handling of any
Hazardous Material originating on or from the Real Property; or
(iii) the placement of structures or Hazardous Materials
into waters of the United States; or (iv) the presence of
any Hazardous Materials in any building, structure or workplace
or on any portion of the Real Property; or (v) any
violation of Environmental Laws at or on any part of the Real
Property, or arising from the activities of the Seller or any
Affiliate of the Seller at the Hospital, involving Hazardous
Materials.
Environmental Laws
means all Laws relating to
pollution or the environment, including the Comprehensive
Environmental Recovery, Compensation, and Liability Act, as
amended, 42 U.S.C. § 9601,
et seq.
(
CERCLA
); the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. § 6901,
et
seq.
(
RCRA
), the Clean Air Act, 42 U.S.C
§ 7401,
et seq.,
the Occupational Safety and
Health Act, 29 U.S.C. § 600,
et seq.
(
OSHA
), and all other Laws relating to
emissions, discharges, releases, or threatened releases of
pollutants, contaminants, chemicals, pesticides, or industrial,
infectious, toxic or hazardous substances or wastes into the
environment (including ambient air, surface water, groundwater,
land surface or subsurface strata) or otherwise relating to the
processing, generation, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants,
chemicals, or industrial, infectious, toxic, or hazardous
substances or wastes.
ERISA
means the Employee Retirement Income
Security Act of 1974, as amended.
ERISA Controlled Group
means a group of
Persons considered to be aggregated with each other pursuant to
Section 414(b), (c), (m) or (o) of the Code.
Excluded Assets
has the meaning set forth in
Section 2.2.
Excluded Contracts
has the meaning set forth
in Section 2.2(b).
Excluded Liabilities
has the meaning set
forth in Section 2.4.
Exhibits
means the exhibits to this Agreement.
Final Capital Lease Obligations Calculation
means a calculation of the aggregate amount of the Capital
Lease Obligations as of the Closing Date as reflected on the
Closing Balance Sheet. The Final Capital Lease Obligations
Calculation shall be prepared using the same methodologies and
assumptions used in connection with the preparation of the
determination of the Capital Lease Obligations set forth on
Schedule 1.1A
and in a manner consistent with GAAP
and the Baseline Balance Sheet.
Final Cash Purchase Price
means an amount
equal to (i) One Hundred and Nineteen Million Dollars
($119,000,000) plus or minus (ii) the Final NWC Calculation
minus (iii) Final Capital Lease Obligations Calculation.
Final NWC Calculation
means a calculation of
the Net Working Capital as of the Closing Date. The Final NWC
Calculation shall be prepared using the same methodologies and
assumptions used in connection with the preparation of the
determination of Net Working Capital set forth on
Schedule 1.1B
. For the avoidance of doubt, the
accounting policies, assumptions and methodologies used for
determining each of the items used in the determination of Net
Working Capital shall be the same as used in connection with the
preparation of the determination of Net Working Capital set
forth on
Schedule 1.1B
.
FIRPTA
means the Foreign Investment Real
Property Tax Act of 1980, as amended, and the rules and
regulations promulgated thereunder.
3
Furniture and Equipment
means all equipment
(including movable equipment), vehicles, furniture or
furnishings that are held or used by Seller primarily or
exclusively in the business or operation of the Hospital (other
than Excluded Assets), including all such equipment, vehicles,
furniture or furnishings that have been fully depreciated for
accounting purposes.
GAAP
means United States generally accepted
accounting principles and practices as in effect from time to
time, as modified as described in
Schedule 5.6
and
applied consistently by Seller throughout the periods involved
and in accordance with Sellers practices and policies
utilized in its September 30, 2010 financial statements.
Government Programs
means the federal
Medicare, all applicable state Medicaid and successor programs.
Governmental Entity
means any government or
any agency, bureau, board, directorate, commission, court,
department, official, political subdivision, tribunal or other
instrumentality of any government, whether federal, state or
local, domestic or foreign.
Hazardous Materials
has the meaning set forth
in the definition of Environmental Condition.
Hired Employee
has the meaning set forth in
Section 10.3(b).
Historical Financial Information
has the
meaning set forth in Section 5.6(a).
Hospital
has the meaning set forth in the
recitals hereto.
Hospital Employees
has the meaning set forth
in Section 5.16(b).
HQI Program
has the meaning set forth in
Section 5.9(e).
HSR Act
means the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the related
regulations and published interpretations.
Intellectual Property
means, to the extent
held or used primarily or exclusively in the business or
operation of the Hospital, patents, trademarks, trade names,
service marks, copyrights and any applications therefor.
Interim Balance Sheet
means the balance sheet
of Seller in respect of the Hospital as of the Interim Balance
Sheet Date. The Interim Balance Sheet shall be prepared in
accordance with GAAP (except as provided in
Schedule 5.6
), applied on a basis consistent with
the Baseline Balance Sheet.
Interim Balance Sheet Date
means the most
recently ended calendar month prior to the Closing Date for
which financial statements are available for Seller in respect
of the Hospital.
Interim Capital Lease Obligations Calculation
means a calculation of the aggregate amount of the Capital
Lease Obligations as of the Interim Balance Sheet Date as
reflected on the Interim Balance Sheet. The Interim Capital
Lease Obligations Calculation shall be prepared using the same
methodologies and assumptions used in connection with the
preparation of the determination of the Capital Lease
Obligations set forth on
Schedule 1.1A
and in a
manner consistent with GAAP and the Baseline Balance Sheet.
Interim Cash Purchase Price
means an amount
equal to (i) One Hundred and Nineteen Million Dollars
($119,000,000) plus or minus (ii) the Interim NWC
Calculation minus (iii) the Interim Capital Lease
Obligations Calculation.
Interim NWC Calculation
means a calculation
of the Net Working Capital as of the Interim Balance Sheet Date.
The Interim NWC Calculation shall be prepared using the same
methodologies and assumptions used in connection with the
preparation of the determination of Net Working Capital set
forth on
Schedule 1.1B
.
Inventory
means all inventory and supplies
held or used in the business or operation of the Hospital.
Law
means any constitutional provision,
statute, ordinance or other law, rule, regulation or order of
any Governmental Entity.
4
Leased Real Property
means all real property
subject to a leasehold or subleasehold estate (and in which
Seller is the tenant or subtenant) held or used in the business
or operation of the Hospital described on
Schedule 1.1C
, which constitutes all leasehold or
subleasehold interests held by Seller and used in the business
or operation of the Hospital.
LMC
has the meaning set forth in
Section 6.3.
Manager
means NM Hospital Management, LLC, a
North Carolina limited liability company and the manager of
Seller.
Material Adverse Effect
shall mean any fact,
circumstance, event, change, effect, condition or occurrence
that, individually or in the aggregate, has had or is reasonably
likely to have a material adverse effect on the business,
operations, property, financial condition or results of
operations of the Purchased Assets and the Hospital, taken as a
whole;
provided
,
however
, that any adverse effect
arising out of, resulting from or attributable to any of the
following shall not constitute or be deemed to contribute to a
Material Adverse Effect, and otherwise shall not be taken into
account in determining whether a Material Adverse Effect has
occurred: (i) a fact, circumstance, event, change, effect
or occurrence, or series of such items, to the extent affecting
(A) global, national or regional economic, business,
regulatory, market or political conditions or national or global
financial markets, including changes in interest or exchange
rates or (B) the healthcare industry generally,
(ii) the negotiation, execution or the announcement of, or
the performance of obligations under, this Agreement, the
Schedules or the other documents contemplated by this Agreement
or the consummation of the transactions contemplated hereby,
(iii) any changes or any proposed changes in Law or GAAP or
the enforcement or interpretation thereof, (iv) any actions
taken with the specific written consent of or at the written
request of Buyer, (v) any hostilities, acts of war,
sabotage, terrorism or military actions, or any escalation or
worsening of any such hostilities, act of war, sabotage,
terrorism or military actions, or (vi) the implementation
of the Patient Protection and Affordable Care Act.
Medicaid
means Title XIX of the Social
Security Act.
Medicare
means Title XVIII of the Social
Security Act.
Net Working Capital
means, as of the date of
determination, an amount equal to the following with respect to
the Seller, in each instance as determined in accordance with
GAAP, consistently applied: (a) the sum of the amounts
reflected in the entries (or line items) on the applicable
balance sheet entitled (i) Inventories; and
(ii) Prepaid expenses;; minus (b) the
amounts reflected in the entries (or line items) on the
applicable balance sheet entitled Accrued PTO- which
is further defined herein. Inventories shall be
comprised in all material respects of Inventory used or useful
in respect of the Hospital, with obsolete items written off.
Prepaid expenses shall be limited to prepaid
expenses which are useable by Buyer after Closing in the
operation of the Hospital. For avoidance of doubt, the parties
agree that no other amounts reflected in the entries (or line
items) on the applicable balance sheet shall be considered in
determining Net Working Capital. Net Working Capital shall be
prepared in accordance with GAAP (except as provided in
Schedule 5.6)
, applied on a basis consistent with
past practices using the same policies, methodologies and
assumptions used in connection with the preparation of the
determination of Net Working Capital set forth on
Schedule 1.1B
. The Net Working Capital as
of September 30, 2010 was $1,617,881, as set forth on
Schedule 1.1B
.
ORYX
has the meaning set forth in
Section 5.9(e).
OSHA
has the meaning set forth in the
definition of Environmental Laws.
Outside Date
has the meaning set forth in
Section 11.2(a).
Owned Real Property
means all the real
property described on
Schedule 1.1D
, which
constitutes all real property both (a) owned by Seller or
owned by any Seller Affiliate and (b) held or used in the
business or operation of the Hospital, together with all leases
and subleases therein, improvements, buildings or fixtures
located thereon or therein, all easements, rights of way, and
other appurtenances thereto (including appurtenant rights in and
to public streets), and all claims and recorded or unrecorded
interests therein, including any and all options to acquire such
real property.
5
Permit
means any license or permit required
to be issued by any Governmental Entity.
Permitted Encumbrance
means any Encumbrance
that is (i) a lien for Taxes not yet due and payable,
(ii) a lien securing any Capital Lease Obligation or
Assumed Liability, (iii) a lease obligation under any
Scheduled Contract set forth on
Schedule 5.11
, which
is assumed in writing by Buyer, (iv) an Encumbrance
reflected on the Survey described in Section 6.4 that is
reasonably approved by Buyer and that does not materially
interfere with the operations of the Purchased Assets in a
manner consistent with the current use by Seller, and
(v) an exception listed in Schedule B
Section II of the title commitment obtained from the
Title Company prior to the Closing Date
(
Title Commitment
) that is reasonably
approved by Buyer and that does not materially interfere with
the operations of the Purchased Assets in a manner consistent
with the current use by Seller.
Person
means an association, a corporation, a
limited liability company, an individual, a partnership, a
limited liability partnership, a trust or any other entity or
organization, including a Governmental Entity.
Phase I Assessment
has the meaning set forth
in Section 6.5.
Plans
has the meaning set forth in
Section 5.15(a).
Purchased Assets
has the meaning set forth in
Section 2.1.
QNet
has the meaning set forth in
Section 5.9(e).
RCRA
has the meaning set forth in the
definition of Environmental Laws.
Real Property
means the Owned Real Property
and the Leased Real Property.
Restricted Area
has the meaning set forth in
Section 11.14(a).
Retirement Plans
has the meaning set forth in
Section 5.15(g).
Scheduled Contracts
has the meaning set forth
in Section 5.11.
Schedules
means the disclosure schedules to
this Agreement.
Seller
has the meaning set forth in the
Preamble hereto.
Seller Affiliate
means Seller, the Manager
and any Affiliate of Seller. Without limiting the foregoing,
Seller Affiliate shall not include any physician or Affiliate of
a physician that is or has been a direct or indirect member of
Seller.
Separation Date
has the meaning set forth in
Section 10.3(d).
Survey
has the meaning set forth in
Section 6.4.
Taxes
has the meaning set forth in
Section 5.18(a).
Title Commitment
has the meaning set
forth in the definition of Permitted Encumbrance.
Title Company
means Land Services USA,
Inc.
Transition Patients
has the meaning set forth
in Section 10.1.
Transition Patient Services
has the meaning
set forth in Section 10.1.
Transition Services Agreement
has the meaning
set forth in Section 11.10.
TRICARE
means the Department of
Defenses managed healthcare program for active duty
military, active duty service families, retirees and their
families and other beneficiaries.
WARN Act
has the meaning set forth in
Section 10.3(b).
1.2
Interpretation
. In this
Agreement, unless the context otherwise requires:
(a) references to this Agreement are references to this
Agreement and to the Exhibits and Schedules;
6
(b) references to Articles and Sections are references to
articles and sections of this Agreement;
(c) references to any party to this Agreement shall include
references to its respective successors and permitted assigns;
(d) references to a judgment shall include references to
any order, writ, injunction, decree, determination or award of
any court or tribunal or arbitrator in a binding arbitration;
(e) the terms hereof, herein,
hereby, and derivative or similar words will refer
to this entire Agreement;
(f) references to any document (including this Agreement)
are references to that document as amended, consolidated,
supplemented, novated or replaced by the parties from time to
time;
(g) unless the context requires otherwise, references to
any Law are references to that Law as of the Closing Date, and
shall also refer to all rules and regulations promulgated
thereunder;
(h) the word including (and all derivations
thereof) shall mean including, without limitation;
(i) references to time are references to Mountain Standard
or Daylight time (as in effect on the applicable day) unless
otherwise specified herein;
(j) the gender of all words herein include the masculine,
feminine and neuter, and the number of all words herein include
the singular and plural;
(k) provisions of this Agreement shall be interpreted in
such a manner so as not to inequitably benefit or burden any
party through double counting of assets or
liabilities or failing to recognize benefits that may result
from any matters that impose losses or burdens on any party,
including in connection with the determination of the Final Cash
Purchase Price and the calculation of losses on casualty claims;
(1) the terms date hereof, date of this
Agreement and similar terms shall mean the date set forth
in the opening paragraph of this Agreement; and
(m) the section headings and subheadings in this Agreement
and the Schedules are for convenience of reference only and
shall not affect the meaning or interpretation of this Agreement
or the express description of the Schedules.
1.3
Schedules
. Buyer and
Seller hereby acknowledge and agree as follows:
(a) the Schedules and any disclosures made in or by virtue
of them are integral parts of this Agreement as if fully set
forth in this Agreement and all statements appearing therein
shall be deemed to be representations;
(b) the fact that any items of information are contained in
the Schedules shall not be construed as an admission of
liability under any applicable law, or to mean that such
information is required to be disclosed in or by this Agreement,
or to mean that such information is material. Such information
shall not be used as a basis for interpreting the terms
material, materially,
materiality or any similar qualification in the
Agreement. Nothing in the Schedules constitutes an admission of
any liability or obligation of Seller to any third party, nor an
admission against Sellers interest; and
(c) items disclosed on one particular Schedule relating to
one section of the Agreement are deemed to be constructively
disclosed or listed on other Schedules relating to other
sections of the Agreement to the extent it is reasonably
apparent on the face of such other Schedules that such
disclosure is applicable to such other Schedules.
7
ARTICLE 2
SALE OF
PURCHASED ASSETS AND CERTAIN RELATED MATTERS
2.1
Sale of Purchased
Assets
.
At Closing and subject to the terms
and conditions of this Agreement, other than the Excluded
Assets, Seller shall sell, transfer, convey, assign and deliver
to Buyer, and Buyer shall purchase from Seller, all rights,
title, and interest in and to all assets of every description,
and whether real, personal or mixed, tangible or intangible,
owned or leased by Seller and held or used in the business or
operation of the Hospital, including the following items
(collectively, the
Purchased Assets
):
(a) All Furniture and Equipment;
(b) Good and marketable title in fee simple absolute to the
Owned Real Property, and, to the extent permitted by law, any
rights of Seller against third parties related to any such Owned
Real Property, together with all plants, buildings, structures,
improvements, construction in progress, appurtenances,
covenants, easements, servitudes and fixtures situated thereon,
forming a part thereof, or in any manner belonging to or
pertaining to such interests of Seller;
(c) Sellers interest in the Contracts relating to the
Leased Real Property;
(d) (i) All of the interest of Seller or its
Affiliates in all Scheduled Contracts in respect of the
Purchased Assets, (ii) all Contracts that both are not
listed on
Schedule 5.11
and that are De Minimis
Contracts that relate primarily or exclusively to the operations
of the Hospital and, (iii) all Contracts representing
Capital Lease Obligations (collectively, the
Assumed
Contracts
), but excluding (i) except as otherwise
provided herein, Contracts relating to Plans and (ii) the
Excluded Contracts;
(e) All Permits and Approvals issued or granted by
Governmental Entities to the extent assignable under applicable
Law and which are held or used by the Seller Affiliates and
relate to the ownership, development and business or operation
of the Purchased Assets (including any pending Permits and
Approvals related to any Purchased Assets);
(f) All computer hardware, software, and data processing
equipment owned by Seller or used primarily in the business or
operation of the Hospital or the operation of the Purchased
Assets which, in the case of software, is listed on
Schedule 2.1(f)
unless it is a De Minimis Contract,
and, to the extent assignable or transferable, all rights in all
warranties of any manufacturer or vendor with respect thereto;
(g) All Inventory;
(h) Assumable prepaid expenses, claims for refunds and
rights to offset in respect thereof (in each case to the extent
included in the Final NWC Calculation);
(i) To the extent transferable or assignable under
applicable Law, all financial, patient and medical staff records
held or used by the Seller Affiliates primarily or exclusively
in the business or operation of the Hospital (but specifically
excluding any records maintained by Affiliates of Seller in
connection with the provision of services by such Affiliates for
the benefit of Seller);
(j) All Intellectual Property, including Sellers
rights in the name Heart Hospital of New Mexico;
(k) Sellers goodwill in respect of the Purchased
Assets and the Hospital; and
(1) All records related to the business, operation or
ownership of the Hospital including ad valorem and gross
receipts Tax returns and records including federal forms 940,
941,
W-2,
W-3
and New
Mexico
Forms CRS-1
(but specifically excluding income Tax returns, franchise Tax
returns and supporting materials for such returns such as
working papers and Tax provisions).
Seller shall transfer and convey good and marketable title to
the Purchased Assets and all parts thereof to Buyer, free and
clear of all Encumbrances except for the Permitted Encumbrances.
8
2.2
Excluded
Assets
. Notwithstanding anything to the
contrary, Seller is not selling, and Buyer is not purchasing or
assuming obligations with respect to, the following assets which
shall remain the property of Seller after the Closing (the
Excluded Assets
):
(a) All restricted and unrestricted cash and cash
equivalents, including investments in marketable securities,
certificates of deposit, bank accounts and promissory notes,
except to the extent such assets are included in the
determination of the Final NWC Calculation;
(b) All (i) group Contracts entered into by MedCath
Corporation or MedCath Incorporated for the benefit of Seller
and one or more Seller Affiliate, (ii) Contracts with
managed care organizations, health maintenance organizations,
insurers and similar third party payors, (iii) Contracts
that are both not listed on
Schedule 5.11
and that
are not De Minimis Contracts that relate to the operations of
the Hospital, and (iv) Contracts listed as Excluded
Contracts on
Schedule 5.11
(collectively, the
Excluded Contracts
);
(c) The corporate record books, minute books, and corporate
seals and all records of any kind that Seller is required by Law
to retain in its own possession together with those records
maintained by Seller with respect to its Affiliates;
(d) Such other property and assets, if any, specifically
described on
Schedule 2.2(d)
;
(e) Any claims or rights against third parties related to
the Purchased Assets (including the Assumed Contracts),
contractual or otherwise, accruing or arising prior to the
Closing, except to the extent (i) included in the
determination of the Final NWC Calculation or (ii) such
claim or right would also relate to a period after Closing, but
only to the extent such right or claim relates to periods after
Closing;
(f) All rights to settlement and retroactive adjustments,
if any, for open cost reporting periods ending on or prior to
the Closing Date (whether open or closed) arising from or
against the U.S. Government under the terms of the Medicare
program or TRICARE and against any state under its Medicaid
program and against any third-party payor programs that settle
on a cost report basis (
Agency Receivables
);
(g) All rights of Seller under this Agreement or any
agreement contemplated hereby;
(h) All (i) claims for refunds of Taxes and all other
Tax assets for periods prior to the Closing, (ii) Federal
and State income tax returns for periods prior to the Closing,
and (iii) books and records created for the purpose of
complying with Federal and State Tax Laws;
(i) All data processing equipment, proprietary computer
software and Intellectual Property utilized in connection with
the provision of services by Affiliates of Seller for the
benefit of Seller that are listed on
Schedule 2.2(i)
, and, in the case of software, all
software unless listed on
Schedule 2.1(f)
;
(j) All accounts receivable of Seller, and all rights to
payment, whether billed or unbilled, recorded or unrecorded,
accrued and existing, whether or not written off, in connection
with the operation of the Hospital on or prior to the Closing
Date;
(k) The names and symbols used in connection with the
Hospital and the Purchased Assets which include the name
MedCath or any variants thereof, or any other names
which are proprietary to the Seller or its Affiliates, other
than Heart Hospital of New Mexico;
(1) Any proprietary information contained in
(i) Sellers employee or operation manuals or
(ii) any films or videos used by Seller for operational or
training purposes;
(m) All intercompany accounts of Seller and its Affiliates;
(n) All of Sellers insurance proceeds arising in
connection with the operation of the Hospital or the Purchased
Assets prior to Closing, except to the extent provided in
Section 11.8;
(o) All assets used by Seller and its Affiliates in
rendering corporate services to the Seller Affiliates or the
Hospital that are located outside the Hospital, except to the
extent such assets are reflected in the Final NWC Calculation;
9
(p) Any assets used or operated by MedCath Corporation or
MedCath Incorporated on a company-wide or region-wide basis,
unless such assets are reflected in the Final NWC Calculation;
(q) To the extent permitted by Sections 7.2 and 7.3
hereof, all assets disposed of or exhausted prior to Closing,
including Inventory, prepaid expenses and Furniture and
Equipment, except to the extent such assets are included in the
determination of the Final NWC Calculation; and
(r) All provider numbers and related agreements related to
any Government Programs and TRICARE.
2.3
Assumed Liabilities
. As
of Closing, Buyer agrees to assume the future payment and
performance of the following liabilities of Seller and its
Affiliates (collectively, the
Assumed
Liabilities
):
(a) all obligations and liabilities that arise or accrue
after Closing under the Assumed Contracts;
(b) the Capital Lease Obligations;
(c) subject to the provisions of Section 2.9, ad
valorem and personal property Taxes payable for the calendar
year in which the Closing Date occurs;
(d) obligations and liabilities as of the Closing Date in
respect of (i) accrued paid time off of Hired Employees
(including employer FICA and any other estimated employer taxes
thereon) and accrued Extended Service Recognition leave
(including employer FICA and any other estimated employer taxes
thereon) (
ESR Leave
) of Hired Employees who
have completed six (6) years of eligibility service with
Seller as of the Closing Date (collectively, the
Accrued PTO
), but only to the extent such
Accrued PTO (including, for purposes of clarification, ESR
Leave) is included in the determination of the Final NWC
Calculation and (ii) the COBRA liabilities and obligations
set forth in Section 10.3(c) hereof; and
(e) any state and local transfer, sales, and recording fees
and similar Taxes which may arise upon the consummation of the
transactions contemplated herein (excluding, for the avoidance
of doubt, any Taxes measured by income or gain). Buyer shall be
responsible for, and Seller will collect from Buyer, any amount
of New Mexico Gross Receipts Tax due as a result of the
contemplated transaction, the payment of which by Buyer shall be
in addition to any other obligations of Buyer under this
Agreement. Seller shall be responsible for remitting such Tax to
the appropriate taxing authority.
2.4
Excluded
Liabilities
. Except as expressly provided to
the contrary in Section 2.3 with respect to Assumed
Liabilities, Buyer is not obligated to pay or assume any
liability of any type or nature, including the following,
whether fixed or contingent, recorded or unrecorded, known or
unknown (collectively, the
Excluded
Liabilities
):
(a) current liabilities, accounts payable, long-term
liabilities, and all indebtedness and obligations or guarantees
of Seller, except to the extent included in the Final Capital
Lease Obligations Calculation or the determination of the Final
NWC Calculation;
(b) any obligation or liability accruing or arising during
the period prior to Closing in connection with (i) any
Assumed Contract (other than that which may arise from the
failure to obtain the consent of the counter-party thereto of
any Assumed Contract), (ii) the operation of the Hospital,
including all malpractice and general liability claims, whether
or not same are pending, threatened, known or unknown prior to
Closing, or (iii) any Governmental Programs or other
third-party payor programs, including recoupment of previously
paid or reimbursed amounts, and any Cost Report settlement
payables relating to all Cost Report periods ending on or before
the Closing Date;
(c) any obligation or liability accruing, arising out of,
or relating to any Excluded Contract;
(d) (i) any federal, state or local Tax obligations of
Seller and its Affiliates in respect of periods (or portions
thereof) ending on or prior to Closing, including any income
Tax, any franchise Tax, any Tax recapture and any sales
and/or
use
Tax and any payroll or withholding Tax (other than any ad
valorem and personal property Taxes and state and local
transfer, sales, and recording fees and Taxes which may arise
upon the consummation of the transactions contemplated herein)
that are not included in the Final
10
NWC Calculation or prorated as of Closing and (ii) federal,
state or local income Tax obligations or liabilities of Seller
and its Affiliates resulting from the consummation of the
transactions contemplated by this Agreement;
(e) any obligation or liability for claims by or on behalf
of employees of Seller and its Affiliates relating to periods
prior to Closing, including liability for any pension, profit
sharing, deferred compensation, or any other employee health and
welfare benefit plans, liability for any EEOC claim, wage and
hour claim, unemployment compensation claim or workers
compensation claim, and liability for all employee wages and
benefits, including accrued vacation and holiday pay and Taxes
or other liability related thereto in respect of employees of
Seller and its Affiliates, except to the extent that accruals
for such obligations are included in the determination of the
Final NWC Calculation;
(f) any obligation or liability accruing, arising out of,
or relating to any federal, state or local investigations of, or
claims or actions against, Seller or any of its Affiliates or
any of their employees, medical staff, agents, vendors or
representatives which existed or occurred prior to
Closing; and
(g) any obligation or liability accruing, arising out of or
relating to any violation of, or non-compliance with, Law
pertaining to the Purchased Assets, the Hospital or the
operation thereof, which existed or occurred prior to Closing.
2.5
Purchase
Price
.
Subject to the terms and
conditions hereof, in reliance on the representations and
warranties herein set forth and as consideration for the sale
and purchase of the Hospital and the Purchased Assets set forth
herein, in addition to assuming the Assumed Liabilities, Buyer
shall tender to Seller an amount equal to the Final Cash
Purchase Price. On the Closing Date, Buyer shall wire transfer
an amount equal to the Interim Cash Purchase Price in
immediately available federal funds to an account designated by
Seller in writing at least two (2) business days prior to
Closing. The amount of the Interim Cash Purchase Price will be
further and finally adjusted and settled after Closing as
provided in Section 2.7.
2.6
Interim Cash Purchase
Price
. At least five (5) business days
prior to the Closing Date Seller shall deliver to Buyer
(i) the Interim Balance Sheet, (ii) the Interim NWC
Calculation and (iii) the Interim Capital Lease Obligations
Calculation. Based upon such exchange of information, the
parties shall determine, calculate, and agree, in writing, upon
the Interim Cash Purchase Price.
2.7
Final Cash Purchase
Price
. Not more than forty-five
(45) days after the Closing Date, Seller shall deliver to
Buyer (i) the Closing Balance Sheet, (ii) the Final
NWC Calculation and (iii) the Final Capital Lease
Obligations Calculation. Subject to Section 2.8, based upon
such exchange of information, the parties shall determine,
calculate and agree, in writing, upon the Final Cash Purchase
Price.
2.8
Dispute of Adjustments/Reconciliation of
Final Cash Purchase Price
.
Within
thirty (30) days after the date on which Buyer has received
the information to be provided by Seller pursuant to
Section 2.7, Buyer shall, in a written notice to Seller,
either accept or describe in reasonable detail any proposed
adjustments to the calculations exchanged and the reasons
therefor, and shall include pertinent calculations. If Buyer
fails to deliver notice of acceptance or objection to such
calculations within such thirty (30) day period, then Buyer
shall be deemed to have accepted the calculations presented by
Seller. In the event that Buyer and Seller are not able to agree
on the Final Cash Purchase Price within thirty (30) days
from and after the receipt by Seller of any objections raised by
Buyer, Buyer and Seller shall each have the right to require
that such disputed determination be submitted to such
independent certified public accounting firm as Buyer and Seller
may then mutually agree upon in writing for computation or
verification in accordance with the provisions of this
Agreement. The results of such accounting firms report
shall be binding upon Buyer and Seller, and such accounting
firms fees and expenses for each disputed determination
shall be borne equally by the parties. Appropriate payment shall
be made by Buyer or Seller, as appropriate, by wire transfer of
immediately available federal funds promptly upon (and in all
events within three (3) business days after) agreement
between Seller and Buyer on the Final Cash Purchase Price or
determination of the Final Cash Purchase Price in accordance
with this Section as follows: either (i) Buyer shall pay
Seller the amount by which the Final Cash Purchase Price exceeds
the Interim Cash Purchase Price or (ii) Seller shall pay
Buyer the amount by which the Interim Cash Purchase Price
exceeds the Final Cash Purchase Price. At all reasonable times
11
following delivery by Seller of the information and calculations
required by Section 2.7, Seller shall make available to
Buyer and its agents all books and records of Seller related to
the determination of the Interim Cash Purchase Price and the
Final Cash Purchase Price, including all accounting work papers
and journal entries underlying the determination of the Interim
Cash Purchase Price and the Final Cash Purchase Price or any
component thereof. Any amounts due under this Section 2.8
shall bear interest from the Closing Date until paid at a rate
equal to the Applicable Rate per annum.
2.9
Proration
. To the extent
feasible, at the Closing, Buyer and Seller shall prorate as of
the Closing Date, in accordance with their respective
obligations herein, any costs or payments relating to the
Purchased Assets that relate to periods both before and after
Closing which become due and payable after the Closing Date with
respect to (i) the Assumed Contracts, (ii) ad valorem
or similar Taxes, duties or fees, if any, on the Real Property,
(iii) personal property Taxes on the Purchased Assets, and
(iv) all utilities servicing the Hospital, including water,
sewer, telephone, electricity and gas service, in each case to
the extent not included on the determination of the Final NWC
Calculation. Any above-described obligations which are not known
at least five (5) business days prior to the Closing Date
shall be similarly apportioned, subject to the above, and paid
by the responsible party as soon as practicable after the
Closing.
2.10
No Compensation for
Referrals
. Buyer and Seller agree that
neither this Agreement nor any other Contract entered into in
connection with the transactions contemplated by this Agreement
requires, is payment for, or is contingent upon the admission or
referral of any patient to, or the provision of any item or
medical services by, (i) Buyer or its Affiliates,
(ii) Seller, its Affiliates or any direct or indirect
equityholders of Seller or MedCath Corporation, (iii) the
Hospital, or (iv) any healthcare facility owned by or
affiliated with Buyer or Seller. The parties acknowledge that no
party who may receive any benefit from the transactions
contemplated by this Agreement, including without limitation New
Mexico Heart Institute, Southwest Cardiology Associates or any
other direct or indirect owner of Seller who is a physician,
immediate family member of a physician, or entity owned or
controlled by any physician, has any obligation to refer
patients to Buyer, the Hospital, or any healthcare facility
owned by or affiliated with the Buyer, and that all such
referrals shall be based only upon the professional medical
judgment of the referring physician, the medical needs of the
patient, and patient choice.
ARTICLE 3
CLOSING
3.1
Closing
. Subject to the
satisfaction or waiver by the appropriate party of all the
conditions precedent to Closing specified in Articles 8 and
9, the consummation of the sale and purchase of the Hospital and
the Purchased Assets and the other transactions contemplated by
and described in this Agreement (the
Closing
)
shall take place at the offices of Moore & Van Allen
PLLC, Suite 4700, 100 North Tryon Street, Charlotte, North
Carolina 28202, not later than the fifth (5th) business day
after the conditions set forth in Articles 8 and 9 have
been satisfied or waived or at such other date
and/or
at
such other location as the parties hereto may mutually designate
in writing (the
Closing Date
). Subject to the
other terms of this Agreement, the parties shall use
commercially reasonable efforts to cause the conditions set
forth in Articles 8 and 9 to be satisfied so that the
Closing will occur on July 31, 2011.
3.2
Actions of Buyer at
Closing
.
At the Closing and unless otherwise
waived in writing by Seller, Buyer shall deliver to Seller the
following:
(a) An amount equal to the Interim Cash Purchase Price by
wire transfer of immediately available funds to an account
designated by Seller;
(b) One or more Assignments of Contracts and Assumption of
Liabilities duly executed by Buyer, pursuant to which Buyer
shall assume the future payment and performance of the Assumed
Contracts and the Assumed Liabilities;
(c) Copies of resolutions duly adopted by the board of
directors of Buyer, authorizing and approving Buyers
performance of the transactions contemplated hereby and the
execution and delivery of this
12
Agreement and the documents described herein, certified as true
and of full force and effect as of Closing, by the appropriate
officers of Buyer;
(d) A certificate of Buyer certifying that the conditions
set forth in Sections 8.1 and 8.4 have been satisfied;
(e) Certificates of incumbency for the respective officers
of Buyer executing this Agreement and any other document
contemplated herein dated as of the Closing Date;
(f) Certificates of existence and good standing of Buyer
from its state of organization dated the most recent practical
date prior to Closing;
(g) The Transition Services Agreement, duly executed by
Buyer; and
(h) Such other instruments and documents Seller reasonably
deems necessary to effect the transactions contemplated hereby.
3.3
Actions of Seller at
Closing
.
At the Closing and unless otherwise
waived in writing by Buyer, Seller shall deliver to Buyer the
following:
(a) Subject only to the Permitted Encumbrances, deeds
containing special warranty of title, duly executed by Seller in
recordable form, conveying to Buyer good and marketable fee
simple absolute title to the Owned Real Property;
(b) One or more assignments of lease, duly executed by
Seller assigning to Buyer Sellers interest in the
Contracts relating to any Leased Real Property;
(c) One or more assignments of lease, duly executed by
Seller or one of its Affiliates, assigning to Buyer
Sellers interest as lessor under or sublessor under
Contracts that lease space to third parties;
(d) One or more Bills of Sale and Assignment, duly executed
by Seller transferring to Buyer valid title to all tangible
assets which are a part of the Purchased Assets and valid title
to all intangible assets which are a part of the Purchased
Assets, free and clear of all Encumbrances other than the
Assumed Liabilities and the Permitted Encumbrances;
(e) One or more Assignments of Contracts and Assumption of
Liabilities duly executed by Seller assigning Sellers
interest in the Assumed Contracts to Buyer;
(f) Copies of resolutions duly adopted by Seller and the
Manager, authorizing and approving Sellers performance of
the transactions contemplated hereby and the execution and
delivery of this Agreement and the documents described herein,
certified as true and in full force and effect as of Closing by
an appropriate officer of the Manager;
(g) A certificate of Seller certifying that the conditions
set forth in Section 9.1 and Section 9.4 have been
satisfied;
(h) Certificates of incumbency for the respective officers
of the Manager executing this Agreement and any other document
contemplated herein dated as of the Closing Date;
(i) Certificates of existence and good standing of Seller
and Manager from their respective states of organization dated
the most recent practical date prior to Closing;
(j) A FIRPTA certificate, executed by Seller certifying
Sellers U.S. taxpayer identification number and that
Seller is not a foreign Person, within the meaning of Section
1445 of the Code;
(k) The Transition Services Agreement, duly executed by the
appropriate Affiliate of Seller; and
(1) Such other instruments and documents as Buyer
reasonably deems necessary to effect the transactions
contemplated hereby.
3.4
Additional Acts
. From
time to time after Closing, Seller shall execute and deliver
such other instruments of conveyance and transfer, and take such
other actions as Buyer reasonably may request, to
13
convey and transfer full right, title and interest to, vest in,
and place Buyer in legal and actual possession of, any and all
of the Purchased Assets. Seller shall also furnish Buyer with
such information and documents in its possession or under their
control, or which Seller can execute or cause to be executed, as
will enable Buyer to prosecute any and all petitions,
applications, claims and demands relating to or constituting a
part of the Purchased Assets.
ARTICLE 4
REPRESENTATIONS
AND WARRANTIES OF BUYER
As of the date hereof and as of the Closing Date (except to the
extent any of the following speaks as of a specific date, such
as the date hereof), Buyer represents and warrants to Seller the
following:
4.1
Organization, Qualification and
Capacity
.
Buyer is a corporation duly
organized and validly existing in good standing under the Laws
of the State of New Mexico. The execution and delivery by Buyer
of this Agreement and the documents described herein, the
performance by Buyer of its obligations under this Agreement and
the documents described herein and the consummation by Buyer of
the transactions contemplated by this Agreement and the
documents described herein have been duly and validly authorized
and approved by all necessary actions on the part of Buyer, none
of which actions have been modified or rescinded and all of
which actions remain in full force and effect.
4.2
Powers; Consents; Absence of Conflicts With
Other Agreements, Etc
.
The execution,
delivery and performance of this Agreement and the documents
described herein by Buyer and the consummation by Buyer of the
transactions contemplated by this Agreement and documents
described herein, as applicable:
(a) are not in contravention or violation of the terms of
the certificate of incorporation, limited partnership agreement,
operating agreement or similar governing document of Buyer;
(b) except as set forth on
Schedule 4.2
, do not
require any material Approval or Permit of, or filing or
registration with, or other action by, any Governmental Entity
to be made or sought by Buyer or any of its Affiliates; and
(c) will not conflict in any material respect with, nor
result in any material breach or contravention of, any material
Contract to which Buyer is a party or by which Buyer is bound.
4.3
Binding Agreement
. This
Agreement and all documents to which Buyer or any of its
Affiliates will become a party hereunder are and will constitute
the valid and legally binding obligations of Buyer
and/or
such
Affiliates and are and will be enforceable against it in
accordance with the respective terms hereof or thereof, except
as enforceability may be restricted, limited or delayed by
applicable bankruptcy or other Laws affecting creditors
rights generally and except as enforceability may be subject to
general principles of equity.
4.4
Sufficient
Resources
. Buyer has sufficient financial
resources, and at the Closing Buyer will possess sufficient
funds, to permit Buyer to deliver the Interim Cash Purchase
Price in accordance with Section 2.5 and the Final Cash
Purchase Price in accordance with Section 2.7, subject to
satisfaction of the conditions precedent to Buyers
obligations to close the transactions contemplated by this
Agreement.
4.5
Litigation
. There is no
claim, action, suit, proceeding or investigation pending or, to
the knowledge of Buyer, threatened in writing against or
affecting Buyer that has or would reasonably be expected to have
a material adverse effect on the ability of Buyer to perform
this Agreement or any aspect of the transactions contemplated
hereby.
4.6
Buyer
Acknowledgements
. The decision of Buyer to
purchase the Purchased Assets and to assume the Assumed
Liabilities has been (i) made voluntarily and of its own
accord, based upon, (A) the knowledge and experience of
Buyer in financial and business matters relating to owning and
operating general acute care hospitals, (B) consultations
with advisors of Buyer, and (C) its investigation of the
business, assets, risks and prospects of the Hospital and
Purchased Assets and (ii) made without relying on any
statement (whether oral or written), or any representation or
warranty of, Seller or any Affiliate, officer or director of
Seller, other than the representations and warranties expressly
contained in this Agreement and the other Contracts executed at
14
the Closing in connection herewith. As of the date hereof, Buyer
has no knowledge of any facts or circumstances which constitute
or are reasonably likely to constitute a breach of the
representations and warranties of Seller set forth in
Article 5 of this Agreement.
4.7
Statements True and
Correct
. This Agreement and the Schedules
prepared by Buyer do not include, as of the date hereof and as
of the Closing Date, any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
made in this Agreement with respect to Buyer not misleading.
4.8
No Other Representations and
Warranties
. EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN THIS ARTICLE 4 (INCLUDING THE
SCHEDULES), BUYER MAKES NO EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY, AND BUYER HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR
WARRANTY WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS
AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT.
ARTICLE 5
REPRESENTATIONS
AND WARRANTIES OF SELLER
As of the date hereof and as of the Closing Date (except to the
extent any of the following speaks as of a specific date, such
as the date hereof), Seller represents and warrants to Buyer the
following:
5.1
Incorporation, Qualification and
Capacity
. Seller is a limited liability
company duly organized and in existence under the Laws of the
State of New Mexico. The Manager is a limited liability company
duly organized and validly existing in good standing under the
laws of the State of North Carolina and is duly qualified and
authorized to transact business in the State of New Mexico.
Seller is duly authorized, qualified to do business and in good
standing under all applicable Laws of any Governmental Entity
having jurisdiction over the business and operation of the
Purchased Assets to own its properties and conduct its business
in the place and manner now conducted. Except as set forth on
Schedule 5.1
, the execution and delivery by Seller
of this Agreement and the documents described herein, the
performance by Seller of its obligations under this Agreement
and the documents described herein and the consummation by
Seller of the transactions contemplated by this Agreement and
the documents described herein have been duly and validly
authorized and approved by all necessary corporate actions on
the part of Seller and corporate actions on the part of the
Manager, none of which actions have been modified or rescinded
and all of which actions remain in full force and effect.
5.2
Powers; Consents; Absence of Conflicts With
Other Agreements, Etc
.
The execution,
delivery and performance of this Agreement and the documents
described herein by Seller of the transactions contemplated by
this Agreement and documents described herein, as applicable:
(a) are not in contravention or violation of the terms of
the operating agreement of Seller;
(b) except as set forth on
Schedule 5.2
, do not
require any material Approval or Permit of, or filing or
registration with, or other action by, any Governmental Entity
to be made or sought by Seller or any of its Affiliates; and
(c) assuming the Approvals and Permits set forth on
Schedule 5.2
are obtained, will not conflict in any
material respect with, or result in any violation of or default
under (with or without notice or lapse of time or both), or give
rise to a right of termination, cancellation, acceleration or
augmentation of any obligation or to loss of a material benefit
under, or result in the creation of any material Encumbrance
(other than Permitted Encumbrances) upon any of the Purchased
Assets under (i) any Assumed Contract or (ii) any Law
applicable to any of the Purchased Assets;
provided
that
no representation or warranty is given with respect to consents
or approvals required to assign any of the Assumed Contracts.
5.3
Affiliates and Minority
Interests
.
Schedule 5.3
sets
forth a true and complete list of (i) any subsidiaries of
Seller and (ii) any interest in another Person held by
Seller.
15
5.4
No Outstanding
Rights
.
Except as set forth on
Schedule 5.4
, there are no outstanding rights
(including any rights of first refusal or offer or rights of
reverter), options, or Contracts made on Sellers behalf
giving any Person any current or future right to require Seller
or any of its Affiliates or, following the Closing Date, Buyer,
to sell or transfer to such Person or to any third party any
material interest in any of the Purchased Assets.
5.5
Binding Agreement
.
This
Agreement and all documents to which Seller will become a party
hereunder are and will constitute the valid and legally binding
obligations of Seller and are and will be enforceable against it
in accordance with the respective terms hereof or thereof,
except as enforceability may be restricted, limited or delayed
by applicable bankruptcy or other Laws affecting creditors
rights generally and except as enforceability may be subject to
general principles of equity.
5.6
Seller Financial Information
.
(a)
Schedule 5.6
hereto contains the following
financial statements and financial information (collectively,
the
Historical Financial Information
):
(i) unaudited balance sheet of the Hospital dated as of
December 31, 2010;
(ii) unaudited statement of operations of the Hospital for
the three (3) month period ended on December 31,
2010; and
(iii) audited balance sheets, statements of operations, and
statements of cash flows for the fiscal years ended
September 30, 2010 and 2009.
Except as disclosed on
Schedule 5.6
, the financial
statements included in the Historical Financial Information have
been prepared, and the Additional Financial Statements have been
and will be prepared, in accordance with GAAP in all material
respects, applied on a consistent basis throughout the periods
indicated, and Seller has not changed any accounting policy or
methodology in determining the obsolescence of inventory
throughout all periods presented. Except as set forth on
Schedule 5.6
, the balance sheets contained in the
Historical Financial Information present fairly, and the balance
sheets in the Additional Financial Statements present fairly and
will present fairly, in all material respects the financial
condition of the Hospital as of the dates indicated thereon, and
the statements of operations contained in the Historical
Financial Information present fairly, and the statements of
operations contained in the Additional Financial Statements
present fairly and will present fairly, in all material respects
the results of operations of the Hospital for the periods
covered.
(b) Except as set forth on
Schedule 5.6
and
except for (i) liabilities that are disclosed in this
Agreement, Contracts entered into in connection herewith and
schedules and exhibits hereto and thereto, and
(ii) liabilities that were incurred after the Baseline
Balance Sheet Date in the ordinary course of business, as of the
date hereof, there are no material liabilities of any nature of
Seller or any of its Affiliates relating to the Hospital, the
Purchased Assets or the Assumed Liabilities that are required in
accordance with GAAP to be disclosed on the financial statements
of Seller.
5.7
Permits and Approvals
.
(a) Set forth on
Schedule 5.7
is a true and
complete description of all material Permits and Approvals
currently issued or granted by a Governmental Entity and owned
or held by or issued to Seller in connection with the Purchased
Assets, and such Permits and Approvals constitute all material
Permits and Approvals necessary for the conduct of the business
and operation of the Hospital as currently conducted and the use
of the Purchased Assets by Seller, all of which are in full
force and effect.
(b) The Hospital is in compliance in all material respects
with all Permits and Approvals required by Law. There is not now
pending nor, to the knowledge of Seller, threatened in writing
any action by or before any Governmental Entity to revoke,
cancel, rescind, modify or refuse to renew any of the Permits
and Approvals, and all of the material Permits and Approvals are
and shall be in good standing now and as of the Closing.
16
5.8
Intellectual
Property
. Except for Intellectual Property
constituting Excluded Assets:
(a) Seller owns, is licensed to use or otherwise possesses
all necessary rights to use, all Intellectual Property used in
the Hospital as of the Closing Date.
(b) To the knowledge of Seller, there is no unauthorized
use, disclosure, infringement or misappropriation of any
Intellectual Property rights of Seller, any trade secret
material to Seller, or any Intellectual Property right of any
third party to the extent licensed by or through Seller, by any
third party, including any employee or former employee of
Seller, relating in any way to any of the Purchased Assets.
(c) Except as set forth on
Schedule 5.8
,
neither Seller nor any of its Affiliates has any patents,
registered trademarks, registered service marks or registered
copyrights related to any of the Purchased Assets. Except as set
forth on
Schedule 5.17
, neither Seller nor any of its
Affiliates has been served with process in any suit, action or
proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of
any trade secret or other proprietary right of any third party
related to any of the Purchased Assets. To the knowledge of
Seller, the business of the Hospital does not infringe any
material Intellectual Property or other material proprietary
right of any third party. Neither Seller nor any Affiliate of
Seller has brought any action, suit or proceeding for
infringement of Intellectual Property or breach of any license
or Contract involving Intellectual Property related to any of
the Purchased Assets against any third party.
5.9
Medicare
Participation/Accreditation
.
(a) The Hospital is a provider with valid and
current provider agreements and with one or more provider
numbers with the Government Programs. The Hospital is a
provider with valid and current provider agreements
and with one or more provider numbers with TRICARE or its
successor programs. Except as set forth on
Schedule 5.9
, the Hospital is in compliance with the
conditions of participation for the Government Programs in all
material respects and has received all Approvals or
qualifications necessary for capital reimbursement on the
Purchased Assets. Except as set forth on
Schedule 5.9
, there is not pending, nor to the
knowledge of Seller threatened in writing, any proceeding or
investigation under the Government Programs involving Seller or
any of the Purchased Assets. Except as disclosed on
Schedule 5.9
and except for claims, actions and
appeals in the ordinary course of business, there are no
material claims, actions or appeals pending before any
commission, board or agency, including any fiscal intermediary
or carrier, Governmental Entity or the Administrator of the
Centers for Medicare & Medicaid Services, with respect
to any Government Program cost reports or claims filed on behalf
of Seller with respect to the Hospital on or before the date of
this Agreement, or any disallowances by any commission, board or
agency in connection with any audit of such cost reports. Except
as disclosed on
Schedule 5.9
or except for those
audits and reviews in the ordinary course of business, no
validation review or program integrity review (including any
recovery audit contract review) related to the Hospital, the
operation of the Hospital, or the consummation of the
transactions contemplated by this Agreement, has been conducted
by any commission, board, agency or Governmental Entity in
connection with the Government Programs, and to the knowledge of
Seller, no such reviews are scheduled, pending or threatened
against or affecting Seller with respect to the Hospital, the
operation of the Hospital, or the consummation of the
transactions contemplated by this Agreement.
(b) The Hospital is duly accredited, with no contingencies,
by The Joint Commission. Seller has provided Buyer copies of the
most recent Joint Commission accreditation survey report and
deficiency list for the Hospital, if any, and each plan of
correction, if any.
(c) All billing practices of Seller with respect to the
Hospital to all third party payors, including the Medicare,
Medicaid and CHAMPUS/TRICARE programs and private insurance
companies, have been in compliance in all material respects with
all applicable laws, regulations and policies of such third
party payors and the Medicare, Medicaid and CHAMPUS/TRICARE
programs, and neither Seller nor the Hospital has billed or
received any payment or reimbursement in excess of amounts
allowed by law.
(d) Neither Seller nor any of its officers, directors, or
managing employees are excluded from participation in the
Medicare, Medicaid or CHAMPUS/TRICARE programs, nor to
Sellers knowledge is any such exclusion threatened in
writing.
17
(e) Seller has registered with the QNet Exchange
(
QNet
) as required by The Centers for
Medicare and Medicaid Services (
CMS
) under
its Hospital Quality Initiative Program (the
HQI
Program
). Seller has in all material respects
submitted all quality data required under the HQI Program to CMS
or its agent and all quality data required under the ORYX Core
Measure Performance Measurement System (
ORYX
)
to The Joint Commission for all calendar quarters concluded
prior to the date of this Agreement, except for any quarter for
which the respective reporting deadlines have not yet expired.
All such submissions of quality data have been made in all
material respects in accordance with applicable reporting
deadlines and in the form and manner required by CMS and The
Joint Commission, respectively. Seller has not received notice
of any reduction in reimbursement under the Medicare program
resulting from its failure to report quality data to CMS or its
agent as required under the HQI Program. Seller has provided
Buyer with the HQI Program validation results for
all calendar quarters concluded prior to the date of this
Agreement, except for any quarter for which the respective
reporting deadlines have not yet expired.
5.10
Regulatory
Compliance
. Except as set forth on
Schedule 5.10
, Seller is in compliance in all
material respects with all applicable statutes, rules,
regulations and requirements of Governmental Entities having
jurisdiction over the Hospital and the Purchased Assets and the
business operation of the Hospital and the Purchased Assets.
Seller has timely filed all material forms, applications,
reports, statements, data and other information required to be
filed with Governmental Entities. Neither Seller nor any of its
employees, with respect to the operation of the Hospital, have
committed a violation of federal or state laws regulating health
care fraud, including but not limited to the federal
Anti-Kickback Law, 42 U.S.C.
§1320a-7b,
the Stark I and II Laws, 42 U.S.C. §1395nn, as
amended, and to the knowledge of Seller, the False Claims Act,
31 U.S.C. §3729,
et
seq
. To the
knowledge of Seller, the Hospital is in compliance in all
material respects with the administrative simplification
provisions required under the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), including the
electronic data interchange regulations and the health care
privacy regulations, as of the applicable effective dates for
such requirements.
5.11
Scheduled
Contracts
. Attached hereto as
Schedule 5.11
is a list of all Contracts to which
Seller or any of Seller Affiliates is a party and which are
material to the operation of the Hospital (this representation
shall not be breached if a De Minimis Contract is not listed on
Schedule 5.11
), including all provider network
agreements, clinical affiliation agreements, medical director
agreements, consulting agreements, management services
agreements, professional services agreements, transfer
agreements, recruitment agreements, employment agreements, real
estate lease agreements, personal property lease agreements,
supply agreements and software agreements, but excluding all
Contracts with managed care organizations, health maintenance
organizations, insurers and similar third party payors, all of
which are Excluded Contracts. For each Contract listed on
Schedule 5.11
,
Schedule 5.11
clearly
identifies those Contracts that are Excluded Contracts and that
will not be assumed by Buyer. Contracts which are listed on
Schedule 5.11
and not designated therein as an
Excluded Contract are referred to herein as the
Scheduled Contracts
. Each Scheduled Contract
(i) is valid and existing (or constitutes a
month-to-month
Contract under which goods or services are being provided after
the expiration of its original term), and Seller or the
applicable Affiliate of Seller has duly performed in all
material respects its obligations under each Scheduled Contract
to which it is a party to the extent that such obligations to
perform have accrued and (ii) except for any breaches
resulting from the failure to obtain the consent of the
counterparty thereto to the assignment of same to Buyer, no
material breach or default, alleged material breach or default,
or event which would (with the passage of time, notice or both)
constitute a material breach or default under any Scheduled
Contract by Seller or the applicable Affiliate of Seller or, to
the knowledge of Seller, and except as set forth on
Schedule 5.11
, any other party or obligor with
respect thereto, has occurred.
5.12
Encumbrances; Real Property
.
(a) There are no Encumbrances (other than Permitted
Encumbrances) on the Purchased Assets that were created by,
through or under Seller or any Affiliate of Seller. Seller owns,
and will convey good and marketable fee simple absolute title in
the Owned Real Property, and all buildings and improvements
located thereon, to Buyer free and clear of all Encumbrances
except for Permitted Encumbrances. Seller agrees that title to
the Real Property shall not be altered between the date of this
Agreement and Closing in any material respect, except to the
extent not restricted by Sections 7.2 and 7.3.
18
(b) (i) All buildings and improvements located on the
Real Property conform in all material respects with all
applicable zoning regulations and building codes; (ii) all
of the Real Property is serviced by all necessary utilities,
including water, sewage, electricity and telephone, and Seller
is not aware of any material inadequacies with respect to such
utilities; (iii) to the knowledge of Seller, none of the
buildings or improvements on the Real Property is located in a
flood hazard area; and (iv) all of the buildings and
improvements located on the Real Property are accessible by
public roads and, to the knowledge of the Seller, no fact or
condition exists that would result in the termination of the
current access from any building or improvement to any presently
existing highways and roads adjoining or situated on the Real
Property.
(c) The Real Property comprises all of the real property
owned or leased by Seller that is associated with or employed in
the operation of the Hospital.
5.13
Personal
Property
. Seller presently owns and will hold
on the Closing Date good title to all tangible personal property
assets and valid title to all intangible assets included in the
Purchased Assets free and clear of all Encumbrances, except
Permitted Encumbrances and rights of owners under Assumed
Contracts or under leases or licenses of assets leased or
licensed in the ordinary course of business.
5.14
Insurance
.
Schedule 5.14
sets forth a true and complete list of all insurance policies or
self insurance funds maintained by Seller as of the date of this
Agreement covering the ownership and operation of the Purchased
Assets or the Hospital, indicating the types of insurance,
policy numbers, terms, identity of insurers and amounts and
coverages (including applicable deductibles). All of such
policies are now and will be until the Closing in full force and
effect on an occurrence basis (with the exception of the
Hospitals professional liability insurance, pollution
liability insurance, employment practices liability insurance,
directors and officers liability insurance and fiduciary
liability insurance, all of which are on a claims made basis,
and crime liability insurance which is on a discovery basis)
with no premium arrearages. Such policies of insurance shall not
be assigned to Buyer as part of the Purchased Assets and Buyer
acknowledges that all of the coverages listed on
Schedule 5.14
with respect to the Purchased Assets
will cease on the Closing Date. Seller has in all material
respects given in a timely manner to its insurers all notices
required to be given under its insurance policies with respect
to all of the claims and actions covered by insurance, and no
insurer has denied coverage of any such claims or actions.
Seller has not (a) received any notice or other
communication from any such insurance company canceling or
materially amending any of such insurance policies, and no such
cancellation or amendment is threatened in writing or
(b) failed to give any required notice or present any claim
which is still outstanding under any of such policies with
respect to the Hospital or any of the Purchased Assets.
5.15
Employee Benefit Plans
.
(a)
Schedule 5.15
contains a true and complete
list of all the following agreements, plans or other Contracts,
covering any employee of the Hospital, which are presently in
effect: (i) employee benefit plans within the meaning of
Section 3(3) of ERISA, and (ii) any other employee
benefit plan, program, policy, or arrangement, whether written
or unwritten, formal or informal, which Seller currently
sponsors, or to which Seller has any outstanding present or
future obligations to contribute or other liability, whether
voluntary, contingent or otherwise (collectively, the
Plans
). None of the Plans provide any
post-employment medical or similar benefits except for COBRA
coverage required by federal Law.
(b) The Purchased Assets are not, and Seller does not
reasonably expect them to become, subject to an Encumbrance
imposed under the Code or under Title I or Title IV of
ERISA including liens arising by virtue of Seller being a member
of an ERISA Controlled Group.
(c) Neither Seller nor any member of Sellers ERISA
Controlled Group has sponsored, contributed to or had any
obligation to contribute (as defined in ERISA
Section 4212) to any multiemployer plan
(as defined in ERISA Section 4001(a)(3) or 3(37)(A)) on or
after September 26, 1980, on behalf of any employees of the
Hospital.
(d) Neither Seller nor any member of Sellers ERISA
Controlled Group has at any time sponsored or contributed to any
single employer plan (as defined in ERISA
Section 400l(a)(14)) to which at least two or
19
more of the contributing sponsors (as defined in
ERISA Section 4001(a)(13)) are not members of the same
ERISA Controlled Group.
(e) There have been no non-exempt prohibited transactions
with respect to any Plan. Neither Seller nor any ERISA
Affiliate, nor to Sellers knowledge, any other Person for
which Buyer or any of its Affiliates could have any liability,
has breached any fiduciary duty with respect to any Plan for
which Buyer or any of its Affiliates could have any liability.
Except as set forth on
Schedule 5.15
, there are no
material actions, audits or claims pending or, to Sellers
knowledge, threatened in writing against Seller with respect to
Sellers maintenance of the Plans, other than routine
claims for benefits.
(f) Seller and each member of Sellers ERISA
Controlled Group have complied in all material respects with the
continuation coverage requirements of Section 1001 of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended, ERISA Sections 601 through 608 and
Section 5000 of the Code.
(g) All of Sellers Plans that are intended to satisfy
Section 401(a) of the Code (
Retirement
Plans
) from which assets may be involved in a
direct rollover (as defined in
Section 40l(a)(31) of the Code) to an employee benefit plan
maintained by Buyer have complied with the requirements of
Section 401(a) of the Code.
(h) All contributions, including salary deferrals, required
to be made under the terms of any of the Plans as of the date of
this Agreement have been timely made or, if not yet due, have
been (and will be) properly reflected in the Historical
Financial Information or the Additional Financial Statements, as
applicable.
5.16
Hospital Employees and Employee
Relations
.
(a) Except as set forth on
Schedule 5.16(a)
,
(i) there is no pending or, to Sellers knowledge,
threatened in writing employee strike, work stoppage or labor
dispute, (ii) to Sellers knowledge, no union
representation question exists with respect to any Hospital
Employees, no demand has been made for recognition by a labor
organization by or with respect to any Hospital Employees, no
union organizing activities by or with respect to any Hospital
Employees are taking place, and none of the Hospital Employees
is represented by any labor union or organization, (iii) no
collective bargaining agreement exists or is currently being
negotiated by Seller or any Seller Affiliate, and
(iv) there is no unfair labor practice claim against Seller
or any Seller Affiliate before the National Labor Relations
Board, or any strike, dispute, slowdown, or stoppage pending or,
to Sellers knowledge, threatened in writing against or
involving the Hospital and none has occurred.
(b)
Schedule 5.16(b)
sets forth a list of all
of the employees of Seller and each other Seller Affiliate who
works primarily or exclusively for the benefit of the business
conducted at the Hospital (the
Hospital
Employees
) as of the date of such Schedule and the
following information for each Hospital Employee: current salary
or wage rate, accrued paid time off, periods of service, date of
hire, department and job title or other summary of the
responsibilities as well as an indication as to whether such
Hospital Employee is part-time, full-time or on a leave of
absence and the type of leave;
provided
, that salary and
wage rate information may be excluded from
Schedule 5.16(b)
so long as Seller delivers a true
and correct schedule of such salary and wage rate information to
Buyer concurrently with the delivery of
Schedule 5.16(b)
to Buyer. Seller is in compliance
in all material respects with all applicable Laws respecting
labor, employment, fair employment practices, terms and
conditions of employment, workers compensation,
occupational safety, plant closings, and wages and hours with
respect to the Hospital Employees. The Hospital has properly
classified individuals providing services as independent
contractors or Hospital Employees, as the case may be. Each of
the Hospital Employees has properly completed an I-9 form
reflecting the Hospital Employees citizenship or
authorization to work in the United States, and to Sellers
knowledge, the statements contained in and the supporting
documents presented for each of those forms is valid and
accurate in all material respects.
5.17
Litigation or Proceedings
.
(a)
Schedule 5.17
contains an accurate list and
summary description of all litigation and proceedings which are
currently pending with respect to the Hospital, the Purchased
Assets or the business conducted thereon to which Seller is a
party. Except to the extent set forth on
Schedule 5.17
, there are no material claims,
actions, suits, audits, compliance reports or information
requests, proceedings or investigations
20
pending, or to the knowledge of Seller, threatened in writing
against or affecting Seller or the Purchased Assets or the
business conducted thereon.
(b) Other than as set forth on
Schedule 5.17
,
Seller is not subject to any outstanding judgment, order or
decree with respect to the Purchased Assets.
(c) There is no claim, action, suit, proceeding or
investigation pending or, to the knowledge of Seller, threatened
in writing against or affecting Seller that has or would
reasonably be expected to have a material adverse effect on
Sellers ability to perform this Agreement or any aspect of
the transactions contemplated hereby.
5.18
Tax Matters
.
Except as
set forth on
Schedule 5.18
:
(a) All federal, state, county and local income, franchise,
margin, payroll, withholding, property, sales, use and all other
taxes, penalties, interest and any other statutory additions
(
Taxes
) due from Seller with respect to the
Purchased Assets have been timely paid. Seller has timely filed
all material Tax returns required to be filed by it with respect
to the Purchased Assets.
(b) No deficiencies for any of such material Taxes have
been asserted or, to the knowledge of Seller, threatened in
writing, and no audit on any such returns is currently under way
or, to the knowledge of Seller, threatened in writing. There are
no outstanding agreements by Seller for the extension of time
for the assessment of any such Taxes. Seller has not taken and
will not take any action in respect of any federal, state or
local Taxes (including, without limitation, any withholdings
required to be made in respect of employees) which may have a
material adverse impact upon the Hospital or the Purchased
Assets as of or subsequent to Closing.
(c) There are no Tax liens on any of the Purchased Assets
other than liens for Taxes not yet due.
(d) Seller is a partnership for federal and state income
tax purposes but is not and has not been a party to any other
joint venture, partnership or other arrangement or contract that
could be treated as a partnership for federal and state income
Tax purposes. Seller has no liability for unpaid Taxes of any
Person as a former member of an affiliated group or as a
transferee or successor, and is not a party to any tax
allocation or sharing agreement.
5.19
Environmental
Matters
. Except as set forth on
Schedule 5.19
or in any environmental report listed
therein:
(a) Seller is in material compliance with, and the Real
Property and all improvements on the Real Property are in
material compliance with, all Environmental Laws.
(b) There are no pending or, to the knowledge of Seller,
threatened in writing actions, suits, orders, claims, legal
proceedings or other proceedings based on any complaint, order,
directive, citation, notice of responsibility, notice of
potential responsibility, or information request from any
Governmental Entity or any other Person and Seller has no
knowledge of any facts which would reasonably be expected to
form the basis for any such actions or notices arising out of or
attributable to any Environmental Condition.
(c) Seller has been duly issued, and currently has and will
maintain through the Closing Date, all material Approvals and
Permits required under any Environmental Law with respect to the
Hospital. A true and complete list of such Permits, all of which
are valid and in full force and effect, is set forth in
Schedule 5.19
. Seller is in material compliance
(with respect to the Hospital) with and the Real Property and
all improvements on the Real Property are in material compliance
with, all Approvals and Permits. Except in accordance with such
Approvals and Permits, there has been no release of material
regulated by such Approvals and Permits at, on, under, or from
the Real Property in violation of Environmental Laws.
(d) Seller has operated at the Real Property, and to the
Sellers knowledge, the Real Property contains no
underground improvements, including treatment or storage tanks,
or underground piping associated with such tanks, used currently
or in the past for the management of Hazardous Materials, and
Seller has not used any portion of the Real Property as a dump
or landfill.
21
(e) Seller will promptly furnish to Buyer written notice of
any material Environmental Condition or of any actions or
notices described in this Section 5.19.
(f) Except to the extent permitted under Environmental
Laws, neither PCBs, lead paint, nor asbestos-containing
materials are present on or in the Real Property.
(g) No Encumbrance in favor of any Person relating to or in
connection with any claim under any Environmental Law has been
filed or has attached to the Real Property, other than Permitted
Encumbrances.
The representations set forth in this Section are the sole
representations of the Seller with respect to environmental
matters, Environmental Conditions, Hazardous Materials and
compliance with Environmental Law.
5.20
Absence of
Changes
. Except as set forth in
Schedule 5.20
, since the Baseline Balance Sheet
Date, there has not been any transaction or occurrence in which
Seller or any Seller Affiliate, in connection with the Hospital
and Purchased Assets, has:
(a) suffered any material damage, destruction or loss with
respect to or affecting any of the Purchased Assets;
(b) sold, transferred or otherwise disposed of any of the
Purchased Assets which is material to the operation of the
Hospital, except in the ordinary course of business;
(c) granted or incurred any obligation for any increase in
the compensation of any employee who is employed at the Hospital
(including any increase pursuant to any Plans or other
commitment), except in the ordinary course of business, or
entered into any employment, severance or similar agreement with
any member, manager, employee or agent;
(d) changed its methods of accounting in effect on the
Baseline Balance Sheet Date, except as required by changes in
GAAP or regulatory accounting principles (which shall be set
forth in
Schedule 5,20
);
(e) experienced any material change in the composition of
the medical staff of the Hospital, other than normal turnover
occurring in the ordinary course of business;
(f) materially changed the rates charged by the Hospital
for its services, other than those made in the ordinary course
of business;
(g) experienced any Material Adverse Effect or any fact or
condition likely to have or which could be expected to have a
Material Adverse Effect; or
(h) agreed, so as to legally bind Buyer or affect the
Purchased Assets, whether in writing or otherwise, to take any
of the actions set forth in this Section 5.20 and not
otherwise permitted by this Agreement.
5.21
Medical Staff
Matters
. Seller has delivered to Buyer
correct and complete copies of the bylaws and rules and
regulations of the medical staff of the Hospital, as well as a
list of all current members of the medical staff. Seller has
disclosed to Buyer in all material respects (i) all adverse
actions with respect to any medical staff members of the
Hospital or any applicant thereto for which a medical staff
member or applicant has requested a judicial review hearing
which has not been scheduled or has been scheduled but has not
been completed, (ii) any pending or, to the knowledge of
Seller, threatened in writing disputes with applicants, staff
members, or health professional affiliates, and (iii) any
unexpired appeal periods in respect of any medical staff member
or applicant against whom an adverse action has been taken. Any
disclosures have been and will be made in such a manner as to
protect the confidentiality of the Persons involved in the
matters described thereon.
5.22
Sufficiency of Purchased
Assets
.
Except for the Excluded Assets and
for the services to be provided by Seller and its Affiliates
pursuant to the Transition Services Agreement, the Purchased
Assets
22
constitute, in the aggregate, all the assets and property used
by Seller in connection with the operation of the Hospital as
currently conducted in all material respects.
5.23
Experimental
Procedures
. During the past three
(3) years, Seller has not performed nor permitted the
performance of any experimental or research procedures or
studies involving patients in the Hospital except, in all
material respects, to the extent authorized by and conducted in
accordance with the procedures of an Institutional Review Board
responsible for oversight of research at the Hospital.
5.24
Supplies
. Except to the
extent of reserves reflected in Net Working Capital, all of the
Inventory is substantially of a quality and quantity usable and
salable in the ordinary course of business of the Hospital to
the extent reflected in the Interim NWC Calculation. Inventory
is carried at the lower of cost or market, on an average cost
basis and is properly stated in the Historical Financial
Information. The Inventory levels are based on past practices of
Seller at the Hospital in all material respects.
5.25
Third Party Payor Cost
Reports
. Seller has duly filed all required
cost reports for all the fiscal years through and including the
fiscal year ended September 30, 2009. Seller intends to
file the Hospitals cost report for the fiscal year ended
on September 30, 2010 within the time period required by
Law. Except as disclosed on
Schedule 5.25
, all of
such cost reports accurately reflect in all material respects
the information required to be included thereon and such cost
reports do not claim and neither the Hospital nor Seller has
received reimbursement in any amount in excess of the amounts
provided by law or any applicable agreement.
Schedule 5.25
indicates which of such cost reports
have not been audited and finally settled and a brief
description of any and all notices of program reimbursement,
proposed or pending audit adjustments, disallowances, appeals of
disallowances, and any and all other unresolved claims or
disputes in respect of such cost reports.
5.26
Compliance Program
.
(a) Seller has made available to Buyer a copy of its
current compliance program materials, including without
limitation, all program descriptions, compliance officer and
committee descriptions, ethics and risk area policy materials,
training and education materials, auditing and monitoring
protocols, reporting mechanisms, and disciplinary policies. For
purposes of this Agreement, the term compliance
program refers to provider programs of the type described
in the compliance guidance published by the Office of Inspector
General of the Department of Health and Human Services.
(b) Except as set forth in a writing delivered by Seller to
Buyer which specifically makes reference to this
Section 5.26 or to the extent set forth on
Schedule 5.26
, Seller: (i) is not a party to a
Corporate Integrity Agreement with the Office of Inspector
General of the Department of Health and Human Services;
(ii) has no reporting obligations pursuant to any
Settlement Agreement entered into with any governmental entity;
and (iii) to its knowledge, has not been a defendant in any
qui tam
/False Claims Act litigation.
(c) Except as set forth on
Schedule 5.26
, since
January 1, 2007 Seller (i) to the best of
Sellers knowledge, has not been the subject of any
government payer program investigation conducted by any federal
or state enforcement agency; (ii) has not been served with
or received any search warrant, subpoena, civil investigative
demand, contact letter, or telephone or personal contact by or
from any federal or state enforcement agency which may be
reasonably anticipated to give rise to a government
investigation; and (iii) has not received any complaints
from employees, independent contractors, vendors, physicians, or
any other person that, after investigation or review conducted
by Seller, would indicate that Seller has in any material
respects violated any law or regulation.
5.27
Statements True and
Correct
. This Agreement and the Schedules
prepared by Seller do not include, as of the date hereof, any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements made in this
Agreement with respect to Seller and the Purchased Assets not
misleading.
5.28
No Other Representations and
Warranties
. EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN THIS ARTICLE 5 (INCLUDING THE
SCHEDULES), SELLER MAKES NO EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY, AND SELLER HEREBY DISCLAIMS
23
ANY SUCH REPRESENTATION OR WARRANTY WITH RESPECT TO THE
EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
ARTICLE 6
COVENANTS OF
BUYER
6.1
Notification of Certain
Matters
. At any time from the date of this
Agreement to the Closing Date, Buyer shall give prompt written
notice to Seller of (i) the occurrence, or failure to
occur, of any event that has caused any representation or
warranty of Buyer contained in this Agreement to be untrue in
any material respect and (ii) any failure of Buyer to
comply with or satisfy, in any material respect, any covenant,
condition or agreement to be complied with or satisfied by it
under this Agreement. Such notice shall provide a reasonably
detailed description of the relevant circumstances.
6.2
HSR Act Filings
.
(a) Within five (5) business days following the date
hereof, Buyer shall make such premerger filings with the FTC and
the Justice Department as may be required under the HSR Act,
concerning the transactions contemplated by this Agreement. From
the date of such filing until the Closing Date, Buyer shall file
all reports or other documents required or requested by the FTC
or the Justice Department under the HSR Act or otherwise and
will comply promptly with any requests by the FTC or the Justice
Department for additional information concerning the
transactions described herein, so that the waiting period
specified in the HSR Act will expire as soon as reasonably
possible after the execution and delivery of this Agreement.
Buyer agrees to take all commercially reasonable actions
necessary to insure that the waiting period imposed under the
HSR Act terminates or expires prior to thirty (30) days
after the date of making such premerger filings. Without
limiting the foregoing, Buyer agrees to use commercially
reasonable efforts to cooperate with Seller and oppose any
preliminary injunction sought by any Governmental Entity
preventing the consummation of the transactions contemplated by
this Agreement.
(b) Buyer shall cause its counsel to furnish to Seller such
necessary information and reasonable assistance as Seller may
reasonably request in connection with its preparation of
necessary filings or submissions under the provisions of the HSR
Act. Buyer will cause its counsel to deliver to Sellers
counsel copies of all correspondence, filings or written
communications by Buyer or its Affiliates with any Governmental
Entity or staff members thereof, with respect to the
transactions contemplated by this Agreement, except for
(i) information that is not pertinent to such filing or
submission or that is not customarily exchanged between parties
making such a filing or their counsel, including documents filed
pursuant to Item 4(c) of the
Hart-Scott-Rodino
Notification and Report Form or communications regarding such
documents or (ii) information submitted in response to any
request for additional information or documents pursuant to the
HSR Act which reveal the negotiating objectives or strategies or
purchase price expectations of Buyer.
(c) Buyer shall pay all application fees required in
connection with any filings required under the HSR Act.
6.3
Approvals
. Between the
date of this Agreement and the Closing Date, Buyer will
(i) take all reasonable steps to obtain, as promptly as
practicable, all Approvals and Permits of any Governmental
Entities required of either party to consummate the transactions
contemplated by this Agreement and Seller will reasonably
cooperate with Buyer in those efforts and (ii) provide such
other information and communications to any Governmental Entity
as may be reasonably requested. Seller understands and
acknowledges that it is the intent of Buyer to cause the
operations, hospital licensure and Medicare certification of
Lovelace Medical Center, a general acute care hospital that is
owned and operated by Buyer (
LMC
), to be
expanded to encompass and include the Purchased Assets. To this
end, Buyer and its Affiliates will also use commercially
reasonable efforts to obtain all necessary Approvals of
Governmental Entities to accomplish such expansion of the
operations, hospital licensure and Medicare certification of LMC
to encompass and include the Purchased Assets. Notwithstanding
the foregoing or anything in Section 6.3 to the contrary,
Buyer acknowledges that
24
Seller shall not be required to make any CMS Form 855
filings as a result of the Transaction until
ten (10) days after the Closing Date.
6.4
Survey
.
Between the date
of this Agreement and the Closing Date, Buyer will obtain a
current as-built survey of the Owned Real Property (the
Survey
). The Survey shall meet the
requirements of ALTA/ASCM survey and otherwise be in form and
detail reasonably satisfactory to Buyer. The Survey shall be
certified to Buyer, Seller and the Title Company. The cost
of the Survey shall be paid by Buyer.
6.5
Environmental
Survey
. Between the date of this Agreement
and the Closing Date, Buyer shall retain a nationally recognized
environmental consultant reasonably acceptable to Seller to
perform Phase I environmental assessments of the Owned Real
Property in accordance with the U.S. Environmental
Protection Agency Standards and Practices for All Appropriate
Inquiries as required under Section 101 (35)(B) of the
Comprehensive Environmental Response, Compensation, and
Liability Act and referenced in 40 CFR Part 312, and
the ASTM E
1527-05
Standard Practice for Environmental Site Assessments
(the
Phase I
Assessment
). Buyer shall
provide to Seller a copy of the final report issued by
Buyers environmental consultant in connection with the
Phase I Assessment. The cost of the Phase I Assessment shall be
paid by Buyer.
ARTICLE 7
COVENANTS OF
SELLER
7.1
Information
.
(a) Between the date of this Agreement and the Closing
Date, to the extent permitted by Law, Seller shall afford to the
authorized representatives and agents of Buyer reasonable access
to and the right to inspect the plants, properties, books and
records of Seller relating to the Purchased Assets, and will
furnish Buyer with such additional financial and operating data
and other information as to the business and properties of
Seller relating to the Purchased Assets as Buyer may from time
to time reasonably request;
provided
,
however
,
that Buyer may not conduct invasive environmental, health or
safety investigations upon the Real Property or at the Hospital
or of the Purchased Assets, including any sampling or testing of
soils, surface water, groundwater, ambient air, or improvements
at, on or under Real Property, or sampling or testing of the
Hospital or the Purchased Assets, without Sellers prior
written consent. The right of access and inspection of Buyer
shall be made in such a manner as not to interfere unreasonably
with the operation of the Hospital or the Purchased Assets. In
this regard, Buyer agrees that such inspection shall not take
place, and no employees or other personnel at the Hospital shall
be contacted by the representatives of Buyer, without first
coordinating such contact or inspection with a representative of
Navigant Capital Advisors, LLC.
(b) Notwithstanding the foregoing, Buyer understands that
(i) Seller will reasonably establish procedures in order to
protect documents and information deemed by Seller in good faith
to be market sensitive or competitive in nature, including
without limitation pricing information related to managed care
contracts, (ii) litigation and other materials (including
internal/external legal audit letters, PRO information, National
Practitioner Data Bank reports, quality review information and
other physician specific confidential information and
information subject to confidentiality requirements of Law) that
are deemed privileged or confidential by Seller will not be made
available to Buyer, and (iii) Seller shall not be obligated
to generate or produce information in any prescribed format not
customarily produced by Seller.
7.2
Operations
. From the
date hereof until the Closing Date, except as set forth in
Schedule 7.2
, Seller shall with respect to the
Purchased Assets (unless prior written consent of Buyer is
received which will not be unreasonably withheld) use its
commercially reasonable efforts to:
(a) carry on its business related to the Purchased Assets
in substantially the same manner as presently conducted and not
make any material change in personnel, operations, finance,
accounting policies, or real or personal property pertaining to
the Hospital;
(b) maintain the Hospital and all parts thereof in
accordance with Sellers past practices in all material
respects;
25
(c) perform all of its material obligations under
agreements relating to or affecting the Hospital or the
Purchased Assets;
(d) keep in full force and effect present insurance
policies or other comparable insurance on the Purchased Assets;
(e) use commercially reasonable efforts to maintain and
preserve its business organizations intact, retain its present
employees at the Hospital and maintain its relationships with
physicians, suppliers, customers, and others having business
relations with the Hospital;
(f) permit and allow reasonable access by Buyer to make
offers of post-Closing employment to Sellers personnel and
to establish relationships with physicians, medical staff and
others having business relations with Seller;
provided
that Buyer shall have complied with the terms of
Section 7.1 in connection with such access; and
(g) maintain all material Approvals and Permits relating to
the Hospital, Purchased Assets and Assumed Liabilities in good
standing.
7.3
Negative Covenants
. From
the date hereof until the Closing Date, except as set forth in
Schedule 7.3
, Seller shall not, without the prior
written consent of Buyer (which will not be unreasonably
withheld):
(a) materially amend or terminate any of the Contracts
which are material to the operation of the Hospital, enter into
any material contract or commitment, or incur or agree to incur
any material liability, except as provided herein or, in all
material respects, in the ordinary course of business;
provided
that Buyers consent shall not be required
to the extent that such contract or commitment is material to
the continued operation of the Hospital in the manner in which
the Hospital was operated as of the date of this Agreement;
(b) enter into any contract or commitment with physicians
or other referral sources;
provided
that Buyers
consent shall not be required to the extent that such contract
or commitment is material to the continued operation of the
Hospital in the manner in which the Hospital was operated as of
the date of this Agreement and such contract terminates or is
terminated without penalty upon no more than
ninety (90) days written notice;
(c) increase compensation payable or to become payable or
make any bonus payment to or otherwise enter into one or more
bonus agreements with any Hospital Employee, except in the
ordinary course of business in accordance with existing
personnel policies;
(d) acquire (whether by purchase or lease) or sell, assign,
lease, or otherwise transfer or dispose of any material
property, plant, or equipment except in the ordinary course of
business with, in the case of a transfer or disposition,
comparable replacement thereof if such replacement is required
in order to operate the Hospital in the manner it was operated
as of the date of this Agreement;
(e) purchase capital assets or incur costs in respect of
construction-in-progress
in excess of Fifty Thousand Dollars ($50,000) in the aggregate;
(f) take any material action outside the ordinary course of
business of the Hospital or its related ancillary
services; or
(g) enter into any agreement which could be reasonably
expected to have a Material Adverse Effect.
7.4
Notification of Certain
Matters
. At any time from the date of this
Agreement to the Closing Date, Seller shall give prompt written
notice to Buyer of (i) the occurrence, or failure to occur,
of any event that has caused any representation or warranty of
Seller contained in this Agreement to be untrue in any material
respect and (ii) any failure of Seller to comply with or
satisfy, in any material respect, any covenant, condition or
agreement to be complied with or satisfied by it under this
Agreement. Such notice shall provide a reasonably detailed
description of the relevant circumstances.
26
7.5
HSR Act Filings
.
(a) Within five (5) business days following the date
hereof, Seller shall make such premerger filings with the FTC
and the Justice Department as may be required under the HSR Act,
concerning the transactions contemplated by this Agreement. From
the date of such filing until the Closing Date, Seller shall
file all reports or other documents required or requested by the
FTC or the Justice Department under the HSR Act or otherwise and
will comply promptly with any requests by the FTC or the Justice
Department for additional information concerning the
transactions described herein, so that the waiting period
specified in the HSR Act will expire as soon as reasonably
possible after the execution and delivery of this Agreement.
Seller agrees to take all commercially reasonable actions
necessary to insure that the waiting period imposed under the
HSR Act terminates or expires prior to thirty (30) days
after the date of making such premerger filings. Without
limiting the foregoing, Seller agrees to use commercially
reasonable efforts to cooperate with Buyer and oppose any
preliminary injunction sought by any Governmental Entity
preventing the consummation of the transactions contemplated by
this Agreement.
(b) Seller shall cause its counsel to furnish Buyer such
necessary information and reasonable assistance as Buyer may
reasonably request in connection with its preparation of
necessary filings or submissions under the provisions of the HSR
Act. Seller will cause its counsel to deliver to counsel for
Buyer copies of all correspondence, filings or written
communications by Seller or its Affiliates with any Governmental
Entity or staff members thereof, with respect to the
transactions contemplated by this Agreement, except for
(i) information that is not pertinent to such filing or
submission or that is not customarily exchanged between parties
making such a filing or their counsel, including documents filed
pursuant to Item 4(c) of the
Hart-Scott-Rodino
Notification and Report Form or communications regarding such
documents or (ii) information submitted in response to any
request for additional information or documents pursuant to the
HSR Act which reveal Sellers negotiating objectives or
strategies or purchase price expectations.
7.6
Additional Financial
Information
.
Within fifteen (15) days
following the end of each calendar month prior to the Closing
Date, Seller will deliver to Buyer copies of the unaudited
balance sheet and the related unaudited statement of operations
relating to the Hospital for each month then ended (all such
financial statements are referred to herein as the
Additional Financial Statements
).
7.7
No-Shop Clause
.
From and
after the date of the execution and delivery of this Agreement
by Seller until the earlier of Closing or the termination of
this Agreement, Seller shall not (and will not permit any
Affiliate or any other Person acting for or on behalf of Seller
or any of its Affiliates), without the prior written consent of
Buyer (i) offer for lease or sale its assets (or any
material portion thereof) or any ownership interest in any
entity owning any of the Purchased Assets; (ii) solicit
offers to lease or buy all or any material portion of its assets
or any ownership interest in any entity owning any of the
Purchased Assets; (iii) hold discussions with any party
(other than Buyer) looking toward such an offer or solicitation
or looking toward a merger or consolidation of Seller;
(iv) enter into any agreement with any party (other than
Buyer) with respect to the lease, sale or other disposition of
its assets (or any material portion thereof) or any ownership
interest Seller or with respect to any merger, consolidation or
similar transaction involving Seller; or (v) furnish or
cause to be furnished any information with respect to Seller or
its assets to any Person that Seller or such Affiliate or any
such Person acting for or on their behalf knows or has reason to
believe is in the process of considering any such acquisition,
merger, consolidation, combination or reorganization,
provided
the foregoing shall not prevent MedCath
Corporation or Persons acting for or on its behalf from
including any information it deems required by Law in any of its
filings with the Securities and Exchange Commission. Nothing in
this Section 7.7, however, shall apply to or otherwise
restrict any actions, negotiations or agreements in respect of
any transaction involving a sale of equity, merger, combination,
a sale of all or substantially all of its assets or similar
transaction involving MedCath Corporation or its Affiliates and
any other Person, so long as such transaction does not affect
the obligations and duties of Seller or rights of Buyer under
this Agreement; provided however, the obligations of MedCath
Corporation and Seller set forth in this Section 7.7 are
subject in all respects to the exercise of the fiduciary duties,
or other comparable duties, of the board of directors of MedCath
Corporation to its shareholders and to the terms of
Sections 8.5 and 11.16 of this Agreement.
27
7.8
Title Policy
. Seller
shall cooperate with Buyer in its efforts to cause the
Title Company to issue and deliver to Buyer the
Title Commitment to issue an ALTA owners policy of
title insurance, Form B, with extended coverage, for the
Owned Real Property, together with improvements, buildings and
fixtures thereon, in amounts equal to the reasonable value
assigned to such Owned Real Property by the parties and in the
customary form prescribed for use in the State of New Mexico,
but with any mandatory arbitration provision deleted therefrom
(unless such deletion would not be customary under local
practice). The Title Commitment will provide for the
issuance of a title insurance policy (or policies) to Buyer, as
of Closing, which policy (or policies) shall insure good and
marketable fee simple absolute title to Owned Real Property
subject only to Permitted Encumbrances, and shall contain such
endorsements thereto as Buyer may reasonably require in
connection with its review of the Title Commitment and the
Survey. Seller agrees to deliver any information as may be
reasonably required by the Title Company under the
requirements section of the Title Commitment or otherwise
in connection with the issuance of a title insurance policy to
Buyer. Seller also agrees to provide an affidavit of title
and/or
such
other information as the Title Company may reasonably
require in order for the Title Company to delete the
so-called gap exception (i.e., the period of time
between the effective date of the Title Companys last
bringdown of title to such Owned Real Property and the Closing
Date), the parties in possession exception and the
mechanics and materialmens liens exception, and
Buyer and Seller shall cooperate in good faith and use
commercially reasonable efforts to cause the Title Company
to delete all other standard exceptions from the final title
insurance policy. The premium cost related to the standard
owners title insurance policy shall be paid by Seller and
the costs associated with any extended owners title
insurance policy (including all endorsements) shall be paid by
Buyer.
7.9
Provider Agreements
. In
accordance with the requirements of applicable Law, Seller shall
notify the appropriate Governmental Entities of its intent to
terminate as of the Closing Date Sellers provider
agreements related to the Government Programs and TRICARE.
Seller shall take all other required steps to terminate its
participation in the Government Programs and TRICARE effective
as of the Closing Date, including, but not limited to,
terminating provider numbers and national provider identifier
(NPI) numbers related to the Hospital. Notwithstanding the
foregoing or anything in Section 7.9 to the contrary, Buyer
acknowledges that Seller shall not be required to make any CMS
Form 855 filings as a result of the Transaction until ten
(10) days after the Closing Date.
7.10
Approvals
. Between the
date of this Agreement and the Closing Date, Seller will
(i) cooperate with Buyer and take all reasonable steps to
assist Buyer to obtain, as promptly as practicable, all
Approvals and Permits of any Governmental Entities required to
consummate the transactions contemplated by this Agreement and
in connection with the Buyers expansion of the operations,
hospital licensure and Medicare certification of LMC to
encompass and include the Purchased Assets, and
(ii) provide such other information and communications to
any Governmental Entity as may be reasonably requested in
connection with Buyers application for such Approvals and
Permits. Notwithstanding the foregoing or anything in
Section 7.10 to the contrary, Buyer acknowledges that
Seller shall not be required to make any CMS Form 855
filings as a result of the Transaction until ten (10) days
after the Closing Date.
ARTICLE 8
CONDITIONS
PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller hereunder are subject to the
satisfaction, on or prior to the Closing Date, of the following
conditions unless waived in writing by Seller:
8.1
Compliance With
Covenants
.
Buyer shall have in all material
respects performed all obligations and complied with all
covenants and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing Date.
8.2
HSR Act Waiting
Period
.
Seller shall have complied with all
waiting periods under the HSR Act.
8.3
Action/Proceeding
.
No
court or any other Governmental Entity shall have issued an
order restraining or prohibiting the transactions herein
contemplated; and no Governmental Entity with jurisdiction over
the Hospital shall have commenced or threatened in writing to
commence any action or suit before any
28
court of competent jurisdiction or other Governmental Entity
that seeks to restrain or prohibit the consummation of the
transactions herein contemplated.
8.4
Representations and
Warranties
.
The representations and
warranties of Buyer contained in this Agreement that are
qualified by any type of materiality standard shall be true in
all respects, and the representations and warranties of Buyer
that are not so qualified shall be true in all material
respects, when made and as of the Closing Date, as though such
representations and warranties had been made as of the Closing
Date (unless made only as of a specific date in which case they
shall be true as of such date).
8.5
Approvals
.
MedCath
Corporation shall have obtained any approvals of the
shareholders of MedCath Corporation which it has determined,
based upon the advice of counsel, are required under the
Delaware General Corporation Law for MedCath Corporation to
authorize Seller to consummate the transactions contemplated
under this Agreement, as well as any other transactions the
approval of which MedCath Corporation elects to seek
simultaneously therewith. MedCath Corporation shall file a
preliminary proxy statement with the Securities and Exchange
Commission (the
SEC
), which proxy statement
shall,
inter alia
,
request and recommend approval
by the shareholders of MedCath Corporation of the transactions
described herein, and may, in MedCath Corporations sole
discretion, request and recommend approval by the shareholders
of MedCath Corporation of additional transactions. Such proxy
shall contain any information which MedCath Corporation
determines is necessary or appropriate for inclusion therein.
MedCath Corporation shall respond as expeditiously as reasonably
possible to any comments from the SEC. Upon clearance by the
SEC, MedCath Corporation shall deliver the proxy statement to
its shareholders and call a meeting of MedCath Corporation
shareholders. The definitive proxy statement shall contain the
recommendation of the MedCath Corporation board of directors
that the shareholders of MedCath Corporation approve the
transactions contemplated herein, which recommendation shall not
be modified or withdrawn prior to the vote of the shareholders
of MedCath Corporation. MedCath Corporation shall use its
commercially reasonable efforts to cause the meeting date
specified in the proxy statement to occur on or prior to
July 31, 2011. In the event that such shareholder meeting
date is scheduled for a date which is after the Outside Date,
Seller shall not be entitled to exercise its rights under
Section 11.2(a)(ii) hereof. All of the obligations of the
board of directors of MedCath Corporation arising under this
Section 8.5 shall be subject in all respects to the
exercise of their fiduciary duties, or other comparable duties,
to the shareholders of MedCath Corporation.
ARTICLE 9
CONDITIONS
PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer hereunder are subject to the
satisfaction, on or prior to the Closing Date, of the following
conditions unless waived in writing by Buyer:
9.1
Compliance with
Covenants
.
Seller shall have in all material
respects performed all obligations and complied with all
covenants and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing Date.
9.2
Pre-Closing
Confirmations
.
Buyer shall have
(a) obtained reasonable assurances that following Closing,
Buyer will receive all required Approvals and Permits (which
Approvals and Permits shall be effective as of the Closing) from
all Governmental Entities whose approval is required to
consummate the transactions herein contemplated and to expand
the operations, hospital licensure and Medicare certification of
LMC to encompass and include the Purchased Assets so that the
Purchased Assets are operated under the hospital licensure and
Medicare certification of LMC as of the Closing; and
(b) complied with all waiting periods under the HSR Act.
9.3
Action/Proceeding
.
No
court or any other Governmental Entity shall have issued an
order restraining or prohibiting the transactions herein
contemplated; and no Governmental Entity with jurisdiction over
the Hospital shall have commenced or threatened in writing to
commence any action or suit before any court of competent
jurisdiction or other Governmental Entity that seeks to restrain
or prohibit the
29
consummation of the transactions herein contemplated or
otherwise seeks a remedy which would materially and adversely
affect the ability of Buyer to enjoy the use and enjoyment of
the Purchased Assets.
9.4
Representations and
Warranties
.
All representations and
warranties of Seller contained in this Agreement that are
qualified by any type of materiality standard shall be true in
all respects, and all other representations and warranties of
Seller that are not so qualified shall be true in all material
respects, when made and as of the Closing Date, as though such
representations and warranties had been made as of the Closing
Date (unless made only as of a specific date in which case they
shall be true as of such date).
9.5
Transition Services
Agreement
.
Buyer and an Affiliate of Seller
shall have entered into the Transition Services Agreement.
9.6
Title Policy
.
At
the Closing, Buyer shall have received a pro forma of the title
policy (or marked Title Commitment containing no additional
exceptions to title to the Owned Real Property) from the
Title Company in the form described in Section 7.8.
9.7
Absence of Certain
Changes
.
Seller shall have conducted the
business of the Hospital, in all material respects, only in the
ordinary course of business and there shall have occurred no
Material Adverse Effect.
9.8
Releases
.
All
Encumbrances currently encumbering the Purchased Assets other
than Permitted Encumbrances shall have been duly released by the
secured parties and other lien holders, and UCC-3 releases or
termination statements and other lien discharging documents
shall have been properly recorded, the third party shall have
committed in writing to promptly release its lien upon receipt
of a specified payoff amount at the Closing, or the recording
thereof shall have been duly arranged pursuant to the relevant
secured partys written authorization allowing Buyer
and/or
Seller to file lien-discharging documents without the secured
partys signature.
9.9
Environmental
Report
.
Buyer shall have received, at its
sole cost and expense, the Phase I Assessment, prepared by a
firm selected by Buyer, and the scope, findings, and conclusions
of such report shall have been reasonably satisfactory to Buyer.
9.10
Sellers
Deliverables
.
Seller shall have made the
deliveries required to be made by it under Section 3.3
hereof.
ARTICLE 10
TRANSITIONAL
ARRANGEMENTS
10.1
Transition Patients
.
To
compensate Seller for services rendered and medicine, drugs and
supplies provided on or before the Closing Date (the
Transition Patient Services
) with respect to
patients admitted to the Hospital on or before the Closing Date
(or who were in the Hospitals emergency department or in
observation beds on the Closing Date and immediately thereafter
admitted to the Hospital) but who are not discharged until after
the Closing Date (such patients being referred to herein as the
Transition Patients
), the parties shall take
the following actions:
(a)
Medicare, Medicaid, TRICARE and Other DRG
Transition Patients
.
As soon as practicable
after the Closing Date, Seller shall deliver to Buyer a schedule
itemizing the Transition Patient Services provided by Seller to
Transition Patients whose care is reimbursed by the Medicare,
Medicaid, TRICARE or other third party payor program on a
diagnostic related group basis, case rate or similar basis (each
a
DRG Transition Patient
). Buyer shall pay to
Seller an amount equal to (i) the DRG and outlier payments,
the case rate payments or other similar payments received by
Buyer on behalf of each DRG Transition Patient, or, with respect
to any DRG Transition Patient covered by the Acute Care Episode
Demonstration Project (the
ACE Demonstration
Project
), the amount payable for the applicable DRG as
set forth on
Schedule 10.1(a)
, multiplied by a
fraction, the numerator of which shall be the total charges for
Transition Patient Services provided to such DRG Transition
Patient by Seller, and the denominator of which shall be the sum
of the total charges for all services provided to such DRG
30
Transition Patient both before and after the Closing Date minus
(ii) any deposits or co-payments made by such DRG
Transition Patient to Seller;
provided
,
however
,
that with respect to any DRG Transition Patient who is covered
by the ACE Demonstration Project, the total amount of payments
received by Buyer for purposes of allocating payments between
the parties under this Section 10.1(a) shall not include
the portion of such payments attributable to the professional
component of services provided to such DRG Transition Patient.
(b)
Other Patients
.
As of
the Closing Date, Seller shall prepare cut-off billings for
Transition Patient Services provided by Seller for all patients
not covered by Section 10.1(a). Seller shall be entitled to
receive all amounts collected in respect of such cut-off
billings. Buyer shall remit to Seller any amounts Buyer receives
after the Closing with respect to the Transition Patient
Services rendered to such Transition Patients, including any
periodic interim payments or portions thereof applicable to the
period on or prior to the Closing.
(c) All payments required by this Section 10.1 shall
be made within ten (10) business days following the
conclusion of the preceding month in which any payments are
received by Buyer, accompanied by copies of remittances and
other supporting documentation as reasonably required by Seller.
In the event that Buyer and Seller are unable to agree on any
amount to be paid under this Section 10.1, then such amount
shall be determined by the accounting firm through the binding
process provided in Section 2.8 at the joint equal expense
of Buyer and Seller.
(d) Buyer shall use commercially reasonable efforts prior
to and promptly following the Closing to: (i) obtain all
Permits and Approvals necessary to bill and collect for the
Transition Patient Services and (ii) to bill and collect
for the Transition Patient services in accordance with the
applicable requirements of third party payors.
10.2
Sellers Cost
Reports
.
Seller will timely prepare all cost
reports relating to Seller for periods ending on or prior to the
Closing Date or required as a result of the consummation of the
transactions set forth herein, including terminating cost
reports for the Medicare, Medicaid and TRICARE programs (the
Cost Reports
). Buyer shall forward to Seller
any and all correspondence relating to Cost Reports within five
(5) business days after receipt by Buyer. Buyer shall remit
any receipts of funds relating to Cost Reports promptly after
receipt by Buyer and shall forward to Seller any demand for
payments within three (3) business days after receipt by
Buyer. Seller shall retain all rights to Agency Receivables and
to Cost Reports including any amounts receivable or payable in
respect of such reports or reserves relating to such reports,
including bad debt and cost-report settlements. Such rights
shall include the right to appeal any Medicare determinations
relating to Agency Receivables and Cost Reports. Buyer, upon
reasonable notice, during normal business hours and at the sole
cost and expense of Seller, will cooperate with Seller in regard
to the preparation, filing, handling and appeal of any Cost
Reports. Such cooperation shall include the providing of
statistics and obtaining files if in the possession of Buyer and
the coordination with Seller pursuant to adequate notice of
Medicare and Medicaid exit conferences or meetings as well as
providing to appropriate parties (including the Provider
Reimbursement Review Board), as determined to be reasonably
necessary by Seller, a letter acknowledging that Seller retained
all rights to such appeals, and that Buyer agrees that Seller
has the right to pursue such appeals, either on Sellers
behalf, or to the extent required by Law, as a representative of
Buyer. Seller shall retain the originals of Cost Reports,
correspondence, work papers and other documents relating to Cost
Reports and the Agency Receivables. Seller will furnish copies
of such documents (other than work papers) to Buyer prior to the
Closing to the extent then existing if requested by Buyer.
10.3
Employees; Benefits
.
(a) As of the Closing Date, Buyer shall offer employment to
all Hospital Employees who are employed by Seller and not on
leave of any sort as of the Closing,
provided
that those
employees meet the pre-employment screening requirements of
Buyer. Buyer shall offer employment to any Hospital Employee who
is employed by Seller and on short-term leave as of the Closing
under one of the programs listed on
Schedule 5.15
,
which offer of employment shall be made effective as of the date
such Hospital Employee is cleared for and returns to active work
status,
provided
that those employees meet the
pre-employment screening requirements of Buyer and,
provided
further
, that Buyer shall have an obligation to offer
31
employment to any Hospital Employee who is on short term leave,
but if such leave is not a statutory leave, only if such
individual returns to active work status within six
(6) months of the Closing Date. The offer of employment to
the Hospital Employees shall be at their existing job duties,
titles and responsibilities and at their existing base wage and
salary levels. Except for Accrued PTO and ESR Leave or as
provided in Section 10.3(c), no obligations of Seller to or with
respect to any of its employees, including, but not limited to,
obligations for accrued vacation, sick and personal leave,
severance pay, obligations under employment contracts, Plans,
employee handbooks or policies, collective bargaining
agreements, and applicable Law (including liability for payroll
Taxes and other proper deductions and withholdings) are being
assumed by Buyer, and except as may be specifically required by
applicable Law, Buyer shall not be obligated to continue any
employment relationship with any employee for any specific
period of time.
(b) The term
Hired Employee
as used in
this Agreement means a Hospital Employee who accepts employment
with Buyer or one of its Affiliates as of the Closing Date. All
Hired Employees will be retained as
employees-at-will
(except to the extent that such Hired Employees are parties to
Contracts providing for other employment terms as disclosed on
Schedule 5.11
, in which case such Hired Employees
shall be retained in accordance with the terms of such
Contracts). Buyer shall provide each Hired Employee with
employee benefits, including but not limited to retirement,
welfare and paid time off, consistent with similarly-situated
employees at other healthcare facilities owned
and/or
operated by Buyer and its Affiliates. With respect to such
employee benefits, Buyer shall honor the Hired Employees
prior service credit under the Sellers current welfare
plans for purposes of eligibility and satisfying pre-existing
condition limitations in the welfare benefit plans of Buyer.
Buyer shall honor the Hired Employees prior length of
service with Seller for purposes of eligibility and vesting in
the retirement benefit plans and other service-based plans of
Buyer such as paid time off, but shall not accrue benefits or
make contributions to such plans with respect to any such prior
service. For purposes of retirement benefit plans offered by
Buyer, such vesting credit shall be extended at the rate of one
(1) year of credit for each whole twelve-month period
elapsed since each Hired Employees most recent date of
hire with Seller as of Closing. Buyer shall carry over, and give
credit for, the Accrued PTO and ESR Leave for the Hired
Employees to the extent the value of such time is included in
the determination of the Final NWC Calculation. Participation in
Buyers employee programs and plans described in this
Section 10.3 shall begin as soon as administratively
feasible after the Closing Date for participating Hired
Employees (and eligible dependents) and for all other Hired
Employees who, given their service with Seller, have met the age
and service requirements for participation under Buyers
programs and plans. Buyer shall employ a sufficient number of
Hired Employees at the Hospital for at least a
90-day
period following the Closing Date so as not to constitute a
plant closing or mass layoff (as those
terms are used in the Worker Adjustment and Retraining
Notification Act, 29 U.S.C. § 2101
et seq.,
the
WARN Act
), with respect to the
Hospital. Buyer shall be liable and responsible for any
notification required under the WARN Act (or under any similar
state or local Law) and shall indemnify Seller and its
Affiliates from any claims arising out of a breach of this
covenant.
(c) Buyer shall provide continued health and medical
coverage to the extent required under Section 4980B of the
Code and Sections 601 through 608 of ERISA
(
COBRA
) to each current or former employee of
the Hospital (and their spouses, dependents and beneficiaries)
who is classified as an M&A Qualified
Beneficiary (as defined in Treasury
Regulation Section 54.4980B-9,
Q&A 4), each of whom is listed on
Schedule 10.3
.
(d) Seller shall retain the responsibility for payment of
all medical, dental, vision, health and disability claims
incurred by any Hired Employee prior to the date that such Hired
Employee terminates employment with the Seller (his or her
Separation Date
), and Buyer does not assume
any liability with respect to such claims. On or after the
applicable Separation Date, all medical, dental, vision, health
and disability claims incurred by Hired Employees in
Buyers employ will be determined under Buyers
benefit plans. Buyer agrees that it shall use its best efforts,
to the extent commercially reasonable, upon presentation of an
Explanation of Benefits (EOB) by the Hired Employees and their
eligible dependents, to cause them to receive credit under
Buyers health care plans for any amounts paid toward
deductibles and
out-of-pocket
maximums by such Hired Employees and enrolled dependents for the
portion of the current plan year preceding the Closing under a
health care plan maintained by the Seller.
32
(e) Notwithstanding any provision herein to the contrary,
no term of this Agreement shall be deemed to (i) create any
Contract with any Hired Employee, (ii) give any Hired
Employee the right to be retained in the employment of Buyer or
any of its Affiliates, or (iii) interfere with the right of
Buyer to terminate employment of any Hired Employee at any time.
Nothing in this Agreement shall diminish the right of Buyer to
change or terminate its policies regarding salaries, benefits
and other employment matters at any time or from time to time.
The representations, warranties, covenants and agreements
contained herein are for the sole benefit of the parties hereto,
and the Hired Employees are not intended to be and shall not be
construed as beneficiaries hereof. Pursuant to the
Standard Procedure provided in Section 4 of
Revenue Procedure
2004-53,
(i) Buyer and Seller shall report on a
predecessor/successor basis as set forth therein,
(ii) Seller will not be relieved from filing a
Form W-2
with respect to any Hired Employees, and (iii) Buyer will
undertake to file (or cause to be filed) a
Form W-2
for each such Hired Employee with respect to the portion of the
year during which such Hired Employees are employed by Buyer
that includes the Closing Date, excluding the portion of such
year that such Hired Employee was employed by Seller.
10.4
Misdirected
Payments
.
Seller and Buyer covenant and agree
to remit, with reasonable promptness, to the other any payments
received, which payments are on or in respect of accounts or
notes receivable owned by (or are otherwise payable to) the
other. In addition, and without limitation, in the event of a
determination by any Governmental Entity or third-party payor
that payments to the Seller or the Hospital resulted in an
overpayment or other determination that funds previously paid by
any program or plan to Seller or the Hospital must be repaid,
Seller shall be responsible for repayment of said monies (or
defense of such actions) if such overpayment or other repayment
determination was for services rendered on or prior to the
Closing Date and Buyer shall be responsible for repayment of
said monies (or defense of such actions) if such overpayment or
other repayment determination was for services rendered after
the Closing Date. In the event that, following Closing, Buyer
suffers any offsets against reimbursement under any third-party
payor or reimbursement programs due to Buyer relating to amounts
owing under any such programs by Seller or any of its
Affiliates, Seller shall immediately upon demand from Buyer pay
to Buyer the amounts so billed or offset. These obligations
shall be in addition to any other remedies available herein.
ARTICLE 11
ADDITIONAL
AGREEMENTS
11.1
Allocations
.
Buyer and
Seller shall reasonably agree prior to the Closing Date upon an
allocation methodology of the Purchased Assets among the various
classes of assets in accordance with the provisions of
Section 1060 of the Code and applicable Treasury
Regulations, and attach such allocation hereto as
Schedule 11.1
. The parties agree that any Tax
returns, or other Tax information they may file or cause to be
filed with any Governmental Entity shall be prepared and filed
consistent with such agreed upon allocation. In this regard, the
parties agree that, to the extent required, they will each
properly prepare and timely file Form 8594 in accordance
with Section 1060 of the Code.
11.2
Termination Prior to Closing
.
(a) This Agreement and the transactions contemplated by
this Agreement may be terminated as follows:
(i) by mutual consent in writing of Seller and Buyer;
(ii) by Buyer or Seller at any time after July 31,
2011 (the
Outside Date
), if the Closing has
not occurred by such date subject however to the right of Buyer
or Seller to extend the Outside Date as set forth below;
provided
, that the right to terminate this Agreement
under this Section 11.2(a)(ii) is not available to any
party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of
the Closing to occur by such date,
provided further
, that
if the Closing has not occurred due to or related to either
(x) any formal or informal action, review, investigation or
proceeding by any Governmental Entity of any Person or
(y) because MedCath Corporation shall not have obtained any
approvals of the shareholders of MedCath Corporation which it
has determined in its reasonable discretion are required under
the Delaware General Corporation Law for MedCath Corporation to
authorize Seller to consummate the transactions contemplated
under this Agreement, then in either of
33
such events, Buyer or Seller may elect, by providing written
notice to the other party hereto, to extend the Outside Date to
September 30, 2011,
provided
that the right to so
extend the Outside Date under this Section 11.2(a)(ii) is
not available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing to occur by
July 31, 2011;
(iii) by Seller if Buyer breaches in any material respect
any of the representations, warranties, covenants or other
agreements of Buyer contained in this Agreement, which would
give rise to the failure of a condition set forth in
Section 8.1, which breach cannot be or has not been cured
within fifteen (15) days after the giving of written notice
by Seller to Buyer specifying such breach;
(iv) by Buyer if Seller breaches in any material respect
any of the representations, warranties, covenants or other
agreements of Seller contained in this Agreement, which would
give rise to the failure of a condition set forth in
Section 9.1, which breach cannot be or has not been cured
within fifteen (15) days after the giving of written notice
by Buyer to Seller specifying such breach;
(v) by Buyer or Seller, if any court or any other
Governmental Entity issues an order restraining or prohibiting
such party from consummating the sale and purchase of the
Purchased Assets as provided herein and such order becomes final
and non-appealable; or
(vi) by Buyer if a Material Adverse Effect shall have
occurred since the date of this Agreement.
(b) In the event that this Agreement is terminated pursuant
to Section 11.2(a), all further obligations of the parties
under this Agreement shall terminate;
provided
that
nothing in this Section 11.2 shall relieve Seller or Buyer
of any liability for an intentional breach of any covenant in
this Agreement prior to the date of termination, and the parties
shall be entitled to seek and recover damages for such matters
and to seek the remedy of specific performance as set forth in
Section 12.3, provided however, the right to seek damages
and/or
rights to specific performance shall be subject to the
limitations set forth in Articles 11 and 12 of this
Agreement. Further, notwithstanding anything in this
Section 11.2, or any other Section of this Agreement, to
the contrary, in no event shall Seller have any liability to
Buyer, and Buyer shall have no claim against Seller, for damages
of any type or nature arising from any violation or breach of
any representations or warranties made by Seller to Buyer in
this Agreement.
11.3
Buyer Preservation and Seller Access to
Records After the Closing
.
(a) After the Closing, Buyer shall keep and preserve in
their original form all medical and other records of the
Hospital existing as of the Closing and transferred to Buyer
hereunder for such period as required by applicable Law. For
purposes of this Agreement, the term records
includes all documents, electronic data and other compilations
of information in any form. Buyer acknowledges that as a result
of entering into this Agreement and operating the Hospital it
and its Affiliates will gain access to patient and other
information which is subject to rules and regulations regarding
confidentiality. Buyer shall abide by any such rules and
regulations relating to the confidential information that it
acquires. Buyer shall maintain the patient records held at the
Hospital or delivered to Buyer at Closing at the Hospital after
Closing in accordance with applicable Law (including, if
applicable, Section 1861(v)(i)(I) of the Social Security
Act (42 U.S.C. § 1395(V)(l)(i)), and requirements
of relevant insurance carriers, all in a manner consistent with
the maintenance of patient records generated at the Hospital
after Closing. Upon reasonable notice, during normal business
hours and upon the receipt by Buyer of appropriate consents and
authorizations, Buyer shall afford to representatives of Seller,
including its counsel and accountants, full and complete access
to, and the right to make copies of, the records transferred to
Buyer at the Closing (including access to patient records in
respect of patients treated by Affiliates of Seller at the
Hospital), including providing a reasonable location within the
Hospital to conduct its review of such records;
provided
,
however
, that no consents or authorizations shall be
necessary with respect to the Hospitals financial records
and Tax records necessary for Seller to prepare financial
statements, cost reports and Tax returns. Buyer shall reasonably
cooperate with Seller and its agents in connection with the
preparation of financial statements, costs reports and Tax
returns relating to the period prior to Closing. In addition,
Seller shall be entitled to remove from the Hospital any such
patient records, but only for purposes of pending litigation
involving a patient to whom such records refer, as certified in
writing
34
prior to removal by counsel retained by Seller in connection
with such litigation. Any patient records so removed from the
Hospital shall be promptly returned to Buyer following its use
by Seller.
(b) Buyer shall reasonably cooperate with Seller and its
insurance carriers in connection with the defense of claims made
by third parties against Seller in respect of alleged events
occurring while Seller operated the Hospital;
provided
,
Seller shall reimburse Buyer its reasonable and documented
out-of-pocket
third-party expenses incurred in providing such cooperation.
Such cooperation shall include, without limitation, making all
of the Buyers employees reasonably available for
interviews, depositions, hearings and trial; and making all of
the Buyers employees reasonably available to assist in the
securing and giving of evidence and in obtaining the presence
and cooperation of witnesses, all of which shall be done without
payment of any fees to Buyer or its employees or the payment of
any of Buyers internal expenses;
provided
,
however
, that Seller shall pay all reasonable and
documented
out-of-pocket
third-party expenses incurred by such employees (including for
travel). In addition, Seller shall be entitled to remove from
the Hospital any records, but only for purposes of pending
litigation involving the Person to whom such records refer, as
certified in writing prior to removal by counsel retained by
Seller in connection with such litigation. Any records so
removed from the Hospital shall be promptly returned to Buyer
following their use by Seller.
11.4
Reproduction of
Documents
.
This Agreement and all documents
relating hereto, including (i) consents, waivers and
modifications which may hereafter be executed, (ii) the
documents delivered at the Closing, and (iii) financial
statements, certificates and other information previously or
hereafter furnished to Seller or Buyer, may, subject to the
provisions of Section 12.8, be reproduced by Seller and by
Buyer by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and Seller and
Buyer may destroy any original documents so reproduced. Seller
and Buyer agree and stipulate that any such reproduction shall
be admissible in evidence as the original itself in any
judicial, arbitral or administrative proceeding (whether or not
the original is in existence and whether or not such
reproduction was made by Seller or Buyer in the regular course
of business) and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible
in evidence.
11.5
Tax Matters
.
Following
the Closing, the parties shall cooperate fully with each other
and shall provide to the other, as reasonably requested by and
at the expense of the requesting party, all information, records
or documents relating to Tax liabilities of the requesting party
for all periods ending on or prior to the Closing and shall
preserve all such information, records and documents (to the
extent a part of the assets exchanged and delivered at Closing)
at least until the expiration of any applicable statute of
limitations or extensions thereof;
provided
, that neither
party shall be required to provide any of its income Tax returns
(or supporting materials including working papers and Tax
provisions) or those of any Affiliate. Each party shall retain
all Tax returns and supporting materials received pursuant to
Section 2.1 at least until the expiration of any applicable
statute of limitations or extensions with respect thereto and
shall not destroy such items without first offering such items
back to the other party prior to destruction. Buyer and Seller
agree to elect the standard procedure under Revenue Procedure
2004-53
for
information returns to employees and under Revenue Procedure
99-50
for
information reporting to non-employees.
11.6
Consented Assignment and
Permits
.
Buyer shall be responsible for
obtaining any and all consents to assign any Assumed Contract
and any and all Permits and Approvals necessary or desirable in
connection with the transactions contemplated hereby. However,
if any such consent to assignment of an Assumed Contract is not
obtained as of the Closing, such Assumed Contract will still be
assigned to and assumed by Buyer under this Agreement effective
as of the Effective Time. Further, at the request of Buyer,
Seller will cooperate in any reasonable arrangement with Buyer
designed to provide for Buyer the benefits and obligations under
any such Assumed Contract, including enforcement of any and all
rights of Seller against the other party or parties thereto
arising out of the breach or cancellation by such other party or
otherwise.
11.7
Use of Controlled Substance
Permits
.
To the extent permitted by
applicable law, Buyer shall have the right, for a period not to
exceed one hundred twenty (120) days following the Closing
Date, to operate under the licenses and registrations of Seller
relating to controlled substances and the operations of
pharmacies and laboratories, until Buyer is able to obtain such
licenses and registrations for itself. In furtherance thereof,
35
Seller shall execute and deliver to Buyer at or prior to the
Closing a limited power of attorney substantially in the form of
Exhibit A
hereto.
11.8
Risk of Loss; Preclosing Casualty
.
(a) The risk of loss or damage to any of the Purchased
Assets, the Hospital and all other property, transfer of which
is contemplated by this Agreement, shall remain with Seller
until the Closing and Seller shall maintain its insurance
policies covering the Purchased Assets, the Hospital and all
other property through the Closing.
(b) If, prior to the Closing, all or any part of the
Hospital is partially destroyed or damaged by fire or the
elements or by any other cause where such damage or destruction
is in the aggregate (the
Aggregate Damage
)
less than ten percent (10%) of the Interim Cash Purchase Price
and such damage or destruction would not reasonably be expected
to materially interfere with or disrupt operations at the
Hospital in a manner which, individually or in the aggregate,
constitutes a Material Adverse Effect, the parties duties
and obligations under this Agreement shall not be affected and
the Closing shall proceed as scheduled;
provided
,
however
, Seller shall assign, transfer and set over to
Buyer or its designated Affiliate all of Sellers right,
title and interest in and to any insurance proceeds on account
of such damage or destruction, including without limitation the
proceeds of Sellers business interruption insurance
policy, and the amount of the Interim Purchase Price shall be
reduced by the amount of any deductibles under such insurance
policies. If, prior to the Closing, all or any part of the
Hospital is destroyed or damaged by fire or the elements or by
any other cause where the Aggregate Damage exceeds ten percent
(10%) of the Interim Cash Purchase Price or where such damage or
destruction could reasonably be expected to materially interfere
with or disrupt operations at the Hospital in a manner which,
individually or in the aggregate, constitutes a Material Adverse
Effect, Buyer may elect to (i) purchase the Hospital, and
the Closing shall proceed as scheduled (
provided
,
however
, at the Closing, Seller shall assign, transfer
and set over to Buyer all of Sellers right, title and
interest in and to any insurance proceeds on account of such
damage or destruction, including without limitation the proceeds
of Sellers business interruption insurance policy, and the
amount of the Interim Purchase Price shall be reduced by the
amount of any deductibles under such insurance policies) or
(ii) terminate the Agreement by the delivery of a written
notice to Seller on or before the scheduled date of Closing (the
Casualty Termination Notice
). If Buyer and
Seller are unable to agree upon the amount of the Aggregate
Damage, the amount of the Aggregate Damage shall be determined
by a consulting firm mutually selected by Seller and Buyer (the
Independent Consultant) pursuant to
Section 11.8(c).
(c) If pursuant to Section 11.8(b), the amount of the
Aggregate Damage (and any applicable Interim Cash Purchase Price
adjustment) is to be determined by the Independent Consultant,
within fifteen (15) calendar days after the occurrence of
the damage to the Hospital (the
Submittal
Date
), each party shall submit to the other party and
to the Independent Consultant its proposed Aggregate Damage (and
any applicable Interim Cash Purchase Price adjustment) as a
result of the event(s) contemplated by Section 11.8(b),
along with a detailed description of the basis for such amount
and any applicable adjustment. Within ten (10) calendar
days after the Submittal Date (the
Decision
Date
), the Independent Consultant, acting as an expert
and not as an arbitrator, shall determine the definitive amount
of the Aggregate Damage, taking into account any submissions by
Seller or Buyer by the Submittal Date. The decision of the
Independent Consultant as the amount of Aggregate Damage shall
be conclusive and binding as between Buyer and Seller, and the
costs of such review shall be borne equally by Seller and Buyer.
11.9
Change of Name
.
On or
before the Closing Date, Seller shall (a) amend its charter
and take all other actions necessary to change its name to one
sufficiently dissimilar to Sellers present name to avoid
confusion, and (b) take all actions requested by Buyer to
enable Buyer to use any names acquired by Buyer at the Closing.
From and after the Closing Date, Seller shall make no further
use of (i) the name Heart Hospital of New Mexico,
LLC or any derivative thereof, or (ii) any other name
that is sufficiently similar to New Mexico Heart Hospital,
LLC so as to potentially cause confusion.
11.10
Transition Services
Agreement
.
As of Closing, Affiliates of
Seller and of Buyer will execute and deliver the Transition
Services Agreement (
Transition Services
Agreement
), pursuant to which an Affiliate of Seller,
or a qualified third-party designated by an Affiliate of Seller,
will provide certain specified transition
36
services to and for the benefit of Buyer and its Affiliates in
substantially the form attached hereto as
Exhibit B
.
11.11
CVSTAT Program
.
As of
Closing, pursuant to a separate License Agreement (the
CVSTAT License Agreement
), and for and
in consideration of the consummation of the transactions
described herein, MedCath Corporation shall grant Buyer a
non-exclusive license to use the trademark CVSTAT
and to operate the CVSTAT program at the Hospital in the same
manner as same is operated at the Hospital as of the date of
this Agreement. The CVSTAT License Agreement shall not require
the payment of any license fees, royalties or other fees, and
shall be upon such other terms and conditions as MedCath
Corporation and Buyer may mutually agree.
11.12
Quality
Reporting
.
Seller shall submit all quality
data required under the HQI Program to CMS or its agent, and all
quality data required under ORYX to The Joint Commission, for
any calendar quarter with reporting deadlines between the date
of this Agreement and the Closing Date. If a calendar quarter
ends prior to the Closing Date, but the reporting deadline for
such quarter ends after the Closing Date, Seller shall prepare
and submit the quality data for the Hospital required under the
HQI Program and ORYX in accordance with applicable filing
deadlines and in the form and manner required by CMS and The
Joint Commission, respectively, or, at the sole option to Buyer,
Seller shall transmit such quality data to Buyer in a form
mutually agreeable to Buyer and Seller or allow Buyer access to
such data, to enable Buyer to submit quality data for the
Hospital required under the HQI Program and ORYX for such
quarter. If the Closing Date falls between the first and last
day of a calendar quarter, Seller shall cooperate with Buyer to
ensure that all quality data required to be submitted for the
Hospital under the HQI Program and ORYX for the portion of the
quarter during which Seller owned the Hospital can be aggregated
with the quality data for the portion of the quarter during
which Buyer owned the Hospital, to enable Buyer
and/or
Seller to submit quality data for the Hospital required under
the HQI Program and ORYX in accordance with applicable filing
deadlines and in the form and manner required by CMS and The
Joint Commission, respectively.
11.13
Supplemental
Insurance
.
Seller, at its sole cost and
expense, will obtain a supplemental insurance policy providing
for extended reporting periods for claims made on or after the
Effective Time in respect of events occurring prior to the
Effective Time to insure against professional liabilities of
Seller relating to all periods prior to the Effective Time and
to have the effect of converting its current professional
liability insurance into occurrence coverage. Such tail
end insurance shall have the term and limits of coverage
as reflected in
Schedule 11.13
. Buyer
shall be named as an additional insured under the supplemental
insurance policy. Seller shall deliver to Buyer evidence of such
supplemental reporting endorsement at Closing.
11.14
Sellers Covenant Not to
Compete
.
(a) In consideration for the benefits the Seller (including
Manager, MedCath Corporation and their Affiliates) will receive
in connection with the transactions contemplated herein, which
benefits are hereby acknowledged, and as further consideration
for, and as a condition to, the transactions contemplated
hereby, and so that Buyer and its Affiliates shall receive and
be able to maintain the benefit of the goodwill, trade secrets
and confidential information which Seller enjoys and has enjoyed
in connection with its operation of the Hospital, and
recognizing that the covenants contained herein are not
severable from the goodwill and are granted to Buyer to protect
the same, and to otherwise protect the legitimate business
interests of Buyer, Seller covenants and agrees that at all
times from the Closing Date until the fifth
(5
th
)
anniversary of the Closing Date, Seller (including Manager,
MedCath Corporation and their Affiliates) shall not, directly or
indirectly, except as a consultant or contractor to or of Buyer
(or any Affiliate of Buyer), own, lease, manage, operate or
control any acute care hospital, specialty hospital, or
ambulatory or other type of surgery center (any of such uses
being referred to herein as a
Competing
Business
), within a
25-mile
radius of the Hospital (the
Restricted Area
),
without Buyers prior written consent (which Buyer may
withhold in its sole and absolute discretion). In the event of a
breach of this Section 11.14, Seller recognizes that monetary
damages shall be inadequate to compensate Buyer and Buyer shall
be entitled, without the posting of a bond or similar security,
to an injunction restraining such breach, with the costs
(including attorneys fees) of successfully securing such
injunction to be borne by Seller. Nothing contained herein shall
be construed as prohibiting Buyer from
37
pursuing any other remedy available to it under this Agreement
for such breach or threatened breach. All parties hereto hereby
acknowledge the necessity of protection against the competition
of Seller (including Manager, MedCath Corporation and their
Affiliates) and that the nature and scope of such protection has
been carefully considered by the parties. Seller further
acknowledges and agrees that the covenants and provisions of
this Section 11.14 form part of the consideration under
this Agreement and are among the inducements for Buyer entering
into and consummating the transactions contemplated herein. The
period provided and the area covered are expressly represented
and agreed to be fair, reasonable and necessary. The
consideration provided for herein is deemed to be sufficient and
adequate to compensate for agreeing to the restrictions
contained in this Section 11.14. If, however, any court
determines that the foregoing restrictions are not reasonable,
such restrictions shall be modified, rewritten or interpreted to
include as much of their nature and scope as will render them
enforceable.
(b) Notwithstanding anything in this Section 11.14 to
the contrary, a Person that enters into a Change in Control
Transaction with MedCath Corporation or its Affiliates shall not
be considered an assignee or successor of Seller or its
Affiliates for purposes of this Section 11.14 or otherwise
be bound by this Section 11.14.
(c) Further, in no event shall any Person (other than an
Affiliate of MedCath Corporation) that purchases one or more
hospital facilities from MedCath Corporation or one of its
Affiliates (by the acquisition of either the assets thereof or
the equity securities of such Affiliate) in a transaction that
is not a Change in Control Transaction, either be considered an
assignee or successor of Seller or its Affiliates for purposes
of this Section 11.14 or otherwise be bound by this
Section 11.14.
11.15
Information from Virtual Data
Room
.
For a period of at least ninety
(90) days from and after Closing, Seller shall make
available to Buyer, in a format reasonably determined by Seller,
the materials and information contained at the time of Closing
in the virtual data room that houses due diligence materials and
information provided by Seller to Buyer in connection with the
transactions described herein.
11.16
MedCath Corporation Shareholder Approval;
Termination Fee
.
(a) In the event that MedCath Corporation shareholder
approval is determined by MedCath Corporation to be required
with respect to the sale of the Purchased Assets to Buyer and
the shareholders of MedCath Corporation fail to give such
approval by the Outside Date, then as long as there has been no
material default by Buyer with respect to its liabilities and
obligations arising under this Agreement, MedCath Corporation
shall reimburse Buyer for all of its
out-of-pocket
costs and expenses (including, without limitation, costs and
expenses of accountants, attorneys, engineers, valuation experts
and other consultants) incurred or paid by Buyer in connection
with Buyers due diligence, Buyers negotiation of
this Agreement and, generally, in connection with the
transactions described herein, up to an aggregate maximum amount
of $750,000 (the
Expense Reimbursement
).
MedCath Corporation shall reimburse Buyer for such costs and
expenses within ten (10) days after the receipt of an
invoice for same from Buyer that schedules the costs and
expenses incurred or paid by Buyer. This Section shall survive
any termination of this Agreement.
(b) In the event that (i) as a result of the exercise
of the fiduciary duties, or other comparable duties, of the
board of directors of MedCath Corporation to its shareholders,
the Seller does not fulfill its obligations to consummate the
transaction contemplated by this Agreement and as a result
thereof Buyer terminates this Agreement, and (ii) there has
been no material default by Buyer with respect to its
liabilities and obligations arising under this Agreement, then
either (x) if within twelve (12) months following the
termination of this Agreement, Seller consummates the sale of
either the Purchased Assets or a majority of the membership
interest of the Seller to a third party (the
Third
Party Sale
), then as the sole and exclusive remedy of
the Buyer, within ten days of the consummation of the Third
Party Sale, Seller shall pay to Buyer in cash a termination fee
equal to Three Million Two Hundred Thirteen Thousand Dollars
($3,213,000), in which event Buyer shall not be entitled to any
amount under subsection (a) above, or (y) if the
conditions of subsection (x) are not satisfied, then as the
sole and exclusive remedy of the Buyer, Buyer shall be entitled
to the Expense Reimbursement. This Section shall survive any
termination of this Agreement.
38
11.17
Post Closing Access to
Information
.
Seller and Buyer acknowledge
that subsequent to Closing each party may need access to
information or documents in the control or possession of the
other party for the purposes of concluding the transactions
herein contemplated, audits, compliance with governmental
requirements and regulations, and the prosecution or defense of
third party claims. Accordingly, Seller and Buyer agree that for
a period of six (6) years after Closing each will make
reasonably available to the others agents, independent
auditors, counsel,
and/or
governmental agencies upon written request and at the
out-of-pocket
expense of the requesting party such documents and information
as may be available relating to the Hospital for periods prior
and subsequent to Closing to the extent necessary to facilitate
concluding the transactions herein contemplated, audits,
compliance with governmental requirements and regulations, and
the prosecution or defense of claims. The obligations of Seller
in this Section 11.17 shall in all events be subject to and
limited by the rights of Seller and its Affiliates set forth in
Section 12.23, including but not limited to the rights to
dissolve Seller and MedCath Corporation.
ARTICLE 12
GENERAL
12.1
Consents, Approvals and
Discretion
.
Except as herein expressly
provided to the contrary, whenever this Agreement requires any
consent or approval to be given by either party or either party
must or may exercise discretion, the parties agree that such
consent or approval shall not be unreasonably withheld,
conditioned or delayed and such discretion shall be reasonably
exercised.
12.2
Legal Fees and
Costs
.
In the event either party elects to
incur legal expenses to enforce or interpret any provision of
this Agreement by judicial means, the prevailing party will be
entitled to recover such legal expenses, including
attorneys fees, costs and necessary disbursements, in
addition to any other relief to which such party shall be
entitled.
12.3
Choice of Law; Waiver of Jury Trial;
Limitation on Damages
.
(a) The parties agree that this Agreement shall be governed
by and construed in accordance with the Laws of the State of New
Mexico without giving effect to any choice or conflict of law
provision or rule thereof.
(b) EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL
RIGHTS IT MAY HAVE TO DEMAND THAT ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR IN ANY WAY RELATED TO THIS
AGREEMENT OR THE RELATIONSHIPS OF THE PARTIES HERETO BE TRIED BY
JURY. THIS WAIVER EXTENDS TO ANY AND ALL RIGHTS TO DEMAND A
TRIAL BY JURY ARISING FROM ANY SOURCE INCLUDING, BUT NOT LIMITED
TO, THE CONSTITUTION OF THE UNITED STATES OR ANY STATE THEREIN,
COMMON LAW OR ANY APPLICABLE STATUTE OR REGULATIONS. EACH PARTY
HERETO ACKNOWLEDGES THAT IT IS KNOWINGLY AND VOLUNTARILY WAIVING
ITS RIGHT TO DEMAND TRIAL BY JURY.
(c) Notwithstanding the right of each party to terminate
this Agreement pursuant to Section 11.2(a), in the event of
a breach by either party of its obligation to consummate this
Agreement or a breach by either party of a covenant prior to or
following the Closing, except as otherwise provided in this
Agreement, the non-breaching party shall be entitled to specific
performance to force the breaching party to consummate this
Agreement, or to enforce the covenant.
(d) NOTWITHSTANDING ANYTHING TO CONTRARY ELSEWHERE IN THIS
AGREEMENT, NO PARTY TO THIS AGREEMENT (OR ANY OF ITS AFFILIATES)
SHALL, IN ANY EVENT, BE LIABLE TO THE OTHER PARTY (OR ANY OF ITS
AFFILIATES) FOR SPECIAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY
DAMAGES.
12.4
Benefit;
Assignment
.
Subject to provisions herein to
the contrary, this Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective legal
representatives, successors and assigns. No party may assign
this Agreement without the prior written consent of the other
party;
provided
,
however
, that a party hereto may
assign its interest (or a portion thereof) in this Agreement to
an Affiliate,
39
but, in such event, the assignor shall be required to remain
obligated hereunder in the same manner as if such assignment had
not been effected.
12.5
Effective Time; Accounting
Date
.
The transactions contemplated hereby
shall be effective for accounting purposes as of 11:59 p.m.
(the
Effective Time
) on the Closing Date,
unless otherwise agreed in writing by Buyer and Seller. The
parties will use commercially reasonable efforts to cause the
Closing to be effective as of a month end.
12.6
No Brokerage
.
Buyer and
Seller represent to each other that no broker has in any way
been contracted in connection with the transactions contemplated
hereby other than Sellers or a Seller Affiliates
engagement of Navigant Capital Advisors, LLC, the fees and
expenses of which shall be borne solely by Seller or a Seller
Affiliate. Each of Buyer and Seller agrees to indemnify the
other party from and against all loss, cost, damage or expense
arising out of claims for fees or commissions of brokers
employed or alleged to have been employed by such indemnifying
party.
12.7
Cost of
Transaction
.
Whether or not the transactions
contemplated hereby shall be consummated and except as otherwise
provided herein, the parties agree as follows:
(i) Except as provided otherwise elsewhere herein, Buyer
will pay the fees, expenses and disbursements of Buyer and its
agents, representatives, accountants, and counsel incurred in
connection with the subject matter hereof and any amendments
hereto; and
(ii) Except as provided otherwise elsewhere herein, Seller
shall pay the fees, expenses and disbursements of Seller and its
agents, representatives, accountants, and counsel incurred in
connection with the subject matter hereof and any amendments
hereto.
(iii) Seller shall pay the cost of the title policy and
Buyer shall pay the costs associated with any extended
owners title insurance policy (including all
endorsements). Buyer shall pay all costs and expenses associated
with obtaining the Survey and Phase I Assessment, required
filings under the HSR Act and recording fees and associated
Taxes attendant to recording any deeds conveying title to the
Owned Real Property.
12.8
Confidentiality
.
The
Confidentiality Agreement, dated as of April 22, 2010 (the
Confidentiality Agreement
), between Ardent
Medical Services, Inc. and MedCath Corporation shall remain in
full force and effect. It is understood by the parties hereto
that the information, documents and instruments delivered to
Seller by Buyer or the agents of Buyer and the information,
documents and instruments delivered to Buyer by Seller or
Sellers agents are of a confidential and proprietary
nature. Each of the parties hereto agrees that both prior and
subsequent to Closing it will maintain the confidentiality of
all such confidential information, documents or instruments
delivered to it by the other party hereto or its agents in
connection with the negotiation of this Agreement or in
compliance with the terms, conditions and covenants hereof and
only disclose such information, documents and instruments to its
duly authorized officers, directors, representatives and agents
unless (i) compelled to disclose by judicial or
administrative process (including, without limitation, in
connection with obtaining the necessary Approvals of this
Agreement and the transactions contemplated hereby) or by other
requirements of Law or (ii) disclosed in an action or
proceeding brought by a party hereto in pursuit of its rights or
in the exercise of its remedies hereunder;
provided
,
however
, that the parties hereto shall not disclose any
confidential information not required to be disclosed as part of
such permitted disclosure. Each of the parties hereto further
agrees that if the transactions contemplated hereby are not
consummated, it will return all such documents and instruments
and all copies thereof in its possession to the other party to
this Agreement. Each of the parties hereto recognizes that any
breach of this Section 12.8 would result in irreparable
harm to the other party to this Agreement and its Affiliates and
that therefore the non-breaching party shall be entitled to an
injunction to prohibit any such breach or anticipated breach,
without the necessity of posting a bond, cash or otherwise, in
addition to all of their other legal and equitable remedies.
Nothing in this Section 12.8, however, shall prohibit the
use of such confidential information, documents or information
for the purpose of securing financing to either party to effect
the purchase and sale of assets hereunder or such governmental
filings as in the mutual opinion of Sellers counsel and
counsel for Buyer are (i) required by Law or
(ii) otherwise appropriate. Also, this Section 12.8
shall not prohibit the disclosure by
40
either party of any information, instruments or documents that
are required to be filed with Governmental Entities by or under
applicable securities related Laws.
12.9
Press Release
. Except
as required by Law, at all times at or before Closing, neither
Buyer nor Seller will issue any report, statement or release to
the public with respect to this Agreement and the transactions
contemplated hereby without the prior written approval of the
other party hereto of the text of any such public report,
statement or release. Buyer acknowledges that MedCath
Corporation will file one or more
Forms 8-K
and proxy statements with the Securities and Exchange Commission
in connection with the transactions contemplated by this
Agreement and shall be entitled to disclose therein such
information as MedCath Corporation determines to be necessary or
appropriate.
12.10
Waiver of Breach
. The
waiver by either party of breach or violation of any provision
of this Agreement shall not operate as, or be construed to
constitute, a waiver of any subsequent breach of the same or
other provision hereof.
12.11
Notice
. Any notice,
demand or communication required, permitted, or desired to be
given hereunder shall be deemed effectively given when
personally delivered, when received by telegraphic or other
electronic means (including facsimile transmission) or overnight
courier, or five (5) days after being deposited in the
United States mail, with postage prepaid thereon, certified or
registered mail, return receipt requested, addressed as follows:
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If to Buyer:
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c/o Ardent
Health Services
One Burton Hills Boulevard
Suite 250
Nashville, Tennessee 37215
Attention: President and Chief Executive Officer
Facsimile: (615)296-6351
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with copy to:
|
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Ardent Health Services
One Burton Hills Boulevard
Suite 250
Nashville, Tennessee 37215
Attention: General Counsel
Facsimile: (615)296-6384
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If to Seller
|
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c/o MedCath
Corporation
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10720 Sikes Place, Suite 300
Charlotte, NC 28277
Attention: Chief Financial Officer
Facsimile: (704) 708-5035
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with a copy to:
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Moore and Van Allen PLLC
100 North Tryon Street
Suite 4700
Charlotte, NC 28202
Attention: Hal A. Levinson, Esq.
Facsimile: (704)331-1159
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or to such other address, and to the attention of such other
Person or officer as any party may designate.
12.12
Severability
.
In the
event any provision of this Agreement is held to be invalid,
illegal or unenforceable for any reason and in any respect, and
if the rights of Buyer and Seller under this Agreement will not
be materially or adversely affected thereby, (i) such
provision will be fully severable; (ii) this Agreement will
be construed and enforced as if the illegal, invalid or
unenforceable provision had never compromised a part hereof;
(iii) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance
here from; and (iv) in lieu of the illegal, invalid or
unenforceable provision, there will be added automatically as a
part of this agreement a legal, valid and enforceable provision
as similar in terms to the illegal, invalid or unenforceable
provision as may be possible.
41
12.13
No
Inferences
.
Inasmuch as this Agreement is the
result of negotiations between sophisticated parties of equal
bargaining power represented by counsel, no inference in favor
of, or against, either party shall be drawn from the fact that
any portion of this Agreement has been drafted by or on behalf
of such party.
12.14
Divisions and Headings of this
Agreement
.
The divisions of this Agreement
into articles, sections and subsections and the use of captions
and headings in connection therewith are solely for convenience
and shall have no legal effect in construing the provisions of
this Agreement.
12.15
No Third-Party
Beneficiaries
.
The terms and provisions of
this Agreement are intended solely for the benefit of Seller and
Buyer and their respective permitted successors or assigns, and
it is not the intention of the parties to confer, and this
Agreement shall not confer, third-party beneficiary rights upon
any other Person.
12.16
Tax and Medicare Advice and
Reliance
.
Except as expressly provided in
this Agreement, none of the parties (nor any of the
parties respective counsel, accountants or other
representatives) has made or is making any representations to
any other party (or to any other partys counsel,
accountants or other representatives) concerning the
consequences of the transactions contemplated hereby under
applicable Tax related Laws or under the Laws governing the
Medicare program. Each party has relied solely upon the Tax and
Medicare advice of its own employees or of representatives
engaged by such party and not on any such advice provided by any
other party hereto.
12.17
Entire Agreement;
Amendment
.
This Agreement supersedes all
previous Contracts (other than the Confidentiality Agreement)
and constitutes the entire agreement of whatsoever kind or
nature existing between or among the parties representing the
within subject matter and no party shall be entitled to benefits
other than those specified herein. As between or among the
parties, no oral statement or prior written material not
specifically incorporated herein shall be of any force and
effect. The parties specifically acknowledge that in entering
into and executing this Agreement, the parties rely solely upon
the representations and agreements contained in this Agreement
and no others. All prior representations or agreements, whether
written or verbal, not expressly incorporated herein are
superseded and no changes in or additions to this Agreement
shall be recognized unless and until made in writing and signed
by all parties hereto.
12.18
Sellers
Knowledge
.
When used herein, the phrases
to Sellers best knowledge and belief, to
Sellers knowledge and known and similar
references to Sellers knowledge shall mean and refer to
all matters with respect to which (a) Seller has received
written notice or (b) the actual knowledge of its officers
(or its Affiliates officers) listed on
Schedule 12.18
.
12.19
Multiple
Counterparts
.
This Agreement may be executed
in two or more counterparts, each and all of which shall be
deemed an original and all of which together shall constitute
but one and the same instrument. The facsimile signature of any
party to this Agreement or any Contract delivered in connection
with the consummation of the transactions described herein or a
PDF copy of the signature of any party to this Agreement or any
Contract delivered in connection with the consummation of the
transactions described herein delivered by electronic mail for
purposes of execution or otherwise, is to be considered to have
the same binding effect as the delivery of an original signature
on an original Contract.
12.20
Disclaimer of
Warranties
.
Except as expressly set forth in
Article 5 hereof, the Hospital and the Purchased Assets
transferred to Buyer will be conveyed by Seller and accepted by
Buyer in their physical condition as of the Effective Time,
AS IS, WHERE IS AND WITH ALL FAULTS, DEFECTS,
IMPERFECTIONS, LIABILITIES AND NONCOMPLIANCE WITH LAWS,
WITH NO WARRANTY OF HABITABILITY OR FITNESS FOR HABITATION, with
respect to the Real Property, and WITH NO WARRANTIES, INCLUDING,
THE WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, with respect to any personal property which is among
the Purchased Assets, any and all of which warranties (both
express and implied) Seller hereby disclaims. All of the
Purchased Assets shall be further subject to normal wear and
tear on the land, improvements and equipment in the ordinary
course of business up to the Effective Time.
12.21
No Survival
Period
.
The parties intend to shorten the
statute of limitations and agree that no claims or causes of
action may be brought against Buyer or Seller based upon,
directly or indirectly, any of the representations or warranties
contained in this Agreement or any agreements contained in
Article 6 or Article 7 after the Closing.
42
12.22
Right to Seek
Damages
.
Either party shall be entitled to
seek to recover damages and to recover damages from the other
party hereto relating to or arising under this Agreement and the
transactions contemplated hereby, subject to any limitations
thereon set forth in Articles 11 or 12, if, but only if,
any of the following is applicable:
(a) The claim is permitted under the terms of
Section 11.2(b) or Section 11.16;
(b) The other party fails to fulfill its obligations under
any covenant or other agreement set forth in this Agreement
which by its terms is intended to be performed after Closing;
(c) In the case of Buyer, Seller fails to pay or satisfy
Excluded Liabilities, and in the case of Seller, Buyer fails to
pay or satisfy Assumed Liabilities, it being acknowledged that
Seller shall retain liability for the Excluded Liabilities and
covenants and agrees that Seller shall be solely responsible and
liable therefore and, further, that Buyer shall not assume the
Excluded Liabilities or any obligation or responsibility
relating thereto; or
(d) In the case of Buyer, Seller fails to convey to Buyer
at Closing good and marketable title to the Purchased Assets
subject to no Encumbrances other than Permitted Encumbrances,
provided
,
however
, with respect to any matter
relating to the Owned Real Property, Buyer may seek to recover
damages and recover damages from Seller under this Agreement
only if Buyer has first asserted (and used commercially
reasonable efforts to recoup) its rights and remedies against
the Title Company and the title insurance policy issued
thereby with respect to the Owned Real Property.
12.23
Right to Take Limited Liability Company
and Corporate Action
.
Notwithstanding
anything in this Agreement to the contrary, nothing herein shall
prevent or limit, and Buyer shall not take actions to prevent or
limit, (a) Seller at any time after the Effective Time from
being dissolved or liquidated, making payments to its creditors
or distributions to its members, otherwise terminating its
existence
and/or
taking any other limited liability company act, in each case, as
permitted by the New Mexico Limited Liability Company Act, or
(b) MedCath Corporation and its Affiliates from engaging in
or agreeing to a Change in Control Transaction or making
payments to its creditors or distributions to its stockholders
at any time or, after the Effective Time, from being dissolved
or liquidated, and/ or otherwise terminating its existence, in
each case, as permitted by the General Corporation Law of
Delaware. This Section 12.23 is not intended to preclude,
and shall not preclude, Buyer from exercising any rights and
pursuing any remedies it might have under this Agreement. To
this end, Buyer shall be entitled to initiate actions and
proceedings and pursue claims against Seller and others in
accordance with applicable law to enforce its rights and seek
remedies available under this Agreement that are not satisfied
by Seller or MedCath Corporation. Any action or proceeding
initiated or commenced by Buyer against Seller or MedCath
Corporation or their Affiliates asserting a right set forth in
this Agreement shall not be deemed to be an action to prevent or
limit Seller or MedCath Corporation or other Affiliates from
being dissolved or liquidated.
12.24
Guarantee of Buyers
Obligations
. Ardent Medical Services, Inc.,
as principal obligor and not merely as a surety, hereby
unconditionally guarantees full, punctual and complete
performance by Buyer of all of Buyers obligations under
this Agreement and each of the Closing documents subject to the
terms hereof and thereof and so undertakes to Seller that, if
and whenever Buyer is in default, Ardent Medical Services, Inc.
will on demand duly and promptly perform or procure the
performance of Buyers obligations. The foregoing guarantee
is a continuing guarantee and will remain in full force and
effect until the obligations of Buyer under this Agreement have
been duly performed or discharged and will continue to be
effective or will be reinstated if any sum paid to Seller must
be restored by Seller upon the bankruptcy, liquidation or
reorganization of Buyer. Ardent Medical Services, Inc.s
obligations under this Section 12.24 shall not be affected
or discharged in any way by any action or proceeding with
respect to Buyer under any federal or state bankruptcy,
insolvency or debtor relief laws. Notwithstanding the foregoing,
the guaranty of Ardent Medical Services, Inc. shall terminate
after Buyers payment of the Final Cash Purchase Price to
Seller as provided for in Section 2.7 of this Agreement if
any such payment is due in connection with the determination of
such Final Cash Purchase Price.
* * *
[SIGNATURE
PAGE FOLLOWS]
43
IN WITNESS WHEREOF, the parties hereto have caused this Asset
Purchase Agreement to be executed in multiple originals by their
authorized officers, all as of the date and year first above
written.
BUYER:
LOVELACE HEALTH SYSTEM, INC.
Name: Ron Stern
SELLER:
HEART HOSPITAL OF NEW MEXICO, LLC
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By:
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NM Hospital Management, LLC, its Manager
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By:
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Name: O. Edwin French
GUARANTOR:
ARDENT MEDICAL SERVICES, INC.
a Delaware corporation
Name:
Title:
44
IN WITNESS WHEREOF, the parties hereto have caused this Asset
Purchase Agreement to be executed in multiple originals by their
authorized officers, all as of the date and year first above
written.
BUYER:
LOVELACE HEALTH SYSTEM, INC.
Name:
Title:
SELLER:
HEART HOSPITAL OF NEW MEXICO, LLC
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By:
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NM Hospital Management, LLC, its Manager
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By:
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Name: O. Edwin French
GUARANTOR;
ARDENT MEDICAL SERVICES, INC.
a Delaware corporation
Name: Clint B. Adams
45
IN WITNESS WHEREOF, the parties hereto have caused this Asset
Purchase Agreement to be executed in multiple originals by their
authorized officers, all as of the date and year first above
written.
BUYER:
LOVELACE HEALTH SYSTEM, INC.
Name:
Title:
SELLER:
HEART HOSPITAL OF NEW MEXICO, LLC
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By:
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NM Hospital Management, LLC, its Manager
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By:
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/s/ O.
Edwin French
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Name: O. Edwin French
GUARANTOR:
ARDENT MEDICAL SERVICES, INC.
a Delaware corporation
Name:
Title:
46
The undersigned hereby agree to be bound by the no-shop
provisions set forth in Section 7.7 hereof and the
non-compete restrictions set forth in Section 11.14 hereof,
and also in the case of MedCath Corporation for purposes of
Section 11.16 hereof:
NM Hospital Management, LLC
a North Carolina limited liability company
Name: O. Edwin French
MedCath Corporation
a Delaware corporation
Name: O. Edwin French
47
EXECUTION
COPY
EQUITY
PURCHASE AGREEMENT
BY
AND
AMONG
AR-MED, LLC,
BRUCE MURPHY, M.D.,
MEDCATH OF LITTLE ROCK, L.L.C.,
MEDCATH OF ARKANSAS, LLC
AND MEDCATH FINANCE COMPANY, LLC
Dated as of May 6, 2011
Table
of Contents
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Page
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ARTICLE 1 DEFINITIONS
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1
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1.1
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Definitions
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1
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1.2
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Interpretation
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6
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1.3
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Schedules
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7
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ARTICLE 2 SALE AND PURCHASE; PAYMENT OF FINCO OBLIGATIONS
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7
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2.1
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Transfer of Equity Interest
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7
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2.2
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[Intentionally omitted.]
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7
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2.3
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Purchase Price for Equity Interest
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7
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2.4
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Payment for Finco Obligations
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7
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2.5
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Interim Equity Purchase Price
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7
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2.6
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Final Equity Purchase Price
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7
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2.7
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Dispute of Adjustments/Reconciliation of Final Equity Purchase
Price
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7
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2.8
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Allocation of Total Payment
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8
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ARTICLE 3 CLOSING
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8
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3.1
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Closing
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8
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3.2
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Actions of Buyer at Closing
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9
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3.3
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Actions of Seller at Closing
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9
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ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER
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10
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4.1
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Organization, Qualification and Capacity
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10
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4.2
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Powers; Consents; Absence of Conflicts With Other Contracts
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10
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4.3
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Binding Agreement
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10
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4.4
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Litigation
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10
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4.5
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Buyer Acknowledgements
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10
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4.6
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No Other Representations and Warranties
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11
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ARTICLE 4-B
REPRESENTATIONS AND WARRANTIES OF DR. MURPHY
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11
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4.1-B
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Financial Statements of Dr. Murphy
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11
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4.2-B
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No Other Representations and Warranties
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11
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ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF SELLER
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12
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5.1
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Organization, Qualification and Capacity of Seller
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12
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5.2
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Ownership of Equity Interest
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12
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5.3
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Powers; Absence of Conflicts with other Contracts
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12
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5.4
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Binding Agreement
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12
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5.5
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Access to Records Related to Certain Liabilities and Contracts
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12
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5.6
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No Other Representations and Warranties
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12
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ARTICLE 6 [INTENTIONALLY OMITTED.]
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13
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ARTICLE 7 COVENANTS OF BUYER
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13
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7.1
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Notification of Certain Matters
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13
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7.2
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Approvals
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13
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i
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Page
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ARTICLE 8 COVENANTS OF SELLER
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13
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8.1
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Information
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13
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8.2
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Notification of Certain Matters
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13
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8.3
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No-Shop Clause
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13
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8.4
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Agreement to Cooperate with Buyer in Arranging for Financing
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14
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ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
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14
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9.1
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Compliance With Covenants
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14
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9.2
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Action/Proceeding
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14
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9.3
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Representations and Warranties
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14
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9.4
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Approvals
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14
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9.5
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[Intentionally omitted.]
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15
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9.6
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Amounts Due to Seller or MedCath
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15
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ARTICLE 10 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
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15
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10.1
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Compliance with Covenants
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15
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10.2
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Action/Proceeding
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15
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10.3
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Representations and Warranties
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15
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ARTICLE 11 ADDITIONAL, AGREEMENTS
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16
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11.1
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Termination Prior to Closing
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16
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11.2
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Assignment of Employment Agreements
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16
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11.3
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Buyer Preservation and Seller Access to Records After the Closing
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16
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11.4
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Reproduction of Documents
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17
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11.5
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Tax Matters
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17
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11.6
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Change of Name
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18
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11.7
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Insurance
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18
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11.8
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Cessation of Contractual Benefits and Withdrawal from MedCath
Employee Benefit Plans; Transfer to New Company Plans
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18
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11.9
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Payment of Additional Outstanding Expenses
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18
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ARTICLE 12 INDEMNIFICATION; LIMITATION ON DAMAGES
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19
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12.1
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Indemnification
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19
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12.2
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Specific Performance by Seller
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20
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12.3
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Sellers Remedies upon Buyers Material Breach of this
Agreement
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20
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12.4
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Release
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20
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12.5
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Survival
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20
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ARTICLE 13 GENERAL
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21
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13.1
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Consents, Approvals and Discretion
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21
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13.2
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Legal Fees and Costs
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21
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13.3
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Choice of Law; Jurisdiction and Venue; Damages
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21
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13.4
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Benefit; Assignment
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21
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13.5
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Effective Time; Accounting Date
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21
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13.6
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No Brokerage
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21
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13.7
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Cost of Transaction
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21
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13.8
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Confidentiality
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21
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ii
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Page
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13.9
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Press Release
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22
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13.10
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Waiver of Breach
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22
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13.11
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Notice
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22
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13.12
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Severability
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23
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13.13
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No Inferences
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23
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13.14
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Divisions and Headings of this Agreement
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23
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13.15
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No Third-Party Beneficiaries
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23
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13.16
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Tax and Medicare Advice and Reliance
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23
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13.17
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Entire Agreement; Amendment
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23
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13.18
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Knowledge
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24
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13.19
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Multiple Counterparts
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24
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13.20
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Right to Take Action
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24
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13.21
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Guaranty of Buyers Obligations
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24
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Exhibits
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iii
EXECUTION
COPY
EQUITY
PURCHASE AGREEMENT
THIS EQUITIES PURCHASE AGREEMENT
(this
Agreement
) is made and entered into as of
May 6, 2011 by and among
AR-MED, LLC,
an Arkansas
Limited Liability Company (
Buyer
),
BRUCE
MURPHY, M.D.,
a resident of Little Rock, Arkansas
(Dr. Murphy),
MEDCATH OF LITTLE ROCK,
L.L.C.,
a North Carolina limited liability company (the
Company
), and
MEDCATH OF ARKANSAS, LLC,
a North Carolina limited liability company
(
Seller
),
WITNESSETH
WHEREAS
, Seller owns a 70.33% membership interest
(
Equity Interest
) in the Company;
WHEREAS
, the Company owns and operates Arkansas Heart
Hospital located in Little Rock, Arkansas (the
Hospital
);
WHEREAS
, MedCath Finance Company, LLC, a Delaware limited
liability company (
Finco
) is an Affiliate of
Seller and has made certain loans to the Company as evidenced by
the Finco Loan Documents (as herein defined);
WHEREAS
, Buyer desires to purchase from Seller, and
Seller desires to sell to Buyer, all of Sellers Equity
Interest upon the terms and subject to the conditions set forth
in this Agreement;
WHEREAS
, as part of the transactions contemplated by this
Agreement, Buyer has agreed to cause the Company to pay in full
at Closing (as herein defined) all amounts owed to Finco
pursuant to the Finco Loan Documents; and
WHEREAS
, Dr. Murphy is the majority owner of Buyer
and has agreed to be jointly and severally liable with Buyer for
all of Buyers obligations and liabilities arising under
this Agreement.
NOW, THEREFORE
, for and in consideration of the premises,
and the agreements, covenants, representations and warranties
hereinafter set forth, and other good and valuable
consideration, the receipt and adequacy of which are forever
acknowledged and confessed, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1
Definitions
.
As used
herein the terms below shall have the following meanings:
Affiliate
means, as to the Person in
question, any Person that directly or indirectly controls, is
controlled by, or is under common control with, the Person in
question and any successors or assigns of such Person; and the
term control means possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of a Person whether through ownership of
voting securities, by Contract or otherwise;
provided
that, with respect to the Company and Seller,
Affiliate shall not include any direct or indirect
equityholder, officer or director of MC or MedCath or any member
of the Company other than Seller.
Agreement
means this Agreement, as amended or
supplemented, together with all Exhibits and Schedules attached
or delivered with respect hereto or expressly incorporated
herein by reference.
Allocation Schedule
has the meaning set forth
in Section 2.8.
Applicable Rate
means the prime
rate as quoted in the Money Rates section of
The Wall Street Journal
on the Closing Date.
1
Approval
means any approval, authorization,
consent, notice, qualification or registration, or any
extension, modification, amendment or waiver of any of the
foregoing, of or from, or any notice, statement, filing or other
communication to be filed with or delivered to, any Governmental
Entity.
Available Cash
means (i) the amount of
cash held by the Company as of the Closing Date;
plus
(ii) the amount of cash held by MedCath for the benefit of
or due to the Company as of the Closing Date;
plus
(iii) the amount by which Net Working Capital as of the
Closing Date exceeds the Target NWC, if applicable;
less
(iv) the amount by which Net Working Capital as of the
Closing Date is less than the Target NWC, if applicable.
Buyer
has the meaning set forth in the
Preamble hereto.
Buyer Termination Fee
has the meaning set
forth in Section 12.3(a).
CERCLA
has the meaning set forth in the
definition of Environmental Laws.
Change in Control Transaction
means
(i) a transaction in which a Person is or becomes the
beneficial owner, directly or indirectly, of securities of MC
representing fifty percent (50%) or more of the total voting
power represented by MCs then outstanding voting
securities; (ii) a merger or consolidation in which MC is a
party and in which the equityholders of MC before such merger or
consolidation do not retain, directly or indirectly, at least a
majority of the beneficial interest in the voting equity
interests of the Person that survives or results from such
merger or consolidation; or (iii) a sale or disposition by
MC or its Affiliates of all or substantially all of MCs
assets or those of its Affiliates existing as of the date hereof
(excluding the Hospital) either to a single or multiple buyers
thereof. Notwithstanding the foregoing, in no event shall the
acquisition of voting securities by one or more Persons (even if
such offering represents 50% or more of the total voting power
represented by MCs then outstanding voting securities) in
a public offering constitute a Change in Control Transaction.
Claim
means any action, cause of action,
suit, debt due, sum of money, account, reckoning, bond, bill,
specialty, covenant, contract, controversy, agreement, promise,
variance, trespass, damage, judgment, extent, execution, demand,
or chose in action whatsoever, in law or equity (including,
without limitation, court costs, reasonable attorneys fees
and other reasonable professional fees related to the defense of
a potential or asserted Claim).
Closing
has the meaning set forth in
Section 3.1.
Closing Balance Sheet
means the balance sheet
of the Company as of the Closing Date. The Closing Balance Sheet
shall be prepared in accordance with GAAP (as defined by
purposes of this Agreement and consistent with the modifications
set forth in
Schedule 1.1A
), applied on a basis
consistent with past practices.
Closing Date
has the meaning set forth in
Section 3.1.
Code
means the Internal Revenue Code of 1986,
as amended, and the rules and regulations promulgated thereunder.
Company
has the meaning set forth in the
Preamble hereto.
Confidentiality Agreement
has the meaning set
forth in Section 13.8.
Contract
means any binding written or oral
contract, commitment, instrument, lease, or other arrangement or
agreement.
Effective Time
has the meaning set forth in
Section 13.5.
Encumbrance
means any claim, charge,
easement, encumbrance, conditional sales agreement, right of
first refusal, option, encroachment, security interest,
mortgage, lien, pledge or restriction, whether imposed by
Contract, Law, equity or otherwise.
Environmental Laws
means all Laws relating to
pollution or the environment, including the Comprehensive
Environmental Recovery, Compensation, and Liability Act, as
amended, 42 U.S.C.
2
§ 9601,
et seq.
(
CERCLA
);
the Resource Conservation and Recovery Act, as amended,
42 U.S.C. § 6901,
et seq.
(
RCRA
), the Clean Air Act, 42 U.S.C
§ 7401,
et seq.
, the Occupational Safety and
Health Act, 29 U.S.C. § 600,
et seq.
(
OSHA
), and all other Laws relating to
emissions, discharges, releases, or threatened releases of
pollutants, contaminants, chemicals, pesticides, or industrial,
infectious, toxic or hazardous substances or wastes into the
environment (including ambient air, surface water, groundwater,
land surface or subsurface strata) or otherwise relating to the
processing, generation, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants,
chemicals, or industrial, infectious, toxic, or hazardous
substances or wastes.
Equity Interest
has the meaning set forth in
the recitals hereto.
ERISA
means the Employee Retirement Income
Security Act of 1974, as amended.
Excluded Contracts
has the meaning set forth
in Section 11.8.
Exhibits
means the exhibit(s) to this
Agreement.
Final Available Cash Calculation
means a
calculation of the Available Cash as of the Closing Date.
Final Equity Purchase Price
means an amount
equal to (i) Sellers Share of the total of
(x) Seventy Three Million Dollars ($73,000,000), minus
(y) the Finco Obligations, and further minus (z) the
outstanding amount of Financing Obligations as of the Closing
Date, plus (ii) Sellers Share of Final Available Cash.
Final NWC Calculation
means a calculation of
the Net Working Capital as of the Closing Date. The Final NWC
Calculation shall be prepared using the same policies,
methodologies and assumptions used in connection with the
preparation of the determination of Net Working Capital set
forth on
Schedule 1.1B
. For the avoidance of doubt,
the accounting policies, assumptions and methodologies used for
determining the obsolescence of medical supplies inventory and
the accrual of bad debt reserves shall be the same as used in
connection with the preparation of the determination of Net
Working Capital set forth on
Schedule 1.1B
.
Financing Obligations
means the capital lease
obligations of the Company under capital leases identified on
Schedule 1.1C
and the long term indebtedness of the
Company outstanding under the loans identified on
Schedule 1.1C
.
Finco
means MedCath Finance Company, LLC, a
Delaware limited liability company, an entity affiliated with
Seller which has made certain loans to the Company as evidenced
by the Finco Loan Documents.
Finco Loan Documents
means the loan
agreement, promissory note, mortgage, deed of trust, security
agreement and related documents documenting the Finco
Obligations as listed on
Schedule 1.1D
.
Finco Obligations
shall mean the aggregate
amount of indebtedness of the Company (including, without
limitation, current maturities thereof) outstanding under the
Finco Loan Documents as identified on
Schedule 1.1D
in accordance with GAAP. The amount of Finco Obligations as of
December 31, 2010 is set forth on
Schedule 1.1D
.
Finco Obligations Payoff Amount
means the
outstanding amount of principal and accrued but unpaid interest
due to Finco under the Finco Loan Documents as of the Closing
Date.
FIRPTA
means the Foreign Investment Real
Property Tax Act of 1980, as amended, and the rules and
regulations promulgated thereunder.
GAAP
means United States generally accepted
accounting principles and practices as in effect from time to
time, as modified as described in
Schedule 1.1A
and
applied by the Company consistently throughout the periods
involved and in accordance with the Companys prior
practices and policies.
3
Government Programs
means the federal
Medicare program, all applicable state Medicaid programs,
TRICARE and their respective successor programs.
Governmental Entity
means any government or
any agency, bureau, board, directorate, commission, court,
department, official, political subdivision, tribunal or other
instrumentality of any government, whether federal, state or
local, domestic or foreign.
Hospital
has the meaning set forth in the
recitals hereto.
Indemnifiable Losses
means all losses,
liabilities, damages, fines, penalties, interest, costs
(including court costs and costs of appeal) and expenses
(including reasonable attorneys fees and other fees of
professionals and experts related to the defense of a potential
or asserted Claim) actually incurred by an Indemnified Party.
Indemnified Party
has the meaning set forth
in Section 12.1(a).
Indemnifying Parties
has the meaning set
forth in Section 12.1(a).
Intellectual Property
means any patents,
trademarks, trade names, service marks, copyrights and any
applications therefor.
Interim Available Cash Calculation
means a
calculation of the Available Cash as of the Interim Balance
Sheet Date.
Interim Balance Sheet
means the balance sheet
of the Company as of the Interim Balance Sheet Date. The Interim
Balance Sheet shall be prepared in accordance with GAAP (as
defined by purposes of this Agreement and consistent with the
modifications set forth in
Schedule 1.1A
), applied
on a basis consistent with past practices date.
Interim Balance Sheet Date
means the most
recently ended calendar month prior to the Closing Date for
which financial statements are available for the Company.
Interim Equity Purchase Price
means an amount
equal to (i) Sellers Share of the total of
(x) Seventy Three Million Dollars ($73,000,000), minus
(y) the Finco Obligations, and further minus (z) the
outstanding amount of Financing Obligations as of the Closing
Date, plus (ii) Sellers Share of Interim Available
Cash.
Interim NWC Calculation
means a calculation
of the Net Working Capital as of the Interim Balance Sheet Date.
The Interim NWC Calculation shall be prepared using the same
methodologies and assumptions used in connection with the
preparation of the determination of Net Working Capital set
forth on
Schedule 1.1B
.
Law
means any constitutional provision,
statute, ordinance or other law, rule, regulation or order of
any Governmental Entity.
Management Rights
means the Sellers
rights under the Operating Agreement to manage the Company and
to serve as, or to elect, managers of the Company.
Material Adverse Effect
shall mean any fact,
circumstance, event, change, effect, condition or occurrence
that, individually or in the aggregate, has had or is reasonably
likely to have a material adverse effect on the business,
operations, property, financial condition or results of
operations of the Company or the Hospital or their material
assets, taken as a whole;
provided
,
however
, that
any adverse effect arising out of, resulting from or
attributable to any of the following shall not constitute or be
deemed to contribute to a Material Adverse Effect, and otherwise
shall not be taken into account in determining whether a
Material Adverse Effect has occurred: (i) a fact,
circumstance, event, change, effect or occurrence, or series of
such items, to the extent affecting (A) global, national or
regional economic, business, regulatory, market or political
conditions or national or global financial markets, including
changes in interest or exchange rates or (B) the healthcare
industry generally, (ii) the negotiation, execution or the
announcement of, or the performance of obligations under, this
Agreement, the Schedules or the other documents contemplated by
this Agreement or the consummation of the
4
transactions contemplated hereby, (iii) any actions
expressly permitted to be taken pursuant to this Agreement or
taken with the specific written consent of or at the written
request of Buyer, (iv) earthquakes, hurricanes, or other
natural disasters or acts of God, (v) any hostilities, acts
of war, sabotage, terrorism or military actions, or any
escalation or worsening of any such hostilities, act of war,
sabotage, terrorism or military actions, (vi) any failure
to meet internal or published projections, estimates or
forecasts of revenues, earnings, or other measures of financial
or operating performance for any period or (vii) the
implementation of the Patient Protection and Affordable Care
Act, as in effect on the date of this Agreement.
MC
means MedCath Corporation, a Delaware
corporation.
MedCath
means MedCath Incorporated, a North
Carolina corporation.
MedCath Plans
has the meaning set forth in
Section 11.8.
Medicaid
means Title XIX of the Social
Security Act.
Medicare
means Title XVIII of the Social
Security Act.
Net Working Capital
means, as of the date of
determination, an amount equal to the following with respect to
the Company, in each instance as determined in accordance with
GAAP, consistently applied: (a) the sum of the amounts
reflected in the entries (or line items) on the applicable
balance sheet entitled (i) Total Accounts
Receivable; (ii) Medical Supplies
Inventory; and (iii) Prepaid Expenses and Other
Assets less (b) the sum of all the amounts reflected
in the entries (or line items) on the applicable balance
entitled (i) Accounts Payable (but excluding,
for avoidance of doubt, any amounts included within the Finco
Obligations); (ii) Accrued Salaries and
Bonuses; and (iii) Other Accrued
Liabilities. For avoidance of doubt, the parties agree
that the amounts reflected in the entries (or line items) on the
applicable balance sheet entitled Guaranteed Reserve
Asset, if applicable, and Guaranteed Reserve
Liability, if applicable, shall not be considered in
determining Net Working Capital. Net Working Capital shall be
prepared in accordance with GAAP (except as provided in
Schedule 1.1A
), applied on a basis consistent with
past practices using the same policies, methodologies and
assumptions used in connection with the preparation of the
determination of Net Working Capital set forth on
Schedule 1.1B
. The Net Working Capital as of
December 31, 2010 is set forth on
Schedule 1.1B
.
Operating Agreement
means the Operating
Agreement of the Company as amended from time to time, but in
the form in effect as of the date of this Agreement.
OSHA
has the meaning set forth in the
definition of Environmental Laws.
Outside Date
has the meaning set forth in
Section 11.1(a)(ii).
Outstanding Expenses
has the meaning set
forth in Section 9.6.
Permit
means any license or permit required
to be issued by any Governmental Entity.
Person
means an association, a corporation, a
limited liability company, an individual, a partnership, a
limited liability partnership, a trust or any other entity or
organization, including a Governmental Entity.
Releasors
has the meaning set forth in
Section 12.4.
RCRA
has the meaning set forth in the
definition of Environmental Laws.
Schedules
means the disclosure schedules to
this Agreement.
Securities Act
means the Securities Act of
1933, as amended, or any successor law, and regulations and
rules issued pursuant to that Act or any successor law.
Seller
has the meaning set forth in the
Preamble hereto.
Sellers Share
means 70.33%.
5
Sellers Share of Final Available Cash
means Sellers percentage ownership interest in the Company
(70.33%) multiplied by the Final Available Cash Calculation.
Sellers Share of Interim Available Cash
means Sellers percentage ownership interest in the Company
(70.33%) multiplied by the Interim Available Cash Calculation.
Short Period Return
has the meaning set forth
in Section 11.5(b).
Target NWC
means Net Working Capital (as
defined herein) equal to Seven Million Dollars ($7,000,000).
Taxes
means all federal, state, county and
local income, franchise, margin, payroll, withholding, property,
sales, use and all other taxes, penalties, interest and any
other statutory additions.
Total Payment
has the meaning set forth in
Section 2.8.
TRICARE
means the Department of
Defenses managed healthcare program for active duty
military, active duty service families, retirees and their
families and other beneficiaries.
1.2
Interpretation
. In this
Agreement, unless the context otherwise requires:
(a) references to this Agreement are references to this
Agreement and to the Exhibits and Schedules;
(b) references to Articles and Sections are references to
articles and sections of this Agreement;
(c) references to any party to this Agreement shall include
references to its respective successors and permitted assigns;
(d) references to a judgment shall include references to
any order, writ, injunction, decree, determination or award of
any court or tribunal or arbitrator in a binding arbitration;
(e) the terms hereof, herein,
hereby, and derivative or similar words will refer
to this entire Agreement;
(f) references to any document (including this Agreement)
are references to that document as amended, consolidated,
supplemented, novated or replaced by the parties from time to
time;
(g) unless the context requires otherwise, references to
any Law are references to that Law as of the Closing Date, and
shall also refer to all rules and regulations promulgated
thereunder;
(h) the word including (and all derivations
thereof) shall mean including, without limitation;
(i) references to time are references to Central Standard
or Daylight Savings time (as in effect on the applicable day)
unless otherwise specified herein;
(j) the gender of all words herein include the masculine,
feminine and neuter, and the number of all words herein include
the singular and plural;
(k) provisions of this Agreement shall be interpreted in
such a manner so as not to inequitably benefit or burden any
party through double counting of assets or
liabilities or failing to recognize benefits that may result
from any matters that impose losses or burdens on any party,
including in connection with the determination of the Final
Equity Purchase Price and the calculation of losses on casualty
claims;
(1) the terms date hereof, date of this
Agreement and similar terms shall mean the date set forth
in the opening paragraph of this Agreement, and if such date is
left blank, the date when this Agreement is fully executed by
all parties; and
(m) the section headings and subheadings in this Agreement
and the Schedules are for convenience of reference only and
shall not affect the meaning or interpretation of this Agreement
or the express description of the Schedules.
6
1.3
Schedules
. Buyer and
Seller hereby acknowledge and agree as follows:
(a) the Schedules and any disclosures made in or by virtue
of them are integral parts of this Agreement as if fully set
forth in this Agreement and all statements appearing therein
shall be deemed to be representations;
(b) the fact that any items of information are contained in
the Schedules shall not be construed as an admission of
liability under any applicable Law, or to mean that such
information is required to be disclosed in or by this Agreement,
or to mean that such information is material. Such information
shall not be used as a basis for interpreting the terms
material, materially,
materiality or any similar qualification in the
Agreement. Nothing in the Schedules constitutes an admission of
any liability or obligation of Seller to any third party, nor an
admission against Sellers interest; and
(c) items disclosed on one particular Schedule relating to
one section of this Agreement are deemed to be constructively
disclosed or listed on other Schedules relating to other
sections of this Agreement to the extent it is reasonably
apparent on the face of such other Schedules that such
disclosure is applicable to such other Schedules.
ARTICLE 2
SALE AND
PURCHASE; PAYMENT OF FINCO OBLIGATIONS
2.1
Transfer of Equity
Interest
. Subject to the terms and conditions
set forth in this Agreement, at the Closing, Seller shall sell
and transfer the Equity Interest to Buyer, and Buyer shall
purchase from Seller, the Equity Interest, free and clear of all
Encumbrances, charges, claims, or restrictions of any type
except as otherwise provided by this Agreement and Buyer shall
assume all obligations and liabilities of Seller arising under
the Operating Agreement.
2.2
[Intentionally omitted.]
2.3
Purchase Price for Equity
Interest
. Subject to the terms and conditions
hereof, in reliance on the representations and warranties herein
set forth and as consideration for the sale and purchase of the
Equity Interest Buyer shall pay to Seller an amount equal to the
Final Equity Purchase Price. On the Closing Date, Buyer shall
wire transfer an amount equal to the Interim Equity Purchase
Price in immediately available federal funds to an account
designated by Seller in writing at least two (2) days prior
to Closing. The amount of the Interim Equity Purchase Price will
be further and finally adjusted and settled after Closing as
provided in Section 2.6 so that Seller is finally paid an
amount equal to the Final Equity Purchase Price.
2.4
Payment for Finco
Obligations
. Subject to the terms and
conditions hereof, at the Closing, Buyer shall cause the Company
to pay to Finco an amount equal to the Finco Obligations Payoff
Amount. On the Closing Date, Buyer shall cause the Company to
wire transfer an amount equal to the Finco Obligations Payoff
Amount in immediately available federal funds to an account
designated by Finco in writing at least two (2) days prior
to Closing.
2.5
Interim Equity Purchase
Price
. At least five (5) days prior to
the Closing Date Seller shall deliver to Buyer (i) the
Interim Balance Sheet, and (ii) the Interim NWC
Calculation. Based upon such exchange of information, the
parties shall determine, calculate, and agree, in writing, upon
the Interim Equity Purchase Price.
2.6
Final Equity Purchase
Price
. Not more than forty-five
(45) days after the Closing Date, Seller shall deliver to
Buyer (i) the Closing Balance Sheet, and (ii) the
Final NWC Calculation. Subject to Section 2.7, based upon
such exchange of information, the parties shall determine,
calculate and agree, in writing, upon the Final Equity Purchase
Price.
2.7
Dispute of Adjustments/Reconciliation of
Final Equity Purchase Price
.
Within thirty (30) days after the date on which Buyer has
received the information to be provided by Seller pursuant to
Section 2.6, Buyer shall, in a written notice to Seller,
either accept or describe in reasonable
7
detail any proposed adjustments to the calculations exchanged
and the reasons therefor, and shall include pertinent
calculations. If Buyer fails to deliver notice of acceptance or
objection to such calculations within such thirty (30) day
period, then Buyer shall be deemed to have accepted the
calculations presented by Seller. In the event that Buyer and
Seller are not able to agree on the Final Equity Purchase Price
within thirty (30) days from and after the receipt by
Seller of any objections raised by Buyer, Buyer and Seller shall
each have the right to require that such disputed determination
be submitted to such independent certified public accounting
firm as Buyer and Seller may then mutually agree upon in writing
for computation or verification in accordance with the
provisions of this Agreement. The results of such accounting
firms report shall be binding upon Buyer and Seller, and
such accounting firms fees and expenses for each disputed
determination shall be borne equally by the parties. Appropriate
payment shall be made by Buyer or Seller, as appropriate, by
wire transfer of immediately available federal funds promptly
upon (and in all events within three (3) business days
after) agreement between Seller and Buyer on the Final Equity
Purchase Price or determination of the Final Equity Purchase
Price in accordance with this Section as follows: either
(i) Buyer shall pay Seller the amount by which the Final
Equity Purchase Price exceeds the Interim Equity Purchase Price
or (ii) Seller shall pay Buyer the amount by which the
Interim Equity Purchase Price exceeds the Final Equity Purchase
Price. At all reasonable times following delivery by Seller of
the information and calculations required by Section 2.6,
Seller shall make available to Buyer and its agents all books
and records of Seller related to the determination of the
Interim Equity Purchase Price and the Final Equity Purchase
Price, including all accounting work papers and journal entries
underlying the determination of the Interim Equity Purchase
Price and the Final Equity Purchase Price or any component
thereof. Any amounts due under this Section 2.7 shall bear
interest from the Closing Date until paid at a rate equal to the
Applicable Rate per annum.
2.8
Allocation of Total
Payment
. The amounts paid by Buyer under
Sections 2.3 and 2.4 (the
Total Payment
)
shall be allocated in accordance with Code Section 1060,
and in the manner set forth in
Schedule 2.8
(the
Allocation Schedule
). Buyer and Seller agree
that the Allocation Schedule shall reflect, or be amended to
reflect, any post-closing adjustments determined under
Article 2 or otherwise pursuant to this Agreement. Buyer
and Seller shall, and shall cause their respective Affiliates
to, (a) prepare and file all Tax returns (including amended
Tax returns and claims for refund) in all respects and for all
purposes in a manner consistent with the Allocation Schedule
(and agreed amendments thereto) to the extent permitted by Law,
and (b) take no position with respect to Taxes that is
contrary to or inconsistent with the Allocation Schedule (and
agreed amendments thereto), including in any audits or
examinations by any taxing authority or any other proceeding.
Buyer and Seller shall cooperate in the timely filing of any
forms (including IRS Form 8594) with respect to such
allocation, including any amendments to such forms required with
respect to any adjustment to the Final Equity Purchase Price
pursuant to the Agreement. If the allocation is disputed by any
taxing authority, the party receiving notice of such dispute
shall promptly notify the other party hereto, and consult with
such other party and keep it apprised of developments concerning
the resolution of such dispute. Notwithstanding any other
provisions of this Agreement, the foregoing agreement shall
survive the Closing without limitation.
ARTICLE 3
CLOSING
3.1
Closing
. Subject to the
satisfaction or waiver by the appropriate party of all the
conditions precedent to Closing specified in Articles 9 and
10, the consummation of the sale and purchase of the Equity
Interest and the other transactions contemplated by and
described in this Agreement (the
Closing
)
shall take place at the offices of the Hospital in Little Rock,
Arkansas, not later than the fifth (5th) business day after the
conditions set forth in Articles 9 and 10 have been
satisfied or waived or at such other date
and/or
at
such other location as the parties hereto may mutually designate
in writing (the
Closing Date
). The parties
shall use commercially reasonable efforts to cause the
conditions set forth in Articles 9 and 10 to be satisfied
so that the Closing will occur on July 31, 2011; provided,
however, that the transactions contemplated under this Agreement
shall be effective as of the Effective Time.
8
3.2
Actions of Buyer at
Closing
. At the Closing and unless otherwise
waived in writing by Seller, Buyer shall deliver to Seller, or
cause to be delivered to Seller, the following:
(a) An amount equal to the Interim Equity Purchase Price by
wire transfer of immediately available funds to an account
designated by Seller;
(b) An amount equal to the Finco Obligations Payoff Amount
by wire transfer of immediately available funds to an account
designated by Finco;
(c) Copies of resolutions duly adopted by the members and
managers (if any) of Buyer, authorizing and approving
Buyers performance of the transactions contemplated hereby
and the execution and delivery of this Agreement and the
documents described herein, certified as true and of full force
and effect as of Closing, by the appropriate representatives of
Buyer;
(d) A certificate of Buyer certifying that the conditions
set forth in Sections 9.1 and 9.3 have been satisfied;
(e) Certificates of incumbency for the respective members
or representatives of Buyer executing this Agreement and any
other document contemplated herein dated as of the Closing Date;
(f) Certificates of existence and good standing of Buyer
from its state of organization dated the most recent practical
date prior to Closing;
(g) An instrument of assumption duly executed by Buyer
under which Buyer assumes all liabilities and obligations of
Seller arising under or relating to the Management Rights;
(h) An executed instrument of assumption duly executed by
Buyer under which Buyer assumes all liabilities and obligations
of Seller arising under the Operating Agreement;
(i) One or more executed instruments of assumption duly
executed by Buyer under which Buyer assumes all liabilities and
obligations of Seller arising under the employee agreements
which Buyer is required to assume pursuant to Section 11.2
herein; and
(j) Such other instruments and documents Seller reasonably
deems necessary to effect the transactions contemplated hereby.
3.3
Actions of Seller at
Closing
. At the Closing and unless otherwise
waived in writing by Buyer, Seller shall deliver to Buyer the
following:
(a) An executed instrument of assignment and assumption
transferring the Equity Interest and the Management Rights to
Buyer;
(b) An acknowledgment by Finco that all of the Finco
Obligations have been fully paid and satisfied as a result of
the completion of the Closing;
(c) Copies of resolutions duly adopted by Seller
authorizing and approving Sellers respective performances
of the transactions contemplated hereby and the execution and
delivery of this Agreement and the documents described herein,
certified as true and in full force and effect as of Closing by
the appropriate officers of Seller;
(d) Certificates of Seller certifying that the conditions
set forth in Sections 10.1 and 10.3 have been satisfied;
(e) Certificates of incumbency for the officers of Seller
executing this Agreement and any other document contemplated
herein dated as of the Closing Date;
(f) Certificates of existence and good standing of Seller
from its state of organization dated the most recent practical
date prior to Closing;
(g) A FIRPTA certificate, executed by Seller, certifying
Sellers U.S. taxpayer identification number and that
Seller is not a foreign Person, within the meaning of Section
1445 of the Code;
9
(h) A complete copy of the Operating Agreement, including
all amendments hereto, certified by an officer or other
authorized representative of Seller to be a true, correct, and
complete copy of the Operating Agreement as then in effect as of
Closing;
(i) Complete copies of all employee agreements which Buyer
is required to assume pursuant to Section 11.2 herein,
including all amendments hereto, certified by an officer or
other authorized representative of Seller to be true, correct,
and complete copies of these employment agreement as then in
effect as of Closing;
(j) A complete copy of the Confidentiality Agreement, dated
as of April 30, 2010, which shall continue in full force
and effect pursuant to Section 13.8 herein, certified by an
officer or other authorized representative of Seller to be a
true, correct, and complete copy of the Confidentiality
Agreement as then in effect as of Closing; and
(k) Such other instruments and documents as Buyer
reasonably deems necessary to effect the transactions
contemplated hereby.
ARTICLE 4
REPRESENTATIONS
AND WARRANTIES OF BUYER
As of the date hereof and as of the Closing Date (except to the
extent any of the following speaks as of a specific date, such
as the date hereof), Buyer represents and warrants to Seller the
following:
4.1
Organization, Qualification and
Capacity
. Buyer is a limited liability
company duly organized and validly existing in good standing
under the Laws of the State of Arkansas. The execution and
delivery by Buyer of this Agreement and the documents described
herein, the performance by Buyer of its obligations under this
Agreement and the documents described herein and the
consummation by Buyer of the transactions contemplated by this
Agreement and the documents described herein have been duly and
validly authorized and approved by all necessary actions on the
part of Buyer, none of which actions have been modified or
rescinded and all of which actions remain in full force and
effect.
4.2
Powers; Consents; Absence of Conflicts With
Other Contracts
. The execution, delivery and
performance of this Agreement and the documents described herein
by Buyer and the consummation by Buyer of the transactions
contemplated by this Agreement and documents described herein,
as applicable:
(a) are not in contravention or violation of the terms of
the certificate of incorporation, limited partnership agreement,
operating agreement or similar governing document of Buyer;
(b) will not conflict in any material respect with, nor
result in any material breach or contravention of, any material
Contract to which Buyer is a party or by which Buyer is bound.
4.3
Binding Agreement
. This
Agreement and all documents to which Buyer or any of its
Affiliates will become a party hereunder are and will constitute
the valid and legally binding obligations of Buyer
and/or
such
Affiliates and are and will be enforceable against it in
accordance with the respective terms hereof or thereof, except
as enforceability may be restricted, limited or delayed by
applicable bankruptcy or other Laws affecting creditors
rights generally and except as enforceability may be subject to
general principles of equity.
4.4
Litigation
. There is no
claim, action, suit, proceeding or investigation pending or, to
the knowledge of Buyer, threatened in writing against or
affecting Buyer that has or would reasonably be expected to have
a material adverse effect on the ability of Buyer to perform
this Agreement or any aspect of the transactions contemplated
hereby.
4.5
Buyer Acknowledgements
.
(a) Buyer has: (i) such knowledge and experience in
financial and business matters as to be capable of evaluating
the merits and risks of the transactions contemplated by this
Agreement, including the purchase of the Equity Interest;
(ii) the ability to bear the economic risk in connection
with the
10
consummation of the transactions contemplated by this Agreement,
including a complete loss of future revenue related to the
Equity Interest; and (iii) been furnished with and has had
access to such information as it has considered necessary to
make a determination to execute, deliver and perform its
obligations hereunder.
(b) The decision of Buyer, whose majority owner is
currently an investor and a manager of the Company and who is
involved in the operations of the Hospital and the Company and
has full knowledge of the financial performance of the Hospital
and the Company, to purchase the Equity Interest has been
(i) made voluntarily and of its own accord, based upon,
(A) the extensive knowledge and experience of Buyer in
financial and business matters relating to owning and operating
general acute care hospitals, (B) consultations with
advisors of Buyer, and (C) its investigation of the
business, assets, risks and prospects of the Company and
(ii) made without relying on any statement (whether oral or
written), or any representation or warranty of, Seller, or any
of its Affiliates, officer or director of Seller, other than the
representations and warranties expressly contained in this
Agreement and the other Contracts executed at the Closing in
connection herewith. As of the date hereof, Buyer has no
knowledge of any facts or circumstances which constitute or are
reasonably likely to constitute a breach of the representations
and warranties of Seller set forth in Article 5 of this
Agreement.
(c) Buyer is acquiring the Equity Interest for its own
account and not with a view to its distribution within the
meaning of the Securities Act.
4.6
No Other Representations and
Warranties
. EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN THIS ARTICLE 4 (INCLUDING THE
SCHEDULES), BUYER MAKES NO EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY, AND BUYER HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR
WARRANTY WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS
AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT.
ARTICLE 4-B
REPRESENTATIONS
AND WARRANTIES OF DR. MURPHY
As of the date hereof and as of the Closing Date (except to the
extent any of the following speaks as of a specific date, such
as the date hereof), Dr. Murphy represents and warrants to
Seller the following:
4.1-B
Financial Statements of
Dr. Murphy
.
(a)
Schedule 4.1-B
hereto contains the financial statements and financial
information of Dr. Murphy dated as of March 31, 2011
(collectively, the
Murphy Financial
Information
). The Murphy Financial Information is true
and correct and fairly represents the complete and full
financial position and condition of Dr. Murphy.
(b) Except as disclosed in the Murphy Financial
Information, Dr. Murphy has no material liabilities, no
liens, mortgages, security interests or encumbrances on his
assets, and there is no litigation, proceedings or claims
pending or threatened against him other than liabilities that
were incurred after March 31, 2011 in the ordinary course
of business none of which are material in nature.
4.2-B
No Other Representations and
Warranties
. EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN THIS
ARTICLE 4-B
(INCLUDING THE SCHEDULES), DR. MURPHY MAKES NO EXPRESS OR
IMPLIED REPRESENTATION OR WARRANTY, AND DR. MURPHY HEREBY
DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY WITH RESPECT TO
THE EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE
CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT
11
ARTICLE 5
REPRESENTATIONS
AND WARRANTIES OF SELLER
As of the date hereof and as of the Closing Date (except to the
extent any of the following speaks as of a specific date, such
as the date hereof), Seller represents and warrants to Buyer the
following:
5.1
Organization, Qualification and Capacity of
Seller
. Seller is a limited liability company
duly organized and in existence under the Laws of the State of
North Carolina. Except as set forth on
Schedule 5.1
,
the execution and delivery by Seller of this Agreement and the
documents described herein, the performance by Seller of its
obligations under this Agreement and the documents described
herein and the consummation by Seller of the transactions
contemplated by this Agreement and the documents described
herein have been duly and validly authorized and approved by all
necessary corporate actions on the part of Seller, none of which
actions have been modified or rescinded and all of which actions
remain in full force and effect.
5.2
Ownership of Equity
Interest
.
Except as set forth on
Schedule 5.2
, Seller is, and will be on the Closing
Date, the record and beneficial owner and holder of the Equity
Interest, free and clear of all Encumbrances, charges, claims,
or restrictions of any type and on the Closing Date Seller will
transfer the Equity Interest to Buyer free and clear of all
Encumbrances, charges, claims, or restrictions of any type.
Seller owns 70.33% of the total of all outstanding membership
interests in the Company, and the conveyance of Sellers
Equity Interest is intended to, and will, convey to Buyer all of
Sellers equity ownership in the Company. Sellers
Equity Interest has been duly authorized and validly issued.
5.3
Powers; Absence of Conflicts with other
Contracts
. The execution, delivery and
performance of this Agreement and the documents described herein
by Seller of the transactions contemplated by this Agreement and
documents described herein, as applicable:
(a) are not in contravention or violation of the terms of
the operating agreement of Seller or the Operating
Agreement; and
(b) will not conflict in any material respect with, nor
result in any material breach or contravention of, any material
Contract to which Seller is a party or by which Seller is bound.
5.4
Binding Agreement
. This
Agreement and all documents to which Seller will become a party
hereunder are and will constitute the valid and legally binding
obligations of Seller and are and will be enforceable against it
in accordance with the respective terms hereof or thereof,
except as enforceability may be restricted, limited or delayed
by applicable bankruptcy or other Laws affecting creditors
rights generally and except as enforceability may be subject to
general principles of equity.
5.5
Access to Records Related to Certain
Liabilities and Contracts
. The following
documentation is maintained in the Companys files, books
and records: (a) documentation or records related to the
Companys current debts for borrowed monies,
(b) Contracts to which Company is a party related to the
lease of equipment, and (c) Contracts to which Company is a
party and under which Company has an outstanding obligation of
Two Hundred and Fifty Thousand Dollars ($250,000) or more.
5.6
No Other Representations and
Warranties
. EXCEPT FOR THE REPRESENTATIONS
AND WARRANTIES CONTAINED IN THIS ARTICLE 5 (INCLUDING THE
SCHEDULES), BUYER IS PURCHASING THE EQUITY INTEREST AS
IS AND WHERE IS AND SELLER MAKES NO EXPRESS OR
IMPLIED REPRESENTATION OR WARRANTY, AND SELLER HEREBY DISCLAIMS
ANY SUCH REPRESENTATION OR WARRANTY WITH RESPECT TO THE
HOSPITAL, THE COMPANY, THE SELLER OR ITS AFFILIATES OR THE
EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE CONSUMMATION OF
THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
12
ARTICLE 6
[INTENTIONALLY
OMITTED.]
ARTICLE 7
COVENANTS OF
BUYER
7.1
Notification of Certain
Matters
. At any time from the date of this
Agreement to the Closing Date, Buyer shall give prompt written
notice to Seller of (i) the occurrence, or failure to
occur, of any event that has caused any representation or
warranty of Buyer contained in this Agreement to be untrue in
any material respect and (ii) any failure of Buyer to
comply with or satisfy, in any material respect, any covenant,
condition or agreement to be complied with or satisfied by it
under this Agreement. Such notice shall provide a reasonably
detailed description of the relevant circumstances.
7.2
Approvals
. Between the
date of this Agreement and the Closing Date, Buyer will
(a) take all reasonable steps to obtain, as promptly as
practicable, (i) all Approvals and Permits of any
Governmental Entities required of either party to consummate the
transactions contemplated by this Agreement, and (ii) any
and all necessary consents of any counterparties to Contracts
with the Company whose consent to the transactions contemplated
under this Agreement is required under the terms of such
Contract, provided that obtaining any such consents shall not be
a condition to Closing and (b) provide such other
information, notification, and communications to any
Governmental Entity as may be required or reasonably requested
of Buyer, the Company or the Hospital.
ARTICLE 8
COVENANTS OF
SELLER
8.1
Information
.
(1) Between the date of this Agreement and the Closing
Date, to the extent permitted by Law, Seller shall cause the
Company to afford to the authorized representatives and agents
of Buyer reasonable access to and the right to inspect the books
and records of the Company, and to furnish Buyer with such
additional financial and operating data and other information as
to the business, and access to the assets, of the Company as
Buyer may from time to time reasonably request and cause Finco
to afford to the authorized representatives and agents of Buyer
reasonable access to and the right to inspect the books and
records of Finco relating to the Finco Obligations. The right of
access of Buyer shall be made in such a manner as not to
interfere unreasonably with the operation of the Hospital or the
Companys assets.
(2) Notwithstanding the foregoing, Buyer understands that
(i) Seller will reasonably establish procedures in order to
protect documents and information of the Company deemed by
Seller in good faith to be market sensitive or competitive in
nature, including without limitation pricing information related
to managed care contracts and (ii) Seller shall not be
obligated to generate or produce information in any prescribed
format not customarily produced by Seller.
8.2
Notification of Certain
Matters
. At any time from the date of this
Agreement to the Closing Date, Seller shall give prompt written
notice to Buyer of (i) the occurrence, or failure to occur,
of any event that has caused any representation or warranty of
Seller or Finco contained in this Agreement to be untrue in any
material respect and (ii) any failure of Seller to comply
with or satisfy, in any material respect, any covenant,
condition or agreement to be complied with or satisfied by it
under this Agreement. Such notice shall provide a reasonably
detailed description of the relevant circumstances.
8.3
No-Shop Clause
. From and
after the date of the execution and delivery of this Agreement
by Seller until the earlier of Closing or the termination of
this Agreement, Seller shall not (and will not permit any
Affiliate or any other Person acting for or on behalf of Seller
or any of its Affiliates to), without the prior written consent
of Buyer (i) offer for lease or sale the Companys
material assets (or any material portion thereof) or any
ownership interest in any entity owning any of the
Companys material assets or any interest in the Finco
Obligations; (ii) solicit offers to lease or buy all or any
material portion of the Companys assets or
13
any ownership interest in any entity owning any of the
Companys material assets or any interest in the Finco
Obligations; (iii) hold discussions with any party (other
than Buyer) looking toward such an offer or solicitation or
looking toward a merger or consolidation of the Company or sale
or assignment of the Finco Obligations; (iv) enter into any
agreement with any party (other than Buyer) with respect to the
lease, sale or other disposition of the Companys material
assets (or any material portion thereof) or any ownership
interest in the Company or with respect to any merger,
consolidation or similar transaction involving the Company or
any interest in the Finco Obligations; or (v) furnish or
cause to be furnished any information with respect to the
Company or its assets to any Person that Seller or such
Affiliate or any such Person acting for or on their behalf knows
or has reason to believe is in the process of considering any
such acquisition, merger, consolidation, combination or
reorganization, provided the foregoing shall not prevent MC or
Persons acting for or on its behalf from including any
information it deems required by Law in any of its filings with
the Securities and Exchange Commission. Nothing in this
Section 8.3, however, shall apply to or otherwise restrict
any actions, negotiations or agreements in respect of any
transaction involving a sale of equity, merger, combination, a
sale of all or substantially all of its assets or similar
transaction involving MC or its Affiliates and any other Person.
8.4
Agreement to Cooperate with Buyer in
Arranging for Financing
. Seller, at no
out-of-pocket
cost or expense, agrees to reasonably cooperate with Buyer as
necessary for Buyer to arrange for financing in connection with
the consummation of the transactions contemplated by this
Agreement,
provided
that obtaining such financing is not
a condition to Buyers obligation to consummate the
transactions contemplated by this Agreement.
ARTICLE 9
CONDITIONS
PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller hereunder are subject to the
satisfaction, on or prior to the Closing Date, of the following
conditions unless waived in writing by Seller:
9.1
Compliance With
Covenants
. Buyer shall have in all material
respects performed all obligations and complied with all
covenants and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing
Date; provided that this condition will be deemed to be
satisfied unless both (i) Buyer was given written notice of
such failure to perform or comply and did not or could not cure
such failure to perform or comply within fifteen (15) days
after receipt of such notice and (ii) the respects in which
such covenants and obligations have not been performed have had
a material adverse effect on the ability of Buyer to timely
consummate the transactions described herein.
9.2
Action/Proceeding
. No
court or any other Governmental Entity shall have issued an
order restraining or prohibiting the transactions herein
contemplated; and no Governmental Entity with jurisdiction over
the Company or the Hospital shall have commenced or threatened
in writing to commence any action or suit before any court of
competent jurisdiction or other Governmental Entity that seeks
to restrain or prohibit the consummation of the transactions
herein contemplated.
9.3
Representations and
Warranties
. The representations and
warranties of Buyer and Dr. Murphy contained in this
Agreement that are qualified by any type of materiality standard
shall be true in all respects, and the representations and
warranties of Buyer and Dr. Murphy that are not so
qualified shall be true in all material respects, when made and
as of the Closing Date, as though such representations and
warranties had been made as of the Closing Date (unless made
only as of a specific date in which case they shall be true as
of such date); provided, however, that this condition will be
deemed to be satisfied unless any breaches of representations
and warranties by Buyer or Dr. Murphy have had a material
adverse effect on the ability of Buyer to timely consummate the
transactions described herein.
9.4
Approvals
.
(a) MC shall have obtained any approvals of the
shareholders of MC which it has determined in its sole
discretion are required under the Delaware General Corporation
Law for MC to authorize Seller to
14
consummate the transactions contemplated under this Agreement,
which approval may be subject to the shareholders of MC
approving one or more additional transactions, together with the
transactions contemplated under this Agreement, as a whole or as
a group in order to approve the transactions contemplated under
this Agreement.
(b) Seller shall have obtained any consents or approvals
from the Board of the Company or the Companys members
other than Seller, which consents or approvals Seller is
required to obtain in order to consummate the transactions
contemplated under this Agreement.
9.5
[Intentionally omitted.]
9.6
Amounts Due to Seller or
MedCath
. The Company shall have paid to
Seller or MedCath, as appropriate, an amount equal to
(a) all amounts of management fees and related expenses due
from the Company to Seller or MedCath, (b) all amounts of
unreimbursed costs and expenses of any type or nature advanced
or paid by Seller or MedCath on behalf or for the benefit of the
Company, in both cases with respect to the period through and
including the Closing Date (collectively, the
Outstanding Expenses
) and (c) any unpaid
guarantee fee incurred by Members of the Company under the terms
of Section 5.16 of the Operating Agreement.
ARTICLE 10
CONDITIONS
PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer hereunder are subject to the
satisfaction, on or prior to the Closing Date, of the following
conditions unless waived in writing by Buyer:
10.1
Compliance with
Covenants
. Seller shall have in all material
respects performed all their respective obligations and complied
with all covenants and conditions required by this Agreement to
be performed or complied with by either of them at or prior to
the Closing Date; provided that this condition will be deemed to
be satisfied unless both (i) Seller each were given written
notice of such failure to perform or comply and each of them did
not or could not cure such failure to perform or comply within
fifteen (15) days after receipt of such notice and
(ii) the respects in which such covenants and obligations
have not been performed have had a material adverse effect on
the ability of either Seller to timely consummate the
transactions described herein.
10.2
Action/Proceeding
. No
court or any other Governmental Entity shall have issued an
order restraining or prohibiting the transactions herein
contemplated; and no Governmental Entity with jurisdiction over
the Company or the Hospital shall have commenced or threatened
in writing to commence any action or suit before any court of
competent jurisdiction or other Governmental Entity that seeks
to restrain or prohibit the consummation of the transactions
herein contemplated or otherwise seeks a remedy which would
materially and adversely affect the ability of Buyer to purchase
or own the Equity Interest or satisfy and pay in full the Finco
Obligations.
10.3
Representations and
Warranties
. All representations and
warranties of Seller contained in this Agreement that are
qualified by any type of materiality standard shall be true in
all respects, and all other representations and warranties of
Seller that are not so qualified shall be true in all material
respects, when made and as of the Closing Date, as though such
representations and warranties had been made as of the Closing
Date (unless made only as of a specific date in which case they
shall be true as of such date); provided, however, that this
condition will deemed to be satisfied unless any breaches of
such representations or warranties individually or in the
aggregate have had or are reasonably likely to have a Material
Adverse Effect. In the event that there are breaches of
representations and warranties made by Seller hereunder that
have not had or are not reasonably likely to have a Material
Adverse Effect (i) Buyer shall not be excused from
performance hereunder as a result of such breaches and shall be
obligated to complete the transaction described herein, and
(ii) Buyer shall not assert the breach of such
representations and warranties as a basis for not consummating
the transaction contemplated by this Agreement.
15
ARTICLE 11
ADDITIONAL
AGREEMENTS
11.1
Termination Prior to Closing
.
(a) Notwithstanding anything in this Agreement to the
contrary, this Agreement and the transactions contemplated by
this Agreement may not be terminated, except prior to Closing as
follows:
(i) by mutual consent in writing of Seller and Buyer;
(ii) by Buyer, on the one hand, or Seller, on the other
hand, at any time after July 31, 2011 (the
Outside
Date
), if the Closing has not occurred by such date
subject however to the right of Buyer or Seller to extend the
Outside Date as set forth below; provided, that the right to
terminate this Agreement under this Section 11.1 (a)(ii) is
not available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or
resulted in, the failure of the Closing to occur by such date,
provided further
, that if the Closing has not occurred
due to or related to either (x) the conditions set forth in
Sections 9.2 or 10.2 not having been satisfied or
(y) because MC shall not have obtained any approvals of the
shareholders of MC which it has determined in its reasonable
discretion are required under the Delaware General Corporation
Law for MC to authorize Seller to consummate the transactions
contemplated under this Agreement, then in either of such
events, Buyer or Seller may elect, by providing written notice
to the other party hereto, to extend the Outside Date to
August 31, 2011, provided that the right to so extend under
this Section 11.1 (a)(ii) is not available to any party
whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Closing to
occur by July 31, 2011.
(iii) by Seller if Buyer or Dr. Murphy breach in any
material respect any of the representations, warranties,
covenants or other agreements of Buyer or Dr. Murphy
contained in this Agreement, which would give rise to the
failure of a condition set forth in Section 9.1, which
breach cannot be or has not been cured within fifteen
(15) days after the giving of written notice by Seller to
Buyer or Dr. Murphy as the applicable specifying such
breach;
(iv) by Buyer if Seller breaches in any material respect
any of the representations, warranties, covenants or other
agreements of Seller contained in this Agreement, which would
give rise to the failure of a condition set forth in
Section 10.1, which breach cannot be or has not been cured
within fifteen (15) days after the giving of written notice
by Buyer to Seller specifying such breach; or
(v) by Buyer or Seller, if any court or any other
Governmental Entity issues an order restraining or prohibiting
such party from consummating the sale and purchase of the Equity
Interest or the full payment of the Finco Obligations as
provided herein and such order becomes final and non-appealable.
(b) In the event that this Agreement is terminated pursuant
to Section 11.1 (a), all further obligations of the parties
under this Agreement shall terminate without further liability
of any party to another;
provided
that (x) nothing
in this Section 11.1 shall relieve Seller or Buyer, Company
and Dr. Murphy of any liability for an intentional breach
of any covenant in this Agreement prior to the date of
termination, (y) Buyer shall be entitled to seek the remedy
of specific performance as set forth in Section 12.2, and
(z) Seller shall be entitled to the Buyer Termination Fee
as set forth in Section 12.3.
11.2
Assignment of Employment
Agreements
.
Prior to the Closing, Seller
shall cause the employment of the employees listed on
Schedule 11.2
to be transferred and the employment
agreements between MedCath and such employees listed on
Schedule 11.2
to be assigned to and assumed by the
Company.
11.3
Buyer Preservation and Seller Access to
Records After the Closing
.
(a) After the Closing, Buyer shall keep and preserve in
their original form all medical and other records of the Company
existing as of the Closing for such period as required by
applicable Law, or, if applicable Law does not impose a specific
requirement for the time of retention, for a period of at least
three (3) years following the Closing Date. For purposes of
this Agreement, the term records includes all
documents, electronic data and other compilations of information
in any form, including without limitation financial and
16
Tax records. Buyer acknowledges that as a result of entering
into this Agreement and operating the Hospital it and its
Affiliates will gain access to patient and other information
which is subject to rules and regulations regarding
confidentiality. Buyer shall abide by any such rules and
regulations relating to the confidential information that it
acquires. Buyer shall maintain the patient records held at the
Hospital or delivered to Buyer at Closing at the Hospital after
Closing in accordance with applicable Law (including, if
applicable, Section 1861(v)(i)(I) of the Social Security
Act (42 U.S.C. § 1395(V)(l)(i)), and requirements
of relevant insurance carriers, all in a manner consistent with
the maintenance of patient records generated at the Hospital
after Closing. Upon reasonable notice, during normal business
hours and upon the receipt by Buyer of appropriate consents and
authorizations, Buyer shall afford to representatives of Seller,
including its counsel and accountants, full, complete and timely
access to, and the right to make copies of, the records of the
Company (including access to patient records in respect of
patients treated by Affiliates of Seller at the Hospital)
including providing a reasonable location within the Hospital to
conduct its review of such records; provided, however, that no
consents or authorizations shall be necessary with respect to
the Companys financial records and Tax records necessary
for Seller to prepare financial statements, cost reports and Tax
returns. In addition, Seller shall be entitled to remove from
the Hospital any such patient records, but only for purposes of
pending litigation involving a patient to whom such records
refer, as certified in writing prior to removal by counsel
retained by Seller in connection with such litigation. Any
patient records so removed from the Hospital shall be promptly
returned to the Company following its use by Seller.
(b) Without limitation to Buyers indemnification
obligations under Article 12 of this Agreement, Buyer shall
reasonably cooperate with Seller and its insurance carriers at
Buyers expense in connection with the defense of claims
made by third parties against Seller in respect of alleged
events occurring while Seller owned an interest in the Company.
Such cooperation shall include, without limitation, making all
of Buyers employees reasonably available for interviews,
depositions, hearings and trial; and making all of Buyers
employees reasonably available to assist in the securing and
giving of evidence and in obtaining the presence and cooperation
of witnesses, all of which shall be done without payment of any
fees or expenses to Buyer or its employees or the payment of any
of Buyers internal expenses. In addition, Seller shall be
entitled to remove from the Hospital any records, but only for
purposes of pending litigation involving the Person to whom such
records refer, as certified in writing prior to removal by
counsel retained by Seller in connection with such litigation.
Any records so removed from the Hospital shall be promptly
returned to Buyer following their use by Seller.
11.4
Reproduction of
Documents
. This Agreement and all documents
relating hereto, including (i) consents, waivers and
modifications which may hereafter be executed, (ii) the
documents delivered at the Closing, and (iii) financial
statements, certificates and other information previously or
hereafter furnished to Seller or Buyer, may, subject to the
provisions of Section 13.8, be reproduced by Seller and by
Buyer by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and Seller and
Buyer may destroy any original documents so reproduced. Seller
and Buyer agree and stipulate that any such reproduction shall
be admissible in evidence as the original itself in any
judicial, arbitral or administrative proceeding (whether or not
the original is in existence and whether or not such
reproduction was made by Seller or Buyer in the regular course
of business) and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible
in evidence.
11.5
Tax Matters
.
(a) Following the Closing, the parties shall cooperate
fully with each other and shall provide to the other, as
reasonably requested by and at the expense of the requesting
party, all information, records or documents relating to Tax
liabilities of the requesting party for all periods ending on or
prior to the Closing and shall preserve all such information,
records and documents (to the extent a part of the assets
exchanged and delivered at Closing) at least until the
expiration of any applicable statute of limitations or
extensions thereof; provided, that neither party shall be
required to provide any of its income Tax returns (or supporting
materials including working papers and Tax provisions) or those
of any Affiliate.
(b) Buyer shall cause the Company to file two
(2) short period income tax returns for the tax year of the
Company during which the Closing occurs (each, a
Short
Period Return
). The first short period shall end on
17
the date of the Closing, and the second short period shall start
on the day after the date of the Closing. If the Closing occurs
on the last day of a calendar month, Buyer shall to the extent
appropriate file such Short Period Returns based on the
information obtained from the normal month end closing of the
books by the Company. If the Closing occurs on a day other than
the last day of a calendar month, Buyer shall use the
information (to the extent appropriate) from normal month end
closing of the books by the Company for the previous calendar
month and adopt a reasonable method of allocating the income of
the calendar month of the Closing between the Short Period
Returns. Seller shall have the right to review and reasonably
approve the Short Period Return for the period ending on the
date of the Closing in advance of filing.
11.6
Change of Name
. On or
before the Closing Date, the Company shall amend its Articles of
Organization and take all other actions necessary to change its
name to one that does not include MedCath or any
name that is sufficiently similar thereto so as to potentially
cause confusion. From and after the Closing Date, Company shall
make no further use of (i) the name MedCath, or
(ii) any other names that are sufficiently similar to
MedCath so as to potentially cause confusion.
11.7
Insurance
. As of the
Effective Time, Seller shall cause the Company to be removed as
either a named insured or beneficiary under each of the
insurance policies listed on
Schedule 11.7
and Buyer
shall obtain, or cause the Company to obtain at Buyers
expense, any and all insurance policies necessary to cover the
ownership and operation of the Company and the Hospital.
11.8
Cessation of Contractual Benefits and
Withdrawal from MedCath Employee Benefit Plans; Transfer to New
Company Plans
.
(a) As of the Effective Time, the Hospital shall no longer
receive benefits (or have any obligations) arising out of
certain Contracts between (i) MC, MedCath, Seller their
Affiliates
and/or
the
Company and (ii) certain third parties. Such Contracts that
are material to the Company are all group Contracts entered into
by MedCath or MC for the benefit of the Company and one or more
Affiliates of Seller, and are those specific Contracts listed on
Schedule 11.8(a)
(collectively, the
Excluded Contracts
). As of the Effective
Time, the Company shall withdraw from and cease to be a
participating employer under the employee benefit plans listed
on
Schedule 11.8(b)
(the
MedCath
Plans
), and the employees of the Company shall cease
to accrue further benefits and shall cease to be active
participants under the MedCath Plans.
(b) Buyer shall cause the Company to adopt and establish
effective immediately after the Effective Time a defined
contribution plan with a cash of deferred arrangement within the
meaning of Section 401(k) of the Code intended to be
qualified under Section 401(a) of the Code and a related
trust exempt from taxation under Section 501(a) of the Code
(the Company 401(k) Plan). The Company 401(k) Plan shall
benefit Hospital employees currently covered by the MedCath
Incorporated 401(k) Profit Sharing Plan and Trust (the
MedCath 401(k)Plan).
(c) Before the expiration of the applicable remedial
amendment period under Section 401(b) of the Code, Buyer
shall cause the Company to file for and make commercially
reasonable efforts to obtain a determination from the Internal
Revenue Service that the Company 401(k) Plan and related trust
are qualified and exempt from taxation within the meaning of
Sections 401(a) and 501(a) of the Code, respectively.
(d) As soon as practicable after the Closing, MedCath or
MC, as the case may be, shall transfer, or cause to be
transferred, in a trust to trust transfer in accordance with
Section 414(1) of the Code, the account balances (assets
and liabilities) of the Hospital employees currently covered by
the MedCath 401(k) Plan from the MedCath 401(k) Plan and any
related trusts to the Company 401(k) Plan and its related trust.
All assets shall be transferred from the MedCath 401(k) Plan to
the Company 401(k) Plan in cash except any participant loan
notes with respect to the Hospital employees shall be
transferred in kind.
11.9
Payment of Additional Outstanding
Expenses
. To the extent any Outstanding
Expenses are not known or paid as of the Closing Date under
Section 9.6, then Buyer shall cause all such amounts to be
promptly paid to Seller after Closing upon Sellers request
therefore accompanied by reasonable supporting documentation.
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ARTICLE 12
INDEMNIFICATION;
LIMITATION ON DAMAGES
12.1
Indemnification
.
(a) From and after the Closing, Buyer, Dr. Murphy, and
the Company (collectively, the
Indemnifying
Parties
) shall jointly and severally indemnify and
hold harmless MedCath, MC, Seller and its Affiliates, and their
respective officers directors, principals, attorneys, agents,
employees or other representatives (each, an
Indemnified Party
) from and against any
Indemnifiable Losses relating to or arising out of (i) any
breach of any representation or warranty of the Buyer or
Dr. Murphy in Article 4 or
Article 4-B,
(ii) the failure by the Buyer to perform any covenant or
agreement in this Agreement, or (iii) any liability or
obligation, whether known, contingent or unknown, of any type or
nature, whether now existing or arising after Closing, relating
to the Company or the Hospital or relating to or arising out of
the ownership, management or operations of the Company prior to,
on or after the Closing Date, including without limitation any
liability or obligation, relating to or arising out of
(A) current liabilities, accounts payable and long-term
liabilities of the Company or the Hospital, (B) any
Contract to which the Company or the Hospital was, is or will be
a party, (C) any act or omission of the Company or the
Hospital, including without limitation any malpractice or
general liability claim, (D) the Intellectual Property
rights of the Company or any Intellectual Property rights of any
third party to the extent licensed by or through the Company or
the Hospital, (E) reimbursement by Government Programs or
other third party payors for goods and services provided by the
Company or the Hospital or any other matters relating to
Government Programs or other third party payors,
(F) federal, state or local investigations of, or claims or
actions against, the Company or the Hospital, including without
limitation any investigations, claims or actions in connection
with the ongoing investigation relating to Implantable
Cardioverter Defibrilators, (G) cost reports filed by the
Company or the Hospital with Medicare either before or after
Closing, (H) any actual or alleged violation of, or
non-compliance with, any Law by the Company or the Hospital
relating to or arising from the ownership, management or
operations of the Company or the Hospital or by Seller or its
Affiliates, including without limitation any Environmental Laws,
whether existing or occurring, or alleged to exist or occur,
prior to or after Closing, (I) any civil or criminal
obligation, liability or litigation accruing, arising out of, or
relating to any acts or omissions of the Company, the Hospital,
Seller, Sellers Affiliates or their respective officers,
directors, employees or agents relating to or arising from the
ownership, management or operation of the Company or the
Hospital (for purposes of clarification, the scope of this
subsection (I) for which indemnification is required from
the Indemnifying Parties does not include unrelated claims if
made by a stockholder of MC against MC), (J) former,
current or future employees of the Company or the Hospital,
including without limitation claims related to severance,
workers compensation, unemployment compensation, employee
health and welfare benefit plans, wages and benefits, ERISA or
violations of Laws adopted by the United States Equal Employment
Opportunity Commission, or (K) any obligation or liability
of the Company or the Hospital with respect to Taxes or Tax
returns due either before or after Closing, including without
limitation Taxes which may arise upon consummation of the
transactions contemplated under this Agreement other than Taxes
due from Seller with respect to its income arising from the sale
of its Equity Interest to Buyer. The obligations to indemnify
Seller and its Affiliates under this Article 12 shall
survive the Closing.
(b) If any claim or liability is asserted in writing
against an Indemnified Party which would give rise to a claim
under this Section 12.1, the Indemnified Party shall notify
Buyer in writing of the same within ten (10) business days
of receipt of such written assertion of a claim or liability;
provided, however, that the failure to provide such notice as so
indicated shall not affect the Indemnifying Parties
obligation to indemnify and the Indemnifying Parties shall have
no remedy by reason of such failure except to the extent of any
actual prejudice resulting from such delay. The Indemnified
Party shall have the right to elect to either, at the
Indemnifying Parties sole cost, (i) defend any such
claim, select the counsel and any other professionals or
experts, subject to Buyers approval which shall not be
unreasonably withheld, conditioned or delayed, and control the
defense, settlement and prosecution of any litigation or
(ii) require that the Indemnifying Parties undertake the
defense of such claim and take such other actions described in
subsection (i), above, on behalf of the Indemnified Party using
counsel and any other professionals or experts approved in
writing by Seller, which shall not be unreasonably withheld,
conditioned or delayed. The parties hereby agree that neither
party shall be required to obtain the consent of the other party
prior to engaging Moore & Van Allen, PLLC or
19
Reed Smith to defend a claim under this Section 12.1. In
the event the Indemnifying Parties undertake the defense of a
claim upon the request of an Indemnified Party under subsection
(ii), above, such claim shall not be compromised or settled
without the consent of the Indemnified Party.
(c) The Indemnified Party and Indemnifying Parties shall
cooperate in all reasonable respects, at the expense of the
Indemnifying Parties, in the investigation, trial and defense of
any lawsuit or action that may be subject to this
Section 12.1, any appeal arising therefrom and any
notifications to insurers.
12.2
Specific Performance by
Seller
. Notwithstanding the right of Buyer to
terminate this Agreement pursuant to Section 11.1(a), in
the event of a breach by Seller of its obligation to consummate
the transactions contemplated by this Agreement or a breach by
Seller of a covenant prior to or following the Closing, Buyer
shall be entitled to specific performance to force Seller to
consummate the transactions contemplated by this Agreement or to
enforce the covenant, such relief to be without the necessity of
posting a bond, cash or otherwise (unless required by applicable
Law).
12.3
Sellers Remedies upon Buyers
Material Breach of this Agreement
. If Seller
terminates this Agreement pursuant to Section 11.l(a)(iii),
as Sellers sole and exclusive additional remedy for
Buyers uncured breach of this Agreement which results in
such a termination of this Agreement, the parties agree and
acknowledge that Seller shall have suffered a material loss and
incurred damage of an incalculable nature and amount, in which
event Buyer and Dr. Murphy, jointly and severally, shall be
obligated to pay to Seller, as liquidated damages, a fee of
Three Million and 00/100 Dollars ($3,000,000) (
Buyer
Termination Fee
). The parties agree and acknowledge
that the amount of the Buyer Termination Fee is fair and
reasonable. The Buyer Termination Fee shall be payable to Seller
in immediately available funds by wire transfer no later than
six (6) months after such termination; provided however,
such Buyer Termination Fee shall not be due from Buyer, if and
only if, within six (6) months of any such termination of
this Agreement by Seller (a) either (x) Seller
consummates the sale of its Equity Interest on terms that
include a purchase price paid in cash equal to or greater than
the Final Equity Purchase Price, repayment in full of all Finco
Obligations and other terms and conditions comparable to or more
favorable than those set forth in this Agreement, or
(y) the Company consummates the sale of its assets on terms
that results in a cash distribution to Seller equal to or
greater than the Final Equity Purchase Price, repayment in full
of all Finco Obligations and other terms and conditions
comparable to or more favorable than those set forth in this
Agreement, and (b) Dr. Murphy has fully cooperated and
supported the transactions described in subsections (x) and
(y) above. The obligations hereunder shall survive the
termination of this Agreement.
12.4
Release
. As of the
Effective Time, each of the Indemnifying Parties (collectively
with any of their heirs, executors, administrators, personal
representatives, successors, assigns, officers, directors,
shareholders, owners, members and affiliates) (collectively, the
Releasors
) shall release each Indemnified
Party from all Claims that the Releasors ever had, has or
hereafter can, shall or may have against any Indemnified Party
for, upon, or by reason of any matter, cause or thing
whatsoever, whether known, contingent or unknown, of any type or
nature, whether existing or arising on or after Closing,
including without limitation, any matter, cause or thing
relating to or arising out of the ownership, management or
operations of the Company prior to, on or after the Closing
Date, including without limitation related to those matters set
forth in Section 12.1(a)(i)(A) through (K). Each individual
who is directly or indirectly a member or investor in the
Company (other than Seller and its Affiliates) and who is also
directly or indirectly a member or investor in the Buyer shall
be a Releasor for purposes of this Section 12.4 and shall
execute a release of Seller and its Affiliates reflecting the
terms of this Section 12.4.
12.5
Survival
.
(a) The representations and warranties of the parties
contained herein and all rights with respect thereto, shall
survive until sixty (60) days after the expiration of the
applicable statute of limitations.
(b) The covenants and agreements of the parties contained
herein which by their terms do not contemplate performance after
the Closing shall terminate as of the Closing. The covenants and
agreements which by their terms contemplate performance after
the Closing Date shall survive the Closing in accordance with
their terms.
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ARTICLE 13
GENERAL
13.1
Consents, Approvals and
Discretion
. Except as herein expressly
provided to the contrary, whenever this Agreement requires any
consent or approval to be given by either party or either party
must or may exercise discretion, the parties agree that such
consent or approval shall not be unreasonably withheld,
conditioned or delayed and such discretion shall be reasonably
exercised.
13.2
Legal Fees and
Costs
. In the event either party elects to
incur legal expenses to enforce or interpret any provision of
this Agreement by judicial or arbitral means, the prevailing
party will be entitled to recover such legal expenses, including
attorneys fees, costs and necessary disbursements, in
addition to any other relief to which such party shall be
entitled.
13.3
Choice of Law; Jurisdiction and Venue;
Damages
.
(a) The parties agree that this Agreement shall be governed
by and construed in accordance with the Laws of the State of
North Carolina without giving effect to any choice or conflict
of law provision or rule thereof.
(b) Except as specifically provided for elsewhere in this
Agreement, the parties to this Agreement agree that any legal or
equitable action or proceeding with respect to this Agreement,
or arising in any manner in connection with the transactions
contemplated by this Agreement shall be brought in the courts of
the State of North Carolina, Mecklenburg County, or the United
States District Court for the Western District of North Carolina.
13.4
Benefit;
Assignment
. Subject to provisions herein to
the contrary, this Agreement shall inure to the benefit of and
be binding upon the parties hereto and their respective legal
representatives, successors and assigns. No party may assign
this Agreement without the prior written consent of the other
party; provided, however, that a party hereto may assign its
interest (or a portion thereof) in this Agreement to an
Affiliate, but, in such event, the assignor shall be required to
remain obligated hereunder in the same manner as if such
assignment had not been effected.
13.5
Effective Time; Accounting
Date
. The transactions contemplated hereby
shall be effective for all purposes as of 11:59 p.m. (the
Effective Time
) on the Closing Date, unless
otherwise agreed in writing by Buyer and Seller. The parties
will use commercially reasonable efforts to cause the Closing to
be effective as of a month end.
13.6
No Brokerage
. Buyer and
Seller represent to each other that no broker has in any way
been contracted in connection with the transactions contemplated
hereby other than Sellers or an Affiliate of Sellers
engagement of Navigant Capital Advisors, LLC, the fees and
expenses of which shall be borne solely by Seller or its
Affiliate. Each of Buyer and Seller agrees to indemnify the
other party from and against all loss, cost, damage or expense
arising out of claims for fees or commissions of brokers
employed or alleged to have been employed by such indemnifying
party.
13.7
Cost of
Transaction
. Whether or not the transactions
contemplated hereby shall be consummated and except as otherwise
provided herein, the parties agree as follows:
(a) Except as provided otherwise elsewhere herein, Buyer
will pay the fees, expenses and disbursements of Buyer and its
agents, representatives, accountants, and counsel incurred in
connection with the subject matter hereof and any amendments
hereto;
(b) Except as provided otherwise elsewhere herein, Seller
shall pay the fees, expenses and disbursements themselves and
its respective agents, representatives, accountants, and counsel
incurred in connection with the subject matter hereof and any
amendments hereto; and
(c) [Intentionally omitted.]
13.8
Confidentiality
. The
Confidentiality Agreement, dated as of April 30, 2010 (the
Confidentiality Agreement
), between
Dr. Bruce Murphy and MC shall remain in full force and
effect. It is understood by the
21
parties hereto that the information, documents and instruments
delivered to Seller by Buyer or the agents of Buyer and the
information, documents and instruments delivered to Buyer by
Seller or Sellers agents are of a confidential and
proprietary nature. Each of the parties hereto agrees that both
prior and subsequent to Closing it will maintain the
confidentiality of all such confidential information, documents
or instruments delivered to it by the other party hereto or its
agents in connection with the negotiation of this Agreement or
in compliance with the terms, conditions and covenants hereof
and only disclose such information, documents and instruments to
its duly authorized officers, directors, representatives and
agents unless (i) compelled to disclose by judicial or
administrative process (including, without limitation, in
connection with obtaining the necessary Approvals of this
Agreement and the transactions contemplated hereby) or by other
requirements of Law or (ii) disclosed in an action or
proceeding brought by a party hereto in pursuit of its rights or
in the exercise of its remedies hereunder;
provided
,
however
, that the parties hereto shall not disclose any
confidential information not required to be disclosed as part of
such permitted disclosure. Each of the parties hereto further
agrees that if the transactions contemplated hereby are not
consummated, it will return all such documents and instruments
and all copies thereof in its possession to the other party to
this Agreement. Each of the parties hereto recognizes that any
breach of this Section 13.8 would result in irreparable
harm to the other party to this Agreement and its Affiliates and
that therefore the non-breaching party shall be entitled to an
injunction to prohibit any such breach or anticipated breach,
without the necessity of posting a bond, cash or otherwise, in
addition to all of their other legal and equitable remedies.
Nothing in this Section 13.8, however, shall prohibit the
use of such confidential information, documents or information
for the purpose of securing financing to either party to effect
the purchase and sale of equity interests hereunder or such
governmental filings as in the mutual opinion of Sellers
counsel and counsel for Buyer are (i) required by Law or
(ii) otherwise appropriate. Also, this Section 13.8
shall not prohibit the disclosure by either party of any
information, instruments or documents that are required to be
filed with Governmental Entities by or under applicable
securities related Laws.
13.9
Press Release
. Except
as required by Law, at all times at or before Closing, neither
Buyer nor Seller will issue any report, statement or release to
the public with respect to this Agreement and the transactions
contemplated hereby without the prior written approval of the
other party hereto of the text of any such public report,
statement or release. Buyer acknowledges that MC will file one
or more
Forms 8-K
and proxies with the Securities and Exchange Commission in
connection with the transactions contemplated by this Agreement
and issue a press release announcing the execution of this
Agreement, which
Forms 8-K,
press release and proxies may contain such information as Seller
determines to be necessary or appropriate.
13.10
Waiver of Breach
. The
waiver by either party of breach or violation of any provision
of this Agreement shall not operate as, or be construed to
constitute, a waiver of any subsequent breach of the same or
other provision hereof.
13.11
Notice
. Any notice,
demand or communication required, permitted, or desired to be
given hereunder shall be deemed effectively given when
personally delivered, when received by telegraphic or other
electronic means (including facsimile transmission) or overnight
courier, or five (5) days after being deposited in the
United States mail, with postage prepaid thereon, certified or
registered mail, return receipt requested, addressed as follows:
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If to Company, Buyer,
or Dr. Murphy:
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c/o Bruce
E. Murphy, M.D.
PERSONAL & CONFIDENTIAL
7 Shackleford West Blvd.
Little Rock, AR 72211-3714
Facsimile:
( ) -
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with copies to:
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Gregory M. Hopkins, Esq.
Hopkins Law Firm,
A Professional Association
1000 West Second Street
Little Rock, AR 72201
Facsimile: (501) 375-0231
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If to Seller or Finco:
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c/o MedCath
Corporation
10720 Sikes Place, Suite 300
Charlotte, NC 28277
Attention: Chief Financial Officer
Facsimile: (704) 708-5035
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with a copy to:
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Moore and Van Allen PLLC
100 North Tryon Street
Suite 4700
Charlotte, NC 28202
Attention: Hal A. Levinson, Esq.
Facsimile: (704) 331-1159
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or to such other address, and to the attention of such other
Person or officer as any party may designate.
13.12
Severability
. In the
event any provision of this Agreement is held to be invalid,
illegal or unenforceable for any reason and in any respect, and
if the rights of Buyer and Seller under this Agreement will not
be materially or adversely affected thereby, (i) such
provision will be fully severable; (ii) this Agreement will
be construed and enforced as if the illegal, invalid or
unenforceable provision had never compromised a part hereof;
(iii) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the
illegal, invalid or unenforceable provision or by its severance
here from; and (iv) in lieu of the illegal, invalid or
unenforceable provision, there will be added automatically as a
part of this agreement a legal, valid and enforceable provision
as similar in terms to the illegal, invalid or unenforceable
provision as may be possible.
13.13
No
Inferences
. Inasmuch as this Agreement is the
result of negotiations between sophisticated parties of equal
bargaining power represented by counsel, no inference in favor
of, or against, either party shall be drawn from the fact that
any portion of this Agreement has been drafted by or on behalf
of such party.
13.14
Divisions and Headings of this
Agreement
. The divisions of this Agreement
into articles, sections and subsections and the use of captions
and headings in connection therewith are solely for convenience
and shall have no legal effect in construing the provisions of
this Agreement.
13.15
No Third-Party
Beneficiaries
. The terms and provisions of
this Agreement are intended solely for the benefit of Seller,
Finco and Buyer and their respective permitted successors or
assigns, and it is not the intention of the parties to confer,
and this Agreement shall not confer, third-party beneficiary
rights upon any other Person.
13.16
Tax and Medicare Advice and
Reliance
. Except as expressly provided in
this Agreement, none of the parties (nor any of the
parties respective counsel, accountants or other
representatives) has made or is making any representations to
any other party (or to any other partys counsel,
accountants or other representatives) concerning the
consequences of the transactions contemplated hereby under
applicable Tax related Laws or under the Laws governing the
Medicare Program. Each party has relied solely upon the Tax and
Medicare advice of its own employees or of representatives
engaged by such party and not on any such advice provided by any
other party hereto.
13.17
Entire Agreement;
Amendment
. This Agreement supersedes all
previous Contracts (other than the Confidentiality Agreement)
and constitutes the entire agreement of whatsoever kind or
nature existing between or among the parties representing the
within subject matter and no party shall be entitled to benefits
other than those specified herein. As between or among the
parties, no oral statement or prior written material not
specifically incorporated herein shall be of any force and
effect. The parties specifically acknowledge that in entering
into and executing this Agreement, the parties rely solely upon
the representations and agreements contained in this Agreement
and no others. All prior representations or agreements, whether
written or verbal, not expressly incorporated herein are
superseded and no changes in or additions to this Agreement
shall be recognized unless and until made in writing and signed
by all parties hereto.
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13.18
Knowledge
. Whenever
any statement herein or in any schedule, exhibit, certificate or
other documents delivered to any party pursuant to this
Agreement is made to its knowledge or words of
similar intent or effect of any party or its representative,
such person shall make such statement only if such facts and
other information which, as of the date the representation is
given, are actually known to the party making such statement,
which, with respect to Seller or Finco means the actual
knowledge of its officers (or its Affiliates officers)
listed on
Schedule 13.18
.
13.19
Multiple
Counterparts
. This Agreement may be executed
in two or more counterparts, each and all of which shall be
deemed an original and all of which together shall constitute
but one and the same instrument. The facsimile signature of any
party to this Agreement or any Contract delivered in connection
with the consummation of the transactions described herein or a
PDF copy of the signature of any party to this Agreement or any
Contract delivered in connection with the consummation of the
transactions described herein delivered by electronic mail for
purposes of execution or otherwise, is to be considered to have
the same binding effect as the delivery of an original signature
on an original Contract.
13.20
Right to Take
Action
. Notwithstanding anything in this
Agreement to the contrary, nothing shall prevent or limit, and
Buyer shall not take any action to prevent or limit,
(a) Seller at any time after the Effective Time from being
dissolved or liquidated, making payments to its creditors or
distributions to its stockholders or members, otherwise
terminating its existence
and/or
taking any other action, in each case, as permitted by
applicable Law, or (b) MC and its Affiliates from engaging
in or agreeing to a Change in Control Transaction or making
payments to its creditors or distributions to its stockholders
at any time or, after the Effective Time, from being dissolved
or liquidated, and/ or otherwise terminating its existence, in
each case, as permitted by the General Corporation Law of
Delaware.
13.21
Guaranty of Buyers
Obligations
. Dr. Murphy and the Company
(the
Guarantors
), each a principal
obligor and not merely as a surety, hereby jointly and severally
unconditionally guarantee full, punctual and complete
performance by Buyer of all of Buyers obligations under
this Agreement and each of the Closing documents subject to the
terms hereof and thereof and so undertakes to Seller that, if
and whenever Buyer is in default, the Guarantors will on demand
duly and promptly perform or procure the performance of
Buyers obligations. The foregoing guarantee is a
continuing guarantee and will remain in full force and effect
until the obligations of Buyer under this Agreement have been
duly performed or discharged and will continue to be effective
or will be reinstated if any sum paid to Seller or Finco must be
restored by Seller or Finco upon the bankruptcy, liquidation or
reorganization of Buyer. The obligations of the Guarantors under
this Section 13.21 shall not be affected or discharged in
any way by any action or proceeding with respect to Buyer under
any federal or state bankruptcy, insolvency or debtor relief
Laws. Seller shall not be required to exhaust any rights or
remedies against Buyer prior to obtaining performance hereunder
from Dr. Murphy
and/or
the
Company.
[SIGNATURE
PAGE FOLLOWS
]
24
EXECUTION
COPY
IN WITNESS WHEREOF, the parties hereto have caused this Equity
Interest Purchase Agreement to be executed in multiple originals
by their authorized officers, all as of the date and year first
above written.
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BUYER:
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AR-MED
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By:
/s/ Bruce
Murphy
its President
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By:
Name:
Title:
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DR. MURPHY:
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/s/ Bruce
Murphy
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BRUCE MURPHY, M.D.
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COMPANY:
(for the purpose of agreeing to be bound under
Section 11.6, Article 12 and Section 13.21)
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MEDCATH OF LITTLE ROCK, L.L.C.
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By: MedCath of Arkansas, LLC,
its Manager
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By:
/s/ O.
Edwin French
Name: O.
Edwin French
Title: Manager
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SELLER:
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MEDCATH OF ARKANSAS, LLC
a North Carolina limited liability company
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By:
/s/ O. Edwin
French
Name: O. Edwin
French
Title: Manager
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25
The Board of Directors and
Strategic Options Committee
MedCath Corporation
10720 Sikes Place, Suite 300
Charlotte, NC 28277
Dear Board Members:
We understand that Heart Hospital of New Mexico, LLC, a New
Mexico limited liability company (the Hospital or
the Seller) which is owned approximately 74.8% by an
indirect wholly-owned subsidiary (ManageCo) of
MedCath Corporation (MedCath or the
Company), 15% by physician investors organized as NM
Heart Institute, LLC (NMHI) and 10% by physician
investors organized as Southwest Cardiology Association, LLC
(SWCA) and 0.2% by other individual physicians -
collectively the Physician Investors, proposes to
enter into an Asset Purchase Agreement (the
Agreement) with Lovelace Health Systems, Inc. (the
Buyer) pursuant to which the Buyer will acquire
substantially all of the assets of the Hospital for total
consideration of $119 million subject to certain working
capital requirements, payable in cash (the
Consideration). Herein, the above described
transaction is referred to as the Transaction.
The affirmative approval of NMHI and SWCA is required under the
Sellers governing agreement to enter into the Transaction.
NMHI and SWCA were not willing to provide that approval absent
payment to them of additional consideration. Accordingly, as
part of the Transaction, the Physician Investors will receive an
allocation in cash of a portion of the net proceeds from the
Transaction which otherwise would have been received by the
Company in addition to the portion of the net proceeds from the
Transaction payable to the Physician Investors with respect to
their ownership interest in the Hospital (which additional
allocation is referred to as the Physician Investor
Payment).
The Board of Directors of the Company (the Board)
and its Strategic Options Committee (the Special
Committee) have requested that Stout Risius Ross, Inc.
(SRR) evaluate the fairness of the Transaction and
if appropriate, provide the following opinions (the
Opinions) to them:
1. the Consideration to be received by the Hospital
pursuant to the terms of the Transaction are fair to the
Hospital from a financial point of view;
2 the consideration to be received by the Company with
respect to its membership interest in the Hospital combined with
the repayment of the intercompany debt due from the Hospital to
the Company as a result of the Transaction is not less than the
fair market value; and
3 the Physician Investors Payment to be paid to the
Physician Investors pursuant to the terms of the Transaction is
reasonable from a financial point of view. You have advised us
that for purposes of this paragraph (3), the Physician Investors
Payment may be considered by us to be reasonable if
(1) it does not cause the proceeds that are received by the
Company to be less than the Fair Market Value of the
Companys interest in the Hospital and (2) it is
within the range of empirical financial evidence.
One South Wacker Drive, 38th
Floor
Chicago, IL 60606
ph. 312
857-9000
fax 312
857-9001
www.srr.com
The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 2
We have not been requested to opine as to, and our Opinions do
not in any manner address: (i) the Sellers or the
Companys underlying business decision to proceed with or
effect the Transaction, (ii) the terms of any agreements or
documents related to, or the form or any other portion or aspect
of, the Transaction, except as specifically set forth herein,
(iii) the fairness of any portion or aspect of the
Transaction to the holders of any class of securities, creditors
or other constituencies of the Company, except as specifically
set forth herein, (iv) the fairness of the consideration
received by the Company relative to the Physician Investors
Payment to be received by the Physician Investors pursuant to
the terms of the Transaction, provided that this subsection is
not intended to be a limitation on the three opinions we provide
at the conclusion of this letter, or (v) the solvency,
creditworthiness or fair value of the Company or any other
participant in the Transaction under any applicable laws
relating to bankruptcy, insolvency or similar matters. Further,
we were not requested to consider, and our Opinions do not
address, the merits of the Transaction relative to any
alternative business strategies that may have existed for the
Seller or the Company or the effect of any other transactions in
which the Seller or the Company might have engaged, nor do we
offer any opinion as to the terms of the Agreement. Moreover, we
were not engaged to recommend, and we did not recommend, a
Transaction price, and we did not participate in the Transaction
negotiations. Furthermore, no opinion, counsel or interpretation
is intended in matters that require legal, regulatory,
accounting, insurance, tax or other similar professional advice.
We have also assumed, with your consent, that the final executed
form of the Agreement will not differ from the draft of the
Agreement that we have examined, that the conditions to the
Transaction as set forth in the Agreement will be satisfied, and
that the Transaction will be consummated on a timely basis in
the manner contemplated by the Agreement.
Our Opinions are intended to be utilized by the Board and its
Special Committee as only one input to consider in its process
of analyzing the Transaction.
In arriving at the opinions set forth below, we have, among
other things:
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Reviewed certain business and financial information relating to
the Hospital that we deemed to be relevant;
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Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of the Hospital furnished to us by the
Company;
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Concerning the two matters above, conducted discussions with
members of senior management and representatives of the Company;
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Reviewed the consideration and valuation multiples for the
Hospital and compared them with those of certain publicly traded
companies that we deemed to be relevant;
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Reviewed the results of operations of the Hospital and compared
them with those of certain publicly traded companies that we
deemed to be relevant;
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Compared the proposed financial terms of the Transaction with
the financial terms of certain other transactions that we deemed
to be relevant;
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Participated in certain discussions among representatives of the
Company, the Board and the Special Committee and their financial
and legal advisors;
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The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 3
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Reviewed drafts as of May 4, 2011 of the Agreement by and
between Lovelace Health System, Inc. and Heart Hospital of New
Mexico, LLC, and certain related documents (the
Transaction Documents); and
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Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
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In connection with our analysis, we have made such reviews,
analyses, and inquiries as we have deemed necessary and
appropriate under the circumstances. The principal sources of
information used in performing our analysis included, but were
not limited to:
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Hospitals audited financial statements for the fiscal
years ended September 30, 2006 through September 30,
2010;
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Hospitals internally prepared financial statements for the
six month periods ended March 31, 2010 and March 31,
2011;
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Financial projections prepared by the Hospital management for
the fiscal years ending September 30, 2011 through
September 30, 2013;
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A timeline detailing the negotiations between Navigant Capital
Advisors, LLC and various parties regarding the sale of the
Hospital;
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A Confidential Information Memorandum concerning the potential
sale of the Hospital prepared by Navigant Capital Advisors, LLC;
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A review of publicly available financial data of certain
publicly traded companies that we deemed relevant;
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A review of available information regarding certain merger and
acquisition transactions that we deemed relevant;
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Discussions with both the Hospitals and MedCaths
management concerning the Hospitals business, industry,
history, and prospects;
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A site visit to the Hospital located in Albuquerque, New
Mexico; and
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An analysis of other facts and data resulting in our conclusions.
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Our Opinions are premised on the assumption that the assets,
liabilities, financial condition, and prospects of the Hospital
as of the date of this letter have not changed materially since
the date of the most recent financial information made available
to us. In rendering our Opinions, we have assumed and relied
upon the accuracy and completeness of all financial and other
information that was publicly available, furnished by the
Hospital or the Company, or otherwise reviewed by or discussed
with us without independent verification of such information and
we have assumed and relied upon the representations and
warranties of the Seller contained in the draft Agreement we
reviewed. We have assumed, without independent verification,
that the financial forecasts and projections provided to us have
been reasonably prepared and reflect the best currently
available estimates and judgment of the Companys
management of the future financial results of the Hospital,
The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 4
and we have relied upon such projections in arriving at our
Opinions. We have not been engaged to assess the reasonableness
or achievability of such forecasts and projections or the
assumptions upon which they were based, and we express no view
as to the forecasts, projections, or assumptions. We have
assumed that the Transaction will be consummated on the terms
described in the Agreement, without any waiver of any material
terms or conditions by the Seller or the Buyer. We have also
assumed that the final forms of the Transaction Documents will
be substantially similar to the last drafts reviewed by us.
While we participated in a site visit and facility tour of the
Hospital, we have not conducted a physical inspection,
independent evaluation or appraisal of the Hospital facilities,
assets or liabilities, nor have we been furnished with any such
evaluation or appraisal. Our Opinions are necessarily based on
business, economic, market, and other conditions as they exist
and can be evaluated by us at the date of this letter. It should
be noted that although subsequent developments may affect these
Opinions, we do not have any obligation to update, revise, or
reaffirm our Opinions. We reserve the right, however, to
withdraw, revise, or modify our Opinions based upon additional
information that may be provided to or obtained by us after the
issuance of the Opinions that suggests, in our judgment, a
material change in the assumptions upon which our Opinions are
based.
SRR conducted its analyses at the request of the Board and its
Special Committee to provide a particular perspective of the
Transaction. In so doing, SRR did not form a conclusion as to
whether any individual analysis, when considered independently
of the other analyses conducted by SRR, supported or failed to
support our Opinions. SRR does not specifically rely or place
any specific weight on any individual analysis. Rather, SRR
deems that the analyses, taken as a whole, support our
conclusion and Opinions. Accordingly, SRR believes that the
analyses must be considered in their entirety, and that
selecting portions of the analyses or the factors they
considered, without considering all analyses and factors
together, could create an imperfect view of the processes
underlying the analyses performed by SRR in connection with the
preparation of the Opinions.
Our Opinions are furnished for the use and benefit of the Board
in connection with the Transaction, and are not intended to, and
do not, confer any rights or remedies upon any other person, and
are not intended to be used, and may not be used, for any other
purpose, without our express, prior written consent. We will
receive a fee for our services, but our compensation for
providing financial advisory services to the Board is neither
based upon nor contingent on the results of our engagement or
the consummation of the proposed Transaction. Further, none of
our employees who worked on this engagement has any known
financial interest in the assets or equity of the Hospital, the
Company or the outcome of our engagement. In addition, the
Company has agreed to indemnify us for certain liabilities
arising out of our engagement.
It is understood that these Opinions were prepared at the
request of the Board and its Special Committee for their
confidential use and may not be reproduced, disseminated,
quoted, or referred to at any time in any manner or for any
purpose without our prior written consent, except as required by
applicable securities laws. Notwithstanding anything to the
contrary contained herein, the Company may include references to
the Opinion Letter and to SRR in public disclosures (in each
case in such form as SRR shall approve and this approval shall
not to be unreasonably withheld or challenged).
The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 5
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof:
1 the Consideration to be received by the Hospital pursuant
to the terms of the Transaction are fair to the Hospital from a
financial point of view;
2 the consideration to be received by the Company with
respect to its membership interest in the Hospital combined with
the repayment of the intercompany debt due from the Hospital to
the Company as a result of the Transaction is not less than the
fair market value; and
3 the Physician Investors Payment to be paid to the
Physician Investors pursuant to the terms of the Transaction is
reasonable from a financial point of view.
Yours very truly,
STOUT RISIUS ROSS, INC.
The Board of Directors and
Strategic Options Committee
MedCath Corporation
10720 Sikes Place, Suite 300
Charlotte, NC 28277
Dear Board Members:
We understand that MedCath Corporation (MedCath or
the Company) proposes to enter into an Equity
Purchase Agreement (the Agreement) to sell its
interest in MedCath of Little Rock, LLC (the Arkansas
LLC) which it owns through MedCath of Arkansas, LLC
(MedCath Arkansas or the Seller). The
Arkansas LLC owns and operates the Heart Hospital of Arkansas
(AHH or the Hospital). The Arkansas LLC
is owned approximately 70.33% by MedCath Arkansas and 29.67% by
physician investors (the Physician Investors). Per
the Agreement, MedCath Arkansas would sell its 70.33% interest
in the Arkansas LLC to AR-Med, LLC (AR-Med or the
Buyer), a newly formed limited liability company
which is owned by certain Physician Investors who are currently
affiliated with Little Rock Cardiology Clinic, P.A.
(LRCC). Collectively, Physician Investors affiliated
with LRCC own 14.8% of Arkansas LLC. The purchase price from the
Buyer will include cash proceeds in an amount based on an
enterprise value of approximately $73 million, or on such
other terms as may be agreed by the parties together with cash
proceeds equal to all intercompany loans made to the Hospital by
the Company. The estimated equity proceeds for MedCaths
70.33% interest is $34.779 million (the
Consideration). Herein, the above described
transaction is referred to as the Transaction.
The Board of Directors of MedCath (the Board) and
its Strategic Options Committee (the Special
Committee) has requested that Stout Risius Ross, Inc.
(SRR) provide an opinion (the Opinion)
to the Board and the Special Committee with respect to the
fairness, from a financial point of view, of the Consideration
to be received by the Company pursuant to the Transaction.
We have not been requested to opine as to, and our Opinion does
not in any manner address: (i) the Sellers or the
Companys underlying business decision to proceed with or
effect the Transaction, (ii) the terms of any agreements or
documents related to, or the form or any other portion or aspect
of, the Transaction, except as specifically set forth herein,
(iii) the fairness of any portion or aspect of the
Transaction to the holders of any class of securities, creditors
or other constituencies of the Company, except as specifically
set forth herein, (iv) the solvency, creditworthiness or
fair value of the Company or any other participant in the
Transaction under any applicable laws relating to bankruptcy,
insolvency or similar matters. Further, we were not requested to
consider, and our Opinion does not address, the merits of the
Transaction relative to any alternative business strategies that
may have existed for the Seller or the Company or the effect of
any other transactions in which the Seller or the Company might
have engaged, nor do we offer any opinion as to the terms of the
Agreement. Moreover, we were not engaged to recommend, and we
did not recommend, a Transaction price, and we did not
participate in the Transaction negotiations. Furthermore, no
opinion, counsel or interpretation is intended in matters that
require legal, regulatory, accounting, insurance, tax or other
similar professional advice. We have also assumed, with your
consent, that the final executed form of the Agreement will not
differ from the draft of the Agreement that we have examined,
that the conditions to the Transaction as set forth in the
Agreement will be satisfied, and that the Transaction will be
consummated on a timely basis in the manner contemplated by the
Agreement.
One South Wacker Drive, 38th
Floor
Chicago, IL 60606
ph. 312
857-9000
fax 312
857-9001
www.srr.com
The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 2
Our Opinion is intended to be utilized by the Board and its
Special Committee as only one input to consider in its process
of analyzing the Transaction.
In arriving at the opinion set forth below, we have, among other
things:
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|
|
|
|
Reviewed certain business and financial information relating to
Arkansas LLC that we deemed to be relevant;
|
|
|
|
Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of Arkansas LLC furnished to us by the
Company;
|
|
|
|
Concerning the two matter above, conducted discussions with
members of senior management and representatives of the Company;
|
|
|
|
Reviewed the consideration and valuation multiples for the
Hospital and compared them with those of certain publicly traded
companies that we deemed to be relevant;
|
|
|
|
Reviewed the results of operations of Arkansas LLC and compared
them with those of certain publicly traded companies that we
deemed to be relevant;
|
|
|
|
Compared the proposed financial terms of the Transaction with
the financial terms of certain other transactions that we deemed
to be relevant;
|
|
|
|
Participated in certain discussions among representatives of the
Company, the Board and the Special Committee and their financial
and legal advisors;
|
|
|
|
Reviewed drafts as of May 4, 2011 of the Agreement by and
between AR-Med, Dr. Bruce Murphy, Arkansas LLC, MedCath
Arkansas, and MedCath Finance Company, LLC and certain related
documents (the Transaction Documents); and
|
|
|
|
Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
|
In connection with our analysis, we have made such reviews,
analyses, and inquiries as we have deemed necessary and
appropriate under the circumstances. The principal sources of
information used in performing our analysis included, but were
not limited to:
|
|
|
|
|
Arkansas LLCs audited financial statements for the fiscal
years ended September 30, 2006 through September 30,
2010;
|
|
|
|
Arkansas LLCs internally prepared financial statements for
the six month periods ended March 31, 2010 and
March 31, 2011;
|
|
|
|
Financial projections prepared by Arkansas LLC management for
the fiscal years ending September 30, 2011 through
September 30, 2013;
|
|
|
|
A timeline detailing the negotiations between Navigant and
various parties regarding the sale of the Hospital;
|
|
|
|
A Confidential Information Memorandum concerning the potential
sale of the Hospital prepared by Navigant;
|
The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 3
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|
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|
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A review of publicly available financial data of certain
publicly traded companies that we deemed relevant;
|
|
|
|
A review of available information regarding certain merger and
acquisition transactions that we deemed relevant;
|
|
|
|
Discussions with both the Hospitals and MedCaths
management concerning the Hospitals business, industry,
history, and prospects;
|
|
|
|
A site visit to Heart Hospital of Arkansas located in Little
Rock, Arkansas; and
|
|
|
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An analysis of other facts and data resulting in our conclusions.
|
Our Opinion is premised on the assumption that the assets,
liabilities, financial condition, and prospects of Arkansas LLC
as of the date of this letter have not changed materially since
the date of the most recent financial information made available
to us. In rendering our Opinion, we have assumed and relied upon
the accuracy and completeness of all financial and other
information that was publicly available, furnished by the
Company, or otherwise reviewed by or discussed with us without
independent verification of such information and we have assumed
and relied upon the representations and warranties of the Seller
contained in the draft Agreement we reviewed. We have assumed,
without independent verification, that the financial forecasts
and projections provided to us have been reasonably prepared and
reflect the best currently available estimates and judgment of
the Companys management of the future financial results of
Arkansas LLC, and we have relied upon such projections in
arriving at our Opinion. We have not been engaged to assess the
reasonableness or achievability of such forecasts and
projections or the assumptions upon which they were based, and
we express no view as to the forecasts, projections, or
assumptions. We have assumed that the Transaction will be
consummated on the terms described in the Agreement, without any
waiver of any material terms or conditions by the Seller or the
Buyer. We have also assumed that the final forms of the
Transaction Documents will be substantially similar to the last
drafts reviewed by us.
While we participated in a site visit and facility tour of the
Hospital, we have not conducted a physical inspection,
independent evaluation or appraisal of the Hospital facilities,
assets or liabilities, nor have we been furnished with any such
evaluation or appraisal. Our Opinion is necessarily based on
business, economic, market, and other conditions as they exist
and can be evaluated by us at the date of this letter. It should
be noted that although subsequent developments may affect this
Opinion, we do not have any obligation to update, revise, or
reaffirm our Opinion. We reserve the right, however, to
withdraw, revise, or modify our Opinion based upon additional
information that may be provided to or obtained by us after the
issuance of the Opinion that suggests, in our judgment, a
material change in the assumptions upon which our Opinion is
based.
SRR conducted its analyses at the request of the Board and its
Special Committee to provide a particular perspective of the
Transaction. In so doing, SRR did not form a conclusion as to
whether any individual analysis, when considered independently
of the other analyses conducted by SRR, supported or failed to
support our Opinion. SRR does not specifically rely or place any
specific weight on any individual analysis. Rather, SRR deems
that the analyses, taken as a whole, support our conclusion and
Opinion. Accordingly, SRR believes that the analyses must be
considered in their entirety, and that selecting portions of the
analyses or the factors they considered, without considering all
analyses and factors together, could create an imperfect view of
the processes underlying the analyses performed by SRR in
connection with the preparation of the Opinion.
The Board of Directors and
Strategic Options Committee
MedCath Corporation
May 5, 2011
Page 4
Our Opinion are furnished for the use and benefit of the Board
in connection with the Transaction, and are not intended to, and
do not, confer any rights or remedies upon any other person, and
are not intended to be used, and may not be used, for any other
purpose, without our express, prior written consent. We will
receive a fee for our services, but our compensation for
providing financial advisory services to the Board is neither
based upon nor contingent on the results of our engagement or
the consummation of the proposed Transaction. Further, none of
our employees who worked on this engagement has any known
financial interest in the assets or equity of Arkansas LLC, the
Company or the outcome of our engagement. In addition, the
Company has agreed to indemnify us for certain liabilities
arising out of our engagement.
It is understood that this Opinion was prepared at the request
of the Board and its Special Committee for their confidential
use and may not be reproduced, disseminated, quoted, or referred
to at any time in any manner or for any purpose without our
prior written consent, except as required by applicable
securities laws. Notwithstanding anything to the contrary
contained herein, the Company may include references to the
Opinion Letter and to SRR in public disclosures (in each case in
such form as SRR shall approve and this approval shall not to be
unreasonably withheld or challenged).
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof the Consideration to be received by the
Company pursuant to the terms of the Transaction is fair to the
Company from a financial point of view.
Yours very truly,
STOUT RISIUS ROSS, INC.
ANNUAL MEETING OF STOCKHOLDERS OF MEDCATH CORPORATION to be held on July 26, 2011 Important
Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on July
26, 2011: The Companys Notice of Meeting for the Annual Meeting, Proxy Statement for the Annual
Meeting, form of proxy card and 2010 Annual Report on Form 10-K, as amended, are available at:
l_selectgroup=Proxy%20Filings and hoenix.zhtml?c=129804&p=irol-reports, respectively. Please sign,
date and mail your proxy card in the envelope provided as soon as possible. Please detach along
perforated line and mail in the envelope provided.20233304033300001000 7 072611 PLEASE SIGN, DATE
AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN
HERE x FOR AGAINST ABSTAIN 1. To elect two individuals to the board of directors to serve for a
three-year term as a Class I 2. To approve the sale of substantially all of the assets of Heart
Hospital of New Mexico director. to Lovelace Health Systems, Inc. as described in the accompanying
proxy statement. NOMINEES: FOR ALL NOMINEES O Robert S. McCoy, Jr.3. To approve the sale of
MedCaths equity interests in Arkansas Heart Hospital to AR-MED, LLC as described in the
accompanying proxy statement. O James A. Deal 4. To cast a non-binding advisory vote on MedCaths
compensation of our named executive WITHHOLD AUTHORITY FOR ALL NOMINEESofficers as described in the
accompanying proxy statement. FOR ALL EXCEPT 1 year 2 years 3 years ABSTAIN (See instructions
below) 5. To cast a non-binding advisory vote on the frequency of holding a non-binding advisory
vote on executive compensation. FOR AGAINST ABSTAIN 6. To cast a non-binding advisory vote on
compensation and other payments to executives as described in the accompanying proxy statement. 7.
To ratify the appointment of Deloitte & Touche LLP as the Companys independent registered public
accounting firm for the fiscal year ending September 30, 2011. INSTRUCTIONS:To withhold authority
to vote for any individual nominee(s), mark FOR ALL EXCEPT 8. To approve the adjournment proposal
as described in the accompanying proxy and fill in the circle next to each nominee you wish to
withhold, as shown here: statement. This appointment of proxy, when properly executed, will be
voted in the manner directed by the undersigned stockholder(s). If no direction is given, this
proxy will be voted FOR the election of each nominee in Proposal 1 and FOR approval of Proposals 2,
3, 4, 6, 7 and 8 and 1 YEAR in Proposal 5, and in their discretion, the proxies are authorized to
vote upon any other business as may properly come before the meeting. PLEASE COMPLETE, SIGN, DATE,
AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. (for directions to the annual
meeting, stockholders may contact James A. Parker, MedCaths Secretary, at (704) 815-7700) MARK X
HERE IF YOU PLAN TO ATTEND THE MEETING. To change the address on your account, please check the box
at right and indicate your new address in the address space above. Please note that changes to the
registered name(s) on the account may not be submitted via this method. Signature of Stockholder
Date: Signature of Stockholder Date: Note: Please sign exactly as your name or names
appear on this Proxy. When shares are held jointly, each holder should sign. When signing as
executor, administrator, attorney, trustee or guardian, please give full title as such. If the
signer is a corporation, please sign full corporate name by duly authorized officer, giving full
title as such. If signer is a partnership, please sign in partnership name by authorized person.
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MEDCATH CORPORATION ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY 26, 2011 THIS REVOCABLE
PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints O. Edwin
French and James A. Parker as proxies, each with full power of substitution, to represent and vote
as designated on the reverse side, all the shares of Common Stock of Medcath Corporation which the
undersigned would be entitled to vote if personally present at the Annual Meeting of Stockholders
to be held at the Moore & Van Allen PLLC located at 100 North Tryon Street, Suite 4700, Charlotte,
North Carolina 28202, on July 26, 2011, or any adjournment or postponement thereof. (Continued and
to be signed on the reverse side)
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