EXHIBIT 10.6
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A DELAWARE LIMITED LIABILITY COMPANY
TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
ARTICLE I DEFINITIONS............................................................................................1
ARTICLE II FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY..................................................2
Section 2.1 Company Formation; Effective Date......................................................2
Section 2.2 Name of Company........................................................................2
Section 2.3 Purposes and Business Objectives.......................................................2
Section 2.4 Statement of Philosophy and Values.....................................................3
Section 2.5 Registered Agent and Office; Principal Place of Business...............................4
Section 2.6 Commencement and Term..................................................................4
ARTICLE III MEMBERS AND CAPITAL CONTRIBUTIONS....................................................................4
Section 3.1 Initial Capital Contributions of Members...............................................4
Section 3.2 Liability of Members - For Capital.....................................................5
Section 3.3 Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals
from the Company.................................................................5
Section 3.4 Interest on Capital Contributions or Capital Accounts..................................6
Section 3.5 Additional Funding.....................................................................6
Section 3.6 Enforcement of Commitments.............................................................8
Section 3.7 Member Documentation...................................................................8
Section 3.8 Reserved Powers of Members.............................................................9
Section 3.9 Appointment of Board of Directors.....................................................10
Section 3.10 Obligations Relating to Real Property.................................................10
Section 3.11 Medical Office Building...............................................................10
ARTICLE IV NAMES AND ADDRESSES OF MEMBERS.......................................................................11
ARTICLE V MANAGEMENT OF THE COMPANY.............................................................................11
Section 5.1 General Authority and Powers of LHMI and the Board of Directors.......................11
Section 5.2 Restrictions on Authority of the Board of Directors...................................12
Section 5.3 Duties of the Board of Directors......................................................13
Section 5.4 Delegation by the Board of Directors..................................................13
Section 5.5 Right to Rely Upon the Authority of the Manager.......................................13
Section 5.6 Company Expenses......................................................................14
Section 5.7 No Management by Members..............................................................16
Section 5.8 Consent by Members to Exercise of Certain Rights and Powers by
Board of Directors..............................................................16
Section 5.9 Meetings, Quorum and Vote of the Board of Directors...................................16
Section 5.10 Other Business of Members.............................................................17
Section 5.11 Board of Directors' Standard of Care..................................................19
Section 5.12 Limitation of Liability...............................................................20
Section 5.13 Indemnification of the Directors......................................................20
Section 5.14 Purchase of Goods and Services from Members...........................................20
Section 5.15 Certain Decisions of the Board of Directors...........................................21
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Section 5.16 Indemnity by the Company..............................................................22
Section 5.17 Force Majeure.........................................................................22
ARTICLE VI DISTRIBUTIONS AND ALLOCATIONS........................................................................22
Section 6.1 Distributions of Cash Flow from Operations and Cash from Sales or
Refinancing.....................................................................22
Section 6.2 Profits...............................................................................23
Section 6.3 Losses................................................................................23
Section 6.4 Code Section 704(c) Tax Allocations...................................................23
Section 6.5 Miscellaneous.........................................................................24
Section 6.6 Special Allocations of Guarantee Fees.................................................24
ARTICLE VII DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS...............................................25
Section 7.1 No Termination by Certain Acts of Member..............................................25
Section 7.2 Dissolution...........................................................................25
Section 7.3 Dissolution and Final Liquidation.....................................................26
Section 7.4 Termination...........................................................................27
Section 7.5 Payment in Cash.......................................................................27
Section 7.6 Termination of Noncompetition Covenants...............................................27
ARTICLE VIII REMOVAL OR WITHDRAWAL OF MEMBERS AND...............................................................27
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS........................................................27
Section 8.1 Members - Restriction on Transfer.....................................................27
Section 8.2 Condition Precedent to Transfer of Membership Interest................................29
Section 8.3 Substitute Member - Conditions to Fulfill.............................................29
Section 8.4 Allocations Between Transferor and Transferee.........................................30
Section 8.5 Rights, Liabilities of, and Restrictions on Assignee..................................30
Section 8.6 Repurchase of Interests in Certain Event..............................................31
Section 8.7 Death of a Member.....................................................................32
ARTICLE IX RECORDS, ACCOUNTINGS AND REPORTS.....................................................................33
Section 9.1 Books of Account......................................................................33
Section 9.2 Access to Records.....................................................................33
Section 9.3 Bank Accounts and Investment of Funds.................................................33
Section 9.4 Fiscal Year...........................................................................34
Section 9.5 Accounting Reports....................................................................34
Section 9.6 Tax Matters Partner...................................................................34
ARTICLE X MEETINGS AND VOTING RIGHTS OF MEMBERS.................................................................34
Section 10.1 Meetings..............................................................................34
Section 10.2 Voting Rights of Members..............................................................35
ARTICLE XI AMENDMENTS...........................................................................................36
Section 11.1 Authority to Amend by the Board of Directors..........................................36
Section 11.2 Restrictions on the Board of Directors' Amendments....................................36
Section 11.3 Amendments to Certificate.............................................................37
ARTICLE XII MISCELLANEOUS.......................................................................................37
Section 12.1 Acknowledgment of Authority...........................................................37
Section 12.2 Waiver of Provisions..................................................................37
Section 12.3 Interpretation and Construction.......................................................37
Section 12.4 Governing Law.........................................................................37
Section 12.5 Partial Invalidity....................................................................38
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Section 12.6 Binding on Successors.................................................................38
Section 12.7 Notices and Delivery..................................................................38
Section 12.8 Counterpart Execution; Facsimile Execution............................................38
Section 12.9 Statutory Provisions..................................................................38
Section 12.10 Waiver of Partition...................................................................39
Section 12.11 Change in Law.........................................................................39
Section 12.12 Investment Representations of the Members.............................................40
Section 12.13 Decisions by Directors................................................................41
Section 12.14 Referrals to Hospital and Ownership of Shares of Common
Stock of MedCath Incorporated...............................................41
Section 12.15 Acknowledgments Regarding Legal Representation........................................41
Section 12.16 Arbitration...........................................................................42
Section 12.17 Exhibits..............................................................................42
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OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE LOUISIANA SECURITIES ACT
IN RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT
THE SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE
OF REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
THIS OPERATING AGREEMENT (the "Agreement") of Lafayette Heart
Hospital, LLC (the "Company"), a Delaware Limited Liability Company is made and
entered into by and among Persons whose names, addresses and taxpayer
identification numbers are listed on the Information Exhibit (Exhibit A).
RECITALS
A. The Company has been formed to develop, own and operate an
acute care hospital which hospital shall be located in or near Lafayette,
Louisiana and shall specialize in all aspects of cardiology and cardiovascular
care and surgery and other services which the Board of Directors may approve
from time to time;
B. It is intended that the Hospital will be an efficient,
quality provider of medical services within the greater Lafayette, Louisiana
area;
C. The Capital Contributions and active involvement of the
Members are necessary to enable the Company to achieve its objectives.
ARTICLE I
DEFINITIONS
Unless otherwise indicated, capitalized words and phrases in this
Operating Agreement shall have the meanings set forth in the attached Glossary
of Terms (Exhibit B).
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
SECTION 2.1 COMPANY FORMATION; EFFECTIVE DATE.
The Company was formed upon the filing of the Certificate of Formation
with the Delaware Secretary of State in accordance with the provisions of the
Act which shall be the "Effective Date" of this Agreement. Upon the Effective
Date, the Persons listed on the attached Information Exhibit shall be admitted
to the Company as Members and the Persons who executed the Certificate of
Formation shall be withdrawn as Members (unless they are listed on the
Information Exhibit), all without the necessity of any further act or
instrument and without causing the dissolution of the Company. This Agreement
shall be effective as of the date the Company was formed.
SECTION 2.2 NAME OF COMPANY.
The name of the Company is Lafayette Heart Hospital, LLC.
SECTION 2.3 PURPOSES AND BUSINESS OBJECTIVES.
The principal purposes and business objectives of the Company are as
follows:
(a) To develop, own and operate a general acute care
hospital specializing in the diagnosis and treatment of cardiac
disease and cardiovascular and vascular surgery and other medical
services and procedures approved by the Board of Directors from time
to time in the greater Lafayette, Louisiana which would include, but
not be limited to, the following:
(i) Services and facilities to meet all
requirements of the State of Louisiana, Medicare, the Joint
Commission on Accreditation of Healthcare Organizations
("JCAHO") and other credentialing or licensing bodies or
agencies in order to have the Hospital licensed as a general
acute care hospital and to perform cardiology and
cardiovascular surgical services of every type or nature and
to be eligible to obtain appropriate reimbursements
therefore;
(ii) Approximately 50,000 square feet in a
building to be constructed in accordance with plans and
specifications approved by the Company;
(iii) Approximately thirty-two (32)
medical/surgical beds;
(iv) Two (2) heart catheterization laboratories
with available space for one additional heart catheterization
lab;
(v) Two (2) heart surgical suites with space
for the development of one (1) additional heart surgical
suite;
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(vi) All appropriate support services and
systems; and
(vii) Appropriate Equipment and services with
respect to the facilities described above and as otherwise
reasonably necessary or appropriate for the diagnosis and
treatment of cardiovascular disease, including but not
limited to invasive and non-invasive cardiac testing,
interventional treatment including percutaneous transluminal
coronary angioplasty and atherectomy, and cardiac surgery
which would include, but not be limited to, bypass grafts and
valve surgery.
The above size, number and scope of facilities of the
Hospital are only preliminary estimates. The Board of Directors is
authorized to finally make all determinations with respect thereto.
(b) To lease or acquire the real property, and if
appropriate to construct a suitable building, in which the Hospital
shall be located;
(c) Any other purpose reasonably related to (a) and (b)
above.
SECTION 2.4 STATEMENT OF PHILOSOPHY AND VALUES.
Notwithstanding anything in this Agreement to the contrary, the
Company and the Hospital shall be operated in accordance with the following
philosophy and values in all material respects:
(a) The Hospital shall seek to participate in all public
health care financing programs applicable to its business including
the Medicare and Medicaid programs:
(b) The Board of Directors shall adopt and oversee the
adherence to the policies of the Hospital, as they may be reasonably
amended from time to time, for providing care for those patients who
are unable to pay for Hospital care;
(c) The medical staff of the Hospital shall be open to
any physician who meets the qualifications stated in the Bylaws, Rules
and Regulations of the Medical Staff;
(d) The Company shall adopt and adhere to a conflict of
interest policy with respect to contracts between the Company and
Members or Directors;
(e) All medical decisions and all policies and
procedures relating to the delivery of medical services at the
Hospital shall be made by those physicians who are members of the
medical staff of the Hospital as provided in the Bylaws, Rules and
Regulations of the Medical Staff.
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SECTION 2.5 REGISTERED AGENT AND OFFICE; PRINCIPAL PLACE OF
BUSINESS.
The registered agent and office of the Company shall be as indicated
in the Certificate of Formation, as amended from time to time. The principal
place of business of the Company shall be at such location in the greater
Lafayette, Louisiana area as selected by the Board of Directors from time to
time. The Board of Directors shall promptly notify the Members of any changes
in the Company's registered agent, registered office, or principal place of
business.
SECTION 2.6 COMMENCEMENT AND TERM.
The Company commenced on the filing of the Certificate of Formation in
the Office of the Secretary of State of Delaware, as required by Section 2.1
hereof, and shall continue until December 31, 2061, unless sooner terminated or
dissolved as provided herein; provided, however, that the termination date may
be extended for up to an additional forty (40) years in five (5) year
increments upon the election of the Board of Directors. The consent of each
Director to such extension shall not be unreasonably withheld or delayed.
ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
SECTION 3.1 INITIAL CAPITAL CONTRIBUTIONS OF MEMBERS.
(a) The initial Capital Contributions of the initial
Members listed on Exhibit A attached hereto incorporated by reference
herein (the "Initial Members") shall equal $[***].
(b) Such initial Capital Contribution shall be made as
follows:
(i) LHMI shall initially own a [***]%
Membership Interest in the Company and shall contribute to
the Company for its Membership Interest [***]% of such
initial Capital Contributions.
(ii) The Investor Member shall initially own a
[***]% Membership Interest and shall contribute to the
Company for its Membership Interest [***]% of such initial
Capital Contributions.
(iii) Each Member shall contribute its initial
Capital Contribution (x) in cash in full or (y) twenty
percent (20%) of its initial Capital Contribution in cash by
the Member for its Membership Interest, and shall
simultaneously provide an irrevocable letter of credit for
the balance of the Member's initial Capital Contribution (for
which, with respect to a letter of credit of the Investor
Member, neither the Company nor LHMI shall have any
liability, and with respect to a letter of credit of LHMI,
neither the Company nor the Investor Member shall have any
liability) that will continue to be available for at least
twenty-four (24)
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
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months from subscription by the Member for its Membership
Interest in the Company. In the event of (y), the applicable
Member shall arrange that following the contribution of
twenty percent (20%) of the required initial Capital
Contribution of such Member in cash, LHMI shall be permitted,
upon five (5) days written notice from LHMI at any time after
execution of this Agreement, to draw on such letter of credit
for the remaining balance of the initial Capital Contribution
of the applicable Member as the needs of the Company for
funds may require, in LHMI's sole discretion and without the
Member's consent; provided that, upon each such draw, LHMI
shall draw on all outstanding letters of credit in proportion
to the applicable Member's Membership Interest in the
Company. Each Member acknowledges that in all events LHMI
intends to fully draw any letter of credit provided by a
Member pursuant to this Section within not more than
twenty-four (24) months of the Member's subscription for a
Membership Interest in the Company. Notwithstanding the
foregoing, the Board of Directors may approve, in its sole
discretion, the contribution by the Investor Member of
specific real property in lieu of a letter of credit for some
portion of the Investor Member's initial Capital Contribution
to be determined by the Board; provided, however, that the
fair market value of the real property to be contributed
shall be determined through an independent appraisal
performed by an independent appraiser selected by the Board
at the time of the contribution, the real property to be
contributed shall be suitable to the Board in its sole
discretion as the site of the Hospital, and provided further
that the transaction shall comply with all applicable laws
and regulations in the determination of counsel for the
Company.
(c) The Members may be liable to the Company for amounts
distributed to them as a return of capital as provided by the Act.
Members shall not be required to contribute any additional capital to
the Company except as provided in Section 3.5.
SECTION 3.2 LIABILITY OF MEMBERS - FOR CAPITAL.
The liability of each Member for capital shall be limited to the
amount of its agreed Capital Contribution as a Member as provided in Section
3.1 and Section 3.5, except that the Members may be liable to the Company for
amounts distributed to them as a return of capital as provided by the Act. The
Members shall not be required to contribute any additional capital to the
Company except as provided in Section 3.5.
SECTION 3.3 MAINTENANCE OF CAPITAL ACCOUNTS; WITHDRAWALS OF
CAPITAL; WITHDRAWALS FROM THE COMPANY.
An individual Capital Account shall be maintained for each Member in
accordance with requirements of the Code and the Regulations promulgated
thereunder. No Member shall be entitled to withdraw or to make demand for
withdrawal of any part of its Capital Account or to receive any distribution
except as provided herein. Except as otherwise provided in this Agreement, each
Member shall look solely to the assets of the Company for the return of its
Capital Contributions and shall have no right or power to demand or receive
property other than
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cash from the Company. No Member shall have priority over any other Member as
to the return of its Capital Contributions, distributions or allocations,
except as provided in this Agreement.
Except as otherwise provided herein, a Member may not withdraw from
the Company without the written consent of the other Member. In no case shall a
Member have the right to have its Membership Interest redeemed by the Company
unless approved by the other Member.
SECTION 3.4 INTEREST ON CAPITAL CONTRIBUTIONS OR CAPITAL
ACCOUNTS.
No interest shall be paid to any Member based solely on its Capital
Contributions or Capital Account. The preceding sentence shall not prevent the
Company from earning interest on its bank accounts and investments and
distributing such earnings to the Member in accordance with Articles VI and
VII.
SECTION 3.5 ADDITIONAL FUNDING.
If from time to time, the Board of Directors reasonably determines
(which determination shall not be unreasonably withheld or delayed) that funds
in addition to that contemplated by Sections 3.1 and 3.2 are necessary or
appropriate for the development or operation of the Hospital, then:
(a) First, on terms and conditions reasonably acceptable
to the Board of Directors, LHMI or one of its Affiliates shall loan
the Company an amount to be agreed upon by the Company and LHMI not to
exceed Eight Million Dollars ($8,000,000), at the Prime Rate plus one
percent (1%) per annum which loan shall be secured by the Company's
assets. Interest shall be paid monthly in arrears. Funds initially
shall be advanced hereunder through the period ending no later than
the first (1st) anniversary of the date when the Hospital receives
authorization under applicable law to treat patients (the "Opening
Date"). Amounts then outstanding shall be repaid with interest on a
five (5) year repayment schedule so that the principal amount of the
loan is reduced by one-sixtieth (1/60) per month, with interest
payable monthly on the balance of the principal (the "Repayment
Schedule"); provided, however, that in no event shall the Repayment
Schedule begin later than the thirteenth (13th) month following the
Opening Date. To the extent the Company repays such loan from time to
time in amounts which are in excess of scheduled principal amounts,
such amounts of excess principal payments may be reborrowed by the
Company on mutually acceptable terms. The Members acknowledge that the
Company intends to seek construction, mortgage and equipment financing
from third party lenders and lessors and that the loans set forth in
this subsection (a) are not intended to be used for such purposes. In
the event that interim financing is needed for such purposes, LHMI may
elect in its discretion to provide such financing on an interim basis
pending the closing of third-party financing therefor;
(b) Second, the Board of Directors thereafter shall use
commercially reasonable efforts to borrow such funds from a bank or
other lender on terms and conditions reasonably acceptable to the
Board of Directors. All loans obtained hereunder
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shall be subject to the approval of the Board of Directors, which
approval shall not be unreasonably withheld or delayed;
(c) Third, if loans as provided in (a) have been fully
advanced for their intended purpose up to the maximum aggregate
principal amount of Eight Million Dollars ($8,000,000) and loans as
provided in (b) above are not reasonably available, the Board of
Directors may through written notice require that the Members
contribute additional capital to the Company pro rata according to
their respective Membership Interests, provided however, a Member's
maximum obligation for such additional Capital Contributions shall be
limited to an additional amount equal to two (2) times the Member's
initial Capital Contribution pursuant to Section 3.1. Notwithstanding
the foregoing, upon the date (the "Reduction Date") that is ninety
(90) days subsequent to the receipt by the Board of Directors of the
final report of the Company's independent auditors for the fifth full
year of the Company's operations following the opening of the
Hospital, the maximum obligation of each Member for any additional
Capital Contributions shall be reduced to one times the Member's
initial Capital Contributions; provided however that if, prior to the
Reduction Date, the Board of Directors reasonably determines,
following review of the final audit report for the fifth full year of
the Company's operations following the opening of the Hospital, that
the Company's immediate need for additional capital by the Company
will exceed one times the initial Capital Contributions of the
Members, then the Board may approve the delay of such reduction for up
to two (2) years, such approval not to be unreasonably withheld by any
member of the Board. In all events, no Member shall be required to
make any additional Capital Contributions, and neither LHMI nor any of
its Affiliates shall have any obligations to make any loans to the
Company or provide any guarantees of any indebtedness of the Company,
in the event that (i) any loans made by LHMI and its Affiliates to the
Company have been repaid in full, including without limitation the
loan made pursuant to Section 3.5(a) and (ii) there are no outstanding
guarantees of LHMI and its Affiliates of any indebtedness of the
Company;
(d) Fourth, if additional funds are thereafter needed by
the Company, LHMI or one of its Affiliates may, but shall not be
required to, loan such funds to the Company at the Prime Rate plus one
percent (1%) per annum which loan shall be secured by the Company's
assets. Interest shall be paid monthly in arrears and principal shall
be repaid according to a schedule to be agreed upon by the Company and
LHMI or its Affiliate;
(e) Fifth, if additional funds are thereafter needed by
the Company, the Board of Directors shall request additional Capital
Contributions from the Members and each Member may elect whether or
not to contribute its pro rata portion of such additional capital
requirements as optional Capital Contributions. The other Members may
elect to contribute optional Capital Contributions not contributed by
any Member hereunder. Thereafter, the Board of Directors shall
reasonably adjust the percentage Membership Interest of each Member
(based on the aggregate of all Capital Contributions made by all of
the Members in accordance with this Agreement) in the event any Member
elected not to make optional Capital Contributions pursuant to this
Section 3.5(e); and
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(f) Sixth, if adequate funds have not been obtained or
raised in accordance with (a) through (e) above (including, without
limitation, taking into consideration funds made available by Members
for amounts which are in excess of their obligations hereunder), then
the Board of Directors may elect to dissolve the Company provided,
however, if any Members or any of their Affiliates (i) have any
outstanding loans to the Company or are committed to provide such
loans or (ii) are providing a guaranty or are committed to provide a
guaranty for any indebtedness of the Company, then only those Members
alone upon unanimous approval of such Members, upon at least fifteen
(15) days prior written notice to the other Members, shall be entitled
to so dissolve the Company due to the Company not having sufficient
funds to meet its financial obligations or liabilities as they come
due.
SECTION 3.6 ENFORCEMENT OF COMMITMENTS.
In the event any Member (a "Delinquent Member") fails to make a
mandatory Capital Contribution as provided in Section 3.1 or Section 3.5 or an
optional Capital Contribution as agreed to by the Delinquent Member under
Section 3.5 (the "Commitment"), the Board of Directors shall give the
Delinquent Member a notice of the failure to meet the Commitment. If the
Delinquent Member fails to perform the Commitment (including any costs
associated with the failure to meet the Commitment and interest on such
obligation at the Default Rate) within ten (10) business days of the giving of
notice, the Board of Directors may take such action, including but not limited
to enforcing the Commitment in a court of appropriate jurisdiction in the state
in which the principal office of the Company is located or the state of the
Delinquent Member's address as then reflected in the Agreement. Each Member
expressly agrees to the jurisdiction of such courts but only for the
enforcement of Commitments. The other Members may elect to contribute
additional amounts equal to any amount of the Commitment not contributed by
such Delinquent Member. The contributing Member shall be entitled at its
election to treat the amounts contributed pursuant to this Section either as a
Capital Contribution or as a loan from the contributing Member bearing interest
at the Default Rate secured by the Delinquent Member's Membership Interest in
the Company. If the contributing Member elects to contribute such amount as a
Capital Contribution, the percentage Membership Interests of the Members shall
be adjusted proportionately. Until the contributing Member is fully repaid for
such loan made as a result of the default by the Delinquent Member and only if
the contributing Member agrees to accept repayment of such amount, the
contributing Member shall be entitled to all distributions to which the
Delinquent Member would have been entitled had such Commitment been fulfilled
thereby. Notwithstanding the foregoing, no Commitment or other obligation to
make an additional Capital Contribution may be enforced by a creditor of the
Company unless the Delinquent Member expressly consents to such enforcement or
to the assignment of the obligation to such creditor. Notwithstanding anything
herein to the contrary, the Directors designated by the non-delinquent Members
may take all actions contemplated by this Section 3.6 without the consent of
the Directors designated by the Delinquent Member.
SECTION 3.7 MEMBER DOCUMENTATION.
Prior to the execution of this Agreement, the Investor Member and
Investor Entities shall have delivered to LHMI copies of all documents,
instruments and agreements related to the
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formation, ownership and governance of the Investor Member and the Investor
Entities (the "Investor Documents"). None of the Investor Documents will be
altered or amended without the consent of LHMI, which consent shall not be
unreasonably withheld. If LHMI has not provided the Investor Member or Investor
Entity, as the case may be, with its written objection to a proposed alteration
or amendment to Investor Documents, within thirty (30) days of the receipt by
LHMI of such proposed alteration or amendment, then such alteration or
amendment shall be deemed to have been consented to by LHMI. Contemporaneously
with the Investor Member's admission as a Member of the Company, (i) the
Investor Entities shall each execute an Addendum to Subscription Agreement
under which, among other things, they agree to be bound by the terms and
conditions of Section 5.10 hereof, and no additional Investor Entities shall be
admitted as owners of a Member unless such Investor Entities executes an
Addendum to Subscription Agreement; and (ii) the Owners shall each execute an
Addendum to Subscription Agreement under which, among other things, those
individuals agree to be personally bound by the terms and conditions of Section
5.10 hereof. Additionally (unless such requirement is waived by the Board of
Directors), Owners who are physicians (or their Practices) shall also execute a
Hospital Professional Services Agreement with the Company and a Right of First
Refusal Agreement with an Affiliate of LHMI. No Person shall be admitted
hereafter as an owner of the Investor Member or Investor Entities unless such
Person also executes such Addendum to Subscription Agreement, the Hospital
Professional Services Agreement (Owners who are physicians or their Practices
only) and the Right of First Refusal Agreement (Owners who are physicians or
their Practices only) so that they are bound thereby to the same extent as are
Owners as of the date hereof.
SECTION 3.8. RESERVED POWERS OF MEMBERS.
The following actions are the only actions which can be taken by the
Members and shall require the consent of LHMI and the Investor Member:
(a) Amendments to the Certificate of Formation of the
Company or this Agreement;
(b) A merger, consolidation, liquidation, or similar
reorganization or transfer of a substantial portion of the Company's
assets;
(c) A sale, lease encumbrance or other transfer of all
or substantially all of the Company's assets, except for encumbrances
incurred in connection with financing provided to the Company;
(d) Admission of new Members to the Company;
(e) Any alteration or amendment of the Company's
Statement of Philosophy and Values and any action which is
inconsistent with the Company's Statement of Philosophy and Values;
and
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(f) Approval and authorization of disproportionate
distributions or allocations of profits, losses or assets of the
Company, except as specifically permitted elsewhere in this Agreement.
SECTION 3.9. APPOINTMENT OF BOARD OF DIRECTORS.
The Members shall appoint a Board of Directors as follows:
(a) LHMI shall appoint three (3) Directors; and
(b) The Investor Member shall appoint three (3) Directors.
A Director shall serve on the Board of Directors until removed by the
Member appointing such Director. A Member shall have the right, with or without
cause, to remove, substitute or replace any Director which it appointed.
SECTION 3.10 OBLIGATIONS RELATING TO REAL PROPERTY.
The Company intends to purchase real property located in the greater
Lafayette, Louisiana area (the "Development") subject to the following:
(a) The agreement by the developer thereof to sell
sufficient land on which to develop the Hospital for a purchase price
or rent equal to the fair market value thereof as determined by a
qualified independent real estate appraiser acceptable to LHMI, the
Investor Member and the developer;
(b) LHMI shall use reasonable efforts to require the
developer to record a restriction acceptable to the developer, LHMI,
and the Investor Member prohibiting any Person from using any part of
the Development for a purpose which, if conducted by a Member would
violate Section 5.10 hereof;
(c) The agreement will contain other commercially
reasonable terms and conditions, including without limitation, terms
obligating the developer to execute commercially reasonable documents
required by third parties providing financing to the Company which
will require among other things, a first priority lien on the
Company's interest in the Development.
SECTION 3.11 MEDICAL OFFICE BUILDING.
(a) LHMI, either itself (or its designee) or with other
Members of the Company, intends to develop and own a medical office
building on real property which such party will lease or own adjacent
to the Hospital and which will contain approximately Forty-Five
Thousand (45,000) to Sixty Thousand (60,000) of leasable square
footage ("the MOB"). LHMI shall provide written notice to the Investor
Member of LHMI's intent to enter into definitive agreements to develop
and own the MOB, and the Investor Member shall have thirty (30) days
from the delivery of such notice to notify
10
LHMI in writing of the Investor Member's commitment to participate in
the development and ownership of the MOB and to provide to LHMI such
funds as are required to develop and own the MOB in proportion to the
Investor Member's ownership interest in the MOB. The tenant space in
the MOB may be leased to Members, Owners, Practices or their
Affiliates or to other third parties. The owners of the MOB and the
Company shall enter into cross easement agreements and other
agreements which are customary for commercial real estate
developments. The definitive agreements with any third party developer
of the MOB under this Section 3.11(a) shall, if applicable, contain
similar restrictions on the third party developer as those set forth
at Section 3.10(a) - (c) above.
(b) Unless otherwise approved in writing by LHMI in its
discretion, the Company shall not make any binding commitments
regarding the financing or construction of the Hospital until LHMI or
its designee receives final approved plans to develop the MOB in a
form and for an amount of MOB space that is satisfactory to LHMI or
its designee in its sole discretion acceptable to LHMI or its
designee.
ARTICLE IV
NAMES AND ADDRESSES OF MEMBERS
The names and addresses of the Members are as indicated on the
Information Exhibit attached hereto as Exhibit A, which may be amended by the
Board of Directors from time to time in accordance with the provisions of this
Agreement.
ARTICLE V
MANAGEMENT OF THE COMPANY
SECTION 5.1 GENERAL AUTHORITY AND POWERS OF LHMI AND THE BOARD OF
DIRECTORS.
(a) Except as set forth in those provisions of this
Agreement that specifically require the vote, consent, approval or
ratification of the Members and subject to (b) below, the Board of
Directors shall have complete authority and exclusive control over the
management of the business and affairs of the Company. Subject to the
terms and conditions of this Agreement and except as otherwise
provided herein, all Material Agreements and Material Decisions with
respect to the business and affairs of the Company shall be approved
or made by the Board of Directors in accordance with Section 5.15
hereof. No Member has the actual or apparent authority to cause the
Company to become bound in any contract, agreement or obligation, and
no Member shall take any action purporting to be on behalf of the
Company. No Director shall cause the Company to become bound to any
contract, agreement or obligation, and no Director shall take any
other action on behalf of the Company, unless such matter has received
the vote, consent, approval or ratification as required pursuant to
this Agreement with respect
11
to such matter or except as provided below with respect to the
authority and actions of LHMI.
(b) The day-to-day management of the business and
affairs of the Company shall be the responsibility of LHMI pursuant to
the terms of the Management Services Agreement, which management shall
be subject to decisions, guidelines and policies made or established
by the Board of Directors hereunder, provided, however, decisions
relating to medical and clinical practice at the Hospital shall be
made exclusively by the qualified medical personnel of the Hospital
under the direction of a member of the Hospital's medical staff.
(c) The Members acknowledge that the Management Services
Agreement is an integral part of the plans to develop and operate the
Hospital and its execution is a condition to LHMI's participation in
the Company.
SECTION 5.2 RESTRICTIONS ON AUTHORITY OF THE BOARD OF DIRECTORS.
The Board of Directors shall not do any of the following:
(a) Act in contravention of this Agreement;
(b) Act in any manner which would make it impossible to
carry on the express business purposes of the Company;
(c) Commingle the Company funds with those of any other
Person;
(d) Admit an additional Member without the approval of
all Members or except as otherwise provided in this Agreement;
(e) Alter the primary purposes of the Company as set
forth in Section 2.3;
(f) Possess any property or assign the rights of the
Company in specific property for other than a Company purpose;
(g) Employ, or permit the employ of, the funds or assets
of the Company in any manner except for the exclusive benefit of the
Company;
(h) Make any payments of any type, directly or
indirectly, to anyone for the referral of patients to the Hospital in
order to use the Hospital or to provide other services; or
(i) Sell all or substantially all of the assets of the
Company or merge the Company with or into any other Entity without the
approval of all of the Members.
12
SECTION 5.3 DUTIES OF THE BOARD OF DIRECTORS.
The Board of Directors shall do the following:
(a) Diligently and faithfully devote such of its time to
the business of the Company as may be necessary to properly conduct
the affairs of the Company, however, the individual Directors shall
not be required to devote their full time to such duties;
(b) Use its best efforts to cause the Company to comply
with such conditions as may be required from time to time to permit
the Company to be classified for federal income tax purposes as a
partnership and not as an association taxable as a corporation;
(c) File and publish all certificates, statements, or
other instruments required by law for the formation and operation of
the Company as a limited liability company in all appropriate
jurisdictions;
(d) Use their commercially reasonable best efforts to
cause the Company to obtain and keep in force during the term of the
Company fire and extended coverage and public liability and
professional liability insurance with such issuers and in such amounts
as the Board of Directors shall deem advisable, but in amounts not
less (and deductible amounts not greater) than those customarily
maintained with respect to the business equipment and property
comparable to the Company's; and
(e) Have a fiduciary duty to conduct the affairs of the
Company in the best interests of the Company and of the Members,
including the safekeeping and use of all funds and assets, whether or
not in its immediate possession and control, and it shall not employ
or permit others besides the Board of Directors to employ such funds
or assets in any manner except for the benefit of the Company.
SECTION 5.4 DELEGATION BY THE BOARD OF DIRECTORS.
Subject to restrictions otherwise provided herein, the Board of
Directors may at any time employ any other Person, including Persons and
Entities employed by, affiliated with, or related to any Director or any Member
to perform services for the Company and its business, and may delegate all or
part of their authority or control to any such other Persons, provided that
such employment or delegation shall not relieve the Board of Directors of its
responsibilities and obligations under this Agreement, under the laws of the
State of Louisiana or under the laws of the State of Delaware nor will it make
any such Person a Member of the Company.
SECTION 5.5 RIGHT TO RELY UPON THE AUTHORITY OF THE MANAGER.
Persons dealing with the Company may rely upon the representation of
the Manager that such Manager is the manager of the Company and that such
Manager has the authority to make any commitment or undertaking on behalf of
the Company. No Person dealing with the Manager shall be required to determine
its authority to make any such commitment or undertaking. In addition, no
purchaser from the Company shall be required to determine the sole and
exclusive
13
authority of the Manager to sign and deliver on behalf of the Company any
instruments of transfer with respect thereto or to see to the application or
distribution of revenues or proceeds paid or credited in connection therewith,
unless such purchaser shall have received written notice from the Company
affecting the same.
SECTION 5.6 COMPANY EXPENSES.
(a) The Company shall pay the amounts due to LHMI under
the Management Services Agreement from time to time.
(b) The Company shall also pay the following expenses of
the Company:
(i) All development and operational expenses of
the Company, which may include, but are not limited to: the
salary and related expenses of employees and staff of the
Hospital, all costs of borrowed money, taxes, and assessments
on the Hospital, and other taxes applicable to the Company;
expenses in connection with the acquisition, maintenance,
leasing, refinancing, operation, and disposition of the
Equipment, furniture and fixtures of the Hospital (including
legal, accounting, audit, commissions, engineering,
appraisal, and the other fees); and the maintenance of the
Hospital and its Equipment, which may be performed by LHMI or
one of its Affiliates as long as the charges to the Company
for such service are at a fair market price no greater than
the charges for such service from a third party service
provider in an arm's length agreement;
(ii) A medical director's fee in an amount
approved by the Board of Directors to be paid to the Medical
Director of the Hospital pursuant to the Medical Director
Agreement; and
(iii) All fees and expenses paid to third parties
for accounting, legal, documentation, professional, and
reporting services to the Company, which may include, but are
not limited to: preparation and documentation of Company
bookkeeping, accounting and audits; preparation and
documentation of budgets, cash flow projections, and working
capital requirements; preparation and documentation of
Company state and federal tax returns; and taxes incurred in
connection with the issuance, distribution, transfer,
registration, and recordation of documents evidencing
ownership of a Membership Interest in the Company or in
connection with the business of the Company; expenses in
connection with preparing and mailing reports required to be
furnished to the Members for tax reporting or other purposes,
including reports, if any, that may be required to be filed
with any federal or state regulatory agencies, or expenses
associated with furnishing reports to Members which the Board
of Directors deems to be in the best interest of the Company;
expenses of revising, amending, converting, modifying, or
terminating the Company or this Agreement; costs incurred in
connection with any litigation in which the Company is
involved as well as any examination, investigation, or other
proceedings conducted by any regulatory agency involving the
Company; costs of any computer equipment or services used
14
for or by the Company; and the costs of preparing and
disseminating informational material and documentation
relating to a potential sale, refinancing, or other
disposition of the Hospital or the Equipment.
(c) Guarantee Fee. In the event that any Member or its
Affiliates, including, without limitation, MedCath Incorporated,
provide a guarantee of any indebtedness of the Company which is
acceptable to and required by the Company's lenders ("Guarantor
Members") and such guarantees are not provided on a pro rata basis by
all other Members of the Company (the "Nonguarantor Members"), then
the Guarantor Members shall be paid an annual guarantee fee equal to
(a) the amount of such indebtedness which is guaranteed by the
Guarantor Members, multiplied by (b) .0075, multiplied by (c) the
percentage Membership Interest in the Company owned by the
Nonguarantor Members (the "Guarantee Fee"). The annual Guarantee Fee
shall be paid in quarterly installments and the expense thereof shall
be allocated to the Nonguarantor Members as follows:
(i) The Guarantee Fee shall be deducted from
the Cash Distributions otherwise distributable to the
Nonguarantor Members and shall be paid to the Guarantor
Members;
(ii) To the extent that at the time such
Guarantee Fee is due to be paid hereunder there are no
anticipated Cash Distributions, then the Company shall pay
such Guarantee Fee to the Guarantor Members and the amount of
such payments shall be charged to the Capital Accounts of the
Nonguarantor Members;
(iii) When Cash Distributions become available
for distribution to the Members in the future, the Cash
Distributions otherwise distributable to the Nonguarantor
Members shall first be retained by the Company to the extent
that amounts were previously charged to the Capital Accounts
of the Nonguarantor Members in accordance with subsection
(ii) above and any remaining Cash Distributions shall be
distributed to the Members in accordance with Section 6.1.
(d) Once a budget has been approved by the Board of
Directors, LHMI shall have the authority to expend up to one hundred
and five percent (105%) of any and all funds which are included in the
budget and sign all agreements related thereto, including
reimbursement to LHMI and its Affiliates for goods and services
provided to the Company. LHMI shall have the right to recast the
budget by transferring all or part of the funds approved for specific
line items to another category or line item by an aggregate amount not
to exceed ten percent (10%) of the total budgeted funds. LHMI is
further authorized to make additional expenditures reasonably related
to additional revenues or increased patient or procedural volumes
provided that in making such additional expenditures the gross margin
between the Company's net patient revenue and operating expenses
remains the same or greater than the gross margin between net patient
revenues and operating expenses in the most recent budget approved by
the Board of Directors. LHMI shall report to the Board of Directors
from time to time on variances between the Hospital's budget and
actual operating results.
15
SECTION 5.7 NO MANAGEMENT BY MEMBERS.
Except for those management obligations of LHMI set forth herein and
in the Management Services Agreement, the Members shall take no part in, or at
any time interfere in any manner with, the management, conduct, or control of
the Company's business and operations and shall have no right or authority to
act for or bind the Company except as set forth in this Agreement. The rights
and powers of such Members shall not extend beyond those set forth in this
Agreement, the Act, or those granted under the Certificate of Formation and any
attempt to participate in the control of the Company in a manner contrary to
the rights and powers granted herein, under the Act or under the Certificate of
Formation shall be null and void and without force and effect. Subject to the
decisions and judgment with respect to all professional medical or clinical
matters of qualified medical personnel, the Board of Directors shall have the
right to determine when and how the operations of the Company shall be
conducted. The exercise by a Member of any of the rights granted to such
Member, including the exercise of any rights granted to LHMI in its capacity as
Manager, hereunder shall not be deemed to be a Member taking part in the
control of the business of the Company and shall not constitute a violation of
this Section.
SECTION 5.8 CONSENT BY MEMBERS TO EXERCISE OF CERTAIN RIGHTS AND
POWERS BY BOARD OF DIRECTORS.
By its execution hereof, each Member expressly consents to the
exercise by the Board of Directors of the rights, powers, and authority
conferred on the Board of Directors by this Agreement.
SECTION 5.9. MEETINGS, QUORUM AND VOTE OF THE BOARD OF DIRECTORS.
(a) The Board of Directors shall meet at least
quarterly. Notice of any meeting, regular or special, shall be
delivered to each Director personally, by telephone, by electronic
mail, by facsimile transmission or in writing at least five (5)
business days before the meeting.
(b) An emergency meeting of the Board of Directors may
be called by any Director upon shorter notice. Action taken at the
emergency meeting shall be valid so long as the meeting is attended by
at least two (2) members of the Board of Directors appointed by the
Investor Member and at least two (2) members of the Board of Directors
appointed by LHMI, and the action is unanimously approved by the
members of the Board of Directors present at such meeting.
(c) The Board of Directors shall elect one (1) of its
members to preside over the meetings as the Chairperson and one of its
members, as the Secretary, to oversee the preparation and delivery of
meeting notices and the preparation of minutes of the meetings of the
Board of Directors and Members.
(d) A quorum of the Board of Directors shall be
necessary to conduct business at any meeting. A quorum shall consist
of four (4) Directors and must include two (2) Directors designated by
LHMI and two (2)
16
Directors designated by the Investor Member. A Director may attend a
meeting by telephone or other electronic means and be considered
present for purposes of a quorum so long as the telephone or other
connection allows each Director to hear and be heard by all other
Directors.
(e) Except as provided in Section 5.15 or as otherwise
expressly provided in this Agreement, any action taken by the Board of
Directors shall require the affirmative vote of at least a majority of
the Directors present at a meeting at which a quorum is present and
shall require the consent of at least one (1) Director designated by
LHMI and one (1) Director designated by the Investor Member.
(f) Any action which is required to be or may be taken
at a meeting of the Board of Directors may be taken without a meeting
if consent in writing, either collectively or in counterparts, setting
forth the action so taken, is signed unanimously by all Directors.
(g) Attendance at a meeting of the Board of Directors
constitutes waiver of any objection to the notice of the meeting.
SECTION 5.10 OTHER BUSINESS OF MEMBERS.
(a) Subject to (b) below, any Member may engage
independently or with others in other business ventures of every
nature and description, including without limitation the purchase of
medical equipment, the rendering of medical services of any kind, and
the making or management of other investments and neither the Company
nor any Member shall have any right by virtue of this Agreement or the
relationship created hereby in or to such other ventures or activities
or to the income or proceeds derived therefrom, and the pursuit of
such ventures.
(b) Except as specifically provided in this Section
5.10, as long as any Member owns a Membership Interest in the Company,
and for a period of two (2) years after a Member ceases for any reason
to own a Membership Interest in the Company, neither a Member,
Investor Entity, Owner, Practice nor any of their respective
Affiliates, shall hold, directly or indirectly, an investment,
ownership or other beneficial interest in (x) any hospital, or (y) any
other Entity (including a sole proprietorship) which provides any of
the following services or facilities: cardiac catheterization,
angioplasty, peripheral angioplasty, atherectomy, stenting and PTCA or
other cardiac surgical procedures or services (the "Restricted
Services"), in any case within Lafayette, Iberia, St. ▇▇▇▇▇▇, St.
▇▇▇▇▇▇, Acadia, Vermilion, Rapides, Calcasieu, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, or St.
▇▇▇▇ Parishes (collectively, the "Territory"). Notwithstanding the
terms of this Section 5.10(b):
(i) No Member or Owner who is a physician shall
be prohibited from maintaining his or her staff privileges
and admitting and treating patients at any other hospital;
(ii) Nothing herein shall prohibit a Member,
Owner, Practice or their Affiliates from owning up to three
percent (3%) of the outstanding capital stock
17
of a company which provides healthcare services or supplies
and whose stock is publicly traded and listed on a nationally
recognized securities exchange or from investing in a
publicly traded mutual fund or making other investments with
the prior written approval of the Board of Directors;
(iii) Nothing herein shall prevent an Owner or
Practice from providing cardiac services within the scope of
such Owner's or Practice's regular office(s) for the practice
of medicine so long as they do not provide diagnostic or
interventional cardiac catheterization services in such
office; provided, however, that the provision of diagnostic
and therapeutic (but not interventional) cardiac
catheterization services at the site set forth at Exhibit C
by physicians regularly providing services at such site as of
March 1, 2001 shall not be prohibited by this Section
5.10(b)(iii);
(iv) Nothing herein shall prevent the Investor
Member, an Owner or a Practice from operating a cardiac
catheterization laboratory in the MOB located on the
Hospital's campus; provided, however, that, among the
Investor Member, the Owners and the Practices, there may only
be a total of two (2) cardiac catheterization laboratories in
the MOB and further provided that (aa) only diagnostic and
therapeutic (but not interventional) cardiac catheterization
services may be provided in such laboratory and (bb) LHMI or
an Affiliate is engaged to manage the laboratories;
(v) Nothing herein shall prevent LHMI or its
Affiliates from separately operating a mobile catheterization
laboratory within the Territory, but only if either LHMI or
an Affiliate thereof is providing such service as of the
effective date of the Company's Certificate of Formation
pursuant to a lease of six (6) months or less to a provider
who is already providing cath lab services. In addition, LHMI
or its Affiliates may provide new mobile catheterization
laboratory services in the Territory following the execution
of this Agreement so long as the Board of Directors does not
elect to have such service provided by the Company with the
approval for providing such service by the Directors
appointed by LHMI not to be unreasonably withheld; and
(vi) Nothing herein shall prevent any Member or
Owner who is a physician from personally performing
professional medical services directly for his or her
patients at any hospital or facility and from billing and
receiving professional fees as a result of his or her
professional medical services from any payor.
(c) The Members and Owners have reviewed the term and
geographical restrictions included in Section 5.10(b), and in light of
the interests of the Members and Owners, agree that such restrictions
are fair and reasonable.
(d) In order to ensure that the Hospital has available
to it at all times leading and qualified cardiologists and
cardiovascular surgeons, as of the date hereof the
18
Company is entering into the Hospital Professional Services Agreement
with each of the Owners who are physicians or their Practices, which
Hospital Professional Services Agreement includes in Section 7 thereof
certain covenants by the Owners who are physicians or Practices which
are designed to ensure that the Owners who are physicians will be
available to the Hospital from time to time in order to enable it to
meet its objectives of being an efficient quality provider of
cardiology and cardiovascular services. The Members, Practices, and
Owners acknowledge and agree that the execution of the Hospital
Professional Services Agreement by the Owners who are physicians or
Practices is further consideration for the execution by the Members of
this Agreement.
(e) If there is a breach or threatened breach of the
provisions of this Section 5.10 of this Agreement, in addition to
other remedies at law or equity, the non-breaching parties shall be
entitled to injunctive relief. The Members and Owners desire and
intend that the provisions of this Section 5.10 shall be enforced to
the fullest extent permissible under the law and public policies
applied, but the unenforceability or modification of any particular
paragraph, subparagraph, sentence, clause, phrase, word, or figure
shall not be deemed to render unenforceable the remainder of this
Section 5.10. Should any such paragraph, subparagraph, sentence,
clause, phrase, word, or figure be adjudicated to be wholly invalid or
unenforceable, a court with applicable authority is hereby authorized
to "blue pencil" or modify this Section, the balance of this Section
5.10 shall thereupon be modified in order to render the same valid and
enforceable and the unenforceable portion of this Section 5.10 shall
be deemed to have been deleted from this Agreement.
(f) The Company, the Board of Directors and the Members
agree that the benefits to any Member, Owner, Practice or their
Affiliates hereunder do not require, are not payment for, and are not
in any way contingent upon the referral, admission or any other
arrangement for the provision of any item or service offered by the
Company to patients of such Member, any Owner, Practice or their
Affiliates or in any facility, laboratory, cardiac catheterization
facility or other health care operation controlled, managed or
operated by the Company and nothing herein is intended to prohibit any
Owner who is a physician from practicing medicine at any other
facility.
(g) The Investor Member and Investor Entities shall
cause each of their existing and future Owners to agree in writing to
be personally bound by the terms of this Section 5.10.
SECTION 5.11 BOARD OF DIRECTORS' STANDARD OF CARE.
Each Director shall act in a manner he or she believes in good faith
to be in the best interest of the Company and with such care as an ordinarily
prudent Person in a like position would use under similar circumstances. In
discharging his or her duties, each Director shall be fully protected in
relying in good faith upon the records required to be maintained under this
Agreement and upon such information, opinions, reports and statements by any of
its other Directors, Members, or agents, or by any other Person as to matters
each Director reasonably believes are within such other Person's professional
or expert competence and who has been selected with reasonable care by or on
behalf of the Company, including information, opinions,
19
reports or statements as to the value and amount of the assets, liabilities,
income or losses of the Company or any other facts pertinent to the existence
and amount of assets from which distributions to Members might properly be
paid.
Notwithstanding anything herein to the contrary, a Director or Member
shall have the right to vote or approve Company matters in accordance with the
terms of this Agreement regardless of the personal interest of any Member or
Director in the outcome of any vote, decision or matter provided that all
Members or Directors, as the case may be, have been notified of a personal
interest that a Member or Director has in such Company matters.
SECTION 5.12 LIMITATION OF LIABILITY.
A Director shall not be liable to the Company or the Members for any
action taken in managing the business or affairs of the Company if he or she
performs the duty of his or her office in compliance with the standard
contained in Section 5.11. No Director has guaranteed nor shall have any
obligation with respect to the return of a Member's Capital Contribution or
share of income from the operation of the Company. Furthermore, no Director
shall be liable to the Company or to any Member for any loss or damage
sustained by the Company or any Member except loss or damage resulting from
gross negligence or intentional misconduct or knowing violation of law or a
transaction for which such Director received a personal benefit in violation or
breach of the provisions of this Agreement.
SECTION 5.13 INDEMNIFICATION OF THE DIRECTORS.
(a) Each Director shall be indemnified by the Company
against any losses, judgments, liabilities, expenses, including
attorneys' fees and amounts paid in settlement of any claims sustained
by such Director arising out of any action or inaction of the Director
in his or her capacity as a Director of the Company to the fullest
extent allowed by law, provided that the same were not the result of
gross negligence or willful misconduct on the part of the Director and
provided that the Director, in good faith, reasonably determined that
such course of conduct was in the best interest of the Company;
provided, however, that such indemnification and agreement to hold
harmless shall be recoverable only out of Company assets. Subject to
applicable law, the Company shall advance expenses incurred with
respect to matters for which a Director may be indemnified hereunder.
(b) If at any time, the Company has insufficient funds
to furnish indemnification as herein provided, it shall provide such
indemnification if and as it generates sufficient funds and prior to
any cash distributions, pursuant to Article VI or Article VII hereof,
to the Members.
SECTION 5.14 PURCHASE OF GOODS AND SERVICES FROM MEMBERS.
Goods and services may be purchased from Members or their Affiliates
as long as they are of substantially the same quality and a fair market value
price that could be obtained from an unrelated third party in an arm's length
transaction.
20
SECTION 5.15 CERTAIN DECISIONS OF THE BOARD OF DIRECTORS.
(a) As long as LHMI and/or its Affiliates are (i)
providing a guaranty or are committed to provide a guaranty for any
indebtedness of the Company, and/or (ii) have any outstanding loans to
the Company or are committed to provide such loans, then
notwithstanding anything in this Agreement to the contrary, all
decisions and actions to be made by the Board of Directors with
respect to any loan, lease or other similar financing of the
development, construction or operation of the Hospital or the
Company's affairs, including without limitation the decisions with
respect to incurring any indebtedness or the refinancing thereof,
shall be made by the Directors designated by LHMI and shall be subject
to the consent of at least one of the Directors appointed by the
Investor Member, which consent shall not be unreasonably withheld.
(b) The Board of Directors shall be deemed to have
specifically approved all expenditures proposed by LHMI under this
Article V that are substantially consistent with the Development
Budget Exhibit (Exhibit D) or an approved operating budget when funded
from additional Capital Contributions made to the Company by the
Members pursuant to Section 3.5 above.
(c) No Director shall unreasonably withhold its approval
of budgets which are within the reasonable revenue expectations of the
Hospital and which are in compliance (both as to terms and
availability of financing) with agreements with the Company's lenders
and other parties providing financing to the Company; and
(d) In the event that the Board of Directors is unable
to approve an annual budget, LHMI shall be authorized to operate the
Company pursuant to this Agreement under the previous year's budget
increased by the greater of five percent (5%) or the percentage
increase during the previous year in the Consumer Price Index for
Medical Items as published by the United States Department of Labor,
Bureau of Labor Statistics for the region that is most proximate to
Lafayette, Louisiana, until a new budget is approved. LHMI may also
increase a budget under this Section 5.15(d) in reasonable relation to
increases in revenues that exceed those in the current budget or
increases in procedural or patient volumes at the Hospital provided
that in making such additional expenditures the gross margin between
the Company's net patient revenue and operating expenses remains the
same or greater than the gross margin between net patient revenues and
operating expenses in the most recent budget approved by the Board of
Directors.
(e) Without LHMI's written consent, the Investor Member
and the Board of Directors will not approve any change to the
construction, design or equipment of the Hospital, if the effect
thereof is to materially increase the cost thereof as set forth on the
Development Budget Exhibit (Exhibit D) approved hereunder.
21
SECTION 5.16 INDEMNITY BY THE COMPANY.
The Company agrees to indemnify, defend and hold Manager, its
directors, officers, employees and agents, harmless from and against any and
all loss, claim, cause of action, demand, penalty, liability, action, damage or
deficiency, lawsuit or other proceeding against Manager in its capacity as
Manager of the Company, resulting or arising from (a) acts or omissions of the
Company, its Members, officers, employees (unless due to the gross negligence
or willful misconduct of Manager or its owners, officers acting on behalf of
the Manager in its capacity as Manager of the Company), (b) any liability or
obligation of the Company, except those which Manager created in violation of
this Article V; (c) any nonfulfillment of the Company of any of its covenants
or agreements under this Article V; (d) any violation of law by the Company;
and (e) any loss or damage, reasonable attorney's fees and other costs and
expenses incident to any of (a) through (d). The indemnity covenants set forth
in this Section 5.16 shall survive the termination of this Agreement for any
reason.
SECTION 5.17 FORCE MAJEURE.
LHMI shall not be liable nor shall it be deemed to be in default for
any delay or failure in performance under this Article V or other interruption
of service or employment deemed resulting directly or indirectly from Acts of
God, civil or military authority, acts of public enemy, war, accidents, fires,
explosions, earthquakes, floods, failure of transportation, strikes or other
work interruptions by LHMI's employees or any similar or dissimilar cause
beyond the reasonable control of LHMI. Further, LHMI shall not be in default
under this Article V if the default resulted from actions taken at the request
or direction of the Board of Directors or if the Board of Directors failed to
take reasonable action recommended by LHMI to enable it to meet its obligations
hereunder.
ARTICLE VI
DISTRIBUTIONS AND ALLOCATIONS
SECTION 6.1 DISTRIBUTIONS OF CASH FLOW FROM OPERATIONS AND CASH
FROM SALES OR REFINANCING.
Prior to the dissolution of the Company, and subject to the terms and
conditions to which the Company is bound with respect to its lenders ("Loan
Conditions"), Cash Flow from Operations and Cash from Sales or Refinancing, if
any, remaining after repayment of any amounts currently due with respect to
loans made by the Members to the Company, shall be distributed quarterly by the
Manager as Cash Distributions according to the relative percentage Membership
Interests of the Members at such times as the Board of Directors deems
appropriate; provided, however, that to the extent possible, any Guarantee Fee
shall be deducted from the Cash Distributions otherwise distributable to the
Nonguarantor Members and paid to the Guarantor Members as set forth in Section
5.6(c). Notwithstanding anything herein to the contrary, no distributions shall
be made to Members if prohibited by the Act or any other applicable law and
unless the aggregate principal balance of any loans made to the Company by
22
LHMI or an Affiliate pursuant to Section 3.5 does not exceed Six Million
Dollars ($6,000,000) at the time of any Cash Distributions.
The Board of Directors shall, to extent permitted by the Loan
Conditions and subject to the availability of Cash Flow from Operations and
using commercially reasonable efforts, distribute cash annually pro rata to
Members in an amount which is sufficient to enable them to pay income taxes, if
any, which arise from the taxable income of the Company. In computing taxable
income of each Member, the taxable income of each Member for the current year
shall be reduced by any cumulative tax losses incurred in prior years (after
reduction by taxable income in prior years). Such distributions shall assume
for all Members the highest combined federal and state tax rates applicable to
any Member with respect to his or its Profits from the Company.
SECTION 6.2 PROFITS.
Except as provided in the Regulatory Allocations Exhibit (Exhibit E)
and subject to Section 6.6, Profits shall be allocated as follows:
(a) First, to the Members who have been allocated Losses
pursuant to Subsection 6.3(a) below until the cumulative Profits
allocated pursuant to this Subsection 6.2(a) equal the cumulative
prior allocations of Losses under that Subsection.
(b) Next, to the Members who have been allocated Losses
pursuant to Subsection 6.3(b) below until the cumulative Profits
allocated pursuant to this Subsection 6.2(b) equal the cumulative
prior allocations of Losses under that Subsection.
(c) All remaining Profits shall be allocated to the
Members in accordance with their percentage Membership Interests.
SECTION 6.3 LOSSES.
Except as provided in the Regulatory Allocations Exhibit (Exhibit E)
and subject to Section 6.6, Losses shall be allocated as follows:
(a) First, Losses shall be allocated to the Members with
positive Adjusted Capital Account balances in proportion to those
balances.
(b) All remaining Losses shall be allocated to the
Members in accordance with their percentage Membership Interests.
SECTION 6.4 CODE SECTION 704(C) TAX ALLOCATIONS.
Income, gain, loss, and deduction with respect to any property
contributed to the capital of the Company shall, solely for tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for federal
23
income tax purposes and its initial Agreed Value pursuant to any method
allowable under Code Section 704(c) and the Regulations promulgated thereunder.
In the event the Agreed Value of any Company asset is adjusted after
its contribution to the Company, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall take into account any variation
between the adjusted basis of such asset for federal income tax purposes and
its Agreed Value pursuant to any method allowable under Code Section 704(c) and
the Regulations promulgated thereunder.
Any elections or other decisions relating to allocations under this
Section shall be determined by the Board of Directors. Absent a determination
by the Board of Directors, the remedial allocation method under Regulation
Section 1.704-3(d) shall be used. Allocations pursuant to this Section are
solely for purposes of federal, state, and local taxes and shall not be taken
into account in computing any Member's Capital Account or share of Profits,
Losses, other items, or distributions pursuant to any provision of this
Agreement.
SECTION 6.5 MISCELLANEOUS.
(a) Allocations Attributable to Particular Periods. For
purposes of determining Profits, Losses or any other items allocable
to any period, such items shall be determined on a daily, monthly, or
other basis, as determined by the Board of Directors using any
permissible method under Code Section 706 and the Regulations
thereunder.
(b) Other Items. Except as otherwise provided in this
Agreement, all items of Company income, gain, loss, deduction, credit
and any other allocations not otherwise provided for shall be divided
among the Members in the same proportion as they share Profits or
Losses, as the case may be, for the year.
(c) Tax Consequences; Consistent Reporting. The Members
are aware of the income tax consequences of the allocations made by
this Article and by the Regulatory Allocations and hereby agree to be
bound by those allocations as reflected on the information returns of
the Company in reporting their shares of Company income and loss for
income tax purposes. Each Member agrees to report its distributive
share of Company items of income, gain, loss, deduction and credit on
its separate return in a manner consistent with the reporting of such
items to it by the Company. Any Member failing to report consistently,
and who notifies the Internal Revenue Service of the inconsistency as
required by law, shall reimburse the Company for any legal and
accounting fees incurred by the Company in connection with any
examination of the Company by federal or state taxing authorities with
respect to the year for which the Member failed to report
consistently.
SECTION 6.6 SPECIAL ALLOCATIONS OF GUARANTEE FEES.
Any and all deductions, losses or reductions to Capital Accounts
attributable to the payment by the Company of Guarantee Fees shall be allocated
to the Nonguarantor Members in accordance with their relative percentage
Membership Interests.
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ARTICLE VII
DISSOLUTION, WINDING UP AND LIQUIDATING DISTRIBUTIONS
SECTION 7.1 NO TERMINATION BY CERTAIN ACTS OF MEMBER.
Neither the transfer of interest, withdrawal from the Company,
bankruptcy, insolvency, dissolution, liquidation or other disability, nor the
legal incompetency of any Member shall result in the termination or dissolution
of the Company or affect its continuance in any manner whatsoever.
SECTION 7.2 DISSOLUTION.
The Company shall be dissolved upon the happening of any of the
following events, whichever shall first occur:
(a) The election to dissolve the Company in accordance
with the terms of Section 3.5(f) hereof;
(b) The expiration of the term of the Company as
provided in Section 2.6 hereof;
(c) The adjudication of bankruptcy of the Company;
(d) Upon the written consent of LHMI and the Investor
Member;
(e) In accordance with Section 12.11 hereof;
(f) The entry of a decree of judicial dissolution or the
administrative dissolution of the Company as provided in the Act;
(g) Upon the written election of LHMI prior to the
execution by LHMI on behalf of the Company of definitive agreements
for the construction of the Hospital and for a loan to finance the
construction of the Hospital, in the event that upon thirty (30) days
prior written notice to the Members, the conditions set forth at
Section 3.11 have not been met with regard to the MOB; or
(h) Upon the written election of either LHMI or the
Investor Member, in the event that within eighteen (18) months
following the Effective Date, the Company has not commenced
construction of the Hospital, unless such period is extended by the
mutual written agreement of LHMI and the Investor Member.
Upon the occurrence of the events of dissolution set forth at this
Section 7.2, the Manager shall promptly take such steps as are required to
dissolve the Company, including, but not
25
limited to, winding up the affairs of the Company and, upon the completion of
the winding up, the filing of a certificate of cancellation as required under
the Act.
SECTION 7.3 DISSOLUTION AND FINAL LIQUIDATION.
(a) Upon any dissolution of the Company, the Company
shall not terminate, but shall cease to engage in further business
except to the extent necessary to perform existing contracts and
preserve the value of its assets. Its assets shall be liquidated and
its affairs shall be wound up as soon as practical thereafter by the
Manager or, if for any reason there is no Manager, by another Person
designated by the Board of Directors. In winding up the Company and
liquidating assets, the Manager, or other Person so designated for
such purpose, may arrange, either directly or through others, for the
collection and disbursement to the Members of any future receipts from
the Hospital or other sums to which the Company may be entitled, and
shall sell the Company's interest in the Hospital and the Equipment to
any Person, including any Member or any Affiliate thereof, on such
terms and for such consideration as shall be consistent with obtaining
the fair market value thereof, as such fair market value is approved
by the Members.
(b) Upon any such dissolution and liquidation of the
Company, the net assets, if any, of the Company available for
distribution, including any cash proceeds from the liquidation of
Company assets, shall be applied and distributed in the following
manner or order, to the extent available:
(i) To the payment of or creation of reserves
for all debts, liabilities, and obligations to all creditors
of the Company (other than the Members or their Affiliates)
and the expenses of liquidation;
(ii) To the payment of all debts and liabilities
(including interest), and further including without
limitation any accrued but unpaid Guarantee Fees, owed to the
Members or their Affiliates as creditors; and
(iii) The balance to the Members with positive
Capital Account balances after taking into account all other
adjustments during the Fiscal Year in which liquidation
occurs.
(c) The Members shall look solely to the assets, if any,
of the Company for any return of their Capital Contributions and, if
the assets of the Company remaining after payment or discharge of the
Company's debts and liabilities, or provision therefor, are
insufficient to return all or any part of the Capital Contributions,
no Member shall have any right of recourse against the Directors or
other Members or to charge the Board of Directors or other Members for
any amounts except as provided herein and except to the extent
otherwise provided by the Act and/or Delaware law.
(d) Upon such dissolution, reasonable time shall be
allowed for the orderly liquidation of the assets of the Company and
the discharge of liabilities to creditors so as to minimize the losses
normally attendant to a liquidation.
26
(e) The Capital Accounts of the Members, as adjusted,
shall be utilized by the Company for the purpose of making
distributions to those Members with positive balances in their
respective Capital Accounts pursuant to Section 7.3(b). In making such
distributions, the Board of Directors or the Person winding up the
affairs of the Company shall distribute all funds available for
distribution to the Members (after establishing any reserves that the
Board of Directors or the Person winding up the affairs of the Company
deems reasonably necessary pursuant to Section 7.3(b)) prior to the
later of (i) the end of the taxable year in which the event which
caused the termination and dissolution of the Company occurs, or (ii)
ninety (90) days after the occurrence of such event. The Board of
Directors in its sole discretion, or the Person winding up the affairs
of the Company, in its discretion, may elect to have the Company
retain any installment obligations owed to the Company until collected
in full so long as any portion of the reserves which are later
determined to be unnecessary, and all collections on such installment
obligations which are not deemed to be reasonably necessary by the
Board of Directors or the Person winding up the affairs of the Company
to add to such reserves are distributed as soon as practicable in
accordance with the provisions of Section 7.3(b) as modified by this
Section.
SECTION 7.4 TERMINATION.
Upon completion of the dissolution, winding up, distribution of the
liquidation proceeds and any other Company assets, the Company shall terminate.
SECTION 7.5 PAYMENT IN CASH.
Any payments made to any Member pursuant to this Article VII shall be
made only in cash.
SECTION 7.6 TERMINATION OF NONCOMPETITION COVENANTS.
Members shall have no continuing liability or obligation under Section
5.10(b) after the earlier of the second (2nd) anniversary of: (i) the
dissolution of the Company; or (ii) the date upon which the Company surrendered
its license to operate an acute care hospital.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS
SECTION 8.1 MEMBERS - RESTRICTION ON TRANSFER.
(a) Except as otherwise set forth in this Section or in
this Agreement, no Membership Interest or any portion thereof, shall
be validly sold or assigned whether voluntarily, involuntarily or by
operation of law, and no purported assignee shall be
27
recognized by the Company for any purpose, unless such Membership
Interest shall have been transferred in accordance with the provisions
of this Agreement and in compliance with such additional restrictions
as may be imposed by any federal or state securities regulatory
authority or law and with the consent of the Board of Directors. In no
event, however, shall a Member transfer or sell all or any of its
Membership Interest to any party which, if a Member, would be in
violation of Section 5.10(b) hereof.
(b) Except as otherwise set forth in this Section or in
this Agreement, a Member may transfer, sell or assign its entire
Membership Interest only if it has received the approval of the Board
of Directors. Subject to the foregoing: (i) the Company first for a
period of fifteen (15) days, and thereafter the other Members in
proportion to their Membership Interest in the Company for a period of
fifteen (15) days, shall have the right, but not the obligation, to
purchase all, but not less than all, of the Membership Interest
proposed to be transferred, which right shall be exercisable on the
terms and for the purchase price set forth in writing in a bona fide
offer made for the Membership Interests by a third-party (the "Right
of First Refusal"), and (ii) there shall have been filed with the
Company a duly executed and acknowledged counterpart of the instrument
making such assignment signed by both the assignor and assignee and
such instrument evidences the written acceptance by the assignee of
all of the terms and provisions of the Agreement, represents that such
assignment was made in accordance with all applicable laws and
regulations and the assignee shall have represented to the Company in
writing that it meets the investor suitability standards established
by the appropriate state of residence, or, in the absence thereof, the
investor suitability standards established by the Company. The Board
of Directors shall use reasonable care to determine that transfers are
in accordance with applicable laws and regulations, including
obtaining an opinion of counsel to that effect. Any Member that
assigns all of its Membership Interest shall cease to be a Member of
the Company. Any Membership Interests acquired by the Company pursuant
to Section 8.1 may, subject to applicable law, be re-offered by the
Company to suitable investors.
(c) Subject to (d) below, any dissolution, liquidation,
merger (unless Members or their Affiliates existing prior to such
merger own at least fifty-one percent (51%) of the surviving entity
after the merger or unless both parties to such merger are majority
owned by parties who are Members or their Affiliates prior to such
merger) or sale of a Member which is an Entity (a sale shall include a
transfer of fifty percent (50%) or more of its ownership interests or
of substantially all of its assets or any other transaction or series
of related transactions intended to accomplish, in substance, a sale
of such Entity), which event shall not occur, subject to (d) below,
without the written consent of the other Members, shall constitute an
offer by such Member to sell such Member's Membership Interest to the
Company and the other Members pursuant to Section 8.6 for a purchase
price equal to five (5) multiplied by the net income (as reasonably
determined by the Company's accountants) of the Company for the twelve
(12) month period ending as of the calendar quarter most recently
ended prior to such event multiplied by the percentage Membership
Interest of such Member in the Company (the "Formula Purchase Price").
The Formula Purchase Price shall be paid in three (3) equal annual
installments, the first third of which shall be paid upon the
determination of the Formula Purchase Price and
28
the remaining two (2) installments of which shall be paid on the first
and second anniversary of such date (the "Payment Method"). The
remaining two (2) installments shall bear interest at the Prime Rate
as of the date of the date of the determination of the Formula
Purchase Price. Accrued interest shall be paid as of the dates
payments of principal are due as provided above according to the
Payment Method.
(d) Notwithstanding anything herein to the contrary,
LHMI may assign its Membership Interest in the Company, its rights to
designate Directors hereunder, and its rights as manager under the
Management Services Agreement (i) to any party who purchases fifty-one
percent (51%) or more of MedCath Holdings, Inc., MedCath
Incorporated's and their subsidiaries' assets or capital stock if such
purchaser (in case of an asset sale) assumes in writing the
obligations of LHMI hereunder or (ii) to a party under control of,
common control, or which controls LHMI. LHMI may also assign its
Membership Interest in the Company, its right to designate Directors,
and its rights under the Management Services Agreement to a financial
institution (a "Lender") as collateral security for repayment of
indebtedness for borrowed funds by MedCath Incorporated or its
Affiliates; provided, however, that a Lender will not have the right
to vote on behalf of LHMI as a Member of the Company unless and until
the Lender forecloses on LHMI's Membership Interest in the Company.
The Members acknowledge and agree, however, that a Lender may require
that the Company not amend agreements entered into by the Company
without Lender's consent and that a Lender may require that the
Company or LHMI or its Affiliates agree to certain restrictions and
covenants that will bind the Company and/or otherwise restrict certain
rights of the Members under this Agreement.
SECTION 8.2 CONDITION PRECEDENT TO TRANSFER OF MEMBERSHIP
INTEREST.
Notwithstanding anything herein to the contrary, no transfer of
Membership Interest may be made if such transfer (a) constitutes a violation of
the registration provisions of the Securities Act of 1933, as amended, or the
registration provisions of any applicable state securities laws; (b) if after
such transfer the Company will not be classified as a partnership for federal
income tax purposes; and (c) if when taken together with other prior transfers,
results in a "termination" of the Company for federal income tax purposes. The
Company may require, as a condition precedent to transfer of a Membership
Interest, delivery to the Company, at the proposed transferor's expense, of an
opinion of counsel satisfactory (both as to the counsel and substance of the
opinion) to the Company that the transfer will not violate any of the foregoing
restrictions.
SECTION 8.3 SUBSTITUTE MEMBER - CONDITIONS TO FULFILL.
No assignee of a Member's Membership Interest in the Company shall
have the right to become a Substitute Member in place of its assignor unless,
in addition to any other requirement herein, all of the following conditions
are satisfied:
(a) The Company has waived its right pursuant to Section
8.1 to purchase the Membership Interest held by the assignee;
29
(b) The duly executed and acknowledged written
instrument of assignment which has been filed with the Company sets
forth that the assignee becomes a Substitute Member in place of the
assignor;
(c) The assignor and assignee execute and acknowledge
such other instruments as the Board of Directors may deem reasonably
necessary or desirable to effect such admission, including, but not
limited to, the written acceptance and adoption by the assignee of the
provisions of this Agreement;
(d) The payment by the assignee of all costs to the
Company associated with the transaction, including but not limited to
legal fees, transfer fees, and filing fees.
SECTION 8.4 ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE.
Upon the transfer of a Membership Interest, all items of income, gain,
loss, deduction and credit attributable to the Membership Interest so
transferred shall be allocated between the transferor and the transferee in
such manner as the transferor and transferee agree at the time of transfer;
provided such allocation does not violate federal or state income tax law. If
the Board of Directors, in its sole discretion, deems such laws violated, then
such allocation shall be made pro rata for the fiscal year based upon the
number of days during the applicable fiscal year of the Company that the
Membership Interest so transferred was held by the transferor and transferee,
without regard to the results of Company activities during the period in which
each was the holder, or in such other manner as the Board of Directors deems
necessary to comply with federal or state income tax laws. Distributions as
called for by this Agreement shall be made to the holder of record of the
Membership Interest on the date of distribution. Notwithstanding anything
contained in this Agreement to the contrary, the Company shall be entitled to
treat the assignor of any assigned Membership Interest as the absolute owner
thereof in all respects, and shall incur no liability for distributions made in
good faith to such assignor in reliance on the Company records as they exist
until such time as the written assignment has been received by, and recorded on
the books of the Company. For purposes of this Article VIII, the effective date
of an assignment of any Membership Interest shall be the last day of the month
specified in the written instrument of assignment.
SECTION 8.5 RIGHTS, LIABILITIES OF, AND RESTRICTIONS ON ASSIGNEE.
No assignee of a Membership Interest shall have the right to
participate in the Company, inspect the books of account of the Company or
exercise any other right of a Member unless and until admitted as a Substitute
Member. Notwithstanding the failure or refusal to admit an assignee as a
Substitute Member, such assignee shall be entitled to receive the share of
income, credit, gain, expense, loss and deduction and cash distributions
provided hereunder that is assigned to it, and, upon demand, may receive copies
of all reports thereafter delivered pursuant to the requirements of this
Agreement; provided, however, that the Company shall have first received notice
of such assignment and all required consents thereto shall have been obtained
and other conditions precedent to transfer thereof shall have been satisfied.
The Company's tax returns shall be prepared to reflect the interests of
assignees as well as Members.
30
SECTION 8.6 REPURCHASE OF INTERESTS IN CERTAIN EVENT.
(a) In the discretion of the Board of Directors, the
Company may, but is not obligated to, repurchase a Member's Membership
Interest upon a breach by the Member or any of its Affiliates of the
Member's obligations contained in Article III, Sections 5.10, and 8.1
of this Agreement.
(b) In the event that a breach of the Investor Member's
obligations arises out of or is caused by a breach of the obligations
of one or more of the Investor Member's Affiliates (a "Breaching
Affiliate") which breach is reasonably capable of being cured, the
breaching Investor Member shall have thirty (30) days to cure such
breach after the date of notice of the breach is given to the Investor
Member, and if the Investor Member so fails to cure, then the Board of
Directors may, in its discretion, purchase a portion of the Investor
Member's Membership Interest that is proportionate to the ownership
interest of the Breaching Affiliate in the Investor Member at the time
of the breach of the Member's obligations under Section 8.6(a). In the
event that the Board has not elected to so purchase a portion of the
Investor Member's Membership Interest and the Company subsequently has
given notice of its intent to take action against the Investor Member
in accordance with this Agreement, the members of the Investor Member
that are not in breach (the "Non-Breaching Affiliates") shall, subject
to compliance with the conditions set forth hereinafter, have the
option of requiring the Breaching Affiliate to substitute a direct
Membership Interest in the Company for the Breaching Affiliate's
membership interest in the Investor Member, each such direct
Membership Interest in the Company and corresponding capital account,
to be at a percent interest in the Company equal to the percentage of
the membership interest that each such Non-Breaching Affiliate had in
the Investor Member multiplied by the percentage of the Membership
Interest of the Investor Member in the Company immediately prior to
such substitution, adjusted for a proportionately diluted direct
membership in the Company if the breach relates to a failure to make a
capital contribution pursuant to this Agreement (the "Membership
Substitution"). The Non-Breaching Affiliates shall exercise their
right to require the Membership Substitution by written notice, signed
by each of the Non-Breaching Affiliates, to LHMI and the Company, such
notice to be given within fifteen days of the notice set forth (b)
above. As a condition of the Membership Substitution each of the
Non-Breaching Affiliates shall execute such documents and take such
actions as are reasonably required by the Company to assign such
rights as the Investor Member had in the Company, free and clear of
all liens and encumbrances, to the Breaching Affiliate, and the
Breaching Affiliate shall execute any documents reasonably required by
the Manager to reflect the Breaching Affiliate's continued obligation
to the Company as a Member of the Company as if the Breaching
Affiliate had been admitted as a Member of the Company upon the
Effective Date.
(c) Each Member agrees to sell its Membership Interest
to the Company in the event the Company elects to exercise the rights
of repurchase granted under Section 8.6(a) and the purchase price
shall be the lower of (i) the Capital Contributions of the Member less
all amounts distributed to such Member by the Company, and (ii) the
Formula Purchase Price. In the event that the Board of Directors
elects to purchase a
31
portion of the Investor Member's Membership Interest after a breach by
a Breaching Affiliate pursuant to Section 8.6(b), the purchase price
shall be the lower of (i) the Capital Contributions of the Member less
all amounts distributed to such Member by the Company and (ii) the
Formula Purchase Price, multiplied by the percentage ownership
interest of the Breaching Affiliate in the Investor Member.
(d) The Directors designated by the Member whose
activities give rise to the event set forth in Section 8.6(a) shall
not have a vote hereunder and a majority of the other Directors shall
make all decisions under this Section 8.6 with respect to such
activities.
(e) Notwithstanding anything herein to the contrary, the
repurchase of the Economic Interest or Member Interest of LHMI under
Section 8.6(a) shall not become effective unless and until LHMI and
its Affiliates are fully released from their liability as guarantors
for any indebtedness of the Company and unless and until all amounts
loaned by LHMI or its Affiliates to the Company are paid in full.
SECTION 8.7 DEATH OF A MEMBER.
Heirs of Members who are individuals shall be entitled to inherit the
Membership Interests of a deceased Member provided that upon a Member's death
(or the death of an individual that owns a Member other than any Initial
Member) such interests shall be automatically converted to an Economic Interest
only in the Company until such heir agrees in writing to all of the terms and
conditions of this Agreement and such other reasonable terms as may be
established by the Board of Directors, in which event such interest shall again
become a Membership Interest in the Company. Notwithstanding the previous
sentence, within one hundred twenty (120) days of the Company first learning of
the death of an individual or of an individual that owns a Member, the Company
shall have the option to purchase the Membership Interest owned by such
deceased Member directly or through an Entity, and the estate of the deceased
individual shall be obligated to sell such Membership Interest to the Company,
in accordance with the terms of this Section 8.7. The Company may exercise its
option by giving written notice thereof to the estate of the deceased
individual, or the appropriate representative thereof, within such one hundred
twenty (120) day period. The purchase price for such Membership Interest shall
equal the Formula Purchase Price. The purchase price shall be paid according to
the Payment Method. The outstanding amounts due from the Company to the estate
of the deceased individual shall bear interest at Prime Rate as of the date of
such individual's death. Accrued interest shall be paid as of the dates
payments of principal are due as provided above. The agreements for the
formation and governance of the Investor Member shall provide for the
disposition of the membership interest of a deceased member of the Investor
Member, which disposition shall be subject to the approval of the Manager.
32
ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
SECTION 9.1 BOOKS OF ACCOUNT.
At all times during the continuance of the Company, the Board of
Directors shall maintain or cause to be maintained true and full financial
records and books of account showing all receipts and expenditures, assets and
liabilities, income and losses, and all other records necessary for recording
the Company's business and affairs including those sufficient to record the
allocations and distributions required by the provisions of this Agreement.
SECTION 9.2 ACCESS TO RECORDS.
The books of account and all documents and other writings of the
Company, including the Certificate of Formation and any amendments thereto,
shall at all times be kept and maintained at the principal office of the
Company or elsewhere as decided by the Board of Directors. Each Member or its
designated representatives shall, upon reasonable notice to the Company, have
access to such financial books, records and documents during reasonable
business hours and may inspect and make copies of any of them.
SECTION 9.3 BANK ACCOUNTS AND INVESTMENT OF FUNDS.
(a) LHMI shall open and maintain, on behalf of the
Company, a bank account or accounts in a federally insured bank or
savings institution approved by the Board of Directors, which approval
shall not be unreasonably withheld or delayed, in which all monies
received by or on behalf of the Company shall be deposited; provided,
however, if the Company's or MedCath Incorporated's lender requires
that the Company use a particular bank or savings institution as a
condition to financing provided by such lender, then LHMI shall open
and maintain accounts in such bank or savings institution and shall
not be required to receive the approval of the Board of Directors. All
withdrawals from such accounts shall be made upon the signature of
those representatives of LHMI who LHMI may from time to time designate
(provided that LHMI provides written notice of the representatives so
designated to the Board of Directors), and such other Person or
Persons as LHMI may from time to time designate subject to the
approval of the Board of Directors, which approval shall not be
unreasonably withheld or delayed.
(b) Any funds of the Company which LHMI may determine
are not currently required for the conduct of the Company's business
may be deposited with a federally insured bank or savings institution
or invested in short term debt obligations (including obligations of
federal or state governments and their agencies, commercial paper,
certificates of deposit of commercial banks, savings banks or savings
and loan associations) as shall be determined by LHMI, subject to the
approval of the Board of Directors, which approval shall not be
unreasonably withheld or delayed; provided, however, if the Company's
or MedCath Incorporated's lender requires that the Company deposit
funds in a particular bank or savings institution or invest in
particular short term
33
debt obligations as a condition to financing provided by such lender,
then LHMI shall deposit such funds in such bank or savings institution
or invest in such short term debt obligations and shall not be
required to receive the approval of the Board of Directors.
SECTION 9.4 FISCAL YEAR.
The Fiscal Year and accounting period of the Company shall end on
September 30 of each year.
SECTION 9.5 ACCOUNTING REPORTS.
As soon as reasonably practicable after the end of each fiscal year
but in no event later than 120 days after the end thereof, each Member shall be
furnished an annual accounting showing the financial condition of the Company
at the end of such fiscal year and the result of its operations for the fiscal
year then ended, which annual accounting shall be prepared on an accrual basis
in accordance with generally accepted accounting principles applied on a
consistent basis and shall be delivered to each of the Members promptly after
it has been prepared. It shall include a balance sheet as of the end of such
Fiscal Year and statements of income and expense, each Member's equity, and
cash flow for such Fiscal Year. The Company shall be audited annually by a firm
of independent certified public accountants engaged by the Manager on behalf of
the Company which shall also be the accounting firm of the Manager. The audit
may be a simple audit provided that the audit report shall set forth the
distributions to the Members for such Fiscal Year and shall separately identify
distributions from (i) operating revenue during such Fiscal Year, (ii)
operating revenue from a prior period which had been held as reserves, (iii)
proceeds from the sale or refinancing of the Equipment, and (iv) unexpended
proceeds received from the sale of Membership Interests. Any Member, at such
Member's sole cost and expense, may obtain an audit of the Company by an
independent certified public accountant at any time upon notice to LHMI.
Following the opening of the Hospital, the Manager shall also cause to be
prepared and distributed to the Members quarterly financial statements.
SECTION 9.6 TAX MATTERS PARTNER.
LHMI shall act as the "Tax Matters Partner" of the Company as that
term is defined Section 6231 of the Code.
ARTICLE X
MEETINGS AND VOTING RIGHTS OF MEMBERS
SECTION 10.1 MEETINGS.
(a) Meetings of the Members of the Company for any
purpose may be called by the Board of Directors or any Member that
owns at least a thirty-five percent (35%) Membership Interest in the
Company. Such meetings shall be held in the Lafayette, Louisiana area.
A Member may attend a meeting by telephone or other electronic means
34
and be considered present for purposes of a quorum so long as the
telephone or other connection allows each Member to hear and be heard
by all other Members.
(b) A notice of any such meeting shall be given by mail,
not less than ten (10) days nor more than sixty (60) days before the
date of the meeting, to each Member at its address as specified in
Section 12.7. Such notice shall be in writing, and shall state the
place, date and hour of the meeting, and shall indicate by whom it is
being issued. The notice shall state the purpose or purposes of the
meeting. If a meeting is adjourned to another time or place, and if
any announcement of the adjournment of time or place is made at the
meeting, it shall not be necessary to give notice of the adjourned
meeting.
(c) Each Member may authorize any Person or Persons to
act for the Member by proxy in all matters in which a Member is
entitled to participate, whether by waiving notice of any meeting, or
voting or participating at a meeting. Every proxy must be signed by
the Member or its attorney-in-fact. No proxy shall be valid after the
expiration of eleven months from the date thereof unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure
of the Member executing it.
SECTION 10.2 VOTING RIGHTS OF MEMBERS.
(a) Each Member shall take no part in or interfere in
any manner with the control, conduct or operation of the Company, and
shall have no right or authority to act for or bind the Company,
except as provided herein. Votes or decisions, to the extent taken or
to be made, of the Members may be cast by a duly authorized
representative of the Member designated by written notice to the
Company and each Member. Such votes may be cast at any duly called
meeting of the Company or in writing within ten (10) days after
written request therefor. Except as otherwise provided herein, any
matters requiring the consent or approval of the Members shall require
the affirmative vote of each Member that owns at least a thirty-five
percent (35%) Membership Interest in the Company.
(b) No Member shall have the right or power to vote to:
(i) withdraw or reduce the Member's Capital Contributions except as a
result of the dissolution and liquidation of the Company or as
otherwise provided by law or this Agreement; (ii) bring an action for
partition against the Company; (iii) cause the termination and
dissolution of the Company by court decree or otherwise, except as set
forth in this Agreement; or (iv) demand or receive property other than
cash in return for its Capital Contributions.
35
ARTICLE XI
AMENDMENTS
SECTION 11.1 AUTHORITY TO AMEND BY THE BOARD OF DIRECTORS.
Notwithstanding Section 3.8 of this Agreement, the Board of Directors
may amend this Agreement or the Certificate of Formation of the Company without
the consent of the Members for the following purposes only:
(a) To admit additional Members or Substitute Members
but only in accordance with and if permitted by the other terms of
this Agreement;
(b) To preserve the legal status of the Company as a
limited liability company under the Act or other applicable state or
federal laws if such does not change the substance hereof, and the
Company has obtained the written opinion of its counsel to that
effect;
(c) To cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, to clarify any provision of this Agreement, or to make any
other provisions with respect to matters or questions arising under
this Agreement which will not be inconsistent with the provisions of
this Agreement;
(d) To satisfy the requirements of the Code and
Regulations with respect to limited liability companies or of any
federal or state securities laws or regulations, provided such
amendment does not adversely affect the Membership Interests of
Members and is necessary or appropriate in the written opinion of
counsel and any amendment under this subsection (d) shall be effective
as of the date of this Agreement;
(e) To the extent that it can do so without materially
reducing the economic return on investment in the Company to any
Member, to satisfy any requirements of federal or state legislation or
regulations, court order, or action of any governmental administrative
agency with respect the operation or ownership of the Hospital; and
(f) Subject to the terms of Section 2.6, to extend the
term of the Company.
Any proposed amendment by a member of the Board of Directors shall not
be unreasonably delayed or rejected by any other member of the Board of
Directors.
SECTION 11.2 RESTRICTIONS ON THE BOARD OF DIRECTORS' AMENDMENTS.
Except as provided in Section 11.1, amendments to this Agreement shall
be made only upon the consent of LHMI and the Investor Member. No amendment
shall be made pursuant to Section 11.1 above which would materially and
adversely affect the federal income tax treatment to be afforded each Member,
materially and adversely affect the Membership Interests and
36
liabilities of each Member as provided herein, materially change the purposes
of the Company, extend or otherwise modify the term of the Company, or
materially change the method of allocations and distributions as provided in
Article VI and Article VII.
SECTION 11.3 AMENDMENTS TO CERTIFICATE.
In making any amendments to this Agreement, there shall be prepared,
executed and filed for recording by the Board of Directors such documents
amending the Certificate of Formation as required under the Act.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 ACKNOWLEDGMENT OF AUTHORITY.
Upon the execution hereof, each Member hereby authorizes and directs
the Directors appointed by it to be its true and lawful attorney in the
Member's name and on the Member's behalf to take at any time all such action
which such Directors are expressly authorized to perform, or which a Member is
expressly required to perform, under this Agreement.
SECTION 12.2 WAIVER OF PROVISIONS.
The waiver of compliance at any time with respect to any of the
provisions, terms or conditions of this Agreement shall not be considered a
waiver of such provision, term or condition itself or of any of the other
provisions, terms or conditions hereof.
SECTION 12.3 INTERPRETATION AND CONSTRUCTION.
This Agreement, together with the Management Services Agreement, the
Hospital Professional Services Agreement and the Right of First Refusal
Agreement with an Affiliate of LHMI, constitutes the entire agreement among the
Members. Any modification or amendment to this Agreement must be accomplished
in accordance with the provisions of Article III and Article XI. Where the
context so requires, the masculine shall include the feminine and the neuter,
and the singular shall include the plural. The headings and captions in this
Agreement are inserted for convenience and identification only and are in no
way intended to define, limit or expand the scope and intent of this Agreement
or any provision thereof. The references to Section and Article in this
Agreement are to the Sections and Articles of this Agreement.
SECTION 12.4 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, exclusive of its conflict of law rules.
37
SECTION 12.5 PARTIAL INVALIDITY.
In the event that any part or provision of this Agreement shall be
determined to be invalid or unenforceable, the remaining parts and provisions
of said Agreement which can be separated from the invalid or unenforceable
provision and shall continue in full force and effect.
SECTION 12.6 BINDING ON SUCCESSORS.
The terms, conditions and provisions of this Agreement shall inure to
the benefit of, and be binding upon the Members and their respective heirs,
successors, distributees, legal representatives, and assigns. However, none of
the provisions of this Agreement shall be for the benefit of or enforceable by
any creditors of the Company.
SECTION 12.7 NOTICES AND DELIVERY.
(a) To Members. Any notice to be given hereunder at any
time to any Member or any document reports or returns required by this
Agreement to be delivered to any Member, may be delivered personally
or mailed to such Member, postage prepaid, addressed to the Member at
such times as the Member shall by notice to the Company have
designated as the Member's address for the mailing of all notices
hereunder or, in the absence of such notice, to the address set forth
in the Information Exhibit (Exhibit A) hereof. Any notice, or any
document, report or return so delivered or mailed shall be deemed to
have been given or delivered to such Member at the time it is mailed,
as the case may be.
(b) To the Company. Any notice to be given to the
Company hereunder shall be delivered personally or mailed to the
Company, by certified mail, postage prepaid, addressed to the Company
at its registered office. Any notice so delivered or mailed shall be
deemed to have been given to the Company at the time it is delivered
or mailed, as the case may be.
SECTION 12.8 COUNTERPART EXECUTION; FACSIMILE EXECUTION.
This Agreement may be executed in any number of counterparts with the
same effect as if all of the Members had signed the same document. Such
executions may be transmitted to the Company and/or the other Members by
facsimile and such facsimile execution shall have the full force and effect of
an original signature. All fully executed counterparts, whether original
executions or facsimile executions or a combination, shall be construed
together and constitute one and the same agreement.
SECTION 12.9 STATUTORY PROVISIONS.
Any statutory reference in this Agreement shall include a reference to
any successor to such statute and/or revision thereof.
38
SECTION 12.10 WAIVER OF PARTITION.
Each Member does hereby waive any right to partition or the right to
take any other action which might otherwise be available to such party for the
purpose of severing its relationship with the Company or such Member's interest
in the assets held by the Company from the interests of other Members until the
end of the term of both this Company and any successor company formed pursuant
to the terms hereof.
SECTION 12.11 CHANGE IN LAW.
If due to any new law, rule or regulation, or due to an interpretation
or enforcement of any existing law, rule or regulation, health care counsel
reasonably selected by LHMI and reasonably approved by the Board of Directors,
determines in writing that it is reasonably likely that the relationships
established between any of the parties to this Agreement including any Member,
Owner, Practice or their Affiliates and/or successors or assigns will not
comply with any law, rule, regulation or interpretation thereof ("Applicable
Law"), then the Members shall be given notice thereof (a "Change of Law
Event"). If LHMI and the Investor Member disagree with whether a Change of Law
Event exists and that disagreement is not resolved among such parties within
the following thirty (30) days, then that disagreement shall be resolved by
arbitration under Section 12.16 hereof. If a Change of Law Event is determined
to exist, then the Members hereby agree first, to negotiate in good faith to
restructure the relationships established under this Agreement so as to bring
them into compliance with such applicable laws while at the same time
preserving the material benefits of each of the Members. In the event that a
specific proposal for the restructuring of this Agreement is approved by the
Board of Directors, LHMI, and the Investor Member, such restructured agreement
shall become binding upon all Members of the Company. The approval of any such
proposal for the restructuring of this Agreement shall not be unreasonably
withheld or delayed by any Member. Second, in the event that within forty-five
(45) days following the Company's receipt of legal advice in writing from such
health care counsel regarding Applicable Law the parties hereto are unable to
negotiate an acceptable restructuring of their relationship, then, if one or
more Member's ownership is not involved in such non-compliance, such Members
shall have the option, within the following forty-five (45) day period, to
purchase the Membership Interests of each Member whose ownership is involved
with such noncompliance with Applicable Law for a purchase price equal to the
greater of: (a) the Formula Purchase Price or (b) the amount of the Capital
Contributions made by such Member to the Company together with interest thereon
computed at the Prime Rate as of the date of this Agreement from the date of
such contribution through the date upon which the purchasing Members pays all
amounts due under the terms of this Section 12.11. For these purposes,
distributions to the Members by the Company after the effective date of this
Agreement (and whether before or after health care counsel determined there was
a problem under an Applicable Law or before or after the exercise of the
purchase option) shall be treated as payments by the purchasing Members. Such
purchase price shall be paid in accordance with the Payment Method, plus
interest at the Prime Rate as of the date of that the first installment of
principal is due. Accrued interest shall be paid as of the dates payments of
principal are due as provided above. Third, in the event that the compliant
Members do not exercise their option to purchase Membership Interests of a
Member whose ownership causes the Company not to be in compliance with
Applicable Law, any Member may elect in writing within the following forty-
39
five (45) day period, to require that the Company be dissolved, in which event
the Company shall be dissolved in accordance with the terms of this Agreement.
SECTION 12.12 INVESTMENT REPRESENTATIONS OF THE MEMBERS.
(a) Each Member or individual executing this Agreement
on behalf of an Entity which is a Member hereby represents and
warrants to the Company and to the Members that such Member has
acquired such Member's Membership Interest in the Company for
investment solely for such Member's own account with the intention of
holding such Membership Interest for investment, without any intention
of participating directly or indirectly in any distribution of any
portion of such Membership Interest and without the financial
participation of any other Person in acquiring such Membership
Interest in the Company.
(b) Each Member or individual executing this Agreement
on behalf of an Entity which is a Member hereby acknowledges that such
Member is aware that such Member's Membership Interest in the Company
has not been registered (i) under the Securities Act of 1933, as
amended (the "Federal Act"), (ii) under applicable Louisiana
securities laws, or (iii) under any other state securities laws. Each
Member or individual executing this Agreement on behalf of an Entity
which is a Member further understands and acknowledges that his
representations and warranties contained in this Section are being
relied upon by the Company and by the Members as the basis for the
exemption of the Members' Membership Interest in the Company from the
registration requirements of the Federal Act and from the registration
requirements of applicable Louisiana securities laws and all other
state securities laws. Each Member or individual executing this
Agreement on behalf of an Entity which is a Member further
acknowledges that the Company will not and has no obligation to
recognize any sale, transfer, or assignment of all or any part of such
Member's Membership Interest in the Company to any Person unless and
until the provisions of this Agreement hereof have been fully
satisfied.
(c) Each Member or individual executing this Agreement
on behalf of an Entity which is a Member hereby acknowledges that
prior to his execution of this Agreement, such Member received a copy
of this Agreement and that such Member has examined this Agreement or
caused this Agreement to be examined by such Member's representative
or attorney. Each Member or individual executing this Agreement on
behalf of an Entity which is a Member hereby further acknowledges that
such Member or such Member's representative or attorney is familiar
with this Agreement and with the Company's business plans. Each Member
or individual executing this Agreement on behalf of an Entity which is
a Member acknowledges that such Member or such Member's representative
or attorney has made such inquiries and requested, received, and
reviewed any additional documents necessary for such Member to make an
informed investment decision and that such Member does not desire any
further information or data relating to the Company or to the Members.
Each Member or individual executing this Agreement on behalf of an
Entity which is a Member hereby acknowledges that such Member
understands that the purchase of such Member's Membership Interest in
the Company is a speculative investment involving a high degree of
risk and hereby
40
represents that such Member has a net worth sufficient to bear the
economic risk of such Member's investment in the Company and to
justify such Member's investing in a highly speculative venture of
this type.
(d) Each Member or Owner who is a physician hereby
represents and warrants that he or she shall apply for and qualify to
obtain medical staff privileges at the Hospital in order to be
authorized to perform services at the Hospital as required in order to
qualify for the Hospital Ownership Exception to the Federal Limitation
on Certain Physician Referrals (commonly referred to as the ▇▇▇▇▇ Law)
set forth at 42 U.S.C. 1395nn(d)(3) and regulations promulgated
thereunder.
SECTION 12.13 DECISIONS BY DIRECTORS.
EACH OF THE MEMBERS HEREBY AUTHORIZE THEIR RESPECTIVE APPOINTED
DIRECTORS TO MAKE THE DECISIONS TO BE MADE BY THE DIRECTORS HEREUNDER AND
HEREBY RELEASE AND HOLD HARMLESS THE DIRECTORS FROM ANY AND ALL CLAIMS,
LIABILITIES, LOSSES OR DAMAGES WHICH ANY OF THEM MAY HAVE NOW OR IN THE FUTURE
RESULTING FROM ANY DECISION MADE BY THE DIRECTORS HEREUNDER UNLESS DUE TO THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH DIRECTOR.
SECTION 12.14 REFERRALS TO HOSPITAL AND OWNERSHIP OF SHARES OF
COMMON STOCK OF MEDCATH INCORPORATED.
Each Member agrees that if in the reasonable opinion of health care
counsel of MedCath Incorporated, referrals of patients to the Hospital by a
Member, an Owner, Practice or their Affiliate or ownership of shares of common
stock in MedCath Incorporated by a Member, Owner, Practice or their Affiliate
would cause or constitute a violation of any federal or state law, rule or
regulation, then, while the Members are addressing the situation pursuant to
those procedures set forth at Section 12.11 hereof, as applicable
(a) the Member, Owner, Practice or their Affiliate shall
not refer patients to the Hospital; and
(b) the Member, Owner, Practice or their Affiliate shall
not acquire, nor continue to own any of shares of common stock of
MedCath Incorporated.
SECTION 12.15 ACKNOWLEDGMENTS REGARDING LEGAL REPRESENTATION.
Each of the Members hereunder acknowledge and agree that ▇▇▇▇▇ & ▇▇▇
▇▇▇▇▇, PLLC is counsel for LHMI, MedCath Incorporated and their Affiliates, and
may, upon approval of the Board of Directors, also serve as counsel for the
Company from time to time. Each of the Members hereby acknowledges and consents
to such representation. Each Member other than LHMI further acknowledges and
agrees that they shall have no attorney-client relationship with ▇▇▇▇▇ & ▇▇▇
▇▇▇▇▇, PLLC as a result of ▇▇▇▇▇ & ▇▇▇ ▇▇▇▇▇, PLLC's representation of the
Company from time to time.
41
SECTION 12.16 ARBITRATION.
Subject to the right of any Member to seek an injunction or other
equitable relief from a court with applicable authority, any controversy,
dispute or disagreement arising out of or relating to this Agreement shall be
resolved by binding arbitration, which shall be conducted in New Orleans,
Louisiana in accordance with the American Health Lawyers Association
Alternative Dispute Resolution Service Rules of Procedure for Arbitration (the
"Rules"). Such arbitration shall be conducted in accordance with the Rules by a
panel of three (3) arbitrators none of whom shall reside in or practice
primarily in Louisiana. Any decision rendered by the arbitrators shall be final
and binding on the Members and shall be enforceable in any court having
jurisdiction thereof. The arbitrators shall have the authority to require the
losing party to pay all costs associated with such arbitration, including
expenses and fees of arbitrators.
SECTION 12.17 EXHIBITS.
The Exhibits to this Agreement, each of which is incorporated by
reference, are:
EXHIBIT A: Information Exhibit.
EXHIBIT B: Glossary of Terms.
EXHIBIT C: Permitted Site for Cardiac Catheterization Services
EXHIBIT D: Development Budget Exhibit.
EXHIBIT E: Regulatory Allocations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the following execution page(s), to be effective as of the date described in
Article II.
[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]
42
EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
[***]
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
43
For the sole and exclusive purposes of (i) acknowledging and agreeing to be
bound by the terms of Sections 5.10 and 12.12(d) hereof and (ii) acknowledging
the rights and obligations of the Investor Member, the undersigned Investor
Entities and the Owners hereby execute this Operating Agreement.
[***]
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
44
For the sole and exclusive purposes of (i) guaranteeing the full performance of
LHMI's obligations under Article III to make initial capital contributions
pursuant to Section 3.1 and to make additional capital contributions up to the
maximum obligation of LHMI for such additional capital contributions pursuant
to Section 3.5(c); (ii) guaranteeing the obligations of LHMI with respect to
the loan to the Company under Section 3.5(a); (iii) guaranteeing the
obligations of LHMI with respect to the non-compete provisions of Section 5.10;
and (iv) otherwise acknowledging the rights and responsibilities of LHMI under
this Agreement, MedCath Incorporated hereby executes this Agreement.
[***]
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
45
EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
INFORMATION EXHIBIT
Maximum
Mandatory
Additional
Initial Capital Capital Percentage
Name and Address Contribution Contributions Membership Interest
---------------- --------------- ------------- -------------------
[***]
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
A-1
EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
GLOSSARY OF TERMS
As used in this Agreement, the following terms shall have the
following definitions (unless otherwise expressly provided herein).
"Act" means the Delaware Limited Liability Company Act, as in effect
in Delaware and set forth at 6 Del. C. ss.18-101 through 18-1109 (or any
corresponding provisions of succeeding law).
"Adjusted Capital Account" means, with respect to any Member, such
Person's Capital Account (as defined below) as of the end of the relevant
Fiscal Year increased by any amounts which such Person is obligated to restore,
or is deemed to be obligated to restore pursuant to the next to last sentences
of Regulations Section 1.704-2(g)(1) (share of minimum gain) and Regulations
Section 1.704-2(i)(5) (share of member nonrecourse debt minimum gain) and
decreased by the items described in Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6).
"Affiliate" means with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) Entity or holder
of ten percent (10%) or more of the outstanding voting securities or of an
equity interest of any Entity, controlling, controlled by, or under common
control with such Person. Affiliates shall also include each individual holding
or owning an ownership interest in the Investor Member or Investor Entities.
"Agreed Value" means with respect to any noncash asset of the Company
an amount determined and adjusted in accordance with the following provisions:
(a) The initial Agreed Value of any noncash asset
contributed to the capital of the Company by any Member shall be its
gross fair market value, as agreed to by the contributing Member and
the Company.
(b) The initial Agreed Value of any noncash asset
acquired by the Company other than by contribution by a Member shall
be its adjusted basis for federal income tax purposes.
(c) The initial Agreed Values of all the Company's
noncash assets, regardless of how those assets were acquired, shall be
reduced by depreciation or amortization, as
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the case may be, determined in accordance with the rules set forth in
Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
(d) The Agreed Values, as reduced by depreciation or
amortization, of all noncash assets of the Company, regardless of how
those assets were acquired, shall be adjusted from time to time to
equal their gross fair market values, as agreed to by the Members in
writing, as of the following times:
(i) the acquisition of a Membership Interest or
an additional Membership Interest in the Company by any new
or existing Member in exchange for more than a de minimis
Capital Contribution;
(ii) the distribution by the Company of more
than a de minimis amount of money or other property as
consideration for all or part of a Membership Interest in the
Company; and
(iii) the termination of the Company for federal
income tax purposes pursuant to Code Section 708(b)(1)(B).
If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company's assets, it shall be deemed that the fair market values of all
the Company's assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be
made as a result of such event.
"Agreement" means this Operating Agreement, as amended from time to
time.
"Board of Directors," "Director" or "Directors" means those persons
appointed by the Members, pursuant to Section 3.9 of the Operating Agreement,
and given the power and authority under Article V of the Operating Agreement to
manage the Company. The terms "Director" or "Directors" is used for
convenience, but is intended to have the same meaning as the terms "Manager" or
"Managers" in the Act.
"Bylaws, Rules and Regulations of the Medical Staff" means those
bylaws, rules and regulations adopted for the Hospital's Medical Staff.
"Capital Account" means with respect to each Member or assignee an
account maintained and adjusted in accordance with the following provisions:
(a) Each Person's Capital Account shall be increased by
Person's Capital Contributions, such Person's distributive share of
Profits, any items in the nature of income or gain that are allocated
pursuant to the Regulatory Allocations and the amount of any Company
liabilities that are assumed by such Person or that are secured by
Company property distributed to such Person.
B-2
(b) Each Person's Capital Account shall be decreased by
the amount of cash and the Agreed Value of any Company property
distributed to such Person pursuant to any provision of this
Agreement, such Person's distributive share of Losses, any items in
the nature of loss or deduction that are allocated pursuant to the
Regulatory Allocations, and the amount of any liabilities of such
Person that are assumed by the Company or that are secured by any
property contributed by such Person to the Company.
In the event any Membership Interest is transferred in accordance with
the terms of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred
Membership Interest.
In the event the Agreed Values of the Company assets are adjusted
pursuant to the definition of Agreed Value contained in this Agreement, the
Capital Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent with such regulations. In the event the Board of Directors
shall determine that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto, are computed to comply with such
Regulation, the Board of Directors may make such modification, provided that it
is not likely to have a material effect on the amounts distributable to any
Member pursuant to Articles VI or VII hereof upon the dissolution of the
Company. In the event the Board of Directors shall determine such adjustments
are necessary or appropriate to comply with Regulations Section
1.704-1(b)(2)(iv), the Board of Directors shall adjust the amounts debited or
credited to Capital Accounts with respect to (i) any property contributed by
the Members or distributed to the Members and (ii) any liabilities secured by
such contributed or distributed property or assumed by the Members. The Board
of Directors shall also make any other appropriate modifications in the event
unanticipated events might otherwise cause this Agreement not to comply with
Regulations Section 1.704-1(b). In the event any Membership Interest in the
Company is transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to the extent
it relates to the transferred Membership Interest.
"Capital Contribution" means with respect to any Member, the amount of
money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.
"Cash Distributions" means net cash distributed to Members resulting
from Cash Flow from Operations or Cash from Sales or Refinancing, but shall not
include cash payments made to LHMI as its Management Fee for services rendered
pursuant to Article V hereof or any amount in repayment of loans made by the
Members to the Company.
"Cash Flow from Operations" means net cash funds provided from
operations, exclusive of Cash from Sales or Refinancing, of the Company or
investment of any Company funds, without deduction for depreciation, but after
deducting cash funds used to pay or establish a
B-3
reserve for expenses, debt payments, capital improvements, and replacements and
for such other items as the Board of Directors reasonably determines to be
necessary or appropriate and subject to Loan Conditions.
"Cash from Sales or Refinancing" means the net cash proceeds received
by the Company from or as a result of any Sale or Refinancing of property after
deducting (i) all expenses incurred in connection therewith, (ii) any amounts
applied by the Board of Directors in their sole and absolute discretion toward
the payment of any indebtedness and other obligations of the Company then due
and payable, including payments of principal and interest on mortgages, (iii)
the payment of any other expenses or amounts owed by the Company to other
parties to the extent then due and payable, and (iv) the establishment of any
reserves deemed necessary by the Board of Directors in their sole and absolute
discretion. If the proceeds of any sale or refinancing are paid in more than
one installment, each such installment shall be treated as a separate Sale or
Refinancing for the purposes of this definition.
"Certificate of Formation" means the Certificate of Formation of the
Company, as filed with the Secretary of State of Delaware as the same may be
amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time. Any reference herein to a specific section(s) of the Code shall be
deemed to include a reference to any corresponding provision of future law.
"Company" means and shall refer to Lafayette Heart Hospital, LLC,
which was created upon the filing of the Certificate of Formation with the
Office of the Secretary of State of Delaware, to be operated under the name
Lafayette Heart Hospital, LLC, a Delaware limited liability company, and to
continue under this Agreement, as amended from time to time.
"Default Rate" means a per annum rate of return on a specified
principal sum, compounded monthly, equal to the greater of (a) the Prime Rate
plus 500 basis points, or (b) 18%, but in no event greater than the highest
rate allowed by law.
"Economic Interest" means and shall refer to that portion of the
Membership Interest of a Member in the economic rights and benefits of the
Company, including but not limited to all Profits, Losses and Cash
Distributions. Such an Economic Interest will be measured by an amount equal to
the Member's percentage Membership Interest in the Company as the same may be
adjusted from time to time.
"Entity" means any general partnership, limited partnership, limited
liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
"Equipment" means the appropriate equipment and supplies required from
time to time in connection with the development and operation of the Hospital.
"Fiscal Year" means, with respect to the first year of the Company,
the period beginning upon the formation of the Company and ending on the next
September 30, with respect to
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subsequent years of the Company, the twelve month period beginning October 1
and ending September 30, and, with respect to the last year of the Company, the
portion of the period beginning October 1 and ending with the date of the final
liquidating distributions.
"Formula Purchase Price" has the meaning set forth at Section 8.1(c)
of the Agreement.
"Hospital" means an acute care hospital specializing in all aspects of
cardiology and cardiovascular care and surgery in Lafayette, Louisiana, as
further described in Section 2.3 of the Agreement.
"LHMI" means Lafayette Hospital Management, Inc..
"Investor Entity" means an Entity that has a direct or indirect
ownership interest in the Investor Member.
"Investor Member" shall mean [***], a Delaware limited liability
company.
"Management and Licensing Fee" means certain amounts payable to LHMI
pursuant to the Management Services Agreement for services rendered in managing
the operations of the Company.
"Management Services Agreement" means the agreement by and between the
Company and LHMI pursuant to which LHMI will manage the day-to-day business and
affairs of the Company.
"Manager" shall mean LHMI.
"Material Agreement" means any binding agreement, including, but not
limited to, agreements between the Company and a Member or its Affiliate (not
including, however, this Agreement or the Management Services Agreement between
LHMI and the Company to be executed simultaneously with the execution of this
Agreement), which may not be canceled upon less than ninety (90) days notice
and which calls for the expenditure of funds, or involves an obligation for
financing, in excess of $100,000.00 exclusive of (1) agreements or obligations
contemplated by any budget, development plan, financing or construction
contract approved by the Board of Directors as adjusted in Section 5.6(d) and
Section 5.15(d); or (2) agreements incurred in the ordinary course of business
such as employment agreements, purchases of supplies and routine services and
the like.
"Material Decision" means any decisions regarding approvals of the
development and operating budgets for the Hospital, the selection of the site
for the Hospital, the design of the Hospital, the selection of the Hospital's
senior administrator, strategic planning, the execution of managed care
contracts and the execution of exclusive contracts to provide physician
services to the Hospital.
"Medical Director" means the individual designated as the medical
director of the Hospital pursuant to a Medical Director Agreement.
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
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"Medical Director Agreement" means the Medical Director Agreement by
and between the Company and a medical director approved by the Board of
Directors.
"Member" means and shall refer to the organizers of the Company
(unless or until any such organizer has withdrawn) and each of the Persons
identified as "Members" in the then applying Information Exhibit attached
hereto and incorporated herein by this reference or admitted as a Member in
accordance with the terms of this Agreement.
"Membership Interest" means all of a Member's rights in the Company,
including without limitation the Member's share of Profits, Losses, Cash
Distributions and other benefits of the Company, any right to vote, any right
to participate in the management of the business and affairs of the Company,
including the right to vote on, consent to, or otherwise participate in any
decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the
Information Exhibit. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.
"Organization Expenses" means those expenses incurred, either by the
Company, on behalf of the Company or for which the Company has agreed to make
reimbursement, in connection with the formation of the Company including such
expenses as: (i) registration fees, filing fees, and taxes; and (ii) legal fees
incurred in connection with any of the foregoing.
"Owner" means an individual who, through an Investor Entity or
otherwise, has a direct or indirect ownership interest in the Investor Member.
"Payment Method" has the meaning set forth at Section 8.1(c) of the
Agreement.
"Person" means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.
"Practice" means the Entity or sole proprietorship through which an
Owner primarily conducts his medical office practice.
"Prime Rate" means the rate of interest as of the relevant day or time
period as announced by the Bank of America, N.A. or its successor in interest
from time to time as its prime or reference rate.
"Profits and Losses" means, for each Fiscal Year or other period, an
amount equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant
to Code Section 703(a)(l) shall be included in taxable income or loss), with
the following adjustments:
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(a) Any income of the Company that is exempt from
federal income tax and not otherwise taken into account in computing
Profits or Losses shall be added to such taxable income or loss;
(b) Any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
not otherwise taken into account in computing Profits or Losses, shall
be subtracted from such taxable income or loss;
(c) Gain or loss resulting from dispositions of Company
assets shall be computed by reference to the Agreed Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Agreed Value.
"Project Costs" shall include, without limitation, all costs incurred
by the Company in connection with the development and construction of the
Hospital, including without limitation, land acquisition costs, equipment
costs, architectural, design and engineering costs, legal and accounting costs,
construction costs, construction period interest, pre-opening expenses, fees
payable to LHMI or its Affiliates, and other construction and development costs
incurred in connection with the construction and development of the Hospital,
which total amount shall be compiled and submitted by LHMI to the Board of
Directors following the opening of the Hospital.
"Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.
"Regulations" means rules, orders, and regulations issued pursuant to
or under the authority of the Code and shall include revisions to and
succeeding provisions as appropriate.
"Regulatory Allocations" means those allocations of items of Company
income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit
and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section 1.704-1(b)(2)(ii)(d), and the
safe-harbor rules for allocations attributable to nonrecourse liabilities
prescribed in Regulations Section 1.704-2.
"Sale" means the sale, exchange, involuntary conversion (other than a
casualty followed by reconstruction), condemnation, or other disposition of
property by the Company, except for dispositions of inventory items and
personal property in the ordinary course of business and in connection with the
replacement of such property.
"Substitute Member" means an assignee of a Member who has been
admitted to the Company and granted all the rights of a Member in place of its
assignor pursuant to the provisions of this Agreement. A Substitute Member,
upon its admission as such, shall replace and succeed to the rights,
privileges, and liabilities of the Member from whom it acquired its interest in
the Company.
B-7
EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
PERMITTED SITE FOR CARDIAC CATHETERIZATION SERVICES
▇▇▇ ▇▇. ▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
C-1
EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware Limited Liability Company
DEVELOPMENT BUDGET EXHIBIT
D-1
LAFAYETTE HEART HOSPITAL, LLC
CAPITAL EXPENSES
FACILITY SIZE
Total Beds [***]
Total Square Feet [***]
TOTAL
CAPITAL EXPENSES AMOUNT
Property:
Land Cost [***]
Building Construction [***]
Architectural Fees [***]
Interest During Construction [***]
Total Property [***]
Equipment: Capacity
Cath Labs [***]/lab/yr [***] [***]
Operating Rooms [***]/OR/yr [***] [***]
CVRU/Recovery [***]
Radiology, Laboratory & Respiratory [***]
Patient Care [***]
Management Information Systems [***]
Other Departments [***]
Interest [***]
-----
Total Equipment [***]
Loan Acquisition Costs: [***]
TOTALS [***]
[***] These portions of this exhibit have been omitted and filed separately
with the Commission pursuant to a request for confidential treatment.
D-2
EXHIBIT E
TO THE
OPERATING AGREEMENT
OF
LAFAYETTE HEART HOSPITAL, LLC
A Delaware limited liability company
REGULATORY ALLOCATIONS
This Exhibit contains special rules for the allocation of items of
Company income, gain, loss and deduction that override the basic allocations of
Profits and Losses in the Agreement to the extent necessary to cause the
overall allocations of items of Company income, gain, loss and deduction to
have substantial economic effect pursuant to Regulations Section 1.704-1(b) and
shall be interpreted in light of that purpose. Subsection (a) below contains
special technical definitions. Subsections (b) through (h) contain the
Regulatory Allocations themselves. Subsections (i), (j) and (k) are special
rules applicable in applying the Regulatory Allocations.
(a) Definitions Applicable to Regulatory Allocations. For
purposes of the Agreement, the following terms shall have the meanings
indicated:
(i) "Company Minimum Gain" means the same as the meaning
of "partnership minimum gain" set forth in
Regulations Section 1.704-2(d), and is generally the
aggregate gain the Company would realize if it
disposed of its property subject to Nonrecourse
Liabilities in full satisfaction of each such
liability, with such other modifications as provided
in Regulations Section 1.704-2(d). In the case of
Nonrecourse Liabilities for which the creditor's
recourse is not limited to particular assets of the
Company, until such time as there is regulatory
guidance on the determination of minimum gain with
respect to such liabilities, all such liabilities of
the Company shall be treated as a single liability
and allocated to the Company's assets using any
reasonable basis selected by LHMI.
(ii) "Member Nonrecourse Deductions" means losses,
deductions or Code Section 705(a)(2)(B) expenditures
attributable to Member Nonrecourse Debt under the
general principles applicable to "partner
nonrecourse deductions" set forth in Regulations
Section 1.704-2(i)(2).
(iii) "Member Nonrecourse Debt" means any Company
liability with respect to which one or more but not
all of the Members or related Persons to one or more
but not all of the Members bears the economic risk
of loss within the meaning of Regulations Section
1.752-2 as a guarantor, lender or otherwise.
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(iv) "Member Nonrecourse Debt Minimum Gain" means the
minimum gain attributable to Member Nonrecourse Debt
as determined pursuant to Regulations Section
1.704-2(i)(3). In the case of Member Nonrecourse
Debt for which the creditor's recourse against the
Company is not limited to particular assets of the
Company, until such time as there is regulatory
guidance on the determination of minimum gain with
respect to such liabilities, all such liabilities of
the Company shall be treated as a single liability
and allocated to the Company's assets using any
reasonable basis selected by LHMI.
(v) "Nonrecourse Deductions" means losses, deductions,
or Code Section 705(a)(2)(B) expenditures
attributable to Nonrecourse Liabilities (see
Regulations Section 1.704-2(b)(1)). The amount of
Nonrecourse Deductions for a Fiscal Year shall be
determined pursuant to Regulations Section
1.704-2(c), and shall generally equal the net
increase, if any, in the amount of Company Minimum
Gain for that taxable year, determined generally
according to the provisions of Regulations Section
1.704-2(d), reduced (but not below zero) by the
aggregate distributions during the year of proceeds
of Nonrecourse Liabilities that are allocable to an
increase in Company Minimum Gain, with such other
modifications as provided in Regulations Section
1.704-2(c).
(vi) "Nonrecourse Liability" means any Company liability
(or portion thereof) for which no Member bears the
economic risk of loss under Regulations Section
1.752-2.
(vii) "Regulatory Allocations" means allocations of
Nonrecourse Deductions provided in Paragraph (b)
below, allocations of Member Nonrecourse Deductions
provided in Paragraph (c) below, the minimum gain
chargeback provided in Paragraph (d) below, the
member nonrecourse debt minimum gain chargeback
provided in Paragraph (e) below, the qualified
income offset provided in Paragraph (f) below, the
gross income allocation provided in Paragraph (g)
below, and the curative allocations provided in
Paragraph (h) below.
(b) Nonrecourse Deductions. All Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Members in accordance with their
percentage Membership Interests.
(c) Member Nonrecourse Deductions. All Member Nonrecourse
Deductions for any Fiscal Year shall be allocated to the Member who bears the
economic risk of loss under Regulations Section 1.752-2 with respect to the
Member Nonrecourse Debt to which such Member Nonrecourse Deductions are
attributable.
(d) Minimum Gain Chargeback. If there is a net decrease in
Company Minimum Gain for a Fiscal Year, each Member shall be allocated items of
Company income and gain for such year (and, if necessary, subsequent years) in
an amount equal to such Member's share of
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such net decrease in Company Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g)(2) and the definition of Company Minimum Gain
set forth above. This provision is intended to comply with the minimum gain
chargeback requirement in Regulations Section 1.704-2(f) and shall be
interpreted consistently therewith.
(e) Member Nonrecourse Debt Minimum Gain Chargeback. If there is
a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as
of the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
(f) Qualified Income Offset. In the event any Member unexpectedly
receives any adjustments, allocations, or distributions described in
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company
income and gain (consisting of a pro rata portion of each item of Company
income, including gross income, and gain for such year) shall be allocated to
such Member in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, any deficit in such Member's Adjusted Capital
Account created by such adjustments, allocations or distributions as quickly as
possible.
(g) Gross Income Allocation. In the event any Member has a
deficit in its Adjusted Capital Account at the end of any Fiscal Year, each
such Member shall be allocated items of Company gross income and gain, in the
amount of such Adjusted Capital Account deficit, as quickly as possible.
(h) Curative Allocations. When allocating Profits and Losses
under Article VI, such allocations shall be made so as to offset any prior
allocations of gross income under Paragraph (g) above to the greatest extent
possible so that overall allocations of Profits and Losses shall be made as if
no such allocations of gross income occurred.
(i) Ordering. The allocations in this Exhibit to the extent they
apply shall be made before the allocations of Profits and Losses under Article
VI and in the order in which they appear above.
(j) Waiver of Minimum Gain Chargeback Provisions. If LHMI
determines that (i) either of the two minimum gain chargeback provisions
contained in this Exhibit would cause a distortion in the economic arrangement
among the Members, (ii) it is not expected that the Company will have
sufficient other items of income and gain to correct that distortion, and (iii)
the Members have made Capital Contributions or received net income allocations
that have restored any previous Nonrecourse Deductions or Member Nonrecourse
Deductions, then LHMI
E-3
shall have the authority, but not the obligation, after giving notice to the
Members, to request on behalf of the Company the Internal Revenue Service to
waive the minimum gain chargeback or member nonrecourse debt minimum gain
chargeback requirements pursuant to Regulations Sections 1.704-2(f)(4) and
1.704-2(i)(4). The Company shall pay the expenses (including attorneys' fees)
incurred to apply for the waiver. LHMI shall promptly copy all Members on all
correspondence to and from the Internal Revenue Service concerning the
requested waiver.
(k) Code Section 754 Adjustments. To the extent an adjustment to
the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or
Code Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts,
the amount of such adjustment to the Capital Accounts shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or loss (if
the adjustment decreases such basis), and such gain or loss shall be specially
allocated to the Members in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
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