OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
TABLE OF CONTENTS
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
ARTICLE I.........................................................................................................2
ARTICLE II........................................................................................................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.......................................................................................................4
SECTION 3.1. Initial Capital Contributions of Members....................................................4
SECTION 3.2. Liability of Members - For Capital..........................................................4
SECTION 3.3. Maintenance of Capital Accounts; Withdrawals of Capital; Withdrawals from the
Company.................................................................................................4
SECTION 3.4. Interest on Capital Contributions or Capital Accounts.......................................5
SECTION 3.5. Additional Funding..........................................................................5
SECTION 3.6. Enforcement of Commitments..................................................................7
ARTICLE IV........................................................................................................7
ARTICLE V.........................................................................................................7
SECTION 5.1. General Authority and Powers of Managers....................................................7
SECTION 5.2. Restrictions on Authority of the Managers..................................................11
SECTION 5.3. Duties of the Managers.....................................................................12
SECTION 5.4. Delegation by the Managers.................................................................12
SECTION 5.5. Right to Rely Upon the Authority of the Managers...........................................13
SECTION 5.6. Company Expenses...........................................................................13
SECTION 5.7. No Management by Members...................................................................15
SECTION 5.8. Consent by Members to Exercise of Certain Rights and Powers by Managers....................15
SECTION 5.9. Other Business of Members..................................................................16
SECTION 5.10. Managers' Standard of Care................................................................17
SECTION 5.11. Limitation of Liability...................................................................17
SECTION 5.12. Indemnification of the Managers...........................................................18
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SECTION 5.13. Election and Replacement of Investor Manager..............................................18
SECTION 5.14. Role of Investor Manager..................................................................18
SECTION 5.15. Purchase of Goods and Services from MedCath...............................................18
SECTION 5.16. Decisions by Managers.....................................................................18
ARTICLE VI.......................................................................................................20
SECTION 6.1. Distributions of Cash Flow from Operations and Cash from Sales or Refinancing..............20
SECTION 6.2. Profits....................................................................................20
SECTION 6.3. Losses.....................................................................................20
SECTION 6.4. Code Section 704(c) Tax Allocations........................................................20
SECTION 6.5. Miscellaneous..............................................................................21
ARTICLE VII......................................................................................................22
SECTION 7.1. No Termination by Certain Acts of Member...................................................22
SECTION 7.2. Dissolution................................................................................22
SECTION 7.3. Dissolution and Final Liquidation..........................................................23
SECTION 7.4. Termination................................................................................24
SECTION 7.5. Payment in Cash............................................................................24
SECTION 7.6. Goodwill and Trade Name....................................................................24
SECTION 7.7. Termination of Noncompetition Covenants....................................................24
ARTICLE VIII.....................................................................................................25
SECTION 8.1. Manager - Transfers........................................................................25
SECTION 8.2. Members' Right to Continue When Company has no Manager.....................................26
SECTION 8.3. Relationship with Substitute Manager.......................................................26
SECTION 8.4. Members Who Are Not Managers - Restriction on Transfer.....................................26
SECTION 8.5. Condition Precedent to Transfer of Economic Interest and/or Membership Interest............27
SECTION 8.6. Substitute Member - Conditions to Fulfill..................................................28
SECTION 8.7. Allocations Between Transferor and Transferee..............................................28
SECTION 8.8. Rights, Liabilities of, and Restrictions on Assignee.......................................29
SECTION 8.9. Death of a Member..........................................................................29
SECTION 8.10. Repurchase of Interests in Certain Event..................................................30
SECTION 8.11. Permissible Transfers by Investor Members.................................................30
ARTICLE IX.......................................................................................................31
SECTION 9.1. Books of Account...........................................................................31
SECTION 9.2. Access to Records..........................................................................31
SECTION 9.3. Bank Accounts and Investment of Funds......................................................31
SECTION 9.4. Fiscal Year................................................................................31
SECTION 9.5. Accounting Reports.........................................................................31
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SECTION 9.6. Tax Returns................................................................................32
ARTICLE X........................................................................................................32
SECTION 10.1. Meetings..................................................................................32
SECTION 10.2. Voting Rights of Members..................................................................33
ARTICLE XI.......................................................................................................33
SECTION 11.1. Authority to Amend by Managers............................................................33
SECTION 11.2. Restrictions on Managers' Amendments: Amendments by Investor Members......................34
SECTION 11.3. Amendments to Certificates................................................................35
ARTICLE XII......................................................................................................35
SECTION 12.1. Limited Power of Attorney.................................................................35
SECTION 12.2. Waiver of Provisions......................................................................35
SECTION 12.3. Interpretation and Construction...........................................................35
SECTION 12.4. Governing Law.............................................................................35
SECTION 12.5. Partial Invalidity........................................................................36
SECTION 12.6. Binding on Successors.....................................................................36
SECTION 12.7. Notices and Delivery......................................................................36
SECTION 12.8. Counterpart Execution; Facsimile Execution................................................36
SECTION 12.9. Statutory Provisions......................................................................36
SECTION 12.10. Waiver of Partition......................................................................36
SECTION 12.11. Change In Law............................................................................37
SECTION 12.12. Investment Representations of the Members................................................38
SECTION 12.13. Decisions by Investor Manager............................................................39
SECTION 12.14. Referrals to Hospital and Ownership of Shares of Common Stock of MedCath
Incorporated...................................................................................39
SECTION 12.15. Exhibits.................................................................................39
EXHIBIT A: Information Exhibit.
EXHIBIT B: Glossary of Terms.
EXHIBIT C: Development Budget Exhibit.
EXHIBIT D: Regulatory Allocations.
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OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, 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 OHIO SECURITIES ACT IN
RELIANCE UPON THE REPRESENTATION OF EACH PURCHASER OF THE SECURITIES THAT THE
SAME ARE BEING ACQUIRED FOR INVESTMENT PURPOSES. THESE SECURITIES MAY
ACCORDINGLY NOT BE RESOLD OR OTHERWISE TRANSFERRED OR CONVEYED IN THE ABSENCE OF
REGISTRATION OF THE SAME PURSUANT TO THE APPLICABLE SECURITIES LAWS UNLESS AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY IS FIRST OBTAINED THAT SUCH
REGISTRATION IS NOT THEN NECESSARY. ANY TRANSFER CONTRARY HERETO SHALL BE VOID.
THIS OPERATING AGREEMENT (the "Agreement") of Heart Hospital of DTO, LLC
(the "Company"), a North Carolina Limited Liability Company is made and entered
into by and among Persons whose names addresses and taxpayer identification
number are listed on the Information Exhibit.
RECITALS
A. The Company has been formed to develop, own and operate an acute care
hospital which hospital shall be located in or near Dayton, Ohio and shall
specialize in all aspects of cardiology and cardiovascular care and surgery
which DTO Management and the Investor Manager may agree upon;
B. It is intended that the hospital will be a low-cost, high quality
provider of medical services within the Dayton, Ohio area in a manner which is
consistent with the national health care policy of lowering the costs of health
care;
C. The Capital Contributions and active involvement of the Investor Members
are necessary to enable the Company to achieve its objectives.
ARTICLE I
DEFINITIONS
Unless otherwise indicated, capitalized words and phrases in this Operating
Agreement shall have the meanings set forth in the attached Glossary of Terms.
ARTICLE II
FORMATION AND AGREEMENT OF LIMITED LIABILITY COMPANY
SECTION 2.1. Company Formation; Effective Date. The Company shall be 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 Effective Date
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. DTO Management 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 DTO Management 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 "Effective Date") the
Company was formed.
SECTION 2.2. Name of Company. The name of the Company is Heart Hospital of
DTO, 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 Ohio, Medicare, 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 cardiology and cardiovascular surgical
services of every type or nature and to be eligible to obtain
appropriate reimbursements therefore;
(ii) Approximately 53,000 square feet in a building to be
constructed in accordance with plans and specifications approved by
the Company;
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(iii) Approximately 40 medical/surgical beds;
(iv) 3 heart catheterization laboratories with available space
for one additional heart catheterization lab;
(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 Managers are 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 North Carolina as selected by DTO
Management from time to time. DTO Management 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, 2037, 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 DTO Management. In
the event DTO Management does not elect to extend the term hereof, the Investor
Manager may instead elect to extend the term hereof, subject to DTO Management's
consent which shall not be unreasonably withheld or delayed.
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ARTICLE III
MEMBERS AND CAPITAL CONTRIBUTIONS
SECTION 3.1. Initial Capital Contributions of Members. The Members shall
make the following initial Capital Contributions:
(a) DTO Management 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.
In connection with the initial offering and admission of Investor Members
to the Company, in the event that additional portions of the Membership
Interests described in this Section 3.1(b) have not been subscribed for, the
Investor Members who become Members on or about the Effective Date shall be
entitled to acquire on a pro rata basis such remaining Member Interests if DTO
Management and the Investor Manager have agreed to offer such remaining
interests to any such original Investor Member.
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 for capital shall be limited to the amount of its agreed Capital
Contribution as a Member as provided in Section 3.1 and Section 3.5, except that
the Members may be liable to the Company for amounts distributed to them as a
return of capital as provided by the Act. The Members shall not be required to
contribute any additional capital to the Company except as provided in Section
3.5.
SECTION 3.3. Maintenance of Capital Accounts; Withdrawals of Capital;
Withdrawals from the Company. An individual Capital Account shall be maintained
for each Member in accordance with requirements of the Code and the Regulations
promulgated thereunder. No Member shall be entitled to withdraw or to make
demand for withdrawal of any part of its Capital Account or to receive any
distribution except as provided herein. Except as otherwise provided in this
Agreement, each Member shall look solely to the assets of the Company for the
return of its Capital Contributions and shall have no right or power to demand
or receive property other than cash from the Company. No Member shall have
priority over
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any other Member as to the return of its Capital Contributions, distributions or
allocations, except as provided in this Agreement.
Except as otherwise provided herein, a Member may not withdraw from the
Company without the written consent of DTO Management and the Supermajority Vote
of the Members and in no case shall a Member have the right to have its Interest
redeemed by the Company unless approved by DTO Management and by the
Supermajority Vote of the Members.
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, DTO Management
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) Subject to the terms hereof, if additional funds are required by
the Company to enable it to pay its liabilities during its development or
startup phase, DTO Management agrees to loan the Company up to Three
Million Dollars ($3,000,000) for such purpose at the Prime Rate plus one
percent (1%) per annum which loan shall be secured by the Company's assets.
Interest on such loan shall be payable monthly and the principal shall be
repaid as the Company has funds available therefore. Provided, however, if
the Company's losses as calculated by the Company's accountants under
Generally Accepted Accounting Principles ("GAAP") exceed the initial
Capital Contributions made pursuant to Section 3.1, DTO Management shall
not be required to make any such loan to the Company hereunder unless it is
still needed after the Members and Economic Interest Holders make
additional Capital Contributions pursuant to the terms of Section
3.5(b)(ii) below.
(b) Thereafter, if additional funds are required by the Company to
enable it to pay its obligations, subject to the requirements set forth in
(ii) below, then:
(i) DTO Management shall use commercially reasonable efforts to
borrow such funds from a bank or other lender on terms and conditions
reasonably acceptable to DTO Management, or DTO Management may, but
shall not be required, to loan such funds to the Company at the Prime
Rate plus one percent (1%) per annum which loan shall be secured by
the Company's assets. Interest shall be paid monthly in arrears and
principal shall be repaid as the Company has funds available
therefore. All loans obtained hereunder shall be subject to the
approval of the Investor Manager which approval shall not be
unreasonably withheld or delayed;
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(ii) If the Company has losses (after the application of the
delay in earning and accrual of the fees provided for in Section
5.6(b)(ii), (iii) and (iv)) in excess of the amount of the initial
Capital Contributions, DTO Management may from time to time, subject
to the terms below, upon at least fifteen (15) days prior written
notice require that the Members and Economic Interest Holders
contribute additional capital to the Company pro rata according to
their respective Membership Interests and Economic Interests, provided
however, a Member's or Economic Interest Holder=s maximum obligation
for such additional Capital Contributions shall be limited to an
amount equal to two (2) times the Member=s initial Capital
Contribution pursuant to Section 3.1 (or in the case of an Economic
Interest Holder, the initial Capital Contribution obligation under
Section 3.1 of the Person who first acquired that Economic Interest
from the Company). DTO Management shall determine from time to time
when such a mandatory Capital Contribution is needed and shall give
written notice to the Investor Member(s) and the Investor Manager of
the need for the Capital Contribution. This mandatory Capital
Contribution shall be subject to the consent of the Investor Manager;
however, said consent may not be unreasonably withheld by the Investor
Manager. It is further acknowledged and agreed that in the event that
after the Manager has fully advanced its loan pursuant to Section
3.5(a) that for any reason the Company requires additional funds to
meet debts that become due or because of a lack of reasonable
operating reserves, those shall be acceptable reasons for the
mandatory Capital Contribution which shall not be objected to by the
Investor Manager.
(iii) If additional Capital Contributions are needed beyond the
loans described in (a) and (b)(i) above and beyond the mandatory
amount indicated in (b)(ii) above, each Member may elect whether or
not to contribute its pro rata portion thereof of these optional
Capital Contributions. The other Investor Members may elect to
contribute optional Capital Contributions not contributed by any
Investor Member hereunder. DTO Management may then elect to contribute
amounts which the Investor Members, in the aggregate, have not so
contributed as optional Capital Contributions. Thereafter, DTO
Management 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 make optional Capital Contributions pursuant
to this Section 3.5 within; and
(iv) If funds are not available in accordance with (a) and (b),
(i), (ii) or (iii) above, then DTO Management may elect to dissolve
the Company.
SECTION 3.6. Enforcement of Commitments. In the event any Members (a
"Delinquent Member") fails to make a mandatory Capital Contribution as provided
in Section 3.1 or Section 3.5 or an optional Capital Contribution as agreed to
by the Member under Section 3.5 (the "Commitment"), DTO Management shall give
the Delinquent Member a Notice of the failure to meet the Commitment. If the
Delinquent Member fails to perform the Commitment (including
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any costs associated with the failure to meet the Commitment and interest on
such obligation at the Default Interest Rate) within ten (10) business days of
the giving of Notice, DTO Management may take such action, including but not
limited to enforcing the Commitment in the court of appropriate jurisdiction in
the state in which the principal office of the Company is located or the state
of the Delinquent Member=s address as then reflected in the Agreement. Each
Member expressly agrees to the jurisdiction of such courts but only for the
enforcement of Commitments. The other Member=s may elect to contribute
additional amounts equal to any amount of the Commitment not contributed by such
Delinquent Member. The contributing Member shall be entitled at its election to
treat the amounts contributed pursuant to this Section either as a Capital
Contribution or as a loan from the contributing Member bearing interest at the
Default Rate secured by the Delinquent Member=s Interest in the Company. If the
contributing Member elects to contribute such amount as a Capital Contribution,
the percentage Membership Interests of the Members shall be adjusted
proportionately. Until the contributing Member is fully repaid for such loan
made as a result of the default by the Delinquent Member and only if the
contributing Member agrees to accept repayment of such amount, the contributing
Member shall be entitled to all distributions to which the Delinquent Member
would have been entitled had such Commitment been fulfilled thereby.
Notwithstanding the foregoing, no Commitment or other obligation to make an
additional Capital Contribution may be enforced by a creditor of the Company
unless the Member expressly consents to such enforcement or to the assignment of
the obligation to such creditor.
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 Managers. Except as set forth
in those provisions of this Agreement that specifically require the vote,
consent, approval or ratification of the Members, the Managers shall have
complete authority and exclusive control over the management of the business and
affairs of the Company. Subject to the terms and conditions of this Agreement
and except as otherwise provided herein, all Material Agreements and Material
Decisions with respect to the business and affairs of the Company shall be
approved or made by the Managers in accordance with Section 5.16 hereof. No
Member has the actual or apparent authority to cause the Company to become bound
in any contract, agreement or obligation, and no Member shall take any action
purporting to be on behalf of the Company. No Manager shall cause the Company to
become bound to any contract, agreement or obligation, and
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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
below with respect to the authority and actions of DTO Management.
The day-to-day management of the business and affairs of the Company shall
be the responsibility of DTO Management, which management shall be subject to
decisions, guidelines and policies made or established by the Managers
hereunder, provided, however, decisions relating to medical and clinical
practice at the Hospital shall be made exclusively by the qualified medical
personnel of the Hospital. Subject in all cases to the foregoing, DTO Management
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 Managers shall establish cash management
guidelines to be followed by DTO Management;
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(g) To employ or retain on such terms and for such compensation as DTO
Management may reasonably determine, such persons, firms, or corporations
as DTO Management may deem advisable, including without limitation
qualified medical and other employees necessary 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
DTO Management, provided that the selection of the senior administrator of
the Hospital shall be a Material Decision;
(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, xxxx 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 DTO
Management deems necessary or appropriate for the protection of the Company
and DTO Management, for the conservation of the Company or its assets, or
for any purpose beneficial to the Company; however, neither DTO Management
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;
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(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;
(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 the Investor Manager
and other 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 DTO Management and approved by the Investor Manager,
which approval shall be given or withheld in the sole and absolute
discretion of the Investor Manager;
(y) To sell assets of the Company, subject to the restrictions
contained in this Agreement;
(z) Subject to the Governing Body and Medical Staff By-Laws, and with
the written consent of the Investor Manager, to provide exclusive
cardiology and cardiovascular surgery professional service agreements to
Investor Members who will be integral to the successful development of the
Hospital; and
(aa) Acquire equipment and other related tangible assets appropriate
for the operation of a cardiac rehabilitation service from third parties or
from Investor Members based on the fair market value therefor.
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SECTION 5.2. Restrictions on Authority of the Managers. The Managers shall
not do any of the following:
(a) Act in contravention of this Agreement;
(b) Act in any manner which would make it impossible to carry on the
express business purposes of the Company;
(c) Commingle the Company funds with those of any other Person;
(d) Admit an additional Manager, 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 5.3. Duties of the Managers. Each Manager 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 and, in the case of DTO Management, to perform the duties for which
it will receive a Management Fee as provided in Section 5.6(b), or
otherwise, however, each Manager 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;
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(c) In the case of DTO Management file and publish all certificates,
statements, or other instruments required by law for the formation and
operation of the Company as a limited liability company in all appropriate
jurisdictions;
(d) In the case of DTO Management 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 DTO Management shall deem advisable, but in amounts not
less (and deductible amounts not greater) than those customarily maintained
with respect to the business equipment and property comparable to the
Company's;
(e) Have a fiduciary duty to conduct the affairs of the Company in the
best interests of the Company and of the Members, including the safekeeping
and use of all funds and assets, whether or not in its immediate possession
and control, and it shall not employ or permit others besides Managers to
employ such funds or assets in any manner except for the benefit of the
Company; and
(f) In the case of DTO Management, 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 Ohio law.
SECTION 5.4. Delegation by the Managers. Subject to restrictions otherwise
provided herein, the Managers may at any time employ any other Person, including
Persons and Entities employed by, affiliated with, or related to the Managers 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 Managers of their respective
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 or Manager of
the Company.
SECTION 5.5. Right to Rely Upon the Authority of the Managers. Persons
dealing with the Company may rely upon the representation of the Managers that
such Managers are managers of the Company and that such Managers have the
authority to make any commitment or undertaking on behalf of the Company. No
Person dealing with the Managers 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 any
Manager to sign and deliver on behalf of the Company any instruments of transfer
with respect thereto or to see to the application or distribution of revenues or
proceeds paid or credited in connection therewith, unless such purchaser shall
have received written notice from the Company affecting the same.
SECTION 5.6. Company Expenses.
(a) In general, the Company's expenses shall be billed directly to and
paid by the Company. The Company shall reimburse the Managers or their
Affiliates for: (i) all
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Organization Expenses incurred by the Managers or their Affiliates in
connection with the formation of the Company; (ii) the actual costs to the
Managers or their 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 Managers in the development and management of the
Company and its business. The parties specifically recognize that DTO
Management and its Affiliates have incurred legal fees, filing fees, and
other out-of-pocket costs for the benefit of the Company, including costs
connected with the preparation of securities law and health care law
compliance documentation and filings, real estate acquisition matters and
formation and registration of the Company, and agree that DTO Management
shall be reimbursed for these amounts. The reimbursement for expenses
provided for in this Section 5.6(a) shall be made to the Managers or their
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:
(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 DTO Management 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) In addition to reimbursements and other amounts due
hereunder, a Management Fee shall be paid to DTO Management, which for
periods prior to the opening of the Hospital for business shall equal
One Hundred Thousand Dollars ($100,000.00) per year and shall first
accrue commencing with the month during which the Company receives the
Capital Contributions described in Section 3.1(b), and shall be
payable monthly on the last day of each month, and for periods after
the opening of the Hospital for business shall equal two percent (2%)
of the Hospital's collected gross revenues for a month, and shall be
payable monthly on or before the tenth (10th) day following the end of
each month but which amount shall be no less than One Hundred Fifty
Thousand Dollars ($150,000.00) per annum;
(iii) An annual medical director's fee of Fifty Thousand Dollars
($50,000) commencing with the beginning of the design process for the
Hospital which annual fee shall be increased to One Hundred Thousand
Dollars ($100,000) commencing as of the date on which the first of the
following occurs: (X) the
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substantial completion of the construction of the Hospital if the
Hospital is to be located in a new building (whether to be leased to
or owned by the Company), or (Y) the closing of the purchase of the
real property in which the Hospital is to be located if located in an
existing building (either by the Company or by a third party who shall
in turn lease such building to the Company) and shall be payable
monthly on the last day of each month, which fee shall be increased
annually by the Consumer Price Index reasonably applied by DTO
Management on January 1st of each year;
(iv) As compensation for (X) the substantial efforts of the
Investor Manager in assisting in the organization and development of
the Company and the Hospital, (Y) for such Investor Manager's
substantial and ongoing involvement in connection with the design,
development and initial operations of the Hospital after the date
hereof, and (Z) for serving as the Investor Manager in accordance with
the terms of this Agreement and taking all reasonable efforts to
ensure that the other Investor Members are adequately represented
hereunder, the Investor Manager shall be paid a fee equal to Fifty
Thousand Dollars ($50,000.00) per annum commencing with the beginning
of the design process for the Hospital for the two (2) year period
commencing as of such date, which annual fee shall be Twenty-Five
Thousand Dollars ($25,000.00) per year thereafter;
(v) 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 DTO Management 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; and
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(vi) In the event that DTO Management and the Investor Member
reasonably agree that it would be beneficial to the Company to have
the advice of a third party consultant when making a Material
Decision, the reasonable expenses of the third party consultant shall
be an expense of the Company.
(c) Notwithstanding anything herein to the contrary, no amounts shall
be earned, accrued or due from the Company under (b)(ii), (iii) or (iv)
above to the extent that the Company has losses which (i) would be greater
as a result of such amounts being earned, and (ii) which are resulting in
additional Capital Contributions being required under Section 3.5(b)(ii).
SECTION 5.7. No Management by Members. Other than the Managers, 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, DTO Management, in conjunction with the
Investor Manager when applicable, shall 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 5.8. Consent by Members to Exercise of Certain Rights and Powers by
Managers. By its execution hereof, each Member expressly consents to the
exercise by the Managers of the rights, powers, and authority conferred on the
Managers by this Agreement.
SECTION 5.9. Other Business of Members.
(a) Subject to (b) below, any Member, including any 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 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
15
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 a fifty (50) mile radius of the Hospital (the "Territory"), provided
that (i) no Member or Affiliate who is a physician shall be prohibited from
maintaining his or her staff privileges at any other hospital and (ii)
nothing herein shall prohibit a Member or Affiliate 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. In addition, DTO
Management or its Affiliates may separately operate a mobile
catheterization laboratory within the Territory, but only if either DTO
Management or an Affiliate thereof is providing such service pursuant to a
lease of six (6) months or less to a provider who is already providing cath
lab services or if the Investor Manager has elected not to have such
service provided by the Company.
(c) The Members, including the Managers, have reviewed the term and
geographical restrictions included in Section 5.9(b), and in light of the
interests of the parties hereto, agree that such restrictions are fair and
reasonable.
(d) If there is a breach or threatened breach of the provisions of
this Section 5.9 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 5.9 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 5.9. Should any such paragraph, subparagraph, sentence, clause,
phrase, word, or figure be adjudicated to be wholly invalid or
unenforceable, the balance of this Section 5.9 shall thereupon be modified
in order to render the same valid and enforceable and the unenforceable
portion of this Section 5.9 shall be deemed to have been deleted from this
Agreement.
(e) The Company, the Managers and the Investor 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 DTO
Management 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 DTO Management 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
5.9.
16
SECTION 5.10. Managers' Standard of Care. Each Manager shall act in a
manner it believes in good faith to be in the best interest of the Company and
with such care as an ordinarily prudent Person in a like position would use
under similar circumstances. In discharging its duties, each 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 of its other Managers, Members, or agents, or by any other
Person as to matters each 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, a Manager or Member shall
have the right to vote or approve Company matters in accordance with the terms
of this Agreement regardless of the personal interest of any Member or Manager
in the outcome of any vote, decision or matter.
SECTION 5.11. Limitation of Liability. A Manager shall not be liable to the
Company, its Members, or other Managers for any action taken in managing the
business or affairs of the Company if it performs the duty of its office in
compliance with the standard contained in Section 5.10. No Manager has
guaranteed nor shall have any obligation with respect to the return of a
Member's Capital Contribution or share of income from the operation of the
Company. Furthermore, no Manager, its Affiliates or its employees (collectively,
its "Agents") shall be liable to the Company or to any Member for any loss or
damage sustained by the Company or any Member except loss or damage resulting
from gross negligence or intentional misconduct or knowing violation of law or a
transaction for which such Manager or Agent received a personal benefit in
violation or breach of the provisions of this Agreement.
SECTION 5.12. Indemnification of the Managers.
(a) Each Manager and its Agents (as defined in Section 5.11) 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
Member or its Agents in its capacity as a Manager 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 or an
Agent and provided that the Manager or an Agent, 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 may be indemnified hereunder.
17
(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 5.13. Election and Replacement of Investor Manager. In accordance
with the procedures outlined in Section 10.1 herein, the Investor Members shall
elect an Investor Manager to serve for one year terms or until a successor is
duly elected. At any time, in accordance with Section 10.1, the Investor Members
may replace the Investor Manager and elect a new Investor Manager.
SECTION 5.14. Role of Investor Manager. Notwithstanding anything herein to
the contrary, the Investor Manager shall take no action nor make any decision on
behalf of the Company except to the extent it is expressly authorized to do so
under this Agreement in its capacity as Investor Manager.
SECTION 5.15. Purchase of Goods and Services from DTO Management. Goods and
services purchased from DTO Management or its Affiliates shall be of
substantially the same quality and price as could be obtained from an unrelated
third party.
SECTION 5.16. Decisions by Managers. Except as provided in this Agreement,
decisions and actions to be taken by the Managers shall be deemed to have been
made only upon the affirmative approval or consent of DTO Management and the
Investor Manager. If there is more than one Investor Manager, the decision of
the Investor Manager shall be determined by the decision of a majority of such
Investor Managers. In the event a decision, approval or consent is requested of
the Investor Manager by DTO Management, it shall be deemed to have been
affirmatively made if the Investor Manager fails to respond to any such written
request therefor within five (5) days of notice thereof by DTO Management.
Notwithstanding anything in this Agreement to the contrary, all decisions and
actions to be made by the Managers 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 DTO Management and shall be subject to the consent of the Investor Manager,
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 DTO Management and the
Investor Manager. The Investor Manager shall be deemed to have specifically
approved all expenditures proposed by DTO Management that are substantially
consistent with the Development Budget Exhibit or an approved operating budget
when funded from additional Capital Contributions made to the Company by the
Members pursuant to Section 3.5 above.
The development and annual operating budgets to be proposed by DTO
Management shall be approved by the Managers as provided above subject to the
following:
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(a) The Investor Manager shall be deemed to have approved a
development budget which is substantially consistent with the attached
Development Budget Exhibit to this Agreement;
(b) The Investor Manager 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
(c) In the event that the Managers are unable to approve an annual
budget, DTO Management shall be authorized to operate the Company under the
previous year=s budget increased by the greater of 5% or the increase
during the previous year in the Consumer Price Index for Medical Items
until a new budget is approved.
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 amounts then due on loans made by the Members to the Company shall be
distributed quarterly by the Managers as Cash Distributions according to the
relative percentage Membership Interests of the Members and Economic Interest
Owners. 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, 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. Except as provided in the Regulatory Allocations
Exhibit, Losses shall be allocated as follows:
19
(a) First, Losses shall be allocated to the Members with positive Adjusted
Capital Account balances in proportion to those balances.
(b) All remaining Losses shall be allocated to the Members in accordance
with their percentage Membership Interests.
SECTION 6.4. Code Section 704(c) Tax Allocations. Income, gain, loss, and
deduction with respect to any property contributed to the capital of the Company
shall, solely for tax purposes, be allocated among the Members so as to take
account of any variation between the adjusted basis of such property to the
Company for federal 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 DTO Management. Absent a determination by DTO Management,
the remedial allocation method under Regulation Section 1.704-3(d) shall be
used. Allocations pursuant to this Section are solely for purposes of federal,
state, and local taxes and shall not be taken into account in computing any
Member's Capital Account or share of Profits, Losses, other items, or
distributions pursuant to any provision of this Agreement.
SECTION 6.5. Miscellaneous.
(a) Allocations Attributable to Particular Periods. For purposes of
determining Profits, Losses or any other items allocable to any period, such
items shall be determined on a daily, monthly, or other basis, as determined by
DTO Management 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
20
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.
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 DTO Management to dissolve the Company in
accordance with the terms of Section 3.5(c) hereof;
(b) The death, insanity, bankruptcy, retirement (other than due to a
failure of an Investor Manager to be re-elected as an Investor Manager),
resignation (other than due to an Investor Manager's resigning from serving
as a Manager while still remaining a Member) or expulsion of any Manager
who is also a Member, unless the Company is continued by the consent of not
less than a majority in interest (defined in accordance with Revenue
Procedure 94-46 or successor provisions) of the remaining Members within
ninety (90) days after notice of such event, effective as of the date of
such event. If there is no remaining Manager, the remaining Members owning
at least 51% of the Membership Interests which are owned by the remaining
Members shall, if they desire to continue the Company, elect a Substitute
Manager who shall assume all of the rights and duties of DTO Management
under this Agreement (which Substitute Manager accepts such election);
(c) Upon the written agreement of DTO Management and the Investor
Manager;
(d) The expiration of the term of the Company as provided in Section
2.5 hereof;
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(e) The adjudication of bankruptcy of the Company;
(f) Upon the written consent of a Supermajority Vote of the Members;
(g) In accordance with Section 12.11 hereof; and
(h) The entry of a decree of judicial dissolution or the
administrative dissolution of the Company as provided in the Act.
(i) At the election of the Manager, in the event that by September 30,
1997 (unless such date is extended by the consent by the Manager and the
Investor Manager) Investor Members reasonably acceptable to Manager have
not been admitted as Members subscribing for at least sixty-seven (67%)
percent of the Membership Interests described in Section 3.1(b).
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 Managers, or if for any reason
there is no Manager, by another Person designated by a Supermajority Vote
of the Members. In winding up the Company and liquidating assets, the
Managers, 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 DTO Management or any
Affiliate thereof, on such terms and for such consideration as shall be
consistent with obtaining the fair market value thereof, as such fair
market value is approved by a Supermajority Vote of the Members.
(b) Upon any such dissolution and liquidation of the Company, the net
assets, if any, of the Company available for distribution, including any
cash proceeds from the liquidation of Company assets, shall be applied and
distributed in the following manner or order, to the extent available:
(i) To the payment of or creation of reserves for all debts,
liabilities, and obligations to all creditors of the Company (other
than the Members or their Affiliates) and the expenses of liquidation;
(ii) To the payment of all debts and liabilities (including
interest) owed to the Members or their Affiliates as creditors; and
22
(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 Managers or other Members or to charge the Managers 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 Managers 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 Managers 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
Managers in their sole discretion, or the Person winding up the affairs of
the Company, in its discretion, may elect to have the Company retain any
installment obligations owed to the Company until collected in full so long
as any portion of the reserves which are later determined to be
unnecessary, and all collections on such installment obligations which are
not deemed to be reasonably necessary by the Managers 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.
23
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 DTO Management, provided that distributions
and allocations otherwise due to DTO Management shall not be reduced as a result
of DTO Management becoming entitled to such assets.
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 5.9(b)
except that Section 5.9(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 5.9(b), shall not be
impaired by the dissolution or completed liquidation.
ARTICLE VIII
REMOVAL OR WITHDRAWAL OF MANAGERS 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, DTO Management 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 DTO Management may assign its Membership Interest in the Company and
its rights to be a Manager to any party who purchases all or substantially
all of MedCath Incorporated's and its subsidiaries' assets or capital stock
if such purchaser assumes in writing the obligations of DTO Management
hereunder or to a party under control of, common control, or which
controls, DTO Management. DTO Management 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 MedCath Incorporated or its Affiliates. In the event that
DTO Management 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 Incorporated and its subsidiaries, 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. If upon
any transfer of DTO Management's Membership Interest, DTO Management is not
permitted to assign its rights as Manager under this Section 8.1(a), DTO
Management shall not continue as Manager after said transfer, and the
provisions of Section 8.2 shall apply.
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(b) The Investor Manager may not assign its rights to be a Manager
herein. Upon the withdrawal or resignation of the Investor Manager, a
substitute therefore who must be an Investor Member may be elected by a
Majority Vote of Investor Members.
(c) Any resignation or withdrawal by a Manager as a manager shall not
constitute such Manager's withdrawal as a Member.
(d) The Manager will not, without the consent of the Investor Manager,
pledge the assets of the Hospital except for the benefit of the Hospital.
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 Managers 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 DTO
Management 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 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
25
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 DTO Management to comply with requirements imposed by any
federal or state securities regulatory authority and unless DTO Management'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 5.9(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 DTO Management, not to be unreasonably
withheld, provided however: (a) the Company first for a period of fifteen (15)
days, and thereafter the other Members for a period of fifteen (15) days shall
have the right, but not the obligation, to purchase all, but not less than all,
of the 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. DTO
Management 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. 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 as of the Effective Date and 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 as of the Effective Date and 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 fifty
(50%) percent or more 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 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). The Investor Members who are Entities as of the
Effective Date have provided copies to DTO Management of the documents and
agreements related to the creation and governance thereof. These documents and
agreements have not been amended since they were provided to DTO Management and
shall not be amended without DTO Management's written consent. The restriction
of the foregoing sentence shall not apply to Entities which have historically
been dedicated solely to the practice of medicine and continue to be dedicated
solely to the practice of medicine in the future.
26
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 DTO Management 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 DTO Management 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 DTO Management and the Investor Manager to
such substitution is obtained, which consent may be reasonably withheld by
DTO Management or the Investor Manager; 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 DTO Management, 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
27
applicable 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 DTO Management 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 DTO Management
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 DTO Management'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. If any Member is an individual, heirs of
such a Member 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 DTO Management 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 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,
28
the first third of which shall be paid upon the 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. If the Investor Member is
an Entity, the agreements for the formation and the governance of such Entity
shall provide for the disposition of the membership interest of a deceased
member of the Investor Member Entity, which disposition shall be subject to DTO
Management's approval.
SECTION 8.10. Repurchase of Interests in Certain Event
(a) In the discretion of DTO Management, 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 5.9, 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 DTO Management elects to exercise the right of repurchase
granted under Section 8.10(a) and the purchase price shall the lower of (x)
the Capital Contributions of the Member less all amounts distributed to
such Member by the Company, (y) the fair market value of such Member's
Membership Interest determined by an independent appraiser reasonably
selected by DTO Management, and (z) the formula Purchase Price; provided
however, in the event that the Company elects to purchase any Membership
Interest due to a Member's failure to make a required Capital Contribution
pursuant to Section 3.5, the purchase price therefor shall be determined
solely under (x) above.
SECTION 8.11. Permissible Transfers by Investor Members. Notwithstanding
anything in this Agreement to the contrary, an Investor Member may elect within
ninety (90) 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 purpose of holding such Membership
Interest, or for additional purposes approved by DTO Management by advance
written consent, 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 DTO Management first
approves in writing the terms of all documents creating and constituting such
Entity.
29
ARTICLE IX
RECORDS, ACCOUNTINGS AND REPORTS
SECTION 9.1. Books of Account. At all times during the continuance of the
Company, DTO Management 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 DTO Management
or, if required by law, at the registered office of the Company. Each Member or
its designated representatives shall, upon reasonable notice to DTO Management,
have access to such financial books, records and documents during reasonable
business hours and may inspect and make copies of any of them.
SECTION 9.3. Bank Accounts and Investment of Funds
(a) DTO Management 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 DTO
Management may from time to time designate.
(b) Any funds of the Company which DTO Management 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 DTO Management in its sole discretion.
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.
30
The Company shall be audited on an annual basis by a firm of independent
certified public accountants engaged by DTO Management 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, DTO Management shall also cause to be
prepared and distributed to the Members quarterly financial statements following
DTO Management's public announcement of its results for such quarter in a form
and containing such information as reasonably determined by DTO Management.
SECTION 9.6. Tax Returns. DTO Management 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 DTO Management, the Investor Manager 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 Dayton, Ohio 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 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 DTO Management 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
31
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 Managers. Except as otherwise provided
by Section 11.2, this Agreement and the Articles of Organization of the Company
may be amended by DTO Management with the approval of the Investor Manager which
approval shall not 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;
(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
32
under this Agreement which will not be inconsistent with the provisions of
this Agreement;
(d) To satisfy the requirements of the Code and Regulations with
respect to limited liability companies or of any federal or state
securities laws or regulations, provided such amendment does not adversely
affect the Membership Interests of Members and is necessary or appropriate
in the written opinion of counsel and any amendment under this subsection
(d) shall be effective as of the date of this Agreement;
(e) To the extent that it can do so without materially reducing the
economic return on investment in the Company to any Member, to satisfy any
requirements of federal or state legislation or regulations, court order,
or action of any governmental administrative agency with respect the
operation or ownership of the Hospital;
(f) Subject to the terms of Section 2.5, to extend the term of the
Company; and
(g) Upon written notice to all Members, DTO Management may elect to
expand the number of Managers up to nine (9) so that the Managers can serve
as the governing body of the Hospital. In such event, the Managers shall
include, in addition to DTO Management or its designee, the president or
chief executive officer of the Hospital who shall be designated by DTO
Management and three (3) additional Managers elected from time to time by
the Investor Members one of whom must be the medical director of the
hospital. The remaining Managers shall be elected from time to time by DTO
Management. DTO Management may delegate to such governing body such duties
and responsibilities of DTO Management as DTO Management deems necessary or
appropriate. Notwithstanding the foregoing, in the event the number of
Managers is expanded, the Investor Members shall continue to have the right
to elect an Investor Manager who shall be designated to make decisions
which are specifically authorized to be made by the Investor Manager under
this Agreement and DTO Management shall continue to have the right to make
decisions with respect to matters which are reserved for DTO Management at
the time the number of Managers is so expanded.
SECTION 11.2. Restrictions on Managers' Amendments: Amendments by
Investor Members. Except as provided in Section 11.1, amendments to this
Agreement shall be made only upon the consent of DTO Management 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.
33
SECTION 11.3. Amendments to Certificates. In making any amendments to this
Agreement, there shall be prepared, executed and filed for recording by DTO
Management 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 DTO Management as its true
and lawful attorney in the Member=s name and on the Member's behalf to take and
perform at any time all such action which DTO Management is expressly authorized
to perform under this Agreement, administrative actions which a Member is
expressly required to perform under this Agreement, or actions required or
reasonably necessary following the breach of this Agreement by a Member provided
said breach remains uncured for a continuous period of fifteen (15) days after
written notice by DTO Management to the breaching Member.
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.
Where the context so requires, the masculine shall include the feminine and the
neuter, and the singular shall include the plural. The headings and captions in
this Agreement are inserted for convenience and identification only and are in
no way intended to define, limit or expand the scope and intent of this
Agreement or any provision thereof. The references to Section and Article in
this Agreement are to the Sections and Articles of this Agreement.
SECTION 12.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina, exclusive
of its conflict of law rules.
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
34
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 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 assets held by the Company from the
interests of other Members until the end of the term of both this Company and
any successor company formed pursuant to the terms hereof.
SECTION 12.11. Change In Law. If due to any new law, rule or regulation, or
due to an interpretation or enforcement of any existing law, rule or regulation,
health care counsel reasonably selected by DTO Management 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
35
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 DTO Management
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 DTO
Management 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 Contributions made by each such Member to the
Company together with interest thereon computed at the Prime Rate as of the date
of this Agreement from the date of such contribution through the date upon which
DTO Management pays all amounts due under the terms of this Section 12.11. For
these purposes, distributions to the Members by the Company after the effective
date of this Agreement (and whether before or after health care counsel
determined there was a problem under an Applicable Law or before or after the
exercise of the purchase option) shall be treated as payments by DTO Management.
Such purchase price shall be paid in accordance with the Payment Method. Third,
in the event that DTO Management 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 Ohio 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 Ohio securities laws and
36
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,
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 Investor Manager. Each of the Investor Members
hereby authorize the Investor Manager to make the decisions to be made by the
Investor Manager hereunder and hereby release and hold harmless the Investor
Manager 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
Investor Manager hereunder unless due to the gross negligence or willful
misconduct of the Investor Manager.
SECTION 12.14. Referrals to Hospital and Ownership of Shares of Common
Stock of MedCath Incorporated. Each Investor Member agrees that if in the
reasonable opinion of health care counsel to DTO Management, referrals of
patients to the Hospital by the Investor Member or ownership of shares of common
stock in MedCath Incorporated by the Investor Member would cause or constitute a
violation of any federal or state law, rule or regulation, then, as applicable,
37
(a) the Investor Member shall not refer patients to the Hospital; or
(b) the Investor Member shall not acquire, nor continue to own any of
shares of common stock of MedCath Incorporated.
SECTION 12.15. Exhibits. The Exhibits to this Agreement, each of which is
incorporated by reference, are:
EXHIBIT A: Information Exhibit.
EXHIBIT B: Glossary of Terms.
EXHIBIT C: Development Budget Exhibit.
EXHIBIT D: Regulatory Allocations.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
following execution page(s), to be effective as of the date described in Article
II.
[EXECUTIONS APPEAR ON THE FOLLOWING PAGE(S)]
38
EXECUTION PAGE
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
MANAGER:
DTO MANAGEMENT, INC.
By: /s/ Xxxxxxx X. Xxxxxxx
----------------------------------------
Title: Vice President
-----------------------------------------
MEMBERS:
DTO MANAGEMENT, INC.
By: /s/ Xxxxxxx X. Xxxxxxx
----------------------------------------
Title: Vice President
-----------------------------------------
-----------------------------------------
-----------------------------------------
-----------------------------------------
For the purpose of acknowledging and agreeing to be bound by the terms of
Section 5.9, 8.4 and 8.9 hereof, the undersigned Affiliates of the Members other
than DTO Management hereby execute this Operating Agreement.
-----------------------------------------
By:
-----------------------------------------
Title:
-----------------------------------------
-----------------------------------------
By:
-----------------------------------------
Title:
-----------------------------------------
-----------------------------------------
Signature
[Name of physician and address]
-----------------------------------------
Signature
[Name of physician and address]
-----------------------------------------
Signature
[Name of physician and address]
EXHIBIT A
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
INFORMATION EXHIBIT
Maximum
Mandatory
Additional
Initial Capital Capital Percentage
Name, Address & TIN Contribution Contributions Membership Interest
------------------- ------------ ------------- -------------------
DTO Management, Inc. $1,530,000 $3,060,000 __%
0000 Xxxxxx Xxxxxx, Xxxxx 000
Xxxxxxxxx, XX 00000
(56-________________)
$ $ __%
----------------------------- ---------------- ----------------
$ $ __%
----------------------------- ---------------- ----------------
$ $ __%
----------------------------- ---------------- ----------------
$ $ __%
----------------------------- ---------------- ----------------
$ $ __%
----------------------------- ---------------- ----------------
EXHIBIT B
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, 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" means the North Carolina Limited Liability Company Act, as in effect
in North Carolina and set forth at N.C. Gen. Xxxx.xx" 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" means with respect to a Person, (i) any relative of such
Person; (ii) any officer, director, trustee, partner, manager, employee or
holder of ten percent (10%) or more of any class of the outstanding voting
securities or of an equity interest of such Person; or (iii) Entity or holder of
ten percent (10%) or more of the outstanding voting securities or of an equity
interest of any Entity, controlling, controlled by, or under common control with
such Person.
"Agreed Value" means with respect to any noncash asset of the Company an
amount determined and adjusted in accordance with the following provisions:
(a) The initial Agreed Value of any noncash asset contributed to the
capital of the Company by any Member shall be its gross fair market value, as
agreed to by the contributing Member and the Company.
(b) The initial Agreed Value of any noncash asset acquired by the Company
other than by contribution by a Member shall be its adjusted basis for federal
income tax purposes.
(c) The initial Agreed Values of all the Company's noncash assets,
regardless of how those assets were acquired, shall be reduced by depreciation
or amortization, as the case may be, determined in accordance with the rules set
forth in Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
(d) The Agreed Values, as reduced by depreciation or amortization, of all
noncash assets of the Company, regardless of how those assets were acquired,
shall be adjusted from time to time to equal their gross fair market values, as
agreed to by the Members in writing, as of the following times:
(i) the acquisition of a Membership Interest or an additional Membership
Interest in the Company by any new or existing Member in exchange for
more than a de minimis Capital Contribution;
(ii) the distribution by the Company of more than a de minimis amount of
money or other property as consideration for all or part of a
Membership Interest in the Company; and
(iii) the termination of the Company for federal income tax purposes
pursuant to Code Section 708(b)(1)(B).
If, upon the occurrence of one of the events described in (i), (ii) or
(iii) above the Members do not agree in writing on the gross fair market values
of the Company's assets, it shall be deemed that the fair market values of all
the Company's assets equal their respective Agreed Values immediately prior to
the occurrence of the event and thus no adjustment to those values shall be made
as a result of such event.
"Agreement" means this Operating Agreement, as amended from time to time.
"Articles of Organization" means 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.
"Capital Account" means with respect to each Member or assignee an account
maintained and adjusted in accordance with the following provisions:
(a) Each Person's Capital Account shall be increased by Person's Capital
Contributions, such Person's distributive share of Profits, any items in the
nature of income or gain that are allocated pursuant to the Regulatory
Allocations and the amount of any Company liabilities that are assumed by such
Person or that are secured by Company property distributed to such Person.
(b) 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.
B-2
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 DTO Management 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, DTO
Management 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 DTO
Management shall determine such adjustments are necessary or appropriate to
comply with Regulations Section 1.704-1(b)(2)(iv), DTO Management 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. DTO Management shall also make any other appropriate modifications
in the event unanticipated events might otherwise cause this Agreement not to
comply with Regulations Section 1.704-1(b). In the event any Membership Interest
in the Company is transferred in accordance with the terms of this Agreement,
the transferee shall succeed to the Capital Account of the transferor to the
extent it relates to the transferred Membership Interest.
"Capital Contribution" means with respect to any Member, the amount of
money and the initial Agreed Value of any property (other than money)
contributed to the Company with respect to the Membership Interest of such
Member.
"Cash Distributions" means net cash distributed to Members resulting from
Cash Flow from Operations or Cash from Sales or Refinancing, but shall not
include cash payments made to DTO Management as its Management Fee for services
or any amount in repayment of loans made by the Members to the Company.
"Cash Flow from Operations" means net cash funds provided from operations,
exclusive of Cash from Sales or Refinancing, of the Company or investment of any
Company funds, without deduction for depreciation, but after deducting cash
funds used to pay or establish a reserve for expenses, debt payments, capital
improvements, and replacements and for such other items as DTO Management
reasonably determines to be necessary or appropriate; provided, without the
consent of the Investor Manager, DTO Management shall not use such net cash
funds for the early repayment of Company debt.
"Cash from Sales or Refinancing" means the net cash proceeds received by
the Company from or as a result of any Sale or Refinancing of property after
deducting (i) all expenses incurred in connection therewith, (ii) any amounts
applied by DTO Management 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 DTO Management in its
B-3
sole and absolute discretion. If the proceeds of any sale or refinancing are
paid in more than one installment, each such installment shall be treated as a
separate Sale or Refinancing for the purposes of this definition.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time. Any reference herein to a specific section(s) of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"Company" means and shall refer to Heart Hospital of DTO, LLC, which was
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 DTO, LLC, a North Carolina limited liability company, and to
continue under this Agreement, as amended from time to time.
"Default Rate" means a per annum rate of return on a specified principal
sum, compounded monthly, equal to the greater of (a) the Prime Rate plus 500
basis points, or (b) 18%, but in no event greater than the highest rate allowed
by law.
"DTO Management" means and shall refer to DTO Management, Inc., which shall
serve as a Manager of the Company.
"Economic Interest" means and shall refer to that portion of the Membership
Interest of a Member in the economic rights and benefits of the Company,
including but not limited to all Profits, Losses and Cash Distributions. Such an
Economic Interest will be measured by an amount equal to the Member's percentage
Membership Interest in the Company as the same may be adjusted from time to
time.
"Economic Interest Owner" means a Person who has validly acquired a
Member's Economic Interest as permitted under this Agreement but who has not
become a Member. Such Person shall be entitled to the allocations of Profits and
Losses and Cash Distributions under Article 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.
"Effective Date" means the date on which the Company's Articles of
Organization were filed with the Secretary of State of North Carolina in
accordance with the Act.
"Entity" means any general partnership, limited partnership, limited
liability company, corporation, joint venture, trust, business trust,
cooperative or association or any foreign trust or foreign business
organization.
"Equipment" means the appropriate equipment and supplies required from time
to time in connection with the development and operation of the Hospital.
"Fiscal Year" means, with respect to the first year of the Company, the
period beginning upon the formation of the Company and ending on the next
September 30, with respect to subsequent years of the Company, the twelve month
period beginning October 1 and ending
B-4
September 30, and, with respect to the last year of the Company, the portion of
the period beginning October 1 and ending with the date of the final liquidating
distributions.
"Hospital" means an acute care hospital specializing in all aspects of
cardiology and cardiovascular care and surgery in Dayton, Ohio, as further
described in Section 2.3 of the Agreement.
"Investor Manager" means an individual elected by Investor Members in
accordance with Section 5.13 who shall serve as a Manager of the Company.
"Investor Members" means the Members other than DTO Management and its
Affiliates listed on the Information Exhibit attached hereto.
"Majority Vote of Investor Members" means and 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" or "Managers" means and shall refer to one or more managers
designated pursuant to this Agreement. Pursuant to this Agreement and the
Articles of Organization, no Member shall automatically be a manager by virtue
of such Person's status as a Member. Subject to Section 11.1(g) hereof, the
Managers of the Company shall be DTO Management and the Investor Manager. The
powers, rights and duties of each Manager to manage the affairs of the Company
are specified or designated in this Agreement.
"Management Fee" means the amounts payable to DTO Management pursuant to
Section 5.6(b)(ii) for services rendered in managing the operations of the
Company.
"Material Agreement" means any binding agreement which may not be canceled
upon less than ninety (90) days notice and which calls for the expenditure of
funds, or involves an obligation for financing, in excess of $100,000 exclusive
of agreements or obligations contemplated by any budget, development plan,
financing or construction contract approved by the Managers or agreements
incurred in the ordinary course of business such as employment agreements,
purchases of supplies and routine services and the like. Upon ten (10) days
advance written notice to DTO Management, the Investor Manager may notify DTO
Management that the threshold amount for purposes of this definition of Material
Agreement shall be reduced from $100,000 to $75,000. The reduced threshold
amount shall not apply to expenditures or contracts which were already approved,
under negotiation, or completed by DTO Management as Manager as of the date of
said notice.
"Material Decision" means any decisions regarding approvals of the
development and operating budgets for the Hospital, the selection of the site
for the Hospital, the design of the Hospital, the selection of the Hospital=s
senior administrator, strategic planning, the execution of managed care
contracts, the execution of exclusive contracts to provide physician services to
the Hospital, and if requested by the Investor Manager in the future, the
purchase by the Company of goods and services from DTO Management other than for
repayment of loans, amounts set forth in an approved budget, reimbursement for
personnel who work full time at the Hospital, those
B-5
expenditures governed by Sections 5.6(b), or expenditures pursuant to Section
5.15 which do not exceed $25,000 in the aggregate.
"Member" means and shall refer to the organizers of the Company (unless or
until any such organizer has withdrawn) and each of the Persons identified as
"Members" in the then applying Information Exhibit attached hereto and
incorporated herein by this reference. If a Person is already a Member
immediately prior to the purchase or other acquisition by such Person of an
Economic Interest or Membership Interest, such Person shall have all the rights
of a Member with respect to such purchased or otherwise acquired Membership
Interest or Economic Interest, as the case may be.
"Membership Interest" means all of a Member's rights in the Company,
including without limitation the Member's share of Profits, Losses, Cash
Distributions and other benefits of the Company, any right to vote, any right to
participate in the management of the business and affairs of the Company,
including the right to vote on, consent to, or otherwise participate in any
decision or action of or by the Members granted pursuant to this Operating
Agreement or the Act. The percentage Membership Interest of each Member, their
Capital Contributions and other related information shall be listed on the
Information Exhibit. The percentage Membership Interests generally shall be
based upon the pro rata Capital Contribution of each Member.
"Organization Expenses" means those expenses incurred, either by the
Company, on behalf of the Company or for which the Company has agreed to make
reimbursement, in connection with the formation of the Company including such
expenses as: (i) registration fees, filing fees, and taxes; and (ii) legal fees
incurred in connection with any of the foregoing.
"Person" means any individual or Entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such
individual or Entity where the context so permits.
"Prime Rate" means the rate of interest as of the relevant day or time
period as announced by the First Union National Bank, N.A. or its successor in
interest from time to time as its prime or reference rate.
"Profits and Losses" means, for each Fiscal Year or other period, an amount
equal to the Company's taxable income or loss for such year or period,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(l) shall be included in taxable income or loss), with the
following adjustments:
(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;
B-6
(c) Gain or loss resulting from dispositions of Company assets shall be
computed by reference to the Agreed Value of the property disposed of,
notwithstanding that the adjusted tax basis of such property differs from its
Agreed Value.
"Refinancing" means any borrowing incurred or made to recapitalize the
Company or the equity investment in, or to refinance any loan used to finance
the acquisition of property.
"Regulations" means rules, orders, and regulations issued pursuant to or
under the authority of the Code and shall include revisions to and succeeding
provisions as appropriate.
"Regulatory Allocations" means those allocations of items of Company
income, gain, loss or deduction set forth on the Regulatory Allocations Exhibit
and designed to enable the Company to comply with the alternate test for
economic effect prescribed in Regulations Section 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" means a Manager who succeeds either DTO Management or
the Investor Manager with all of the specific rights and powers of such Manager
under this Agreement.
"Substitute Member" means an assignee of a Member who has been admitted to
the Company and granted all the rights of a Member in place of its assignor
pursuant to the provisions of this Agreement. A Substitute Member, upon its
admission as such, shall replace and succeed to the rights, privileges, and
liabilities of the Member from whom it acquired its interest in the Company, to
the extent of the Economic Interest assigned.
"Supermajority Vote of the Members" means and 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.
B-7
EXHIBIT C
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, LLC
A North Carolina Limited Liability Company
DEVELOPMENT BUDGET EXHIBIT
[SEE ATTACHMENT]
B-8
EXHIBIT D
TO THE
OPERATING AGREEMENT
OF
HEART HOSPITAL OF DTO, 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" means the same as the meaning of
"partnership minimum gain" set forth in Regulations Section
1.704-2(d), and is generally the aggregate gain the Company would
realize if it disposed of its property subject to Nonrecourse
Liabilities in full satisfaction of each such liability, with
such other modifications as provided in Regulations Section
1.704-2(d). In the case of Nonrecourse Liabilities for which the
creditor's recourse is not limited to particular assets of the
Company, until such time as there is regulatory guidance on the
determination of minimum gain with respect to such liabilities,
all such liabilities of the Company shall be treated as a single
liability and allocated to the Company's assets using any
reasonable basis selected by DTO Management.
(ii) "Member Nonrecourse Deductions" means losses, deductions or Code
Section 705(a)(2)(B) expenditures attributable to Member
Nonrecourse Debt under the general principles applicable to
"partner nonrecourse deductions" set forth in Regulations Section
1.704-2(i)(2).
(iii) "Member Nonrecourse Debt" means any Company liability with
respect to which one or more but not all of the Members or
related Persons to one or more but not all of the Members bears
the economic risk of loss within the meaning of Regulations
Section 1.752-2 as a guarantor, lender or otherwise.
(iv) "Member Nonrecourse Debt Minimum Gain" means the minimum gain
attributable to Member Nonrecourse Debt as determined pursuant to
Regulations 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 DTO Management.
(v) "Nonrecourse Deductions" means losses, deductions, or Code
Section 705(a)(2)(B) expenditures attributable to Nonrecourse
Liabilities (see Regulations Section 1.704-2(b)(1)). The amount
of Nonrecourse Deductions for a Fiscal Year shall be determined
pursuant to Regulations Section 1.704-2(c), and shall generally
equal the net increase, if any, in the amount of Company Minimum
Gain for that taxable year, determined generally according to the
provisions of Regulations Section 1.704-2(d), reduced (but not
below zero) by the aggregate distributions during the year of
proceeds of Nonrecourse Liabilities that are allocable to an
increase in Company Minimum Gain, with such other modifications
as provided in Regulations Section 1.704-2(c).
(vi) "Nonrecourse Liability" means any Company liability (or portion
thereof) for which no Member bears the economic risk of loss
under Regulations Section 1.752-2.
(vii) "Regulatory Allocations" means allocations of Nonrecourse
Deductions provided in Paragraph (b) below, allocations of Member
Nonrecourse Deductions provided in Paragraph (c) below, the
minimum gain chargeback provided in Paragraph (d) below, the
member nonrecourse debt minimum gain chargeback provided in
Paragraph (e) below, the qualified income offset provided in
Paragraph (f) below, the gross income allocation provided in
Paragraph (g) below, and the curative allocations provided in
Paragraph (h) below.
(b) Nonrecourse Deductions. All Nonrecourse Deductions for any Fiscal Year
shall be allocated to the Members in accordance with their percentage Membership
Interests.
(c) Member Nonrecourse Deductions. All Member Nonrecourse Deductions for
any Fiscal Year shall be allocated to the Member who bears the economic risk of
loss under Regulations Section 1.752-2 with respect to the Member Nonrecourse
Debt to which such Member Nonrecourse Deductions are attributable.
(d) Minimum Gain Chargeback. If there is a net decrease in Company Minimum
Gain for a Fiscal Year, each Member shall be allocated items of Company income
and gain for such year (and, if necessary, subsequent years) in an amount equal
to such Member's share of such net decrease in Company Minimum Gain, determined
in accordance with Regulations Section 1.704-2(g)(2) and the definition of
Company Minimum Gain set forth above. This provision is
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intended to comply with the minimum gain chargeback requirement in Regulations
Section 1.704-2(f) and shall be interpreted consistently therewith.
(e) Member Nonrecourse Debt Minimum Gain Chargeback. If there is a net
decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt for any Fiscal Year, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt as of
the beginning of the Fiscal Year, determined in accordance with Regulations
Section 1.704-2(i)(5), shall be allocated items of Company income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Regulations Sections 1.704-2(i)(4) and (5) and the definition of Member
Nonrecourse Debt Minimum Gain set forth above. This Paragraph is intended to
comply with the member nonrecourse debt minimum gain chargeback requirement in
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.
(f) Qualified Income Offset. In the event any Member unexpectedly receives
any adjustments, allocations, or distributions described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Company income and gain
(consisting of a pro rata portion of each item of Company income, including
gross income, and gain for such year) shall be allocated to such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Regulations, any deficit in such Member's Adjusted Capital Account created by
such adjustments, allocations or distributions as quickly as possible.
(g) Gross Income Allocation. In the event any Member has a deficit in its
Adjusted Capital Account at the end of any Fiscal Year, each such Member shall
be allocated items of Company gross income and gain, in the amount of such
Adjusted Capital Account deficit, as quickly as possible.
(h) Curative Allocations. When allocating Profits and Losses under Article
VI, such allocations shall be made so as to offset any prior allocations of
gross income under Paragraph (g) above to the greatest extent possible so that
overall allocations of Profits and Losses shall be made as if no such
allocations of gross income occurred.
(i) Ordering. The allocations in this Exhibit to the extent they apply
shall be made before the allocations of Profits and Losses under Article VI and
in the order in which they appear above.
(j) Waiver of Minimum Gain Chargeback Provisions. If DTO Management
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 DTO Management 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
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pursuant to Regulations Sections 1.704-2(f)(4) and 1.704-2(i)(4). The Company
shall pay the expenses (including attorneys' fees) incurred to apply for the
waiver. DTO Management 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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