EXHIBIT 10.19
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A NORTH CAROLINA LIMITED LIABILITY COMPANY
DATED SEPTEMBER 26, 2001
TABLE OF CONTENTS
TO THE
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina Limited Liability Company
ARTICLE I DEFINITIONS............................................................................................2
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 Investment Objectives..............................................................2
Section 2.4. Registered Agent and Office; Principal Place of Business........................................3
Section 2.5. Commencement and Term...........................................................................3
ARTICLE III MEMBERS AND CAPITAL CONTRIBUTIONS....................................................................4
Section 3.1. Contributions of Members........................................................................4
Section 3.2. Liability of Members - For Capital..............................................................4
Section 3.3. Members' Accounts and Withdrawals...............................................................4
Section 3.4. Interest on Capital Contributions or Capital Accounts...........................................4
Section 3.5. Additional Funding..............................................................................4
Section 3.6. Appointment of Board of Directors...............................................................5
ARTICLE IV NAMES AND ADDRESSES OF MEMBERS........................................................................6
ARTICLE V MANAGEMENT OF THE COMPANY..............................................................................6
Section 5.1. General Authority and Powers of the Board of Directors..........................................6
Section 5.2. Management of Day-to-Day Operations............................................................11
Section 5.3. Restrictions on Authority of the Board of Directors............................................14
Section 5.4. Duties of the Manager and Board of Directors...................................................14
Section 5.5. Delegation by the Manager......................................................................15
Section 5.6. Right to Rely Upon the Authority of the Manager................................................15
Section 5.7. Company Expenses...............................................................................15
Section 5.8. No Management by Members.......................................................................16
Section 5.9. Consent by Members to Exercise of Certain Rights and Powers by the Board of
Directors......................................................................................17
Section 5.10. Meetings, Quorum and Vote of the Board of Directors.........................................17
Section 5.11. Other Business of Members...................................................................18
Section 5.12. Board of Directors Standard of Care.........................................................20
Section 5.13. Limitation of Liability.....................................................................20
Section 5.14. Indemnification of the Manager and the Directors............................................20
Section 5.15. Purchase of Goods and Services from HHBF....................................................21
Section 5.16. Guarantee Fee...............................................................................21
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........................................................................................22
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Section 6.3. Losses.........................................................................................22
Section 6.4. Code Section 704(c) Tax Allocations............................................................23
Section 6.5. Miscellaneous..................................................................................23
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..............................................................25
Section 7.4. Termination....................................................................................27
Section 7.5. Payment in Cash................................................................................27
Section 7.6. Goodwill and Trade Name........................................................................27
Section 7.7. Termination of Noncompetition Covenants........................................................27
ARTICLE VIII REMOVAL OR WITHDRAWAL OF MANAGERS AND MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC
INTERESTS..........................................................................................27
Section 8.1. Manager - Transfers............................................................................27
Section 8.2. Members' Right to Continue When Company has no Manager.........................................28
Section 8.3. Relationship with Substitute Manager...........................................................28
Section 8.4. Members Who Are Not Managers - Restriction on Transfer.........................................29
Section 8.5. Condition Precedent to Transfer of Economic Interest and/or Membership
Interest.......................................................................................30
Section 8.6. Substitute Member - Conditions to Fulfill......................................................30
Section 8.7. Allocations Between Transferor and Transferee..................................................30
Section 8.8. Rights, Liabilities of, and Restrictions on Assignee...........................................31
Section 8.9. Death of a Member..............................................................................31
Section 8.10. Repurchase of Interests in Certain Event....................................................32
Section 8.11. Permissible Transfers by Investor Members...................................................32
Section 8.12. Special Provisions Regarding Withdrawal.....................................................32
ARTICLE IX RECORDS, ACCOUNTINGS AND REPORTS.....................................................................34
Section 9.1. Books of Account...............................................................................34
Section 9.2. Access to Records..............................................................................34
Section 9.3. Bank Accounts and Investment of Funds..........................................................34
Section 9.4. Fiscal Year....................................................................................35
Section 9.5. Accounting Reports.............................................................................35
Section 9.6. Tax Returns....................................................................................35
ARTICLE X MEETINGS AND VOTING RIGHTS OF MEMBERS.................................................................36
Section 10.1. Meetings....................................................................................36
Section 10.2. Voting Rights of Members....................................................................36
ARTICLE XI AMENDMENTS...........................................................................................37
Section 11.1. Authority to Amend by the Board of Directors................................................37
Section 11.2. Restrictions on the Board of Directors' Amendments: Amendments by
Investor Members............................................................................37
Section 11.3. Amendments to Certificates..................................................................38
ARTICLE XII MISCELLANEOUS.......................................................................................38
Section 12.1. Limited Power of Attorney...................................................................38
Section 12.2. Waiver of Provisions........................................................................38
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Section 12.3. Interpretation and Construction.............................................................38
Section 12.4. Governing Law; Judicial Venue...............................................................38
Section 12.5. Partial Invalidity..........................................................................39
Section 12.6. Binding on Successors.......................................................................39
Section 12.7. Notices and Delivery........................................................................39
Section 12.8. Counterpart Execution; Facsimile Execution..................................................39
Section 12.9. Statutory Provisions........................................................................39
Section 12.10. Waiver of Partition.........................................................................39
Section 12.11. Change In Law...............................................................................40
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. Exhibits....................................................................................42
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AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina Limited Liability Company
THESE SECURITIES ARE BEING ISSUED PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933 AND THE CALIFORNIA 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 AMENDED AND RESTATED OPERATING AGREEMENT (the "Agreement") of
HEART HOSPITAL OF BK, LLC (the "Company"), a North Carolina Limited Liability
Company is made and entered into by and among the Company and HHBF, Inc., a
North Carolina corporation ("HHBF"), as a Member and each of the other parties
identified on the Information Exhibit as Members (the "Investor Members").
RECITALS
1. On or about June 12, 1996, HHBF and certain Investor Members
formed the Company in accordance with the original Operating Agreement of the
Company (the "Original Operating Agreement");
2. The Company was formed to develop, own and operate an acute
care hospital to be located in or near Bakersfield, California and to specialize
in all aspects of adult cardiology and adult cardiovascular care and surgery
which the Board of Directors may agree upon;
3. It is intended that the hospital will be a low-cost, high
quality provider of medical services within the Bakersfield, California area in
a manner which is consistent with the national health care policy of lowering
the costs of health care;
4. The Capital Contributions and active involvement of the
Investor Members are necessary to enable the Company to achieve its objectives;
5. The Original Operating Agreement was amended by the First
Amendment dated July 11, 1996 and subsequently amended by a second amendment
dated December 1, 1999; and
6. The Members of the Company hereby desire to amend and restate
the Original Operating Agreement, as amended.
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.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
Section 2.1. Company Formation; Effective Date. The Company was
formed upon the filing of the Articles of Organization with the Secretary of
State of North Carolina in accordance with the provisions of the Act. Upon the
effectiveness of this Agreement, the Persons listed on the attached Information
Exhibit shall be admitted to the Company as Members and the Persons who executed
the Articles shall be withdrawn as Members (unless they are listed on the
Information Exhibit), all without the necessity of any further act or instrument
and without causing the dissolution of the Company. HHBF shall execute or cause
to be executed all other such certificates or documents, and shall do or cause
to be done all such filing, recording, or other acts, as may be necessary or
appropriate from time to time to comply with the requirements of law for the
continuation and/or operation of a limited liability company in the State of
North Carolina, and other documents to reflect the admission of additional
Members to the Company. Any costs incurred by HHBF in connection with the
foregoing shall be reimbursed promptly upon the completion of such action. The
Agreement shall be effective as of the date the Company was formed.
Section 2.2. Name of Company. The name of the Company is HEART
HOSPITAL OF BK, LLC.
Section 2.3. Purposes and Investment Objectives. The principal
purposes of the Company are as follows:
(a) To develop, own and operate the Hospital which would
include, but not be limited to, the following:
(i) Services and facilities to meet all
requirements of the State of California, Medicare, the Joint
Commission on Accreditation of Healthcare Organizations
("JCAHO") and other credentialling or licensing bodies or
agencies in order to have the Hospital licensed as a general
acute care hospital and to perform adult cardiology and adult
cardiovascular surgical services of every type or nature and
to be eligible to obtain appropriate reimbursements therefore;
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(ii) 70,000 to 80,000 square feet in a building
to be constructed in accordance with plans and specifications
approved by the Company;
(iii) Approximately 60 medical/surgical beds;
(iv) 4 heart catheterization laboratories with
one set up for procedures relating to electrophysiology and
pacemakers;
(v) 3 heart surgical suites with space for the
development of one additional heart surgical suite;
(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. Registered Agent and Office; Principal Place of
Business. The registered agent and office of the Company shall be as indicated
in the Articles of Organization, as amended from time to time. The principal
place of business of the Company shall be at such location in California as
selected by HHBF from time to time. HHBF shall promptly notify the Members of
any changes in the Company's registered agent, registered office, or principal
place of business.
Section 2.5. Commencement and Term. The Company commenced on the
filing of the Articles of Organization in the Office of the Secretary of State
of North Carolina, as required by Section 2.1 hereof, and shall continue until
December 31, 2035, 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
HHBF. In the event HHBF does not elect to extend the term hereof, the Board of
Directors, without the vote of the Directors appointed by HHBF, may instead
elect to extend the term hereof subject to the consent of HHBF which consent
shall not be unreasonably withheld or delayed.
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ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
Section 3.1. Contributions of Members. The Members shall
contribute capital as follows:
(a) HHBF shall own at least a fifty-one percent (51%)
Membership Interest in the Company and shall contribute to the Company
for its Membership Interest One Million Five Hundred Thirty Thousand
Dollars ($1,530,000).
(b) The Investor Members shall own in the aggregate up to
a forty-nine percent (49%) Membership Interest and shall contribute to
the Company for their Membership Interests an amount, in the aggregate,
of up to One Million Four Hundred Seventy Thousand Dollars
($1,470,000). The Membership Interests of the Investor Members shall be
owned as shown on the Information Exhibit attached hereto.
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 3.2. .Liability of Members - For Capital. The liability of
each Member, as such, shall be limited to the amount of its agreed Capital
Contribution as a Member as provided in Section 3.1.
Section 3.3. .Members' Accounts and Withdrawals. An individual
Capital Account shall be maintained for each Member in accordance with
requirements of the Code and the Regulations promulgated thereunder. Except as
provided in Section 8.12 below, 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.
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, HHBF
reasonably determines 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, HHBF shall use commercially reasonable efforts
to borrow such funds from a bank or other lender on terms and
conditions reasonably acceptable to HHBF, or HHBF 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
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Company's assets. Interest shall be paid monthly in arrears and
principal shall be repaid as the Company has funds available therefore.
All loans obtained hereunder shall be subject to the approval of the
Board of Directors which approval shall not be unreasonably withheld or
delayed;
(b) Second, if loans as provided in (a) above are not
available, HHBF may request that the Members contribute additional
capital to the Company pro rata according to their respective
Membership Interests, provided however, such Capital Contributions
shall be made only if the Board of Directors approves such Capital
Contributions. If additional Capital Contributions are so approved,
each Member may elect whether or not to contribute its pro rata portion
thereof. The other Investor Members may elect to contribute capital not
contributed by any Investor Member hereunder. HHBF may then elect to
contribute amounts which the Investor Members, in the aggregate, have
not so contributed. Thereafter, HHBF shall reasonably adjust the
percentage Membership Interest of each Member (based on the relative
aggregate Capital Contributions made by the Members in accordance with
this Agreement) in the event any Member elected not to contribute
capital pursuant to a capital call approved in accordance with this
Section 3.5; and
(c) Third, if funds are not available in accordance with
(a) or (b) above, then HHBF may elect to dissolve the Company.
Section 3.6. Appointment of Board of Directors . The Members shall
appoint a Board of Directors as follows:
(a) HHBF shall appoint four (4) Directors, one of whom
shall be the president or chief executive officer of the Hospital; and
(b) The Investor Members shall appoint three (3)
Directors, one of whom shall be the medical director of the Hospital,
and the balance shall be elected by the Investor Members, with votes to
be weighted based on ownership percentages.
A Director shall serve on the Board of Directors until removed
by the Member or group of Members appointing such Director; provided,
however, that elections of Directors to be elected by the Investor
Members shall be held no less frequently than every two (2) years.
Whenever possible, in order to promote continuity, at least one (1)
Director elected by the Investor Members shall carry over from one term
to the immediately subsequent term. A Member or group of Members shall
have the right, with or without cause, at any time, to remove,
substitute or replace any Director which it or they appointed.
The Board of Directors shall serve as the governing body of
the Hospital and, subject to and in accordance with the requirements of
the accreditation requirements of JCAHO, the governing body shall be
responsible for adopting and approving the Hospital's and medical
staff's bylaws.
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ARTICLE IV
NAMES AND ADDRESSES OF MEMBERS
The names and addresses of the Members are as indicated on the
Information Exhibit, attached hereto and as amended from time to time.
ARTICLE V
MANAGEMENT OF THE COMPANY
Section 5.1. General Authority and Powers of the Board of
Directors. 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 Section 5.2 below, the Board of Directors shall have complete
authority and exclusive control over the management of the business and affairs
of the Company. 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 Manager or
Director shall cause the Company to become bound to any contract, agreement or
obligation, and no Manager 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 to such matter or except as
provided in Section 5.2 below with respect to the authority and actions of HHBF.
It is acknowledged that all decisions relating to the Hospital and medical staff
bylaws and physician credentialling matters shall be handled by the Board of
Directors in its capacity as the Hospital's governing body as set forth at
Section 3.6.
In the event a decision, approval or consent is required from the
Directors appointed by the Investor Members only, it shall be deemed to have
been affirmatively made if the Directors appointed by the Investor Members fail
to respond to any such written request therefor within ten (10) days of notice
thereof by HHBF. 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 HHBF and shall be subject to the consent of a majority
of the members of the Board of Directors appointed by the Investor Members,
which consent shall not be unreasonably withheld; provided, the application of
the Company's funds toward the repayment of all or a portion of any financing of
the Company in excess of amounts then required to be paid (i.e., voluntary
prepayments) shall be made only with the consent of the Board of Directors.
The following material decisions shall be made by the Board of
Directors as determined above, except as otherwise provided:
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(a) Hospital Development. The Board of Directors shall
approve the development plan for the Hospital, the selection of the
site for the Hospital, the design of the Hospital and the construction
for the development of the Hospital.
(b) Capital Improvements and Expansion. Any renovation
and expansion plans and capital equipment expenditures with respect to
the Hospital shall be reviewed and approved by the Board of Directors
and shall be based upon economic feasibility, patient care criteria and
then current market conditions.
(c) Key Management and Clinical Employees. The selection,
retention and removal of the president/senior administrator, vice
president-clinical, vice president-managed care, catheterization
laboratory director, nurses and technicians, operating room/surgery
suites director, nurses and technicians, and ICU/CCU director, nurses
and technicians shall be subject to the approval of the Board of
Directors upon the written request of any Director on an employee by
employee basis. Any Director may initiate the process to determine
whether the employment of any of the above individuals should be
terminated by providing to the other a written report which documents
the reasons why the individual's job performance is materially
deficient and includes a recommended course of action for the Company
to take. With the consent of the non-initiating Directors, which
consent shall not be unreasonably withheld, the Board of Directors
shall cause the Company to take such recommended actions; provided,
such actions shall be consistent with the established disciplinary
procedures of the Company with respect to employees, which shall
include any procedures set forth in any employee handbooks or manuals;
provided further, the actions must be consistent with the obligations
of the Company under any contracts or agreements to which it is a
party, including agreements with the individual in question, and with
applicable law.
(d) Certain Service Providers. The selection, retention
and removal of perfusionists, radiologists, emergency room physicians,
pathologists and anesthesiologists to provide services at the Hospital
shall be subject to the approval of the Board of Directors upon the
written request of any Director on an employee by employee basis. Any
Director may initiate the process to determine whether the service
relationship of any of the above service providers should be terminated
by providing to the other a written report which documents the reasons
why the service provider's performance is materially deficient and
includes a recommended course of action for the Company to take. With
the consent of the non-initiating Directors, which consent shall not be
unreasonably withheld, the Board of Directors shall cause the Company
to take such recommended actions; provided, such actions shall be
consistent with the established disciplinary procedures of the Company
(i) contained in the medical staff bylaws and rules and regulations and
Hospital bylaws and (ii) with respect to employees, whether or not such
service provider is an employee of the Company, which shall include any
procedures set forth in any employee handbooks or manuals; provided
further, the actions must be consistent with the obligations of the
Company under any contracts or agreements to which it is a party,
including agreements with the service provider in question, and with
applicable law.
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(e) Marketing. All advertising and other marketing of the
services performed at the Hospital shall be subject to the prior review
and approval of the Board of Directors.
(f) Ancillary Services. The Board of Directors shall
approve Hospital-provided ancillary services based upon the pricing,
access to and quality of such services.
(g) Provider and Payor Relationships. Decisions regarding
the establishment or maintenance of relationships with other health
care providers and payors shall be made by the Board of Directors.
(h) Strategic Planning. The Board of Directors shall
develop long-term strategic planning objectives and adopt a strategic
plan for the Hospital.
(i) Capital Expenditures and Replacements. The Board of
Directors shall determine the priority of major capital expenditures.
In addition, with respect to equipment for the catheterization
laboratory, the operating rooms/surgery suites and the ICC/CCU
department, HHBF or any Director may present to the Board of Directors
proposals for the replacement of any such equipment that is used and
obsolete and such proposal shall be implemented with the consent of the
Board of Directors, which consent shall not be unreasonably withheld;
provided, such replacement shall be made only after the cost of any
such used equipment has been fully recovered as depreciation on the
Company's books and financial records in accordance with general
accepted accounting principals.
(j) Selection of Surgical Supplies and Implants.
Decisions regarding the selection of supplies and implants used in
cardiac, thoracic and vascular surgery, including instruments, sutures,
cardioplegia, valves and synthetic graphs, shall be made by the Board
of Directors as follows:
(i) The Directors appointed by the Investor
Members shall submit to the Board of Directors a list of
preferred parties to be the "primary vendor" for such items.
(ii) HHBF, on behalf of the Board of Directors,
shall solicit bids from those parties who desire to serve as
the Hospital's primary vendor for such items.
(iii) HHBF shall submit such bids to the Board of
Directors which shall choose one such party to be the primary
vendor and another such party to be the "secondary vendor."
(iv) HHBF shall cause the Company to enter into
an agreement with the party selected by the Board of Directors
as the primary vendor pursuant to which such party shall
provide such items to the Hospital.
(v) The needed items shall thereafter be
acquired from the party selected as the primary vendor
pursuant to the agreement reached with that party.
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In the event the primary vendor is not able to provide the
required items, the Hospital may acquire them from the
secondary vendor. In the case of specialty items that neither
the primary vendor nor the secondary vendor can provide, the
Hospital may acquire them from other vendors.
(vi) Upon reasonable notice, the Directors
appointed by the Investor Members may give notice to HHBF or
the Board of Directors of their desire to change the party who
will serve as the primary vendor, and to the extent such a
change will not violate any contract or agreement to which the
Company is a party, including any contract or agreement with
the party who is the primary vendor at that time, the Board of
Directors, through HHBF, will attempt to enter into an
agreement with the party selected by the Directors appointed
by the Investor Members to replace the prior party as the
primary vendor.
(k) Selection of Supplies Utilized in the Catheterization
Laboratory. Decisions regarding the selection of supplies, including
pacemakers, used in the catheterization laboratory shall be made by the
Board of Directors as follows:
(i) The Directors appointed by the Investor
Members shall submit to the Board of Directors a list of
preferred parties to be the "primary vendor" for such items.
(ii) HHBF, on behalf of the Board of Directors,
shall solicit bids from those parties who desire to serve as
the Hospital's primary vendor for such items.
(iii) HHBF shall submit such bids to the Board of
Directors which shall choose one such party to be the primary
vendor and another such party to be the "secondary vendor."
(iv) HHBF shall cause the Company to enter into
an agreement with the party selected by the Board of Directors
as the primary vendor pursuant to which such party shall
provide such items to the Hospital.
(v) The needed items shall thereafter be
acquired from the party selected as the primary vendor
pursuant to the agreement reached with that party. In the
event the primary vendor is not able to provide the required
items, the Hospital may acquire them from the secondary
vendor. In the case of specialty items that neither the
primary vendor nor the secondary vendor can provide, the
Hospital may acquire them from other vendors.
(vi) Upon reasonable notice, the Directors
appointed by the Investor Members may give notice to the Board
of Directors of their desire to change the party who will
serve as the primary vendor, and to the extent such a change
will not violate any contract or agreement to which the
Company is a party, including any contract or agreement with
the party who is the primary vendor at that time, the Board of
Directors, through HHBF, will attempt to enter into an
agreement
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with the party selected by the Directors appointed by the
Investor Members to replace the prior party as the primary
vendor.
(l) Scope of Hospital Services. Any decision to expand
the scope of the Hospital services beyond those consistent with the
services reasonably expected to be provided by a hospital specializing
in all aspects of adult cardiology and adult cardiovascular care and
surgery shall be made only upon the consent of the Board of Directors,
which for this purpose must include a majority of the Directors
appointed by the Investor Members, which consent can be given or
withheld on the sole and absolute discretion of each Director.
(m) Exclusive Contracts. The Board of Directors shall
approve the execution of exclusive contracts to provide physician
services to the Hospital.
(n) Global Contracting. HHBF, in consultation with the
Board of Directors, shall develop, and the Board of Directors shall
approve, a unified managed care strategy under which the Hospital and
physicians practicing at the Hospital would enter into managed care
agreements including agreements containing package pricing for the
services of the Hospital and such physicians.
(o) Other Material Decisions. The Board of Directors
shall approve any binding agreement which may not be canceled upon less
than ninety (90) days' notice and which calls for the expenditure of
funds, or involves an obligation for financing, in excess of $100,000,
exclusive of agreements or obligations contemplated by any budget,
development plan, financing or construction contract approved by the
Board of Directors or agreements incurred in the ordinary course of
business such as employment agreements for other than key employees,
purchases of supplies and routine services and the like.
(p) Budgets. The development and annual operating budgets
to be proposed by HHBF shall be approved by the Board of Directors as
provided above subject to the following:
(i) The Board of Directors shall be deemed to
have approved a development budget which is substantially
consistent with the attached Development Budget Exhibit to
this Agreement;
(ii) The Board of Directors shall not
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
(iii) In the event that the Board of Directors is
unable to approve an annual budget, HHBF shall be authorized
to operate the Company under the previous year's budget
increased by the greater of 5% or the increase during the
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previous year in the Consumer Price Index for Medical Items
until a new budget is approved.
Section 5.2. Management of Day-to-Day Operations. The day-to-day
management of the business and affairs of the Company shall be the
responsibility of HHBF, which management shall be subject to decisions,
guidelines and policies made or established by the Board of Directors hereunder,
including those governed by Section 5.1, provided, however, decisions relating
to medical and clinical practice at the Hospital shall be made exclusively by
the qualified medical personnel of the Hospital. Subject in all cases to the
foregoing, HHBF shall have the right and the power, if, as, and when it, from
time to time, deems necessary or appropriate on behalf of the Company, subject
only to the terms and conditions of this Agreement:
(a) To negotiate and execute on behalf of the Company all
documents, instruments and agreements reasonably necessary or
appropriate to lease, acquire and/or construct the Hospital and/or the
real property on which the Hospital is or will be located, and to
borrow funds to finance such lease, acquisition and/or construction (it
being acknowledged that the Hospital may be an existing building or may
be a newly constructed building);
(b) To prepare a budget for the development of the
Hospital and thereafter, annual operating budgets;
(c) To acquire the Equipment and enter into loans or
other financing arrangements therefor;
(d) To handle the negotiation and execution of all such
other agreements regarding the purchase of goods or services for the
Hospital;
(e) To establish procedures for quality assurance, peer
review and granting privileges to physicians with other specialties at
the Hospital, subject to the terms of the Hospital and medical staff
bylaws adopted for the Hospital;
(f) To expend all or portions of the Company's capital
and income in furtherance of or relating to the Company's business and
purposes, including, but not limited to, payment of all ongoing
operational expenses, payment of commissions, organization expenses,
professional fees, rental fees, and management fees, and to invest in
short-term debt obligations (including, but not limited to, obligations
of federal and state governments and their agencies, commercial paper,
and certificates of deposit of commercial banks, or savings banks or
savings and loan associations) such of the Company's funds as are
temporarily not required for the development or operation of the
Company and the payment of Company obligations; provided, that the
Board of Directors shall establish cash management guidelines to be
followed by HHBF;
(g) To employ or retain on such terms and for such
compensation as HHBF may reasonably determine, such persons, firms, or
corporations as HHBF may deem advisable, including without limitation
qualified medical and other employees necessary
11
or appropriate to operate the Hospital, attorneys, accountants,
financial and technical consultants, supervisory managing agents,
insurance brokers, brokers and loan brokers, appraisers, architects and
engineers, who may also provide such services to HHBF, provided that
the selection of the senior administrator of the Hospital shall be
approved by the Board of Directors in the manner set forth at Section
5.10;
(h) To execute leases, deeds, contracts, rental
agreements, construction contracts, sales agreements, and management
contracts;
(i) To exercise all rights, powers, and privileges of the
Company as lessee with respect to the Hospital or rights held by the
Company;
(j) To consent to the modification, renewal, or extension
of any obligations to the Company of any Person or of any agreement to
which the Company is a party or of which it is a beneficiary;
(k) To execute in furtherance of any or all of the
purposes of the Company, any deed, lease, deed of trust, security
interest, mortgage, promissory note, ▇▇▇▇ of sale, assignment,
contract, or other instrument purporting to purchase or convey or
encumber in whole or in part the Equipment or the Hospital or other
real or personal property of the Company;
(l) To prepay in whole or in part, refinance, recast,
increase, modify, or extend any security interest, deed of trust, or
mortgage affecting the Hospital and in connection therewith to execute
any extensions or renewals thereof on the Hospital and to grant
security interests in any of the Equipment or the Hospital;
(m) To adjust, compromise, settle, or refer to
arbitration any claim against or in favor of the Company, and to
institute, prosecute, and defend any actions or proceedings relating to
the Company, its business, and properties;
(n) To acquire and enter into any contract of insurance
which HHBF deems necessary or appropriate for the protection of the
Company and HHBF, for the conservation of the Company or its assets, or
for any purpose beneficial to the Company; however, neither HHBF nor
its Affiliates shall be compensated for providing insurance brokerage
services relating to obtaining such insurance;
(o) To prepare or cause to be prepared reports,
statements, and other relevant information for distribution to the
Members, including annual reports;
(p) To open accounts and deposit and maintain funds in
the name of the Company in banks or savings and loan associations;
provided, however, that the Company's funds shall not be commingled
with the funds of any other Person;
12
(q) To cause the Company to make or revoke any of the
elections referred to in Section 754 of the Internal Revenue Code of
1986 as amended or any similar provisions enacted in lieu thereof;
(r) To make all decisions related to generally accepted
principles of accounting to be applied on a consistent basis and
federal income tax elections;
(s) To possess and exercise, subject to the restrictions
contained in this Agreement, any and all of the rights, powers and
privileges of a manager under the Act;
(t) To execute, acknowledge, and deliver any and all
documents or instruments in connection with any or all of the
foregoing;
(u) To modify or otherwise improve the Hospital, subject
to the restrictions contained in this Agreement;
(v) To manage, direct, and guide the operation of the
Hospital including all necessary acts relating thereto, other than
medical or clinical matters which shall be under the direction of
agreed upon qualified medical personnel;
(w) To establish minimum insurance requirements for all
physicians practicing at the Hospital;
(x) To admit as Members additional investors who have
been proposed for Member status by HHBF and approved by a majority of
the Directors appointed by the Investor Members which approval shall be
given or withheld in the sole and absolute discretion of each Director;
(y) To sell assets of the Company, subject to the
restrictions contained in this Agreement; and
(z) To 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;
(aa) 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 HHBF 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
(bb) To deliver to the Secretary of State of North
Carolina for filing an annual statement in accordance with the Act and
make any similar filings required under California law.
13
Section 5.3. Restrictions on Authority of the Manager and Board of
Directors. Neither the Manager nor the Board of Directors shall 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 Manager or Director, except as
provided in this Agreement;
(e) Admit an additional Member, except as provided in
this Agreement;
(f) Alter the primary purposes of the Company as set
forth in Section 2.3;
(g) Possess any property or assign the rights of the
Company in specific property for other than a Company purpose;
(h) Employ, or permit the employ of, the funds or assets
of the Company in any manner except for the exclusive benefit of the
Company;
(i) 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 payable by
Medicare or Medicaid; or
(j) 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 a Supermajority Vote of the Members.
Section 5.4. Duties of the Manager and Board of Directors. The
Manager and 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, each Director shall not be required to
devote its 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; and
(c) 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
14
employ or permit others besides the Manager or the Board of Directors
to employ such funds or assets in any manner except for the benefit of
the Company.
Section 5.5. Delegation by the Manager. Subject to restrictions
otherwise provided herein, the Manager may at any time employ any other Person,
including Persons and Entities employed by, affiliated with, or related to the
Manager 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 Manager of its
responsibilities and obligations under this Agreement or under the laws of the
State of North Carolina nor will it make any such Person a Member of the
Company.
Section 5.6. 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 the 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 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 5.7. Company Expenses.
(a) In general, the Company's expenses shall be billed
directly to and paid by the Company. The Company shall reimburse the
Manager or its Affiliates for: (i) all Organization Expenses incurred
by the Manager or its Affiliates in connection with the formation of
the Company; (ii) the actual costs to the Manager or its Affiliates of
goods, services, and materials used for and by the Company; and (iii)
all reasonable travel and other out-of-pocket expenses incurred by the
Manager in the development and management of the Company and its
business. Notwithstanding the above provision, each party hereto shall
bear the costs of its own legal fees incurred prior to the execution of
this Agreement in connection with this venture and the Manager shall
not be reimbursed for any salary or compensation of its employees or
its Affiliates' employees for services prior to the execution of this
Agreement (i.e., the Manager and its Affiliates shall not be entitled
to a reimbursement of corporate overhead resulting from employee
compensation); provided, the parties hereto specifically recognize that
the Manager and its Affiliates have incurred legal fees, filing fees,
and other out-of-pocket costs for the benefit of the Company, including
costs in connection with the preparation of documents for securities
law and health care law compliance, real estate acquisition matters and
formation and registration of the Company, and agree that the Manager
shall be reimbursed for the first $25,000.00 of such costs. The
reimbursement for expenses provided for in this Section 5.7(a) shall be
made to the Manager or its Affiliates regardless of whether any
distributions are made to the Members under Article VI and Article VII.
(b) The Company shall also pay the following expenses of
the Company:
15
(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 HHBF or one of its
Affiliates as long as the charges to the Company for such
service are no greater than the charges for such service from
a third party service provider;
(ii) 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 or Economic 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 or Economic Interest
Owners 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 HHBF 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 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.
Section 5.8. No Management by Members. Other than the Manager and
the Board of Directors, 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
and those granted under the Articles of Organization and any attempt to
participate in the control of the Company in a manner contrary to the rights and
powers granted herein and under the Articles of Organization shall be null and
void and without force and effect. Subject to the decisions and judgment with
respect to all professional medical or clinical matters of qualified medical
personnel, HHBF in conjunction with the Board of Directors when applicable,
shall
16
have the right to determine when and how the operations of the Company shall be
conducted. The exercise by any other Member of any of the rights granted to the
Member hereunder shall not be deemed to be taking part in the control of the
business of the Company and shall not constitute a violation of this Section.
Section 5.9. Consent by Members to Exercise of Certain Rights and
Powers by the Manager and Board of Directors . By its execution hereof, each
Member expressly consents to the exercise by the Manager and Board of Directors
of the rights, powers, and authority conferred on the Manager and the Board of
Directors by this Agreement.
Section 5.10. 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 Manager 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 Members and at least two (2) members of the Board of Directors
appointed by HHBF, and the action is approved in accordance with (e)
below.
(c) The Board of Directors shall elect one of its members
to preside over the meetings as the Chairperson and one of its members,
as the Secretary, to oversee the preparation and delivery of meeting
notices and the preparation of minutes of the meetings of the Board of
Directors and Members.
(d) A quorum of the Board of Directors shall be necessary
to conduct business at any meeting. A quorum shall consist of four (4)
Directors and must include two (2) Directors designated by HHBF and two
(2) Directors designated by the Investor Members. 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 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 Board of Directors present at a
meeting at which a quorum is present and shall require the consent of
at least one Director designated by HHBF and one Director designated by
the Investor Members. Any action that requires the consent of the
Directors appointed by the Investor Members only shall require the
consent of at least two (2) of the Directors appointed by the Investor
Members.
(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.
17
(g) Attendance at a meeting of the Board of Directors
constitutes waiver of any objection to the notice of the meeting.
Section 5.11. Other Business of Members.
(a) Subject to (b) below, any Member, including the
Manager, may engage independently or with others in other business
ventures of every nature and description, including without limitation
the purchase of medical equipment, the rendering of medical services of
any kind, and the making or management of other investments and neither
the Company nor any Member shall have any right by virtue of this
Agreement or the relationship created hereby in or to such other
ventures or activities or to the income or proceeds derived therefrom,
and the pursuit of such ventures.
(b) As long as any Member owns a Membership Interest in
the Company, and for a period of five (5) years (the "Tail Period")
after a Member ceases for any reason to own a Membership Interest in
the Company, neither a Member nor any of its respective Affiliates,
shall hold, directly or indirectly, an investment, ownership or other
beneficial interest in (i) any hospital or (ii) 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, in any case within ▇▇▇▇ County, California and
Tulare County, California (the "Territory"), provided that (i) no
Member who is a physician shall be prohibited from maintaining his or
her staff privileges at any other hospital or from owning an interest
in a medical practice that provides the professional service component
of the medical procedures described in (b)(ii) above and (ii) nothing
herein shall prohibit a Member from owning up to three percent (3%) of
the outstanding capital stock of a company whose stock is publicly
traded and listed on a nationally recognized securities exchange or
from investing in a publicly traded mutual fund; provided, further, the
Tail Period shall be reduced to two (2) years once the Hospital has
been opened for business and regularly conducting that business
provided the Member in question can demonstrate that at the
commencement of the Tail Period he was not a party to any agreement,
whether written or oral, binding or conditional/tentative, to acquire
(or have an option to acquire) an interest in any entity or enterprise
to which this Section 5.11(b) would otherwise apply. If at any time
after the Hospital has been opened for business and regularly
conducting business for at least five (5) years substantially all of
the assets or stock of MedCath Corporation, MedCath Incorporated or
HHBF is acquired by one Person or a group of Persons who are not
Affiliates of MedCath Incorporated in one transaction or series of
related transactions within a twelve (12) month period, the Tail Period
shall be reduced to one (1) year. Further, if during the first five (5)
years after the Hospital has opened for business and is regularly
conducting that business the stock of HHBF is sold to a Person who is
neither an Affiliate of MedCath Corporation or MedCath Incorporated nor
a purchaser of all or substantially all of MedCath Corporation's or
MedCath Incorporated's assets or stock, then there will be no Tail
Period. In addition, neither HHBF nor its Affiliates shall separately
operate a mobile catheterization laboratory within the Territory.
Nothing contained herein shall limit the
18
ability of a relative of an individual Member to own an interest in an
Entity providing the above-referenced services or facilities if such
relative is actively engaged in the practice of medicine as a licensed
physician or if the Member in question can reasonably demonstrate that
such relative's ownership is not designed to circumvent the intent of
this Section 5.11(b). Notwithstanding the above limitations, if a
written proposal is presented by a Director to the Board of Directors
regarding the establishment or operation of a mobile catheterization
laboratory in the Territory by the Company, and at lease one (1)
Director appointed by HHBF (if the proposal is made by a Director
appointed by the Investor Members) or at least one (1) Director
appointed by the Investor Member (if the proposal is made by a Director
appointed by HHBF), does not approve such proposal, then the party
making such proposal may, alone or with other Members establish or
operate such a service but only in substantial conformity with such
proposal. Any such written proposal must have sufficient details and
specificity to allow a proper evaluation of it and to determine whether
any Member(s) separately establishing or operating such a service have
done so in substantial conformance with such proposal.
(c) The Members, including the Manager, have reviewed the
term and geographical restrictions included in Section 5.11(b), and in
light of the interests of the parties hereto, agree that such
restrictions are fair and reasonable.
(d) If there is a breach or threatened breach of the
provisions of this Section 5.11 of this Agreement, in addition to other
remedies at law or equity, the non-breaching party shall be entitled to
injunctive relief. The parties desire and intend that the provisions of
this Section 5.11 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 5.11. Should any such
paragraph, subparagraph, sentence, clause, phrase, word, or figure be
adjudicated to be wholly invalid or unenforceable, the balance of this
Section 5.11 shall thereupon be modified in order to render the same
valid and enforceable and the unenforceable portion of this Section
5.11 shall be deemed to have been deleted from this Agreement.
(e) The Company, the Manager, the Board of Directors and
the Members agree that the benefits to any Investor Member hereunder do
not require, are not payment for, and are not in any way contingent
upon the referral, admission or any other arrangement for the provision
of any item or service offered by HHBF or the Company to patients of
such Investor Member in any facility, laboratory, cardiac
catheterization facility or other health care operation controlled,
managed or operated by HHBF or the Company and nothing herein is
intended to prohibit any party from practicing medicine at any other
facility.
(f) If an Investor Member is a legal entity and not an
individual, such Investor Member shall cause each of its existing and
future Affiliates to agree in writing to be personally bound by the
terms of this Section 5.11.
19
Section 5.12. Standard of Care. Each Director and the Manager shall
act in a manner he, she or it believes in good faith to be in the best interest
of the Company and with such care as an ordinarily prudent Person in a like
position would use under similar circumstances. In discharging his, her or its
duties, each Director and the Manager 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 Directors,
Members, or agents, or by any other Person as to matters each Director or the
Manager reasonably believes are within such other Person's professional or
expert competence and who has been selected with reasonable care by or on behalf
of the Company, including information, opinions, reports or statements as to the
value and amount of the assets, liabilities, income or losses of the Company or
any other facts pertinent to the existence and amount of assets from which
distributions to members might properly be paid.
Notwithstanding anything herein to the contrary, the Manager, 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 the Manager or any Member or Director in the outcome of any vote, decision or
matter.
Section 5.13. Limitation of Liability. Neither the Manager nor any
Director shall be liable to the Company, its Members, or the other Directors for
any action taken in managing the business or affairs of the Company if he, she
or it performs the duty of his, her or its office in compliance with the
standard contained in Section 5.12. Neither the Manager nor any 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, neither the Manager, its Affiliates or its employees
(collectively, its "Agents") nor any 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 the Manager, its Agents
or such Director received a personal benefit in violation or breach of the
provisions of this Agreement.
Section 5.14. Indemnification of the Manager and the Directors.
(a) The Manager, its Agents and 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 them arising out of any action or inaction of
the Manager, its Agents or Director in his, her or its capacity as
Manager or Director of the Company (or in the case of an Agent, within
the scope of the Manager's authority) 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 Manager, Agent or Director and
provided that the Manager, Agent or 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 Manager or Director may be indemnified
hereunder.
20
(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 5.15. Purchase of Goods and Services from HHBF. Goods and
services purchased from HHBF or its Affiliates shall be of substantially the
same quality and price as could be obtained from an unrelated third party.
Section 5.16. Guarantee Fee In the event that any Member of the
Company or its Affiliates 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 Guarantee Fee shall be
paid quarterly and the expense thereof shall be allocated to the Nonguarantor
Members as follows:
(a) The Guarantee Fee shall be deducted from the Cash
Distributions otherwise distributable to the Nonguarantor Members and
shall be paid to the Guarantor Members;
(b) 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;
(c) 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 (b) above and any remaining Cash Distributions shall be
distributed to the Members in accordance with Section 6.1.
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, Cash Flow
from Operations and Cash from Sales or Refinancing, if any, remaining after
repayment of any 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 and Economic Interest Owners;
provided, however, that to the extent possible, any Guarantee Fee shall be
deducted from the
21
Cash Distributions otherwise distributable to the Nonguarantor Members and paid
to the Guarantor Members as set forth in Section 5.16. Notwithstanding anything
herein to the contrary, no distributions shall be made to Members if prohibited
by the Act.
Section 6.2. Profits. Except as provided in the Regulatory
Allocations Exhibit 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(c) 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. Losses. Except as provided in the Regulatory
Allocations Exhibit and subject to Section 6.6, Losses shall be allocated as
follows:
(a) First, to the Members who have been allocated Profits
pursuant to Subsection 6.2(c) above until the cumulative Losses
allocated pursuant to this Subsection 6.3(a) equal the cumulative prior
allocations of Profits under that Subsection.
(b) Next, Losses shall be allocated to the Members with
positive Adjusted Capital Account balances in proportion to those
balances.
(c) 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 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 HHBF. Absent a determination by HHBF, the
remedial allocation method under
22
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 HHBF 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.
(d) Economic Interest Owners. Each Economic Interest
Owner shall be entitled to the distributions and allocations to which
its predecessor in interest would have been entitled under this Article
VI had it retained the Economic Interest acquired by the Economic
Interest Owner.
Section 6.6. Special Allocations of Guarantee Fees Any and all
deductions, losses or reductions to Capital Account 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.
23
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 by HHBF to dissolve the Company in
accordance with the terms of Section 3.5(c) hereof;
(b) Upon the written agreement of the Board of Directors;
(c) The expiration of the term of the Company as provided
in Section 2.5 hereof;
(d) The adjudication of bankruptcy of the Company;
(e) Upon the written consent of a Supermajority Vote of
the Members;
(f) In accordance with Section 12.11 hereof;
(g) The entry of a decree of judicial dissolution or the
administrative dissolution of the Company as provided in the Act; and
(h) In accordance with Section 8.12 hereof.
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 HHBF or any Affiliate thereof, on such terms and
for such consideration as shall be consistent with obtaining the fair
market value thereof; provided if the buyer is HHBF or any of its
Affiliates, such fair
24
market value shall, at the option of a majority of Directors appointed
by the Investor Members, be determined by independent appraisal.
(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 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 Manager or other
Members or to charge the Manager or other Members for any amounts
except as provided herein and except to the extent otherwise provided
by the Act and/or North Carolina law.
(d) Upon such dissolution, reasonable time shall be
allowed for the orderly liquidation of the assets of the Company and
the discharge of liabilities to creditors so as to minimize the losses
normally attendant to a liquidation.
(e) The Capital Accounts of the Members, as adjusted,
shall be utilized by the Company for the purpose of making
distributions to those Members with positive balances in their
respective Capital Accounts pursuant to Section 7.3(b). In making such
distributions, the Manager, or the Person winding up the affairs of the
Company shall distribute all funds available for distribution to the
Members and Economic Interest Owners (after establishing any reserves
that the Manager deem or the Person winding up the affairs of the
Company deems reasonably necessary pursuant to Section 7.3(b)) prior to
the later of (a) the end of the taxable year in which the event occurs
which caused the termination and dissolution of the Company, or (b)
ninety (90) days after the occurrence of such event. The Manager, in
its 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 Manager
25
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.
(f) Each Economic Interest Owner shall be entitled to the
distributions to which its predecessor in interest would have been
entitled pursuant to this Article VII had it retained the Economic
Interest acquired by the Economic Interest Owner.
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. Goodwill and Trade Name. Upon the dissolution of the
Company, the firm or trade name of the Company and any goodwill associated
therewith shall become the sole property of HHBF, provided that distributions
and allocations otherwise due to HHBF shall not be reduced as a result of HHBF
becoming entitled to such assets, unless the dissolution was caused due to
HHBF's breach of this Agreement in which case such intangible assets shall not
be distributed to HHBF on a non pro rata basis; provided however, upon a
dissolution of the Company in connection with the sale of substantially all of
the assets of the Company, this Section 7.6 shall not increase the distributions
and allocations to which HHBF is otherwise entitled.
Section 7.7. Termination of Noncompetition Covenants. Upon the
later of the dissolution of the Company and the completion of the liquidation
process, the Members shall have no continuing liability, or obligation under
Section 5.11(b) except that Section 5.11(b) shall continue to be binding upon a
Member whose breach of this Agreement caused a dissolution of the Company and
any actions for a breach of this Agreement, including a breach of Section
5.11(b), shall not be impaired by the dissolution or completed liquidation.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MANAGER AND MEMBERS AND
TRANSFER OF MEMBERS' MEMBERSHIP AND/OR ECONOMIC INTERESTS
Section 8.1. Manager - Transfers.
(a) Except as provided in this Section 8.1, without the
consent of a Majority Vote of Investor Members, HHBF shall not
voluntarily withdraw from the Company as a Member at any time prior to
its termination, or transfer or assign any of its rights and duties as
a Manager, provided that HHBF may assign its Membership Interest in the
Company and its rights to be Manager to any party who purchases all or
substantially all of MedCath Corporation's or MedCath Incorporated's
assets or capital stock if such purchaser assumes in writing the
obligations of HHBF hereunder or to a party under
26
control of, common control, or which controls, HHBF. HHBF may also
assign its Membership Interest in the Company and its rights to be a
Manager to a financial institution as collateral security for repayment
of indebtedness for borrowed funds by HHBF or its Affiliates. In the
event that HHBF desires to sell any Membership Interest and such sale
is not in connection with the sale of all or substantially all of the
assets or capital stock of MedCath Corporation or MedCath Incorporated,
then the other Members shall first have an option to purchase such
Membership Interest in accordance with the Right of First Refusal
provided in Section 8.4. In addition, HHBF shall ensure that for the
first five (5) years after the Hospital first opened for business and
regularly conducted such business the stock of HHBF will not be sold to
any Person or Entity that is not an Affiliate of MedCath Corporation or
MedCath Incorporated other than in connection with the sale of
substantially all of the assets of MedCath Incorporated and thereafter,
the Investor Members shall be given written notice of any proposed sale
and shall have a right of first refusal to acquire the stock of HHBF
should the owner intend to sell such stock other than in connection
with the sale of substantially all of the assets of MedCath Corporation
or MedCath Incorporated, which right shall be exercisable for
forty-five (45) days after the date the Investor Members receive notice
of a proposed sale.
(b) Any resignation or withdrawal by the Manager as a
manager shall not constitute the Manager's withdrawal as a Member.
Section 8.2. Members' Right to Continue When Company has no
Manager. If at any time there is no remaining Manager, a meeting of the Members
shall be held at the principal place of business of the Company within
forty-five (45) days after the happening of such event to consider whether to
continue the Company on the same terms and conditions as are contained in this
Agreement (except that the Manager may be different) and to select a manager for
the Company, or whether to wind up the affairs of the Company, liquidate its
assets and distribute the proceeds therefrom in accordance with Article VII
hereof. The Company may be continued and a new manager (who accepts such
appointment) selected by the Members within ninety (90) days of the occurrence
of the event described in Section 7.2(b) with respect to the last manager. The
new manager shall execute, acknowledge, file or record (as appropriate) Articles
of Organization and an Operating Agreement, or amendments to those documents,
and such other documents as may be required by the Act. The continuance of the
Company pursuant to the terms of this Section 8.2 is conditioned upon (i) any
amendment required by the Act of the Articles of Organization to reflect the
foregoing change and, if applicable, compliance by the Company with any notice
provisions of the Act and (ii) delivery to the withdrawing manager of an
indemnification agreement by the Company, in form and substance reasonably
satisfactory to the withdrawing manager, indemnifying and holding the
withdrawing Manager harmless against all future liabilities of the Company.
Section 8.3. Relationship with Substitute Manager. The relationship of
the Members to any Person that has either acquired the Membership Interest of
HHBF or has been elected as a successor manager as provided herein shall be
governed by this Agreement. If such Person was not previously a manager, then
such Person, as Substitute Manager, shall have all the rights and powers of its
predecessor manager under this Agreement; provided, such Person assumes in
writing the obligations of such manager under this Agreement and any arising
thereafter, and
27
accepts and adopts all the terms and provisions of this Agreement in writing.
The withdrawing Manager shall be liable for all of its covenants and obligations
under this Agreement for all periods prior to its withdrawal until such
liability is assumed by a Substitute Manager.
Section 8.4. Members Who Are Not Managers - Restriction on
Transfer. Except as otherwise set forth in this Section or in this Agreement, no
Economic Interest and/or Membership Interest of an Investor Member or any
portion thereof, shall be validly sold or assigned whether voluntarily,
involuntarily or by operation of law, and no purported assignee shall be
recognized by the Company for any purpose, unless such Economic Interest and/or
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 HHBF to comply with requirements imposed by any federal or
state securities regulatory authority and unless HHBF's consent is obtained. In
no event, however, shall an Investor Member transfer or sell all or any of its
Economic Interest and/or Membership Interest to any party which, if a Member,
would be in violation of Section 5.11(b) hereof. Except as otherwise set forth
in this Section or in this Agreement, an Investor Member may transfer, sell or
assign its entire Economic Interest and/or Membership Interest if it has
received the approval of HHBF, not to be unreasonably withheld, provided
however: (a) the other Investor Members (on a pro rata basis of all such
Investor Members desiring to do so) first for a period of fifteen (15) days, and
thereafter 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 Economic
Interest and/or 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 Interests by a third-party (the "Right
of First Refusal"), and (b) there shall have been filed with the Company a duly
executed and acknowledged counterpart of the instrument making such assignment
signed by both the assignor and assignee and such instrument evidences the
written acceptance by the assignee of all of the terms and provisions of the
Agreement, represents that such assignment was made in accordance with all
applicable laws and regulations and the assignee shall have represented to the
Company in writing 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. HHBF 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 who is not a Manager that assigns all its Membership Interest shall cease
to be a Member of the Company, except that unless and until a Substitute Member
is admitted in his or her stead, such assigning Member shall retain the
statutory rights of an assignor of a Membership Interest under the Act. Any
Membership Interests acquired by the Company pursuant to Section 8.4 shall,
subject to applicable law, be re-offered by the Company to suitable investors.
Any dissolution, liquidation, merger (unless Investor 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 Investor Members or their Affiliates prior to
such merger) or sale of an Investor 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) shall
constitute an offer by such Investor
28
Member to sell such Investor Member's Interest pursuant to Section 8.4 for the
Formula Purchase Price (as defined in Section 8.9 below).
Section 8.5. Condition Precedent to Transfer of Economic Interest
and/or Membership Interest. Notwithstanding anything herein to the contrary, no
transfer of an Economic Interest and/or 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 an Economic Interest and/or 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 HHBF that the transfer will not violate any of the foregoing
restrictions.
Section 8.6. 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
8.4 to purchase the Membership Interest held by the assignee;
(b) The duly executed and acknowledged written instrument
of assignment which has been filed with the Company sets forth that the
assignee becomes a Substitute Member in place of the assignor;
(c) The assignor and assignee execute and acknowledge
such other instruments as HHBF 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 written consent of HHBF and a majority of the
other Members to such substitution is obtained, which consent may be
withheld in HHBF's or the other Members' sole and absolute discretion;
and
(e) 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 8.7. Allocations Between Transferor and Transferee. Upon
the transfer of a Member's Economic Interest or Membership Interest, all items
of income, gain, loss, deduction and credit attributable to the Economic
Interest or 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 HHBF, 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
29
fiscal year of the Company that the Economic Interest or 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 HHBF 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 Economic Interest or Membership Interest on the date
of distribution. Notwithstanding anything contained in this Agreement to the
contrary, both the Company and HHBF shall be entitled to treat the assignor of
any assigned Economic Interest or 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 Economic Interest or Membership Interest shall be the
last day of the month specified in the written instrument of assignment.
Section 8.8. Rights, Liabilities of, and Restrictions on Assignee.
No assignee of a Member's Economic Interest or 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 HHBF's failure or refusal to admit an
assignee as a Substitute Member, such assignee shall be entitled to receive the
share of income, credit, gain, expense, loss and deduction and cash
distributions provided hereunder that is assigned to it, and, upon demand, may
receive copies of all reports thereafter delivered pursuant to the requirements
of this Agreement; provided, the Company shall have first received notice of
such assignment and all required consents thereto shall have been obtained and
other conditions precedent to transfer thereof shall have been satisfied. The
Company's tax returns shall be prepared to reflect the interests of assignees as
well as Members.
Section 8.9. Death of a Member. Heirs of Members shall be entitled
to inherit the Membership Interests of a deceased Member, provided that upon a
Member's death 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 HHBF as a condition to such heir becoming a Member, 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 a Member, the Company shall have the
option to purchase the Membership Interest of the deceased Member, and the
estate of the deceased Member shall be obligated to sell such Membership
Interest to the Company, in accordance with the terms of this Section 8.9. The
Company may exercise its option by giving written notice thereof to the estate
of the deceased Member, or the appropriate representative thereof, within such
one hundred twenty (120) day period. The purchase price for such Membership
Interest shall equal the greater of (a) such deceased Member's Capital Account
balance as of the last day of the calendar quarter most recently ended prior to
such Member's death, or (b) 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 the
death of such Member multiplied by the percentage Membership Interest of such
Member in the Company (the "Formula Purchase Price"). The purchase price shall
be paid (the "Payment Method") in three (3) equal annual installments, the first
third of which shall be paid upon the
30
determination of the purchase price and the remaining two (2) installments of
which shall be paid on the first and second anniversary of such date. The
outstanding amounts due from the Company to the estate of the deceased Member
shall bear interest at Prime Rate as of the date of such Member's death. Accrued
interest shall be paid as of the dates payments of principal are due as provided
above.
Section 8.10. Repurchase of Interests in Certain Event.
(a) In the discretion of HHBF, the Company may, but is
not obligated to, repurchase a Member's Economic Interest or Membership
Interest upon such Member's breach of the Member's obligations
contained in Article III, Sections 5.11, 8.1(b), 8.4, 8.9, 12.1 and
12.11 of this Agreement.
(b) Each Member agrees to sell its Membership Interest to
the Company in the event HHBF elects to exercise the right of
repurchase granted under Section 8.10(a) and the purchase price shall
the lower of (x) the Capital Contribution of the Member less all
amounts distributed to such Member by the Company, and (y) the fair
market value of such Member's Membership Interest determined by an
independent appraiser reasonably selected by HHBF.
Section 8.11. Permissible Transfers by Investor Members.
Notwithstanding anything in this Agreement to the contrary, an Investor Member
may elect within thirty (30) days of acquiring a Membership Interest in the
Company to assign its Membership Interest to a corporation, limited liability
company or limited partnership formed and maintained for the sole purpose of
holding such Membership Interest if such assignee is owned by the Investor
Member or such assignee's owners are substantially identical to the owners of
such Investor Member as long as such assignee and its Affiliates agree in
writing to be bound by all the terms and conditions of this Agreement and HHBF
first approves in writing the terms of all documents creating and constituting
such Entity.
Section 8.12. Special Provisions Regarding Withdrawal.
Notwithstanding anything else contained in the Act or this Agreement, the
withdrawal of an Investor Member from the Company shall be governed by and made
only pursuant to the terms of this Section 8.12 and the withdrawal of HHBF shall
be governed by Section 8.1.
(a) Subject to this Section 8.12, an Investor Member may
withdraw from the Company by giving written notice of such withdrawal
to the Company at least six (6) months prior to the effective date of
the withdrawal except that, during the first thirty six (36) months
after an Investor Member is first admitted to the Company as a Member,
such Investor Member shall not withdraw from the Company except as
further permitted in subsections (b) or (c) below. Upon the effective
date of a withdrawal, the Investor Member shall no longer be a Member
in the Company and shall have the status as if he were only an assignee
of a Member and shall be only an Economic Interest Owner to the extent
the withdrawing Investor Member retains its Economic Interest. Except
as expressly provided below, an Investor Member shall not be entitled
to any distributions or to have its Economic Interest redeemed or to
any other type of payment from the
31
Company or any other Member as a result of the Investor Member's
withdrawal. Except as otherwise expressly provided below, the Company
shall have the option to redeem the Membership Interest of any Investor
Member who has withdrawn from the Company for an amount equal to such
withdrawn Investor Member's Capital Account balance as of the effective
date of such withdrawal net of distributions to such withdrawn Investor
Member after the effective date of such withdrawal. HHBF may exercise
such option on behalf of the Company by causing it to tender the
redemption price to the withdrawn Investor Member within three (3)
months of the effective date of the withdrawal.
(b) If, by the end of the sixth (6th) month after an
Investor Member is first admitted to the Company as a Member, the
Company has not received a written commitment from a lender for the
financing of the construction of the Hospital (which commitment shall
contain commercially reasonable terms and shall be subject to
negotiation of definitive loan agreements), such Investor Member may
withdraw from the Company by providing written notice of such
withdrawal to the Company within ten (10) days of that six (6) month
anniversary. In such a case, the Membership Interest of the withdrawing
Investor Member shall be redeemed by the Company for an amount equal to
the Investor Member's Capital Contributions to the Company net of any
previous distributions by the Company to such Investor Member.
(c) If, by the end of the eighteenth (18th) month after
an Investor Member is first admitted to the Company as a Member, the
Company has not commenced, or is not diligently pursuing, construction
of the Hospital pursuant to a construction contract or series of
related construction contracts to build the Hospital, such Investor
Member may withdraw from the Company by providing written notice of
such withdrawal to the Company within ten (10) days of that eighteen
(18) month anniversary. In such a case and subject to (f) below, the
Membership Interest of the withdrawing Investor Member shall be
redeemed by the Company for an amount equal to the Investor Member's
Capital Account balance as of that eighteen (18) month anniversary.
(d) If the Company receives notices of withdrawal from
any Investor Member pursuant to subsection (c) above that would result,
when aggregated with withdrawals previously made pursuant to subsection
(b) above, in the withdrawal of Members holding at least twenty percent
(20%) of the percentage Membership Interests in the Company held by
Investor Members, at the election of HHBF, the Company may be dissolved
and liquidated and no Investor Member will be entitled to withdraw or
have its Membership Interest redeemed. HHBF shall make this election by
written notice to the Board of Directors within thirty (30) days of the
above referenced withdrawal notices.
(e) In the event an Investor Member withdraws from the
Company pursuant to (b) or (c) above and is not and has not as of the
withdrawal date been in breach of this Agreement, there shall be no
"Tail Period" for the purposes of Section 5.11(b) of this Agreement
with respect to the withdrawn Investor Member, it being acknowledged
that if an Investor Member withdraws from the Company pursuant to
subsection (a) above, there shall be a Tail Period as set forth in
Section 5.11(b).
32
(f) In the event an Investor Member withdraws from the
Company pursuant to (b) or (c) above and has not as of the withdrawal
date been in breach of this Agreement, then such Investor Member shall
simultaneously be released from the restrictions set forth in paragraph
7 of the Hospital Professional Services Agreement entered into by and
among the Company, the Investor Member's medical practice and the
owners of such medical practice.
ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
Section 9.1. Books of Account. At all times during the continuance
of the Company, HHBF 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 Articles of
Organization and any amendments thereto, shall at all times be kept and
maintained by HHBF or, if required by law, at the registered office of the
Company. Each Member or its designated representatives shall, upon reasonable
notice to HHBF, have access to such financial books, records and documents
during reasonable business hours and may inspect and make copies of any of them.
Each Member may receive by mail, upon written request to the Company and at such
Member's cost, a list of the names and addresses of the Members and Economic
Interest Holders and the percentage of Economic Interest held by each of them or
such other information which may be obtained pursuant to requirements of the
Act.
Section 9.3. Bank Accounts and Investment of Funds.
(a) HHBF shall open and maintain, on behalf of the
Company, a bank account or accounts in a federally insured bank or
savings institution as it shall determine, in which all monies received
by or on behalf of the Company shall be deposited. All withdrawals from
such accounts shall be made upon the signature of such Person or
Persons as HHBF may from time to time designate.
(b) Any funds of the Company which HHBF 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 HHBF in its sole
discretion.
33
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. At HHBF's election the
Company shall either be audited or such annual accountings shall be either
reviewed or compiled by a firm of independent certified public accountants
engaged by HHBF on behalf of the Company. The report shall set forth the
distributions to the Members for such Fiscal Year and shall separately identify
distributions from (i) operating revenue during such Fiscal Year, (ii) operating
revenue from a prior period which had been held as reserves, (iii) proceeds from
the sale or refinancing of the Equipment, and (iv) unexpended proceeds received
from the sale of Membership Interests. Following the opening of the Hospital,
HHBF shall also cause to be prepared and distributed to the Members quarterly
financial statements following HHBF's public announcement of its results for
such quarter in a form and containing such information as reasonably determined
by HHBF.
Section 9.6. Tax Returns. HHBF shall cause income tax returns for
the Company to be prepared, at Company expense, and timely filed with the
appropriate authorities. As soon as is reasonably practicable, and in any event
on or before the expiration of 75 days following the end of each Fiscal Year,
each Member shall be furnished with a statement to be used in the preparation of
the Member's tax returns, showing the amounts of any Profits or Losses allocated
to the Member, and the amount of any distributions made to the Member, pursuant
to this Agreement, along with a reconciliation of the annual report with
information furnished to Members for income tax purposes.
ARTICLE 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 HHBF, the Board of Directors or by Investor
Members holding in the aggregate ten percent (10%) of the Membership
Interests. Such request shall state the purpose of the proposed meeting
and the matters proposed to be acted upon thereat. Such meetings shall
be held in the Bakersfield, California area.
(b) A notice of any such meeting shall be given by mail,
not less than fifteen (15) days nor more than sixty (60) days before
the date of the meeting, to each Member at
34
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 that it is being issued at or by the direction of HHBF,
the Board of Directors or by the Investor Members, as the case may be.
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 at any duly called meeting of the Company or
in writing within ten (10) days after written request therefor. Each
Member shall be entitled to the number of votes equal to the percentage
Membership Interest of such Member.
(b) No Member shall have the right or power to vote to:
(i) withdraw or reduce the Member's Capital Contributions except as a
result of the dissolution and liquidation of the Company or as
otherwise provided by law or this Agreement; (ii) bring an action for
partition against the Company; (iii) cause the termination and
dissolution of the Company by court decree or otherwise, except as set
forth in this Agreement; or (iv) demand or receive property other than
cash in return for its Capital Contributions.
ARTICLE XI
AMENDMENTS
Section 11.1. Authority to Amend by the Board of Directors. Except
as otherwise provided by Section 11.2, this Agreement and the Articles of
Organization of the Company may be amended by HHBF with the approval of a
majority of members of the Board of Directors appointed by the Investor Members,
such approval not to be unreasonably withheld or delayed:
(a) To admit additional Members or Substitute Members but
only in accordance with and if permitted by the other terms of this
Agreement;
35
(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. 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 2.5, to extend the
term of the Company.
Section 11.2. Restrictions on the Board of Directors' Amendments:
Amendments by Investor Members. Except as provided in Section 11.1, amendments
to this Agreement shall be made only upon the consent of HHBF and with a
Majority Vote of Investor Members. Except as set forth in this Section 11.2, no
amendment shall be made pursuant to Section 11.1 which would materially and
adversely affect the federal income tax treatment to be afforded each Member,
materially and adversely affect the Membership Interests and 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 Certificates. In making any amendments
to this Agreement, there shall be prepared, executed and filed for recording by
HHBF such documents amending the Articles of Organization as required under the
Act.
ARTICLE XII
MISCELLANEOUS
Section 12.1. Limited Power of Attorney. Upon the execution hereof,
each Member hereby irrevocably constitutes and appoints HHBF as 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 HHBF is expressly authorized to perform, or which a
Member is
36
expressly required to perform, under this Agreement; provided that HHBF shall
give written notice at least five (5) days in advance of executing any document
on behalf of a Member pursuant to this Section 12.1.
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
contains the entire agreement among the Members and any modification or
amendment hereto must be accomplished in accordance with the provisions of
Article XI and Article XII. This Agreement supersedes the Original Operating
Agreement, as amended; provided, however, that the Affiliates of the Members
shall continue to be bound by the terms of Section 5.10 of the Original
Operating Agreement the terms of which are substantially similar to Section 5.11
of this Agreement. 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; Judicial Venue. This Agreement shall
be governed by and construed in accordance with the laws of the State of North
Carolina, exclusive of its conflict of law rules. The parties hereby agree to
designate the state courts having jurisdiction over the Bakersfield, California
area to be the appropriate venues for the resolution of any disputes arising
under this Agreement and specifically submit themselves to those courts for this
purpose.
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 parties hereto and their respective heirs, successors, distributees, legal
representatives, and assigns. However, none of the provisions of this Agreement
shall be for the benefit of or enforceable by any creditors of the Company.
Section 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 Article IV
hereof. Any notice, or
37
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.
Section 12.10. Waiver of Partition. Each party does hereby waive any
right to partition or the right to take any other action which might otherwise
be available to such party for the purpose of severing its relationship with the
Company or such party's interest in the Equipment 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 HHBF determines in
writing that it is reasonably likely that the relationships established between
any of the parties to this Agreement including any of their Affiliates and/or
successors or assigns will not comply with any law, rule, regulation or
interpretation thereof ("Applicable Law"), then the parties hereto hereby agree
first, to negotiate in good faith to restructure the relationships established
under this Agreement so as to bring them into compliance with such applicable
laws while at the same time preserving the material benefits of each of the
parties hereto. In the event that a specific proposal for the restructuring of
this Agreement is approved by HHBF and a Majority Vote of Investor Members, such
restructured agreement shall become binding upon all Members of the Company.
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 HHBF shall have the option, within the
following forty-five (45) day period, to purchase the Membership Interests of
some or all of the Investor Members 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 Contribution
made by each such Member to the Company together with interest thereon computed
at the Prime Rate as of the date of this Agreement from the date of such
contribution through the date upon which HHBF pays all amounts due under the
terms of
38
this Section 12.11. For these purposes, distributions to the Members by the
Company shall be treated as payments by HHBF. Such purchase price shall be paid
in accordance with the Payment Method. Third, in the event that HHBF does not
exercise its option to purchase Membership Interests of a Member whose ownership
causes the Company not to be in compliance with Applicable Law, such Members may
elect in writing within the following forty-five (45) day period, to require
that the Company be dissolved, in which event the Company shall be dissolved in
accordance with the terms of this Agreement.
Section 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, including an Economic 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 California
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 California 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, including an Economic 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,
39
and reviewed any additional documents necessary for such Member to make
an informed investment decision and that such Member does not desire
any further information or data relating to the Company or to the
Members. Each Member or individual executing this Agreement on behalf
of an Entity which is a Member hereby acknowledges that such Member
understands that the purchase of such Member's Membership Interest in
the Company is a speculative investment involving a high degree of risk
and hereby represents that such Member has a net worth sufficient to
bear the economic risk of such Member's investment in the Company and
to justify such Member's investing in a highly speculative venture of
this type.
Section 12.13. Decisions by Directors . Each of the Members hereby
authorizes the 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 the Directors.
Section 12.14. Referrals to Hospital and Ownership of Shares of
Common Stock of MedCath Corporation or MedCath Incorporated. Each Investor
Member agrees that if in the reasonable opinion of health care counsel to HHBF,
referrals of patients to the Hospital by the Investor Member or ownership of
shares of common stock in MedCath Corporation or MedCath Incorporated by the
Investor Member would cause or constitute a violation of any federal or state
law, rule or regulation, then, as applicable,
(a) the Investor Member shall not refer patients to the
Hospital; and
(b) the Investor Member shall not acquire, nor continue
to own any of shares of common stock of MedCath Corporation or MedCath
Incorporated.
Section 12.15. Exhibits. The Exhibits to this Agreement, each of
which is incorporated by reference, are:
EXHIBIT A: Articles of Organization.
EXHIBIT B: Information Exhibit.
EXHIBIT C: Glossary of Terms.
EXHIBIT D: Development Budget Exhibit.
EXHIBIT E: Regulatory Allocations.
IN WITNESS WHEREOF, pursuant to Section 11.2, this Agreement has been
executed on the following execution pages upon the consent of HHBF and Majority
Vote of Investor Members, to be effective as of September 26, 2001.
[EXECUTIONS APPEAR ON THE FOLLOWING PAGES]
40
CONSENT TO AMENDED AND RESTATED OPERATING AGREEMENT
The undersigned Member of Heart Hospital of BK, LLC hereby approves and
consents to the Amended and Restated Operating Agreement of Heart Hospital of
BK, LLC.
[***]
[***] These portions of this exhibit have been omitted and filed separately with
the Commission pursuant to a request for confidential treatment.
A-1
EXHIBIT A
TO THE
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina Limited Liability Company
Reference is made to the Articles of Organization which are attached as Exhibit
A to the Original Operating Agreement and incorporated herein by this reference.
A-2
EXHIBIT B
TO THE
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina Limited Liability Company
INFORMATION EXHIBIT
Initial Capital Percentage
Name, Address & TIN Contribution Membership Interest
------------------- --------------- -------------------
HHBF, Inc.
▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ $ 1,530,000 53.3%
(▇▇-▇▇▇▇▇▇▇)
Investor Members $ 1,340,000 46.7%
B-1
EXHIBIT C
TO THE
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina 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" shall mean the North Carolina Limited Liability Company Act, as
in effect in North Carolina and set forth at N.C. Gen. Stat. ss. 57C-1-01
through 57C-10-07 (or any corresponding provisions of succeeding law).
"Adjusted Capital Account" means, with respect to any Member or
Economic Interest Owner, 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" 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.
"Agreed Value" shall mean 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
C-1
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" shall mean this Amended and Restated Operating Agreement,
as amended from time to time.
"Articles of Organization" shall mean the Articles of Organization of
the Company, as filed with the Secretary of State of North Carolina as the same
may be amended from time to time.
"Board of Directors," "Director" or "Directors" shall mean those
persons appointed by the Members, pursuant to Section 3.6 of the Amended and
Restated Operating Agreement, and given the power and authority under Article V
of the Amended and Restated Operating Agreement to manage the Company. The terms
"Director" or "Directors" is used for convenience, but is intended to have the
same meaning as the terms "Manager" or "Managers" in the Act.
"Capital Account" shall mean 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
C-2
of any Company liabilities that are assumed by such Person or that are
secured by Company property distributed to such Person.
(b) Each Person's Capital Account shall be decreased by
the amount of cash and the Agreed Value of any Company property
distributed to such Person pursuant to any provision of this Agreement,
such Person's distributive share of Losses, any items in the nature of
loss or deduction that are allocated pursuant to the Regulatory
Allocations, and the amount of any liabilities of such Person that are
assumed by the Company or that are secured by any property contributed
by such Person to the Company.
In the event any Membership Interest is transferred in accordance with
the terms of this Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred Membership
Interest.
In the event the Agreed Values of the Company assets are adjusted
pursuant to the definition of Agreed Value contained in this Agreement, the
Capital Accounts of all Members shall be adjusted simultaneously to reflect the
aggregate adjustments as if the Company recognized gain or loss equal to the
amount of such aggregate adjustment.
The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such regulations. In the event HHBF 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, HHBF 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 HHBF shall determine such
adjustments are necessary or appropriate to comply with Regulations Section
1.704-1(b)(2)(iv), HHBF 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. HHBF 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" shall mean 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" shall mean 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 HHBF as its Management Fee for services
or any amount in repayment of loans made by the Members to the Company.
C-3
"Cash Flow from Operations" shall mean net cash funds provided from
operations, exclusive of Cash from Sales or Refinancing, of the Company or
investment of any Company funds, without deduction for depreciation, but after
deducting cash funds used to pay or establish a reserve for expenses, debt
payments, capital improvements, and replacements and for such other items as
HHBF reasonably determines to be necessary or appropriate; provided, without the
consent of the Board of Directors, HHBF shall not use such net cash funds for
the early repayment of Company debt. In addition, HHBF shall not cause the sum
of the reserves of Cash Flow from Operations plus the reserves of Cash from
Sales or Refinancing to exceed $3,000,000.00, without the consent of the Board
of Directors.
"Cash from Sales or Refinancing" shall mean 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 HHBF in its 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 HHBF in its 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. In addition, HHBF shall not cause the sum of the reserves of
Cash Flow from Operations plus the reserves of Cash from Sales or Refinancing to
exceed $3,000,000.00, without the consent of the Board of Directors.
"Code" shall mean 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" shall refer to HEART HOSPITAL OF BK, LLC, which shall be
created upon the filing of the Articles of Organization with the Office of the
Secretary of State of North Carolina, to be operated under the name HEART
HOSPITAL OF BK, LLC, a North Carolina limited liability company, and to continue
under this Agreement, as amended from time to time.
"Economic Interest" shall refer to that portion of the Membership
Interest of a Member in the economic rights and benefits of the Company,
including but not limited to all Profits, Losses and Cash Distributions. Such an
Economic Interest will be measured by an amount equal to the Member's percentage
Membership Interest in the Company as the same may be adjusted from time to
time.
"Economic Interest Owner" shall mean a Person who has validly acquired
a Member's Economic Interest as permitted under this Agreement but who has not
become a Member. Such Person shall be entitled to the allocations of Profits and
Losses and Cash Distributions under Article VI and VII to which the previous
owner of the Economic Interest would have been entitled had such previous owner
retained the Economic Interest. Unless and until such Economic Interest Holder
is admitted as a Substitute Member, it shall be a mere assignee of a Member.
C-4
"Entity" shall mean 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" shall mean the appropriate equipment and supplies required
from time to time in connection with the development and operation of the
Hospital.
"Fiscal Year" shall mean, with respect to the first year of the
Company, the period beginning upon the formation of the Company and ending on
the next September 30, with respect to subsequent years of the Company, the
twelve month period beginning October 1 and ending September 30, and, with
respect to the last year of the Company, the portion of the period beginning
October 1 and ending with the date of the final liquidating distributions.
"HHBF" shall refer to HHBF, Inc., which shall serve as a Manager of the
Company.
"Hospital" shall mean an acute care hospital specializing in all
aspects of cardiology and cardiovascular care and surgery in Bakersfield,
California, as further described in Section 2.3 of the Agreement.
"Investor Members" shall mean the Members other than HHBF listed on the
Information Exhibit attached hereto.
"Majority Vote of Investor Members" shall refer to the affirmative
vote, approval or consent of Investor Members holding a majority of the
percentage Membership Interests held by the Investor Members in the aggregate.
"Manager" shall refer to HHBF.
"Management Fee" shall mean the amounts payable to HHBF pursuant to
Section 5.6(b)(ii) for services rendered in managing the operations of the
Company.
"Member" shall refer to the organizers of the Company (unless or until
any such organizer has withdrawn) and each of the members identified in the then
applying Information Exhibit attached hereto and incorporated herein by this
reference. To the extent the Manager has purchased a Membership Interest in the
Company, such Person will have all the rights of a Member with respect to such
Membership Interest, and the term "Member" as used herein shall include a
Manager to the extent such Person has purchased such Membership Interest in the
Company. If a Person is already a Member immediately prior to the purchase or
other acquisition by such Person of an Economic Interest or Membership Interest,
such Person shall have all the rights of a Member with respect to such purchased
or otherwise acquired Membership Interest or Economic Interest, as the case may
be.
"Membership Interest" shall mean 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
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decision or action of or by the Members granted pursuant to this 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" shall mean those expenses incurred, either by
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.
"Person" shall mean any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.
"Prime Rate" means the rate of interest as of the relevant day or time
period 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" shall mean, 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:
(a) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits or
Losses shall be added to such taxable income or loss;
(b) Any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B)
expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and
not otherwise taken into account in computing Profits or Losses, shall
be subtracted from such taxable income or loss;
(c) Gain or loss resulting from dispositions of Company
assets shall be computed by reference to the Agreed Value of the
property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Agreed Value.
"Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.
"Regulations" shall mean 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" shall mean 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
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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 Manager" shall mean a manager who succeeds HHBF with all of
the specific rights and powers of the Manager under this Agreement.
"Substitute Member" shall mean 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, to
the extent of the Economic Interest assigned.
"Supermajority Vote of the Members" shall refer to the affirmative
vote, approval or consent of Members holding sixty-seven percent (67%) of the
percentage Membership Interests held by the Members in the aggregate.
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EXHIBIT D
TO THE
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
A North Carolina Limited Liability Company
DEVELOPMENT BUDGET EXHIBIT
Reference is made to the Development Budget Exhibit which is attached as Exhibit
D to the Original Operating Agreement and incorporated herein by this reference.
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EXHIBIT E
TO THE
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
HEART HOSPITAL OF BK, LLC
a North Carolina 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" has 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 HHBF.
(ii) "Member Nonrecourse Deductions" shall mean losses, deductions
or Code Section 705(a)(2)(B) expenditures attributable to
Member Nonrecourse Debt under the general principles
applicable to "partner nonrecourse deductions" set forth in
Regulations Section 1.704-2(i)(2).
(iii) "Member Nonrecourse Debt" means any Company liability with
respect to which one or more but not all of the Members or
related Persons to one or more but not all of the Members
bears the economic risk of loss within the meaning of
Regulations Section 1.752-2 as a guarantor, lender or
otherwise.
(iv) "Member Nonrecourse Debt Minimum Gain" shall mean the minimum
gain attributable to Member Nonrecourse Debt as determined
pursuant to Regulations
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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 HHBF.
(v) "Nonrecourse Deductions" shall mean 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" shall mean allocations of Nonrecourse
Deductions provided in Paragraph (b) below, allocations of
Member Nonrecourse Deductions provided in Paragraph (c) below,
the minimum gain chargeback provided in Paragraph (d) below,
the member nonrecourse debt minimum gain chargeback provided
in Paragraph (e) below, the qualified income offset provided
in Paragraph (f) below, the gross income allocation provided
in Paragraph (g) below, and the curative allocations provided
in Paragraph (h) below.
(b) Nonrecourse Deductions. All Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Members in accordance with their
percentage Membership Interests.
(c) Member Nonrecourse Deductions. All Member Nonrecourse
Deductions for any Fiscal Year shall be allocated to the Member who bears the
economic risk of loss under Regulations Section 1.752-2 with respect to the
Member Nonrecourse Debt to which such Member Nonrecourse Deductions are
attributable.
(d) Minimum Gain Chargeback. If there is a net decrease in Company
Minimum Gain for a Fiscal Year, each Member shall be allocated items of Company
income and gain for such year (and, if necessary, subsequent years) in an amount
equal to such Member's share of such net decrease in Company Minimum Gain,
determined in accordance with Regulations Section 1.704-2(g)(2) and the
definition of Company Minimum Gain set forth above. This provision is intended
to comply with the minimum gain chargeback requirement in Regulations Section
1.704-2(f) and shall be interpreted consistently therewith.
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(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 HHBF
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 HHBF 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
E-3
attorneys' fees) incurred to apply for the waiver. HHBF 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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